LG Display Co Ltd (LPL) 2017 Q4 法說會逐字稿

(foreign language) Ladies and gentlemen, welcome to LG Display's Fourth 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 Q4 2017 Earnings Conference Call. I am Heeyeon Kim, Head of IR. On behalf of the company, I thank you all for joining us at this conference call.

(foreign language) Let me introduce the executives present here with me today. CFO, Sang Don Kim of LG Display; Young Kwon Song, SVP of Strategy and Marketing Group; Matthew Kim, Head of Market Intelligence; Stephen Ko, Head of TV Marketing; JY Kwon, Head of IT Marketing; and [KJ 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 in the fourth quarter of 2017 to be followed by Q&A.

(foreign language) Please refer to our website and attachment to our disclosures for more details regarding Q4 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 yet been audited by an outside auditor.

(foreign language) With that said, our CFO, Sang Don Kim, will now start with the presentation on Q4 2017 earnings results.

(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 Q4 2017 Earnings Release Conference Call.

(foreign language) Looking back to the past 1 year, the company achieved meaningful results through consistent sales despite stronger global competition and panel price decline since the second half. We significantly increased OLED TV sales as well as the share of differentiated products in large-screen LCDs.

(foreign language) By business division, the company achieved the target production of 1.7 million units in large OLED. This secured stable yield and profitability while expanding the customer base. We also turned around to EBITDA plus for the year, enabling faster improvement in business performance down the road.

(foreign language) For plastic OLED, the company started 6G E5 volume production as planned. We also laid the basis to preempt the expected growth in plastic OLED by making additional investment in 6G.

(foreign language) In LCD, we were able to secure profitability and remain the market-leading position by maximizing productivity and increasing the portion of differentiated products with leading technologies and competitiveness.

(foreign language) I will now present more details about the company's performance in the fourth quarter.

(foreign language) Revenue in the fourth quarter was KRW 7.1261 trillion, up 2% quarter-on-quarter. The revenue increase reflects more shipment of large LCD TVs, reflecting year-end seasonality and demand for Chinese New Year despite the panel price decrease and strengthening premium position through OLED TV sales expansion.

(foreign language) Operating income stood at KRW 44.5 billion, down KRW 541.5 billion quarter-on-quarter. Aside from the general decline in ASP and stronger Korean won, expenses in 2017 Q4 were far larger than usual. OLED R&D and promotion expenses, in preparation of OLED business expansion, were pre-executed. Expense in Q1 '18 is expected to go back to the usual level.

(foreign language) To give you more details on the shipment and ASP in Q4, area shipment was 11.04 million square meters, up 7% Q-o-Q. There was increase in large LCD TV shipment due to the year-end seasonality and a big jump in the OLED TV shipment to high-end markets like Europe and Japan.

(foreign language) Capacity rose by 1% Q-o-Q following the ramp-up in China capacity and the large OLED E42 to fulfill the demand for large screens.

(foreign language) Although ASP kept declining, the pace of the price drop slowed down thanks to profitability-focused ASP management by increasing the share of differentiated products. Blended ASP fell by 2% Q-o-Q following the increase in the shipment of large-sized products with lower ASP per square meters.

(foreign language) As for the product mix, notebook and tablet segment rose by 1% -- 1 percentage point in share, thanks to shipment growth and improved product mix from the year-end seasonality. Mobile revenue share also rose by 1 percentage point as ASP per square meters rose from the improved product mix. TV's share out of revenue remained flat despite higher shipment because of the lower ASP.

(foreign language) As for the company's financial position, inventory was KRW 2.3501 trillion, down by KRW 313.9 billion Q-o-Q. Inventory at year-end was at a sound level as the year-end seasonality was met with the inventory prepared in the preceding quarter.

(foreign language) As for the company's financial indicators, our indicators such as liabilities and cash also remains solid at the end of 2017 as a result of efficient management.

