LG Display Co Ltd (LPL) 2020 Q2 法說會逐字稿

[Interpreted] Good afternoon. This is Kim Hee Yeon, 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 Suh; Seung Min Lim, in charge of Corporate Business Management; Matthew Kim of TV Marketing; and [Jae-Young Kwon] of IT Marketing. This conference call will be conducted for 1 hour in both Korean and English, starting with a presentation on the financial results of Q2 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 Q2 2020. For those joining through the webcast, please refer to the details on the widget on the 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 Q2 2020 earnings results.

Let me start off with our business performance in Q2. Revenue in Q2 was KRW 5.307 trillion, up 12% quarter-on-quarter. There was increase in IT product shipments despite the slowdown in TV and mobile shipment due to COVID-19. Operating loss was KRW 517 billion, showing an increase quarter-on-quarter. Despite the growth in revenue, fixed cost burden increased, following the production adjustment to respond to demand uncertainty and also because of the demand volatility and seasonality due to the contraction in the upstream industries like the smartphone. Operating margin was minus 10%, EBITDA margin, 8%, and net loss was KRW 503.8 billion.

Next is area shipment and ASP. Area shipment in Q2 was 6.7 million square meters, down 4% Q-o-Q. It is owed mostly to a slowdown in TV shipments following retail shutdowns under COVID-19. ASP was $654, up 15% Q-o-Q and up 44% Y-o-Y. This is due to growth in shipment of IT products where the company has unique strength. The company's production capacity was reduced by 4% Q-o-Q as downsizing of low-margin TV fab continues. It is a decrease by 29% Y-o-Y.

Next is Q2 revenue breakdown by product segment. What is noteworthy in Q2 revenue is that share of IT was 52%, going over the 50% mark. This is largely attributable to the COVID-triggered increase in work-from-home and online education. TV's revenue share was 23%, down 8 percentage points Q-o-Q due to decrease in TV panel shipment and LCD panel price. Mobile and other product share was 25%, down 7 percentage points Q-o-Q due to demand slowdown in upstream industries like smartphone and auto.

Next is the company's financial position and ratios. The company's inventory at the end of Q2 was KRW 2.0394 trillion, down 12% Q-o-Q. There was production adjustments in response to the pandemic-related demand slowdown and uncertainties. As for financial ratios, liabilities-to-equity ratio and net debt-to-equity ratio rose slightly Q-o-Q. Cash flow at the end of the quarter was KRW 3.5991 trillion, staying flat from the previous quarter despite the increase in net loss, thanks to stronger financial management such as more efficiency in working capital.

Next is the company's guidance for Q3 2020. In Q3, although the risks from COVID-19 continue as the pandemic lingers on, revenue growth and profitability improvement are expected for the company. Mass production will begin at Chinese OLED fab, shipment of POLED for smartphones is likely to grow and differentiated IT products will increase. Area shipment is expected to grow at 20% level and blended ASP is to grow additionally at a mid-single digit. As a result, it is expected that the company recover the revenue before the LCD structure innovation, thanks to realignment around high-value and businesses -- around high value-add businesses despite the capacity decrease following fab downsizing.

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

[Interpreted] Good morning to our shareholders, investors and analysts. I am DH Suh, CFO of LG Display. COVID-19 and its repercussions are lasting longer than expected, heightening uncertainties in the market and business environment. First and foremost, I wish everyone and your family health and safety.

Allow me to add some more details on the company's Q2 performance. There were both positive and negative impact from COVID-19. Area shipments fell 4% Q-o-Q. Shipment of OLED TV panels fell sharply following the global spread of COVID-19 and subsequent off-line retail shutdowns. Market demand for mobile products also shrank. On the other hand, work-from-home and online schooling have emerged as new opportunities as part of our new lifestyle. This has led to increase in sales of IT products, where the company has unique strength. ASP rose 15% Q-o-Q and 44% Y-o-Y, while total revenue was up 12% Q-o-Q. ASP recovered to the mid-$650 level, the highest in 22 quarters since Q4 2014 as the company's business realignment around OLED steadily progressed. Despite the growth in revenue, operating loss increased Q-o-Q. There was production adjustment of TV and mobile products in response to demand uncertainty and slowdown in upstream industry, which increased the fixed cost burden. And there was also a decline in ASP, mostly coming from LCD, which put a further drag on profitability.

