LG Display Co Ltd (LPL) 2020 Q3 法說會逐字稿

[Interpreted] Good afternoon. 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'm joined by the CFO, DH Suh; Seung Min Lim, in charge of Corporate Business Management; Matthew Kim of TV Marketing; Jae Kwon of IT Marketing; and [Kyu Han Sun] of Auto Marketing. The conference call will be conducted for 1 hour in both Korean and English, starting with a presentation on the financial results of Q3 2020 and the company's outlook followed by Q&A. Please refer to the IR presentation documents in the company's website for more details on the financial results of Q3 2020. 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 yet been audited by an outside auditor.

With that said, we will now start with the presentation on Q3 2020 earnings results.

Let me start off with our business performance in Q3. Revenue in Q3 was KRW 6.7 trillion, up 27% quarter-on-quarter. There was increase in IT product shipment following the trend of work from home and online schooling due to COVID-19. Supply of new POLED products began for strategic customers, and there was robust global demand for TV.

Operating loss was KRW 164.3 billion, turning around to profit after 7 quarters -- I'm sorry, so operating profit was KRW 164.3 billion, turning around to profit after 7 quarters. Operating margin was 2%, EBITDA margin, 19% and net income was KRW 11 billion.

Next is area shipment and ASP. Area shipment in Q3 was 8.3 million square meters, up 23% Q-o-Q. It is owed mostly to growth in TV panel shipment and IT products as work from home and online schooling became the new norm. ASP was $706, up 8% Q-o-Q and up 38% Y-o-Y. This is due to growth in the share of large OLED and PO mobile product shipment and rise in LCD panel price.

The company's production capacity increased by 15% Q-o-Q following the start of the Guangzhou new OLED fab, conversion of Gen 8 facilities to IT and the start of new lines for a small- to mid-sized OLED, but there was a decrease by 17% Y-o-Y due to LCD fab downsizing.

Next is Q3 revenue breakdown by product segment. IT revenue was maintained after the spike in Q2 due to working from home and online schooling. TV revenue rebounded rapidly after the downturn in Q2. TV revenue share was 28%, up 5 percentage points Q-o-Q due to increase in OLED TV panel shipment following the start of Guangzhou new fab. Mobile and other product share was 29%, up 4 percentage points Q-o-Q, with full-scale shipment of new products for strategic customers.

Next is the company's financial position and ratios. The company's inventory at the end of Q3 was KRW 2.4 trillion, which is an increase Q-o-Q. There was production ramp-up of TV panels ahead of seasonal demand and preparation of mobile product shipment for strategic customers. As for financial ratios, current ratio improved while liabilities-to-equity ratio and net debt-to-equity ratio remained little changed Q-o-Q.

Cash flow at the end of the quarter was KRW 3.3674 trillion, falling slightly from the previous quarter. Although net income turned around to profit, there was increase in working capital, along with revenue growth as well as partial repayment of debt. Particularly noteworthy is interest-bearing debt decreasing by KRW 310 billion for the first time since large-scale CapEx began in 2017.

Next is the company's guidance for Q4 2020. Although, uncertainties are expected to persist in Q4, such as COVID-19 and macro factors, the company expects to see a low single-digit growth in area shipment following increased sales with mass production starting in the Chinese OLED fab. Blended ASP is expected to keep up the pace of increase as shipment for strategic customers grows and LCD panel price rises.

Next is presentation by the company's CFO, DH Suh.

[Interpreted] Good morning. This is DH Suh, CEO of LG Display -- CFO of LG Display.

COVID-19 is lasting longer than expected. First and foremost, I wish health and safety for all our shareholders, investors and analysts.

Allow me to add more details on the company's Q3 performance. As work from home and online schooling are becoming a new lifestyle due to COVID-19, the company's IT business has shown robust performance, thanks to its preemptive response to the changes. The company was able to turn around to profit for the first time in 7 quarters, thanks to stable supply of POLED panel to strategic customers and start of volume production in the Guangzhou new OLED fab. Area shipment in Q3 was up 23% Q-o-Q. Shipment of IT products continues to grow, and shipment of large-sized panel also jumped amidst robust global demand and sales of TV.

In addition, supply of new mobile products to strategic customers increased, and the rising LCD panel price pulled up ASP by 8%, bringing the total revenue up by 27% Q-o-Q. There was even improvement in financial performance across the businesses. By product segment, IT is maintaining consistent profit structure, thanks to unique competitiveness, while mobile POLED achieved meaningful improvement in profitability, thanks to better quality and yield and growth in new products for strategic customers. TV also contributed to profitability improvement with the start of mass production in the Guangzhou OLED fab and flexible operation of LCD fab according to supply-demand status.

Next is Q4 2020 outlook and the company's direction. There continue to be both opportunities and volatility, nonface-to-face culture and home entertainment have fast become the new norm, while uncertainties in the external environment persists.

