LG Display Co Ltd (LPL) 2019 Q1 法說會逐字稿

(foreign language) Good morning and good evening.

First of all, thank you all for joining this conference call.

And now we'll begin the conference of the fiscal year 2019 first quarter earnings results by LG Display.

This conference will start with a presentation followed by a divisional Q&A session.

(Operator Instructions)

Now we shall commence the presentation on the fiscal year 2019 first quarter earnings results by LG Display.

[Interpreted] Good morning.

This is Kim Heeyeon, in charge of LG Display's IR.

On behalf of the company, let me thank all the participants at this conference call.

Today, I am joined by the CFO, DH Seo; Song Young-Kwon, in charge of the Strategy and Marketing Group; [Kim Sung-Min], in charge of Corporate Business Management; JY Kwon of IT Marketing; Daniel Lee of Market Intelligence; Team Leader [Stephen Ko] of TV Marketing; and KJ Jin of Mobile Marketing.

The conference call will be conducted for 1 hour in both Korean and English, starting with a presentation on the financial results of Q1 2019 and the company's outlook followed by the Q&A.

Please refer to the IR presentation documents in the company's website for more details on the financial results of Q1 2019.

For those joining through the webcast, please refer to the details on the widget on your screen.

Before we begin the presentation, please take a moment to read the disclaimer.

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.

With that said, we will now start the presentation on Q1 2019 earnings results.

I will report on the financial performance of Q1.

Revenue in Q1 was KRW 5.8788 trillion, down 15% quarter-on-quarter.

Area shipment and blended area ASP fell due to seasonality, while shortage in some IT components also had an impact.

Such seasonality led to negative growth in operating income Q-o-Q resulting in operating loss of KRW 132 billion in the first quarter.

Operating profit margin was minus 2% with EBITDA margin of 12%.

Income before tax was minus KRW 128.7 billion and net income, minus KRW 62.6 billion.

Next is area shipment and ASP.

Area shipment in Q1 was 9.83 million square meters, down 11% quarter-on-quarter, slightly underperforming our guidance.

Not only seasonality but shortage of some IT components also had an impact as was explained earlier.

Blended area ASP was $528, down 5% Q-o-Q.

This is due to the product mix.

Our ASP for large panels remained stable late in Q1.

Shipment fell for small to medium panels with relatively high ASP.

Capacity in Q1 fell 5% Q-o-Q due to the fewer number of working days specific to Q1.

There was also maintenance and increased R&D usage that normally take place during the low season.

As for the revenue share in Q1, mobile and other application share was 25%, down 3 percentage points Q-o-Q, due to seasonality for smartphones and wearables.

Notebook and tablet share was 22% and monitors, 17%.

Share of these IT products rose 3 percentage points overall to 39%, outnumbering TV for the first time.

As for TV, its revenue share remained flat Q-o-Q despite the decline in the panel price because of the rising share of OLED TV.

Next is the company's financial positions and ratios.

Inventory at the end of Q1 was KRW 2.6298 trillion.

The value fell slightly Q-o-Q.

The company plans to manage inventory in value at a stable level.

As for financial ratios, liabilities-to-equity ratio and net debt-to-equity ratio rose slightly due to continued investment with focus on OLED.

Cash flow at the end of Q1 was KRW 2.482 trillion, almost unchanged Q-o-Q due to continued investment in OLED and financing from outside.

Next is the company's guidance for 2019 second quarter.

Area shipment in Q2 is expected to grow at a mid- to high single-digit percentage.

As for blended area ASP, although upward movement is emerging among some large panel sizes, its pace will be limited due to oversupply.

The ASP trajectory is expected to be different by product and size depending on demand, panel supplier's fab operation and production mix strategy as they try to preserve profitability.

Next is presentation by the company's CFO, Seo Dong-Hee.

[Interpreted] Good morning to shareholders, investors and analysts from home and abroad.

This is LG Display's CFO, DH Seo.

I'm pleased to greet everyone again since the Q4 earnings release conference call in January.

Following the presentation on Q1 financial performance, I will now present a review of Q1 and the market as well as review of each business followed by the company's strategy.

First is a review of Q1 and the market situation.

As already explained, the company turned to deficit in Q1 as area shipment fell by double digit and blended area ASP fell by mid-single-digit due to seasonality.