Next is Q3 2020 outlook and the company's direction. Although the macro environment in Q3 will not be favorable due to the lingering COVID impact, the company will be able to show part of the outcome of its business realignment efforts such as mainstreaming large OLED, POLED business turnaround and LCD structural innovation. For OLED TV, there were some challenges due to COVID-19 such as difficulty sending our engineers, but we are able to establish the optimum conditions for mass production and enabled mass production to begin in July. As the fab has newer equipment compared to domestic fabs, which can support high-efficiency and productivity, we will start seeing valuable impact soon. Based on this, we will improve the mass production yield for 77-inch, 48-inch and 65-inch, 55-inch MMG line to the existing fab level in a short period of time and ensure that we can respond to the market demand in the second half. The annual sales target is planned at high 4 million to 5 million, but given the persistent COVID risks, we will remain flexible to the market environment as we try to maximize sales opportunities.

As for POLED, the favorable seasonality is expected to pull up the shipment of new products for the strategic clients. There have been many challenges, but we were able to stabilize the product quality and yield and will now focus on ensuring reliable supply. For IT, the new COVID-led trends of working from home and online education are expected to remain opportunities. The company will keep capturing such opportunities by responding without delay to clients' needs with IT products, where the company has unique strengths.

Let me also say a few words about the path of our LCD structural innovation. The purpose of this is to further strengthen the company's already competitive fab end products. This is especially so for IT. And for TV, we will also keep strengthening our competitiveness based on the Guangzhou fab, where the company has market competitiveness.

Based on the performance to be achieved in our major business areas, significant improvement in profitability is also expected in Q3 from the previous quarter. But to make sure we have a fundamentally sound business structure, we need to see results from the 3 core projects at the same time. The company's performance will be on an upward trend, but there will be some ups and downs from quarter-to-quarter depending on factors like COVID-19 or demand for individual products like the smartphone.

Next is management direction and financial management. The ongoing pandemic defies easy prediction. To respond to an environment with growing volatility, the company will undertake early financing and stronger CapEx and working capital management under the worst-case scenario.

That concludes the company's presentation on Q2 performance and Q3 outlook. I hope to come back to you at the next earnings release in October with more improved performance and outlook. Thank you very much for your attention.

[Interpreted] That brings us to the end of earnings presentation for Q2 2020. We will now take questions. Operator, please commence with the Q&A session.

(foreign language)

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

[Interpreted] I have 2 questions about OLED. First is about the ramp-up plan at the Guangzhou line in the second half of this year. And along with that, what is the company's plan for the production of large OLED? And the second question is about POLED. So what is your outlook for the POLED utilization as well as plans for improving profitability?

[Interpreted] Now this is in response to your first question. As was reported earlier, there have been many challenges in the early part of this year. But in the end, we were able to start mass production in July this year. And also based on this, the ramp-up will move on as scheduled. In other words, we will try to have the -- to enable loading of the full capacity, 60,000 as soon as possible.

And for the year, now of course, in the second quarter, there was sales slowdown because of the COVID-19 impact. But then for the year, the target is to have the high 4 million to 5 million units according to our sales plan. Of course, this also depends on the situation with COVID-19, for example, the lockdowns in many economies or the reopening of the economies and also the retail shutdown or reopening of the shutdown. So of course, there would be still impact from COVID-19. But then since we have already gone through the difficulties and challenges in the second quarter, we now have the experience to deal with these challenges. So now if there are continuing difficulties, then, let's say, if there are continued shutdown in the retail side, then we could do some expansion of sales on the online channels. We also work with the customers to have promotions or other events in order to drive sales. So we believe that through such efforts, we will be able to meet the sales plan of high 4 million to 5 million units.

And regarding your second question about the utilization of the small to medium POLED in the second half of this year. Now of course, we have the fab in Kumi and Paju, but especially for the Paju fab, the plan is to have full utilization. So assuming full utilization, then we believe that this is also going to have a meaningful impact on improving profitability.

[Interpreted] The next question will be presented by Sang Ryul Kwon by DB Financial Investment.

[Interpreted] I also have 2 questions. First is about the panel for IT products. Now perhaps the IT panel products have become the, let's say, the -- they have become the most commodified. But also on the other hand, we see that it is very -- the most profitable for the company. So how do you see as the -- what do you see as the success factors in the high profitability for the company's IT products? So in other words, how do you differentiate yourselves in your IT products from other companies? And also a related question is, now if the products for IT are so profitable, then it's also likely that the peers might decide to allocate more capacity to IT products as well. Then does this mean that it's likely that the IT products would also walk the path of LCD TV like before? So does the company have any plans against this possible scenario?

