LG Display Co., Ltd. Q2 FY2022 Earnings Call

Good afternoon and good morning. This is Brian Heo, responsible for LG Display's investor relations. I would like to thank everyone participating in this conference call. Today, I'm joined by the CFO, Sunghyun Kim; Hee-Yeon Kim, Senior Vice President of the Corporate Strategy Group; Seung Min Lim, Vice President of Corporate Planning; Jeong Yi, who oversees Business Intelligence; Daniel Lee, who heads Large Display Marketing; Seong Gon Kim, who leads Medium Display Marketing; and Ki Hwan Son, Vice President of Auto Marketing. The conference call will be conducted in both Korean and English. Please refer to today's provisional earnings release or the IR Events section on the company's website for detailed financial results for Q2 2022. Before we start the presentation, please take a moment to read the disclaimer. Today's results are based on consolidated IFRS standards prepared for your understanding and have not yet been audited by an external auditor. Let me begin with our business performance in Q2. Due to COVID-19, lockdowns in certain Chinese production facilities have affected our production and shipment of high-value and IT products, resulting in our business performance in Q2 falling short of initial guidance. Revenue for Q2 was KRW5.607 trillion, a decline of 13% quarter-over-quarter and 19% year-over-year. Shipment disruptions from the lockdowns, weak demand in downstream markets, and a continued decrease in LCD panel prices contributed to this. We experienced an operating loss of KRW488 billion, with an operating margin of minus 9% and an EBITDA margin of 12%. Our net loss for the quarter stood at KRW382 billion. Next, let's discuss area shipment and ASP trends. Area shipment in Q2 was 7.85 million square meters, decreasing by 4% from the previous quarter. In addition to the impact of Chinese lockdowns, concerns about economic downturns led to a slowing demand in downstream markets. Set makers reduced their orders to minimize inventory, which resulted in lower shipments of both large and medium display products. The average selling price per square meter was $566, down by 14% quarter-over-quarter. Shipments of POLED smartphones decreased due to seasonal factors, and LCD panel prices continued to fall. The company’s production capacity in Q2 decreased by 5% compared to the previous quarter, due to active adjustments in general-use LCD production and ongoing new product development and maintenance. Now, let’s look at the revenue breakdown by product segment. TV panels made up 31% of our revenue, which is an increase of five percentage points from the previous quarter. Despite the ongoing decline in LCD panel prices, shipments of OLED TV panels grew owing to their strong position in the high-end TV market. IT panels accounted for 35% of our revenue, a decrease of three percentage points quarter-over-quarter, significantly impacted by disruptions caused by Chinese lockdowns. Mobile and other segments represented 24%, remaining flat quarter-over-quarter. Moving on to the company's financial position and ratios. Our cash and cash equivalents were KRW3.669 trillion. Inventory reached KRW4.722 trillion, up by KRW492 billion quarter-over-quarter. This inventory was prepared in anticipation of shipment disruptions from the Chinese lockdowns and to ensure readiness for high-end product shipments in the latter half of the year, including new POLED models. Our liabilities-to-equity ratio stood at 162%, while the net debt-to-equity ratio was 71%, reflecting an increase quarter-over-quarter due to new borrowings aimed at investing in OLED to prepare for future markets. Regarding cash flow, our cash and cash equivalents at the beginning of Q2 were KRW4.111 trillion. This decreased by KRW442 billion, closing at KRW3.669 trillion at the end of Q2, largely due to investments in OLED, the payout of annual dividends for 2021, and the net loss reported in Q2. Now, I'd like to move on to our guidance for Q3 2022. We anticipate that area shipment will rise by mid-single digits quarter-over-quarter in Q3. The shipment of IT panels, which was impacted by Chinese lockdowns, is expected to recover, and we foresee growth in shipments of large OLED and POLED smartphones driven by seasonal demand. However, we anticipate that recovery in Q3 may be constrained due to a slowdown in demand stemming from macroeconomic instability and diminished consumer confidence, as well as customers' efforts to reduce inventory. We expect the average selling price per square meter to increase to around 20%, supported by a rise in shipments of POLED smartphones and wearable products alongside OLED TV panels. Per product, prices for IT panels are likely to continue declining, whereas price decreases for LCD TV panels are expected to moderate gradually as manufacturers adjust production levels, including utilization rates. Next, we will hear from our CFO, Sunghyun Kim, who will discuss our operational strategy.

