LG Display Co., Ltd. Q4 FY2022 Earnings Call

Good morning and good evening. First of all, thank you all for joining this conference call. And now we will begin the Conference of the Fiscal Year 2022 Fourth Quarter Earnings Results by LG Display. This conference will start with a presentation followed by a divisional Q&A session. Please refer to the provisional earnings release today or the IR Events section of the company’s website for more details on the financial results of Q4 2022. 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. Before we begin the earnings presentation, CFO, Sunghyun Kim will provide a briefing on the company’s main tasks and activities.

Good morning. This is Brian Heo in charge of LG Display’s IR. On behalf of the company, let me thank all the participants at this conference call. Today, I am joined by the CFO, Sunghyun Kim; CSO, Hee Yeon Kim; Seung Min Lim, Senior Vice President of Corporate Planning; Jeong Lee, in charge of Business Intelligence; an additional individual in charge of Large Display Marketing; Seong Gon Kim, in charge of Medium Display Marketing, and Ki Hwan Son, Vice President of Auto Marketing. The conference call will be conducted in both Korean and English.

Good morning. This is Sunghyun Kim, CFO of LG Display. Looking back on 2022, we see a demand slowdown accelerate in major product groups due to a worsening macro environment, which resulted in a year-long inventory correction in downstream industries. The softening demand that started in general B2C products spread to B2B and then to high-end product groups as well, which had shown relatively solid demand. The display market continued to face headwinds, with panel prices still on a declining trend, although the pace has slowed down. Given the protracted challenges in the market, the company is focusing on recovering financial soundness and future-proofing. Upgrading our business structure remains our utmost priority, allowing us to concentrate our internal capabilities. Allow me to first brief you on our activities and achievements in recovering our financial soundness. The company is moving ahead of the original timeline to downsize the LCD TV business, which has structurally weakened competitiveness. Production in the Gen 7 LCD TV fab located in Korea was terminated at the end of last year, and the remaining Gen 8 LCD TV fab in China is scheduled to downsize to 50% of its capacity starting this year. We will phase out the LCD TV business while responding to commercial products and the volume agreed with customers. To address the continued soft demand and secure operational flexibility, the company undertook intense production adjustments. The inventory reduction by around KRW1.6 trillion from Q3 affected profitability in Q4, but it placed the company in a better position to flexibly respond to the market environment in the first half of this year. The pre-emptive inventory adjustment in Q4 is expected to reduce costs in Q1 this year. The company plans to keep reducing costs and improving operational efficiency through LCD TV capacity downsizing in China and intense production adjustments in large OLED fabs in Korea, along with close monitoring of real demand changes and market inventory. Next, regarding the progress of the company’s business realignment efforts and future plans. In supply and demand-based business, we will enable a more rational operational structure and secure consistent profitability while focusing on high value-add products amid market volatility. The company will also add a stronger drive to the transition to an order-based business structure. We are systematically preparing for projects agreed with customers, like the new smartphone lines to be mass-produced in the second half of the year and OLED for IT products to be mass-produced in the first half of next year. Such order-based business took up 30% of our business last year, is expected to be in the low 40% this year, and exceed 50% in 2024. We also continue to broaden market-creating businesses, exploring new markets with our competitive products like gaming and transparent displays. We will build a stable revenue structure by strengthening the future business portfolio. With market volatility remaining high, sluggish demand for panels is expected to last into the first half of the year. The market situation where panel shipments fall short of actual sales is likely to persist in the first half, but the panel inventory issue is expected to be mostly addressed in the first half, thanks to intense production adjustments across the industry. This should hopefully return the industry-wide inventory to healthy levels in the second half. Having said that, with recovery in real demand remaining uncertain, the company remains focused on large-scale cost-cutting. Both volume and revenue are expected to decrease in Q1 given its traditional seasonality, on top of industry-wide inventory adjustment. The company expects about KRW1 trillion in cost reduction in Q1 from the large-scale business rationalization underway since Q4, such as active inventory control, LCD TV downsizing, and OLED TV production adjustments. In addition, new capacity utilization for smartphones and strong improvement in fundamentals will improve performance quarter-to-quarter and help achieve a turnaround in the second half of the year. In terms of investment, only the minimum ordinary investment will be made along with investments in order-based projects already agreed with customers. CapEx for the year will be around KRW3 trillion on a cash-out basis. The last point before we present the Q4 earnings is regarding the increase in Q4 net loss. The company’s mid to large size panel businesses had been accounted for as one cash-generating unit, but following the decision to phase out the marginal LCD TV business, the large OLED business was separated as a standalone cash-generating unit in Q4. For the separated cash-generating unit, asset valuation was reviewed and assessed by an outside organization according to the standards and procedure in place. With soft demand for premium TVs last year due to the economic slowdown, as well as the downward revision of demand outlook, asset impairment of approximately KRW1.3 trillion was recognized for the OLED business to ensure proper accounting. The result was reflected as a non-operating expense in Q4, which increased the net loss, but as you would all understand, it is the result of accounting adjustment that has nothing to do with cash flow. The company expects a positive impact down the road as it reduces our business uncertainties. As the leader in large OLED, the company possesses incomparable competitiveness in the premium TV market, where we intend to keep growing our market share. We will keep establishing a consistent revenue structure by enabling qualitative growth as we strengthen our product and cost competitiveness and accelerate our efforts to open up new markets like transparent and gaming displays. Thank you very much for your attention.

