LG Display Co Ltd (LPL) 2015 Q2 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 2015 second 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 2015 second quarter earnings results by LG Display.

Welcome to LG Display second 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 market intelligence and IT mobile marketing.

Steven Koh is head of market intelligence division, [Sam Choy] is head of IT mobile marketing division. Next slide please.

Before we move onto the earnings results, please take a minute to read the disclaimer. I would like to remind everyone the 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 second quarter results performance and third quarter outlook which correspond to the slides available on our website. Afterwards, we will take questions.

Moving onto revenue and profits on the next two slides. Our revenue in the first quarter decreased 4% quarter-on-quarter, recording KRW6.7 trillion. Due to economic uncertainties we have witnessed a slowdown in end demand, resulting in set makers' conservative approach to adjusting inventory during second quarter.

With the panel price decline which reflected the weak demand, especially in IT segment, and in TV segment below 40-inch category. Third, with the continuous TV size migration trend and increased portion of our Advanced In-Cell technology-based smartphone and customer base, our revenue grew 12% YoY basis.

Due to the mix changes toward the larger size TVs and increasing the portion of our A80 smartphone product, we have seen a minor blended ASP decline, and resulting in an operating profit of KRW488 billion. Operating margin was 7%, EBITDA margin was 20%. Pre-tax profit was KRW507 billion and net profit was KRW363 billion.

Moving on to slide 5, looking at our financial positions and ratios. At the end of first quarter, the total assets was KRW22.5 trillion, liabilities KRW9.8 trillion and equity KRW12.6 trillion. Cash and cash equivalents was KRW2.7 trillion and inventory decreased to below KRW2.6 trillion.

As our liabilities decreased by KRW459 billion, liability to equity ratio and current ratio improved, recording 78% and 144%. Net debt to equity ratio was 11%, maintaining a healthy situation.

Moving on to slide 6, looking at our cash flow. Cash at the beginning of second quarter was KRW2.7 trillion. Cash flow from operating activities resulted in cash inflow of KRW640 billion, while cash flow from investing activities resulted in an outflow of KRW620 billion, all in all 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. During second quarter, our area shipment was flat QoQ, recording 9.8 million square meters which was a bit below our guidance.

Due to mix (inaudible - technical difficulty) uncertainties and weak end demand we have witnessed order changes from our customers, reflecting those uncertain market situations. Despite the weak set demand situation, continuous larger-size trending TV segment as well as increasing portion of our Advanced In-Cell Touch smartphone by broadening our customer base was a positive factor during second quarter.

With the order adjustment from the set-makers, accordingly natural inventory correction started during the second quarter. Thus we expect the inventory situation to be stabilized during the third quarter.

With regards to pricing, (inaudible) for IT segment and small to medium-sized TVs under 40-inch category showed a downward trend due to weak demand. However, as explained earlier, our blended ASP per square meter decrease was limited to 5% quarter-on-quarter due to continuous larger-size trend in TV segment and increase in Advanced In-Cell Touch products in our customer base.

Moving on to our product mix on slide 8. Our TV business was 40% of our total, followed by mobile applications 28%, monitor 16% and the remaining 16% was for combined notebook and tablet segment. Due to the fluid demand in the mid- to larger-size segments, TV monitor and notebook tablet segment revenue portion declined 1.8%.

On the other hand, with the increase in A80 based smartphones and minimal mix expansion, the third portion of the mobile segment increased 3 percentage points quarter-on-quarter, resulting in 28%.

Moving on to slide 9 and looking at our capacity. Our producible capacity in second quarter was 12.3 million square meters, remaining quite flattish versus the previous quarter.

Next, we come to our outlook section. Lastly, I would like to share our outlook for Q3 and second half. For the third quarter, we expect total area shipment in square meters to remain flat versus previous quarters due to our limited capacity as well as conservative order trend from set-makers resulting from the underlying macro and demand uncertainties.

But with the continued larger-size trend in TV segment, our production and unique shipments for TV is expected to decrease quarter-on-quarter due to those mix changes toward larger-size production, impacting the market supply and demand situation in a positive way.

As for prices, we expect panel prices to continue downward trend, although price fluctuation may vary among panel-makers depending on the supply-demand situation of each segment and sizes. For example, 48-inch has been showing a deep price decline while 43 inches and 49 inches, which was focusing on -- we are focusing on is showing a relative market price declining trend. We will implement a flexible production operation and utilization adjustment strategy based on market situations.

