LG Display Co Ltd (LPL) 2016 Q4 法說會逐字稿

Good morning. Welcome to LG Display's fourth quarter 2016 earnings conference call. (Operator Instructions) Before the presentation we will have a three-minute video about our CES exhibition. Sorry, mobile access is limited to watch the video; you may watch it with your computer, please.

Now, I hand over to the speaker. Ma'am, please begin.

(interpreted) Good morning. Thank you for joining LG Display's Q4 2016 earnings conference call. I am HeeYeon Kim, head of IR. On behalf of the Company, I would like thank all of you for joining us this morning.

With us today are our CFO, Don Kim, of LG Display; Young Kwon Song, SVP of strategy and marketing group; DuckYong Kim, head of corporate business management division; Matthew Kim, head of market intelligence; and Stephen Ko, head of TV marketing.

Today's earnings presentation will last around one hour and we will be providing English and Korean consecutive interpretation. We will begin with the business performance for Q4 2016 followed by outlook for the future, and have a Q&A session.

Please refer to our website and attachments to our disclosures for more detail regarding Q4 results. For those of you joining us via the webcast, please refer to the references and the widget on the bottom left corner of your screen.

Before we begin the earnings presentation, allow us to show you a short video on our key strategic model which created a buzz during the CES in January.

(video playing 18:21 to 21:53)

(interpreted) For those of you who are logged on via the mobile, we will be shortly uploading the link to the video so please refer to that at your leisure. I now would like to also ask that you please refer to the disclaimer.

Today's numbers are based on IFRS standards on a consolidated basis subject to outside auditor's review. It has been prepared for the benefit of all of you.

With that, let me invite our CFO, Don Kim, for the earnings presentation for the fourth quarter.

(interpreted) Good morning. I am Don Kim, CFO of LG Display. I would like to thank our shareholders, analysts and investors for joining LG Display's Q4 2016 earnings conference call.

In looking back, the past full year, despite difficulties in ASP declines in the first half of the year, with differentiated high value-add product mix expansion and rigorous cost savings efforts, we continued the profit trend. And as we enter the second half of the year underpinned by such efforts and price increases, as well as favorable currency movements, the extent of profit improvement was quite large.

In terms of different businesses for large-sized OLEDs, we solidified the foundation for business expansion in terms of production, customer and product. By turning positive EBITDA in the second half, we now have the basis to speed up business performance improvements going forward.

Also for small-to-mid-sized OLED, through timely Gen 6 investments, we have secured a foothold to enable early catch-up in response to accelerated growth from small-to-mid plastic OLED business. On the LCD side, driven by maximized productivity and competitiveness in technology and product, we were able to secure profitability through expanding the share of differentiated products, keeping our market leadership and competitive advantage.

Let me now move on to Q4 earnings results in more detail. Q4 revenue was up 18% q-on-q to KRW7,936 billion, and increases in overall ASP, mostly around large sizes, in line with the size migration trend and seasonality impact on small-to-mid sizes.

Operating income was up 180% q-on-q, to KRW904.3 billion. On the back of overall ASP increase, profitability-focused product mix around large-size UHD, and In-Touch products and positive currency trends, we recorded a significant profit above initial expectations.

To elaborate on Q4 area shipment and ASP, area shipment record 10.77 million square meters. Although sales was good, supported by high seasonality and supply-and-demand dynamics were tight, due to the Company's capacity constraint area shipment was flat q-on-q.

Despite some capacity expansions in China intended to respond to larger-size demands, total capacity declined slightly due to capacity conversion to large-sized OLED. On sustained ASP growth and product mix impact from new small-to-mid panels, blended ASP was up 16% q-on-q. TV and IT segment all trended upwards, driven by low inventory and improvements in supply-demand from migration to larger sizes.

