LG Display Co Ltd (LPL) 2014 Q4 法說會逐字稿

Good morning and good evening. First of all, thank you all for joining this conference call and now we will begin the conference of the fiscal year 2014 fourth 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 fourth quarter earnings results by LG Display.

Good morning, everyone. Welcome to LG Display fourth quarter year 2014 conference call. My name is Heeyeon 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 representative from Market Intelligence. KY Ko is head of the Market Intelligence division.

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 K-IFRS accounting standards and are unaudited. Next slide please.

We have approximately one hour for this conference call. During the first part of the call I would like to highlight our fourth quarter results performance and Q1 outlook which correspond to the slides available on our website. Afterwards we will take questions. Please do not hesitate to contact us after the call if you have further questions.

Moving onto revenue and profits on the next slide. Q4 revenue increased by 27% quarter-on-quarter thanks to shipment increase, ASP improvement and favorable ForEx movement. Along with the seasonal demand increase, we have witnessed continuous size migration trends towards larger size TVs.

This led to tight supply and demand situation during Q4 impacting profitably on pricing. Also, small and medium displays shipments increased as well due to new product launch and seasonal effects, resulting to a higher revenue portion in Q4 and blended ASP increase.

Our operating profit was KRW626 billion, which increased by 32% quarter-on-quarter. Operating margin was 8% and EBITDA margin was 18%. Pre-tax profit was KRW488 billion and net profit was KRW389 billion.

Moving on to slide 4, looking at our financial positions and the results. At the end of Q4 total asset was KRW23 trillion, liability KRW11.2 trillion and equity KRW11.8 trillion. Cash and cash equivalents increased by KRW52 billion, resulting in KRW2.4 trillion.

Inventory increased slightly to KRW2.7 trillion from previous KRW2.6 trillion. Unit-based inventory level remains (inaudible) as our shipment increased by 4% while our capacity only increased by 2% during Q4. However, in line with our continuous focus to value-added products, we have seen a mix shift towards value-added products which have higher ASP but also higher cost as well.

Preparation for China and OLED conversion fab as well as the later Chinese New Year holiday season this year also impacted in our year-end inventory increase due to the time mismatching. But considering our demand forecasted for Q1 we expect our inventory level to reduce naturally by the end of this quarter.

Looking at our balance sheet, all our balance sheet has improved during Q4. Liability to equity ratio, current ratio and net debt to equity ratio all improved versus third quarter, recording 95%, 122% and 60% respectively and remain in a healthy situation.

Moving on to slide 5, looking at our cash flow. Cash at the beginning of the third quarter was KRW2.4 trillion. Cash flow from operating activities resulted in cash inflow of KRW1.1 trillion, while cash flow from investing activities resulted in an outflow of KRW694 billion. With cash outflow from financing activities at KRW391 billion, our net change in cash was an inflow of KRW52 billion, resulting in cash at the end of the quarter with KRW2.4 trillion.

Moving on to slide 6, I would like to go over our performance highlights. In Q4 our shipments increased by 4% resulting in 10.1 million square meters due to our continuous [IT] capacity conversion towards value-added products, our IT segment shipments decreased quarter-on-quarter.

But we have seen a seasonal demand increase especially for larger size TV panels and small and medium displays, new products launched during the peak season. Pricing showed a positive upward trend during Q4 due to capacity constraints driven by limited capacity growth while demand on an area basis increased continuously due to size migration trends.

Also panel makers' efficient [spend] mix operation based on profitability also helped the industry situation to remain healthy. Our favored pricing trend, along with the increasing portion of the shipments in the small and medium panels which have a relatively higher ASP per square meter, our blended ASP per square meter lowers by 70% quarter-on-quarter to $773.

Moving on to our product mix on slide 7. Our TV business was 36% of our total revenue, followed by mobile applications at 23%, tablets 19%, monitors 14% and notebooks 8%. The sales portion of the mobile and tablet increased by 12 percentage points and 7% respectively due to the increased shipments of new products for the seasonal demand. On the other hand, due to continuous IT capacity reduction during year 2014 therefore the sales portion of monitor and notebook was declining in Q4.