(foreign language) As for cash flow. Cash at the end of quarter was KRW 3.3606 trillion, up KRW 58.6 billion from the previous quarter.

(foreign language) Now we will look at the company's outlook on 2018.

(foreign language) It is expected that supply-side impact will be bigger in the display panel industry in 2018 with the Chinese players planning to add new lines for 10.5G. Currency uncertainty will also be influential. There are also expectations of new opportunities such as accelerated migration to bigger size with major sports events, promotion and P-OLED business expansion, along with the higher demand for OLED.

(foreign language) The company will keep closely watching the market and set makers and respond accordingly as we prepare our business from a conservative position reflecting demand uncertainties.

(foreign language) As for the company's guidance for Q1, area shipment is expected to decrease by high single-digit due to demand slowdown coming from the seasonality. (foreign language) Panel ASP decline will be milder than Q4 and stabilized by the end of this quarter. Although it is too early to predict change in the supply-demand dynamics, there are signs of improvement in demand and inventory in some regions like China. Downward rigidity is expected in the ASP as the key factor for pricing is changing from panel supply demand to profitability strategy from panel makers, unlike the LCD industry of the past.

(foreign language) Amid unfavorable circumstances reflecting low seasonality in Q1 such as volume decrease and FX movement, the company will try to improve the profitability with strong effort for cost reduction.

(foreign language) CapEx plan in 2018 is around KRW 9 trillion, as part of the company's longer investment plan of KRW 20 trillion, focusing on OLED business until 2020. Most of it will be on new technologies, such as OLED and oxide, to prepare for the future. CapEx will be executed in a rational manner by carefully observing the industry dynamics while keeping the sound financial structure.

(foreign language) Last is the company's business strategy for this year.

(foreign language) The company will keep increasing high value-added products in LCD, enabling -- to enable our ongoing profitability by accelerating production innovation and speed up transition to OLED.

(foreign language) More customers are adapting OLED TV panels as was demonstrated through this year's CES. Demand for OLED TV that offers OLED-only differentiated values, such as the wallpaper, CSO and rollable, is expected to rise sharply. We will also prepare with greatest effort to go along with expected schedule for 8.5G OLED plant in Guangzhou, approved by the government late last year.

(foreign language) For the small-medium plastic OLED, we will increase productivity by stabilizing 6G E5 volume production. We will also prepare the new E6 line for timely volume production to accommodate market and customers' needs. We will secure competitiveness of smartphone technology and products and strengthen plastic OLED's competitiveness by preparing leading technologies such as the foldable.

(foreign language) The company will also strengthen its market position by growing -- the company will also strengthen the market position of growing businesses like auto and commercial by leveraging our proprietary technologies like OLED, in-TOUCH and transparent.

(foreign language) Market environment this year remains uncertain, and much needs to be done, such as the company's large-scale investment. But as always, we will do our best to set ourselves apart from competitors with thorough execution and flexible management.

(foreign language) That brings us to the end of earnings presentation for Q4 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 [KI Security].

(foreign language) Now I have 2 questions, both on the OLED TV panel. First is about the pricing. Now I understand that the OLED TV panel price went down considerably last year, so what is your outlook on the OLED TV panel price for this year? And then the second question is with regards to investment. Now you finally have the government's approval for your investment in China. But then I understand that you have been preparing for the facility investment regardless of the approval early on. So I wonder, from this point on, when do you foresee -- so what do you believe will be the timing of the completion of the investment? And when do you believe that you will be able to start utilization?

(foreign language) Now in response to your first question, now last year, it was 1.7 million units. And this year, the target is between 2.5 million to 2.8 million units. So I believe that your question stems from the concern that perhaps with bigger shipment, the ASP will fall. But then, as we have reiterated to the investors several times, our target this year -- our highest target, is to improve profitability. (foreign language) Now given that there is still undersupply compared to the customers' demand, we will still try to defend our pricing by providing as much value to the customers as possible. And in the end, we will try our best to at least maintain the blended ASP. (foreign language) Now with regards to your second question about our 8.5G OLED fab in China, it is true that we have received the approval from the government late last year, 3 months later than we had expected. But then we have been following our scenario planning, and we will try our best to start volume production in the second half of 2019.

