LG Display Co Ltd (LPL) 2015 Q4 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 representative from marketing intelligence. Kyu-young Ko is the Head of Market Intelligence Division.

Next slide please. Prior to the earnings announcement, we will have a change of operation on earnings release. Local offsite earnings release prior to this kind of English conference call will be merged together from next quarter. Thus, you will directly ask your questions to our management, including our CFO, Head of Corporate Strategy, together with the help of LG's divisions. For more details, we will guide you through the information mail of earnings release in our website later.

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 we would like to highlight our third-quarter (sic ? see slide 3 "Q4") results/performance and fourth-quarter (sic ? see slide 3 "Q1") outlook, which corresponds 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 on to the revenue and profit on the next slide, despite the weak sector demand and macroeconomic uncertainties, our revenue in the fourth quarter increased 5% quarter on quarter, recording KRW7.5 trillion. It was mainly driven by continuous mix change towards larger size and ultra-high-definition TVs, and increase of small mid-size panel shipments. However, due to the price decline across all segments, our operating profit decreased, resulting KRW61b. Operating margin was 1%. EBITDA margin was 12%. Pretax profit was KRW31b and net loss was KRW14b. That net loss was driven by adjustment of a deferred tax asset.

Moving on to slide 5, looking at our financial positions and ratios, at the end of first quarter total asset was KRW22.5 trillion, liability KRW9.8 trillion, and equity KRW12.7 trillion. Cash and cash equivalents was KRW2.5 trillion and inventory was reduced to KRW2.3 trillion. Liabilities to equity ratio, current ratio and net debt to equity ratio all improved, respectively 78%, 144% and 30%, maintaining a healthy situation.

Moving on to slide 6, looking at our cash flow, cash at the beginning of first quarter KRW2.6 trillion. Cash flow from operating activities resulted in cash inflow of KRW750b while cash flow from investing activities resulted in an outflow of KRW730b (sic ? see slide 6 "KRW725b"). With the cash outflow from financing activities at around KRW90b, our net cash change was an outflow of KRW70b, resulting in cash at the end of the quarter with KRW2.5 trillion.

Moving on to slide 7, I would like to go over our performance highlights. During Q4 our shipment increased 4%, recording 10.2m square meters. Despite weak sector demand and macroeconomic uncertainties, our area shipment increased due to continued larger-size trend and increasing ultra-high-definition portion in TV area. Also new product launch in small-to-medium-size segment impacted positively in Q4 shipment. As for pricing, decline continued across all segments. However, our blended ASP per square meter increased 2% thanks to the new shipment in small-and-medium-sized.

Moving on to our product mix on slide 8, our TV business was 34% and then mobile 32%, notebook and tablet 19%. The remaining was 15% for the monitor. Due to new product launch in our mid-size category, the sales portion of mobile segment increased 5 percentage points quarter on quarter, resulting in 32%.

Moving on to slide 9 and looking at our capacity, our producible capacity in Q4 was similar to the previous quarter level, resulting in 12.1m square meters.

Next we turn to our outlook section. For the first quarter we expect total area shipment in square meters to decrease by a mid-to-high-single-digit percentage compared to the fourth quarter due to low seasonality. As for pricing, although the supply of products and size may vary, the downturn trend in panel price is expected to slow gradually because the price level is big already and potential increase of panel-maker supply control affected the profitability plunge. And individual ASP decline is expected to slow, but the blended ASP decline would be higher than apple-to-apple price trend for our Company. That's driven by small and medium product revenue reduction in first quarter, as usual.

Under this kind of low seasonality and weak price trend, we will try to overcome by focusing on profitable product mix based on technology differentiation, such as ultra-high-definition, advanced in-cell touch technology, and in-plane switching panels. And in OLED we will strengthen its market leadership by providing customers differentiated value, with continuous improvement for OLED market expansion and competitive enhancement.

That's our briefing for our fourth-quarter earnings and our highlights. 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). Brian White, Drexel.