COVID-19 has given new roles and a high level of importance to display. And along with changes in the industry's competitive landscape, volatility in the display industry in the future is likely to be different in different patterns than in the past. The company plans to double down on our activities in various fronts to remain flexible to the market environment. One example is converting part of the LCD TV facilities to IT to strengthen our readiness to respond rapidly and flexibly to new opportunities like nonface-to-face and remote online activities.

For LCD TV, we intend to have greater flexibility in fab operations according to supply and demand while maintaining the basic principles of structural innovation. Production of LCD TV panels in Korea is running flexibly within the existing facilities and available resources, based on customers' needs and short-term supply/demand status while following the principles of structural innovation.

For OLED TV, we were able to lay the basis for a reliable supply to mainstream OLED. With the stabilization of the Guangzhou new fab followed by full-scale shipment, COVID-19 slowed down demand for high-end products in the first half, but sales in the second half are expected to double from the first half with the reopening of off-line retailers. For the year, shipment is expected at mid-4 million units.

Production capacity for large-sized OLED is total 140,000 sheets in Paju and Guangzhou combined. We will grow to 7 million to 8 million units in 2021 by responding to demand for midsize of up to 48-inch and for ultra-large size of 77-inch or bigger.

The COVID-triggered changes in lifestyle have also highlighted various uses of TV in addition to just watching. For such users as gaming, work from home and home training, OLED's unique strengths, such as natural colors, flexible design and eye comfort will stand out even more. With display products that are optimized for the new environment and customers' needs and that are able to flexibly respond to new form factors, the company will keep broadening its market leadership.

As for POLED, supply of new products began fully for strategic customers. We will try to minimize seasonal volatility and ensure consistent business management by achieving reliable product quality and yield and stronger relations with strategic customers.

Let me also touch upon the path of our LCD structural innovation. The purpose of this is to further strengthen the company's already competitive areas and speedily rationalize the fabs and products that are structurally less competitive. It is under this principle that our China LCD fab will be made even more competitive. Part of the domestic LCD TV fab will be converted to IT, and the remaining capacity will be flexibly run within the given facilities and available resources in response to the market situation and customers' needs.

Next is management direction and financial management. The company is continuing with preemptive financial management under the worst-case scenario to respond to uncertainties and volatility in the business environment. CapEx for this year has been adjusted to a high KRW 2 trillion level to keep investment within EBITDA. We will further tighten control of our finances to keep improving our financial position.

That concludes the company's presentation on Q3 performance and outlook. I hope to come back to you at the next earnings release with more improved performance and outlook. Thank you for your attention.

[Interpreted] This brings us to the end of earnings presentation for Q3 2020. We will now take questions. Operator, please commence with the Q&A session.

[Interpreted] The first question will be presented by Dongwon Kim from KB Securities.

[Interpreted] I have 2 questions. First is about the LCD and the second -- followed by the POLED question. So now first, the LCD market recently has been showing quite a good pickup. So does this mean that there would be any changes to the company's strategy to reduce the portion of the LCD business as well as the structural innovation? And if you could also give some specific details regarding the Paju line, for example, the P7 and P8 and also including your IT panel business?

And the second question is about the POLED. So can you give us an update on the orders in the fourth quarter coming from your North American customer? And also, what do you -- what is your outlook for the POLED demand for next year?

[Interpreted] Now this is the CFO speaking, and I would take the first question. And I understand that your question is about where there are -- whether there are any changes regarding our strategy for structural innovation in LCD and also the current update on the progress.

Now on one hand, because of the COVID-19 impact and also when it comes to the changes in the supply/demand dynamics in the market and also on the impact of the ASP, it is true that there has been some, let's say, help on improving the company's profitability. Now having said that, let me emphasize that the company's strategy for structural innovation in the LCD business remains unchanged.

Now the structural innovation is about strengthening the already competitive areas of the company, especially for the LCD, then also to speedily rationalize the structurally less competitive fabs or products. So first of all, as was mentioned in the last quarter, now out of the LCD business, where we already have competitiveness, so the IT products. Now in IT products, we will continue to strengthen this because we believe that when it comes to the customer base or the technology base and also the competitiveness of the products themselves, the IT business for the company has unique competitiveness compared to others. So this is where we will continue to strengthen competitiveness.

So it is under such principle and direction that the LCD fab in China will continue to strengthen competitiveness. Now on the other hand, the LCD fab in Korea, it is true that we have already made some adjustment. So for example, part of the facilities have been converted for IT. So this is applicable to P8, as you have asked about. And then for the remaining capacity, we will make sure that they are run flexibly according to the market situation and customer needs, although we believe that they are prone to changes on these fronts as well. So we will try to run them according to the given facilities and the available resources.

