LG Display Co Ltd (LPL) 2015 Q1 法說會逐字稿

Welcome to LG Display First Quarter Year 2015 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 Market Intelligence and TV and IT/Mobile Marketing. KY Ko is Head of the Market Intelligence division. [Sang Wong Choi] is head of IT/Mobile Marketing division. [CH Kim] is TV Marketing 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 an hour for this conference call. During the first part of the call, I would like to highlight our first quarter results, performance and second quarter outlook, which correspond to the slide 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 on to revenue and profit on the next slide, revenue in the first quarter was KRW7 trillion, which was a decrease by 16% quarter-on-quarter and a growth by 26% YoY. Sequential revenue decrease was driven by seasonal shipment decline and sales mix change. Compared to previous years, TV shipment showed a relatively strong movement. And also due to the tough tablet demand situation, we have shifted some of our existing capacity to produce IT products which are more profitable than tablets.

Our mix change towards more profitable applications, combined with our cost reduction efforts related to an operating profit resulted in KRW744 billion, which increased by 19% quarter-on-quarter, while revenue had dropped [here to 16%]

quarter-on-quarter. Operating margin was 11%. EBITDA margin was 23%. Pretax profit was KRW624 billion and net profit was KRW476 billion.

Moving on to Slide 5, looking at our financial positions and ratios. At the end of first quarter, total asset was KRW22.4 trillion, liability KRW10.2 trillion, and equity KRW12.1 trillion. Cash and cash equivalents increased by KRW322 billion, resulting in KRW2.7 trillion. Inventory decreased to KRW2.6 trillion from KRW2.8 trillion. Liability to equity ratio, current ratio and net debt to equity ratio all improved sequentially, recording 84%, 129% and 10% each, maintaining a healthy situation.

Moving on to slide 6 and looking at our cash flow. Cash at the beginning of first quarter was KRW2.4 trillion. Cash flow from operating activities resulted in cash inflow of KRW806 billion, while cash flow from investing activities resulted in an outflow of KRW321 billion. With the cash outflow from financing activities at KRW485 billion, our net change in cash was an inflow of KRW322 billion, resulting in cash at the end of the quarter with KRW2.7 trillion.

Moving on to Slide 7, I would like to go over our performance highlights. In first quarter, our shipment decreased by 3% quarter-on-quarter, resulting in 9.8 million square meters. Our blended ASP per square meter decreased by 16% quarter-on-quarter due to mainly sales mix change. Revenue portion of tablets, which has higher ASP per square meter, dropped significantly, while TV with lower ASP per square meter grew sequentially.

Next slide will be more helpful to understand our sales mix change. Moving on to our product mix on slide 8. Our TV business was 41% of our revenue, followed by mobile applications 25%, monitor 17%, and remaining 17% was combined notebook and tablet. For your reference, as the hybrid products between tablet and notebook appeared, it became quite [vague] to divide the boundary between those two products. Therefore, from this year on, we decided to disclose it as one category, merging notebook and tablet segments. Due to tablet demand decrease, the sales portion of notebook/tablet segment decreased 10 percent points quarter-on-quarter.

Moving on to slide 9 and looking at our capacity. Our producible capacity in first quarter decreased by 2% quarter-on-quarter to 12.3 million square meters. Despite of our capacity increase from China facility, additionally [30K] ramp-up, we have witnessed capacity decrease in first quarter. That's mainly due to the capacity allocation for R&D use and preparation for new models, which was greater than the capacity increase.

Next, we turn to our outlook section. Second quarter, we expect total area shipment in square meters to increase by low to mid single-digit [percentage], due to seasonal demand increase and bigger size demand in TV. Especially, due to the favorable larger size TV order trend, our TV unit shipment is likely to fall during second quarter, as we are shifting more to larger size production within our limited capacity. We are expecting second quarter capacity should be similar or slightly higher than first quarter.

As for pricing, we expect the pricing to vary by application and regions, depending on each demand and supply situation. Overall, we expect the pricing to show mild movement, but as mentioned, pricing trend will result differently for each panel maker depending on its customer and product mix.

Looking at the market environment, there are concerns about the macro uncertainties related to local currency depreciation in specific regions. But on the other hand, there is also upside potential of size migration trend towards bigger screen to accelerate. Therefore, we are planning our business plan in a conservative manner, but we'll closely monitor the market situation and timely adjust our sales mix flexibly, depending on the market situation.

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

(Operator Instructions) Nicolas Gaudois, UBS.

