LG Display Co., Ltd. Q4 FY2021 Earnings Call

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 2021 Fourth Quarter Earnings Results by LG Display. This conference will start with the presentation followed by a divisional Q&A session.

Good morning. This is Brian Ha 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, Sang Hong Kim; Hian Yin, Senior Vice President of Corporate Strategy Group; Seung Min Lim, Vice President of Corporate Planning; Hee-Yeon Yi, in charge of Business Intelligence; Daniel Lee, in charge of Large Display Marketing; He Young Kwan, Vice President of Medium Small Display Marketing; and Yu Han Soon, Vice President of Auto Marketing. The conference call will be conducted in both Korean and English. Please refer to the provisional earnings release today or the IR Events section on the company's website for more details on the financial results of Q4 2021. Before presenting the company's earnings, there will be a presentation on OLED EX, a new technology for large OLED. It can be viewed via mobile devices or a video webcast through an IT device, as well as on the IR website. The OLED EX presentation will last for about 5 minutes, followed by a briefing on the financial results of Q4 2021 and the company's outlook for Q1 2022 and Q&A. The technology presentation will be led by Min Yu Jin, in charge of live display promotion. The company's large OLED has been evolving and developing ever since its launch, culminating in the OLED EX technology. This presentation is in English with Korean subtitles at the bottom of the screen.

Hi, I want to appreciate all of you for joining us today. I'm Min Yu Jin, Head of Live Display Promotion Division. I'm proud to introduce to almost in OLED evolution OLED EX. Evolutionary experience, OLED EX embodies our goal of providing customers with an evolved experience through evolving technology. In OLED EX, we introduce EX technology, which enables an evolved experience. EX technology improves product efficiency and brightness by increasing the stability of organic light-emitting devices, which are the most important elements in creating great picture quality for OLED. The two key steps enabling this technology are deuterium and personalized algorithms. Deuterium is an element, also known as heavy hydrogen. As the name implies, it has a similar structure to ordinary hydrogen, but it has an extra neutron. It is not artificially synthesized; it is a real natural element. However, there is only one atom of deuterium for every 6,000 atoms of hydrogen. We developed the technology to extract deuterium from water to replace hydrogen in existing OLED materials. Our OLED materials maintained their original shape but become more stable through our deuterium substitution process, meaning that they are stronger against electrical stimulation and heat, allowing them to remain more reliable for longer, even at high brightness. Ultimately, we developed a highly stable device that emits brighter light. Using deuterium, OLED EX can achieve a higher level of natural brightness and detail similar to what we've seen in real life. The second key to EX technology is personalized algorithms. We use personalized algorithms to control OLED's brightness and enhance performance by predicting usage for each device according to the viewing patterns of each user. I often display places I want to travel to after the pandemic on my OLED TV. This is one of them: an aerial view of the Grand Prismatic Spring or hot spring in Yellowstone National Park in the U.S. It looks almost like the sun blazing, doesn't it? Some days, I view this scene for a long time, and the blue pixels on my OLED TV are, of course, used a lot for the blue part. The green parts mostly utilize green cell pixels, and as you can guess, the red parts use mostly fewer pixels. This is where our personalized hydrogen technology comes into play, intelligently predicting usage and optimizing each RGB element to maintain stable use. These personalized algorithms combined with deuterium give our OLED panels their strength. With EX technology, our OLED has evolved to become stronger than ever with a 30% increase in brightness and natural colors, produced with greater detail. OLED EX decreases details precisely as content creators intended. Design is also no exception when it comes to the evolution of OLED EX. OLED EX introduces a new bezel that's about 30% smaller than before, making this the most aesthetically pleasing design of any existing OLED. We took innovative evolution a step further to satisfy the many consumers without making any compromises that affect OLED image quality or slim design. We can sum up the OLED EX philosophy of evolution with the phrase 'the world's great detail', meaning detailed innovation to bring our customers' perfect picture quality. The reason we emphasize technical expertise in developing detail is simple: because every detailed innovation results in the details in the content our customers experience. This is important not only for Hollywood filmmakers and other professionals but also for everyone who wants to capture and enjoy every last detail. OLED EX panels with EX technology will be used in all of our OLED TV panels from the second quarter of 2022, and we will continue to showcase new innovative products while pursuing natural reality, the philosophy that guides us. With OLED EX, we will provide our customers an evolved experience with OLED and show evolved leadership in the global OLED market. Thank you.