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

(foreign language) Now my question is with regards to the CapEx. So I can see that your CapEx plan for this year, it's higher than the market expectation and also somewhat larger than the average EBITDA. So I wonder what is your planning for -- to finance the CapEx.

(foreign language) So I take it that your question is about our financial operation. Now we have already announced that we are going to invest KRW 20 trillion in OLED by 2020. Now in preparation for that, it is unavoidable that there is a sizable investment to be made in 2018. (foreign language) Now we must make sure that we do not miss out on the investment timing, and that is why we have planned for KRW 9 trillion -- around KRW 9 trillion in CapEx for 2018. And a part of that have to be funded -- have to be financed through borrowing. (foreign language) Now for the -- so let me give you more details about our financing for the CapEx. Now financing has to be done for 2 purposes. One is for the investment in the Guangzhou fab in China. And the other is for the investment in Korea. And for both, we have been making extensive preparation. (foreign language) Now as for the OLED fab in China, we have been in discussion with the Guangzhou government regarding our cooperation, and we want to minimize the input of the capital, and we are also having discussion about financing locally. (foreign language) And as for -- given the fact that if company's financial structure remains quite sound, thanks to our efforts for the past few years, we believe that this kind of financing will make sense in terms of -- it will be more than acceptable given our current financial structure. (foreign language) And I understand that there have been some questions from some investors about possible paid-in capital increase, and let me assure you that there is no such plan by the company at all.

(foreign language) Our next question is from UBS.

First one is on your reference to OLED R&D and promotional "exceptional expenses in Q4". Could you actually explain this a little bit more in detail? I mean, number one, one would expect that R&D for OLED is going to be continuous up curve from here, so what is exceptional in the R&D expenses there in Q4? And promotional expenses, I'm not sure I actually quite understand what the concept is for panel makers versus, let's say, a system of TV makers. So again, could you clarify and maybe give us some idea of the actual run rate of OpEx for OLED going forward? And then I have a follow-up. (foreign language)

(foreign language) Now I take it that your question is really regarding the difference in our operating income in Q4 of last year. (foreign language) Now if I may give you a more detailed explanation. Now first of all, about the OLED R&D. Now because there has been an increase in OLED customers, in order to prepare for this year, so for example, the major sports events and so forth. Now because of that, it was difficult for us to accommodate all the needs using the general R&D expenses. And that is why there has been pre-execution or pre-spending of the R&D expense in Q4 to make the necessary preparation. (foreign language) Now this was a strategic increase in our expense in order to help expand our business into this year. (foreign language) And in addition to that, there have been some one-off expenses in Q4 in the amount of KRW 160 billion. So they were mostly to maintain a sound balance sheet of the company and also some labor costs.

Okay. On -- as a follow-up, could I -- could we please get a bit more clarity on your current view for the ramp-up of the E6 fab for mobile OLED? Could you confirm the timing for the first line hopefully this year? And also how you're thinking about the additional 2 lines and the timing of that ramp as well as pace after this in the context of what you explained back in -- last July, i.e. we think part of the total investment of [2021] planning into OLED in a normal term time frame. (foreign language)

(foreign language) Now with regards to the E5, we are currently stabilizing the productivity. And then as for the E6 in Paju, the 15k, the mass production will begin in the third quarter of this year. (foreign language) And then in addition to that, the potential capacity ramp-up for plastic OLED down the road. Now as we have mentioned several times, we would have to observe the market circumstances as well as the customers' demand, and we would have to pick the optimum timing in order to make additional investment.

(foreign language) Our next question is from Bank of America Merrill Lynch.

