LG Display Co Ltd (LPL) 2017 Q3 法說會逐字稿

(foreign language) Ladies and gentlemen, welcome to LG Display's Third 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 very much for joining LG Display's Third Quarter 2017 Earnings Conference Call.

I am Heeyeon Kim, Head of IR.

(foreign language) With us today are our CFO, Sang Don Kim of LG Display; DuckYong Kim, Head of Corporate Business Management Division; Matthew Kim, Head of Market Intelligence; JY Kwon, Head of IT Marketing; and [KY Jin], Head of Mobile Marketing.

(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 for the third quarter of 2017 as well as market outlook, which will be followed by a Q&A.

(foreign language) Please refer to our website and attachments to our disclosures for more details regarding Q3 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) Also, please note that today's results are based on consolidated K-IFRS standards prepared for your benefit and have not yet been audited by an outside auditor.

(foreign language) With that said, our CFO, Sang Don Kim, will now start with the presentation on the third quarter 2017 earnings results.

(foreign language) Good morning.

I am Sang Don Kim, CFO of LG Display.

(foreign language) I would like to thank the shareholders, analysts and investors for joining LG Display's Q3 2017 earnings conference call.

(foreign language) In looking back this third quarter with TV set price increases driven by previous panel price increase, display market saw slower-than-expected sell-throughs in the regions such as North America, Europe and China, which are the areas with larger average sizes.

This has led to slower-than-expected size migration with downward trend in large panel ASP.

(foreign language) Despite such backdrop, large OLED TV segment saw increase in shipment from additional E42 capacity entering full-fledged mass production from Q3.

And as seen from E5 2017, 13 companies have adopted OLED TVs with new premium products such as Wallpaper and CSO gaining positive reception, attesting to differentiation against LCD TVs, which led to customer diversification and rise in volume for OLED TV.

(foreign language) Also, for the small to medium P-OLED business, there were smooth supplies for new models from E2 line, and progress for E5 line, which started mass production in Q3, is ongoing as planned, in time for product launches end of the year.

We plan to stabilize Gen 6 P-OLED production yield and secure technological competitiveness from E5 line and do our utmost in building the basis for full-fledged expansion of small to mid-P-OLED business.

(foreign language) Now let's move on to Q3 earnings results.

(foreign language) Driven by higher OLED TV penetration and other efforts in solidifying the premium positioning as well as rise in small to mid-mobile product shipment on high seasonality, Q3 revenue was up 5% Q-on-Q to KRW 6,973,100,000,000.

(foreign language) With selling price declines around large panels, operating income fell 27% Q-on-Q, coming in at KRW 586 billion.

(foreign language) Moving on to Q3 area shipment and ASP.

Despite the typical high seasonality, TV demand was lower than expected, which led to 1% Q-on-Q increase in area shipment at 10,320,000 square meters.

(foreign language) Capacity increased by a mid-single digit Q-on-Q due to maximum capacity activities at the China fab and OLED E42 line entering full-fledged mass production.

(foreign language) Now the prices for large panels displayed overall downward trend, but ASP per square meter was up 4% on seasonality for the small to mid-products.

(foreign language) Next is on the product mix.

(foreign language) TV share of the revenue mix saw 6 percentage point decline Q-on-Q on ASP declines in large panels, but mobile saw 5 percentage points share expansion driven by greater shipment from high seasonality.

With the product mix focused around profitability, IT revenue share recorded a comparatively similar level.

(foreign language) Moving on to the financial update.

Inventory came in at KRW 2,664,000,000,000, up KRW 320.6 billion Q-on-Q.

(foreign language) Inventory did rise on won amount basis in light of responding to customer demands for the fourth quarter and greater share of high-end product share like the OLED.

But we expect the level of inventory amount to be lower as of the end of the year through tight inventory management accompanying close monitoring of the market.

Debt-to-equity ratio inched up slightly, but financial ratios overall are kept at a sound level.

(foreign language) Cash flow was up KRW 700.5 billion Q-on-Q, with cash at the end of the period coming in at KRW 3,302,000,000,000.

(foreign language) Let me now move on to market outlook for Q4 and 2018.

(foreign language) Demand in the second half of 2017 was lower than expected on muted sell-throughs in areas that effectively led size migration like North America, China and Western Europe, which led to lowering of Q3 ASP, but we expect the ASP decline to slow in Q4, underpinned by panel company strategies focused on profitability and year-end promotions.

