LG Display Co., Ltd. Q2 FY2023 Earnings Call

Good morning and good evening. First of all, thank you all for joining this Conference Call. Now we will begin the Conference of the Fiscal Year 2023 Second Quarter Earnings Results by LG Display. This conference will start with a presentation followed by a divisional Q&A session. Now we shall commence the presentation on the fiscal year 2023 second quarter earnings results by LG Display.

Good morning. This is Brian Heo, responsible for LG Display's Investor Relations. I want to thank everyone participating in this conference call. Joining me today are CFO Sunghyun Kim, Hee-Yeon Kim, Chief Strategy Officer; Seung-Min Lim, Senior Vice President of Corporate Planning; Ki Hwan Son, Vice President of Auto Marketing; Jeong Lee, in charge of Business Intelligence; and Seong Gon Kim, responsible for Medium Display Marketing. The call will be held in both Korean and English. For more information on our Q2 2023 financial results, please refer to the earnings release and the IR Events section on our website. Before we start the presentation, I ask you to read the disclaimer. Today's results are based on consolidated IFRS standards prepared for your benefit and have not yet been audited externally. I will begin with the Q2 business results. The ongoing inventory correction in the downstream industries, particularly in TV and IT, has led to a decline in panel inventory in the channels. However, as inventory situations improve across the industry, we are starting to see a gradual recovery in panel demand, with medium and large panel shipments increasing in Q2, driven by OLED TV and IT. Revenue for Q2 totaled KRW 4.739 trillion, reflecting a 7% increase quarter-over-quarter. We reported an operating loss of KRW 881 billion, down from the previous quarter, due to increased shipments, enhanced operational efficiency, and effective cost-saving measures. The price of LCD TV panels is on an upward trend, but its effect on our Q2 results was limited as we continue to downsize our LCD TV operations as planned. Looking at area shipment and average selling price per square meter, Q2 area shipment rose by 11% quarter-over-quarter to 4.72 million square meters, supported by a rise in medium and large panel shipments. The average selling price per square meter was $803, down 6% quarter-over-quarter, consistent with previous guidance amid seasonal declines in mobile shipments. In terms of revenue composition by product segment, TV panels made up 24% due to growth in OLED TV panel shipments. IT accounted for 42%, showing a 4 percentage point increase quarter-over-quarter, while mobile and other segments contributed 23%, down 9 percentage points due to the seasonal drop in mobile panel shipments. Our automotive business is maintaining steady growth, with an unchanged revenue mix of 11% quarter-over-quarter. OLED revenue mix decreased quarter-over-quarter due to seasonal declines in mobile OLED, dropping 3 percentage points to 42%. Now, regarding our financial position and key metrics, the company's cash and cash equivalents stood at KRW 3.853 trillion, while the inventory value was KRW 2.62 trillion due to our efforts to minimize inventory. Key financial ratios improved quarter-over-quarter, driven by strategic financing activities to strengthen liquidity, despite reporting a net loss for the quarter. The debt-to-equity ratio was 293%, with a net debt-to-equity ratio of 143%. Cash flow for Q2 was KRW 3.853 trillion, nearly unchanged from the prior quarter, balancing cash inflows from financial activities with cash outflows for investments. Now, looking ahead to Q3 guidance, with decreasing inventory levels across the industry, we anticipate further growth in medium and large product shipments in Q3. Area shipment is expected to increase in the mid-single digits. We also expect the average selling price per square meter to rise in the high single digits quarter-over-quarter, due to seasonal growth in mobile panel shipments. Thank you for your attention. Now I will hand it over to CFO Sunghyun Kim, who will share the key highlights.

