LG Display Co Ltd (LPL) 2017 Q1 法說會逐字稿

(foreign language) Ladies and gentlemen, welcome to LG Display's First Quarter of 2017 Earnings Release Conference Call.

We will begin with the presentation followed by a Q&A session.

(Operator Instructions)

Now we will start the presentation.

I hand over to the speaker.

Ma'am, please begin.

(foreign language) Good morning.

Thank you for joining LG Display's Q1 2017 Earnings Conference Call.

I am Heeyeon Kim, Head of IR.

On behalf of the company, let me thank all the participants for attending today's conference call.

(foreign language) Let me first introduce the executives present here with us.

First, CFO, Sang Don Kim of LG Display; Young Kwon Song, Senior Vice President of Strategy and Marketing Group; DuckYong Kim, Head of Corporate Business Management Division; Matthew Kim, Head of Market Intelligence; Stephen Ko, Head of TV Marketing; [ Jae Yong Kwon ], leader of IT Marketing Division; and [ Kijun Jin ], leader of Mobile Marketing Division.

(foreign language) Today's earnings presentation will last around 1 hour in both Korean and English.

There will be a presentation on the company's financial performance in the first quarter of 2017 and market outlook, to be followed by Q&A.

(foreign language) Please refer to our website and attachment to our disclosures for more details regarding Q1 results.

For those of you joining us via the webcast, please refer to the references in the widget on the bottom left corner.

(foreign language) Before we begin the presentation, please take a moment to read the disclaimer.

(foreign language) Please note that today's results are based on consolidated K-IFRS standards prepared for your benefit, and have not been audited by an outside auditor.

(foreign language) With that said, the CFO, Sang Don Kim, will now start with the presentation on Q1 2017 earnings result.

(foreign language) Good morning and afternoon and evening for those calling in from abroad.

This is Sang Don Kim, CFO of LG Display.

I would like to thank our shareholders, analysts and investors for joining LG Display's Q1 2017 Earnings Release Conference Call.

(foreign language) Before presenting the company's earnings, if we look back to Q1, ASP maintained a consistently favorable trend, led by large display despite the weak seasonality, as migration to bigger TVs continued on the demand side and production constraints continued on the supply side due to limited growth in supply area.

(foreign language) In addition, there was better-than-expected response from customers and market to OLED TV like the wallpaper and CSO that we unveiled at the CES this year, and interest and demands for P-OLED are growing.

(foreign language) We will keep broadening and diversifying our customer base by meeting market expectations with the additional OLED TV capacity at E42 to be completed in Q2 this year.

(foreign language) The E5 small- to mid-plastic OLED line, where mass production will begin in the second half, is on schedule.

We will ensure successful mass production of the E5 sixth generation plastic OLED by building the company's technology and production know-how.

(foreign language) Now let me move on to Q1 earnings result in more detail.

(foreign language) Revenue in Q1 was KRW 7,062,000,000,000, down 11% quarter-on-quarter.

This is largely owed to the 7% reduction in area shipment due to limited capacity and drop in blended ASP coming from the lower share of mobile.

(foreign language) Operating income came in at KRW 1,026,000,000,000, up by 14%.

Profit grew quarter-on-quarter, largely owed to the upward ASP trend in large display.

Premium focused product mix such as large UHD TVs and high-resolution, high-end IT products, as well as continuous cost-saving efforts.

(foreign language) To elaborate more on Q1 area shipment and ASP, area shipment was 10.07 million square meters, down by only 7% quarter-on-quarter despite the seasonality.

This is due to the tight supply amidst continuous size migration.

(foreign language) Capacity fell by mid-single percentage quarter-on-quarter due to fewer working days and usage for R&D for new products and OLED line conversion.

(foreign language) Blended ASP was down by 5% quarter-on-quarter.

Although large panel ASP maintained its upward trend, shipment of small to mid-display decreased due to seasonality.

(foreign language) TV share out of -- as for the revenue share by product.

First, TV share out of revenue was up 5 percentage points, thanks to a premium focused product mix, such as UHD, and continuous rise in large-sized ASP.

But mobile share fell by 5 percentage points on lower shipment due to seasonality.

IT share remained little change as a result of profitability-focused fab mix.