Yes. I'm wondering if you can talk a little bit about the size of the adjusted deferred tax asset. What was the dollar number or Korean won number in the fourth quarter?

And are you expecting a loss for LG Display in the first quarter?

For our tax adjustment, amount is around KRW10b. And also we have another tax adjustment driven by our overseas companies' dividend payment that we have to pay related to tax.

Would that be similar to the -- you said KRW10b in the fourth quarter. Will that be similar in the first quarter?

In first quarter we don't expect that kind of impact.

And your second question. In first quarter, we already, in analyst's first-quarter report, based on the kind of report, our first quarter is likely to be loss-making, but we try to do our best to make money in first quarter as well. But for now actually it's not, the confidence level is not that high because the market situation is not that stabilizing. However, but in some area we start to see some meaningful signs of decelerating of a price trend and also together with our cost-reduction effort. Anyhow, we will do our best to try to decelerate this kind of worsening situation.

And finally, the cost down, what do you expect in terms of component costs down in the March quarter? Thank you.

In March quarter we are expecting our overall cost reduction, including material cost, will be around high-single-digit.

Okay. Thank you.

Rob Stone, Cowen & Co.

Hi. Thanks for taking my questions. The first one, if your cost down is going to be high-single-digits, given your comments about pricing and mix, would you expect gross profit margins to decline further in the March quarter or do you think they may be getting close to a stable level?

Actually in January already, our panel price went down. So reflecting this kind of January impact, our gross profit margin will not get better than first quarter. It will be worse, but the level of worsening ratio we try to be lower than market expectations.

So gross margins are likely to decline again in March, but hopefully not as much as they did from Q3 to Q4. Is that what you were saying?

In terms of numbers, market situation is quite fluctuating so we cannot deliver the -- specify the number. Please understand this kind of situation.

Okay. Let me shift to a different topic then. On your OLED TV shipments, I wonder if you could comment on the TV panel shipments for the year, so fourth quarter and the year, and if you're still thinking about roughly 1m OLED TV panels in 2016.

Last year our shipment for OLED was around 400,000 units. Among them, 50% was sold in Q4. So it means at least every quarter our shipment will be over 200,000 units. So all in all this year we are targeting 1m units based on over 65 inches will be 40% among total shipments.

So 65 inches or greater is 40% of the mix?

No. 65 inches and above size will be expected to be 40%. The remaining 60% will be 55 inches.

Okay. Yes, that's how I understood it. Great. And finally, I wanted to ask you about capital expenditures for OLED. I believe you announced additional spending. There was a 6-K of around KRW460b for I think converting additional lines in Paju. Is that number correct, because I saw another story which actually had a higher figure for OLED TV CapEx? So if you could comment on CapEx plans overall for the year and how much of that is for OLED.

Over this year CapEx will be in between KRW4 trillion to KRW5 trillion. For now we don't have any finalized number. We just only have a forecast number at around KRW4 trillion to KRW5 trillion. Among them, at least 50% or potentially 60% will be in the OLED side. As you already know, our mobile OLED investment that was released last year for smartphone and/or mobile, and that's around KRW1 trillion. And also we announced two days before another fab conversion from LCD into OLED. That [mono] glass impact will be 25K. That's also slightly below KRW1 trillion.

So this kind of TV and mobile investment will be around 50% or 60% among our total CapEx. But the total CapEx amount will be changeable. It's just a forecast number for now.

Okay. So just to be sure I heard correctly, the fab conversion for OLED TV, is that an additional 25,000 plates per month in addition to the 34,000 you have now?

In the past we have 34K and we will add 25 more K, in terms of --

And that comes online in the first half of 2017?

Maybe second half of 2017 in terms of the ramp up.

Okay. Thank you very much for taking my questions.

(Operator Instructions). Brian White, Drexel.

Yes, just a couple of questions around the TV market. Number one, what are we expecting, what are you expecting in terms of unit growth for TVs on the Chinese new year?

And what are you modeling for global TV unit growth in 2016?

