LG Display Co., Ltd. Q3 FY2023 Earnings Call

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'm joined by the CFO, Sung-Hyun Kim; Hee-Yeon Kim, CSO; Seung Min Lim, Senior Vice President of Corporate Planning; Keuk Sang Kwon, Vice President of Auto Marketing; Ki-Yong Lee, in charge of Business Intelligence; an individual in charge of Large Display Strategic Marketing; and Myoung-Kyu Kim, in charge of Medium, Small Display Strategy. The conference call will be conducted in both Korean and English. Please refer to the provisional earnings release today or the IR Events section in the company's website for more details on the financial results of Q3 2023. 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. I will start with Q3 business results. Revenue was almost flat quarter-on-quarter amidst intense inventory correction continuing in the downstream industries, as demand is slow to recover due to macroeconomic uncertainties with the impact being felt differently by product category like TV, IT, and mobile. Revenue in Q3 was KRW4.785 trillion, up 1% quarter-on-quarter. There was an operating loss of KRW662 billion, narrowing quarter-on-quarter and year-on-year, maintaining the improvement trend. As the company continues with business structure upgrades, it has also remained on the path of cost innovation and operational efficiency. Next, on area shipment and ASP per square meter. Q3 area shipment was up 1% quarter-on-quarter to 4.77 million square meters. ASP per square meter was $804, up $1 quarter-on-quarter. In terms of revenue breakdown by each product segment, TV panels revenue mix was 23%, almost flat quarter-on-quarter. IT accounted for 40%, down 2 percentage points quarter-on-quarter, due to delayed recovery in B2B demand. Mobile and others took up 28%, up by 5 percentage points following the seasonal increase in mobile panel shipments. Auto business revenue mix was at 9%, down by 2 percentage points quarter-on-quarter as a result of some shipment adjustments. OLED revenue mix remained unchanged at 42%. Next is on the financial position and key metrics. The company's cash and cash equivalent was KRW4.087 trillion. Inventory value was KRW3.349 trillion, up by KRW667 billion quarter-on-quarter to prepare for seasonal demand. Key financial ratios were up quarter-on-quarter, resulting from activities to strengthen liquidity, as well as net loss in the quarter. Debt-to-equity ratio was 322% and net debt-to-equity ratio, 151%. Cash flow at quarter end was KRW4.087 trillion, up by KRW235 billion from the KRW3.853 trillion in the beginning from activities to strengthen liquidity. Next, on Q4 guidance. With an increase in TV panel shipment to respond to year-end demand as well as expansion in the previously delayed IT panel shipment, shipment area in Q4 is expected to grow by 19% quarter-on-quarter. Shipment of panels for smartphones with high ASP per square meter is expected to grow, likely to drive up ASP per square meter by mid-20% level quarter-on-quarter. Thank you. Next, CFO, Sung-Hyun Kim will walk us through the key highlights.

Good afternoon. This is CFO, Sung-Hyun Kim. The company was able to narrow the loss in Q3 again following Q2. Despite the challenging market environment, where downstream demand remains sluggish, we focus on upgrading the business structure and innovating costs. In Q4, panel inventory adjustment will ease in the downstream industries, and shipment of mid- and large-sized products and panels for new mobile products will grow to respond to the year-end seasonality. Profitability improvement continues as the company keeps up its cost innovation and operational efficiency activities, and a turnaround is expected in Q4. The company will keep strengthening key businesses to respond to market demand and changes in the business environment and improve its profit structure by persisting with the enterprise-wide cost innovation. Allow me to explain more about the OLED business strategy, which I understand to be of high interest in the market. In large OLED, we will broaden our position in the premium TV market and improve profitability by boosting customer portfolios centered on ultra-large products and by innovating costs, such as cutting material costs in key components. For small and medium OLED, we are driving shipments of mobile products by fully utilizing the new ramped-up capacity. We are also preparing for volume production and supply of IT OLED in 2024, equipped with technology marked by higher durability and performance like long life and high luminance. Over the mid to long term, the pace of OLED penetration is likely to differ by IT product, like monitor, notebook PC, and tablets, as well as through consumer acceptance. It is important to efficiently utilize the existing infrastructure and respond wisely to varying customer needs and market opportunities. In the automotive business, the company will keep solidifying its world #1 position by expanding orders won and revenue based on our unique technology competitiveness that encompasses Tandem OLED to high-end LCD, as well as rigorous quality control and stable supply capability. With little visibility into the future trajectory of real demand, the company plans to push ahead with intense restructuring of the revenue structure so as to achieve more meaningful performance next year. Thank you very much for your attention.

