LG Display Co., Ltd. Q3 FY2022 Earnings Call

Good morning, this is Brian Heo, responsible for LG Display's Investor Relations. I want to thank everyone participating in this conference call. Today, I am joined by our CFO, Sunghyun Kim; Hee Yeon Kim, Senior Vice President of Corporate Strategy Group; Seung Min Lim, Vice President of Corporate Planning; Jeong Lee, in charge of Business Intelligence; Daniel Lee, overseeing Large Display Marketing; Seong Gon Kim, responsible for Medium Display Marketing; and Ki Hwan Son, Vice President of Auto Marketing. The conference call will be held in both Korean and English. For more information on the financial results of Q3 2022, please refer to the provisional earnings release or the IR Events section of our website. Before we begin the presentation, I encourage you to read the disclaimer. Today's results are based on consolidated IFRS standards prepared for your benefit and are not yet audited by an external auditor. Now, let me discuss our business performance in Q3. The macroeconomic situation worsened in Q3, leading to a sharper decline in panel demand than anticipated, due to weak sales from set makers, significant inventory reductions, and stricter inventory operation standards. In our biggest OLED TV market, Europe, consumer confidence dropped rapidly after the Russia-Ukraine war and energy crisis, resulting in negative sales for actual sets. The reduction in demand was particularly noticeable in our strongest areas of high-end TVs and IT, causing us to underperform our guidance for Q3. Our revenue for Q3 was KRW 6.771 trillion, reflecting a 21% increase quarter-over-quarter but a 6% decline year-over-year. Although we saw growth in IT product shipments rebounding from lockdowns in our Chinese production facilities last quarter and an increase in mobile and wearable shipments, LCD panel prices continued to decline, resulting in an operating loss of KRW 759 billion. In addition to weak large OLED sales, we experienced an accelerated drop in LCD panel prices and delays in the supply of new mobile models. Our operating profit margin for Q3 was minus 11%, with an EBITDA margin of 6%. We recorded a net loss of KRW 774 billion. Area shipments for Q3 totaled 7.68 million square meters, reflecting a 2% decrease from the previous quarter, primarily due to lower shipments of OLED TVs and monitors. The average selling price per square meter rose to $675, a 19% increase quarter-over-quarter, attributed to a higher proportion of smartphones and wearables. The company's production capacity in Q3 decreased by 3% compared to the previous quarter as we accelerated our exit strategy for domestic LCD TV production. TV panels comprised 25% of our shipments, down six percentage points from the previous quarter. OLED panel shipments declined, and LCD panel prices continued to fall, while the share of IT panels remained stable at 45%. Although there was a decrease in monitor panel shipments, we also saw recovery from shipment disruptions caused by Chinese lockdowns in Q2. Mobile and others accounted for 30% of our shipments, an increase of six percentage points quarter-over-quarter driven by growth in smartphones and wearables. At the end of Q3, the company’s cash and cash equivalents amounted to KRW 3.264 trillion, remaining above the KRW 3 trillion mark. Our inventory stood at KRW 4.517 trillion, which has decreased by KRW 205 billion from the previous quarter. The debt-to-equity ratio was 181%, and the net debt-to-equity ratio was 84%, both up from the previous quarter. At the start of Q3, our cash and cash equivalents were KRW 3.669 trillion; this figure has decreased by KRW 405 billion to KRW 3.264 trillion by the end of Q3, affected by our investments and net losses during the quarter. Market volatility and uncertainties are expected to continue. However, seasonal effects in response to year-end demand in Q4 will likely increase area shipments quarter-over-quarter by a low to mid single-digit percentage. We also anticipate an increase in the average selling price per square meter by mid to high single-digit percentages, supported by new mobile product launches. Next, the company's CFO Sunghyun Kim will present operational strategy.