(foreign language) As for financial performance, inventory was KRW 2,283,000,000,000, almost flat quarter-on-quarter.

Inventory appears to remain low with tight supply continuing mostly for large-sized TV panel.

The company will closely monitor the market condition and maintain a tight inventory control.

Overall, the company remains in sound financial position at end of Q1 in terms of debt and cash position, thanks to improved market situation and efficient management.

(foreign language) Cash at the end of the quarter was KRW 2,303,000,000,000, down by KRW 419 billion from the previous quarter.

(foreign language) Next is on market outlook and the company's strategic direction in more detail.

Tight supply is expected to continue for large panels on the back of continued size migration and closing of low-generation production lines.

There appear to be no major risk factors, although some corrections may be possible in some product or sizes.

(foreign language) The company will keep a very close eye on the market environment and set makers to react accordingly while ensuring sustainable profitability through different technologies and product mix under the current favorable supply-demand dynamics.

(foreign language) Moving on to Q2 guidance.

Area shipment is projected to be generally flat quarter-on-quarter due to capacity limitation, but TV shipment is expected to fall slightly or remain flat following the increase in large-sized panels.

(foreign language) As for the ASP, it is expected to remain on a stable trend, albeit with some fluctuations by size and product depending on the supply-demand dynamics.

But for area ASP, it is likely to drop by single-digit percentage due to seasonality of small- to mid-sized products.

(foreign language) As for the CapEx this year, it is likely to be higher than initially planned amidst growing demand for volume production of new technologies, but coming up with this specific numbers will take time as detailed planning is still under work.

(foreign language) The company is revising its strategic and investment focus as well as detailed planning as industry is quickly moving from LCD to OLED, with better-than-expected reception of OLED TV like wallpaper and CSO and growing customer interest and demand for P-OLED.

(foreign language) We will develop our strategy and plan after a thorough review of market opportunities and risks in light of the timeliness and adequacy of investment insofar as it does not affect the company's sound financial position.

(foreign language) Even as we prepare for sustainable growth into the future, the company will do its best to set itself apart from peers in profitability through rigorous business management and cash flow control under meticulous scenario planning.

This concludes my report.

Thank you.

(foreign language) This brings us to the end of the earnings presentation for Q1 2017.

We will now take your questions.

I would like to now ask the operator to please commence the Q&A session.

(foreign language) (Operator Instructions) (foreign language) Our first question is from Nicolas Gaudois at UBS.

First question relates to OLED TV panels.

You just alluded to better-than-expected reception of new OLED TV models, which were launched at CES, including the wallpaper.

Is this leading you to reconsider your plans for 2018 and '19, in particular for further conversion of capacity from LCD to OLED in Gen 8.5 next year and potentially in 2019, Gen 10.5 in your P10 site which you're currently building up?

And after this, I've got a follow-up.

(foreign language)

(foreign language) This is the CFO speaking.

Now in the last quarter's earnings release conference call, I talked about the EBITDA for the year in full and saying that the target is to have the EBITDA in the black.

And then we will maintain that until 2019, so we have also talked about the EBITDA target for 2019 as well.

Now having said that, I did mention earlier that, yes, the reception from the customers regarding the new OLED TV was quite good, better than expected.

Then also, there is some view inside the company that there is some upsell potential.

For example, if there is improvement in the yield, then there could also some improvement in the shipment as well.

So yes, there is the possibility of upselling potential.

But now we have the 60,000 capacity for this.

And so for this year, we are going to focus only on securing new customers and diversifying the customer base.

So again, yes, there is the upside potential in this area.

But for us to fix the timing of, let's say, changing the plan and so forth, would be too early to say at this point.

(foreign language) And I believe that you also asked about the possible additional conversion of the capacity in 2018 and 2019.

And yes, we -- I did mention that there is some upside potential, but mostly coming from the demand side.

So we believe there is some upside potential from the demand.

So regarding this, we -- there are various in the number of investment options that are under review.

Likewise, for the P10 investment and also investing to meet customer demand, there are various options available that are currently under review.

And once we have some kind of decision, then we will communicate that with the market.

Great.

And just a quick follow-up on CapEx.

You just mentioned upside versus your initial guidance due to tight demand.

Were you referring there to upside related to LCD CapEx?

Or is any of that OLED-related including your ramp-up of Gen 6?

