LG Display Co Ltd (LPL) 2018 Q3 法說會逐字稿

(foreign language) Ladies and gentlemen, welcome to LG Display's Third Quarter of 2018 Earnings Release Conference Call.

We will begin with a 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, ladies and gentlemen.

I am Kim Heeyeon, the Head of IR.

And before I begin, I would like to ask you to first read our disclaimer.

And please be informed that the numbers on the disclosure today have yet to be audited by an outside auditor.

And let me now introduce the executives present here with us today.

First, we have the CFO, Kim Sang Don; and we have Song Young Kwon; and also from MI, Mr. [Kim Tang Won] and from TV Mr. [Kogi Young]; and from IT, we have Mr. [Kwon Jae Young]; And also from mobile and also from the management support, Mr. [Song Dug Yong].

(foreign language) And now I will hand over to CFO, Kim Sang Don, to deliver the presentation on the company's financial performance for the Q3 of 2018.

(foreign language) Good morning, this is LG Display's CFO, Sang Don Kim.

(foreign language) I would like to thank our shareholders, analysts and investors for joining us at the Q3 2018 earnings release conference call.

(foreign language) Looking back to the third quarter, favorable conditions continued, such as robust shipment, following demand for inventory buildup within channels and general rise in the panel ASP.

(foreign language) As was explained in the previous earnings release call, the company sees this as temporary improvement and has maintained a conservative view in our operation with a clear recognition that the LCD industry is going through cycles that are different from the display industry.

(foreign language) The company successfully turned around to operating income in 2 quarters, thanks to expansion of high value-add LCD products such as commercial and high-end IT, continuous work to improve OLED profitability and the favorable exchange rate.

(foreign language) Particularly, noteworthy is OLED TV's turnaround to profit in the quarter, although by a small margin, which represents a milestone for the company that can be benchmarked and its preparation for a broad portfolio of OLED products.

(foreign language) We see this as the beginning.

A momentum to carry on, and we'll do our best to show better performance from OLED.

(foreign language) Let me now turn to financial performance from Q3.

(foreign language) Revenue in Q3 was KRW 6.1024 trillion, up 9 percentage points Q-o-Q.

Operating income was KRW 140.1 billion.

As mentioned earlier, there was shipment growth coming from channels inventory buildup, rise in ASP, a favorable FX movement of an average 4% in the quarter.

In addition, OLED TV turnaround to profit and the push to strengthen IT high-end business continued.

(foreign language) Area shipment in Q3 was 10.8 million square meters, up 5% Q-o-Q on par with our guidance.

(foreign language) ASP was generally on the rise but area ASP was flat Q-o-Q, as shipment of small panels with relatively high-area ASP was partially delayed due to tight supply of parts (foreign language) The company's capacity in Q3 was 13.38 million square meters, an increase of 4% quarter-on-quarter.

(foreign language) As for the product mix in Q3, monitor was 18%, notebook and tablets were 20%, up 1 percentage point quarter-on-quarter, respectively, thanks to increase in the shipment of high value-add products on the back of the company's technological competitiveness.

This resulted in the mobile and TVs share going down by 1 percentage point each to 21% and 41%, respectively.

(foreign language) Next is the company's financial positions and ratios.

(foreign language) Inventory at Q3 end was recorded at KRW 2.5874 trillion, an increase quarter-on-quarter.

This is attributable to the strategic inventory buildup in the lead up to seasonality as well as the growth in share of high value-add products like OLED.

Inventory in days remains stable.

(foreign language) As for financial ratios, liabilities-to-equity ratio and net-debt-to-equity ratio rose slightly due to medium- to long-term investment.

(foreign language) Cash flow at the end of Q3 was KRW 2.8386 trillion, down KRW 359 billion quarter-on-quarter due to the continued investment into the company's shift to OLED.

(foreign language) Next is the company's guidance for Q4.

(foreign language) Area shipment growth in Q4 is expected at a low- to mid-single percentage Q-o-Q due to seasonality.

(foreign language) As for the panel ASP, the rise is not expected to continue, but there will be divergence by product and size.

(foreign language) Area ASP is expected to rise at the 10% level.

Parts supply issue was resolved for our mobile products with normalized shipment of this product category with high-area ASP.

(foreign language) Last is the supply-demand outlook and the company strategy.

(foreign language) As was explained in the previous quarter, the LCD market is still expected to see double-digit growth in supply.

As for demand, market volatility continues to grow as macro uncertainties persist such as tariffs, trade friction and FX risks in emerging economies.

(foreign language) But many other factors will affect the panel price in the future as we have seen the panel ASP rebound in Q3 despite the oversupply in theory.