Let me now continue with our business performance in Q4. With the worsening macro economy in Q4, set demand continued to remain subdued. It was followed by inventory adjustment across downstream industries, the impact of which also spread to high-end products that had been showing relatively solid trends. Revenue in Q4 went up 8% quarter-on-quarter, thanks to the shipment of smartphone products. However, there was an operating loss of KRW876 billion following shipment decreases of IT panels, a decline in panel prices, and intense production adjustments to reduce inventory. The operating profit margin in Q4 was minus 12%, with an EBITDA margin at 3%. There was a net loss of KRW2.094 trillion, with KRW1.33 trillion of impairment being accounted as non-operating loss. For the year, revenue in 2022 was KRW26.152 trillion, down 13% year-on-year. There was an operating loss of KRW2.085 trillion, and the operating profit margin was minus 8%. Next is area shipment and ASP trend. Area shipment in Q4 was 7.86 million square meters, increasing 2% from the previous quarter. It was slower than ordinary seasonality due to demand decrease in mid-sized products and structural innovation in the large product business. The ASP per square meter was $708, going up 5% quarter-on-quarter, owed to the increase in the portion of smartphones and wearables. Next is revenue breakdown by product segment. OLED accounted for 52% in Q4, following the transition to an OLED-focused business structure. For the year, its portion grew sharply from 32% in 2021 to 40% in 2022. OLED’s contribution to financial performance is expected to keep growing this year, with its portion of revenue exceeding 50%. This growth will be largely driven by the increase in smartphone capacity and panel shipments in the second half of the year, along with the continued phase-out of the LCD TV business. TV panels accounted for 25%, remaining unchanged quarter-on-quarter. The share of IT panels was 34%, declining by 9 percentage points quarter-on-quarter due to a decrease in panel shipments and a decline in panel prices. The portion of mobile and other products was 34%, up by 9 percentage points quarter-on-quarter on the back of higher shipments of smartphones and wearables. The auto business, a new growth engine for the company, has maintained growth, with its portion rising from 5% in 2021 to 7% in 2022. It is expected to continue growing by double digits this year. Next is the company’s financial position and ratios. The company’s cash and cash equivalents stood at KRW3.547 trillion, staying above the KRW3 trillion line. Inventory was KRW2.873 trillion, decreasing by KRW1.644 trillion quarter-on-quarter as a result of the decision to keep inventory at a minimum and the subsequent strong adjustment in production. In terms of main financial ratios, the debt-to-equity ratio was 215%, and the net debt-to-equity ratio was 101%, both up quarter-on-quarter. Next is cash flow. The company’s cash and cash equivalents at the start of Q4 were KRW3.264 trillion. It increased by KRW283 billion and stood at KRW3.547 trillion at the end of Q4, thanks to increased cash flow from financial activities. Lastly, outlook for Q1. With growing market volatility and demand uncertainty, alongside the company’s execution of the LCD exit strategy, area shipments are expected to fall more sharply than in ordinary seasonality. In response to the demand slowdown that will last for some time, we will keep improving profitability quarter-on-quarter by enhancing financial soundness and remaining on the path of structural innovation. In addition to KRW1 trillion in cost-cutting for Q1, we will strive to achieve a turnaround in the second half by recovering panel demand and utilizing new smartphone capacity. That completes my briefing. Thank you very much.

