LG Display Co., Ltd. Q3 FY2020 Earnings Call

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 am joined by the CFO, DH Suh; Seung Min Lim, in-charge of Corporate Business Management; Matthew Kim of TV Marketing; JY Kwon of IT Marketing; and Seonggon of Auto Marketing. This conference call will be conducted for one hour in both Korean and English, starting with the presentation on the financial results of Q3, 2020, and the Company's outlook, followed by Q&A. Please refer to the IR presentation document on 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 6.7 trillion won, up 27% quarter-on-quarter. There was an increase in IT product shipment following the trend of working from home and online schooling due to COVID-19. Supply of new P-OLED products began for strategic customers and there was robust global demand for TV. Operating profit was 164.3 billion won, turning around to profit after seven quarters. Operating margin was 2%, EBITDA margin was 19%, and net income was 11 billion won. Next is area shipment and ASP. Area shipment in Q3 was 8.3 million square meters, up 23% quarter-on-quarter. It is owed mostly to growth in TV panel shipment and IT products as working from home and online schooling became the new norm. ASP was $706, up 8% quarter-on-quarter and up 38% year-on-year. This is due to the growth in the share of large OLED and mobile product shipment and a rise in LCD panel price. The Company's production capacity increased by 15% quarter-on-quarter following the start of the Guangzhou new OLED fab conversion of Gen-8 facilities to IT and the start of new lines for small-to-mid-size OLED. But there was a decrease of 17% year-on-year 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 quarter-on-quarter due to an increase in OLED TV panel shipment following the start of the Guangzhou new fab. Mobile and other products share was 29%, up 4 percentage points quarter-on-quarter 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 2.4 trillion won, which is an increase quarter-on-quarter. There was a production ramp-up of TV panels ahead of seasonal demand and preparation of mobile product shipment for strategic customers. As for financial ratios, the current ratio improved, while liabilities to equity ratio, and net debt to equity ratio remained little changed quarter-on-quarter. Cash flow at the end of the quarter was 3.3674 trillion won, falling slightly from the previous quarter. Although net income turned around to profit, there was an increase in working capital along with revenue growth, as well as partial repayment of debt. Particularly noteworthy is interest-bearing debt decreasing by 310 billion won for the first time since large-scale topics 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 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 prices rise. Next is the presentation by the company CFO, DH Suh.

Good morning this is DH Suh. 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 working 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 seven quarters, thanks to stable supply of P-OLED panels to strategic customers and the start of volume production in the Guangzhou new OLED fab. Area shipment in Q3 was up 23% quarter-on-quarter. Shipment of IT products continues to grow, and shipment of large-size 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% quarter-on-quarter. There was even improvement in the financial performance across the businesses. By product segment, IT is maintaining a consistent profit structure, thanks to unique competitiveness while mobile P-OLED achieved meaningful improvement in profitability. TV also contributed to profitability improvement with the start of mass production in the Guangzhou OLED fab and flexible operation of the 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; non-face-to-face culture and home entertainment have fast become the new norm, while uncertainties in the external environment persist. COVID-19 has given new rules 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 in different patterns than in the past. The company plans to double down on 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 non-face-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 the mainstream market 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 offline retailers. For the year, shipment is expected at mid 4 million units. Production capacity for large-size 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 a mid-size of up to 48 inches and for ultra-large size of 77 inches or bigger. The COVID-triggered changes in lifestyle have also highlighted various uses of TV in addition to just watching. For such uses as gaming, working from home, and home training, OLED's unique strengths such as natural colors, flexible design, and eye comfort will stand out even more. We’d 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 P-OLED, 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 2 trillion won 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 improved performance and outlook. Thank you for your attention.

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

I have two questions. First is about the LCD, and the second followed by the P-OLED 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 us some specific details regarding the Paju lines, for example, the P7 and P8, and also including your IT panel business? And the second question is about the P-OLED. So, can you give us an update on the orders in the fourth quarter coming from your North American customer and also what is your outlook for the P-OLED demand for next year?

Now this is the CFO speaking and I would take the first question. I understand that your question is about whether there are any changes regarding our strategy for structural innovation in LCD and also the current update on the progress. 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, it is true that there has been some hope 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. The structural innovation is about strengthening the already competitive areas of the company, especially for the LCD, and then also to speedily rationalize the structurally less competitive fabs or products. So first of all, as was mentioned in the last quarter, out of the LCD business where we already have competitiveness so the IT products. 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. 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 adjustments. For example, part of the facilities have been converted for IT. 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 this front as well, we will try to run them according to the given facilities and the available resources. Now with regards to your second question about the P-OLED business. As you would know, extensive amount of time and efforts have been spent on trying to normalize the P-OLED business so far. For 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 reliable quality in 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. As for the progress 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. 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. One of the strategic tasks for the company was the turnaround in the plastic OLED business. We will not be resting on our laurels when it comes to the achievement in the second half of this year. We will continue to work towards a fundamental turnaround of the plastic OLED business. So rest assured that we will not be complacent.