Okay. Chinese new year sales could be okay, but this time is such a seasonal and then demand looks like it is spread before and after the festive season, so that means it's different people and then before new year and after new year there is some promotion we expect. So it will be okay.

So globally and then I think this year TV sales growth rate will be in low-single-digit area and then growth rate will be mid-single, over mid-single.

So units you think will be up low-single-digits?

Yes.

Okay. And on the March quarter just on smartphones, when we look at your various businesses here, what type of decline should we expect quarter on quarter in the March quarter for smartphones? Is this an average decline for smartphones in the March quarter or greater than average?

For us the March quarter seasonality will follow the usual pattern. For us, we have new business model such as AIT business. So thanks to this kind of AIT portion increase, our March quarter revenue reduction will be similar or better than the seasonality.

Okay. And when we think about the year, do you think your business in smartphones will grow in 2016 or not grow? And I'm talking your mobile business specifically, the way you break out mobile. Will that business grow for LG Display in 2016 or will it not grow?

Yes. We will talk in two ways. In terms of unit shipment, it will be flattish or declining, but in terms of revenue, we are expecting, we have a high potential of revenue in year 2016. That's because of our AIT portion will increase significantly. Last year our AIT portion was around 50%. This year we are expecting most of customers will adopt AIT products. So AIT revenue itself is much higher than individual LCD mobile business.

Okay. And finally, capacity utilization in the fourth quarter, what was your capacity utilization?

And what are you projecting for the first quarter?

In case of utilization ratio, it was a high-90%.

In first quarter it is expected mid-90%. But, however, if we look at the number of production, it is clearly different in first quarter. In terms of our capacity itself, looks similar in first quarter and Q4. However, our OLED capacity is around mid/high-single-digit percentage level, but it was low-to-mid-single-digit percentage in Q4. It means LCD capacity will drop in first quarter of it and then our size mix to the bigger screens will also reduce our shipment production for the TV. So all in all, although there the utilization ratio reduction will not be that big, the final output or production will be double-digit decline in first quarter.

Okay. And if you look at TV inventories right now, TV panel inventories, where are they in the industry? Are they higher than average? What is the -- how many weeks of TV panel inventory do you think is out there?

TV panel inventory itself is not much higher, a bit, a little bit higher than its normal one. So at the moment not serious situation.

Okay. And how about TV inventory itself? The full product, the full product of a television, what's the inventory situation look like there?

Okay. Major TV maker, like LG and Chinese and big player, and inventory level is quite okay. That means it's a little bit higher than is a normal one, but that one is very normal situation because they now preparing new products, placing them in retailer. So that is quite okay.

Quite okay. Okay. Great. Thank you.

Rob Stone, Cowen & Co.

Hi. My follow-up question was with respect to costs below the gross profit line. Given that you'll have a volume decline in the first quarter and an additional pressure on margins, can you comment on the level of operating expenses? The absolute level of operating expenses that you expect in Q1, might that be reduced from the amount of operating expenses in Q4? Do you have room to lower expenses?

That's a good point. Right now we try to do our every effort to absolute number of that kind of operating expense in the fourth quarter, so finally we hope it will reduce sequentially.

Okay. And a question with respect to OLED TV shipments. And I know this is not entirely up to LG Display since you pass the panels on to LG Electronics or other TV makers, but do you have a sense of the demand situation for OLED TV? We, to the extent we were able to check with retailers here in the United States, felt like the TVs that were there were selling through very quickly and perhaps if there had been more product available that would have sold as well. If you could comment from your marketing point of view on the level of consumer interest in your OLED TVs and whether, if you'd been able to produce more, you probably would have sold those through as well.

Actually two days ago we made an announcement of another glass addition for the OLED with 25K. That's driven by our stronger confidence from the market side for the OLED. Actually after we are leading 65 inches ultra-high-definition OLED into the market in Q4 last year, distributors' reaction and response was significantly changed. So right now demand for the segmentation was increasingly high. So the situation, it will be more favorable for us. That is why we made a quick announcement for additional, addition for the OLED, converting from the LCD into OLED.