Thank you for your attention. Before we begin the presentation, please note that today's results are based on consolidated IFRS standards prepared for your benefit and have not yet been audited by an outside auditor. There has been a revision to the KIFRS number 1016 on property, plant and equipment. In applying the revision, the company modified how we account for prototypes sold during planned test operations. Previously, the net selling price of the goods produced during test operation would be deducted as PPE from the acquisition cost. But with the amendment, the cost must now be recognized as profit or loss. Early application of the amendment has caused some changes in our earnings for 2020. With that said, we will now start with the presentation on Q4 2021 earnings results. Let me start off with our business performance in Q4. Revenue in Q4 was KRW 8.881 trillion, driven by a higher share of large, medium, and small OLED, and an increase in IT panel shipment following the business structure upgrade. It was the highest ever for a quarter, up 22% Q-o-Q and up 18% Y-o-Y. Operating profit was KRW 476 billion, down 10% Q-o-Q due to continued decline in LCD TV panel prices and year-end one-off costs. Excluding one-off factors, actual performance was in line with market expectations. The operating profit margin in Q4 was 5%, with an EBITDA margin at 19%. Net profit was KRW 180 billion. Let me now go over our business performance for the year. Revenue in 2021 was KRW 29.878 trillion, and operating profit was KRW 2.231 trillion. Revenue was the highest ever, while profitability was also considerably improved, thanks to the turnaround in OLED and the upgrade in our business structure. Revenue was up 23% Y-o-Y. We turned around to profit with an operating profit margin of 7%. Next is area shipment and area ASP. Area shipment in Q4 was 9.36 million square meters, an increase of 12% from the previous quarter. IT panel shipments remained solid, and large OLED panel shipments grew due to strong demand for high-end TV. The area panel price was $806, an increase of 8% Q-o-Q, thanks to shipment growth in large and medium small OLED. The company's production capacity in Q4 decreased 3% Q-o-Q, due to line adjustments to prepare for new models and additional allocation to R&D. Next is Q4 revenue breakdown by product segment. IT panels, our standout among the competition, maintained the largest share at 42%. TV panels followed next with 27%, down 5 percentage points Q-o-Q despite higher shipments of large OLED due to declining LCD TV panel prices. Mobile and others accounted for 31%, up 8 percentage points Q-o-Q, thanks to growth in shipments of P OLED smartphones and wearables. The company's financial position and ratios show cash and cash equivalents at the end of Q4 were KRW 4.3 trillion. Inventory was KRW 3.35 trillion, decreasing by KRW 230 billion Q-o-Q. The inventory is kept at a higher level than usual as a precaution against supply chain uncertainties, such as commodities and logistics issues. The liabilities-to-equity ratio was 158%, and the current ratio was 94%, both remaining almost flat Q-o-Q. The net debt-to-equity ratio came in at 57%, improving by 6 percentage points Q-o-Q and down 20 percentage points Y-o-Y, showing meaningful improvement in financial soundness. Next is cash flow. The company's cash and cash equivalents at the start of Q4 were KRW 4.209 trillion, which increased by KRW 75 billion to stand at KRW 4.285 trillion at the end of Q4. I will now turn the presentation over to our new CFO, Sang-Don Kim, for additional business performance and strategy.

Good afternoon and good evening to shareholders, investors, and analysts from home and abroad. This is LG Display's CFO, Sang-Don Kim. I moved from being in charge of finance to CFO last year, and I greet you for the first time today through this conference call. As the new CFO, I feel the responsibility of having to deliver on the company's strategic tasks under an increasingly volatile business environment with the persistent pandemic and intensifying competition. But I also see expectations for new opportunities as we witness our strategic push in the past few years to upgrade the business structure and better prepare for the future bear fruit. With a sense of heavy responsibility being the CFO at such a critical juncture, I will play an active role in improving corporate performance while balancing opportunities and risks. With that, now let me move on to the guidance for Q1 2022 and the company's business strategy. First, regarding Q1 guidance, Area shipment will decline by mid to high single digits Q-o-Q, but the pace of seasonal decline will not be as significant as in previous years. Although shipments of panels of all sizes are expected to fall due to seasonality, IT panels continue to enjoy B2B demand stemming from the increasing trend of work from home, online education, and general changes in the office environment. However, area price is expected to fall by mid to high teens Q-o-Q due to seasonal decline in shipments of mobile panels. Next, regarding operational strategy for each business, looking back at the past year, we were able to show meaningful results in our core strategic tasks even as COVID-related volatility and uncertainty continued. Most importantly, OLED is now at a stage where it can produce substantive results. Although the TV set market saw negative growth of over 10% last year, sales of OLED TV sets grew over 60%, driving expansion in the overall high-end TV market. The high-end TV market experienced over 30% growth Y-o-Y, with OLED TV's share in this market surpassing 30% as of Q4 last year. Panel shipment recorded remarkable growth of more than 70% Y-o-Y, and the business turned around to profit in the second half of last year, reaching the BEP level for the year. Continuing from last year, shipment growth for this year is planned at 20%. We also aim to improve profitability based on stronger business performance. In the case of small and medium OLEDs, we are capable of ensuring consistency in development, mass production, and quality. It is now on a stable growth path based on stronger relations with strategic partners. In mobile business, we aim to further improve profitability by expanding new models in the second half. We will leverage our unique competitiveness to broaden outside the mobile premium market and expand into the mobility industry, including automobiles. The LCD sector achieved outstanding results by proactively responding to market changes. In LCD, we are maintaining a select and focused approach centered on high-end IT, in line with our strategic positioning. This year is expected to see demand adjustments following COVID-19. The company will continue to secure stability in operations by minimizing volatility. We are gradually reducing the portion of supply-demand businesses that are highly susceptible to market conditions while increasing the businesses that can produce consistent results in strategic collaboration with customers. Moving forward, anchored on OLED, we will continue to expand our business to deliver new experiences and values to customers, going beyond existing product areas. Regarding investment and financial management activities, CapEx last year was KRW 3.2 trillion. It is expected to increase this year as we proceed with investment in small and medium OLED, as decided last year. The company will maintain the principle of keeping CapEx within EBITDA while striving to improve our financial soundness. The company announced today a predictable and sustainable mid-term dividend policy aimed at improving shareholder value. We will maintain a dividend payout ratio of 20% of the consolidated net profit for the business years of 2021 to 2023. Accordingly, the Board of Directors decided on a cash dividend of KRW 651 per share for the 2021 business year. The company will keep looking for ways to improve shareholder value from a long-term perspective. Even as the pandemic lingers, we will bolster our responsiveness to the external environment to minimize risks and ensure stability in business operations. We will spare no effort to continuously heighten market confidence and create higher values.