(foreign language) Now my first question is about the CapEx. So you have a CapEx planning of KRW 20 trillion by 2020. And this year, the CapEx will be KRW 9 trillion, mostly in OLED, I presume. And then last year, it was KRW 7 trillion. So then with the KRW 20 trillion in target, if the CapEx spending of KRW 9 trillion goes as planned this year, then by the end of this year, what percentage of the total planning of the KRW 20 trillion do you believe will be completed? Because that would also mean that starting from next year, your Capex burden would significantly be lightened. So my question is, again, by the end of this year, what percentage of the KRW 20 trillion CapEx planning do you believe will be completed?

(foreign language) Now we have already announced the plan for KRW 20 trillion in CapEx between 2017 to 2020. And this is for the new expansion of the OLED business. So KRW 10 trillion will go into large OLED panel. The other KRW 10 trillion is for plastic OLED. (foreign language) Now our plan is to operate the 8.5G in Guangzhou in the second half of 2019. And the same timing for E6, second half of 2019, which means that our CapEx investment will peak in 2019. But then we believe that the actual CapEx spending will be less in 2019 than in 2018. (foreign language) And as a result of that, we expect the CapEx spending to considerably decrease from 2020. (foreign language) And then also, there is the annual maintenance investment and for which we believe that it would be less than KRW 1 trillion.

(foreign language) Now my next question is about your dividend. Now we appreciate the fact that you have decided on the cash dividend of KRW 500 per share despite your Capex burden, so we appreciate that. And I would just like to understand your view about the shareholders' -- your policy on shareholder return, again, because you are -- you have made this decision despite the CapEx burden. So if you could elaborate on the company's return to shareholder policy.

(foreign language) I would like to go back to the point that I made a few years back when we decided to pay out dividends again. Now the shareholder dividend policy is something that should not easily change. So perhaps it falls short of the shareholders' expectations. But still we believe that it is important for us to keep the shareholder dividend policy consistent. Now on one hand, of course, there is the burden of CapEx spending to prepare for the future and also there are some market uncertainties that remain. But again, we believe that it is important to maintain the shareholder dividend policy consistently. (foreign language) Now for the company, the time now is very important because we are at a time of transition. So for example, the CapEx -- we are making big CapEx investment in order to prepare for the future. And likewise in order to prepare for the future, we're also trying to change or improve the customer profile structure. So it is time -- it is a very important timing for us, important time of transition. But then again, we believe that it is important to at least maintain the shareholder dividend policy. So -- and that is why we have made the decision to pay out the dividend this year again and then also for the paid-in capital increase so that has been the concern of many shareholders. Let me assure you once again that we do not have plans for such paid-in capital increase. So again, basically the company's position is that we have to maintain consistency in the shareholder dividend policy.

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

(foreign language) Now I have 2 questions regarding the LCD panel. The first is, now as you have mentioned, there are signs of improvement in the first quarter on the TV panel demand as well as the inventory level. Then also we can see that in the past period, there has been some -- there seems to have been improvement in the outlook for TV pricing going forward. So I wonder what is the company's outlook on the TV panel's price trend in the first half of this year. And do you believe that it is possible for the TV panel price to bottom out in the first quarter of this year? And then the second question is about the 10.5G new line in China. And what I understand is that there has been some delay here because of some technical issues in the pre process -- the pre steps of the process. And given the fact that for Sharp, it took a few years for them to start the 10G operations. Perhaps this year, there will not be much contribution to come from the Chinese fab in terms of the supply. Is my understanding correct?

