LG Display Co Ltd (LPL) 2015 Q3 法說會逐字稿

Welcome to LG Display's third 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 marketing intelligence. [Kyu-young Ko] is Head of Market Intelligence Division.

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 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 third quarter results performance and fourth quarter outlook, which corresponded to slides available on your website. Afterward, 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. Despite weak sector demand and macroeconomic uncertainties, our revenue in the third quarter increased 7% quarter on quarter, recording KRW7.2 trillion. It was mainly driven by continuous TV size migration trend, which changed towards larger size and ultra-high definition TVs.

Increase of small to medium-sized panel shipments, and FX movement impacted positively. However, due to the price decline across all segments, our operating profit decreased KRW155b, resulting KRW333b.

Operating margin was 5%. EBITDA margin was 16%. Pre-tax profit was KRW272b and net profit was KRW198b.

Moving on to slide 5, looking at our financial positions and ratios. At the end of third quarter, total asset was KRW23.8 trillion, liabilities KRW10.8 trillion, and equity KRW13 trillion.

Cash and cash equivalent was KRW2.6 trillion and inventory was KRW2.9 trillion, which was an increase by KRW298b.

Inventory, at the end of third quarter increased, mainly due to strategic inventory preparation for new, small to medium-sized product line. The size of our [categories] inventory is maintained in the highest level.

Liability to equity ratio and net debt to equity ratio slightly moved upward, which is maintaining a healthy situation.

Moving on to slide 6, looking at our cash flow. Cash at the beginning of third quarter was KRW2.7 trillion. Cash flow from operating activities resulted in cash inflow of KRW574b, while cash flow from investing activities resulted in an outflow of KRW820b.

With the cash flow from financing activities in KRW163b, our net cash change in -- net cash change was an outflow of KRW83b, resulting in cash at the end of the quarter with KRW2.6 trillion.

Moving on to slide 7, I would like to go over our performance highlights. During third quarter, our shipment -- area shipment was flat, quarter on quarter, concluding 9.2m square meters. Despite the weak sector demand and macroeconomic uncertainties, our area shipment stayed at previous quarter's level, due to continued larger size trend and increasing ultra-high definition portion in TV segment. Also, new product launching in small to medium-sized segment impacted positively.

As for pricing, decline continued across all segments. However, our blended ASP per square meter stayed flat, recording $622 basically, due to increasing portion of our differentiated product, such as ultra-high definition, and IPS monitor, etc.

Our TV division was 39% of our revenue, in the next slide, followed by mobile applications 27%, combined notebook and tablet segment 18%, and remaining 16% was monitors.

Due to new product launch in our medium-sized category, the third portion, of notebook and tablet segment increased 2 percentage points QoQ, resulting in 18%.

Moving on to slide 9 and looking at our capacity, our producible capacity in third quarter was 12.1m square meters, decreasing slightly versus previous quarter, due to our oxide conversion for OLED televisions.

Next, we turn to our outlook section. We expect the total net display area shipment in the fourth quarter to increase by a low single-digit percentage, compared to the third quarter, due to year-end seasonal factors and new product launch impact.

Although the supply of our products and sizes may vary, the downturn trend in panel prices is expected to slow. However, our blended ASP is expected to incline slightly, due to increase in small and medium-sized product portion, reaching a relatively higher ASP per square meter.

Let me conclude by saying that we are trying our utmost to overcome this tough situation by focusing on increasing value-added products and also expanding new business areas, such as auto, commercial, and industrial business, albeit it is small now.

Furthermore, our continued focus of preparing structural differentiation through OLED remains intact. We are quite encouraged by OLED TV performance during the national holiday season in China. From this quarter on, with the increased capacity in our [larger] OLED facility, through its conversion from LCD, we will be able to increase our OLED panel shipment meaningfully, supplying to various customers, hoping to result in profit improvement in the near future.

In line with our OLED strategy and new business preparation, recently we acquired the OLED lighting business unit from LG Chem. Through this acquisition, we expect to expand and improve our competitive edge in the OLED business, through the synergy coming from display and lighting OLED technology.