If I recall, for LCD, you already had plans to have some capacity in China in the second half of the year, in Gen 8.5 in particular, because you started supplying one of the major TV vendors due to one of a panel makers stopping supplying them.

(foreign language)

(foreign language) Now, again, this is the CFO.

And as I have explained earlier, in terms of the possibility of revising our investment plan, it is currently under intensive consideration and review.

(foreign language) Now I remember explaining this some time ago that in coming up with -- so for the decision-making in investment, there are a lot of factors that have to be considered.

For example, the actual size of the CapEx, as well as our technological readiness as well as internal capability and also our financial factors as well.

(foreign language) And right now, there are a lot of demands and a number requirements coming from various customers.

So the size of the CapEx will be determined in time in consultation with our customers.

And fortunately, we are currently enjoying a very good favorable market situation in terms of profitability as well as the reputation that we enjoyed from the customers.

So we are going to make our decisions based on the market situation as well as the customer's requirements.

(foreign language) Now having said that, let me also emphasize that our strategic orientation remains that 70% of our CapEx will go into OLED, mostly in the large-sized TV panels and plastic OLED.

(foreign language) The next question is from Yoo Jong Woo at Korea Investment.

(foreign language) Now I have 2 questions.

First is you have the plan to start operation of the E5 line in the second half of this year.

But then recently, as also known in the market, now one of the major mobile customers -- so the orders coming from one major customer has been ended.

So then -- so that means that there would be less demand for the LG Display's LCD panel.

Now do you believe that by operating the E5 line, you will be able to offset the reduction in the volume and also the expected reduction in the sales?

And if so, how much do you believe that you would be able to offset that?

And the second question is about the investments.

So as the CFO has mentioned earlier, your plan is to invest 70% of your CapEx into the large-sized and small- to mid-sized OLED.

But then, given your EBITDA, do you believe that it would be possible to maintain a balance in the investment between the large-sized and the small- to mid-sized?

Or do you believe that it would be better to focus on one?

(foreign language) Now this is the CFO again.

And I believe that your first question is pertaining to the LTPS capacity.

And we believe that the mid to -- small- to mid-sized display moving to the plastic OLED is an irreversible market trend.

So we would also try to make the investment accordingly in order to keep up with this trend or the movement from the LTPS to plastic OLED.

(foreign language) Now having said that, we believe that there are still market opportunities left for the LTPS LCD.

So utilizing our competitiveness in the Generation 6 line production as well as high quality, we believe that we still have some play left for, for example, the high specifications demand, as well as the auto and also the ultra-high-resolution smartphones.

So for those, we will try to keep utilizing the market opportunities available.

(foreign language) And regarding your second question about the CapEx for the large OLED and plastic OLED.

Now as the market already is aware of -- now in -- up until recently, we were in the phase 2 of the large TV mass production.

And afterwards, after receiving the customer perceptions, we have expanded the production and is now providing better value.

And then for the plastic OLED, yes, we have the technology for this as well as the possibility of successful mass production.

But right now, we are in the phase of trying to increase capacity.

(foreign language) Now coming back to your question about the CapEx -- or the 70% of the CapEx going into OLED this year.

Yes, I do believe that there would be a higher share going into mobile and plastic OLED this year.

(foreign language) But let me also tell you that we are going to have a very conservative CapEx spend for OLED because OLED requires higher investment than LCD.

So we would also have to closely review the customer's commitment level as well as the level of certainty of market demand as we run a very conservative CapEx spend in OLED.

(foreign language) (Operator Instructions) (foreign language) Our next question is from Simon Wu at BOA.

(foreign language) First is about the LCD pricing, now which has enjoyed very good pricing for 3 consecutive quarters.

But then the industry being cyclical, I believe that there would be some adjustment in the -- or the correction in the LCD pricing, and eventually it might decline again.

When do you think that is going to happen?

So I would like to ask the view from the management.

(foreign language) Now I am from market intelligence.

And now with regards to the demand, then right now it is moving from large size to ultra-large size, and also the resolution is moving toward a higher resolution.

For example, the UHD.

And then looking at the supply, then that -- actually, there has been some changes since last year.

So in the second half of this year, it seems as if the supply increase is going to be at a lower extent compared to last year.

And because of this, we believe that the stable pricing will continue for some time into the future.