That brings us to the end of the earnings presentation for Q3 2023. We will now take questions. Operator, please commence with the Q&A session.

The first question will be presented by Eun Kim from Meritz Securities.

Thank you. I have a two-part question. I would like to ask my first question, then follow up with the second after the response. Now the first question is about the issues of delay in the second half of the smartphone panel shipments. So I wonder what have been the changes in the smartphone panel shipment in the second half for the company compared to the plan?

Now this is the CFO responding to your first question. Of course, I realize that this kind of question is important and perhaps necessary, but I also have to ask for your understanding that I must give you a short response, meaning that we are actually not at liberty to discuss issues that are related to certain customers. This also relates to the limitations of the nature of the industry itself. Now having said that, it is true that as the market is already aware, there have been some disruptions in our production in a form that is different from the past, but we were able to overcome the issues. Now going into the fourth quarter, you would know that there has been improvement or a ramp-up in our production capacity. We plan to fully utilize the new ramp-up capacity to make up for the delay as much as possible.

Now then, my next question is, as was the guidance in the previous quarter, it is the same communication, meaning that the company is looking forward to a turnaround in the fourth quarter. So that is, as I understand, on the back of the recovery in the mobile industry, but I wonder whether the assessment or the projection by the company still remains valid. And does the company believe that there is now some visibility into the achievement of this goal? And, of course, if there is a turnaround that is achieved, then perhaps things might improve. But still, I would say that the environment is still challenging. For example, the rates remain high. Borrowings appear to have gone up again throughout the quarters again. So that would also bring up the interest expense as well. I wonder whether there are any financing activities planned for the company to strengthen its liquidity? And also, how does the company plan to repay its borrowings?

Now regarding the turnaround, yes, it remains our target for Q4, and we keep working very hard toward it. I would like to ask for your patience and support as we continue to work towards this, which remains a valid target for us. It is true that the market environment is not easy. But throughout this, our focus is on driving cost innovation to improve our profitability to the level of the market. Once the market improves, I must say that, of course, there have been these ups and downs in the past, but this tough time is quite long and a bit more challenging than before. But once this is over, I believe that all the activities we have persisted with during this time will come back to us with considerable benefits. In the meantime, the company intends to strengthen its key businesses and also continues to drive ahead with cost innovation to improve our performance in line with the market environment. As we have been going through this tough time for about two years now, this is an industry that requires a lot of investment with not much return initially, which you all know. It is also true that it has had an impact on our financial strength. Various options in financing are available, but we tend to stick to the traditional approach, which means maintaining stability. So rather than relying on the stock market or entering the financial market, we can sense that there is still quite a lot of trust in the company. We have been working to get financing from government-run banks, as well as large commercial banks. Most of the major financial institutions are working to finance with low-interest, long-term instruments.

The following question will be presented by Hyun-Soo Kim from Hana Securities.

Thank you for giving me the opportunity to ask my questions. I also have two questions, one on LCD TV and another on OLED TV. Now for the LCD TV, there have been reports lately that main major set makers will be increasing their purchasing of panels. I wonder what the company's direction is in terms of the LCD TV business, including the Guangzhou LCD fab. Secondly, there was earlier guidance on the increase in the shipment of medium to large-sized panels in Q4. The question is whether it is reflecting the expected seasonality at the year-end with expected demand recovery? If that is the case, what would be the projection or the outlook for the large OLED shipment for the year? What is the company’s plan for medium- to long-term operations, and what is the company's projection for longer-term profitability?