And now with regards to your second question about the POLED business. As you would know, extensive amount of time and efforts have been spent on trying to normalize the POLED business so far. And yes, so far, a lot of hard work has gone into this. And now starting in the second half, we were able to stabilize the development. And as a result, we were able to ensure a reliable quality and yield. And based on these achievements, we are now able to produce mass -- so we are now able to have mass production and volume supply to our strategic customer.

So as for the progress on -- in the second half of this year, now we are currently fully utilizing the available capacity to respond to the demand coming from the strategic customers. And then looking toward next year and on, although there would be some changes in demand, depending on the seasonality, based on the mass production capability that we have already secured, we believe that we have now laid the basis for consistent business down the road.

Now of course, in the early part of this year, we have explained about the 3 strategic tasks for the company. One of them was turnaround in the plastic OLED business. So we will not be resting on our laurels when it comes to the achievements in the second half of this year, and we will continue to work toward a fundamental turnaround of the plastic OLED business. So rest assured that we will not be complacent.

[Interpreted] The next question will be presented by Jeongu Ko from NH Investment & Securities.

[Interpreted] Now I have 2 questions regarding the OLED business. First is about the W OLED. Now it seems as if there is quite healthy demand for the 48-inch OLED TV recently. So I'm wondering whether the changes in the demand for the 48-inch OLED TV have brought about any changes in the company's investment targets for the W OLED.

And also, your shipment guidance this year was for 4 million, but then I wonder whether there have been any changes since then. And also perhaps it is a bit early -- too early to tell, but then can you also give us some further guidance about the W OLED business for next year? Aside from the guidance that you have already given, so for example, what would be your guidance for the shipment outlook of the W OLED next year?

And the second question is about the -- your POLED business. So it seems as if your business with Huawei in China would be bit suffering more recently. So then based on that, what would be your outlook for the POLED business down the road?

[Interpreted] Now I will first respond to your question about the wide OLED. Now first of all, yes, the -- I believe that your question was about whether there have been any changes to our shipment guidance, which was around 4 million this year, and also whether the demand for the 48-inch W OLED TV have brought about any changes to the company's strategy. Now first of all, the number that we have given in the pre-COVID timing was about 6 million for this year. But then because of the COVID-19 situation lasting throughout the first half, now things have changed. And of course, the situation is slightly different even today. But then immediately after the COVID-19 situation, the demand for high-end TV has slowed down considerably, and that is why we have adjusted the guidance to around 4.2 million, 4.5 million this year.

And then regarding the impact of the increasing demand for 48-inch. Now it appears that it is mostly for gaming purposes. Now -- and yes, there has been increase in the demand for 48-inch, but then unfortunately, the Guangzhou fab, it's mostly for 77-inch and MMG. So this means that there is limitation in our production capacity for the 48-inch. And because of that, we were not able to rapidly ramp up the production.

So we are currently trying to make improvement in order to improve the currently limited production capacity. So for example, we are currently developing the technology to produce the 48-inch in the Paju lines. So following such development, we do believe that we will be able to produce more 48-inch next year.

And then now to your question or the second question about the strategic customer in China. So as you would also know, there is a big question mark about when we can resume our business because it is not only about the company gaining the license for the export but then also for the other companies in the supply chain, gaming experts. So I believe that most of the semiconductor companies would have to gain the license in order to resume the business.

Now of course, strategically speaking, it's a very important client for the company. But then when it comes to the volume itself, then we were not at the stage of providing mass volume. So when it comes to the impact on the business itself, then I would say that it is more than manageable. But of course, having said that, if the business were to resume, then we would be ready to move in very quickly, so we are continuing to make preparation.

The next question will be presented by Hyung Soo Kim from Hana Financial Investment.

[Interpreted]

(technical difficulty)

on IT. Now first, regarding the TV market, now the competitors recently appear to be highly interested in the mini LED. So I wonder what the company's view is regarding mini LED. And also, what is your response strategy to this?

And then the second question is about the IT. Now COVID-19 has actually driven up demand for IT products. And as a result of this, many of your peers are also strengthening marketing for IT, for example, converting some of their facilities for TV for IT. So then as a result of this, do you see any changes in the competitive landscape? And what is the company's view on the market going forward?

[Interpreted] Now then, this is the CFO, and I will be responding to the first question. And then the second question on IT will be taken by Mr. Kwon of the IT marketing business.

Now the first, about the mini LED and the company's -- so your question is about the company's view on the mini LED. And now yes, we do see that there have been some moves by the competitors recently regarding the mini LED. But then when it comes to the set market, then we see that the -- some of the Chinese companies have launched mini LED backlit TV sets. But then we see that the -- what we have seen so far is that the market, the impact on the market has been minimal.