Also, we will more proactively focus on OLED market and customer expansions. Our decision to invest in a Gen 6 plastic OLED fab is in line with our strategy for those structural future preparations to go OLED.

Looking at the market environment, there are concerns about continuing uncertainties but there could also be upside potential such as continuing size migration trend, especially in TV, increasing portion of specialty products such as IPS and A80 and recent favorable FX movements as well as the expectation of a healthy environment to come during third quarter, resulting from set-makers' [older] inventory adjustment from second quarter.

Therefore we are watching the market situation very thoroughly to flexibly adjust our set mix operation and utilization based on the market changes as to maximize our profit generation.

That's the end of our presentation. Let's have our Q&A session.

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

Yes. Hi, good morning. A couple of questions. First, you talked yesterday about converting some amorphous silicon capacity to LTPS. Maybe if you could elaborate a little bit on the rationale for that and what is the timeline for this conversion? And also, in addition to that, you actually have finalized plans to add more capacity after this for high-end mobile displays.

And secondly, as things stand after the recent variation in underlying pricing, if you could, referring back to Q2, rank qualitatively the profitability of each segment for your business it would be quite useful. Thank you very much.

Our classic OLED set convergence, if it takes two years is a bit longer than before. In case of (inaudible) 35K amorphous silicon facility can be converted into 7.5K LTPS classic OLED.

For the further conversion plan is not decided yet, but anyway this classic OLED facility is very brand new to support different designs for different segmentations. So it will take a longer time then the historical conversion production plant. And for the profitability for each segmentation, in case of TV and modular, which is quite higher than our average margin but the other side, notebook, tablet and mobile is much lower than our average margin.

Okay. Thank you.

Rob Stone, Cowen & Company.

Hi. Thanks for taking my questions. I had a couple of questions on OLED capacity as well. So the new line that you announced today or yesterday, Gen 6 7500 substrate starts. Is that a phase 1? Do you expect that facility might ultimately have more than a capacity of 7500 substrates per month?

Our Gen 6 space 7.5K, yes it is the first phase of our classic OLED to support for the blend older displays. So if we were have sound migration we will consider another phase but it's not decided yet.

Okay. And then with respect to the capacity expansion that was planned for OLED TV this year, can you provide any update on how that's progressing from the 14,000 towards the 34,000 substrates?

Yes, it is in line with our previous communication, another 20,000 will be added in second half. The production will be starting in the middle of second half this year. So totally our OLED TV capacity 34,000.

Great. And how is the shipment trend for OLED TV panels for the second quarter or the first half so far?

Shipment trend will be quite significant. During first half our shipment was very small because during first quarter as you already know, we have some issues to start the OLED products online and actually we start to provide ultra-high definition, really good sets, TV sets from second quarter. So the volume scale is not that big but in second half in accordance with our 20,000 addition of production our shipment will increase significantly from in the middle of second half.

Can you quantify any more precisely the panels shipped in the second quarter for TV?

Actually, around 80% will be (inaudible) in second half of the whole total quarter.

Okay, about 80% of the plan for the year in the second half. Great. Thank you very much.

Andrew Abrams, SCMR.

Hi. Thank you for taking the question. Can you repeat what you said about ASPs for third quarter? It was very difficult to hear. I thought you said ASP is down 5% but I just want to make sure that's correct.

Our ASP, 5% is blended ASP and the third quarter we are expecting individual panel prices to continue to decline but it's quite different based on size and application.

In case of above -- 40 and above size panel price decline our speed is very slow for the 32 inch, and in case of IT panel price, it is -- it has declined significantly so we are expecting stabilized in the middle of third quarter. So all in all, together with the mixed trend, our blended ASP would not be declining in third quarter.

Okay. Thank you.

There are no participants with questions. (Operator Instructions) [Sanjeev Rana], CLSA.

Hi. Good morning everyone. I have three short questions for you. First is on ForEx. What was the impact of ForEx on your earnings in the second quarter and how do you see it in the second half of this year given the Korean won has weakened?

My second question is that you alluded to cost savings and flexible production in the second half of this year. Could you a little bit explain more about that?

And my third question is what are you expecting of the product mix in the second half, like any segments that you expect to do well?

In case of FX impact in the second quarter, it was very limited. Actually in case of every, the FX change it was flattish so there is no positive FX impact in second quarter for our operating side.

