LG Display Co., Ltd. Q1 FY2022 Earnings Call

Good morning and good evening. Thank you all for joining this conference call. We will begin the Conference for Fiscal Year 2022 First Quarter Earnings Results by LG Display. The conference will start with a presentation followed by a divisional Q&A session. Now we shall commence the presentation on the fiscal year 2022 first quarter results by LG Display.

Good afternoon. This is Brian Heo, responsible for LG Display’s Investor Relations. On behalf of the company, I would like to thank all the participants in this conference call. Today, I am joined by CFO Sung-Hyun Kim, Hee-Yeon Kim from the Corporate Strategy Group, Jeong Yi from Business Intelligence, Daniel Lee from Large Display Marketing, Seong Gon Kim from Medium Display Marketing, and Ki Hwan Son from Auto Marketing. The conference call will be conducted in both Korean and English. For more details on the financial results of Q1 2022, please refer to the provisional earnings release today or the IR Events section on the company's website. 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 yet been audited by an outside auditor. Let me start off with our business performance in Q1. Revenue in Q1 was KRW 6.471 trillion, down 27% quarter-over-quarter and 6% year-over-year. Seasonality and the macroeconomic environment, along with market volatility following changes in the pandemic situation, were contributing factors. Operating profit was KRW 38 billion, with a decrease in shipments of both large and small OLED panels, and LCD prices fell. The operating profit margin in Q1 was 1%, and the EBITDA margin was 19%. Net profit was KRW 54 billion. Next, let’s discuss area shipment and ASP. Area shipment in Q1 was 8.14 million square meters, decreasing 13% from the previous quarter. Seasonality and soft demand in the downstream industry led to reduced shipments of large and medium panels. Additionally, there were production and shipment disruptions due to parts supply and logistics issues arising from lockdowns in China. The area ASP was $660, down 18% quarter-over-quarter, with mobile shipments slowing due to seasonality and ongoing declines in LCD panel prices. The company's production capacity in Q1 remained nearly flat from the previous quarter. Now, regarding the Q1 revenue breakdown by product segment, TV’s share was 26% due to adverse seasonality and a sustained decline in LCD prices. Mobile and other products accounted for 26%, which is five percentage points lower quarter-over-quarter. Both LCD TV and OLED TV accounted for less than 10% each, whereas high-end IT products, where the company has competitive advantages, comprised 48%, demonstrating solid performance. Next, we will review the company's financial position and ratios. At the end of Q1, the company's cash and cash equivalents stood at KRW 4.11 trillion. Inventory was KRW 4.23 trillion, which increased by KRW 880 billion quarter-over-quarter. The higher-than-usual inventory value was due to a larger proportion of OLED and high-end LCD products, along with a general increase in inventory levels as we built up buffer stocks to counter supply chain uncertainties such as material and logistics issues. The liabilities to equity ratio was 159%, remaining stable quarter-over-quarter. The net debt to equity ratio stood at 67%, and the current ratio was 90%. On cash flow, the company's cash and cash equivalents at the start of Q1 were KRW 4.285 trillion. This decreased by KRW 174 billion, ending the quarter at KRW 4.111 trillion. Now, I will hand it over to CFO Sung-Hyun Kim for guidance on Q2 2022 and the company's strategy.