But then, because the panel price is already somewhat high, it also depends on how market will be tolerant of this pricing.

So I would say that this is, right now, quite flexible.

(foreign language) And the next question now is from the investor's perspective, you also have to be concerned about the initial yield as well as the cost recognition for the current investment into the E5, which is the -- for the plastic OLED for smartphones.

And the CFO earlier mentioned that your plan for this year in terms of EBITDA is to be in the black; and in terms of EBIT, to be in the black by 2019.

I wonder whether this is also inclusive of the plastic OLED?

And the next question is about the sixth generation plastic OLED.

The business is going to be in the amount of trillions of won.

And I wonder, in such a case, EBITDA, when do you believe that, that can be in the black?

(foreign language) This is the CFO again.

And the -- about the EBITDA being in the black in 2017 and EBIT surplus for 2019, that is for the large-sized OLED panel.

(foreign language) And as you have also observed for the plastic OLED, large-scale investment is currently underway, and the investment is larger than the LCD.

And now for such large-scale investment, as this is continuing, for us, the first priority is to make sure that the production will stabilize as early as possible.

(foreign language) So to be more specific, the first challenge or the first priority for the plastic OLED is to secure enough capacity to have the economy of scale.

And second is to build on the existing large-scale -- large-sized OLED panel competitiveness, our experience and also try to create the synergy effect with the large-sized OLED panel.

And in doing so, have the synergy in terms of the cost as well as investment efficiency and securing the supply chain.

(foreign language) Now in terms of the yield or the EBITDA, please understand that it is too early for us to specify how much they're going to be.

But then, I can tell you that we have been planning for the plastic OLED for quite some time and things are moving along on track.

(foreign language) Our next question is from Rob Stone at Cowen & Company.

I wanted to ask if you could provide a little more color on the OLED TV shipments and performance during Q1?

Could you comment on the panel shipments?

And also, gross margins improved quite a bit from Q4 to Q1.

Did OLED TV production also contribute to the improved gross profit percentage in the first quarter?

(foreign language)

(foreign language) Now this is the CFO speaking again.

Now regarding the OLED TV panel, yes, it seems that as if the business is moving in the way that is exceeding our target.

So for the -- in the first half, the shipment, on a quarterly basis, is 300,000.

And in the second half, it's likely to be 500,000 per quarter.

(foreign language) Now of course, among the questions that we get, there are some about the possible improvement in the profitability much faster than expected.

Now as the CFO, I have to remain conservative about our forecast and expectations.

But then, I can say that internally, yes, there seem to be positive expectations because of the performance of late at that is exceeding the target.

I have one follow-up question if I may.

You mentioned that the sales from the E5 line or mass production should start in the second half.

Can you comment on the when mass production is expected for the new lighting -- OLED lighting capacity?

(foreign language)

(foreign language) Now this is the CFO again.

And so the question was about the OLED lighting.

Now in terms of the plastic OLED for the E5 line, yes, the mass production at the E5 line for plastic OLED will begin at the end of the Q2 of this year.

And then also for the E6 line, the Gen 6, now for this, the mass production will begin in the second half of 2018.

And then for the OLED lighting, the Gen 5, now currently, we are reviewing the possibility of producing 15,000 in the second half of this year.

(foreign language) The next question is from Kyung Min Kim at Daishin Securities.

(foreign language) I have 2 questions regarding technology.

Now first about the CSO, I understand how this works is that there is a vibrating panel.

And because of this, the sound can be made without having speakers.

And I believe that this will have very good applicability for the artificial intelligence areas or voice recognition in the future.

But at international exhibitions, you only talked about the applicability for TVs.

But I wonder whether there are other applications that you are currently envisioning or do you have any plans to identify and develop other applications?

(foreign language) Now this is -- I am from the Strategy and Marketing Division.

And yes, as you have mentioned, the CSO, the Crystal Sound OLED, it does have very good scalability, so we actually do not have fixed applications for this.

And because of such a broad applicability, we will be making such decisions or such applications in close consultation with our customers.

(foreign language) Now I'm from IR, and I would like to add some explanation to that.

Now for LG Display's OLED technologies, so far, in the industry, it has been talked mostly in terms of the good picture quality as well as how slim it is.