The first question is really on how you look at the TV panel market by segments, considering you own shipments on (inaudible) basis were somewhat better basically in Q1 and you have a positive (inaudible) sequentially for Q2. Do you see any segments where you think customers are on the higher side for panel inventories by size of panels entering versus second quarter? And my follow-up question also somewhat relates to the TV panel market. You made comments I think yesterday on being somewhat cautious on how you'll allocate your mix in the second half of the year with potential decline year-over-year in TV unit panel shipments on your side for H2, which kind of makes sense in the context of market uncertainty. Would that lead to you having a reasonably limited area growth in H2 versus H1 of this year?

I would like to explain the overall TV panel market situation. I think the [fourth] quarter is comparatively end up very strong than before, because last fourth quarter -- last second half is, what is very short of [vendor] panel supply. That's why (inaudible) will need some extra volume Q1. So that's why the Q1 is very strong, especially in the 32-inch market it's very strong. Price also is very strong. For now it's (inaudible) so I think that price is stable and supply/demand also very stable. That is the overall situation.

This is [CH Kim] of the marketing division. In our Company, the second half of the LCD TV panel production would be decreasing, both the quantity and area, compared to the first half, because there are limited capacity. As you know, there's part of the capacity change from (inaudible) already, and also size migration is a very important thing. UHD and larger size demand is very strong for us, so that we are -- you have to increase the larger size and UHD portion. So that means we have to decrease the 32-inch, something like that, the small size one. That is why right now this industry, the capacity is increasing, but size and mix is changing. That means we expect second half also to keep the balance.

I will add more things on your question. Our second half shipment also declined Y-o-Y basis and half-on-half basis, it have a meaningful volume scale. Why we are decreasing our shipment, that's not because of the market uncertainty or demand weakness. That's because of the size migration impact and capacity limitation as [CH] highlighted. Actually, during first quarter, as you already know, 32-inch production was increased. So among our total shipments, 32-inch portion was around mid-30%, but this kind of trend will decline significantly. In second half we are expecting 32-inch portion is slight over 20%. In this, we have to support more bigger screens such as 43-inch or 50-inch. Actually our customers' demand for this bigger screen is increasingly growing.

So as you already know, from one mother glass [8th gen, A,] we can get 18 cuts for 32-inch, but we only get eight cuts or six cuts for 40-something inch and 50-something inch. To meet this kind of bigger screen demand, our production should decline naturally. That's the main reason second half our production declined. That's not because of the market uncertainty or demand weakness.

Rob Stone, Cowen & Company.

There have been a couple of stories in the news the last couple of days about your plan for OLED unit production and possibly somewhat slower than expected sales, I guess, particularly of the Full HD as opposed to UHD OLED TVs. Can you provide any color on your updated production targets for OLED TVs this year and how that's going so far?

Actually our target number has not changed. This year our target number is 600,000 and next year 1.5 million units. But if there our target changes, that might be driven by mix change. Let's put it this way, last year we only have 55-inch Full HD, but now this year we expected -- we provided our product line from 55-inch to [65-inch and 77-inch]. So if there's a bigger screen demand from 65-inch or 77-inch, it means, within the limited capacity, our production capability is likely to decline. But for now, according to our assumption, we don't have any shipment change. But if there's a bigger screen demand, yes. Potentially our shipment is likely to decline. That's not because of the inventory or weak demand, but because of the size migration impact.

It seems logical to me that the premium early adopter customers you're targeting for the OLED TVs, which are particularly the 4K OLED TVs which are unique in the market, may be more heavily to the high end of the size range. My follow-up question is, do you still see a position in the market for a Full HD OLED TV or wouldn't it be the case that someone who wants the very best and latest technology, which is OLED of course, would also want to have a UHD TV as opposed to a full HD TV?

I think let's put it this way. In case of LCD side, we have Full HD and UHD simultaneously. There are market segmentations. Some customer want to get Full HD, some customers wants to get ultra-high definition. But market trend will move toward ultra-high definition. So we believe OLED market trend will follow this kind of natural trend.

And can you finally make any comments about the yield for UHD OLED?

Please understand we cannot mention about that. But anyway, it is in line with our basic assumption and our track record.

So you're taking yields into account of course with your unit assumption for the year, your units and capacity?

Yes, definitely.

SC Bae, Barclays.

I have some follow-up question on your previous comment on the TV production, the decline on units. I guess you already gave us a color. However, I want to ask you some more color. Can you provide some specific number of year-over-year growth of your TV production in second half of this year?