Although there are continuing marketing concerns and uncertainties, we aim to overcome industry difficulties through strategies which I mentioned before. We are watching the market situation very carefully and if needed, we will flexibly adjust our [fab mix] operation and utilization ratio, based on market changes, as to maximize our profit generation.

That's the end of our presentation. Now we open up our 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). Brian White, Drexel.

Yes, good morning. My first question is just on the mobile market. It seems like it had a very modest increase, quarter on quarter. So I'm wondering why we didn't see a bigger sequential uptick.

And my second question is on the utilization rate. What was the loading rate in the third quarter? And what is the loading rate expected to be in the fourth quarter? Thank you.

In case of mobile segmentation, if you look at our presentation material, our sales revenue portion for the mobile decreased 1 percentage point. That's because of our better-than-expected first half order trend.

But in third quarter, although there is a big order trend in third quarter and fourth quarter, usually there is a technology migration and new product launch preparation. Because this kind of natural preparation, usually in third quarter our shipment -- in this third quarter, our shipment looks smaller than before. That's the main reason. It means in Q4, our mobile segmentation sales revenue and order trend should increase meaningfully.

And then our utilization ratio in third quarter, it was almost full. But it is likely to reduce at around mid or low 90%. But it's not fixed yet. However, if we have any risk point from the order trend, we are quite ready to adjust our utilization ratio in Q4.

Okay. And one follow-up. The detailed financial results, they cannot be found on the website. Is there somewhere on the website I can find these, or you can email them?

Okay, definitely. Sorry for the late update.

Thank you.

Rob Stone, Cowen & Company.

Hi. I have a couple of questions related to OLED TV and your OLED activities in general.

First, on OLED TV, can you provide any color on OLED panel shipments -- TV panel shipments in Q3 and how you're thinking about your target for the year?

And related to that, I think in the past, you've said the units depend on the mix of 55 and 65. So can you give us some color on what proportion of OLED TVs are going out in 55 and 65? Thanks.

Our total panel shipment will be around 400,000 to 500,000 units this year. Actually, in third quarter, the shipment portion for the whole year is around 25%. And maybe another 50% will be shipped out in Q4.

The mix was mainly focused on the 55-inch until third quarter. However, in [Q4], 65-inch, 77-inches should be increased meaningfully. And then next year, our 65-inch, 77-inch portion should be around 40%.

So have you revised your 1.5m target for next year also?

Yes, our shipment next year will be below 1.5m unit. That's because of our size mix change. In the past, we were only focusing on the 55 size. But right now at our -- [within] the 65-inch and 77-inch market response for the bigger screen is quite bigger.

The sales mix, even in Q4 and next year should be changing significantly. So when you consider this kind of sales mix towards 65 and 77, our production scale should decrease, definitely. Following year, our shipment will decrease. So maybe 1m unit will be a reasonable forecast next year.

Okay. And finally, in the prepared remarks in the press release, there was a comment about making preparations for the OLED market, as part of the strategy for differentiated technology and maintaining profitability. Can you elaborate on what is meant by preparation? Is that market development? Is that referring to CapEx? What things are you doing to prepare the OLED market? Thank you.

Our preparation to differentiate our technology eventually for the OLED, it was mostly focused on the yield improvement and production improvement, until the first half this year. And then from second half this year, we increased our capacity, the volume scale, and customer diversification. That's also -- the customer diversification, and size, and product line [of] expansion was another preparation.

And next year, we will have a more diversified ecosystem and a diversified customer base and product line-up. Also we will deliver better cost structure and price structure to our customers. That's our natural progress, in terms of our OLED TV side.

And also, we have small-size and plastic OLED CapEx plan already in year 2017. By doing this kind of plastic OLED, we will deliver design flexibility to our customers. So under this kind of our overall strategy, we already announced for plastic OLED CapEx at around KRW1 trillion, until year 2017. And other than we don't have any concrete plan yet. So we will deliver more detailed numbers, maybe next conference -- next quarter conference call.