So right now it is just starting stage with the new facility. Ramp up in Q4 last year. So the volume scale will continuously increase every quarter. But, anyway, order trend is higher than our actual shipment.

So demand is strong. That's good. Thank you.

Eric Lin, [CLSA].

Hi. Good morning. This is Eric from CIMB. Yes, just have some questions to follow up. First one is on the OLED. Would you clarify that the KRW1 trillion CapEx for mobile is for Gen 6 or Gen 8, and what will be the capacity and the ramp-up schedule?

That was already announced in last year's second half. That was the [Efong] facility to support flexible mobile and OLED. The capacity will be 7.5k based on Gen 6 there.

Okay. And the conversion you just mentioned, which is another KRW1 trillion for 25K, that is for Gen 8, right?

Yes, Gen 8.

Okay. Hee Yeon, can you remind me when will be the mass production schedule for the mobile line, the Gen 6 line?

That's second half year 2017.

I see. I see. Okay. My next question is on the EOD. What would be the penetration ratio you would expect for this year and what was last year?

Okay. I explain by two things. One thing is the global UHD market penetration is, 2014 suggest a 4% to 5% in UHD penetration in the market. Last year, 2015, is 14% penetration. This year will be 24% penetration. Our company's UHD sales portion, high-single/low-teens, is higher than the market portion.

That's low teens, higher than --

No. Our UHD sales portion is high-single and low-teens, higher than that of the market proportion of UHD.

I see. I see. So that is the RGBW performance, right?

We have a big swap, RGBW and then M+. Recall that M+ is almost 60% of the market.

M+ 60%.

Yes. Okay.

Can you give us some idea about the pricw gap right now, the M+ to RBGW, and the UD to full-HD, in terms of panel price.

The high-end model is 1.3 times. Mid-and-low-end model is 1.1/1.2 times.

So I guess should we assume that maybe in a year or two the UD will be the majority of 50-inch-plus TV market?

I think so. At the moment the 65-inch market is over 70% market (inaudible) than UHD. 55 inches UHD should end up over 50% in this year.

So let me go back to OLED a little bit. And the OLED TV panel you plan to ship, are they full-HD or UD this year?

In case of the ultra-high-definition, it is expected to be over 60%.

So the OLED panel, the 1m OLED panel, 50% will be UD? Am I right?

I'm sorry. It's over 90%.

90%. Okay. And what was last year?

Last year it was around 40%. The shipment was (multiple speakers).

Hee Yeon, it is 40, four-zero, right?

Yes.

Okay. My last question is what would be the capacity increase this year over last year for LG Display?

Capacity increase?

Yes.

In terms of capacity increase, it might be similar. Although we have LCD capacity reduction into OLED design, the reduction level should be compensated by China facility. So over-capacity will be similar. However, the allocation for the LCD side will be slightly below than last year.

I see. Thank you so much. That's all from me.

Eric Smith, [Private Capital Partners].

Thank you for taking my questions. First, have you made any final decisions concerning the size and capacity of the P10 fab?

And also, could you talk about whether you have any plans to bring OLED into the laptop or monitor display market?

So P10, the specification was not finalized yet. We just build the fab first to catch up the market trend better than the industry. So the size is not fixed yet. But, anyway, we will target bigger screens on that fab.

And mobile IT OLED, nowadays there are lots of discussions about that. However, we will focus more on the TV and the mobile segmentation first because of the limited capacity. And then if there is stronger market demand from the IT OLED product, we will consider about that. However, for the time being because of the limited capacity, our focus should be TV and mobile.

I have some comment. So OLED for IT products, some chance. That means IT market also have some high-end market potential. It's a good segment. But we think that IT product will be (inaudible) and then IPS or oxide is enough at the moment. That is our strategy. So if we have any strong demand in OLED IT product we can do something there.

Thank you.

Brian White, Drexel Hamilton.

(Technical difficulty) about how you view the capacity coming online from some of the big China panel makers?