Good afternoon. This is the CFO, Sunghyun Kim. Looking back at the first half of the year, actual set sales fell short of expectations with macroeconomic uncertainties persisting and consumer sentiment dampening. But inventory soundness began to improve in Q2 across the ecosystem, leading to actual growth in panel purchases. It appears that the market is now over the worst, but not yet starting a full recovery backed by real demand. Consequently, the company further propped up liquidity through strategic financing activities in Q2 as well for the purpose of upgrading our business structure with our priorities, strengthening our financial structure. Cost-saving initiatives like reducing fixed costs, manpower deployment efficiency and flexible operation of fabs are still ongoing. To upgrade our business structure, we will keep increasing the share and performance of contract-based business in the second half, including mobile products. Contract-based business revenue mix is expected to top 40% this year and 50% next year. The target is 70% in the next 2 to 3 years. The company will also strengthen the share and business competitiveness of OLED in all categories that cut across all the different sizes of panels. With improving market awareness of OLED value, its company-wide revenue mix is expected to surpass 50% this year and keep growing thereafter. By product category, large OLED business will keep running on the basis of real demand while broadening the customer base and consolidating its market position in the premium TV market. It will not be bound to the traditional TV market as the product portfolio keeps diversifying into new applications like gaming and transparent. They will also keep implementing cost innovations and improving expense structure efficiency. For mid-sized OLED, the company is steadfastly building up the structure to respond to mass production in the first half of 2024. We will keep strengthening its business capability by preempting the market and ensuring stable operations. For medium LCD, we will focus on recovering profitability by enabling a high-efficiency production system and cost innovations while solidifying our leadership by targeting the premium monitor and laptop markets based on differentiated competitiveness. In small OLED business, we will grow the shipment volume and improve business consistency based on production ramp-up and technological capability. In auto, we continue to improve business performance on the basis of reliable supply, thanks to dedicated capacity, as well as technology that can provide differentiated value like tandem OLED. The company will focus on growing our revenue and increasing orders on top of differentiated technological competitiveness and customer relations across OLED and high-end LCD and boost our position as the world's number one. Going into the second half, a turnaround to profit is expected in Q4 on anticipation of high panel demand by set makers following the return to healthy inventory levels and growth in contract-based business. But as explained earlier, the market is yet to start a full recovery driven by real demand. The company will keep a close eye on the external environment as we strive toward more meaningful performance by focusing on recovering financial soundness and upgrading the business structure. Thank you very much for your attention.

The first question will be provided by Daun Kim from KB Securities. Please go ahead with your question.

Thanks for taking your questions. My questions are regarding OLED as well as the consolidated performance. First of all, for the small and mid-sized OLED last year due to technical issues, the shipments of panels were reduced. Does the company expect similar technical issues this year for small and mid-sized OLED panels? Does the company believe that there would be similar issues that could also reduce the shipment from the initial plan? My second question is the company has now been seeing losses for the past 5 quarters straight. However, in the presentation, it was mentioned that the company expects a turnaround in the fourth quarter of this year. From which business will the biggest contribution come? Will it be the large OLED, small to mid-sized OLED, or any other businesses? What are the reasons or the drivers for such a contribution from that particular business?

Thank you very much for your questions. This is also Brian Heo, in charge of LG Display's IR. First of all, let me clarify that we are not able to comment on any situation involving the customer. For the second half of the year, based on our expanded mass production capability, the company intends to increase shipments. By doing so, we also plan to improve our consolidated earnings.

Now this is the CSO responding to your second part of the question. As the CFO has already explained in his presentation of the highlights, we see that the inventory level is going down across the market. As a result, we see that profitability is going to improve on both the large and medium-sized OLED. Where we are expecting the biggest momentum to come in the second half, as Mr. Brian Heo just explained, is from the capacity increase as well as the increase in the volume of the small-sized panels.

The following question will be presented by Hwan Seung Kim from Hana Securities. Please go ahead with your question.

I also have two questions. They are pertaining to investment and EBITDA. First, the company's guidance was somewhere in the mid to high KRW 3 trillion level for the year. Having gone through quite a lot of changes in the circumstances, I wonder whether the number remains unchanged? Or are there any changes to the number for the annual investment? What would be the expected investment for 2023 as well as 2024? What would be the company's guidance for EBITDA? The second part of the question is about the investment, particularly in the OLED IT. I understand that the company is now investing in the OLED IT Gen 6. Can the company provide us with an update regarding that investment? And with the company's clients in North America, what is the plan for the IT investment for Gen 8?

Thank you. This is the CFO responding to your question. Yes, the company has given the guidance of mid to high KRW 3 trillion level for the annual investment. Currently, investment is underway where the investment is necessary within the guidance range. At the same time, we are conducting efforts in parallel to improve the efficiency of the investment as well as spending. As the investors would be aware in this industry, investment is implemented over a long period after pre-orders, meaning that it is not easy to flexibly adjust the investment amount given the circumstances. Regarding the expected investments for next year, our thinking now is that there can be a meaningful reduction from the mid- to high-level KRW 3 trillion level of investment this year. The investment into IT OLED Gen 6 is currently underway and will continue into the first half of next year. Regarding potential investment in Gen 8, this depends on customer needs and also on several other factors like technological development and market demand sufficient to contribute to the company's profitability.