If you now look at the product mix, mobile share was up four percentage points q-on-q on new small-to-medium-sized product shipments. TV on the other hand was flat q-on-q with higher share of high-value-added products like UHD and limited area shipment arising from lower capacity as compared against ASP growth. IT revenue share declined on a relative basis due to profitability-focused fav mix strategy in line with price increases in larger-sized panels.

In terms of the financials, inventory declined KRW204.2 billion q-over-q, recording KRW2,287.8 billion. As supply-demand dynamics remains tight, inventory levels are also low. We will continue to monitor the market closely and tightly manage the inventory levels.

Financial ratios, including debt and cash positions, continued to resound as of end of 2016, supported by a positive market and efficient business management. In terms of cash flow, there was KRW241.2 billion increase q-on-q with cash at the end of quarter coming in at KRW2,722.4 billion.

Let me now move on to 2017 and the first quarter market outlook. We expect supply will continue to be tight in 2017, with sustained trend towards larger sizes and the impact from industry restructuring fully coming through. Also, uncertainties in the global macro environment will be a critical factor influencing demand and currency movements.

Under the favorable supply-and-demand backdrop through differentiated technologies and product deployment, we will continue to generate profit whilst we closely watch and respond to movements in market and the set makers.

Moving on to Q1 guidance, with OLED production line conversion, R&D into new products and lower number of operational days, capacity decline is expected to be in the mid-single-digit, leading to a comparable level of decline in the area shipment. Also, with increase in the sales of large panels, shipment decline is expected to be greater.

The upward trend in panel ASP is expected to continue in the first quarter. Usually Q1 is a slow season but TV sales were strong at the year end and demand continues to be strong on very low industry inventory. We don't see any sizeable capacity increases coming through from the industry and supply is expected to decline, driven by size migrations. We therefore project ASP growth to continue for the time being.

This year's CapEx is expected to be around mid to upper KRW5 trillion in size. On top of large-size OLED conversion, various investments will be made to realign the business to better prepare for the future, such as investing into Gen 6 plastic OLED. We plan to closely review investment priorities according to time horizons and implement such plans in consideration of the Company's financial position in a reasonable, efficient and flexible manner.

Lastly, let me elaborate on our corporate strategy. As a leading display company, we will continue to expand on the distinguishing values of OLED and LCD respectively, and further upgrade our business structure. In particular, in order to bolster OLED competitiveness, five business divisions have been integrated into three divisions of TV, IT and mobile.

Up to 2016, OLED business was operated with a focus on technology so as to identify and discover customer value, but we plan to shift that emphasis on delivery and expansion of customer value, thereby use resources more efficiently and enhance synergies and strengthen fast execution capabilities.

For large-size OLED, we will further bolster differentiations in terms of design and multifunction conversions above and beyond picture quality. At the CES early this year, we introduced Crystal Sound OLED and wallpaper, which are singular products in terms of picture quality, design and sound integration. We plan to build upon the product portfolio that maximizes the positive and unique characteristics of OLED so as to expand the OLED camp.

For the small-to-mid OLED we will leverage existing technology and manufacturing knowhow the Company has built to bring success to stable mass production of E5 Gen 6 plastic OLED. We will also endeavor to generate synergies across technologies by bringing our experience in large-sized OLED to other business portfolios, including mobile and auto business.

For the LCD business, we will expand on our uniqueness to respond to differentiation needs for the set products and to expand the consumers value offerings. Based on our differentiated technologies such as IPS, M Plus, In-Touch among others, we plan to develop singular products and with continued cost savings efforts we will do our utmost to make the LCD business trend different from that of the overall market trend.

Thank you.

(interpreted) That brings us to the end of the earnings presentation for Q4 2016. We will now take questions. Operator, please commence with the Q&A session.

We will now begin our Q&A session. (Operator Instructions) Our first question is from Rob Stone at Cowen and Company. Please ask your question.

Hi, thank you for taking my question. I wonder if you could provide a little more color on your expectations for OLED TV production this year? I believe besides adding to substrate [starts] you expect to improve your throughput, so where do you see your TV capacity going in 2017? Thanks.