On a YoY basis, it might be mid to high single digit range in terms of Y-o-Y basis. And half-on-half basis, it might be similar or higher.

I have a follow-up question. My understanding is that if I look at the total -- at the end-demand trend, annually, my understanding is that TV demand increased 30% to 35% half-on-half, and you're mentioning that your production of TV panel will shrink like mid to high single-digit half-on-half. Is that meaning that we would see some sort of shortage situation in the second half of this year? In that case, can we expect some price stabilization or increase instead of the price decline?

Yes. Definitely we are concerned about the severe shortages in our Company, but industries are little bit different. So we are just -- we are going to stay the price line.

Okay. I would like to add some comment. Industry wise, some people worry about is the new capacity of the China company in second half, but (inaudible) trying to increase some mix and then improvement, that means is that they'd like to increase [from] 55-inch, 49-inch, even 65-inch. But we expect some difficulties for improving the model mix in new fabs. That means that they will then increase or gain for 32-inch. So as (inaudible) already explained, our Company will keep decreasing in the 32-inch in the second half. That means we'd like to increase in the larger size in the mix. So I think that is -- that means size by size and company by company the supply/demand situation will be different. That's why we think that second half market will be stable. We can have some chance to improve our business situation.

Jerry Tsai, HSBC.

Congratulation on a very good quarter. Just I have questions about the margin. I understand how in the first quarter that your margin was able to expand on the back of the TV and IT revenue rose as a percentage of your sales. But then I just wonder on an individual segment basis, did margin for those two segments also went up on Q-on-Q basis?

In first quarter, yes, it's surprising, even though 16% revenue declined, in this kind of situation, our profit went up. That's mainly driven by our sales mix changing, more profitable revenue increase. That's TV and IT segmentation. That's the main reason.

And second reason is our cost reduction efforts. We reduced our costs at around KRW150 billion sequentially. These kind of efforts combination gave us improved margin trend. And in terms of profit hierarchy, TV monitor is the best, and then notebook. And small size, small and medium-size margin is below than average.

So, on a Q-on-Q basis for these individual segments, you didn't see much fluctuation in terms of margin. It's just more of the fact that just the revenue contribution from this higher margin product go up, that's pretty much it?

In second quarter, our sales mix is expected to be similar.

Just as a quick follow-up, it seems like you will be undergoing quite a bit of product mix change going forward. So, hence, the second half, the decline in terms of unit. How do we think about the impact on your margin due to this mix change?

Although shipment order declined for the TV side, the ASP and size will grow. We are expecting ASP per square meter should be better. So in this kind of situation, our margin should be protected.

Claire Kyung Min, Daishin Securities.

I have three questions. The first one is about the quarterly depreciation, second one is about UHD TV panels, and third one is about PC panels. Let me ask you the first question. It seems that depreciation and amortization of Q1 decreased by KRW55 billion compared to Q4. I expected an increase of depreciation because of China Guangzhou fab and OLED TV panel fab. And can you explain why the depreciation of Q1 decreased? And I will ask you the second question after your answer.

Yes, our depreciation expense declined in first quarter, and going forward, our depreciation expenses should be similar every quarter, and annual depreciation expense will be similar as of last year. In first quarter, although we have a China facility and OLED facility, our depreciation expense has declined. That's because of the modules. We have less of module business in certain -- irrespective of the sales activity, major module depreciation expense ended. That's the main reason.

My second question is about the UH TV panel technology, which is called [MPlus]. And as far as I know, [MPlus] is one of the cost-saving technology by adding another white pixel on the existing three red, green blue sub pixels, and improving luminance. And can you explain how the [MPlus] technology contribute cost savings during the cell-making process or module-making process?

Actually the panel itself, there is no cost reduction. But toward TV set point of view, the luminance increasing means we can reduce the (inaudible) cost. That's why we are -- actually we are developing this technology for not only those of our Company, but also our customer or the consumers.

And here's my third question. This is about PC panel. When I compare PC panel business versus TV panel business, the demand driver of TV panel business is definitely larger-sized products. But when I see the PC panel business, the demand driver seems to be just one, which means high resolution. And if you look at the second half of this year, can you explain us any other new demand driver for monitor or notebook panels?

Well, as you know, there's no specific momentum to grow. So we hope in the second half -- second quarter, we expect some, you know, fresh demand due to [Win 10] launching. So there's no specific momentum. But as you know, well, second half last year, our IT capacity was shrinked. So we -- our shipment was -- our shipment was -- I mean our share was reduced. So we try to recover our market position. It means that our share is around 29% to 30% of total PC.