Good afternoon. This is LG Display CFO Sung-Hyun Kim. Let me now move on to guidance for Q2 2022 and the company's operations strategy. First is Q2 guidance. Individual panel prices are expected to decline in large and medium segments. Area prices are projected to drop by around 10% quarter-over-quarter due to ongoing seasonality in mobile panels. However, area shipments in Q2 are anticipated to rise by low to mid 10% quarter-over-quarter. Shipments of large OLED are expected to increase significantly as a result of recovering from the logistics and parts issues that affected volume in Q1, along with TV set makers preparing for seasonality and new product launches. In the first half, we face concerns over persistent external factors such as demand and supply chain uncertainties related to seasonality. In the second half, we expect improved performance driven by an increase in large OLED supply and new small to medium OLED models as well as stable operations in high-end IT. The company will monitor demand uncertainties and ongoing supply chain challenges while enhancing risk management to meet our objectives. Next is the operational strategy for each business. Despite recent market volatility, the company will continue to enhance performance through OLED and high-end LCD products that have unique competitiveness. The company is focused on maintaining stability in business operations by minimizing volatility. We are gradually decreasing our reliance on supply/demand businesses that are affected by market conditions while increasing those that can deliver consistent results through strategic collaborations with customers. Furthermore, based on our OLED technology, we will continue to refine our business structure to boost areas that generate new demand and market growth. As part of this strategy, we plan to operate the highly competitive LCD business in segments where we hold a competitive edge. The competitive portions of the LCD business, such as high-end IT, will be reinforced, while non-competitive products in LCD TV will be gradually phased out. Next is an update and plan regarding the large OLED business. Although the TV market experienced a 10% decline in Q1, continuing from last year, sales of OLED TV sets grew over 40% due to our technological and product differentiation, which has supported the expansion of the high-end TV market overall. The high-end TV market has seen a year-on-year growth of around 10%. Our large OLED business is projected to achieve significant shipment growth in the second half of the year as consumer recognition of their value increases. Profitability is also expected to improve progressively. For large OLED, the company aims to expand its customer base and product lineup to sustain performance growth. The live display area will concentrate on exploring new markets to further enhance performance. In the small and medium-sized OLED sector, we aim to boost profitability from last year by increasing supply via new smartphone models in the second half. We will enhance our competitive edge by focusing on high-end products. Leveraging our strengths in automotive technology and leadership in the wearable market, we will expand the achievements of the small OLED business. We will also strive to introduce the premium mid-sized OLED market by utilizing our unique advantages, such as tandem technology. The company will continue to emphasize its differentiated technological edge in small and medium OLED. Lastly, regarding our investment plan, capital expenditures this year will grow year-over-year as we commence investment in the medium OLED fab that was approved last year. However, it will remain aligned with EBITDA; our investment principles and implementation will focus strictly on growth and profitability. We are committed to creating higher market values while leveraging our unique strengths. Thank you.

That concludes the earnings presentation for Q1 2022. We will now take questions; operator, please begin the Q&A session.

Now the Q&A session will begin. In order to allow as many questions as possible within the limited time, we would appreciate only two questions from each participant. The first question will be presented by Dohn Kim from KB Securities. Please go ahead with your question.

I have two questions, one regarding OLED and the other about LCD. In the first quarter, the shipments for large OLED did not meet expectations. Does this indicate there will be adjustments in large OLED revenue, profitability, and shipments for the year? Will this also affect the company's plans for ramping up capacity for large OLED and diversifying customers? What is the company's mid to long-term strategy for white OLED? My second question pertains to LCD. The price of LCD panels continues to decline, and we are seeing intensified competition from Chinese panel manufacturers, with the market conditions appearing to worsen. What is the company's outlook for LCD demand and pricing in the second half, and how does the company plan to maintain profitability?

Thank you very much. I would like to respond from the large marketing team. It is true that OLED shipments in the first quarter did not meet our expectations. However, while the overall TV market declined by 10%, OLED TV sales increased by over 40%. Looking at the trend since April, we expect OLED shipments to rise in the second quarter, along with improved profitability. Regarding our medium to long-term strategy for large OLED, as the CFO mentioned earlier, we will continue to prepare for investment based on profitability and growth principles and will communicate with the market when ready. Concerning the ongoing decline in LCD panel prices, when we developed our business plan this year, we anticipated that Chinese manufacturers would become more disciplined due to market conditions last year. However, even with the market shrinking by over 10%, they are still offering very aggressive pricing. In response, as the CFO explained earlier, instead of directly reacting to market prices, we will adjust our business structure by reducing the share of non-competitive products, like general TVs produced from the fab, to better manage risks.

And this is from the medium marketing team. I would like to respond to a question about the LCD and IT. I will address it from two perspectives: demand and price. Regarding demand in the B2C sector, with the decline of the COVID-19 boom, we expect a decrease in B2C as well. For B2B, we initially anticipated a slight improvement, but this improvement has been slower than expected due to the macroeconomic situation. However, demand levels are still projected to be higher than pre-pandemic levels. Now, from the price perspective, prices started to decline in late last year and this trend has continued into this year. Our company holds a significant share in the high-end market, with over 70% of our IT revenue coming from this segment. This high-end segment is less affected by pricing fluctuations, providing us with a more stable structure. We aim to strengthen our position in the high-end market to secure profitability.

