LG Display Co Ltd (LPL) 2014 Q3 法說會逐字稿

Good morning and good evening. First of all thank you all for joining this conference call. Now we will begin the conference of the fiscal year 2014 third quarter earnings results by LG Display. This conference will start with a presentation followed by a [divisional] Q&A session. (Operator Instructions) Now we shall commence the presentation on the fiscal year 2014 third quarter earnings results by LG Display.

Welcome to LG Display third quarter conference call. My name is Hee Yeon Kim, Head of IR Division. I would like to welcome everyone to our quarterly earnings conference call. I am joined by our IR staff as well as representatives from Marketing Intelligence and TV Marketing. [Ko Kyu-young] is Head of Market Intelligence Division and Matthew Kim is head of TV Marketing team. Next slide please.

Before we move on to the earnings results, please take a minute to read the disclaimer. I would like to remind everyone that results are based on consolidated KIFRS accounting standards and are un-audited. Next slide please.

We have approximately an hour for this conference call. During the first part of the call I would like to highlight our third quarter results performance and Q4 outlook which correspond to the slides available on our website. Afterwards we will take questions.

Moving on to revenue and profits on the next slide. Third quarter revenue increased by 9% quarter-on-quarter thanks to shipment increase in ASP improvement. The (inaudible) increase mainly came from the larger sized TV in accordance with our China fab ramp up. The overall price trend for TV and IT was also the revenue booster. The size migration towards larger sized TVs led to tight supply situations resulting in favorable TV pricing trend.

We have seen the same overall pricing trend in the IT side as well as we have witnessed the continuous supply constraint including our [service] by reducing our IT capacity further during Q3. Our operating profit was KRW474 billion, which increased by 191% sequentially. Operating margin was 7% and EBITDA margin stood at 20%. Pre-tax profit was KRW432 billion and net profit was KRW354 billion.

Moving on to slide 4 and looking at our financial positions and ratios. At the end of third quarter, total asset was KRW22.7 trillion, liability KRW11.3 trillion and equity KRW11.4 trillion. Cash and cash equivalents increased by KRW121 billion resulting in KRW2.4 trillion. Inventory increased to KRW2.6 trillion from KRW2 trillion. As we have also seen similar pattern last year, inventory at the end of third quarter increased due to strategy inventory preparations for small and medium category product due to the Q4 seasonality.

Besides the new small and medium product, inventory situation for other category is very lean. As it is with our strategy inventory preparation which was attributable to the strong order trend, it is expected to be shipped out during Q4. Thus, we expect a total inventory amount to go down at the end of this year.

Looking at our balance sheet, overall balance sheet has improved during the third quarter. Current ratio, net debt to equity ratio were improved through recording 116% and 19% respectively and liability to equity remained (inaudible) 99%.

Moving on to slide 5 and looking at our cash flow. Cash at the beginning of the third quarter was KRW2.2 trillion. Cash flow from operating activities resulted in cash inflow of KRW789 billion and cash flow from investing activities resulted in an outflow of KRW724 billion. The net cash change in -- the net cash change was an inflow of KRW121 billion resulting in cash at the end of the quarter recording KRW2.4 trillion.

Moving on to slide 6, I would like to go over our performance highlights. As explained all year, our shipment increased by 3% quarter-on-quarter, resulting in 9.7 million square meter, driven by a seasonal demand increase especially for larger sized TV panels and small and medium displays. As core pricing, we have moved into the positive pricing trend for both [IT] and TV during the quarter driven by capacity constraints resulting from the larger sized demand and (inaudible) efficient (inaudible) operation.

Moving on to our product mix on slide 7. Our TV business was 42% of our revenue, followed by mobile applications 19%, monitors 17%, tablet at 12% and notebook at 10%. The sales portion of mobile and tablet increased by 3 percentage points each, respectively due to sequential shipment growth. (Inaudible) TV and mobile to the [priority] in capacity allocation resulting in reduced capacity for notebook and monitor. This in turn resulted in decline of notebook and monitor. Therefore, the sales portion of notebook and monitor decreased by 2% and (inaudible) percentage points respectively.

Moving on to slide 8 and looking at our capacity. Our producible capacity in third quarter increased by 9% q-on-q to 12.3 million square meters and it was mainly due to the China fab ramp up impact.

Next we come to our outlook section. For the first -- for the fourth quarter, we expect a total area shipment to grow by mid-single digit percentages, mainly driven by continuous size migration trend to bigger display and also increasing shipments for display small and medium sized panels.