Okay. I'd like to add some comments for IT market. So as you know, whereas the PC market itself is not growing, just very flat and little bit of decrease. But as you know well, our Company is focused on high-end product. For example is IPS and then high-resolution, as you already commented. So those market itself is growing. So we focus on IPS, high-resolution market. (inaudible) our potential in PC industry, Windows 10 is the -- we focus is the hybrid PC, we will grow in future. So, that is another momentum in the PC market. So we'd like to focus on those and the high-end market. That is our strategy.

And also as you already understand, we continue to increase IPS monitor and IPS notebook as well. Thanks to this kind of our IPS differentiated products, our margin generation is differentiated as well. So, going forward, we continue to support this kind of IPS products into the market.

Ben Lu, Moon Capital.

Congrats on a very good quarter. First, as you talked about how TV units will be down mid to high single digits year-over-year and half-on-half in the second half, can you talk about what your TV area growth will do in second half year-over-year and half-on-half?

Area growth should be flat -- should be flat.

Both year-over-year and half-on-half?

In terms of year-over-year, yes, definitely it'll be increased because of our new facility from China. But half-on-half, it might be flattish. But within this kind of flattish capacity, our size migration give us limitation of production unit.

So units will be down mid to high single digits half-on-half, but area growth will be flattish due to size migration?

Yes, half-on-half basis.

And then earlier, Hee Yeon, you talked about the cost down was KRW150 billion Q-on-Q. Can you break that down by how much of that KRW150 billion was from better mix, meaning less tablet and more TV or IT as well or just from better pricing from your component suppliers?

KRW150 billion means that's the cost reduction from the procurement side.

And can you -- that's a lot larger than what you normally get. Is this a one-time thing and can you talk about where you got most of the cost down from and why?

Actually, first quarter cost reduction was big, was bigger than the historical pattern. Going forward, we'll try to reduce our cost at around the low single digit percentage.

Can you elaborate on where the cost came from? Was it polarizer, film, glass, or is it across everything?

In every areas, including our overhead costs.

I'm just kind of surprised why, given that your margins are near historical highs, panel pricing is very good, your component suppliers agreed to a bigger-than-usual price cut in Q1.

As you already understand in usually first quarter, usually first quarter is seasonal weak, but it turned out to be better, thanks to the size migration and our efforts. Going forward, we will try to reduce our costs based on our market assumptions. But the reality and market situation can be changeable every time. So it means we will be very flexible on our strategy.

And then my last question is, you know, it's very unusual to see your Q1 OP strong. Typically Q1 tends to be the low season and your profits gradually improve through the rest of the year. How should we think about seasonality through the rest of the year? I know Q2 should be down a little bit, but then should we expect Q3, Q4 to improve again? And what's the linearity through the rest of the year? Thank you.

Actually, going forward, our sales trend and profit generation trend is not that highly related with the seasonal patterns, because as we already highlight, our capacity remain flattish and our sales mix and product mix shifted towards more profitable segmentation. So that's why our first quarter number was quite different from the market or seasonal pattern. So, going forward, seasonality is not that key area for our earnings forecast.

So is it possible that Q2 could be flat Q-on-Q and then second half to be up again as well?

Second quarter? Second half?

Yes. Do you think the second half may be higher versus Q1 levels?

It's too early to mention about that. Anyway, we will try to be more focusing on our better profit portfolio management.

Alberto Moel, Bernstein Research.

I have a couple of questions that are related. One, you mentioned that the product mix shift towards monitors and TVs has given you some margin expansion. I wondered if you've got some color, if you have some color on the margin expansion on TVs, how much of that was driven by a shift to 4K and how much was it from traditional HD panels also having good margins? And a related question is, on the KRW150 billion cost reduction, how much of that was driven by FX gains from a weaker won or basically from local procurement or local cost structure in your cost reductions? So, kind of related, so, two questions out there. Thanks.

It's very difficult to quantify. Anyway, in case of TV side, we have ultra-high definition TV and also [MPlus], that's also cost-efficient solution for us. Ultra-high definition, that was -- first quarter, that was around 10%. And then in case of IPS monitor, that's already over 40% among our total shipment. We will continue to increase this kind of IPS and ultra-high definition. But it's very difficult to quantify which was allocated for our profit generation. But anyway, with this kind of differentiated products, it gave us a chance to improve our profit generation meaningfully. Sorry, our IPS monitor portion is already 70%. And in case of notebook, that's around 30%. We will continue to increase this kind of profit -- this kind of [proportion] going forward.