The first question will be presented by an analyst from KB Securities. Please go ahead with your question.

Thank you very much for giving me the chance to ask my questions. I have two questions, one regarding the company’s financial strategy and the other about the large OLED business. The first is about the company’s financial plan, including any potential borrowings following the worsening of the financial performance. Could you also provide an overview of the CapEx implementation in 2022 and the company’s plan for CapEx this year? Next, regarding the large OLED business strategy and the exit strategy, could the company also brief us about the large OLED business strategy and how OLED will continue to enhance its premium image over LCD? What will be the strategy to differentiate OLED from LCD?

Thank you very much for the question. This is the CFO responding. Fundamentally, the financial strategy would be to keep earning revenue from operations. However, given the nature of the industry and the market situation, sometimes that is not conducive. In such cases, we will try to improve financial soundness through better cash flow management, which is what we are currently doing. The plan is to accelerate our exit strategy in LCD TV, which has proven to be a marginal business, to minimize potential losses from this business. We will also keep reducing our investment and expenditures while enhancing cost efficiency to create an operational structure aligned with the current market situation. Another part of the plan is to minimize our inventory and working capital. By doing so, we will be able to minimize cash flow expenditure. Recent actions, such as terminating production in the Gen 7 LCD fab and downsizing production in the Gen 8 LCD fab in China, are not just about downsizing production; they also entail reducing expenditures. By doing so, we intend to cut costs by about KRW1 trillion in the first quarter as explained earlier, while managing working capital and improving cost efficiency. Regarding CapEx, I explained our principles earlier. For last year and this year, we will maintain minimum ordinary investment necessary for production facilities and for order-based businesses with fixed demand and revenue. Last year, it was KRW5.2 trillion on a cash-out basis, a bit higher than expected. This aligns with our principle of transitioning towards order-based business. Accelerating our investment timeline for some order-based businesses means that we expect revenue to accrue sooner this year. In terms of funding, while there are concerns about potential shortages of funds due to our investment plan and current performance, I can assure investors and shareholders that there is no cause for concern as we are making preparations and implementing various strategies in this regard. There are ways in the market outside of borrowing or using our own funds. For cash management, our shareholders and investors need not worry, as we will make the best use of the available options.

This individual is in charge of Large Display Marketing responding to your question about the OLED plan for 2023. In terms of shipment, OLED is expected to remain similar in 2023 year-on-year. The demand in the high-end market continues to fluctuate, and given that it's unclear when demand will recover, we will closely monitor the market and aim to differentiate OLED in the high-end TV market to increase our market share from the current high 20% level to over 30%. We will adjust our production and work on reducing fixed costs consistent with actual demand trends to improve inventory levels among distributors and set customers. Regarding the large OLED business strategy, we have already achieved economies of scale for large OLED with the potential to compete in the high-end market, meaning that we can produce 10 million units. Opportunities continue to arise for new markets and customers. We will reinforce our competitiveness and profitability while pursuing growth in existing markets. The market-creating business segments such as gaming and transparent OLED also show potential, continuing the trend of subdued demand in the current TV market. Our commitment to enhancing cost innovation and OLED-specific competitiveness is intended to drive growth for both the market and the business. Regarding differentiation between OLED and LCD, since my answer is quite lengthy, I would like to reserve more details for another opportunity. Thank you. We will take the next question.