Great. One final quick one. Can you comment on OLED TV yields, through Q3?

55 yield ratio is already similar to the LCD level, and 65 and [77%] is a bit lower. But at the end of this year or early next year, the speed of yield improvement and level of yield should be similar to 55-inch. That's our expectation.

Great. Thank you.

Nicolas Gaudois, UBS.

Yes, good morning.

First question is on your comments yesterday in Seoul, on the pricing. I think you suggested low single-digit improvement in -- or small improvement, sorry, in blended ASPs in Q4. Maybe if you can clarify a little bit how you get there, in terms of mix effect, versus the underlying decline we still see in LCD panel pricing, especially for large area, into the fourth quarter.

And the second question, if you could comment a little bit on your readiness for the move to CMOS from NMOS for [TPS] next year, and whether that will require an incremental CapEx here, or effectively you have what you need to address this into the middle of next year. Thank you.

For your first question, as you already understand, in Q4, individual panel prices should decline. But we expect the slope or level of decline will be slowed in Q4.

But anyway, thanks to the mix improvement, as you highlighted, especially from the mobile sales increase and also IPS monitor and ultra-high definition TV sales increase, we are expecting our blended ASP to increase.

And then for your second question, it's very difficult to answer right now. But anyway, if there is any kind of preparation for the new technology, we are ready. We are preparing. That's our answer.

Okay. That's great. Thank you very much.

Andrew Abrams, SCMR.

Hi. Thanks for taking my questions. Can you give us some handle on whether the pricing on your OLED TVs is based on the improvements that you're making in yield? Or are you looking for a price point where consumers seem to be more aggressive, in terms --

The participant who just asked the question hung up the phone. Jerry Tsai, HSBC.

Good morning. Hi. I think you mentioned yesterday, during the Korea meeting, that the 32-inch inventory is quite severe. But meanwhile, the larger size is probably relatively more healthy. Well, given that the demand for larger size TV are likely also to be better than 32-inch, we could probably conclude that larger size inventory correction should be completed before the 32-inch does.

Well, if that's the case, my question is that is it possible to see the price recovery for the larger size, even when the 32-inch inventory is still above the normal level? That's my first question.

Okay. So the 32-inch, [as we already been commented], 32-inch inventory is -- the level is higher than that of the larger size. That's why the Q2, Q3 price erosion is over 10%. Comparing 32-inch to larger size, over 40-inch larger size then the price is quite [stable] down for 32-inches.

But it's -- we cannot easily say that larger size and then pricing is stabilized than before, because it's the set maker and the panel maker are trying to then shift the portion to -- from 32-inch over 40-inch and 55-inch UHD. That's why it's the larger size in terms of price is -- cannot be stabilizing really soon.

But the important thing is the supply, demand and the situation is different from the size by -- size and by product. As you know well, it's the 32-inch oversupply due to the [Chinese] panel makers and over-production. But we -- our Company is focusing on more larger size UHDTV panel. Here is a -- we hear there is a Chinese panel maker (inaudible) products in the larger size. That means we have more opportunity to have some share and some margin in larger size TV in that area.

Okay. Okay. Thank you. That's helpful. For the follow-up question, I'd just like to know about the impact of the utilization cuts on margin. Perhaps you can give us some idea. For example, how much impact on margin for every 5% cuts in utilization? Thank you.

Actually, nowadays the profit generation formula is not only based on the utilization ratio. Price decline ratio is the bigger side. Anyway, by adjusting utilization ratio potentially we'll try to protect margin erosion further. So we don't have that kind of numbers at this point now.

So basically no impact on the margin, even if you cut your utilization by, say, 5% to 8%.

If we will reduce our whole inventory meaningfully and also we are a bit conservative to our production, in the end it will be favorable on the price trend. So if the price trend would be slowed in terms of decline, it will definitely favorable for our profit generation in Q4 and next year. That's our assumption.

Okay. Thank you. That's helpful. Thank you.

Ben Lu, Moon Capital Management.

Hi. Thank you, guys, for taking my question. I have two quick questions.