Moving on to slide 8 and looking at our capacity. Our producible capacity in Q4 increased by 2% quarter-on-quarter to 12.6 million square meters. This increase was due to our China fab full ramp up effect during second half last year.

Next we turn to our outlook section. For the first quarter, we expect the total area shipment in square meters to decrease by mid-single-digit percentages as we have entered the low season. However, we expect the degree of the seasonality to be milder than the previous years.

Due to continuous larger size trends and favorable (inaudible) situation at the end of the last year, we cautiously believe the industry started this year with a healthy inventory situation, therefore the seasonal inventory correction is expected to be somewhat milder this time. Also, as we have been continuously reducing capacities for traditional IT segments last year, our IT will be fully loaded during Q1 regardless of the seasonal low trend as we have a lower capacity base for that division. As for pricing, our pricing is expected to stabilize while pricing for each segment and application may vary depending on each supply and demand situation.

Let me conclude by saying that we are encouraged by progress we have seen over the past quarters and during the year 2014. Despite the difficult marketing environment, especially with our business structure changing toward increasing open (inaudible) business, we were able to push the sequential improvement in our result through our differentiated value-added product based on our technology leadership as well as an efficient operational production strategy to proactively meet market demand.

At the same time, we have been thoroughly preparing for our future with our OLED technology in those small and larger size displays. For smart displays we have successfully started mass production for plastic OLED for design flexible smartphone and wearable displays.

And in the TV segment we expected to see meaningful enhancements in product lineups covering ultra-high definitions and customer base through our efforts during last year. In this way, our value addition and future preparation, we are keeping a disciplined CapEx strategy.

As a result, we have spent KRW3 trillion for CapEx in year 2014 which was a decrease versus our original expectation at the beginning of our last year. By keeping the same strategy, balancing between capacity growth versus financial soundness continuously, we expect our CapEx for this year to see further decline, YOY basis.

Also in means of efficient fab operation within limited capacity growth, we have converted our IT fab to (inaudible) facility and also changing our production mix to more profitability. We are encouraged that those actions has reacted to a favorable market situation last year and we will continuously put our efforts to have a flexible and profitable profitability-based fab operation while limiting capacity growth going forward.

Lastly, it needs to provide shareholder value, a dividend of KRW500 per common share has been decided at the BOD meeting held on January 28 and the decision will be finalized after the approval at the coming Annual General Meeting of shareholders.

By focusing on operational excellence and risk management as well as preparing our future with a differentiated product through our leading technology, we believe this strategy will lead us to a more reliable and value-creating company for our shareholders.

Now we open up for a Q&A session. We ask that you limit yourself to one question and one follow-up. Operator, may we have the first question, please?

Now Q&A session will begin. (Operator Instructions) Nicolas Gaudois, UBS.

Yes. Good morning. Just two quick questions if I may. One is I guess since you provided your outlook Wednesday in Seoul, Samsung made some comments on the large panel side of the industry yesterday, pointing to supply and demand risks in the second half of the year, in their opinion coming from in particular the continuous ramp of capacity in China, which as you know is pretty much staged throughout the year.

And secondly, we heard obviously from both your captive customer and Samsung itself that margins on the TV business side have come down tremendously in both cases. So when you look at both I guess if you could maybe refresh a little bit what you think, or recap what you think, in terms of outlook for large panels as we move into the second half of the year in particular, whilst I think we all agree that the start of the year looks reasonably benign for now.

And I've got a follow-up. Thank you.

Your question is related to supply and demand situation in the TV and larger segmentation. Actually, from last year as you already witnessed, the larger size demand, especially for TV, has been growing although the unit growth was not that growing. In this kind of size migration trend it gave us a chance to have a favorable price trend; we believe this kind of trend will be an ongoing issue.

And also, set-makers' price pressure was always tough for us. Last year it was also tough but thanks to the bigger screen size migration trend it gave us a chance to have a better position in terms of price negotiation. This time we also have a similar trend. That's our assumption.

Eric Lim, CIMB.