The following question will be presented by Simon Wu from Bank of America. Please go ahead with your question.

Thank you very much. There was a mention of a turnaround to profit in the fourth quarter. Considering the panel price rising, I believe, only in LCD TV and not in others. I am trying to better understand the rationale behind the expectation of turnaround in Q4, especially because it appears that the company has done most of the cost reductions that it can. While some volume increase is anticipated in the second half compared to the first half, I'm uncertain whether that would be sufficient to move the company from almost a KRW 1 trillion loss in one quarter to almost zero next. I'd like to ask for further elaboration. Additionally, there has been a steady increase in borrowing. What would be the company's interest expense in the second quarter? That would be helpful for us to calculate the financial cost over the year.

This is the CFO speaking. The question was about the interest expense or financial expense for the second quarter. I know that you're going to multiply that number by four. I would just like to provide you the annual number, which is expected to be at low to mid KRW 600 billion.

This is the CSO, and I would like to comment on the expected turnaround in Q4. As explained earlier, our small panels account for about 20%. Over the next two quarters, we expect an increase of 10 percentage points each quarter. The small panel has very high seasonality, and there's also the new fab that we are operating. Another factor is the mid-sized IT, which has taken up the biggest share out of our revenue in Q2. While the price for TV is moving up, it is true that for the mid-sized IT, there isn't a significant movement. However, it seems like the price for mid-sized IT is also bottoming out, and we have observed a slight increase, which we believe will contribute to profitability.

The following question will be presented by Junghoon Chang from Samsung Securities. Please go ahead with your question.

The first question, yes, the CFO commented on a possible turnaround in Q4. For Q3, it was just about improvement, so no specific guidance as far as I understood. I wonder whether this incorporates the possibility of delay in mobile shipments in the second half or if it is regardless of that, considering the overall market circumstances and that the company cannot exceed the BP for the third quarter. My second question is about the press reports about a new customer in large IT OLED. The company's guidance was simply about the possibility of starting a new partnership. If there could be any further highlights regarding this, it would be appreciated. What would be the company's expectation of the volume for next year?

This is the CFO speaking. The question was about potential turnaround in Q4 and improvement in Q3. Overall, it is clear that there is improvement in Q3. Regarding the mobile shipment delay, I must clarify that the company has never commented on it. However, we always remain conservative regarding market volatility or the company's internal operations. For Q3, we expect a faster improvement than what we observed between Q1 and Q2, and we anticipate that improvement will accelerate in Q4 to achieve a turnaround. You also asked about a new customer in large size, but due to the nature of our industry, we cannot comment on anything related to the customer, as that falls under the set makers' position. There is no further information to share at this time. As for potential volume next year, there’s nothing for me to comment on.

The final question will be presented by Jonna Kim from Meritz Securities. Please go ahead with your question.

Of course, demand remains uncertain in many categories. The demand in TV is uncertain, but thanks to some correction in supply, the pricing for TV continues to rise, but we do not see such conviction in IT. For mid- to long-term expectations, we believe that significant growth in demand is in the auto display category. The market tends to believe that the company shares a similar expectation. For the medium term, what would be the potential orders received for the auto business? What is the company's plan for the auto orders to be received for this year and next year? What would be the revenue to be recognized in this business again for this year and the next?

This is Ki Hwan Son, Vice President of Auto Market, responding to your question. Up to the second quarter for OLED orders received, it has been KRW 4 trillion, and we believe that the orders will continue to grow. We are currently continuing to upwardly adjust the expected orders for next year and the year after that. As for the order backlog, it is currently KRW 20 trillion, which will be helpful in achieving consistent revenue growth. We expect annual growth of mid 10% until 2027.

The final question will be presented by Tiantian Huang from JPMorgan Securities. Please go ahead with your question.

I have one question about the company's LCD fab business in Guangzhou, China. What would be the timing of the sell-off and also the tangible asset disposal? Regarding the LCD fab in Guangzhou, can you provide any updates? When can the company officially provide such updates to the market?

I realize there are many speculations regarding the LCD fab in Guangzhou, but what is certain is that half of it is still operational. We are trying to rationalize the use of the assets, but nothing is determined yet. There hasn't been any progress to share with the market. Thank you very much. That concludes the LG Display 2023 second quarter earnings results conference call. If there are any additional comments or questions, please contact the IR team.