The next question will be presented by an analyst from KIWOOM Securities. Please go ahead with your question.

Thank you. I also have two questions. First, regarding the LCD TV exit strategy, which the company explained. As a result, I believe that it places the company in a different position from peers in terms of financial performance. Could you provide guidance on financial performance for the first quarter as well as the year? My second question is about the specific business plan. The company discussed market-creating businesses, as well as plans to strengthen the future business portfolio. Could you provide more details about this business plan?

Now first, regarding the outlook for the year, the response is clear: low in the first half and high in the second half. With the macro economy struggling, demand is likely to remain slow in the first half. The situation we observed since last year, where panel purchases fell short of actual set sales, is expected to continue into the first half as inventory adjustments proceed. Given this environment, large-scale cost-cutting remains an option for the company. Last year, inventory levels were reduced by about KRW1.6 trillion across one quarter, providing potential benefits in the first quarter of this year. Additional actions to downsize or reduce large-size business production are being taken, coupled with cost cuts through business rationalization. Consequently, we expect revenue growth to start in Q2, with reduced losses, anticipating the beginning of a turnaround in the second half of the year.

This is Hee Yeon Kim, CSO, discussing our business plan. I would like to explain our plan based on three segments: gaming monitors, transparent OLED, and sound solutions. We are targeting the high-end gaming monitor segment, where customers are willing to pay more, and we are currently in discussions with around eight to nine customers, with plans to go into mass production within the year. Regarding transparent OLED, we are targeting key vertical customers who recognize the product's importance for retail and construction applications. These products typically function as solutions rather than standalone products. Thus, it's critical to create the right ecosystem, and we are working with key vertical partners to build this ecosystem and achieve visible outcomes within the year. For sound solutions, typically requiring space for installation, we have developed a film-type sound solution that takes up less space and won an Innovation Award at CES. This has particular value in applications where space is limited, such as in the automotive sector, where we intend to concentrate our efforts.

Thank you. We will take one last question.

The last question will be presented by an analyst from Bank of America. Please go ahead with your question.

I have two questions as well. Firstly, I appreciate the presentation. It seems that the company’s trajectory is moving towards Gen 6 OLED, but demand in this segment is challenging due to competition from BOE and lower tablet prices than smartphones. Given the current environment, what rationale does the company have for believing that it can drive sales for high-priced OLED products? Secondly, regarding recent press reports about micro OLED and how it might replace small OLED in the near future, which is anticipated in the next 2-3 years, what do you foresee in terms of the potential replacement of the Gen 6 OLED panel by micro OLED?

Thank you. This is Hee Yeon Kim, CSO, addressing both questions. Regarding micro OLED, I do not believe the company is in a position to answer this particular question. However, in any market, there are always alternative technologies, including both OLED and micro LED for the TV market. I believe a market size exists to accommodate both, and the company is adeptly addressing promising developments. Moreover, various technological options are available in the mobile sector, and the company is preparing for different types of technology. If a business case emerges and there's visibility and potential within customer negotiations, we will certainly proceed. To conclude my response, we will closely monitor market changes and respond as necessary. Next, about IT OLED, this segment requires both short-term and mid-to-long-term perspectives, involving not just tablets but also monitors and notebooks. We're targeting the premium gaming monitor market, where customers are willing to pay more, and tablets are part of that. Currently, BOE holds a 30% market share in the high-end segment. While there are concerns regarding premium pricing and potential scalability, value perception on the part of set makers has increased our share. The same may hold true for the Tablet segment, where we will consider various factors and circumstances to establish rational prospects for penetration rates and adjust our strategy accordingly.

If there are no further questions, we will now close the Q4 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.