LG Display Co., Ltd. Q1 FY2021 Earnings Call

Good afternoon. This is Daniel Lee, 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; Heeyeon Kim, Senior Vice President of Corporate Strategy Group; Seung Min Lim, Vice President of Corporate Planning; Stephen Ko, Vice President of TV Marketing; Jae Yong Kwon, Vice President of IT, Strategy and Marketing; and Ki-Joon Jin, in charge of auto marketing. The conference call today will be conducted for 1 hour in both Korean and English, starting with the presentation on the financial results of Q1 2021 and the company's outlook for Q2, followed by Q&A. Please refer to the IR presentation document on the company's website for more details on the financial results of Q1 2021. 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 IFRS standards prepared for your benefit and have not been audited yet by an outside auditor. With that said, we will now start with the presentation on Q1 2021 earnings results. Let me start off with our business performance in Q1. Revenue was down 8% quarter-on-quarter, reporting KRW6.883 trillion. Solid demand and price increase continued for large products, but mobile shipment decreased due to seasonality. Operating profit was KRW523 billion, decreasing Q-o-Q on the back of reduced mobile shipment. Operating margin was 8% with EBITDA margin at 24%. Net profit was KRW266 billion. Next is area shipment and ASP. Area shipment in Q1 was 8.54 million square meters, down slightly from 8.66 million square meters of the previous quarter. Demand for medium- and large-sized panels stayed strong despite the seasonality. With seasonality affecting mobile panels, ASP was $736 marking a decrease of 7% Q-o-Q, but increased by 30% Y-o-Y. The company's production capacity in Q1 increased 3% Q-o-Q as we respond flexibly to market demand. Next is Q1 revenue breakdown by product segment. In terms of the revenue breakdown, IT panel accounted for the highest portion at 40% and TV panels, 31%. Mobile and others accounted for 29%, down 5 percentage points quarter-on-quarter due to reduced shipment of small to midsized OLED panels. Next is the company's financial position and ratios. The company's cash and cash equivalent at the end of Q1 was KRW4.352 trillion. Inventory was KRW2.352 trillion, increasing by KRW181 billion Q-o-Q as we preemptively responded to part shortage. As for financial ratios, liabilities-to-equity ratio was 175% and current ratio was 101%, remaining unchanged Q-o-Q. Net debt-to-equity ratio came in at 75%, posting an improvement Q-o-Q. Cash flow was up KRW55 billion quarter-on-quarter, coming in at KRW4.352 trillion at the end of Q1. Borrowings decreased by KRW214 billion. Next is the presentation by the company's CFO, DH Suh.

Good morning. This is DH Suh, CFO of LG Display. Before presenting on Q1 performances, I would like to thank all of you, our shareholders, investors and analysts for your unwavering support even as uncertainties continue from the extended impact of COVID-19. I will now brief you on the company's Q1 performance. Despite the seasonality, strong demand continued for TV and IT products, along with the stay-at-home economy trend, LCD panel prices rose more sharply than expected due to issues such as part supply. As such, financial performance this quarter remained solid from the previous quarter. Revenue fell 8% Q-o-Q due to seasonality, but it was higher by 46% Y-o-Y. It was KRW6.883 trillion higher than in other years in the first quarter. In terms of P&L, the company achieved an 8% operating profit margin by responding agilely to market opportunities even as concerns grow over part supply in the industry, such as glass and semiconductors. EBITDA margin was 24%, staying at the 20% level since the last quarter. In particular, the most meaningful achievement in Q1 was the sales of OLED TV. Despite the seasonality, it recorded 1.6 million units of shipment, which is on par with the peak season level in Q4. With the changes in lifestyle triggered by COVID-19, customers and end consumers are clearly seeing the fundamental and distinct values of OLED. The company's IT business, equipped with unique competitiveness, has been maintaining stable performance by responding flexibly to the COVID-related demand growth. As for the mobile business, we were able to considerably reduce volatility by improving elements of operational stability, such as yield and quality, although there was some seasonal impact in the first quarter. Next is on the guidance for Q2 2021. In Q2, solid demand is expected for large panels like TV, monitors and notebook PCs. Area shipment will grow by mid- to high single-digit Q-o-Q, while ASP is expected to fall by mid- to high single digit, feeling the impact of reduced mobile shipment due to seasonality. But our actual performance is subject to market circumstances, especially given the risk of cost increase coming from the part supply issue such as semiconductors. The company's view on the part supply situation is that it is a structural issue that is short-term uncertainty. Therefore, we are preemptively and carefully reviewing our responses from a longer-term perspective. We will try to minimize the impact by strengthening our readiness while keeping a close eye on the market. Next is update and outlook for each business segment. Mainstreaming OLED is the most important of our three key strategic tasks. Internally, we are further improving yield and productivity, while out in the market, we are trying to drive sales in the premium segment with the goal of improving profitability. For the mobile business, growth in sales volume Y-o-Y is expected on the back of improved productivity and operational stability; we will solidify the opportunity for a turnaround by thoroughly preparing for mass production of new models in the second half. In IT, we are strengthening our partnership with strategic customers based on product and production competitiveness. We will keep bolstering our market leadership and sustain our profitability. And in the LCD TV business, we plan to remain flexible in our operations in response to the changing demand and competitive landscape. We will try to maximize our opportunities within the available resources as we work closely together with customers. Notably, in the second half of this year, we anticipate changes in people's consumption patterns following vaccination campaigns and the subsequent improvement in the COVID situation. In particular, changes in people's lifestyles such as growing outdoor activities could lead to changes in product demand. The company will closely monitor changes in market trends and strengthen our readiness. At the same time, we will keep improving our financial position through activities designed to ensure financial stability. It is hoped that the rollout of vaccines will gradually ease the anxiety and inconvenience brought on by COVID-19. I do hope for a speedy return to normal and wish that all our shareholders, investors, and analysts stay healthy and safe. Thank you for your attention. That brings us to the end of the earnings presentation for Q1 2021. We will now take questions.