But in case of regarding profit side, we have some operating -- we have some FX variation gains because right now our US dollar debt decreases significantly while our US dollar asset is much higher than US dollar debt. So we have some valuation gains on the recurring side.

In second quarter, although we have a significant cost reduction in first quarter, because of this our second quarter cost reduction was very limited (inaudible). And our product mix, our product mix is expected to be similar as second quarter and second half.

Thank you.

Claire Kyung Min Kim, Daishin Securities.

Good morning. Thank you for taking my questions. The first question is about fab allocation. As far as I know, LG Display already has OLED TV panel fab and small-sized OLED fab in Paju which is in the northern part of Korea.

And now it seems that your Company decided to establish a new next-generation OLED fab in Gumi which is in the southern part of Korea. But as far as I know there are some spaces still remaining in Paju, so can you give us some colors on your strategy decision on the fab location between these two places in regard of the OLED investment?

If we look at our small-size business, our -- most of small-size business was run by Gumi area, which is the southern part of Korea. So that's why we choose our plastic OLED facility for northern part of Korea -- southern part of Korea.

Okay, thank you. And my next question is about your Company's outlook for panel prices. Because last year when your Company decided to reduce the production of IT panels which are mostly monitor and notebook, that decision actually had a big impact, big positive impact on the panel price movement in the first half of last year to the second half of last year.

And now your Company tries to reduce the TV panel production in terms of the unique shipments. So do you believe that your Company's decision can have a positive impact on the panel prices in the second half of this year although there are new capacity increase from Chinese competitors, which is a different aspect from the last year.

New custom is very great. Yes we think so, last year really the success story of the converting IT facility into LTPS. So in second half this year we will reduce our facility again to support the bigger screen TV demand. It is a different story from last year. So our production should be limited for IT segmentation so we hope it will be favorable for IT price trend.

Regardless of this kind of trend, actually notebook price has plunged to loss-making level from -- for the industry-wide. So the IT panel prices should stabilize when you look at our competitors and industry profit generation situation.

In case of China, Chinese competitors' facilities are mostly focused on the TV side, so this is a different story. Chinese facilities will be used to put TV which is the supply expansion. However, as you already understand, size migration gives us a chance to reduce production. Actually in third quarter, LG Display third quarter TV shipments will decline even though the area (inaudible) showed flattish the size migration will mitigate the Chinese expansion.

Okay, thank you.

by Eric Lim, CIMB.

Hi Hee Yeon. Can you remind us the CapEx number this year and how would you break it down into OLED, LCD and maintenance?

This year, CapEx should be similar of last year at around KRW3 trillion level. Maybe 30% will be used for OLED and next to [preparation] and the remaining percentage will be China facility together with our maintenance.

What about next year? Are we going to expect the OLED CapEx increase in a big way? Then also (inaudible- multiple speakers) standard.

For next year, only we have plastic OLED expansion was decided and the other things are not decided yet, so we don't have the numbers. Anyway, we will try to control our CapEx to be reasonable (inaudible) in accordance with the market situation.

Yes considering that the TV OLED will be reaching 33,000 this year and we're not going to expand LCD capacity in China next year, so should we assume next year CapEx will be coming down compared with this year?

It's early to mention about that, so we will give you more detailed numbers at the end of this year. Please understand.

Okay. My second question is regarding to OLED. What would be the number we should assume for the OLED operating loss in second quarter?

Operating loss should be similar trend. We try to maintain OLED operating loss every quarter.

So it's like KRW150 billion?

For the detailed numbers, we cannot mention about that. Please understand.

Okay. So I will assume OLED will be still running below water so when we ramp up more OLED production in second half, will that be a drag to the margin in second half?

Second half, we have positive and negative factors simultaneously. Positive factors will be improved together with the (inaudible) scale and negative factor is our fixed depreciation expense increased but we hope that will be offset exactly or potentially it's better.

Okay. Because normally in second half we will have a higher OpEx and depreciation. Will that be still the case for this year?

In terms of depreciation, it should be flat every quarter.

Okay. What about OpEx?

It's quite in line with our sales trend and also R&D expansion. That will be similar or slightly increased.

Okay. Yes, thanks a lot but can I have one more question about OLED?

Okay.

Assume we have 34,000 capacity next year and we will be able to sell our OLED TV panel at twice price of LCD. What would be the yield level that we can reach breakeven for OLED operation next year?