But then now -- as for our investment or vision into the OLED is, of course, on one hand, yes, the picture quality and the form factor of such slimness, of course, they're important as well.

But then we also highly value the possibility of convergence, so I would say that the CSO is a very good embodiment of such convergence possibility.

So because of this, it would also have scalability and convergence possibility into the Fourth Industrial Revolution and also for voice recognition and artificial intelligence.

So because of that, there is going to be a lot -- more R&D efforts to be made into this, and we would also try to broaden its applicability.

(foreign language) And actually, my second question seems to have been answered by the IR leader already.

So that concludes the questions for my part.

(foreign language) The next question is from HyunCheol Soh at Shinhan Investment.

(foreign language) I also have 2 questions.

First is about the large-size TV panel, larger than 60-inch.

So what is the increase in the supply or the production of the large-size TV panel that is planned for the second half of this year, so in terms of the number of units?

Because I believe that, that this going to be largely determine the supply-and-demand dynamics in the second half.

And the second question is about the OLED panel that the -- Sony is receiving from you.

And since because this is pertaining to a particular customer, I understand that you might not be able to respond to this.

But I would just like to know what Sony's reaction or response is regarding the panel that it is receiving from you.

(foreign language) I'm from TV Marketing Division.

And now for the super large-sized TV panels.

Yes, we remained the very strong dominant #1 player in the industry, and the target is to have growth at higher than 2 digit.

And right now, the developments are ongoing.

(foreign language) Now regarding your second question.

Yes, because this is pertaining to a particular customer, it is difficult for us to give you the details.

But then, what we understand so far is that now the product has been launched in China already, and it is also planned to be launched in the U.S. and European markets, respectively, in April and May.

And we also understand that although it is a high-end, high-priced products, it has been launched quite well and is enjoying smooth sailing.

(foreign language) Now I'm from the Market Intelligence Division, I would like to elaborate a bit more about the 60-inch and above market.

(foreign language) Now for the super large-sized, in -- from the second half of this year, the line-up is going to be expanded more in earnest.

So for this year, the growth rate would be at the 30% level.

(foreign language) The next question is from Jung Chang at Samsung Securities.

(foreign language) Now I also have 2 questions regarding OLED.

Now regarding the large-sized OLED, now let's say with the wide OLED going to the full HD, now the -- it took about 1 or 2 years to reach the golden yield.

So I wonder whether the similar level of yield would be reached for the QHD.

And also -- so in such a case, can we assume the kind of the BDP similar to the other large-sized OLED level?

And then the second question is about the mid- -- the small- to mid-sized products.

So now for the E5, the E5 yield, now for this, I wondered -- now in order -- or for the E5 yield, now is the plan to reach the yield at the full HD level?

Or will this be at the QHD level?

And so -- and another question related to this is that independent of the customer's demand, when do you believe that -- what kind of yield do you believe should be reached internally for the company to increase the capacity?

(foreign language) Now this is the CFO again.

Now as was explained in Q4 earnings release, now not only for the large-sized OLED TV panel -- so for large-sized OLED TV panel, not just for the full HD, but then also for the 55-inch, 60-inch and other sizes, we have reached the golden yield.

So for the LCD, it took 10 years.

But then for OLED, it took about 2 years for us to reach the golden yield.

(foreign language) And then, for the E5 plastic OLED.

Now as you would understand, it takes a lot of effort, and it's quite challenging to secure a sufficient yield in the early stage.

But then based on our experience of the OLED cycle, we believe that the improvement is -- rather than being incremental, I believe that the improvement would be that we would, at a certain point, reach the momentum and then see a very rapid upgrade since then.

(foreign language) And for me to specify the target would be very difficult at this point.

But then, I hope that you would keep a close watch on LG Display on how -- on what we do before we move into the mass production stage.

(foreign language) The next question is from Sang Un Lee at Yuanta Securities.

(foreign language) Now looking at the Q4 and also Q1 earnings, then if we take away the OLED side and just looking at the LCD, we see that the profitability is actually higher than 20%.

So now regarding this, do you believe that such a high margin is deserving, meaning that because the LCD is different from LGD and also the Chinese LCD products?

So because the LG Display's LCD provides higher value in terms of the technology, do you believe that this is a deserving margin that is adequate that has been realized just now, finally?