And on the -- so just to clarify, so, basically the UHD proportion is 10% of your shipments were UHD, and you can say that it did improve your margins but you can't quantify it, is that correct?

Yes.

And the second question, which is on the FX impact on your cost structure, on your cost reduction, if you have any comment on that.

FX impact for first quarter is not that big. As you already know, our average FX changes, won against U.S. dollar was just KRW10. It is very -- it's not that big. [Depending on movement] we will have a total impact around KRW30 billion. So that's not a big part of our profit generation in first quarter.

Andrew Abrams, SCMR.

The product mix that you've kind of gotten in first quarter, how close do you think that's going to remain in those basic categories for the rest of the year? Where you were on the TV business is pretty consistent with where you've been, other than fourth quarter, but some of the other categories have changed a bit. How much variance do you think there'll be in those percentages going forward?

Overall mix trend should be similar. In case of mobile business, we are strong in second half. In case of TV business, it might be flattish half-on-half. So if we look at last year's sales mix trend, we expect our sales trend and mix trend should be similar than -- as last year, in terms of the picture.

And can you give us some indication as to where you are on the OLED flexible business, you know, in terms of capacity, in terms of where you are in adding that capacity? And maybe on a general basis, where you are on adding capacity in the large panel OLED business.

Your question is flexible OLED for large panels, TV or mobile side?

Flexible mobile and then the large panel separately.

In case of large panels, large panel we now have 14K at (inaudible) facility, but we also have a plan to increase at the end of this year. It might be 20K additionally. And then flexible OLED, now we have 40K based on gen -- 4.5 generation. Further, our expansion is under review. We have not finalized it yet.

You mean for the total for the year? I'm sorry, did you say you were at 40K for the flex line?

No, 1-4-K, 14k.

And so you haven't set a number that you think you'll be at for the flex line by the end of this year yet?

Yes, we're under review.

Jerry Tsai, HSBC.

I have a couple of follow-up regarding IPS technology. Can you give us a sense of the -- what's the adoption of the IPS in IT panel outside the U.S. major customer? And what is the premium over the TM panel right now and where do you think the premium can go in the coming year?

Monitor case, you know, IPS premium is not high, just $2 or $3. But notebook case, at the moment, the IPS premium is around $7 to $10. So, we're going to reduce that premium in the future. So, we'd like to change the -- change market into the IPS market.

And also for the customer base, as I already highlighted, in case of monitor that's already over 70% and notebook is over 30%, it means we have very diversified customer portfolio for IT segmentation. Most of our customers have already IPS monitor and notebook. The penetration speed for monitor is much faster than notebook, but we also hope notebook penetration will follow the monitor trend.

So in terms of the upside for the entire market, you think there's a limited upside or you think there should be -- still be plenty of upside for the IPS in IT panel?

We hope we have many upside for the IPS panel.

Could I ask one more question about the Oxide, because I want to know if -- are you preparing this just for the major strategic partner or you think there could be other customers will be adopting this kind of technology in the coming year?

I cannot understand what you are asking, but in case of Oxide, we have two kinds of solutions for Oxide OLED and Oxide LCD. In these two kinds of solutions, we, in terms of technology and productions, are ready. We will -- I don't understand what you mean exactly.

I mean I'm just wondering if it's for (inaudible) for the Oxide LCD, would it just be for the one strategic customer or you think there will be other customers be using these panels in the coming year?

As I already highlighted, our technology is ready and production is also ready. And if a customer who wants to get that kind of a product technology, we would support all kind of customers.

Eric Smith, DryStone Capital.

With respect to OLED televisions, can you give a capacity utilization number for Q1? And I was also wondering the timing of any potential capacity expansion beyond the current M2 fab. Thank you.

In terms of OLED side, the capacity utilization is very less for this timing, because it is ramping-up stage for the new facility.

And any potential timing -- the CEO recently gave an interview with The Wall Street Journal talking about potential capacity expansion down the road. Can you talk about the timing of any decision around that?

Potential capacity expansion, yes, we -- for now we are planning to add another 20K at the end of this year, on top of existing 14K. That's our expansion plan.

Okay, thank you.

Yes, okay. On behalf of LG Display, we thank you for participating in our Q1 earnings conference call. Should you have further questions, please contact either myself or my colleagues. Thank you.