Good afternoon and good evening, this is CFO Sunghyun Kim of LG Display. The display market has remained quiet due to weak sales and significant inventory reductions, along with stricter inventory management criteria. Over the past three years, the company has aimed to upgrade its business, but it has faced difficulties in navigating the severe decline in demand and high market fluctuations. With a cautious approach to the prolonged downturn, the company will address the situation more seriously with stricter operational standards. We will prioritize restoring our financial stability while continuing our business upgrade efforts and speeding up business realignment. The first step is to accelerate our exit from the LCD TV market. Given the limited opportunities for competitive differentiation and the market's performance volatility, we will expedite the closure of production in our Gen 7 TV fab in Korea and gradually decrease production in our Gen 8 TV fab in China as part of our strategy to exit LCD. The company will push forward with our transition to OLED by aggressively withdrawing from LCD TV. Secondly, we will focus on cutting costs and enhancing investment efficiency. We will limit investments and operational expenditures to essential ordinary investments until our financial condition improves significantly. This year, we will reduce capital expenditures by over KRW 1 trillion to align them with depreciation and amortization levels. From next year, capital expenditures will be kept within EBITDA limits and primarily reserved for essential investments, maintaining them at half the depreciation and amortization level. We will also manage expenses with stricter requirements under a conservative management approach. Thirdly, we will manage inventory at minimal levels. At the end of the third quarter, our inventory was KRW 4.5 trillion, slightly lower than the previous quarter, but we aim to further decrease it by KRW 1 trillion by year-end to maintain it below an acceptable level. Production adjustments will also be significantly aligned with inventory levels. As we prioritize financial stability, we will continue to realign our business. We are focusing on enhancing our business structure, emphasizing high-end LCD and OLED products. Moreover, we are accelerating our transition to an order-based business model to reduce volatility from supply and demand shifts, ensuring a stable revenue structure and reinforcing our future business portfolio. In terms of strategic orientation for each business segment, the company will shift to an operational structure based on real demand for large panel products. We will strengthen our product and cost competitiveness to secure profitability and focus on qualitative growth. In addition to ultra-large OLED, the company will broaden its live display business by increasing differentiated products based on customer value such as gaming. However, given the conservative outlook that macro uncertainties will persist until next year, we will manage our business under tighter criteria. Medium products used to be a significant revenue source due to differentiated technology and a strong customer base, but general use products are showing increasing volatility linked to LCD TV. In response, the company will strengthen customer relations and focus on high-end products. We aim to increase market share in high-end monitors and notebooks where the company already possesses differentiated competitiveness, with the goal of minimizing business volatility. Additionally, we will prepare monitors using our competitive large OLED technology, starting with tablet OLED set to begin mass production in 2024, and will also expand into notebook OLED. Our objective is to continue strengthening the medium OLED business portfolio over the mid to long term. For small OLED, we will enhance our capability in order-based business to stabilize operations and prepare next-generation technology at the appropriate time for future initiatives. In the automotive sector, the company is solidifying its leadership and gaining global OEM trust by implementing customer-specific strategies that provide differentiated value across categories like OLED and LTPS LCD. The company's efforts in the auto business are now yielding results from our early investments, and we intend to continue developing our auto business to become the overwhelming leader in the future by delivering differentiated customer value. The company will focus on securing stability and upgrading its future business portfolio through a financial soundness plan and a strategy to accelerate business realignment. Some positive signals began to emerge recently from changes in LCD panel price. But the company will still maintain a strong focus on implementing our business strategy. The challenging business environment is expected to persist into next year. The company will realign its strategic tasks to adapt to the changing environment and enhance its execution to position ourselves for further progress. Thank you very much for your attention.

That brings us to the end of the earnings presentation for Q3 2022. We will now take questions. Operator, please begin the Q&A session.

I have one question about OLED TV and another regarding the auto business. Firstly, I believe it is crucial for the company to achieve a turnaround in the OLED TV business. Recently, there have been reports about the suspension of the OLED TV line or production cuts. When does the company expect to see a meaningful turnaround in the OLED TV business? I understand that the market is currently struggling, but when does the company think a turnaround might happen, and what conditions do you believe will facilitate such a turnaround? Secondly, the CFO briefly mentioned achievements in the auto business for the second half. Could you provide more details about these achievements, such as the order backlog in the auto business and any developments related to OLED?

Now, as we all know, there is an ongoing macroeconomic crisis, and there is also the thought that the Russia-Ukraine war may last longer than initially expected. Consequently, we believe it is essential to adjust our utilization rates to preserve the value of OLED. Therefore, for now, we will maintain our capacity in line with actual demand to improve our cost competitiveness. Additionally, we will utilize our remaining lines to expand our business in areas such as live display and other development purposes. Regarding the TV business, we plan to increase the utilization rate as we observe actual demand changes. We will also work on broadening our product offerings to include differentiated value options, such as gaming, as mentioned in the presentation.

Now, there is the macro situation that has dampened demand. When we look at the overall market for TVs, the total European market only accounts for about mid to high 10 percent. However, for our company's OLED TVs, Europe represents over 45 percent of our sales. Due to the Russia-Ukraine war, the demand for OLED TVs in Europe has diminished significantly, impacting our sales. Since we cannot predict when the Ukraine-Russia conflict will end, we decided it is best to hedge our risks. We believe that once the situation in Europe improves, our OLED sales will also rebound.