(foreign language) Now I'm Matthew Kim, in charge of market intelligence, and I would like to add some more details to what the CFO has explained in terms of the market outlook. (foreign language) Now first I'll give you an update on the changes in the demand-supply inventory as things stand today compared to Q4. And then I would also give you an outlook for the year of 2018. (foreign language) Now in terms of demand compared to the expectations in Q3, there has been a slight pick up in the demand coming from emerging economies, including China and then the supply remained flat. And as a result, inventory has improved slightly compared to the third quarter. (foreign language) And then next is the demand-supply outlook for 2018. Now looking at the TV market, the TV market itself is in a mature stage. And given the fact that the supply is increasing at a single-digit, we believe that -- in the high single-digit, we believe that it is important to maintain a conservative outlook on the demand and supply. (foreign language) But then in the second half of 2017, there has been a big decline in the panel pricing. And also given the fact that there is a major sports event in the first half of this year, we believe that there would be some opportunities for the set makers for additional promotions. (foreign language) And then looking at the panel makers, we believe that there would be moves to improve their profitability as it has declined in the past. So for example, for the old fabs and also the older generation fabs, so for some of the less competitive plants or fabs, there is a likelihood that they would do some kind of adjustment. (foreign language) And given the circumstances and the different factors, we believe that in terms of the price, it would maintain downward rigidity and stabilize by the end of the quarter. (foreign language) Now for the fab in China, that is a development that we had expected. And so if the technological stabilization is further delayed, then we believe that it would have a positive impact on the demand-supply dynamics in the second half.

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

I have 2 questions, please. The first one is if you could provide some more detail on the status of volume shipments for plastic OLEDs from E5. And do you expect to begin shipping some OLED units to your major mobile customer this year? (foreign language)

(foreign language) Now as you would all know, we are currently improving the productivity of E5. And also for E6, our target is to start a mass production in the third quarter of this year. So please understand that at this point, it is too early to discuss volume shipment. And then in terms of the customers, various discussions are underway with various customers. And please understand that we are not at liberty to discuss these details.

(foreign language) Our next question is from Daiwa.

(foreign language) Now my question is with regards to the small-medium display. Now I understand that there has been moves to adopt the small-medium display for smartphones starting last year. And then we see that the adoption of plastic OLED has been increasing so much so that now there were expectations that the plastic OLED was going to become the mainstream in smartphones. But then since then, the pricing has gone up. So not just for the display, but because various features have been added. And that is why now, we see that there has been perhaps some slowdown in the demand and also sales of the plastic OLED. And of course, there are various parts that they go in to the smartphone but then, display takes up a big part of that. And that is why in the market, there are now the -- some are saying that perhaps they will go back to using LCD instead of the plastic OLED. So now my question is what do you see in terms of trends among your customers? So what is the market or the company's observations among your customers? And do you believe that this will have any impact on your plan for plastic OLED ramp-up? Do you believe that this will change plastic OLED ramp-up plan? And also based on your observations, do you have any plans to further utilize your LTPS LCD?

(foreign language) Now in response to your question, now regarding the plastic OLED and the LTPS LCD panel market dynamics, of course, we are very closely monitoring the situation and keeping a very close watch. (foreign language) Now as a panel maker, it is of utmost importance for us to appropriately deal with customers' demands. So through various discussions with our customers, we will make the necessary preparation. (foreign language) Now I remember mentioning this when I announced our decision to invest in plastic OLED, and that is basically, we are a follower as you make this investment into plastic OLED. And as a follower, it was important for us to minimize business risks. (foreign language) So in other words, instead of just having aggressive capacity ramp-up, what is more important to us and what we believe is right for us is to find the right investment timing as we try to minimize business risks. (foreign language) And now, given the situation, the CapEx is also much larger than for the LCD. So it is also important for us to minimize the spending as well. So a part of our planning is to perhaps convert a part of the LTPS capacity for P-OLED. (foreign language) So in conclusion, regarding the changes in the plastic OLED and the LTPS market and also with regards to the customers' thoughts and their ideas for the future. Now as the panel maker, we would have to be very cautious in our approach. And we will be keeping a very close watch on the market circumstances and the changes, and try to deal with them accordingly.

(foreign language) Now due to the time constraint, we will wrap up the Q&A session. And we will now close Q4 2017 earnings conference call. Thank you once again for joining us today, and please contact us at the IR team for any additional questions. Thank you.

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