Actually it's very difficult to quantify. The cost reduction factors is not only from the unit ratio although we have (inaudible) ratio, we need volume scale and mature cost reduction in mass production reduction. So together with these kind of market process to reduce our cost side, we will deliver reasonable cost OLED to the market, but it will take time.

Should we assume the ASP for OLED TV panel on a like-for-like basis will be more than double compared to LCD? Will that be the reasonable assumption when we put into our model?

For the numbers, we cannot mention about that. Please understand, because right now volume scale is very small but while our expense related to the R&D and marketing is huge, so it's a bit only to mention about that kind of numbers. After reaching the 34,000 fully ramped up, we can deliver more reasonable numbers. Anyway we will...

What about right now? The ASP premium?

Actually our cost structure is quite higher than LCD because it is very (inaudible) and also our volume scale versus the LCD is just 1% and 100% LCD so it's a bit unfair to compare LCD right now so that's why we can deliver more reasonable comparison between LCD and OLED after (inaudible) 34,000.

Okay. Fair enough. Thank you so much, Hee Yeon.

Andrew Abrams, SCMR.

Hi thanks. Can you give us some indication of what your planning is for the OLED TVs in terms of panel size? I guess it's primarily 55 inch thus far and you've expressed two other models. Do you have any idea how the allocation is going to go between those three different sizes?

We focused 55 inch full HD to last year but this year it was changed, 55 inch UD and 65 inch 77 inch UD products but nowadays market response for 65 inch and 77 inch is a bit greater than our expectation, so the mix is likely to be changed for the 65 inch and 77 inch ultra-high definition, but anyway major production for this year should be 55 inch ultra-high definition product.

Got it and is there any way you can discuss your yield? I realize that you're in the process of ramping up which is going to affect yield no matter what the circumstances are, but is there some guidelines you can give on where you would be in terms of OLED 55 inch TVs on yield?

In case of 65 inch full HD OLED last year it was already hit over 80%. Now it is a bit higher than last year. In case of ultra-high definition, we are on progress to increase our yield ratio to the similar level of full HD so we believe ultra-high definition yield ratio should be similar at the end of this year, with full HD.

Got it and lastly, can you talk a little bit about your utilization rate overall, not just with OLED but how second quarter compared to first quarter and where you think maybe third quarter's going to be in terms of total utilization?

Our total utilization was around mid-90% during first half. In second half, is of similar, maybe 90% but total production unit will decline as I highlighted. Our TV size mix increase towards bigger screen they should rein in our production (inaudible).

Got it. Okay. Thanks very much. I appreciate it.

Rob Stone, Cowen and Company.

Hi. I had a follow up question or two part question really on OLED market and product development. In the press release, you referred to increasing the range of sizes and resolutions for OLED and also working on market support. I wonder if you could comment on whether additional models are planned for TV or whether the reference to size and resolution was about mobile OLED displays. The second part of my question is in what ways you may be working for market support, that you'll build channel support or advertising or pricing programs, what you might be doing by way of market support? Thank you.

This year, we have (inaudible - technical difficulty) confidence about our ultra-high definition TVs, especially ultra-high definition TV, (inaudible) ultra-high definition. So we will promote our marketing activities towards our customers and also we will do a commercial promotion in merchandising areas and public areas. We will try to highlight ultra-high definition TV into market. Detailed promotion strategy and promotion plan, we don't have any information yet so if you contact us after the conference call, we will prepare it for that.

Okay and with respect to new sizes and resolutions, was that oriented towards mobile displays?

We already have new resolution displays for TV, that's the 65 inch and 77 inch ultra-high definition from previous 55 inch full HD. For mobile size, for mobile size, full HD right now.

Okay, thank you.

Claire Kyung Min Kim, Daishin Securities.

Hi, thank you for giving me a chance to ask a question again. I think for the first half of this year, the Q1 and Q2 earnings trends were quite different from the traditional patterns of lower earnings in Q1 and better earnings in Q2. This year, Q1 was much better than Q2, so can we interpret the situation as a more healthy status in terms of earning seasonability? So if I forecast the next year's earnings, can I predict that next year's Q1 earnings are more normalized than the previous years?

That is also a good question. Actually this year we showed very mitigated seasonality. It is quite different from previous pattern. That's because of our portfolio management. As you already know, our capacity is limited from previous two years about, so within limits of our capacity, we have to allocate our product portfolio based on profit maximization. So in first quarter, we are more allocating IT segment instead of loss-making tablet sizes and also 32 inches which was most profitable product in first quarter.