While there is limited capacity and utilization rate increase in fourth quarter, we expect it to reach the shipment guidance though shipping (inaudible) our [strategy] inventory which was prepared during the previous quarter to meet the growing demand in Q4. Our pricing is expected to remain stable in the fourth quarter. We anticipated blended ASP per square meter to increase through this change.

Let me conclude by saying that we are encouraged by the progress we have seen over the past quarters. We have been focusing on value rather than volume, focusing on high value added product but also preparing for the future with a continuous (inaudible) developments which is expected to bear fruit in the coming future and will result in a structural differentiation. In this way our [variation] and future preparation, we will keep this (inaudible) for our CapEx by balancing between capacity growth versus financial [funding]. With our financial performance improvement we believe that this strategy is leading us to the right way; to better customer relationships, providing us confidence to [better] prepare for the future as to offer our customers with more value-added products through our technology and product leaderships.

That's the end of our third quarter results explanation. Now we open up for Q and A session. We ask that you limit yourself to one question and one follow-up. Operator, may we have the first question please?

There is one thing that I have to announce. Currently the line is not good so there are a lot of noises in the line. So could you just please drop the line and then make a call once again. Please participants, wait until the line is connected. (Operator Instructions)

The first question will be provided by Andrew Abrams from JG Capital. Please go ahead sir.

Hi. Thank you for taking my questions. First I was just trying to get a little color on the status of the OLED fabs. I'm assuming that you're still producing TVs on the pilot line. Is that correct? Also, when would you expect the new Gen-8 line to start taking over some of that production capability?

As we continue to comment here, we will add additional OLED production base at the end of this year. There might be the similar scale at around the 6K on top of the 8K. So that is our schedule. Then if our production and in the increment (inaudible) we will add more 20K at the end of next year. That's our plan. All the progress is in line with our regional plan.

Got it. Okay. Can you give us an idea of what the cost down was in the third quarter and if you think that's going to change in the fourth quarter?

Cost reduction related for OLED or overall cost reduction -- that might be overall cost reduction. That's my understanding. Our overall cost reduction is -- continues at around the low single digits every quarter.

Low single digits. Okay. Thank you very much.

The following question will be presented by Ben [Lu] from Moon Capital Management. Please go ahead sir.

Hi. Thank you guys for doing the call. I guess I have a similar question to the prior caller. Can you give us a sense of what is the OLED losses for 2014 and where do you see that going for 2015?

Regarding the investment related expense, it's not relevant to comment in this conference call. Anyway, we have to record related -- investment-related expense for the OLED this year. But we hope [to kind of] -- expenses should be -- will reduce going forward. Please understand, we cannot mention about the number itself.

Okay. But you think you can still have OLED break even by second half of next year?

We try to make money maybe at the [full] scale of ramp up our full 34K production base at the end of the next year.

Got it. Okay. Then Hee Yeon, can you help us think about mobile revenues or shipments in Q4 and how we should think about it in Q1 because I think at the Korean Analysts' Meeting you talked about how Q1 will be a smaller than usual seasonal decline and obviously your mobile revenues is at all-time record highs for you guys. So I just wanted to get some clarity for Q4 and Q1 and whether new product launches in Q1 will help reduce the seasonal decline.

Actually our Q4 overall trend is strong as [you all expected] because of the seasonality and (inaudible) end market. Actually, we are expecting our revenue mix should be higher than Q4 last year. That should be a good clue for your assumptions. And Q1, is early to mention about that.

Okay -- because I think at the Korean Analysts' Day you guys talked -- Analysts' Meeting -- you talked about how Q1 should see a milder sequential decline than usual. So I wanted to get a little bit more color on what's driving that -- whether it's just inventory, supply demand, new products?

Actually our fourth quarter trend should be highly related with the [end] demand during Q4. It end demand will be much higher than our -- in our customers' expectation. Yes, there should be better fourth quarter. But it's early -- a bit early to mention about that.

Okay. Great. Can I have one last --

Then in first quarter -- in first quarter we hope seasonality should be milder than before because of the (inaudible) increased demand from the (inaudible) side. Although there is a unique decline seasonality we hope it can be compensated by bigger screen demand which is resulted in the high utilization ratio. Also we hope for new applications of product in the small sized segmentation to support us and to mitigate our low seasonality in first quarter.