Good afternoon shareholders, investors, and analysts. This is CFO Sunghyun Kim. Following the briefing on Q2 business performance, I would like to explain the company’s operational strategy. As the economic downturn approaches, consumption is expected to slow, particularly for non-essential goods. Manufacturers and retailers are generally becoming more conservative in their operations. If this trend continues, the company will enhance risk management while actively searching for new growth opportunities for the future. Let me first highlight the company’s current emphasis on risk management. We remain committed to our business realignment initiatives to reduce volatility and ensure operational stability. We will swiftly realign any unprofitable businesses, accelerating internal decision-making and execution processes. For instance, in the case of LCD TV panels, where differentiation is becoming limited, we are phasing down production and aiming to halt domestic output of these panels next year. We will expedite this process in light of the deteriorating market conditions. The company is determined to improve operational efficiency in response to the volatile environment. We are reassessing the optimal capacity for each facility and finalizing strategies to enhance cost efficiency, including lowering fixed costs. We will increase our efforts for cost innovation and efficiency due to rising production costs driven by supply chain issues and inflation. Next, we will strengthen inventory management. Given the uncertain market outlook, we intend to minimize inventory. While there were specific concerns regarding Chinese lockdowns in Q2, we will focus in the second half on recovering from shipment disruptions and adjusting production flexibly to reduce inventory by year-end. Lastly, we aim to improve investment efficiency. While we remain committed to investing in our business structure and future competitiveness, we will reassess all adjustable investments, including current ones, to evaluate their size, timing, and execution speed. Annual capital expenditures will be aligned with depreciation and amortization levels to maintain financial stability. We will uphold stringent investment discipline. Despite high uncertainties in the global economy and business landscape, the company aims to proactively manage risks through flexible responses facilitated by stronger internal operations. Meanwhile, we are actively working on creating unique performance independent of market conditions and discovering new growth drivers. First, we will strengthen our leadership in the large OLED and IT segments, where we already possess a competitive edge. OLED TVs are performing well, gaining sales even as the overall TV market declines. We will continue to solidify our market position in large OLED as it becomes more mainstream. In IT, despite overall market slowdowns, IT devices are now considered essential due to lifestyle changes post-pandemic. The company will further strengthen its market positioning based on our customer base and competitiveness in high-end IT products to generate distinctive performance. Secondly, we will develop our make-to-order business to ensure more stable operations. As business volatility increases, we are advancing our efforts to enhance our make-to-order business in collaboration with key customers. In mobile, we aim to achieve profitability through differentiated POLED products and lay the groundwork for new technology ventures with strategic partners. We will also expand our IT product portfolio and solidify our leadership in high-end products through mid-sized OLED investments. We are preparing for the future based on our existing infrastructure and customer relationships. In the automotive sector, we continue to expand our market presence by providing unique solutions to global customers, offering a range that includes OLED and high-end LCD displays. We remain the top global manufacturer of auto displays in terms of sales and are working to secure contracts with global OEM customers, targeting a market share exceeding 30% in the next three years. Third, we will accelerate the launch of market-creating businesses and explore new markets aggressively. We aim to diversify our new business initiatives in preparation for a unique future, having already seen promising developments in large OLED. Our market-creating ventures include gaming and transparent OLEDs as we strive to expand new markets in life display. Finally, we will proactively prepare for future businesses and establish a foundation for development. Similar to our approach with OLED TVs and high-end IT, we plan to leverage our differentiated technologies across a variety of applications. We will actively pursue new display territories and enhance our competitiveness. Although volatility is prevalent in the current business environment, the company will continue to differentiate itself and create value through proactive risk management and operational efficiency improvements while preparing for the future and ensuring growth. Thank you for your attention.

That brings us to the end of the earnings presentation for Q2 2022. We will now take questions. Operator, please start the Q&A session.

The first question will be provided by Won-Suk Chung from Hi Investment Securities. Please go ahead with your questions.

I have two questions, one for LCD and another for OLED. For LCD, we see that manufacturers using LCD displays are experiencing a decline in demand. My question is about the company’s plans for the LCD lines. Will they be discontinued or converted to OLED production? Additionally, it seems that the domestic company’s realignment of the LCD business has faced some delays, even though the sluggishness of the LCD market has been anticipated since COVID-19. I would like to know the specific reasons for this lack of flexibility in the LCD operations. My second question is about OLED. The overall demand for TVs is continuing to drop, and LCD panel prices are also decreasing. This situation doesn't seem promising for the OLED TV market either. What are the company’s shipment plans for the remainder of the year?

This is Hee-Yeon Kim, Senior Vice President of Corporate Strategy Group, responding to your question about the operation of LCD lines. Since 2019, we have gradually reduced the fab capacity for LCD TVs due to lower competitiveness. However, we have maximized our existing capacity to meet the demand that arose during the pandemic. For the domestic LCD business, where competitiveness is weak, we will downsize and plan for an early exit. As we align with customers, we will start discontinuing production and will reduce our capacity in the first half of next year. In contrast, for the LCD TV fab in China, where we maintain cost competitiveness, we will convert production to more competitive products, such as IT or commercial applications. The Korean P7 fab has a capacity of 150,000, from which we will reduce 60,000 in the second half of this year and another 30,000 in the first half of next year. The Chinese fab has a capacity of 200,000, with 10% already converted to IT. The remaining 170,000 will be converted to commercial or IT products based on competitive advantage. By the second half of next year, approximately 40% of the TV capacity will have been reduced. Regarding IT capacity, which stands at about 200,000, it will be maintained depending on cost competitiveness and product competitiveness.