The next question will be presented by Jun Il Kim from Meritz. Please go ahead with your question.

I have two questions regarding investment. First, I understand the company's investment policy indicates that capital expenditures would be kept within EBITDA, which is certainly advisable. However, given the current environment characterized by rising demand, lockdowns in China, and geopolitical risks, it seems that uncertainties regarding profitability are increasing. In light of this, is the company considering a more flexible approach to its investment policy or perhaps adopting a more conservative stance? My second question pertains to the company's investments aimed at strategic customers in the Americas. When does the company anticipate the completion of the fab, and when can we expect revenue to start generating from this facility? What are the company's expectations for the return on invested capital for this fab? Additionally, regarding OLED applications, which are broad-ranging—from mobile to IT to automotive—how does the company believe this will impact profitability? Moreover, with Chinese manufacturers continuously expanding their presence in this market, what strategies does the company have in place to respond?

This is the CFO responding to your question about investment. Over the years, we have maintained a policy that capital expenditures would be kept within EBITDA. This is to ensure that investment does not negatively impact our financial structure or health; we do not want to increase our burden. When the company develops an investment plan for the year, we consider many factors. For instance, we assess the timing for making these investments, the significance of the investment, and its relevance to revenue or market presence. Based on these factors, we define the phases of the investment. If the market conditions change negatively during the investment process, the company will remain flexible in its investment plan to avoid becoming too burdensome. The risks mentioned, such as Chinese lockdowns, geopolitical risks, and profitability uncertainties, are indeed characteristics of this year's market. However, our focus with capital expenditures is on future profitability. We will take current constraints, such as cash flow limitations, into account and aim for flexibility, but we intend to continue investing for the future.

This is Senior Vice President Hee-Yeon Kim of the Corporate Strategy Group responding to a question about the small to medium OLED segment. While we cannot disclose specific customers, I can share that the revenue timing we discussed last year for our investment specified 2024, and our plan is on track. You also inquired about the company's expectations for ROIC, which I interpret as a question about how we verify the feasibility of our investments. In the era of LCDs, we anticipated high growth, leading to investment decisions despite potential supply and demand fluctuations. However, the current environment shows a slowdown or stagnation in growth, necessitating new growth through existing product penetration. This shift means we must prioritize profitability alongside growth, making it essential for investment decisions to include clear visibility into profitability. We have implemented safeguards in our decision-making process to ensure profitability, and moving forward, our challenge will be to enhance the visibility of profitability in our investment strategies.

The following question will be presented by Junwoo Cho from Hyundai Motor Securities. Please proceed with your question.

Now, my question is about the electronification of automobiles. We can see that worldwide, the automotive industry is experiencing both electrification and electronification. I would like to know LG Display’s positioning in this trend regarding product and technological competitiveness, as well as your medium to long-term strategy and your role within the LG Group as it adapts to these changes in the auto industry. Additionally, while we understand the company's competitiveness and vision, can you provide investors with more details, particularly about the order backlog for both LCD and OLED, along with the outlook for these two businesses?

This is Ki Hwan Son, Vice President of Auto Marketing responding to your question. We believe that the trends in auto electrification and autonomous driving create significant opportunities to use large-size displays, particularly with OLED technology. LG Display possesses the unique tandem technology that meets automotive reliability standards. With this technology and our in-TOUCH LTPS LCD, we aim to enhance our market position. Regarding synergy among different group companies, while each company operates in its own sector under fair competition, we can also work together to strengthen our customer portfolio. For instance, we can promote a comprehensive solution for customers that combines batteries, infotainment, sensors, cameras, and displays. This collaboration will help enhance the overall value we provide to our customers. Lastly, regarding the order backlog and outlook, while I cannot disclose specific numbers for the backlog, I can share that we have consistently received OLED orders for premium vehicles over the past few years. Currently, OLED orders account for more than 30%, and we anticipate that these orders will continue to grow, enabling us to further strengthen our OLED business.

The following question will be presented by Hyun-soo Kim from Hana Financial Investment. Please go ahead with your question.