Hi Heeyeon and KY, good morning. My question centering on OLED; if no further amorphous silicon capacity will be built, should we assume that total output of TV panel will decline going forward if we continue to convert amorphous capacity for OLED?

Our amorphous capacity -- actually this year, as we already mentioned, we will convert the existing LCD facility into OLED at the end of this year. So then (inaudible) maybe in terms of Q4 this year versus last Q4, capacity. Capacity was not growing -- was not growing. So based on this kind of assumption, unit growth (inaudible) to build and it did.

I see. So in the future after these 34K OLED investments, are we going to build a new fab for additional OLED expenditure in the future?

In the future the timeline generally be an issue. In the near future we will continuously convert the existing LCD facility into OLED but in the longer future if we are very successful to generate a profit from the OLED side, it might be. It might be, but it's not decided yet.

Okay. So can you give us some detail about the CapEx number for the 34K OLED in total?

In total it's not decided yet because in total it will be finalized at the end of this year, but the CapEx amount might be -- it's ranging around -- below KRW1.5 trillion.

That's this year, right?

No, no, no. Total, cumulative basis. In terms of this year CapEx, as we highlighted, our CapEx will decline YOY basis. I know our CapEx is not finalized yet but mix of the CapEx maybe around 50% comes from the maintenance costs and 30% comes from the OLED, 20% maybe our future preparation.

I see. Thanks a lot. If it's possible, may I have one more question?

Yes.

Considering there are about 33% of equity are held by foreign institutions, would you consider to have English investor conference calls simultaneously with the Korean conference calls? Or at least we can have them -- have the two events on the same day?

Okay. Let me consider about that. Thank you for your good opinion.

Okay. Thanks a lot. Oh, one more thing on the cash flow part. What is the cash outflow of financing activities?

Cash (technical difficulty). That's the repayment of our liabilities.

I see. Thanks a lot.

Thank you.

Ben Lu, Moon Capital Management.

Hi. Thanks again for having this call. I almost forgot you guys actually reported two days ago. Really quickly, when you guys guided Q1 ASP stable was that on a blended or a like-for-like basis?

That's like-for-like basis. Blended ASP will decline as our mix will change. Actually, small and medium size revenue mix should decline in Q1.

Okay. Thank you for clarifying. The other question is can you talk a little bit -- or can you help us quantify the FX benefit to you guys on the P&L, both on gross margin or maybe operating margin, whichever is easier for you?

Actually, our net exposure to the US dollar is around 50% so if we have 1% or KRW10 movement, we might have KRW300 billion or KRW400 billion -- KRW30 billion or KRW40 billion in impact for operating side in terms of quarterly basis. But also we have another flipside in the recording profit side because we have $2.1 billion debt position. So the operating side impact and recording side the impact will be naturally hedged. That's our FX structure.

Okay. So your OP in Q4 wasn't impacted by the FX move?

In terms of our OP, it was impacted in a positive way but in terms of recurring profit we also have a negative impact. It was offsetting each other.

Okay. So on your OP level, is there any way to quantify how much of that KRW626 billion in OP came from the FX benefit?

It might be quantified 50% net exposure and FX movement was KRW50.

Okay. Got it.

You can easily calculate the numbers.

Got it. The reason I was asking is can you help us understand why your gross margin was down 60 bps and your operating margin was only up 30 bps despite sales being up 27% sequentially? I think you guys said at the Korean analyst day that there were some onetime costs for some new projects. Maybe you can help us quantify that so we can better understand what is the core profitability of the business doing.

As I highlighted, in Q4 we have higher mix for high-end product, but that high-end product also have a higher cost structure. Because of that our OP improvement and GP improvement would be lower than your expectation.

Okay. The reason I was a little confused because typically in Q4 you guys always see higher value-adding meeting some of the small and midsize panels but the sequential increase in margins was smaller than historical levels. So I was just curious if there were any other onetime costs or expenses that we should be aware of in Q4.

Actually, larger size panel markets such as TV, the supply and demand situation was very favorable, then margin generation would be much better than our average operating profit. But small and medium size, although it is a high-end value-added product, as I highlighted the cost also is very high, so margin should have been lower than our average margin. That should be our answer.