I have two questions regarding the OLED business. First, I'd like to know about the W-OLED. It appears there is a strong demand for the 48 inch OLED TV lately, so I’m curious if this demand has led to any adjustments in the company’s investment targets for W-OLED. Also, your shipment guidance for this year was 4 million units. Have there been any updates on that? It might be a bit premature to ask, but could you provide some additional guidance on the W-OLED business for next year, particularly regarding the shipment outlook? My second question pertains to your P-OLED business. It seems that your collaboration with Huawei in China has faced some challenges recently. Given that, what is your outlook for the P-OLED business going forward?

I will first respond to your question about the White OLED. Now first of all, yes, 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 has brought about any changes to the company 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, things have changed. Of course, the situation is slightly different even today. Immediately after the COVID-19 situation, the demand for high-end TV has slowed down considerably. That is why we have adjusted the guidance to around 4.2 million to 4.5 million this year. Regarding the impact of the increasing demand for 48 inch, it appears that it is mostly for gaming purposes. There has been an increase in the demand for 48 inch, but unfortunately the Guangzhou fab is mostly for 77 inch in MMG. This means that there is limited production capacity for the 48 inch, and because of that, we are not able to rapidly ramp up the production. We are currently trying to make improvements in order to enhance the currently limited production capacity. For example, we are currently developing the technology to produce the 48 inch in the Paju lines. Following such development, we believe that we will be able to produce more 48 inch next year. Now regarding your second question about the strategic customer in China. As you would also know, there is a big question mark about when we can resume our business because it's not only about the company gaining the license for the export, but also for the other companies in the supply chain gaining export licenses. I believe that most of the semiconductor companies would have to gain the license in order to resume business. Strategically speaking, it's a very important client for the company, but when it comes to the volume itself, we were not at the stage of providing mass volume. The impact on the business itself is something I would say is manageable. But of course, having said that, if the business were to resume, we would be ready to move in very quickly, so we are continuing to make preparations.

They all IT. Now first, regarding the TV market. Now the competitors recently appeared 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 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?

Now then, this is the CFO again. I will be responding to the first question about the mini LED and the company’s view on it. Yes, we do see that there have been some moves by the competitors recently regarding the mini LED. However, when it comes to the set market, we see that some of the Chinese companies have launched mini LED backlight TV sets, but the impact on the market has been minimal. Based on our understanding so far regarding the device structure, this is essentially an LCD that is backlit by mini LED. However, depending on the efforts of the set solution companies, there may be some improvements over the LCD. During the COVID-19 era, many people have been increasingly watching more TV or utilizing their monitors for online schooling. We have conducted a survey on the users to identify their pain points in using displays. Analyzing customer pain points, we were once again affirmed that the solution that would resolve many of the biggest challenges that the customers are experiencing would be OLED. Some of the most frequently mentioned concerns are the impact on eye health after extended viewing and limitations in color representation. Although mini LED technology will bring certain improvements, OLED distinctly addresses these pain points better. OLED displays are easier on the eyes and are among the best technologies for accurate color representation. We will continue to promote these strengths of OLED and consult with customers to leverage OLED's unique advantages. Our aim is to achieve the shipment target of 7 million to 8 million units next year.

Regarding your question about the IT business strategy and the competitive landscape. First, about the IT business environment, the COVID-triggered demand increase is highly subject to developments in the COVID-19 situation as well as the real economy. However, we believe that the demand overall will remain high into the first half of next year. Regarding the competitive landscape, it is true that some suppliers are trying to increase their production volume to respond to IT demand. That does not bode well for the company. However, there is also a positive factor, which is the decrease in the number of suppliers. For example, there has been an exit by a domestic player in LCD, and Chinese LCD makers are going through restructuring. When it comes to the IT business environment and changes, the company has two advantages. One is the technological advantage, with examples like IPS oxides, nano bezel, and high resolution. These technological edges allow us to lead the high-end market. The second advantage is that among customer feedback, technology remains the most important factor. Due to our technological advantage, we have built long-term partnerships with strategic customers, ensuring consistent business.

We will take one last question.

Good afternoon. Thanks for taking my question. The first one is regarding your Gen-7 LCD capacity remaining in Korea, which we believe is around 80,000 to 90,000 sheets 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 you know initially you intended to actually close it down? And second question relates to CapEx, you explained you are reducing the CapEx issue 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 intend to start lowering your debt next year by keeping CapEx as low as possible?

Regarding your first question about the Gen-7 capacity in Paju. Yes, currently it is maintained at between 80,000 to 90,000 sheets per month. We take all market factors into consideration when we make decisions. It's well-suited for ultra-large commercial products and is competitive for that product category. Much of the LCD TV capacity has been converted to IT, and the remaining capacity in P7 and P8 is currently being run mostly for commercial products. For the remaining capacity, we will run them flexibly according to market situation and customer needs. Our position now is to ensure that it can be and will be flexibly run in response to market demands. Regarding your question about CapEx for next year, our plan is to keep CapEx within EBITDA. For this year, we will manage it at a high level of 2 trillion won. For next year, the plan remains similar, aiming to keep CapEx within EBITDA. We want to be ready for the future, so we will make investments where essential as we continue to improve our financial ratios. We will share final plans with you once they are ready, but the goal remains to keep CapEx within EBITDA.

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.