(foreign language) In terms of 2018 supply and demand dynamics, we expect supply to grow year-over-year on 10G NPAT from China, and we expect uncertainties on the demand side, keeping us to be conservative on business planning.

Having said that, we expect the key factor behind pricing to shift from panel supply and demand to profitability as we go forward.

(foreign language) As the industry enters more mature phase and as there is greater recognition of structural oversupply in the LCD sector, we expect panel companies to exert greater efforts around preserving their profitability.

Hence, we believe ASP to move not in line with supply and demand dynamics, but in line with profitability.

(foreign language) Next is on Q4 guidance of the company.

(foreign language) Area shipment is expected to increase by mid-single-digit on the back of responses to high seasonality during the year-end and Chinese New Year holidays.

(foreign language) ASPs can differ depending on supply and demand for different product types and sizes, but we expect an overall downward trend, but the gradient of decline is expected to be mild.

(foreign language) According to the disclosures made last quarter, we will make investments focused on OLED for the coming several years under the long-term plan to prepare for the future.

We expect CapEx execution to be focused on years 2018 and 2019, leading to higher investment amount for next year compared to 2017.

For a more detailed annual investment size, we will come back to you once they become concrete.

(foreign language) In light of the recent trends in LCD panel price declines and uncertainties surrounding demand, fixed cost required for large and small to mid-OLED business and initial ramp-up costs can be burdensome to a certain extent.

But LG Display will continue to maximize profitability around differentiated LCD products and actively expand the OLED business so as to secure OLED margin, thereby contributing to across-the-board profitability improvements.

(foreign language) Under the conservative stance that market environment will continue to be challenging, we will engage in flexible production capacity operations, rigorous cost innovations and cost savings on multiple fronts, focusing on higher efficiencies in resource execution and be preemptively managing financial soundness such as the cash flow position so that LG Display can stand out among its peers.

Thank you.

(foreign language) That brings us to the end of earnings presentation for Q3 2017.

We will now take questions.

Operator, please commence with the Q&A session.

(foreign language) (Operator Instructions) (foreign language) Our first question is from Samsung Security.

(foreign language) I would like to pose one question with the -- you've talked about how the mobile mix has actually changed despite the decline in the large LCD -- decline in large LCD, the blended ASP had actually moved up.

So with respect to the migration from LCD to OLED, we've -- our concern at the market that the mobile panel share could actually go down.

So could you provide some color as to what will happen in 2018 in light of your ability to respond to OLED demand?

And also how much of a change will we have to expect in the share of the mobile panel out of your entire product mix?

And would that have any impact on your blended ASP?

If you cannot disclose any specific figures, I would actually appreciate at least an overall directional guidance.

(foreign language) Now as you are well aware, we are currently in the process of migrating from LCD panels to plastic OLED, and we expect revenues related to OLED to start to generate once the investment actually is complete in year 2019.

(foreign language) Now if you look at the mobile LCD panel share of our -- based on our companywide figures, it's about 30%.

(foreign language) Now starting this year, we expect the P-OLED panel sales to start to really gradually increase and take off, and by next year, we think that it will either be flat or there will be a slight growth.

(foreign language) Just to add on what I have previously said, as you know, we have a phased approach in the setup and the construction of the P-OLED fab, so we expect PO revenue to start to grow gradually starting next year.

(foreign language) Our next question is from Simon Wu at BoA.

(foreign language) I'm from Merrill Lynch.

I would like to first thank you for a great performance.

I guess, on an EBITDA basis, over the past 1, 2 and 3 quarters, we've seen actually your profit increase despite the fact that the depreciation has gone up and your operating profit has actually declined.

But on an EBITDA level, I think your performance was quite good.

So thank you for that.

So moving on to my question, when you look at the OLED TV, recently, we saw some article coverage on the burning effect that people have witnessed on your OLED TVs.

We'd like to understand what your view is with respect to this issue.

And secondly, we'd like to understand what your capacity management status is currently at in terms of your glass capacity?

And are things going well in terms of production execution and capacity execution to go over that 2 million mark?

(foreign language) To answer your first question, I think in the market, there's been some intentional creation of noise regarding this issue, but we believe what's most important is the decision and the judgment of our customers.

Our performance would arise out of the positions and decisions of the customers.

And we, at our company, are exerting our utmost endeavors to satisfy what the customers want.

OLED panel basically adopts a totally different platform compared to existing LCDs.

We have high confidence in our OLED platform.

And we are, once again, exerting our best of the efforts.