I have questions regarding the OLED TV and the XR display. For the OLED TV, I've heard in the media that negotiations are ongoing with a new domestic customer. When does the company expect to conclude these negotiations? Also, how will this affect the supply volume for OLED TV panels in 2022 and 2023? Is there a possibility for a ramp-up in production? My second question is about the XR market. In the current display market, stock prices seem to respond more to XR-related demand and orders rather than a company's earnings or performance. There's a lot of expectation for growth in this area. How is the company preparing for XR, and what revenue potential does it foresee from this market?

Now, regarding your question about the potential transaction with Samsung Electronics, I must clarify that we cannot provide any definitive information at this moment. When we have clarity, we will communicate it to the market. Our stance remains consistent with the previous quarter, which means that opportunities are open, and the needs of both companies must align. As for the XR devices, we are closely monitoring the market. When we determine that profitability and volume meet our criteria, we will be ready to enter the market as soon as possible. We are currently making preparations, including R&D, to ensure that we are well-positioned to respond to market developments when the time comes.

This is Hee-Yeon Kim from the Corporate Strategy Group. I would like to add a few points to the CFO’s comments. As we all know, the XR market holds great promise, but it also presents significant challenges, particularly related to display technology. This indicates numerous potential opportunities. We believe that LG Display has the technological expertise necessary to address these display challenges. Our core technologies for large OLED, auto OLED, and IT OLED will support our leadership in the XR market. Based on this market perspective and our technological strengths, we are currently assessing the timing and scale of our entry into this market and when we can initiate our business. We also need to consider other factors such as price premiums and the pace of market growth. Taking all these aspects into account, we will ensure that we are prepared to respond to the market promptly.

The last question will be presented by Simon Wu from BOA Securities. Please go ahead with your question.

Now my questions might be somewhat redundant from previous ones, but I would like to ask about the management's perspective on the LCD market or the LCD cycle. Reflecting on the LCD boom last year, it seems that it was influenced by the shutdown in the Gen 8 process along with high demand driven by the COVID pandemic. Looking forward, what assumptions does the company have regarding both supply and demand for the LCD cycle to improve again? My second question concerns OLED TV. There are expectations for profitability in OLED TV to increase, especially with Chinese factory capacity exceeding 90,000 and the company's efforts to reduce production costs. However, it seems likely that improvements in OLED may coincide with a decline in prices for high-end LCDs. Therefore, what is the company's outlook or guidance regarding pricing and cost reduction not only for the second half of the year but also for OLED TV panels in the coming years? Additionally, does the company think achieving an operating profit margin in the high single digits, around 5%, is feasible in the near future?

Now first regarding the LCD cycle, I would like to respond from the Business Intelligence perspective. I will mention two conditions: first is demand. In terms of demand, we see that the COVID boom has significantly increased demand, which means that this year, we expect quite a large extent of negative growth. Given the current situation and risk factors, we believe that demand uncertainty is likely to persist for some time. This means that for the LCD supply-demand cycle to improve, we would need enhancements more from the supply side. For the short term, there is a need to adjust utilization rates across the industry. In the longer term, there are quite a number of old fabs over 15 years old; for these non-competitive fabs, we might have to close some of them or make adjustments to improve the LCD cycle. To sum up, since demand uncertainties are not likely to disappear anytime soon, we expect some down cycle to continue this year. Moving into next year, perhaps some of these demand uncertainties will be alleviated, and there could be some adjustments on the supply side. Combined with these factors, the LCD cycle could improve next year.

And this is Daniel Lee from Large Display Marketing responding to your question about OLED. It is true that we need to be mindful of the competition with high-end LCDs. However, as I mentioned earlier, we've observed a 40% year-over-year growth in OLED TVs during the first quarter, even as the overall TV market shrinks. This indicates that the market is increasingly recognizing the value of OLED. We believe this will result in reduced price volatility and allow us to operate our business as planned. In terms of costs, there are ongoing factors that could drive them up, such as rising commodity and logistics prices. Nevertheless, we are continuing to improve our material costs and development processes to enhance our overall cost efficiency. If these initiatives yield positive outcomes, we are confident that we can achieve OLED profitability on a phased basis.

We will now close Q1 2022 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.