Okay. Hee Yeon, if I can ask one last thing to your answer earlier that mobile mix should be higher than last year. Your mobile mix was 15% of revenues last year. It was already 19% in Q3. So -- God, I hope it's larger than what it was last year. So maybe can you give a little bit more color as to how much larger it'll be than the 15% last year since it was already 19% last quarter?

What I'm trying to say is together with the tablet and mobile that was mid-30% last year, so altogether it was over mid 30% in Q4 this year. That's what I mean.

Got it. Okay. Thank you so much. Congrats on a great quarter.

Thank you.

The following question will be provided by [Soon Hun Huang] from Deutsche Bank. Please go ahead sir.

Yes. Hello. Congratulations on a strong result and thank you for taking my question. Recently one of your main competitors in the small size panel business reported losses and, I think, lowered its full year guidance, which could raise some concerns about overall mobile panel profitability.

The company also I think seems to suggest that this is more of an industry-wide issue and I think it did raise some questions about [LTT] mobile phone panel business. So I have two questions related to this topic. One, could you please maybe explain how LTT small size panel profitability was progressing during the third quarter and if you can provide an outlook of how that profitability will look like in the fourth quarter? Thank you.

Actually, as we have wide business portfolio in all category from small to larger size, it's very -- it's not that easy to mention about the specific segmentation. However, we will deliver overall trends. If we look into the details, our profit increase in third quarter was mainly driven by size migration towards the bigger display and price increase in the larger size displays, such as TV and IT. Profitability for small size was (inaudible) during third quarter. But as we [guide] it, we expect the small size display profitability to see improvement due to the (inaudible) increase in Q4. Does that answer your question?

Okay. Thank you. Yes.

The following question will be provided by Alberto Moel from Sanford C. Bernstein. Please go ahead sir.

Good morning. Just a quick clarification. You saw some very good ASP, quarter-on-quarter ASP increases and a couple of questions relate to that, quick questions. One is, how much of that sort of space, this bit of an area increase was due to the mix shift from -- to some larger panel to smaller panel which although are maybe, you know, profitability may be tougher, but they're still higher, much higher ASPs.

Second, in your comment just now you said that ASPs for the next quarter, your Q4 2014 ASP is, you said, expect blended ASP per square meter to -- we had expected blended ASP per square meter to increase so this has changed and you say here, ASP just stabilized. There was a comment from yesterday's meeting, at least someone who maybe transcribed it wrong, who was suggesting that ASP increases for end of Q4 should be double digit. So I just wanted clarification on that comment there, thank you.

Yes, we will clarify on this. We have two kinds of ASP. AS individual product, ASP versus blended ASP per square meters. In case our plan ASP per square meter in third quarter that was raised by 7%. That's the combination between individual products, price increase at low single digits, together with another low single digit of mixed improvement. In Q4, our product-by-product ASP increased, ASP trend should be stabilizing in Q4, but blended ASP should be changing meaningfully thanks to the small size sales increase. As you already know, small size ASP per square meter is much higher than bigger screen, this square meter basis.

Understood. So the ASP stabilization is on a like-for-like, but your increase on a blended will be because of the mix, primarily, you think?

Yes, that's correct.

Thank you. Thank you.

Jerry Tsai from HSBC.

Hi, you just mentioned your capacity was up 9% q on q during third quarter. Can you give us some idea what it's going to be like in the fourth quarter as well as in first half next year?

In the fourth quarter we are expecting most things (inaudible) capacity increase. Then fourth quarter, theoretical capacity should remain flat, however actually usually we will be doing the bottlenecking and operation of the (inaudible) because of that every fourth quarter we are witnessing (inaudible) single digit capacity decline, that's the usual pattern.

Okay, so no additional capacity to video other than be bottleneck in the first half next year?

Actually it's the biggest screen demand from TV market. If it is higher than our expectation, we will consider minor increase, but it's not yet decided.

Okay, thank you, that's helpful. My second question is regarding to the size migration which, according to you drove up the panel price in the third quarter. My question is since US and China is leading the way in terms of adapting this large size TV, but then do you also see the other markets also doing the same as well in terms of getting -- buying these much, much bigger TVs?

As you know well, this year is biggest large screen demand is quite good. So in those in the trend will (inaudible) continued into next year, especially in the trend is also in that -- sorry the 42 inch also very short, due to a supply issue, short supply, that's why I think that in Q4 and the price wars and the civilized -- that is our current trend and conclusion.

Okay. Sure, last question will be regarding the pixel migration for a smartphone. For the overall market, do you think this pixel migration for smartphone is happening faster or slower than your expectation say three to four months ago? Then what do you think is coming for in the coming year in terms of the migration of the pixel for the smartphone products?