(foreign language) In terms of the large-sized OLED TV panel capacity in 2017, we're expected to sell around 1.7 million this year in terms of capacity.

(foreign language) As I've mentioned previously, the number of customers who have adopted the large-sized OLED panel have -- is at 13.

So 13 customers have adopted OLED.

So we see a very strong increasing trend in terms of the demand.

And we see that by next year in terms of the volume, we're looking at about 2.5 million to 2.8 million.

(foreign language) Our next question is from Nicolas Gaudois at UBS.

First one and then I have a follow-up afterwards.

Just to continue on OLED TV panel production.

So with the volumes you just confirmed for this year and for next year, the indications you gave which, if anything, is a little bit higher than your prior target.

Could you comment on profitability last quarter for the OLED TV panel business and how you see the timing to reach EBIT breakeven at some point hopefully by next year?

And my follow-up question is -- relates to mobile LCD.

We've had a lot of anxiety in the market about the volumes in Q3 and Q4.

Maybe if you could qualitatively talk about how you compare your outlook for mobile LCD going into Q4 versus what you expected 1 or 2 months ago.

(foreign language)

(foreign language) So I understand your first question to relate to profitability for our large OLED TV panels (foreign language) Now the company's view is that we are on track as according to the guidance that we have previously communicated.

In 2017, when it comes to the large OLED TV panels, we are making EBITDA in the black on a monthly basis.

(foreign language) In terms of the customer demand, it is quite strong.

And if you look at our yield and also different production indicators, they are improving so we expect profitability to improve as we go forward.

(foreign language) And we are, at this point, devising our business plan internally with a target of turning profit on the operating profit level by the second half of next year.

(foreign language) I think in terms of the mobile LCD, we've seen some press coverages relating to some uncertainties relating -- or to the customers, the TAM-related matter.

(foreign language) Because the demand from the customers are quite robust, our focused activities are providing with ample support.

(foreign language) And we are fully prepared to adjust the capacity for mobile LCD in line with the speed of penetration of plastic OLED.

(foreign language) Our next question is from Daishin Securities.

(foreign language) In terms of your Q3 net profit, the figure was actually better than the market consensus.

Were there any particular points that we need to note on a nonoperating side or the corporate income tax line item?

Second question is, in 2018, in order for your free cash flow to stabilize, I believe, at the corporate-wide level, you need to keep your cost of goods sold within the company below 90% level.

In light of the fact that your Q3 depreciation has increased and also the fixed cost, therefore, had increased, what are your plans to manage your cost in the coming years?

(foreign language) Responding to first question, there are no particular items to note.

(foreign language) For the second question, I need to break down the answer to OLED and LCD.

If you look at the large-sized OLED TV, basically, we are in the process of scaling the economic size in order to secure profitability.

(foreign language) Now as you have pointed out, in order to reduce the material cost and overhead cost and thereby increase profitability, one of the ways to achieve that is to set up OLED TV fab in China.

(foreign language) And underpinned by our previous experiences, we want to enhance the efficiencies of our line and attain economy of scale by expanding the ecosystem when it comes to the material sourcings and the material-related cost, thereby really enhancing cost efficiency and cost competitiveness.

(foreign language) Now on the LCD side, the -- our experience is very broad-based.

And in terms of operational excellence, I believe LG Display is at its best in the industry.

(foreign language) One of the key characteristics of LG Display is its flexible production management, operational management.

(foreign language) Once again, we will do our utmost to maintain our cost competitiveness through various different activities.

(foreign language) Our next question is from Korea Investment.

(foreign language) I would like to ask 2 questions.

The CFO has previously mentioned that there's been some heightened uncertainties around mobile LCD demand, and the company is preparing to convert LTPS LCD capacity to OLED.

But can you provide a little more color as to when this will happen?

When can we foresee that move from LCD to OLED conversion in the capacity?

And also, for OLED TV, I understand that your customers, the companies that actually sell the TVs, are enjoying quite good profitability, and the market reception for such product is also very good.

So you would obviously then think that the panel suppliers would have the bargaining power when it comes to price setting.

So what is your outlook for OLED TV panel prices for the fourth quarter and for next year?

(foreign language) Responding to your first question, as I said before, when it comes to the LTPS capacity conversion, we are prepared to nimbly and very quickly respond to any changes that we may witness on our customers or in the market.

But at this point in time, the company's priority and its resources are highly focused on the successful setup of the -- the phased setup of our plastic OLED fab.