(foreign language) If the determinants of the panel price used to be supply and demand dynamics, there are now many more other factors that play today.

For example, there are differences in investment by company, change in the cost structure, following technological development and product mix alterations and reaction to growing macro uncertainties.

In other words, not only supply and demand but company-specific pricing and profitability strategy and fab strategies would also largely affect the price.

(foreign language) Thus, panel ASP is expected to diverge in movements by company, product and size.

(foreign language) Given this backdrop, the company will interpret demand and industry situation from a conservative view.

We will also secure a stable LCD revenue structure by changing the product mix toward high value-add products like commercial and high-end IT.

As part of our medium- to long-term LCD rationalization project, we will convert low-cost competitive LCD fabs for a high value-add products.

(foreign language) As for the fab conversion to OLED, please understand that we cannot specify the scale or the timing yet.

It will be implemented at the optimum timing, given the changes in the market and the company's business structure at which time it will be communicated with the market.

(foreign language) Investment is expected at KRW 16 trillion for the 2 years of 2018 and 2019 per our guidance in the previous quarter.

(foreign language) The company will try to maximize profitability in LCD, while preparing for a wide-ranging OLED portfolio.

We will keep trying to differentiate ourselves by shifting to OLED where we have unparalleled competitiveness.

Thank you.

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

(foreign language) I have 2 questions.

Now first is, you did mention that there has been delay in the shipment of mobile products, and I wonder whether that has anything to do with the depreciation and amortization cost because we can see that the depreciation, amortization cost in the third quarter is lower than the second quarter of this year but the market usually expects the depreciation, amortization to be higher in the third quarter.

So can you explain why this is so this year?

And the second question is, you did mention that it is too early to tell about the scale or the timing of the OLED fab conversion but what would be the optimum conditions that would prompt you to have the OLED fab conversion?

So if so -- so what do you believe would be the conditions that would allow such conversion, so that we will be able to make some judgment, given the circumstances?

(foreign language) Now regarding your first question.

The issue with the parts supply was not for plastic OLED but for LCD.

And as for the depreciation, amortization of plastic OLED, it will be reflected in the -- in Q4 as planned.

(foreign language) And now regarding your second question, which, I believe, is about the investment into the OLED conversion and now as it was explained last time, we have already a very thorough planning on the conversion.

But then we also have a lot of factors that we must consider.

(foreign language) Now first is that we have to keep a very close eye on the market situation and any changes therein.

Now -- so we have to have very close planning for the conversion.

So we have to keep an eye on the sales as well as the demand for OLED, so that there would be no opportunity cost in our conversion.

So we have to make sure that in terms of the time to market, there would be no opportunity cost.

(foreign language) And second is about the company's internal resource allocation.

As we had explained earlier, we are currently getting ready for volume production at the OLED fab in Guangzhou, and we are also getting ready for the plastic OLED set up in Paju.

So we have to make sure that we have the right resources in place and also our focus to resources, so that we can carry on the fab conversion on a step-by-step basis.

(foreign language) And also with regards to the OLED TV panel, now we are planning to invest into the conversion in the way that we will be able to capture new clients and new customers whenever they arise.

(foreign language) So in terms of improving efficiency and also rationalizing the LCD business, the company has already decided on the strategy.

So we will be implementing this strategy.

But then in terms of the specific timing and the scale, now as we have -- as I have explained so far, it largely depends on the circumstances, and we have to make sure that there would be no loss either opportunity cost or any other losses, so we have to look for the optimum timing.

(foreign language) Our next question is from BoA.

(foreign language) First of all, congratulations and thank you for turning to profit in OLED TV business finally.

And my first question is for the short term.

So we have seen the depreciation and amortization go down for 2 quarters in a row according to the IFRS-based financial statements.

And then -- but then now for the fourth quarter, we expect the depreciation, amortization to go up for plastic OLED.

So can you give us some guidance on where you see the depreciation, amortization headed in the future in the fourth quarter and into the next year?

(foreign language) Now for the plastic OLED, now as you would know, the E61 in Paju is expected to go into volume production in the fourth quarter of this year, and at which point, the depreciation and amortization will be incurred.

And we believe in the ballpark figure, it would be around KRW 120 billion per quarter.

So in the fourth quarter, depending on our planning for the volume production, a part of that depreciation, amortization will be -- it will begin to be reflected in the fourth quarter.

And then also for E62, which is slated to go into volume production in the second half of next year, and if it moves ahead on schedule, then there would also be additional depreciation, amortization to be incurred from that.

So for the year 2018, the overall depreciation, amortization is about -- it will be about KRW 1 trillion higher than in 2017.

(foreign language) Now my follow-up question is regarding the macro environment.