(interpreted) I am the CFO; let me respond to that question. In the second half of 2017 there will be around 60,000 capacity -- will be secured, so that will be about twofold on a year-over-year basis increase leading to the volume of about 1.5 million to 1.8 million units.

Moving on to your question about the yield, if you look at for the large-sized OLED TVs, we are well on the track according to our internal plans. In all the models we have already achieved the more than 80%, we have achieved the 80% which is the so-called golden yield percentage.

If you look at the LCD business, it took us 10 years to reach the golden yield level at 80% before OLED. In light of the fact that we were able to achieve the golden level in two years, it is quite meaningful.

Our next question is from Nicolas Gaudois at UBS. Please ask your question.

(interpreted) Yes. Nicolas Gaudois wasn't able to join so I would like to ask the question from UBS. Could you give us a breakdown of your 2016 CapEx into LCD, white OLED and RGB OLED? And also for 2017 can you give us the same three breakdowns for LCD, WOLED, and RGB OLED?

(interpreted) I am the CFO, responding to your question. For 2016, out of the total CapEx, OLED accounts for around 50% as opposed to LCD and for 2017, according to our planned -- OLED investment portion will be around 70%.

(Operator Instructions) Our next question again from Rob Stone at Cowen and Company.

Hi, thank you. I had a follow-up question on the income statement. I wonder if you could comment on below the operating income you seem to have a sizeable other income this time rather than other expense. Can you provide some detail?

(interpreted) Now, in terms of the non-operating line item, there was a significant impact coming from the FX movement. Due to the weak Won there was an impact on AR, the account receivables. And also in terms of deposits and the borrowings that are denominated in foreign currency, there was some valuation-related impact from the foreign currency denominated assets, all leading up to the impact of non-operating income.

Our next question is from Brian White at Drexel Hamilton. Please ask your question.

Yes, I've just got a couple. One clarification; I didn't hear the area shipment guidance for the first quarter. Could you repeat that, please?

(interpreted) Yes, so, let me repeat that. For the first quarter guidance for area shipment, our number is a mid-single digit decline.

Ok, great.

(interpreted) Now, the main drivers behind the decline in capacity is actually three factors. The first factor is the decline in the number of operational days. Number two is the decline in capacity due to the OLED conversion, and number three also declining capacity due to the R&D and to new products.

Okay, great. And when you look at 2017, when you think about the LCD industry, what type of area growth do you expect from the industry and then what type of capacity growth do you expect from the LCD industry?

(interpreted) I am [Sang Ho Nim] from the MI, Market Intelligence Division. On the demand side, due to the migration to larger sizes for TV in terms of the areas of growth, we expect it to be around 5%.

In terms of capacity, there are some companies who will be increasing the capacity to a certain extent. However, due to the overall restructuring in the industry, we think that growth is going to be limited at around 2%.

Great. Thank you.

Our next question is from Nicolas Gaudois at UBS. Please ask your question. (Operator Instructions). Our next question is from Rob Stone at Cowen and Company.

Hi, you mentioned in your prepared remarks working on the ramp up of the first Gen 6 flexible OLED (technical difficulty) the E5 line. Could you comment on what that might have as a revenue impact this year or when do you expect the E5 to start contributing to revenue?

(interpreted) I'm the CFO responding to your question. As you are aware, in terms of our Gen 6 P-OLED E5 facility, it's in the process of being set up and being constructed. So it is scheduled to go into mass production in the third quarter of 2017. So I believe that revenue will be generated after that point in time.

Our next question is from UBS, please ask your question.

Thank you. I have a follow up question. After your E5, do you have any additional plans of converting from LTPS LCD to OLED? If so, when is the timing and what is the size?

(interpreted) I'm the CFO. As you are aware, the new facility for Gen 6 E5 has to do with the conversion from the existing LTPS capacity. If there is requirement for additional capacity. Basically, we will plan based on the premise that there will be additional conversion of LTPS capacity.