To make sure that we don't go through any trial and errors, we are focusing greatly our resources on P-OLED.

(foreign language) Now when it comes to the OLED TV panel prices and its potential trends going forward, we do not think that it is going to mimic the trend that we have seen in LCD panel prices.

We're going to position OLED panel as a new device, a new lifestyle type of a product, so it would not be following the trend of LCD panel prices.

(foreign language) And therefore, we believe that, that will be a way to actually maintain price bargaining power.

If you look at products like CSO and Wallpaper, these are products that would develop or will be developed and has been developed, and it provides the customer with the high customer value.

So basically, our roadmap is to maintain our negotiating power vis-à-vis the price through such approaches.

(foreign language) So this year, the OLED panel volume is only around 1.7 million, but our objective is, by 2020, to go over 6.5 million mark, thereby achieving economy of scale.

We will follow by this roadmap that we have set for ourselves in order to further reinforce the profitability that we can enjoy from OLED TV panels.

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

I have 2 questions, please.

One, if you could comment, given the strength in the OLED business and somewhat a weaker LCD TV demand, number one, how much do you expect OLED TV to contribute to your overall sales in 2017?

My second question is, with respect to operating expenses, it was impressive to see that your revenues increased in Q3, but you managed to lower operating expenses.

Could you comment on the directional trend for operating expenses in Q4, please?

(foreign language)

(foreign language) Now responding to your first question, in 2017, on a full year basis, if you look at the contribution of OLED large panels and small panels to our corporate-wide revenue, it stands at around 10%.

(foreign language) Come next year, 2018, we expect the OLED to account for around 20% of the revenue mix.

This is as according to the business budget and plan that we have set.

(foreign language) In Q4, responding to your second question, we think that the ASP decline will -- to somewhat continue in the fourth quarter.

(foreign language) Now because of that, there may be a slight increase of a percentage of cost as against the revenues, a slight increase, but we are going to endeavor our best in order to make sure that the absolute size of the cost either remain flat or decline.

(foreign language) Having said that, because of the new setup of the fab, we think that there will be slight increase in the depreciation.

(foreign language) Just for your information, in Q4, we think that depreciation increase will be around KRW 40 billion.

(foreign language) Our next question is from Arete Research.

(foreign language) If you turn to Slide 8 and if you look at cash flow, there is a change in working capital which amounts to KRW 650 billion.

I think the size is quite significant, and on a year-over-year basis, this is about 5x higher.

Could you explain this to -- what this is?

(foreign language) So in Q3, you are correct, there's been an increase in the working capital and others line item.

This actually includes typical payable expenses as well as some of the unearned revenue or prepayment that we received from the customers.

(foreign language) Our next question is from NH Investment.

(foreign language) I would like to ask one question.

I think there is a strong demand for 18:9 LCD panel business, the mobile panel business, and there are also plans being announced by Chinese panel makers that they will enter into mass production in the second half of the year.

So can you give us some color as to what percentage of this 18:9 LCD panel actually accounts for it based on either your revenue or your total shipment amount?

And also, in light of the P-OLED conversion, what would be your outlook for this product group next year?

(foreign language) I am KY Jin.

I'm the Head of Mobile Marketing.

If you look at the overall market, the market is moving towards the 18:9 or 18.5 or 18.7:9 market, and we see a very strong demand coming from the Chinese companies.

(foreign language) Looking at our company alone, basically more than 50% of the share is by this 18:9 panels, and the overall market direction is towards that as well.

(foreign language) Our next question is from SCMR.

Two questions.

First, there's been some question about government influence in Korea on approving your China fab.

Would you expect this to slow the progress down?

Or is this pretty standard practice?

And second, can you give us some -- an update on the mix, size mix on your OLED TVs and on yields for each size?

(foreign language)

(foreign language) First, to respond to your initial question relating to our Chinese OLED TV plant, we are in the process of acquiring government approval.

We, at the company, were fully aware of the concern that the government has expressed, and we are in the process of persuading and explaining to them.

And at this point, we are waiting for the government approval.

(foreign language) Responding to your second question on OLED TV size mix, if you look at panel sizes of 55-inch, it accounts for 65%, and for 65 inches and above, the size mix share is 35%.

(foreign language) In terms of the yield in all the size categories, we are showing a significantly high yield.

We've also past the so-called golden yield.

Please understand, I won't be able to disclose the specific yields for individual inches.

(foreign language) Our next question is from Samsung Securities.

(foreign language) I would like to ask 2 questions.