Got it. Okay. If I can ask one last question. I wanted to understand a little bit about how you guys think about the industry. I know, I think Nicolas Gaudois earlier said that second half Samsung was a little bit cautious about potential oversupply and I think AUO reported yesterday saying there was slightly higher inventory in TV and IT in China ahead of the Chinese New Year holiday. Maybe if you can comment a little bit about your perspective on the industry? Thank you.

I think that in the total level (inaudible) inventory is quite a healthy level. So in China as commented the China inventory is a little bit higher than is the normal season because of preparation for the hot season in Chinese New Year. So I think that is my calculation, based on my calculation is the Chinese inventory level is -- now is China inventory means is that [6 to 8 weeks] is a reasonable level.

Great. Thank you so much.

Andrew Abrams, [SC Amar].

Hi, and thanks for taking the questions. I don't mean to harp on the OLED but I've got a couple of questions there. Really on the status of your build-out, first on the pilot line which if I remember correctly was 8K and you were adding 6K, is that still on track and what's the date at which you think that you'll get that line up to 14K?

And then on the conversion of the larger line, I would assume 15K would be your goal there. Do you have a timeline there that you guys are comfortable with as far as that goes?

The CapEx situation for OLED was in line with our original expectation: 8K and then 6K at the end of the last year and another 20K we are expecting second half of this year. That's all planned.

So it was the 8K plus 6K is already completed and the 20K is the line that's being built for this year?

Yes. 8K and 6k is already completed and then the remaining 20K will be added maybe in Q4 this year.

Okay, got it. And on the smartphone product line, are you expecting -- and this is primarily for LG Electronics -- are you expecting the bulk of that product line to have a flex capacity to it or is that still a relatively small part of what you're going to be producing on the smartphone panel side?

I don't understand your meaning exactly. Your question is plastic OLED alone?

Right, and will there be any -- or the relative amount of flexible smartphone panels versus LCD smartphone panels, that's what I was looking for.

We have two kinds of products for the plastic OLED: one is for smartphone and one is wearable devices.

Okay and if you looked at your overall smartphone panels, not just OLED but LCD also, what percentage of all of your total smartphone panels, LCD and OLED would be OLED and flexible?

The flexible OLED for smartphone is not bad, it is just single digit percentages.

Okay, that's what I was looking for. Is that flexible line up and running at full capacity now, that's producing the flex smartphone line?

Unfortunately it is not fully loaded at this point.

Got it, okay, thank you very much for the answers, we appreciate it.

[Ross Don], [Cohen].

Hi, thanks for taking my question. I had a couple of questions on OLED TV. Do you have a view on how many units of OLED TVs you expect to produce -- TV panels you expect to produce and ship this year?

This year it is expected to be 600,000 units.

That would equate to what capacity utilization for you over the year on average?

Actually it not the equation of the utilization ratio issue, it's the function of utilization ratio and yield ratio and sales mix. The sales mix will be clearly [cost-effective] for us. Until last year we only delivered 55 inch, that's six cards from one (inaudible). But this year we start to provide 65 inch and 77 inch, this is [two cards or three cards] from one (inaudible).

Could you comment on your pricing strategy for OLED TV? I've seen some reports that suggest that the market penetration for OLED TV is small because the prices are high. I have the impression that prices are high because the quality is superior and there's not that many units available. So any comments you have would be very helpful, thanks.

Yes, so when you look at our capacity and production capacity for TV OLED, we only have 14K for now and we will have 34K at the end of this year. Also we announced our target shipment to 600,000 units. It is just 0.3% for total TV market demand. It means we have to target ultra-high-end market, so price point will be very strategic because we are targeting ultra-high-end market.

Great. My following question, if I may, is with respect to flexible OLEDs on plastic. Can you comment about your capacity plans for that type of mobile display?

We have 14K based on Gen 4.5 generation.

Great, thank you very much.

Nam Hyung Kim, Arete Research.