And my second question is, we talked about costs down, but I didn't understand what you are expecting from the last pricing in terms of declines in the March quarter. Thank you.

In case of individual material costs, we cannot mention about that, but overall cost reduction, including the major portion of material side, will be high-single-digit in first quarter.

And also we cannot hear about your first question related to China capacity. Can you ask again the first part?

Yes. Just trying to ask about, there is a lot of capacity coming on line out of the China panel makers, like a BOE, and I'm curious how much more capacity do you expect to come online in 2016 and how that's impacting the industry. And so I think some of the companies ramped some capacity in 2015, but it seems to me that there's more coming on in 2016. So if you could share your thoughts on that. Thank you.

As you know well, we added one and then the new factory in last year, Q3 and last quarter, and then trying to ramp up those new fab. But considering those fab, we expect that they still focused on ultra-HD market, their proportion in terms of production level is 65% to 70%. So clearly there is total capacity increase compared to 2015, but we think that is why we should be more focused on the high-end model; we can differentiate our product with our competitor.

Okay. So focus on the high-end panels. Great. Thank you.

Jerry Tsai, HSBC.

Hi. Thank you for taking my question. Let's go back to the new OLED announcement that was made yesterday. Couple of quick questions. First, how much LCD capacity are you converting for this 25K, 26K of OLED capacity? That is my first question.

Yes, 50K will be required to support the 25K OLED capacity.

So is this 50K being taken out as we speak or is it going to be taken out in the later quarter?

It will be taken out maybe at the end of this year.

Okay. So this 50K of LCD capacity will still be ?- will still produce throughout 2016 until the very -- until 4Q?

Maybe only the third quarter or middle of the third quarter.

Okay. Okay. That's helpful. Also, I wonder, if you spent KRW460b on a 26K capacity, what exactly are you spending on? Are you spending -- part of it is going toward the conversion of the silicon to oxide and then part of it will be going for the OLED equipment? Is that how we should think about that?

Unfortunately for now, we have detailed specified numbers related to the equipment side, total amount is only for the backplane switching to oxide. It will cost KRW460b. Together with the deposition for the OLED material, that's all around KRW900b.

So in other words, the difference will be invested in next year. Basically all OLED equipment investment will be included in the 2017 CapEx.

It will be included this year partially and also a major portion will be -- partially and also partially next year. It will be spread out.

So can we make a conclusion that you will be spending almost close to $1b on a 25K, 26K of large-size OLED capacity. And if that's the case, do you think that cost can come down in the future as the scale increases?

We hope so. Actually in the first place we had the 26K, our CapEx was over KRW1 trillion, but now another 25K is quite below KRW1 trillion. So every step forwarding we continue to reduce our equipment costs and CapEx amount. And also together with the UD improvement and material cost enhancement, we will reduce our cost going forward meaningfully.

Okay. Just want to check, the first 25K versus the second 25K, how much was the cost came down approximately in percentage terms?

It was around 30%.

30%. And hopefully you will come down more in the future.

Definitely.

Okay. Thank you so much. Very helpful.

Rob Stone, Cowen & Company.

Hi. I apologize if you already mentioned this, but I didn't quite catch it. Could you comment on how much did OLED account for out of your total revenues in 2015 for the year and in Q4?

TV sales portion is around the mid-30%. Among our TV sales it is around low-to-mid-single digit in Q4 and it is expected to be mid-to-high-single-digit in Q1.

So that's, of the 30% that's TVs, high-single percent is OLED or high single in terms of overall level?

High-single in terms of TV.

So that would be around 3% of total revenue then?

Yes. Total revenue, yes.

Okay. Thank you.

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

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

And in this presentation in early section we had the mistake for the guidance. Shipment guidance the first quarter is not mid-to-high-single-digit. It will be expected to be high-single-digit. That's our mis-presentation.

And finally, on behalf of LG Display, we thank you for participating in our Q4 earnings conference call. Should you have further questions, please contact either myself or my colleagues. Thank you.