But ASP for large panels outperformed expectations as a result of suppliers change in the product mix as a way to secure profitability.

Main reasons of such positive trend in ASP even as oversupply continues appear to be expectations of fab downsizing by some suppliers and profitability-focused pricing by panel makers.

But as the fundamentals are not strong enough to ensure continued upward pricing, future movements are likely to diverge by product and size depending on demand and panel makers' fab operation strategy and production adjustment.

Next is a review of the company's large OLED business.

Since going over [the eDP] in the second half of 2018, the situation has remained positive.

OLED is expected to exceed 30% out of TV business within 2019 as the company together with its clients continue to strengthen its positioning in the high-end market and will send a clear message that among all TV sets, the premium is OLED TV.

Production infrastructure in China is also under preparation as planned.

Although there will be fixed cost burden in the second half, it will be stabilized at an early date so as to increase its profit contribution to the company from 2020.

In addition to the capacity increase in China, the company will keep up cost innovation and production efficiency activities to grow revenue and profit.

As the OLED market keeps expanding, we are also creating opportunities for a wide range of applications.

Distinctive designs such as wallpaper, rollable and the sound display integration of crystal sound OLED and transparent OLED are based on the features unique to OLED that cannot be implemented using LCD.

In particular, we believe you'll be able to see a transparent display in the market within the year.

Based on such product portfolio, the company will double down its effort to maximize value for customers.

And ultimately, we'll manage the business so that it can stand apart from the supply/demand and pricing dynamics of the LCD market.

Next is the company's plastic OLED business, which runs around smartphone, smartwatch and auto display.

As you are aware, we are steadily making preparation for plastic OLED as the next technology platform for small to medium display.

First, for smartphone as a late entrant, we are now getting ready to gain meaningful access to major strategic clients.

But the smartphone market itself, as you're aware, is changing rapidly with sharp growth in supply amidst sluggish demand.

The current market situation and rapid changes in the competitive landscape increase the risk at the time of entry which will incur ongoing cost until we reach a stable growth pace.

The company plans to achieve meaningful results while minimizing loss through quick stabilization and market entry.

Second, for wearables like smartwatch, we will sustain and solidify our unique positioning in the market based on our strengths and achievements to date.

For auto display, which is the third portfolio of our plastic OLED business, we will start seeing results in the second half of this year.

In auto, the company already topped KRW 1 trillion in revenue in 2018 with only LCD.

This year, the technology is shifting from the current amorphous silicon to LTPS and plastic OLED.

With volume production starting in the second half of this year, we will demonstrate the potential of LG Display's plastic OLED technology in auto.

As the only player that applies and delivers OLED to TV, smartphone, auto and wearables, we will try to preempt the wide range of display demand in the course of automobile evolution and further elevate our leadership in the market.

Last is LCD business.

The company's large LCD business is segmented into TV and IT with IT revenue outperforming TV.

In IT, we expect to maintain our competitiveness based on oxide, while the revenue share of commercial business under LCD TV is expected to reach mid-20% in 2019.

Thus, any change in pricing coming from LCD supply/demand will have limited impact on the company.

But we will run our operations with profitability as our utmost priority.

As was explained in last year's earnings conference call -- last quarter's earnings conference call, this year we'll require patience of us as we undergo structural shift to OLED business, and we cannot rule out the possibility of underperforming market expectations as we move forward in this process.

But at the same time, we are going all out to improve efficiency in every corner of our organization.

All members of the company will do our best to make sure that at the end of the large-scale investment, we will come out with improved financial structure and performance starting next year.

The company is now undergoing a structural shift toward a new growth driver.

Although challenges remain, we are confident that we have a strong business portfolio centered on OLED that will sustain our growth into the future.

We will strengthen our select and focused approach to take ourselves a notch higher based on the strong portfolio and preemptively manage risks in our business to fulfill market expectations.

Thank you.

[Interpreted] That brings us to the end of earnings presentation for Q1 2019.

We will now take questions.

Operator, please commence with the Q&A.

(foreign language) (Operator Instructions) (foreign language) The first questions will be presented by Mr. [Yoo Jong Woo] from [Hangul Investment & Securities].

[Interpreted] I have 2 questions about plastic OLED.

As the CFO has explained earlier, it seems as if the business environment is not too friendly.

It seems as if the panel price will begin to drop this year as well.