Now regarding the order backlogs, please understand that I cannot disclose specific numbers. In 2020, the order backlog was approximately two weeks, but during the 2021-22 period, it increased to around four to five weeks. This improvement is attributed to strong sales efforts for both OLED and premium LTPS LCD, resulting in a year-over-year increase of about 40% in the order backlog in 2022. For OLED, its share was about 30% in 2001, and in 2022 it rose to 45%. We are witnessing a stable and steady shift in our business portfolio towards OLED, and we are currently preparing our 425 new OLED for premium OEM mass production.

Now I have some questions about the panel price and the IT panel. In October, we noticed that panel prices, especially for TVs, have started to rebound. However, for set makers, despite the earlier decreases in panel prices, demand isn't picking up significantly. How does the company currently view the developments in demand? What is the company's projection for demand and its forecast regarding price trends? Additionally, concerning the IT panel, its share of the company's total business continues to increase. However, notebook companies are still adopting a rather conservative business strategy. When IT demand does improve, does the company anticipate that the IT panel will also start to rebound? If not in the near future, when does the company expect that to happen? Sharing this information would be helpful.

Recently, we are noticing some positive changes in the pricing of LCD panels, particularly those going to China. The market is currently experiencing an oversupply, but to ensure their viability, panel companies have started raising prices, a trend we expect to continue. However, demand for this year and next remains weak due to the declining macro environment. Given the subdued real demand, there are many questions about the sustainability of the price increases. In terms of IT, we anticipate a recovery in demand after the second half of next year, though price competition among panel makers will likely persist. It is also unlikely that prices can remain below cash costs indefinitely, leading us to believe the industry will undertake self-adjustment measures, such as restructuring or production cuts, to reduce supply. If there isn't significant adjustment on the supply side amidst ongoing demand uncertainty, panel prices are likely to stay weak.

I have two questions. The first is about the exit strategy for LCDs. The presentation mentioned the shutdown of the Gen 7 TV fab in Korea and the Gen 8 TV fab in China. Can the company provide a timeline for these shutdowns and confirm if there will be any one-off costs associated with them? The second question pertains to large OLED TVs. Demand still appears to be quite sluggish, and with the ongoing uncertainty of the war in Russia, can the company offer guidance on shipments of large OLEDs for this year and next year?

Now we will be reducing 130,000 from Gen 7 and 80,000 from Gen 8. For Gen 7, this change will move the timeline up by about six months to one year compared to the original schedule. Similarly, the production cut for Gen 8 will occur around the same time. Some actions are already in progress, while others will follow. However, we find it challenging to provide a definitive timeline at this moment since we are coordinating this with customers and related stakeholders. Regarding your questions about the milestones and one-off costs, we plan to have further discussions with customers and employees and will aim to share information through Investor Relations within the year.

The TV market environment remains sluggish, but we believe that customers have a strong perception of the value of OLED TVs. Despite the overall market struggles, we see continuous year-on-year growth and an increase in our company's market share. However, we anticipate negative growth in panel shipments this year compared to last year due to weak sales in Europe and adjustments by manufacturers. Looking ahead to 2023, we expect the inventory adjustments among distributors and manufacturers to be largely completed, which should help close the gap between panel shipments and sales. Our guidance for panel shipments in 2023 is around 7 million units.

I have some questions about the OLED IT panel. Earlier, it was mentioned that the company is addressing the OLED penetration in the medium panel. What about the smartphone and mobile markets? Does the company anticipate a similar increase in OLED penetration in these markets as seen in the medium panel? What is LG Display's perspective on OLED panel penetration? Additionally, there was an announcement last year regarding a KRW 3.3 trillion investment in Gen 6 IT. How is the execution of this planned investment progressing, and are there any plans for further investments to support customers in North America?

First, let me address the growth potential and value of the IT OLED market. The IT OLED sector is evolving in line with the Mobile and TV OLED markets, with the mobile and TV segments providing a foundation for IT OLED as well. In mobile, due to its multifunctional characteristics, the penetration rate is nearing 40%. However, for TV, the OLED penetration is only at 5%. We anticipate that IT OLED will largely reflect the trends of mobile devices, so we are closely monitoring mobile trends for IT OLED development. In terms of customer payment methods, mobile typically involves three-year installment plans, while IT usually requires a one-time down payment. Accordingly, while the value is substantial, customer acceptance may be lower for IT compared to mobile. Regarding our mass production schedule for IT OLED, we have made an announcement and are adhering to the timeline. We are currently in talks with customers about further developments, but there are no concrete updates to report at this time.

If there are no further questions, we will now close the Q3 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.