Actually (inaudible) is -- actually resolution is modular tube and then (inaudible) smartphone. So then price (inaudible) will then increase, but it's issues of course and then product-ability and the practical-ability. So depends on customer strategy and then customer strategy in a market situation, resolution and unfortunately will be changed, but is clear thing is actually [portions] the majority and that rates and [electricity] will be increased, yeah.

Okay, thank you.

Nam Hyung Kim from Arete Research.

Thank you for taking my question. I have two questions on TV panel. So can you give us an update on TV panel demand this quarter? I believe OEM's TV margins are falling at this time, but do you expect any pressure on TV panel price later this quarter or Q1 next year? Then my follow up question on LCD step ramp among Chinese player next year. I believe BOE, CSOT, [C standard] these guys will be ramping (inaudible) next year. Is this going to make market a little bit more uncertain next year or you are not worried about this due to strong demand? Thank you.

So as I already explained a Q4 price will be stabilized for this, the size by size segment, by segment this will be different. But at the moment it is especially 32 inch, 42 inch is in very short supply and the price will get a stable increase after the segment also vary and the Thai situation still. So and somewhat the investment level is quite healthy in the channel and the debt maker. So I think that Q4 price will be stabilized Q4, also Q1 will be a little bit slow, slowdown, new trend of (inaudible) it will be in the natural.

Second question was this, some Chinese and then panel makers (inaudible). We think that it is -- yes we see in the clear in the day and then up in the Q3 next year or new (inaudible). But it's considering this year's and (inaudible) their policy of the product will be done considering those and the [lecture], [Lenco] is throwing down then Korean company, that's my thinking. Also clearly the Chinese makers and capacity increase but I think that it's -- those impact not big, because it's also then large (inaudible) and then demand is strong, that's why (inaudible) and capacity all sit by and then last (inaudible) demand.

Okay, thank you.

The following question will be provided by Ben Lu from Moon Capital Management. Please go ahead sir.

Hi, thank you guys, just had two quick pricing questions. One, you said that your ASP will stabilize on a like-for-like basis in Q4, that means that the large size panel ASP should be kind of flattish supposedly in Q4 because I think seasonal -- historically seasonally is down q-on-q. I just wanted to clarify that for one. Second and just to clarify that you guys did dive for your blended ASP per square meter up mid-teens for Q4, correct?

We continuously highlight like-for-like price should be stabilized in Q4. As you already witnessed during last quarter we already witnessed [overt] prices trend. This kind of overt price trend will be shifted to stabilizing later in Q4. That's our assumption for the price trend. In terms of blended ASP, that will be shifted [meaningfully]. That's because of the mix improvement. That is the same answer.

Okay, great. Then my last question is also on your cost side. If I look at your cost excluding depreciation in Q3, that was up about, I believe 5% or 6% sequentially and that's obviously because of the higher mix from mobile. How should we think about your cost increase, excluding depreciation, in Q4 sequentially? Thank you.

Actually as we highlighted, blended ASP increased thanks to the mix change. That is also correlated with the cost increase. So in Q4, except to depreciation, our overall cost structure should be increased. That's because of the mix change. But we cannot tell how much will increase. That's, anyway, it will be lower than blended ASP increase.

So, by definition, margin should improve then, right?

We hope it will improve.

Great, thank you so much.

The following question will be provided by Andrew Abrams, from JG Capital. Please go ahead sir.

Hi, just one more question on the OLED side. Do you feel that you will be able to have enough OLED capacity over the next two or three quarters to be able to supply other panel producers with OLED TV panels? Or is your capacity going to be pretty much dedicated to LG electronics? Can you supply others with the amount of capacity that you're in the process of building out?

As I mentioned before, at the end of this year we will ramp up second phase of OLED new facility. And then we also have third phase plant increase at end of next year. So by doing this kind of ramp up schedule, we believe we can diversify our customer base with [diverse] by the product lineups. So it means it's okay to meet our customer demand. Actually our customers, most of our OLED customers are targeting high end product tablets. So we believe it is okay to meet that kind of highest product tablet range.

Got it, thank you very much. One other question on that, as you start to produce OLEDs for small size watches, are they going to be done on the pilot line or are they done on the Gen 8 line or are you dedicating a line specifically for flex that you're going to use aside from the smartphone flex?

That's provided from our small size facility, 4.5 generation batch.

So they'll all be made on that line, okay. Thank you very much, I appreciate it.