Or do you believe that this is simply because of the market situation that you are enjoying any one-off buoyancy?

So do you believe that this is an undeservingly high margin that is abnormal and one-off and is likely to go down again?

And the second question is, now looking -- for the next 3 years, what would be the production road map and the technology road map for LG Display as well as the other Chinese LCD makers?

Because I believe that for the TV, as the size becomes larger, in the near future, 75-inch and larger could also become as popular as the 65-inch as it is today.

So in such a case, then the resolution will also have to go up to like 6K or 8K, so when do you think that this can be made possible?

(foreign language) Now this is the CFO taking your first question.

Now it is true that the LCD is recently enjoying a much improved profitability.

But then whether the current margin rate is appropriate or not, I do not believe that I am in the position to make such a judgment.

And we also have to take the market supply and demand into consideration, so it's quite difficult for us to say whether a certain margin level is appropriate or not.

(foreign language) But then what I can tell you is that, clearly, LG Display has 2 advantages.

One is technological differentiation.

For example, the technologies that only LG Display have like M+ and IPS.

So these are the technologies that are different from our peers and that provide better value to our customers.

(foreign language) And the second advantage that we have that we offer to the customers is our reliability as a supplier.

So in terms of the experience in mass production and consistency in quality and also the kind of supply chain that we have that ensures on-time delivery.

So we have the kind of system that enhances reliability for us as a supplier in the eyes of the customer.

(foreign language) And the recent favorable market situation, the positive market situation, it enables the achievement of our plan, the basic strategy of utilizing the profitability of LCD to prepare for the future.

So this provides a very good environment for us to make positive progress on such strategy.

So with this, we could also perhaps pull up the, let's say, our plans for investing into the plastic OLED and also into the large-sized OLED and also developing new applications.

So overall, this bodes quite well in terms of our planning for the future as well.

(foreign language) Now regarding your second question, I would like to respond in the way of providing our strategic orientation for the TV business from the year 2018 to 2020.

(foreign language) Now first, I understand that there are a lot of market concerns regarding the Generation 10 by the Chinese makers, so I would just like to elaborate a bit regarding this.

(foreign language) Now as far as we understand, for the Chinese makers, for them to set up the G8 and then go into the 55-inch UHD, I understand that it took them about 6 quarters to 8 quarters to complete this.

(foreign language) Now based on this, then of course by 2020, the Chinese makers would also accelerate their technological development.

So in such a case, the timing could become shorter.

But still, based on our planning for 2018 and 2020, we believe that the LGD has enough strength and advantages to overcome the challenge coming from the Chinese makers.

(foreign language) Now regarding the 8K.

Now in terms of the market perspective and also in terms of the infrastructure readiness and so forth, we believe that 8K will come into a full bloom by 2019.

(foreign language) And I believe that by just combining the [ UIPS ] technology of IPS as well as the M+, we will be able to differentiate ourselves from the peers in the 8K amorphous LCD and be the -- remain the dominant player.

(foreign language) The next question is from Jong Woo Yoo at Korea Investment.

(foreign language) Now I only have one question.

So it seems as if from the forward industries, the demand seems to be a bit sluggish -- so for example, from the smartphones or PC and so forth.

So what do you believe is -- what is your projection for the demand for this side and how do you foresee this to impact your business?

(foreign language) I am from Market Intelligence.

And as you have mentioned, yes, it is true that in terms of the unit growth in the, like, smartphones or television or PCs, it seems as if the growth from -- in terms of volume from this sector is limited.

But then when we look at the market by product, then there seems to be growing demand for, let's say, high-resolution products, large-sized and high-quality products, and less demand for commoditized products.

And then -- so that -- so in terms of the demand, it seems as if that is where things stand today.

And then looking at the supply, we believe that supply is also going to remain quite tight now because of the capacity loss that could happen as we focus more on the high-quality products as well.

So because of this we believe that, in general, the supply-demand balance will still be maintained.

(foreign language) We will now close our Q1 2017 earnings conference call by LG Display.

Thank you once again for joining us today, and thank you very much for your outstanding questions.

Please do contact us at the IR team for any additional questions or information.

Thank you.

(foreign language) Closing the conference, we currently ask you to fill out the survey if you connected to online webcast.

Thank you all for attending.

You may disconnect now.