One is can you give us an update on what the OLED loss is for this year as well as what you guys are expecting for next year? I think last quarter you guys have talked about OLED production losses will be similar as last year, which is about KRW600b, but that total losses should be another KRW100b to KRW200b due to greater marketing spending in the second half. So if you can give an update on OLED losses.

In case of OLED [losses] we didn't do -- we didn't mentioned about KRW600b at all. But anyway, our this year OLED expense related to future growth will be similar to last year's. Then going forward we -- it will be, hopefully it will be continuously declined, thanks to the [order expansion] and customer diversification and yield improvement.

Okay. So next year should we model OLED losses coming down a little bit? Should they come down in half? I'm just trying to understand the magnitude of the OLED losses.

Anyway, we cannot mention the detailed numbers. Anyway we'll try to reduce OLED loss next year. So we'll try to make our OLED overall [picture] to generate profit in the near future.

Okay. Great. And just to clarify, when you say that losses this year are similar as last year, that's on a production basis, right? Because I believe you guys are spending another KRW100b to KRW200b on marketing for marketing expenses for OLED as well in the second half of this year.

Our overall expense includes all kind of expenses.

Got it. Okay. All right. Great. And then my second question is can you give us an update on your AIT business? How did it do on a sequential basis in Q3 and how should we think about in Q4?

Our AIT business is looking [very good] going forward, because our customer wants to get more total touch solutions, including our individual LCD [version] separately with touch. But unfortunately in the third quarter, our AIT portion is decreased in third quarter temporarily because of our new production and to our new customer was a bit delayed.

But in Q4 the impact for AIT should increase significantly. The AIT portion increase in Q4 will be another prospect to increase our blended ASP over in Q4. But anyway, this year our AIT portion was around 40% and next year it is expected to be 80%.

Okay. 40% of the non-Apple mobile business or 40% --

Yes, yes.

-- of total mobile.

Yes. Our existing customers business is already 100%.

Got it. Okay. And then so next year, when it gets to 80%, should AIT be profitable?

Profitable we hope so.

Okay. Great. Thank you so much.

Andrew Abrams, SCMR.

Hi. Sorry, I think we were disconnected when I asked my question, but let me ask the same question again.

Do you see the impact of your yield improvements being passed on as far as the price of the OLED TV to the retail customer or is that something that LG Electronics is doing in order to try to find a particular price? Does your yield improvement actually get passed down to the consumer at some point?

Our yield improvement is in line with our expectations. So however, consumer price point is totally different because set makers, as we highlighted, we will expand our customer base beyond LG Electronics next year, the price point, the price strategy is depending on our customer base. But anyway, our price point together with the yield improvement, our price point will be lower going forward. However, the speed or a [lower] price of panel is not in line with our customer set price.

I add some comment. Surely we don't want to drive in the market by OLED TV price cutting. So and as you know well that 2.5% over the total TV market is the real premium market. That means it's a 4m/5m market, consumers really see the value of the product. That's why it's our OLED TV that's a very important market, premium market. So that means if we don't need drive up the market by the price. That is an important message.

Okay. Thank you. And can you talk a little bit about what the percentage of UHD 4K TVs you shipped in the third quarter and how that compared to the second quarter across the entire TV line?

In the second quarter it was high -- it was close to 20% and third quarter it was close to 30%. But there is a (technical difficulty) third quarter.

Okay. And lastly, is there some thought process about what percentage of your smartphone displays will wind up being OLED next year relative to what it is this year? Is it going to be completely capacity driven or is it going to be on demand by your customer base? Or how would you determine how much of that smartphone display business is going to be OLED for next year?

Next year [isn't a big volume] because we announced a new production plan for plastic OLED, which we will ramp up in the middle of the year 2017. So a sizable impact you can see somewhere in year 2017 instead of next year. Anyway, we have increased for the OLED smartphones next year, but the capacity is very small. The capacity is flattish this year and next year. So the improvement or increase of our shipment will be more critical in year 2017.