There are no participants with questions. (Operator instructions) The following question will be provided by Jerry Tsai from HSBC. Please go ahead sir.

Hi, I don't know if you recently start to supply this 5K/3K panels for a major US customers all-in-one PC. Just wondering first of all, is the signal that -- I believe that this panel was made by the oxide technology. And so many question is does this suggest you have been making a pretty strong improvement in -- for the oxide and you could actually be extending this technology to other products. If so, what would be the product?

Such -- are you to have plan to adapt it in, let's say, the smartphone or the tablets or notebook? Also, my next question will be, after this, also high definition, the monitor, do you feel -- do you think this could be a mainstream product going forward? Not just for this particular customer, but for the rest of the monitor in display market. That's my questions.

Okay. I think the 5K in the monitors are very, very high end in the monitor and equipment. So this is not going to end up mainstream. This is a high end and a specific area, so [it's best] the customer is enjoying the profit and then the margin.

So this is not mainstream. But this oxide technology we are thinking about is many kinds of (inaudible) and the technology. Some products is [bit buy] and (inaudible) technology bit buy and then oxide. Some technology bit buy and (inaudible). It depends on its cost and then the price, [corporate] demand. We can adjust our product in the mix and the technology mix.

But what's the similar factor that make you decide to choose between ALTPS and the oxide technology?

(Inaudible) and then we have a [bit] in the category (inaudible) and the oxide and then LTPS. Oxide, LTPS and then relatively efficient for the narrow (inaudible) and the [power] consumption. That is our (inaudible). That's why we are working on it, LTPS oxide. But it depends on the product [implementation]. It will be different and then -- different application by technology. For example, in the oxide, we are thinking about is a tablet area and some of an IT area. Yes?

But LTPS, we are thinking -- our focus on is the smartphone area. Yes? So it depends on in the product strategy mix. We can differentiate our product line by the technology.

Okay. Thank you.

The following question will be presented by Eric Lin from CIMB. Please go ahead, sir.

Hi. Thank you for taking my question. My question will be centering on OLED. Can we expect the margin for OLED TV (inaudible) to crossover LCD TV in your Company in two years?

We hope so. That's our target.

Okay. Thank you. If that will be the case, what would be the year rate assumption at the moment and the press premium over LCD TV panel?

Please understand, as you already know, OLED TV is very infant stage in terms of technology, production, scale, and scalability is very small. So it's unfair to deliver our current numbers, because it's very young and infant stages. So we might deliver the kind of numbers maybe at the end of next year.

That should be a good timing, because we can ramp up meaningful scale for OLED TV facility at the end of next year. Before then, our scale is very low. Our material support is very weak.

Because of that, our costs shouldn't be very high. But at the end of next year, maybe in year 2016, we will [hit volume] scale. We try to make money. That's our target.

Thank you.

In terms of [assumption] is always changing, because of the atmosphere changes.

I see. Fully understood. So in that case, can you give us some figures about the cost structural comparison between LCD and OLED TV? That's a -- the fixed cost percentage and the material cost percentage as a -- as a percentage of total cost. The comparison between OLED TV and LCD TV right now.

Let's put it this way. Eventually, we believe -- Let's put it this way. In case of LCD, LCD raw material cost is around 6% and fixed costs such as depreciation part is around 15%. 15%. Yes. But in case of OLED, we can eliminate the (inaudible) unit. The (inaudible) unit is around 40% or 50% among (inaudible) materials.

So you can get either of those cost structure for the OLED maybe to two to three years later.

Hee Yeon , so for OLED we should assume the fixed cost as a percentage of total cost will be higher than that of LCD right?

Yes, fixed cost is higher. Much higher. In case of fixed cost portion for the LCD, that is around 15%. For now, it is expected to be [13%] but it will continuously decline.

As we highlight, right now, [equipment] cost is very expensive because of our small volume scale. However, if we continue to increase our equipment order so equipment investment cost should also decline further. So the kind of fixed cost portion will decrease going forward.

So I think eventually the fixed cost percentage will be still much higher than LCD. Eventually, right?

Not much higher. It will be declined going forward. So it will be a bit higher. That's our eventual.

I see. Thanks a lot. That's all from me.

Currently, there are no participants with questions. (Operator Instructions)

Operator, if there are no questions, we would like to end the conference call now.

Yes, there are no further questions.

Okay. On behalf of LG Display we thank you for participating in our Third Quarter earnings Conference Call. Should you have further questions please contact either myself or my colleagues. Thank you.