The first question will be from Chung Won Suk from HI Investment & Securities.

I have two questions. First is that now we see that the LCD panel price has really increased sharply recently, which also bodes well for the demand for OLED panels. Now for the Guangzhou line, which has completed the setup recently, I wonder what the company's plan is for the medium- to longer-term capacity increase? And also, what is the plan for the capacity increase for the mid- to small-sized panels? Or are there any changes in the company's plan in relation to the recent developments? And then also in relation to this, regarding the sales of OLED TVs, we also see that the OLED TV sales have gone up quite a lot. Then we saw - but then a little has been mentioned about the turnaround timing recently. So when do you expect the turnaround to occur, perhaps for the quarterly earnings or for the yearly earnings? And then the second question is about the auto display. So what is the portion out of sales of the auto display as it stands now? And then how much do you believe that the company will be able to pull this up in terms of the portion out of sales, for example, by increasing the sales of OLED and so forth?

Thank you for the questions. I detect three questions. Now first, I believe, was that there has been a sharp increase in the LCD panel price recently. So given the changes in the situation, what is the company's plan for capacity increase for OLED TV as well as for the small- to medium-sized panels?

Now for the OLED TV, I would say that the market data tells a good story because since the second half of last year, as people have spent longer periods at home, we believe that the consumers are also now discovering the true value of OLED TV. So when you look at the TV set market, there has been growth in this market, and we also see the same trend continuing in the first quarter of this year from the market data. We also see that amidst this growth, the OLED TV growth has been outpacing the growth in the overall TV market. Currently, we have a positive view on the market and regarding the OLED TV's competitiveness. But having said that, the market is always subject to change and especially with signs of the pandemic easing, it could also have changes in demand. So we would keep a close eye on the market situation into the second and the third quarter of this year and then would make the decision on whether we will be expanding our capacity. Once we have such a decision, of course, we would communicate with the market. Regarding the question on whether there have been any changes on our plan for the capacity for the small- to mid-sized plastic OLED. As you know, we have 30,000 capacity in Paju and 15,000 in Kumi. Our plan now is to maximize our productivity from the existing capacity. This means that at this point, no decision has been made regarding an increase in the capacity of the small- to midsized plastic OLED. Moving on to your second question about the expected turnaround time for OLED TV. Now as I understand that the question was on when the OLED TV business will be able to turn around to profit, perhaps which quarter within this year. Now for the OLED TV, we see that the market is doing well. We are trying to improve the yield as well as the quality to keep strengthening our competitiveness, and we are getting good signals out of those fronts. As to when we will be able to turn around to profit in the OLED TV business, it is difficult for me to pinpoint the exact timing, but I can tell you that we are moving in the right direction. Now onto your third question about the auto display. The auto market was probably one of the hardest hit from the COVID-19 pandemic, and the market suffered recently because of the issues with semiconductor supply. But despite the difficulties, the company was able to increase our orders for the auto business to $8.8 billion as of today from the $7.6 billion at the end of last year. This is inclusive of the plastic OLED, which we will be further focusing on in the future as one of our key businesses. We are currently watching the auto display business as we think about how much further it can grow and how significant a revenue source it can be for the company. But what is clear at this point is that EV sales continue to grow, and the expectation is that the EV sales will further pick up pace. If that is the case, then the plastic OLED, which we believe is the display that is best suited to EVs, stands to bring bigger orders to the company. We believe that this will be a very good opportunity for our automotive display business. So the question for automotive display is not how much it is going to contribute now, but how much we can grow this business in the future for the longer term so that it can become a key business for the company.