Got it. Thank you very much. I appreciate it.

Claire Kyung Min, Daishin Securities.

Thank you for letting me ask a question. I have two questions.

The first one is about [strategically] the important products. Throughout this year LG Display allocated production lines to maximize margin. And as far as I remember, LG Display focused producing [IP] panel and 32-inch TV panel in Q1 and mobile AIT panel in Q2. And it seems they focused UHD TV panel and mobile panel in Q3. So could you give us any color on your product strategy for Q4 and next year?

Yes. We already mentioned our key focus on the differentiated products for TV and mobile. So in the third quarter our [differentiated product] portion was almost close to [30]% and it will be increased around 30% or over 30% this year. And then AIT, that was around 40% in second quarter and third quarter and it will be over 50% in Q4. And also iPad monitor and notebook, iPad monitor was close to 80% and in Q4 it will be over 80%. And notebook is around 30%. It will be close mid-30% or 40%. By doing this kind of differentiated product portion increase, in Q4, we are expecting our blended ASP to increase even though individual panel price decline.

Thank you for the explanation. And my second question is about recent acquisition of OLED lighting business from LG Chemical. According to the official announcement yesterday, the acquisition payment would be KRW160b. And is that payment reflected in Q4 expense for operating side or non-operating side? That's my second question.

It's not reflected yet, because we -- right now we have a confirmation from our BOD, but actually it will be done in Q4. It's not reflected. It will be reflected in Q4 at the non-operating side.

Okay. Thank you.

Jerry Tsai, HSBC.

Sure. Okay. Thank you. I have just two very quick questions. First one is that you just mentioned the 55-inch OLED is similar to LCD. Can you give us an idea of the difference between the cash costs of the two -- these two panel types for comparison? That's my question.

For comparison at this point it's meaningless I think, because when you look at our LCD capacity as based on Gen 8, our capacity is around 400K or 450K. But OLED Gen 8 based capacity it is 34K. So our volume scale and material cost reduction speed is not comparable to LCD. So to mention about the cost whether -- it's too early to compare LCD right now.

Okay. So once you ramp up that OLED capacity to a certain level, it'll be more comparable. So does that mean after this Q4 expansions it will be more comparable or we still are far away from that point?

We hope it will be more comparable maybe next year after fully ramp-up and then product and customer diversification to be reflected. Maybe somewhere next year will be a more reasonable comparison to deliver.

Okay. Thank you. And also my second question would be regarding the high-value-added smartphones and tablets, do you have some visibility for these products for the first quarter next year, given that they have been important early contributors for you during the past quarter and also this quarter?

Nowadays all kinds of order trends including smartphones and tablets is very uncertain because of the market situation. So we don't have any higher visibility or segmentation. So that's why we are very careful about our inventory situation and utilization ratio.

Okay. Thank you.

[Chin Wan Song], CLSA.

Hi. Good morning. This is Sanjeev Rana from CLSA. I have two questions.

First is that, given the excess inventory in many products and expected cuts to utilization, how do you see your revenue mix evolving in the next one, two quarters, especially one related to mobile segments? That's my first question.

And the second question is, despite getting new customers for the OLED panels, you seem to have lowered your target for OLED panel sales in 2016. Is it because of any capacity constraints or do you think that OLED penetration will now happen at a lower pace compared to your earlier expectations?

For your first question, so actually our inventory level is mainly driven by our new product launches for small and medium size. But as you already know, we have specific Q4 China seasonalities, so they are kind of -- our inventory will be [resolved] at the end of this year. So it means our sales portion for mobile business should increase in Q4 significantly. And then it will be mild in Q1. That's our overall assumption for Q4 and first quarter.

And then OLED shipments, our forecast change that's mainly because of size mix change, not because of the slow pace of OLED adoption. Actually, as I highlighted before, in the past we gave a 55-inch based forecast number. However, the market response to 55-inch and 77-inch is increasingly growing. That's the main reason to reduce our forecast for next year.

Okay. Thanks.

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

Operator, if there is no question, we would like to end the conference call now. 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.