That brings us to the end of the earnings presentation for Q4 2021. We will now take questions.

The first question will come from Sung Hyun Kim at Hanwha Financial Investments. Please proceed with your question.

Now I have two questions. One on large OLED and another on LCD. First about the large OLED: What was the performance in 2021 and the outlook for 2022? Are there any differences between the guidance last time regarding the 2021 performance and the expected shipments in 2022? And also, what was the profitability for this business division for 2021 and the outlook for 2022? My second question is on LCD. The LCD panel price has been falling for the seventh month now, but we are also seeing some signs of the price decline stopping for 30-inch and 40-inch LCD panels. What is the panel price outlook for LCD this year? For IT, we see that the IT LCD panel price also started to decline last month, so what is the price outlook for IT panels this year?

Now first of all, as the CFO highlighted earlier, the overall TV set market showed negative growth of over 10% last year. Among them, OLED TV, in other words, high-end TV, continued to grow, and OLED TV solidified its position in the high-end TV market. In Q4 of last year, the OLED TV took up over 30% of the high-end TV market. To give you more highlights, we see that some meaningful performances are worth noting. In developed markets like North America, for the year, it took over 30% market share, and in Europe, over 40%. Not only the sales of TV sets but accordingly, the company's panel shipments also grew by over 70% Y-o-Y. In the second half, it turned around to profit, and for the year, we reached BEP. In terms of specific shipments, we did fall a little bit short of the target in terms of the shipment totals, but we did come in line with the target in terms of area as we had focused more on large OLED. This year, as the CFO reported earlier, our guidance is for over 20% increase in panel shipments. The more recent numbers show that although they are for weekly sales, in January, we see that actual sales remained similar to the fourth quarter level. Based on our stronger business structure, we will continue to improve our profitability.

Now regarding the first question about large OLED, I am responding to your question about the outlook for IT panel prices. Compared to the TV, the decline in IT panel prices has lagged behind by about a quarter. So we believe that in terms of price stabilization, it will also happen later than the TV prices. However, we believe that most of the IT panel price declines will be centered on low-end products like TN or VA panels. For the high-end products, where the company is strong, we believe that the prices will remain stable.

Regarding the demand outlook for IT, since the onset of the pandemic, there has been a trend of working from home as well as online education, which drove the demand for IT products. Now, as COVID-19 continues to be prolonged, we are also seeing the easing of restrictions in different parts of the world. Increasing outdoor activities by citizens suggest that the B2C demand is likely to decline. However, for B2B, because of the back-to-office trend as well as economic recovery globally, we believe that the B2B demand in 2022 will remain strong. The outlook for demand between 2022 and 2021 is expected to be pretty much similar. Thus, concerning supply, because of the soft TV market last year, much of the supply on the TV side has shifted to IT, prompting a decline in IT prices starting in the last part of last year. In the short term, we believe that the IT price decline, which started in the latter part of last year, will continue, but the pace of decline now is mostly concentrated in the mainstream products. However, the company is strong in high-end products, so we believe that our business will remain stable compared to the overall market.