So then regarding the plastic OLED performance, so there is the guidance that you gave us in the early part of the year.

And then now what is your outlook for the PO performance for this year at this point?

So is there a gap between your outlook in the early part of this year and today?

And how much is that gap?

And I'm sure that you will not be able to give us a number, but then can you just give us an idea of gap between the early year outlook and your outlook now if there is any?

And then the second question is about the plastic OLED business.

So of course, there would be some risks with the plastic OLED business.

But then you mentioned that you have competitiveness in auto, and there would be some additional achievements to come this year.

So can you be more specific about what kind of achievements they would be?

[Interpreted] Thank you for the questions.

And now for the plastic OLED.

To prevent misunderstanding, let me limit my statement to smartphone.

So based on the plastic OLED as a technology platform, we have portfolio in the smartphone and wearables such as smartwatch and auto, and we are also preparing for new applications.

But then for the purpose of this earnings release conference call, I would like to limit my statement to smartphone as I give you the outlook.

Now this would be similar to the over -- so this would be related to the overall risks in the plastic OLED business.

So in terms of the risks, we see that largely there are twofold.

First is that the growth in demand in the market including for said products is not as rapid as we had expected.

And then second is that as a late entrant, there is some cost involved for us to gain a meaningful access to strategic clients.

So it is these 2 risk factors that make it difficult for us to predict the performance outlook for this year.

And also, as a result of these risk factors, we currently believe that our numbers might be a bit lower than we had initially expected.

And regarding your second question about the auto business.

So as was explained earlier, we are already topping KRW 1 trillion in revenue in auto using only LCD.

And now as for the new achievements to come this year, you will be able to -- so we believe that you'll be able to see vehicle model equipped with plastic OLED within the year.

Now of course, I cannot disclose the specific number, but we have already begun to receive orders for auto display equipped with plastic OLED.

And once we launch the vehicle models with plastic OLED, then we believe that this will also create further momentum for the orders for the plastic OLED display for auto.

That is all.

Thank you.

(foreign language) The next questions will be presented by Mr. Kwon Sang Ryul from DB Financial Investment.

[Interpreted] I also have 2 questions.

And first is now in the first quarter, given the company-wide revenue as well as the rebound in the panel price starting in March, so it seems as if the KRW 130 billion in operating loss is a little bit difficult to comprehend because now it appears as if the business environment was a bit better than expected.

But then your numbers were still lower than the consensus.

So does this mean that there were reasons other than business operations that contributed to this operating loss?

So for example, some reasons that are [specific more] to the organization?

Or was there a particular loss in other applications?

In other words, do you believe that there were some factors, particular factors, without which it would have been an environment that would have reduced the operating loss?

And then the second question is about the LCD panel pricing.

So there has been a rebound in late March.

So for how long do you believe that this rebound will be sustained?

[Interpreted] Now again thank you for your question.

And now regarding the first question about why our operating loss was lower -- so bigger than the market consensus or expectation.

So now of course, looking at the overall trend, then yes the LCD panel pricing decline was more contained than expected.

And also, revenue was -- revenue also fared better than expected, then why is it still that we got the number that we got.

Now there was some impact from the shortage of some IT components.

And as a result of that, the sales of the more highly profitable IT products was not up to the expectations.

And another element is the R&D cost for the plastic OLED.

So it is difficult to have a linear alignment with the market expectations in terms of the R&D cost for the plastic OLED.

So I would say that there have been some costs incurred from certain applications.

And regarding your second question about the pricing trend for large LCD.

Now looking at the LCD supply/demand dynamics as well as the fact that the Chinese suppliers have invested heavily into their fab and also some fabs are still waiting to go into operations, it seems unlikely that there is an upward pressure in the LCD pricing down the road.

But that is on the macro level.

And looking at the micro level, then there is also the question of when some of the old fabs will go into restructuring.

So I would say that it -- for some of the LCD makers, they also have pressure on the profitability.

So in general, I would say that it depends on the strategy of individual companies as well as their approach toward preserving profitability.

So perhaps there would be some differences by size of the LCD.

But overall, I believe that it is not likely that we can expect the continued up -- rebound in the pricing, wherefore the price to stabilize at a higher level.

But then again, as I mentioned, there could be some differences at the micro level, so we will seize opportunities whenever they arise.

And at the same time, we will make the preparation to prepare for the worst scenario.