And the second question is about your plans to utilize the plastic OLED line. So specifically, the E6 Page 2, Page 1, the E5 line. So of course, in the second half, given that this is the high season for the overseas strategic clients, I'm sure that there are no worries about utilization of the lines, so much so that you even mentioned full utilization. But then going into next year then, the situation is going to be different. So to make sure that you have a stable operation of the lines for the year, then this means that you also have to wisely overcome the non-high season, the slow season. So that means that you need to have careful planning on utilization of each line. So I would just like to ensure about such details, if there are.

[Interpreted] Regarding your first question, that was about expectations or concerns about IT products. So I take it that your question was about the reasons for the company's high profitability being gained from IT products and how we are able to differentiate ourselves in our IT products from others. Now as you would know, for our IT panel, we are -- we have 100% IPS so it is 100% based on IPS. And on top of that, there is the oxide technology that we utilize. So I believe that this is the combination of this IPS and oxide technology that give us the differentiating factor compared to other peers and thus the competitiveness. And also in the course of that, we have also restructured the low value-add businesses or the products like the TN type, for example, for notebooks. So the fact that we have focused on the high value-add products, I believe, is the success factor in the IT products today.

And also regarding your question on concerns over the -- perhaps the possible repeat of the LCD business in the plastic OLED as well, in the IT products as well. Now yes, I think in this case, all we can do is make sure that we look ahead 1 to 2 years or even 3 years in terms of our technology, especially for oxide. And in the oxide-based technology, we already have our strength and competitiveness, but I believe that we need to continue to differentiate. So that even as the peers try to catch up with us, we would be able to keep the distance between ourselves and the rest. And regarding this point, the representative from the marketing side will deliver further details.

[Interpreted] This is [Jae Young Kwon] of IT Marketing. Now when we look at the trends in the IT products, then we see that there is still much room for further differentiation, for example, high resolution or high pixels and low-power design. So these are the areas where we can continue to differentiate. And also, as the CFO has explained, now the company already has competitiveness in IPS technology as well as oxide. And it is based on such technological competitiveness that we will continue to keep up with the trends and continue to lead so that we will be able to maintain our competitive advantage and continue to lead the IT market.

[Interpreted] And before I move on to the second question, I would like to respond -- I would like to say a few words about the LCD business. Now after the -- one of our peers announced that they would be withdrawing from the LCD business, there appears to be some misunderstanding in the market and industry that the company might also withdraw from the LCD business entirely. But as I have explained already, as I was explaining about the direction of the company's LCD structural innovation, what we intend to do with the LCD business innovation is to strengthen the competitiveness of the already competitive fab end products. And so we already have the strong fabs end products. And what we are trying to do is make sure that they will become even more competitive. So in such a case, I would say that the -- our portfolio of IT products are very much different from the competitor. And so in terms of the product volume or the customer base or the product profile -- product portfolio, we are quite differentiated from the peer and from the other players. So what we are planning to do is to innovate the LCD business structure so that the IT products will remain a key driver of revenue for the company, and we will continue to promote this business sector. So I do hope that there would be no misunderstanding about the company's LCD business.

And now moving on to your question about the utilization of plastic OLED fab. Now of course, it is true that there is seasonality in the smartphone, so there is probably no avoiding the trend of low demand in the first half and high demand in the second half. So -- but then when we look at our capacity and also the market trend and combining that with our capacity balance, so if we can -- so on top of this, if we can continue to have trust from the customers and have a stable supply, then I believe we will be able to overcome this seasonality.

And specifically about the operation fab for Paju fab and Kumi fab. Now for Paju fab, as you would know, it is specialized for smartphones, whereas for Kumi fab, it produces a diversity of products. So we are already producing a diversity of products. And also, we are making preparation for further diversity. So we are currently making preparation for small volume production of a variety of products in the Kumi fab. So for example, auto products are already being produced at the Kumi fab, and also the wearable products will be produced in the Kumi fab soon. And also for the future products that we are preparing, for example, foldable that they will also be produced out of Kumi. And aside from that, there can be many other attempts that can be made based on plastic OLED, and they would be mostly be produced out of Kumi fab as well.