Now I also have two questions. First, about the cooperation between Samsung Electronics and LG Display. Samsung Electronics deciding to adopt LG Display's white OLED. Can you give us an update on this? If new information arises, does this mean that you are in the final stages? The second question is about Samsung Display starting the mass production of QD OLED. Compared to QD OLED, what do you believe are the advantages of white OLED?

This involves not only our company but also a specific customer, and therefore, we cannot comment on this or share plans or updates at this time. As I already explained earlier, in the high-end TV market, OLED has achieved outstanding performance, and our plan is to continue this growth trend based on the existing customer base. If we manage to acquire new customers, then that will likely positively impact OLED sales in the premium market.

Regarding the advantages of the company's OLED over QD OLED, the launch of OLED products by competitors is a welcome development for us. It helps mainstream premium OLED products and will have a positive impact on driving sales. Although there has been media exposure at CES, the actual product has not yet launched, so any meaningful comparison will need to wait until it is released. I believe that overall quality and competitiveness are what's most important, rather than just looking at one or two specific specifications. Given our history of over 10 years since our launch, along with our business experience, product competitiveness, cost effectiveness, economies of scale, and customer base, we believe we have strong competitiveness and intend to maintain this advantage.

I have two questions but also a request for clarification regarding the presentation earlier. It was mentioned that for the fourth quarter financial performance, excluding one-off factors, the performance was unaffected. Could you clarify what the one-off factors were? Regarding the auto display outlook, do you believe growth drivers will come from applications, display forms, or customers? Finally, considering the higher sales and profitability observed since the pandemic, can you compare your profits to Taiwanese panel makers who saw over 20% operating profit margins in the third quarter of last year? What implications does this have for your margins and competitive strength?

Regarding your question about the one-off costs, we have a way of sharing the good performance with investors as dividends and also recognize the performance of those who made it possible, namely our executives and employees. I cannot provide specific numbers as we have not yet communicated internally how we will distribute the business performance. So, it is a bit too early for further details. Once discussions are complete, we will create opportunities for one-on-one communications with you.

Regarding our auto business status, LG Display enjoys leadership both in terms of sales and technology. As the demand for larger sizes and higher resolutions, alongside more sophisticated designs continues to grow, so does our order backlog for LTPS LCD and OLED, which remains at 90% as of the end of 2021. LG Display intends to create customized platforms for different market segments and customers. For the extreme conditions required for auto displays, we will center our marketing on tandem OLED. For customers that value design, we will provide plastic OLED. For customers who prioritize higher picture quality, we can also offer ATO, which is advanced thin OLED. Based on these two technologies, we will broaden our market and customer base by utilizing our OLED platform. We also cater to those wishing to differentiate by cost by marketing our in-cell touch LTPS LCD.

Regarding the profitability differences with other players, this is due to various factors such as customer structure and product lineup. When examining the history of the display business, we see that those with a higher share of commodity or general LCD products can show improved profitability when the market is favorable but tend to experience substantial losses when the market is down. For players like the Taiwanese competitor with a more significant share of lower-tier customers and products, they have benefitted more than others during the pandemic. We focus on long-term differentiation, positioning ourselves to achieve more stable business outcomes despite market fluctuations.

Thank you for the excellent performance in the fourth quarter. My question pertains to the growth potential going forward. Given that OLED capacity is nearly full and new ramp-up can only happen in about a year's time, do you believe there is still room for additional top-line growth for OLED? Perhaps maximizing utilization rates and enhancing productivity could support growth rates, but wouldn’t there be limitations? What is your outlook for further growth of OLED?

The question pertains to the growth potential of large OLED. We have observed a recent market trend towards convergence, suggesting that more opportunities are ahead for us. For instance, based on WRGB technology, we can supply to the TV market and also to IT in the gaming sector, as well as utilize our unique transparent feature for the mobility market. In these segments, the ASP would be higher compared to TVs, allowing us to pursue both revenue growth and higher profitability, thereby achieving top-line growth. More growth will come following CapEx investments that will begin from 2024, leading to higher sales. Additionally, even without CapEx from gaming and transparent OLED, the ASP in those applications will surpass others.

I appreciate your suggestion regarding the alignment of CapEx with EBITDA. We recognize the necessity of large-scale investments to ensure sustainability and continued profitability, which is essential for both the company and our shareholders. We maintain five guidelines for investments: alignment with mid- to long-term strategy, consideration of market demand and supply conditions, market timing, economic feasibility, and technological compatibility. We assure you that we will remain under our CapEx plan for the year, ensuring that we are adequately positioned for achieving the expected returns on investments. I hope for your understanding and your continued patience as we work toward sharing the results of these investments sooner rather than later. Thank you.

That brings us to the end of the conference call for the earnings presentation of LG Display Q4 2021. I thank all the participants. If you have further questions, then please contact the IR team.