(foreign language) The next questions will be presented by Mr. Ko Jeongu from NH Investment & Securities.

[Interpreted] Now I also have 2 questions about large OLED.

Now the first question is now what the market often ask is about additional or incremental applications or additional demand for OLED.

So I'm sure that aside from TV, there would be other applications that you're exploring.

And now for the TV side, where do you believe are the applications or the demand that would bring you greater visibility?

And then the second question is about the Guangzhou GP3 that is about to go into operation this year.

So in that case, I believe that 65-inch or a larger OLED would also be produced.

So does this mean that the -- so your outlook for large OLED production for this year is 3.8 million to 4 million units.

So is this also inclusive of the MMG technology?

[Interpreted] First is -- this is from Marketing Intelligence.

And now regarding your first question about the large OLED additional applications.

And now as the CFO had explained in the presentation, there would be a rollout of the transparent display in the second half of this year.

So with that, we believe that we'll be able to explore additional applications.

And also in the commercial business, we are currently collaborating with our clients in order to discover new applications.

So we believe they are transparent and also gaming would be a very good application for the commercial business.

[Interpreted] And if I may add a bit more to that.

Now regarding the OLED.

So some of the recent products that we have launched like wallpaper or crystal sound OLED and rollable are not only targeted for TV.

So they are designed to create more experience -- new experience to the customers aside from TV.

So you can see them as our strategic steps to create market beyond the television.

So not only that, but we are also engaging in a number of various activities.

So for example, for the OLED again to give -- to deliver the message that the OLED display is not only for TV, we are also collaborating with artists to send a message that it can give inspiration to artists.

And I'm sure that you have also read about our sponsorship of the van Gogh exhibition.

So these are part of our efforts to position the OLED beyond the television so as to continue to drive the ASP and additional demand.

[Interpreted] And this is the CFO responding to your second question about the Guangzhou fab.

And you mentioned in your question that it is said to go into operation in the third quarter.

But then actually, it will go into operation in the first half of this year because the ramp-up activities are being undertaken on track.

And now the question was whether the MMG -- so for the MMG, we are getting ready to apply the MMG technology for both the Guangzhou fab and the Paju fab.

And the question was whether the MMG is inclusive in the 3.8 million to 4 million units for this year, and the answer is yes.

And also if the MMG technology is more stabilized, then there is a possibility of this number going a bit higher.

So let me be more specific.

The MMG is already being applied to a part of the Guangzhou fab already and is getting prepared to be applied to Paju fab.

(foreign language) The next questions will be presented by Mr. Nicolas Gaudois from UBS.

First question is going back to the overall company strategy.

When you mentioned becoming a more OLED-focused business, we haven't heard so far of any incremental steps in new -- for instance, converting LCD capacity to OLED going forward.

So is this still something you are considering specifically for your existing Gen 8.5 capacity?

And secondly, when you made reference talking about the LCD outlook about the LCD panel makers potentially going through restructuring for older fabs.

How does this supply actually play itself?

As surely in order to potentially solve the structural overcapacity wherein LCD, at some point or another, every single LCD panel maker will have to effectively share the load and start reducing LCD exposure?

[Interpreted]

[Interpreted] Now this is [Hwang Yong Gi] from strategy to respond to your question.

Now first, about the company's overall strategy.

So our focus remains on mainstreaming OLED in our business, so we would be moving toward larger OLED products.

And now regarding the LCD fab capacity.

So we are converting them to be more profitable.

So for example, to TV and also IT and commercial.

And then also for the OLED.

So we also have plans to convert some of the capacity to OLED based on the experience.

But then this will be done in accordance to the market circumstances and in our communication with the customers.

[Interpreted] This is the CFO providing additional response.

Now first question, I believe, was about the additional steps that the company has taken in order to move more toward OLED business.

And the second question, I believe, was regarding what to do about the old fabs.

Now first, about the OLED.

So in terms of how we are going to further boost our OLED business is first, how we are going to increase the applications for OLED.

And more specific to TV then, as I have explained earlier, we are trying to instill the message out in the market that among TVs, the most premium is OLED TV.

So that is what we intend to do for this year.

And then regarding the LCD old fabs.

So now for the old fabs, they are used for TV, IT and also mobile.

So for some of the less competitive old fabs, we have our own planning to make some adjustments.