Thank you. Sorry, one more OLED question. Can you give us an update on recent accident in [E1] (inaudible) your Gen 8 OLED sets. When do you think that that can resume its operation? The local Korean newspapers say it may take two months, so is this going to affect your plan on 600,000 OLED panel production this year? Any update on this would be great.

In advance we are really sorry about that kind of accident. Actually related to that accident, the production start was already [live] and we will start our production actually today. So the impact of the -- into the -- our [E3] factory will be minimalized in terms of production capability. But anyway, we will strengthen our safety issue going forward.

Okay, thank you.

Nicolas Gaudois, UBS.

Yes, hi again, sorry, I was on mute before. If we look at your capex you just split it for us for 2015, how much of that actually would be for the continuation of a ramp in Gansu fab to reach 90,000 sheets per month or is that already effectively done and we shouldn't really expect any new capex allocation and therefore further capacity ramp as well for the China fab in 2015? Thank you.

For the China fab and sheeting side, it was done mostly last year, so the impact for this year it is below 20%. Below 20%.

Okay, so when you said future preparation, that was LCD in China basically, essentially?

Partially.

Partially, great, thank you very much.

Jean-Louis, SGJA.

Yes thank you, it's Jean-Louis here from Societe Generale/Ji Asia. Just two very quick questions: one, I just need to clarify one thing, your Guangzhou joint venture plant, is that 90,000 sheets per month or is that 120,000 sheets per month, as I have heard from the Chinese end?

Yes, it is planned 120,000 per month, but at the end of last year it was 60,000, but it will be setting up 90,000 in the middle of this first half.

So 120,000 by when?

It's not decided yet. It will be depending on market demand situation.

Okay and just a quick follow up please on OLED. If you achieve your target of 600,000 units for TVs this year, does that mean that by Q4 we may see profitability in the OLED business, assuming the yield and the pricing is as you expect?

Actually in Q4 we will be fully ramped up of our third phase OLED facility, so we are expecting we can -- we hope we can make money maybe in year 2016.

Okay, thank you very much.

Jerry Hsiu, HSBC.

Alright thank you. Thank you for taking my call. You just mentioned back in the fourth quarter the cost structure for your high value add products or the small sized displays are high. I'm just wondering do you see any room for improvement to perhaps improve the margin in those segments and if so, then when do you think it will happen?

That's a good question. If our whole volume scale would be similar, yes, definitely our margin should improve naturally. But unfortunately in first quarter pooling contraction will be a seasonal pattern, so it's very difficult to manage our margin improvement sequentially.

Okay. Sure, I understand, okay. Perhaps along the same line, do you expect the metal oxide to be more meaningful contributor in terms of the revenue this year and if so, then what kind of product could be adopting that, this kind of technology?

Oxide is a very critical product for us, especially for OLED side, but in terms of the LCD side, it is very negligible for us.

Just to comment is that we have some (inaudible) in notebook side, tablet side and then high-end monitor side for (inaudible) side. So that is we are selectively (inaudible) opportunity to (inaudible) within higher end margin product.

Okay, thank you.

Eric Lim, CIMB.

It's me again. Heeyeon, could you give us some more detail about the agreement with Universal Display? I think that agreement incorporates two parts: one is licensing and the other is the material purchasing. We didn't see too much detail revealed in the announcement on Universal Display, maybe you could give us some more detail about that and the rationale for the agreement.

Please understand we cannot announce in detail. Anyway the most important thing is we need this strategy alliance each other and stable procurement and strategic development for future material is more important for us to strengthening our ecosystem.

So are you going to pay certain percentage of royalty to Universal Display for the OLED panel production in the future?

For Universal Display agreement, we cannot mention about that. Anyway, as I mentioned, the strategic alliance gives us a big opportunity to strengthen our ecosystem. Please understand.

Okay, understood. Just one housekeeping question, what would be the depreciation cost we have to factor in for first quarter and any non-op items we may expect in first quarter?

First quarter depreciation expense is expected to decline KRW10 billion or KRW15 billion further.

What about non-op? Any further write-offs, equipment and inventory?

No, there is no further write-offs.

Thanks a lot.

Ben Lu, Moon Capital Management.