The following question will be provided by Kim Hyun-soo from Hana Financial Investment.

I have questions on two topics. Now with the shutdown of part of the LCD production, I believe that the company also has to focus more on the white OLED business as a source of revenue. So I was wondering about the schedule of your production ramp-up. To reach like a 10 million by 2023, which is the company's goal, I believe that you would also have to increase the production to over the 30,000 capacity, as was mentioned earlier. It was, of course, explained earlier that that decision is likely to be shared after the third quarter. But then if you could share with us the more specific schedule regarding the production capacity? And then the second question was about the which - it is related to the previous question about the electronification or the electronics of the automotive. Regarding the outstanding orders that were mentioned earlier, what is the period of recognizing this as revenue? And also, what is the profitability of the automotive electronics orders?

Now regarding your first question about the timing of the capacity increase for white OLED. As was explained earlier, we need to conduct some further studies regarding this topic. We would be reviewing the market situation throughout the second and third quarters. When we believe that the right timing comes, then we would make the decision either way and communicate this with the market. Regarding the automotive electronics, the question was when the orders will be recognized as revenue. For automotive electronics, the process is that we would first receive the orders and then go into development, which takes about 1 to 1.5 years. The delivery follows afterwards, and the delivery duration depends on the product and the customers, but that could be somewhere between 4 to 6 years. Overall, it is quite difficult for us to tell you, on average, what the revenue recognition period is going to be. However, you could take into account what I have just explained. Regarding profitability, given that this is a long-term business, it could also be affected by currency or exchange rates and changes in cost. For profitability, what we target is that it should be at a level that can absorb the cost and the risks.

The following question will be provided by an unidentified analyst.

Going back to the automotive display business, could you provide, broadly speaking, a split between what is LCD currently and what is already OLED? Then secondly, moving to LCD panels. You indicated earlier that you'll remain flexible in terms of the capacity you continue to use for production of TV panels. Should we understand that you will continue running the Gen 7 capacity you were supposed to close earlier throughout the year? Or are you thinking already of extending this into 2022?

Now first, regarding your question on the LCD production capacity, yes, for the TV production capacity in Korea, it has already been shut down. But then for the P7, for the production of ultra-large panels, we are maintaining this. For the LCD fab, we intend to remain flexible in its operation and try to maximize the opportunities that are presented to us within the available resources. Therefore, we intend to remain flexible not only throughout this year but possibly into the future, depending on the market circumstances. As for your first question about the automotive display, the share of POLED and plastic OLED out of the outstanding orders is about 30%. To add a bit more to the response regarding the P7 capacity, yes, we are currently maintaining this to deal with commercial needs and requests coming from certain customers. It was explained earlier that we have shut down the domestic production of LCD TV; however, rather than completely shutting this down, we have converted the capacity for IT production.

The last question will be presented by Kim Sung Kyu from Daiwa Securities.

I have some questions regarding the IT business. We see that the demand for IT panels is becoming strong. This also means that the IT panel profitability is quite high for the company as well. We see that more recently, even the domestic peers in the IT side are now showing signs of moving from LCD to OLED, and one of the company's strategic customers is also showing signs of additionally using OLED for their tablet products. I wonder what the company's take is regarding the outlook for these changes in the IT market? How do you foresee such changes affecting the company's strategy? Especially given that the company had the LCD-focused strategy, do you believe that this is going to change the strategy for the company?

Now first of all, as you would also know, I would like to emphasize that it is not the first time in the IT that the OLED is being adopted. Preparation started about 10 years ago, and we are now seeing increasing adoption of OLED in TV products, and also adoption of plastic OLED is increasing in mobile products, especially smartphones. Now I would say that this really represents the last realm. So between the large products and then the smaller smartphones, the midsized segment, which is IT products, this is where we see the last frontier for OLED. Whether small size or large size, given the unique advantages of OLED, I believe it is only a matter of time before it is adopted in IT products and the share of OLED will grow among the IT segment. In this context, regarding the company's strategy, as we have explained several times in the past, we have always made the technological preparation for all sizes of OLED, either small to midsize or large size or now the intermediate size for IT products. Once the OLED is adopted and its share begins to grow, we believe we will need to have the differentiated advantages that we have always had for LCD. We have also seen possibilities from the foldable IT products launched last year. In terms of the technological and production advantages, we are trying to keep strengthening such advantages that we have. In summary, what I want to highlight is that for the technological advantage we have enjoyed from LCD products, it is also important for us to equip ourselves with the kind of advantages for OLED as well. That is what we are doing — continuing to prepare so we can leverage our technological competitiveness once the OLED market takes off in the IT segment. We will now close Q1 2021 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.