First, regarding the recent press articles that we've seen, I think I would like to ask for more clarification on your OLED investment plans.

The fact that you will be investing KRW 15 trillion within the year for Gen 6 up to 60K capacity, I think there's been some different messages that is being announced to the public.

So could you make clarifications on your OLED investment plan?

Second question, people are saying that China could actually advance its mass production schedule of 10.5G.

What impact would that have towards the market?

And what countermeasures do you have?

(foreign language) I think there has been some misunderstanding.

Let me clarify.

As you know, we've communicated our investment plan back in July, and there are no changes to that plan we've communicated.

Starting 2017, for 4 years to come, including 2018, '19 and 2020, our new expansions, we will be investing KRW 20 trillion.

KRW 10 trillion will go to large-sized OLED panels, and the other KRW 10 trillion will go to P-OLED panels.

(foreign language) For your information, we are expecting around KRW 7 trillion of CapEx in year 2017.

(foreign language) Responding to your second question, I understand your question to be the impact on LGD coming from the 10.5G ramp-up of Chinese companies.

Actually that is one of the reasons why we're also very quickly rushing to migrating to the large-sized OLED and plastic OLED business.

For the LCD business, we will continue to have a focus on profitability and really focus on the high-end products that are truly differentiating.

(foreign language) I am Matthew Kim from Market Intelligence.

You asked about the potential impact in supply and demand dynamics.

Even if Chinese companies' 10.5 generation production is actually advanced in terms of its schedule, the panel price trend and its impact on the set price, if you look at next year's demand, on the ultra large-size demand, there could be a significant uplift.

So even -- so in terms of the negative or bad impact on market supply and demand dynamics, we think that, that will be minimized.

(foreign language) Let me make one correction to the previous answer we provided regarding 18:9 platform.

The market is projected to be around 20%.

LGD's share of 18:9 is around 50%.

(foreign language) Our next question is from Daishin Securities.

(foreign language) I have a follow-up question on your OLED TV panels.

The new products like the Wallpaper and CSO, I understand the company had engaged in very active marketing against the investors and your customers.

And if the share of such premium products actually increased, that will have great contribution to your large-sized OLED profitability.

I think for this year, the percentage of such premium products would be quite minimal, but next year, based on the number of shipments, how much share would these types of products actually have?

(foreign language) As you've correctly mentioned, we've seen some very positive customer reception on Wallpaper and CSO products.

So the company also has high expectations for these product groups.

We believe that by next year, out of the OLED panels, Wallpaper and CSOs will probably account for around 30%.

(foreign language) Our next question is from KB Securities.

(foreign language) My question relates to your mid- to long-term strategy on OLED TV.

Currently, the main product is 55-inch when it comes to the OLED TVs, but with the China companies starting -- scheduled to operate their 10.5 generation fab, we think that the 65-inch market will start to really take off.

So under this backdrop, what is the size mix strategy of the company?

And in terms of the definition, we think the high definition upgrade will take place from 4K to 8K.

That will obviously bring down production efficiency for the Gen 8 facilities.

So what are your strategies in terms of size and definition?

(foreign language) I think I can answer this question with 3 points.

Number one, in order to deal with a potential change in the size mix, LG Display has its own unique technology called MMG, based on which, you could actually cut the mother glass into different pieces of inches.

(foreign language) So as we communicated in previous months, we are in the process of really preparing for the technology as well as the process technologies to be fully equipped to be able to produce the 10G OLEDs.

(foreign language) And also, in terms of verifying the technologies, the oxide-based backplane technology compared to amorphous silicon technology is much more advantageous in terms of the driving speed.

So we believe that we really want to be able to verify this technology for the 8K and be able to adopt this technology.

(foreign language) So let me sum that up by saying that in preparing for 10G OLED TV, one of the essential technologies are currently being verified, which is the oxide technology.

Our plan is that we want to actually adopt the oxide technology because the speed at which the plane -- the speed at which the panel is going to be driven is going to be much faster compared to LCD 8K, and it's a more advanced technology.

(foreign language) And also, the Gen 10 is not based on half cuts, but it's based on mother glass.

So it's much more superior in terms of production and also in terms of different characteristics.

(foreign language) Due to the time constraint, we would like to close the earnings presentation.

I'm going to turn it over to the operator so that you may close the event.

(foreign language) If there are no more questions, we'll close the Q&A session.

(foreign language) Once again, thank you very much for joining us today.

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

Thank you very much.

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

Thank you all for attending.

You may disconnect now.