Hi Heeyeon, thank you for letting me ask a follow up. I just wanted to go back to my FX question. I think in Wednesday you guys will talk about how FX helped your OP by about KRW200 billion in the quarter, which meant that if I take out KRW200 billion from your KRW626 billion that you reported, your OP on a constant currency basis would have been KRW426 billion, which would have given you a 5.1% operating margin, which is down almost two points Q-on-Q, despite a 27% increase in revenues.

I know you obviously said there was mix changes in terms of the small size, etc. but I'm a little surprised at how much your margin fell sequentially on a constant currency basis. So can you just walk me through a little bit about what exactly is the profitability of your small, mid-sized business? I know you talk about there's higher cost, but it just seems like the decline in your OP and your margin seems a little bit more than I would have thought.

I continuously highlighted, yes there is a favorable FX impact, so that amount was significant for us and also all the Korean manufacturers. This kind of FX improvement, our operating margin is a bit lower than your expectation. There is lots of reasons. One biggest reason, as I already highlighted, our mix structure. Our high-end product, small and medium size high-end product margin was lower than our average margin, that's the biggest reason. Also we have accelerated our expense [reflections] to make our assets soundness. That shouldn't be hard for us to understand this kind of situation.

Okay, alright. Thank you so much for clarifying.

Currently there are no participants with questions. (Operator instructions) The following question will be provided by [Clare Tome] from Titan Securities. Please go ahead sir.

Thank you for taking my question, I just joined this conference call two minutes ago, so my question might be a little bit redundant. How long do you expect to see a strong flat price movement on TV panels in the first half of this year?

We hope this kind of favorable situation will be an ongoing issue for the whole year. But it is a bit early to mention about that. Anyway, the reason for the favorable price trend was same, the bigger screen demand increase from set makers and from consumer side. We hope that this kind of trend to be sustainable this year.

Do you mean that at least by the second quarter of this year as well?

We think that kind of comment to be meaningless.

Okay, thank you.

We hope this kind of trend should be sustainable.

Okay, thank you, great.

Jerry Hsiu, HSBC.

Sure, as a follow up to Clare's question, just wondering, for your outlook for the entire industry, I think you mentioned about something like high single-digit growth in terms of the total area demand. I'm just wondering can you break it down for us in terms of unit and the size growth?

Yes, so as we already commented, we have high single-digit growth for area base, so most of the area base growth (inaudible) a TV. So TV yes, TV is the high single but it's (inaudible) areas with flat, always the flat. Some (inaudible) increase potential in monitor side, yes? The other one is the smartphone is over five inch and then propositions is increasing. They are doing (inaudible) total area base growth this year.

I'm sorry, what kind of size migration are you assuming for this high-single digit growth?

So for example, for TV, for example and then -- 2013 in China market we sell 32 inch proposition is just 43%, 50 inch is only 15%, or 50 inch portion. But in 2015 we expect 50 inch size, over 30%, almost double again of 2013. (Inaudible) I think with the China and the North American bigger size in the screen, heavy demand will drive and then total area base growth in this year.

Okay, so other than China and US, do you also see the size migration maybe taking place in emerging markets as well?

Yes, I think so. The emerging market also and then now, as you are aware, India or Southeast Asia, the CRT (inaudible) are almost gone. So then (inaudible) those area sizes on the 32 inch too and then over 32 inch. It will be helpful to our then area base growth. Also in South America, (inaudible) in the other Latin American demand all send a very strong for area base growth.

What is the measuring size for this emerging market and what do you think they could be in the next year or two?

Okay, emerging market, there is two kinds of emerging market. One is India, one of the biggest markets in Asia. Those markets, until last year, 70% to 80% demand was under 32 inches. But now its migration will be in that increase, so then I think those proportions will be in the [50% to 60%] over 32 inches position it will be increased by, and then 40%.

That's very helpful, thank you.

Currently there are no participants with questions. We will wait for a second until there is another question.

Operator, if there are no questions, we will end this conference call. On behalf of LG Display, we thank you for participating in our Q4 earnings conference call. Should you have other questions, please contact either myself or my colleagues. Thank you for your participation.