Right now we are more allocate bigger screen TV and AIT products. So this kind of portfolio management to give us a chance to mitigate our seasonality. We hope this kind of situation to be maintained next year as well.

Thank you.

Currently there are no participants with questions. (Operator instructions) The following question will be presented by Duncan Robertson from TT International. Please go ahead, sir.

Hi there. I believe that you've said that you're actively considering your shareholder return policy. Please could you share with us what sort of guidelines or framework within which you are considering that policy, what will guide your eventual decision and when will we expect such a decision? When will get some clarity on that? Thank you.

Thank you for your good question. Actually at the year 2011, we made dividend decision making. So we start to also dividend to investors from this year and then next step, we are on the radio on the consideration among our time management, but it's not finalized yet, but anyhow, we try to support our shareholders' value. So we are in talks with several solutions (inaudible) the final policy, we will get back to you on that. For now, without any finalized solution, we cannot give you any clear guidance. Sorry about that, please understand.

Do you know when you'd be able to give more clear guidance?

In terms of anyway, maybe within this year we have to set a clear guidance, we think so.

Okay thank you. One more question if that's okay. You mentioned that in first quarter, your cost down was very impressive and therefore, the second quarter, there wasn't quite as much progress. What can we expect for the rest of the year, please?

We try to reduce our cost at least low single digit every quarter. That's our normal target.

Okay and I guess you talked about ASPs being down again but perhaps less so than in the second quarter due to stabilization in some segments and the better allocation to higher ASP segments. So presumably then the cost down will be as strong as the price down. Is that fair?

In case of our cost reduction, should be a bit higher -- should be similar or a bit higher than our (inaudible) ASP decrease. That's our current assumption.

Okay, thank you very much.

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

Hi. Thanks for letting me ask a question. Two really quick ones. One is a follow up on capital return. Can you remind us again in terms of I think career regulation, I think the CEO and management have brought staff back in May so does that prevent you guys from announcing any capital returns until the end of the year? That's my first question.

Yes our CEO and (inaudible) management (inaudible) in this May and so if -- that's another solution to support our share price and to care our shareholders and next solution is in talks with our team management it's not finalized yet.

Okay but are there any restrictions from the regulators in Korea that prevent you guys from announcing or doing anything, you know, maybe six months after management had bought stocks?

Without any regulation issue after the individual share buyback if our Company would make decision to buy our shares at the corporate level, they should be not -- that would not be favorable in terms of regulation. That's my personal opinion.

[Got it].

Yes.

Okay, got it. Understood, thank you. Then my second question here is, obviously you guys are focusing more on AIT. Can you remind us again, what was the AIT mix within mobile in Q2 and how should we (inaudible) AIT mix in Q3 and Q4 and can you please just give us a little bit more color on AIT's price premium versus your traditional mobile as well as the margins for AIT versus your traditional mobile?

Our AIT portion, except our US customers, our non-US customers, our AIT portion was mid-teen in first quarter but it was increased to mid-40 in second quarter. So we are targeting over 50% or 60% in second half. That's (inaudible) our trend and strategy. So actually there is market benchmarking price for AIT so we cannot talk the exact number of price premium, but anyway it is quite good for us to support our customers, cost structure and supply chain management. That's why we are getting market share.

All right and what did you say was the mix in Q1?

Mid-teens.

Mid-teens? Okay and then went to mid-40% in Q2.

Yes. Over 40%.

So 15% -- yes, so 15% going to 45%.

Yes.

Okay and then just -- but it does have a [higher ASP] in margin versus your other mobile products for you guys?

[That's Q3].

Okay. Great, thank you so much.

The next question will be given by Chris Lane from KRG Capital. Please go ahead, sir.

Hello. Thank you for taking my question. I just (inaudible) if your OLED television production goal is still 600,000 for this year and 1.5 million for next year?

Yes that's our target numbers.

Okay, thank you very much.

However, but if our customers' response for bigger screens such as 65 and 75, it will be adjusted even lower but that's great (inaudible) for us.

Thank you.

Currently there are no participants with questions. (Operator instructions)

Operator, if there's no questions, we would like to end the call now. Yes on behalf of LG Display, we thank you for participating in our conference call. Should you have further questions, contact either myself or my colleagues. Thank you.