And then also for some fabs that are shared between IT and television, then we will also see whether we will be able to expand the commercial part that are more profitable.

And then also see whether we'll be able to expand the IT part based on oxide technology.

And for some of the large fabs that we believe fundamentally lack competitiveness, we would also make a planning based on the scenarios.

But then this will take some time so not for the short term.

(foreign language) The next questions will be presented by Mr. Kim Dongwon from Macquarie Securities.

This is Daniel Kim of Macquarie.

I have a question for CFO regarding LG Display accounting practice.

Was there any change in depreciation policy over the last 2 years like lengthening depreciation period?

The background on my question is I noticed that your CapEx more than doubled over the last 2 years, but your depreciation charges only edged up.

So in my calculation, effective depreciation period increased from 4 years in the past to now over 7 years in Q1.

So I'm wondering whether there was any changes in depreciation policy.

[Interpreted]

[Interpreted] Yes, the CFO responding to this question.

And let me just make it clear that there has been no change in our depreciation policy.

And perhaps based on simple calculation, maybe what you say is correct.

But then, we also have some old fabs where depreciation has been completed.

And also within the CapEx, there is a lot of investment going into buildings, and the buildings normally are depreciated across 20 years.

So I believe that these are the factors also have to be taken into consideration.

(inaudible) because the cost in building a fab over the last 15, 20 years, it's nothing new that your building has been depreciated over 20 years.

So I've just -- and for example, if you look at the depreciation expense as a percentage of fixed asset, say, from 8% to below 4%.

So I don't think that explain -- I mean building depreciation over longer period explain that -- this number that easily.

[Interpreted]

[Interpreted] Yes.

So it would not be appropriate for us to discuss the detailed numbers at this occasion.

But then if I may give you some more explanation.

So for example, one thing is about the Chinese fab that we have.

Now for this, the CapEx was in the trillions.

But then if -- the ramp-up is still underway, so the depreciation for this fab has not started.

And then also there are some other fabs where we have already invested in but have not gone into operation, and depreciation thus has not started yet.

So there are these other factors to consider.

(foreign language) The next questions will be presented by Mr. Kim Yeon Soo from Hanwha Investment & Securities.

[Interpreted] I also have 2 questions.

First is about the IT panel which is more profitable, thus makes bigger contributions to the company's profitability which is -- so this -- meaning that the IT panel is an important part of your business.

You explained about the shortage in IT components, so then what is your outlook for the second quarter and the second half of this year?

And then the second question is about the JDI which has been recently acquired by a China and Taiwanese consortium, a joint venture.

So now JDI has been very strong in the small- to medium-sized OLED.

So for example, the Apple Watch, and also it has been quite strong in the auto display market.

So how does the company plan to respond to this recent development?

[Interpreted] This is JY Kwon from IT Marketing responding to the first question about the IT component shortage which started in the second half of last year, and we project this to be maintained into the second quarter.

And then in the third quarter, we believe that there is going to be improvement, but LG Display is remaining conservative about our approach.

[Interpreted] And I'm in charge of IR, and let me respond to the second question.

So about the JDI which has been strong in the auto LCD, so they have competitiveness there.

And then now in -- but then now as you would know from the changes in the smartphone and the TV, now the leader in the existing technology, if that leader does not continue to prepare for future technologies, then even if it is a leader in the current technology, there will still be an entry barrier against the future technology.

So in terms of auto, unlike IT, this is an area that requires years of cooperation and communication with the client to develop the product.

And that itself serves as an entry barrier.

So for LG Display, we are going to complete that very long and arduous process in the second half of this year as we launch the product of that collaboration with the client.

And so we believe that it is going to be very difficult for any competitor to jump over the process in a short period of time.

So in the area of OLED, we believe that we have unique and very strong technology in the market.

And so particularly for the auto OLED, we are not worried about competition.

Now we have already gone over the scheduled time, so now last, I would like to explain the questions that we have received from the system from the minority shareholders.

Many of these questions were regarding the timing of volume production in the Guangzhou OLED fab and potential changes and investment in the Paju P10 line.

As they have been answered already in the Q&A session, there will be no further response at this time.

We will close Q1 2019 earnings conference call.

Thank you once again for joining us today.

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

Thank you.

[Portions of this transcript that are marked Interpreted were spoken by an interpreter present on the live call.]