Now, having said that, we will fully consider the existing demand as well as supply and demand dynamics in the market and go about it in a step by step manner and be wise in terms of the conversion.

Our next question is from Lee Sang-Un at Yuanta Securities. Please ask your question.

(interpreted) Starting the end of last year and also the beginning of this year, we see the Chinese companies like BOE and CSOT talking about Gen 10 investment and 10.5 investment. And I think their investment is looking towards 2019. I would like to understand what LG Display's view us when you look at these Chinese players' movement?

And also in terms of these ultra high sized -- large sized LCDs, above 10.5 Gen, what is LGD's views and how are you going to respond to such movement? Considering that the LCD supply is quite tight and to the fact that you are converting to OLED, there will be some shortage in the supply for the LCD. Do you have any investment plans to compensate for that decline in LCD supply?

(interpreted) I'm the CFO, I will respond to your question about LG Display's response to the Chinese companies' capacity addition, and also, I understand your question has to do with our investment plans into fabs above 10 Generation.

I think it is quite clear that the competition in the large size market is going to become more fiercer as we go into the future. In terms of our company, if you look at the ultra large sizes, above 60 inch as well as the high resolution products like UHD 8k, we have a product competitiveness and based on which, we are continuously going to expand on our differentiating products with which we will compete in the market.

Especially as you would know, our company's mid to long-term strategy has to do with conversion to OLED. So before the Chinese players ramp up the higher generation facilities, we will expand our OLED share in the market so that we can structurally differentiate ourselves and establish ourselves with this new industry.

Going forward, from a mid to long-term horizon, if you were to look at the TV market. In terms of the unit growth, the growth is expected to be quite low. But in terms of area, we expect growth.

Now, looking into the future, in light of the fact that the large sizes, 60 inch market is going to expand, and also, there will be continuous demand increases for 4k and 8k, there would be some need to, on certain capacity, we are very prudent in reviewing this aspect.

Now based on 8.5 Generation, we have a high level of perfection in terms of our technology and productivity on the OLED and the LCD side.

However, above Generation 10, we do have the strength of being able to respond to ultra large sizes based on our fabs, but there are many other aspects that needs to be very thoroughly considered in terms of technology, mass production and productivity aspect.

Now, the overarching premise for our corporate strategy, as you know, is OLED. Based on that premise, we will be coming to some sort of a decision making within the first half of this year in terms of the mass production timing, the consumer need, as well as other important aspects.

Our next question is from Jungah Lee of Samsung Securities. Please ask your question.

(interpreted) I would like to ask two questions on your OLED TV size. Considering the fact that the OLED TV panel price is still quite high, I think it has difficulty entering into the so-called mass TV market. At what speeds do you think that OLED TV panel price is going to fall and at what premium do you think it will be able to enter into the mass market?

Your second question is the Crystal Sound OLED panel, I think the initial reaction from the customers have been quite positive. So to what level of a premium can you enjoy in this segment and how big of a market size do you foresee for CSO?

(interpreted) As I mentioned before, with additional capacity for the OLED, the approximate capacity that we would secure would be 60k. And if you were to convert that to number of units, it's only about 1.5 million or 1.8 million units.

So compared to the total TV market, it is still a very small portion and I do not believe that it is appropriate to compare this OLED price to LCD price.

Now, last year, with our focused marketing efforts, we were able to secure a significant amount of market share in the premium zone of the OLED TV. I believe that was quite meaningful.

And also, on top of that, based on the strategic number of customers of one or two, we were able to see expansion of the customer base and I think that therefore, it had proven that OLED TV is by far the most important aspect in the premium TV segment.

So as a panel maker, rather than making an overly simplified comparison of OLED TV panel price to LCD, we will continuously focus on our efforts to maximize the great properties that OLED has as we have showcased during the CES event in terms of picture quality, design and sound integration. That is basically our strategic direction.