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

If you could, first of all, comment a little bit about automotive and OLED you just mentioned. You announced, a couple of weeks ago, a design win with Mercedes, and that comes after another one from [Korea] this year. So if you take a 5-year view, how much do you think automotive could become of total RGB OLED revenues for LG Display? And how profitable are those automotive contracts compared to mobile?

And then secondly, if I may, a clarification on what you said earlier on profitability for RGB OLED and specifically plastic OLED for the Paju fab. Did you actually say that even at full utilization rates, you may actually not reach profitability later this year?

[Interpreted] Now then let me clarify first, so that is to your second question. What I mentioned earlier was that assuming full utilization, there is going to be meaningful or a significant improvement in our profitability.

And coming back to your first question about the plastic OLED auto business, and the question I've taken was that for the next 5 years, how much growth do we foresee from the RGB OLED auto business? Now if I may explain first about the status quo, out of all the orders that we receive for auto, about 20% is for plastic OLED. And as for the next 5-year projection, now we are looking at the market from various angles. And as far as I understand, we have about 25% global market share in the auto display market. And so then the question is, out of the auto display, how fast and how wide can we penetrate with the plastic OLED? That would largely determine the numbers for the next 5 years. But then this being so early in the current trend, we are still having a lot of discussions about various possibilities with the different customers. And because of this, it is -- the situation is quite fluid and because of that, it is very difficult to give you any numbers at this point.

And about the profitability of the auto plastic OLED. Now the very nature of the auto business demands that the supply continues for a long period, for at least like 5 years. And this also is a small volume, multiple variety product. So in this case, what is important for us is not just the absolute profitability, but the question is whether we would have profitability that is enough to cover the risks that would come from such long-term supply. So it's not about the auto plastic profitability being higher or lower than for -- than compared to other plastic OLED products, but then it's about whether it is enough to overcome or enough to manage the risks involved with such long-term supply. So that is our target, that kind of profitability.

(foreign language) The next question will be presented by Hyung Soo Kim from Hana Financial Investment.

[Interpreted] Now I have 2 questions, one about LCD TV, the other about plastic OLED. Now for the LCD TV, this question is specifically about the scrap schedule. Now I'm sure you have the schedule for sequential scrap in the LCD TV. But then recently, we see that there is a very fast recovery in demand for TV, and also, the panel price is on the rise. So I wonder whether you plan to adjust the schedule for the TV scrap. And also looking at the panel price and the current rising trend, how far do you believe that this will continue? To what level?

And the second question is about the plastic OLED and about the E6 line because there have been media reports recently that the company has plans to make additional investments to the third line of the E6 line. So I wonder whether this is true. And also for the E6 line, now the domestic customer, so your domestic customer will also be utilizing integrated touch panel in their next product. So what is the company's progress on the TOE technology?

[Interpreted] Regarding your first question about the LCD. Now regarding the IT products for the LCD, I believe that I have fully explained earlier, so then more specifically about the TV. And in terms of the -- when we were thinking about the LCD structure innovation, we were thinking about what would be the most competitive fab for us. And the answer is probably the Guangzhou LCD fab. And also, we believe that even globally, among the Gen 8 fabs, this fab is probably one of the most competitive. And because of this, the Guangzhou LCD fab is going to remain the main fab for LCD TV for the company. So given that then, as for the production in Korea of the LCD TV for consumers. Now as I have mentioned earlier in the earlier IR, the plan now is to stop the domestic production of the consumer LCD TVs. So that principle remains unchanged. Now having said that, because of the COVID situation and because of the situation with some customers, we intend to be flexible for the shorter term. So if I may summarize then, the overall direction remains unchanged. But then for the shorter term, we are thinking about to be more flexible.

And then regarding your question about some media reports on the company's plan to invest in a third line in the E6 line. So by third line, I take it that you mean additional 15k. So is there a plan for the company to invest in an additional 15k. So defining the question that way, then let me say that there is no such decision to invest in an additional 15k capacity and no such investment is currently being made either. Now having said that, there is a deposition line, so we do have some deposition equipment. And what we are planning to do is to make improvements on the deposition line so that we will be able to prevent the capacity loss that can occur in the course of development.

And then pertaining to your question about the competitor or the company's readiness for the TOE technology. Now as for the technological preparation and the equipment for the TOE, we have already completed the preparation, and I will not be naming the customers. But we are already supplying TOE products to some customers.

[Interpreted] Thank you very much for your questions and your interest. With that, we will now close Q2 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.]