So now this being the earnings release season, there have also been some earnings release by the Taiwanese semiconductor companies and many of them have announced that they plan to reduce their CapEx, including NANYA.

So given these changes in the macro environment, what is the management outlook on the demand, especially the panel demand.

Do you believe that there are any downside risks in the panel demand side?

And also, if circumstances continue to worsen, then you had given us the guidance of KRW 16 trillion in investment for this year and next.

But if circumstances continue to worsen, then do you believe that such large-scale investment will still be warranted?

(foreign language) Now this is [Kim Tang Won] from MI speaking.

Now first of all, regarding the demand for next year.

Now today, what we see is that demand is largely led by emerging economies but then also at the same time, we are fully aware that because of the macro economic circumstances, the economies in this emerging countries could also slowdown.

(foreign language) And now this is the CFO again.

Now -- yes, as you have mentioned, the macro -- so we do believe that, yes, the macro economic uncertainties still persist.

But now for the company, yes, the plan is to invest KRW 16 trillion across 2 years.

But then I believe your question was pertaining to what if the circumstances continue to worsen, what is our planning for that?

And basically, we remain flexible to changes in the circumstances.

So we have our contingency planning, which we plan to implement on a step-by-step basis.

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

(foreign language) Now I have 2 questions regarding the mid to -- small- to mid-size flexible OLED.

Now first, you would start supplying the panel to a major client in the fourth quarter, which will then create a competitive landscape.

Now then given this, then what do you -- what is your outlook for the panel customer's price trend going into next year?

And the second question is, another major player in the industry is planning to volume produce foldable OLED panel in the near future, although the volume is not going to be big in the beginning.

So the question is then what is the company's plan, if there is any, about the development and volume production of foldable OLED panel?

(foreign language) Now regarding the first question, as you would know, we cannot disclose our discussions with the clients, but then I can tell you that the discussions will continue.

(foreign language) And second, regarding the foldable OLED panel, now we are currently developing the technology for this in alignment with the customer.

(foreign language) But then you would also understand that it would take some time.

Because now, first of all, the level of technology required for the foldable display is very high.

And also, we need to have the right circumstances to support this product.

For example, the right kind of system as well as market demand.

Now having said that, as a display company, we intend to be fully ready.

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

(foreign language) Now my question is regarding your long-term OLED TV strategy.

I understand that the company is right now focused on the high-end TV market.

But then now from China, we see the Gen 10.5 ramp-up and also the competition becoming more fierce because of that.

And now although, there are differences between the LCD and OLED?

And then also in terms of the LG Display's share of the market.

Now of course, the numbers vary by institute, but then let's say, out of the total 200 million units, it's estimated to be around 10 million.

So the question is, as I believe that for the long term, ultimately, you would have to go towards the larger size TV like for example OLED 40-inch TV.

So when do you believe that you will be able to reach that point?

And also, given that the prices are very low, do you believe that there is also feasibility in moving toward that direction?

(foreign language) Now this is [Kogi Young] from TV Market business.

Now in the OLED TV, we are preparing a lot of innovative new products like for example CSO, rollable and transparent.

(foreign language) Now having said that, although it is true that for now for the large-size OLED, the TV is currently the main target.

But then that is not going to be so in the future.

So it's not only the TV set but also the non-TV and the commercial, for example, IT.

So based on our innovations like CSO, wallpaper, rollable and transparent, we will be broadening our product category and our portfolio.

So yes, for now, we are focusing on the high-end TV.

But then, we will be expanding into other product categories, too.

(foreign language) So for the short term, yes, it is true that we will be focusing on the high-end TV.

So together, it's the TVs for $1,500 to $2,000 range.

And we will be establishing and maintaining a dominant position in collaboration with our strategic clients.

But then now in the future, in addition to the high-end TV, we would also be broadening into other areas like commercial and IT in conjunction with our client.

(foreign language) Now as there are no further questions in waiting, we believe that we will be able to wrap up the Q&A session at this point.

And also, there have been some questions received from individual shareholders.

But then, we believe that through the line of questioning that we have had so far, most of the questions have been answered already.

So there is no need for us to repeat the questions again or repeat the questions and answers again.

(foreign language) Let me make one more correction about the depreciation and amortization guidance.

So what I meant to say was that the depreciation, amortization is expected to be KRW 1 trillion higher in 2019 compared to 2018, not 2018 compared to 2017.

(foreign language) So to be more specific, the depreciation and amortization is expected to be -- to increase by KRW 400 billion year-on-year in 2018 and by KRW 1 trillion year-on-year in 2019.

If you have any further questions, then please contact the IR team at LG Display.

(foreign language) Ladies and gentlemen, this concludes today's conference call.

Thank you all for attending.

You may disconnect.