I think the same goes for the CSO that we have showcased during the CES event. CSO is by far, the most effective product that we could immediately implement the key characteristics that OLED has.

So in light of the positive response we are getting from our customers as well as the positive perception, we will continue to give our efforts to further upgrade ourselves.

(interpreted) I'm from the head of TV marketing, my name is Stephen Ko, on top of what our CFO has said, let me just elaborate one more thing. The market that we are targeting with OLED is not the LCD market. We are targeting our OLED against the high end premium segment.

For example, in the North America market, the 65 inch, which is above $3,000 in price, the so called ultra high end segment in the fourth quarter, our OLED had accounted for more than 80%. So in the premium market, we have a significant wielding in terms of market share.

Not just on the conventional TV side, but if you look at some of the TV applications, starting this year, we are planning to really expand our coverage into signage, other medical and other industrial related applications. So we will be focusing on expanding the scalability of the OLED on the industrial and the B2B side.

(interpreted) Our next question is from [Jerry Tai] at HSBC Securities. Please ask your question.

Thank you for taking my question. My question is regarding the OLED TV capacity. You mentioned that your second half this year will reach 60,000 capacity per month. I would like to get some idea how much LCD capacity do you have to convert away to achieve that kind of capacity level. And also, along the same line, I would like to know that approximately how many panels, you only mentioned 1.5 million to 1.8 million, I would like to get some idea of the million of panels -- I would like to get some idea of the sizes that you are referring to.

And also maybe, sorry, just one more, about the capacity that you -- I believe that in the fourth quarter, you have some capacity to shut down due to this purpose, and I wonder if you will expect more shutdown in 1Q or even the first half of this year about -- to achieve more OLED capacity? That's it.

(interpreted) I'm the CFO, when you are converting LCD capacity to OLED basically, 41k LCD is going to be converted to 26k OLED. So basically, that is the ratio when you think about LCD capacity conversion into OLED capacity.

Responding to your second question, the OLED sizes, the panel sizes that you have asked on the new capacity, they comprised of 55 inch, 65, and 77.

Just to give you some more color. In terms of sizes above 65 inch for 2016, it was 30% so that includes 65 and 77, for 2017, we expect that ratio to be 40%.

(interpreted) Our next question is from [Kim Song Liu] at [Daiwa]. Please ask your question.

(interpreted) I have a question on your CSO technology. I understand that the market response was very positive but I heard from the other booth that in terms of the ownership of the technology, the patent aspect is not yet very clear cut. Does the LG Display have the ownership of the patent relating to CSO or will there be some third party license issues? Can you clarify this issue?

(interpreted) Now, I'm the CFO, the whole technology around Crystal Sound OLED panel, this is something that can only be implemented based off of OLED, not on LCD.

Basically, attaching an (inaudible) on the speaker side on the OLED panel and enabling the control of the sound on all of the four quadrants is a unique technology that LG Display owns.

Basically, our CSO, Crystal Sound OLED partner, the set company, who was our strategic partner, what they do is that they create a more abundant sound based on their sound control and based on their algorithms.

Now, the existing set makers on this technology, they had to struggle with how they were going to process and deal with the speaker side on the TV set, but as a panel maker we were able to provide a panel where the sound is integrated. So we therefore were able to provide a solution to the set makers.

So I believe that this is a product that is a win-win for both the panel maker as well as the set company. We were able to provide the customer a value offering that the set makers have really wanted, and this is a technology that can only be implemented based off of OLED.

(interpreted) Thank you. That brings us to the end of the Q4 2016 LG Display's earnings presentation. If you have any additional questions please do contact our IR team and also if you have any questions on the videos that we have shown regarding the CES event, please also contact us. Thank you very much.

Closing the conference, we kindly ask you to fill out the survey if you connected online webcast. Thank you all for attending. You may disconnect now.