So based on our understanding so far, when it comes to the device structure, then basically, this is LCD that is backlit by mini LEDs. But of course, depending on the efforts of the set solution companies, there would be some improvement over the LCD.

Now if I may explain the background to this. During the COVID-19 era, many people in the home have been increasingly watching more TV or utilizing the monitor to online schooling or -- so basically, we see that there has been an increase in the time spent on utilizing or viewing the display. So we have done some survey on the users to identify their pain points in using the display. And in analyzing the customers' pain points, we were once again affirmed that the solution that would be -- that would resolve many of the biggest challenges that the customers are experiencing would be OLED.

So there were many pain points that have been mentioned, and some of the most frequently mentioned ones are the concerns on the impact on the eye health or the output of health after -- for having watching -- for having watched the display for so many hours. And another is -- now because of the increase in working from home or online shopping, many more customers also became interested in the color or the color representation. So for example, on the monitor or on the display, they would see color a, and then they would make their choice based on that, and then when they receive the product and they see that the color is different or not what they had expected. So many also complained that there are some limitations in the color representation.

And as I have mentioned earlier, yes, of course, that there would also be some improvement in the mini LED, but then when it comes to the customers' pain points, then once again, we see that some of the OLED-specific features are well suited to relieve such pain points. For example, the OLED display is less harder on the eyes. And also, it is one of the best technologies to represent the true colors, so it shows in natural colors. And also, what we call the Crystal Sound OLED or the CSO, so this is the display embedded with speakers, meaning that it is also good for mobility or portability. So we believe that these are some of the advantages and strengths of OLED that the mini LED, being an LCD, will find very difficult to keep up with. So we will continue to promote these advantages and strengths of OLED. And also, in consultation with the customers, we will try to fully take advantage of the OLED-specific advantages so that we will be able to achieve the 7 million to 8 million shipments target for next year.

[Interpreted] And now regarding your question about the IT business strategy and also the competitive landscape. Now first of all, about the IT business environment, the COVID-triggered upside demand, of course, this is highly subject to the development in the COVID-19 situation as well as the real economy, but we do believe that the upside demand -- so the demand overall will remain high into the first half of next year.

And regarding the competitive landscape, yes, it is true that some suppliers are trying to increase their production volume to respond to the IT demand. So that is 1 factor that does not bode well for the company. But then on the other hand, there is also a positive factor for the company, and that is the decrease in the number of suppliers. For example, there was an LCD exit by a domestic player and also the Chinese LED makers are set to be going through restructuring.

But now also, when it comes to the IT business environment and the changes, the company has 2 advantages they can rely on. And one is the technological advantage that we have, for example, IPS for oxide, Nano Bezel and high resolution. So these are the technological edges of the company that allow us to keep leading the high-end market.

And the second advantage is the fact that among the customers' feedback, the most important is the technology. So because the company has technological advantage over the peers, this has allowed us to build long-term partnership with strategic customers, which has ensured consistent business.

[Interpreted] The last question will be presented by Nicolas Gaudois from UBS.

The first one is regarding your Gen 7 LCD capacity remaining in Korea, which we believe is around 80,000 to 90,000 ships per month and is currently used for TV panels. It seems like that will continue to operate into year-end partly because of the upside in the market currently. Could you update us on your plans regarding this capacity going into 2021 since initially, you intended to actually close it down?

And the second question relates to CapEx. You explained you're adjusting down your CapEx this year in line with EBITDA. Next year, your EBITDA is very likely to go up. Should we expect an increase in CapEx from the levels indicated for 2020? Or do you actually intend to start lowering your debt next year by keeping CapEx as low as possible?

(foreign language)

[Interpreted] Now regarding your first question about the Gen 7 capacity in Paju, yes, currently, it is maintained at between 80,000 to 90,000 per month. And of course, we are taking all the factors of the market into consideration when we make decisions, but then the way we see it now is that it is a fab that is well suited for ultra-large commercial products. And so we believe that it is a fab that is quite competitive for that product category.

And as I have explained earlier, the -- much of the LCD TV capacity has been converted to IT. And then what remains in P7, P8, so especially for P7, it is currently being run mostly for commercial products. And then for the remaining capacity, as was explained earlier, we will be running them within the given human resources. And of course, we also have to take into account the market situation as well as the customers need. So our position now is to make sure that it can be and it will be flexibly run in response to the customers' needs and the market situation.

And then regarding your question about the CapEx for next year, yes, for this year, our plan is to keep CapEx within EBITDA. And then for next year, the plan is similar, meaning that the CapEx would be kept within the EBITDA. And of course, we want to be fully ready for the future so what we intend to do is make investment where necessary as we continue to improve financial ratios. So once we are ready with the final plans, then we would be communicating them to you. But basically, the plan for next year is to keep CapEx within EBITDA.

[Interpreted] So that concludes the Q3 2020 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.]