Next, this is Daniel Lee from Large Display Marketing, addressing your inquiry about OLED shipments and our plans for the rest of this year. As noted, the display market is facing challenges. In the TV segment, we experienced a decline of 24% in 2021 and another 10% decrease in the first half of this year. However, during the first half, despite these hurdles, OLED TV sales have grown by approximately 20% year-over-year, which we consider a significant achievement with our customers' collaboration. Looking ahead to the second half, we anticipate that OLED TV sales will continue to rise, contrary to the broader market trends. Nevertheless, due to the economic downturn and weak downstream demand, we expect overall sales growth to slow compared to the first half, projecting an increase in the mid-teens percentage. As a result of these challenges, both retailers and manufacturers are being conservative with their inventory management. Our company will continue to monitor market conditions and adjust our operations and inventory with the expectation that downside risks may emerge. Therefore, we anticipate a slight year-over-year growth in shipments.

The following question will be presented by SK Kim from Daiwa Capital Market. Please go ahead with your questions.

I have two questions. The first one is about OLED. As the CFO mentioned earlier, the company is strong in IT and automotive technology. Additionally, there are new OLED MI devices, indicating a robust technological position for new applications. Could you elaborate on your technological advantage over competitors? Specifically, what are the differentiating factors, and how significant is the technological gap with other players? My second question is regarding the LCD outlook. Until July, it seemed that the decline in LCD TV prices had slowed, but recently the rate of decline has accelerated. Based on recent developments, what is the company's perspective on the market outlook and price trends for LCD in the second half?

This is Ki Hwan Son, Vice President of Auto Marketing responding to your question about the OLED technology. For automotive OLED, it is crucial for this product to endure extreme environments and conditions. Due to this, LG Display has been developing long-lasting OLED and tandem OLED technology. We have been working on tandem OLED devices since 2015, and in 2019, we launched the tandem OLED for automotive applications. This tandem OLED technology can also be used in IT products because of its high brightness and durability, along with its low power consumption. This means they would also be suitable for the latest technologies like MI. We believe that the technology we developed for automotive purposes is equally appropriate for these applications.

This is Jeong Yi, in charge of Business Intelligence, and I would like to respond to your question about the second half market outlook, as well as the LCD price trend. Now, first of all, about demand in the second half, because of the sluggish actual sales for the set makers, their inventory level at the end of the second quarter ranged from four weeks to seven weeks, meaning that they have an excessive level of inventory. And because of the high inventory level, the set makers will continue to adjust their purchasing of panels into the third quarter of the year. And as a result, there is likely to be a bigger decline in the purchase of panels, more so than the decline in the actual sales of the set products. And that is also the reason why the panel makers have started to adjust their utilization rate in the second quarter and such an adjustment is likely to become broader in the third quarter. So against this backdrop, then looking toward the price trend in the second half, it appears as if the price decline is likely to continue into the third quarter, but then now in the fourth quarter as a result of the supply adjustment, the price trend is likely to at least partially stabilize.

The following question will be presented by Han-Soo Kim, Hana Securities. Please go ahead with your question.

I have one question about the LCD IT business and another about OLED TV. First, regarding the LCD IT business, it's expected that profitability in the second quarter has declined. What was the extent of that decline in profitability from the first quarter to the second quarter? Additionally, can the company provide guidance on IT profitability for the second half of the year? Secondly, concerning OLED TV, the company was in negotiations with a new domestic customer. Can you share any updates on those negotiations? Also, is there any news on the potential ramp-up for OLED TV?

This is Seong Gon Kim, responsible for Medium Display Marketing, and I would like to address the IT market, along with our profitability and outlook. As previously mentioned by others, the IT market is currently facing a downturn, leading to decreased demand for various products, including monitors and notebooks. Consequently, there is a significant amount of inventory in the market, which has also resulted in reduced panel purchases. Overall, the market is struggling and experiencing a slowdown. However, our company primarily operates in the high-end segment, which is less volatile. Therefore, while the IT market is declining, the impact on our profitability has been comparatively smaller than the overall market. Looking ahead to the next quarter, although other companies are adjusting their utilization rates, which will influence demand and supply dynamics, we will continue to focus on the high-end segment to ensure consistent performance.

Now, this is the CFO. The questioner asked for an update on the negotiation in the OLED business. As you would know, the company has been focusing on solidifying the position of OLED panels in the market to make it a standard. I would say that the company has been making progress in that direction so far. During this process, a new potential customer expressed interest in using our panels, which has gained market attention. So negotiations have been underway. However, at this time, there is nothing currently in progress. Moving forward, we will cooperate with any potential customers to create synergies, as long as they recognize the value of OLED and are willing to collaborate to create new markets.

It appears there are no further questions. We will now close the Q2 2022 earnings conference call. Thank you for joining us today. Please reach out to the IR team if you have any additional questions. Thank you.