This is the CFO responding to your questions. Yes, it is true that there have been many questions about the inquiries from set makers regarding their sourcing of the LCD TV panel. There is quite a geographic concentration of the LCD TV production capacity. In consideration of the U.S.-China friction and the CSM stability, many companies are trying to diversify their sourcing strategy and are increasing their inquiries to us. However, within the larger framework of upgrading the business structure, our strategy on the LCD TV business remains unchanged. We will wisely and flexibly respond to the requests coming from set makers, so that we can strategically enhance the value of our LCD fab.

Now, panel shipments are expected to grow over the third quarter, thanks to seasonality. However, actual sales are not going to be as strong as typical seasonality, due to macro impact and sluggish demand for high-end products. We also see intensifying product competition for ultra-large LCD sales from the Chinese region. With the continuation of the inventory correction policy among set makers and retailers, we expect that panel shipments for the year will be under the set shipment at around 5 million units. Starting from 2024, we anticipate negative growth in demand for high-end products, but inventory levels will return to normal. Based on our stable customer base, we believe we will strengthen our position in the high-end market. Additionally, set makers' profitability is improving, and we expect to keep enhancing our profitability based on higher volume and larger sales. This year, our efforts for cost innovation continue by trying to lower the material costs, especially in key components and materials. Going into next year, we will run our fab linked to the real demand to optimize labor costs, fixed costs, and variable costs. We will also work to improve our revenue per production capacity, especially in non-TV businesses, to enhance overall profitability.

The following question will be presented by Dongwon Kim from KB Securities.

Now I have two questions about the Auto Display business. Given the recent sluggish demand for EVs, in the previous quarter, the company provided guidance of about 15% revenue growth for the auto business over the medium to longer term. I wonder whether this guidance remains valid for the company. Additionally, what is the order backlog for the auto business? Of that, what is the share of the OLED business? Based on the circumstances, does the company believe it will be able to turn around the auto display business next year? What is the overall shipment guidance for the auto business over the medium to longer term?

This is Ki-Hwan Son, Vice President of Auto Marketing. First, regarding revenue, the auto business revenue for the year will be within 10% of the company-wide revenue. For the next five years, we are looking forward to revenue growth in the mid-teen percent level. As for the order backlog, it is in the low KRW20 trillion for this year, set to grow by approximately 30% until 2025. The share of the order backlog for the high-end Tandem OLED panel will be in the low 40% for this year and will exceed 50% starting from 2025. Stability in revenue growth for OLED is expected to drive continued growth in profit contribution. Regarding the opportunities and risks in the automotive business, we see that the auto market is gradually moving towards EVs and SEVs, meaning that vehicles are becoming more lifestyle-oriented. The importance of auto displays will drive demand for OLED as well as large displays. As for risks, due to continued sluggish demand in TV and IT, competition surrounding auto displays has heightened. However, with our Tandem OLED technology and superiority in LCD, along with strong relations with global partners, we will continue to strengthen our competitiveness in securing contracts.

The following question will be presented by Kyuha Lee from NH Investment & Securities.

My first question is, according to the LCD panel prices that have been announced by a research organization early this week, there are signs that the panel prices are falling among the small and medium-sized LCD TV. What is the company's outlook for the ASP in the second half and also for the longer term? My second question is, what is the company's outlook for demand per application in 2024? Compared to this year, what meaningful changes does the company believe will occur in the market?

This is Keong Yi in charge of Business Intelligence, and I would like to answer the two questions together. First, concerning TV panel price, it has been on the rise since October last year and has been on an upward trend for approximately one year. As we enter the latter half of October, it began to slightly fall for small and mid-sized products, believed to be a result of set makers' conservative management policies, given that we are not yet in a structural recovery of real demand, and we are approaching seasonality in the first half of next year. It is expected that panel makers will continue to adjust utilization flexibly based on demand to minimize price volatility and stabilize the ASP. Looking ahead, there may be ups and downs depending on the seasonality; however, we believe that the ASP will remain at a level higher than the industry's production cost. As for the IT panels, prices have remained stable for a while now. Over the medium to long term, there are concerns of intensifying competition with expectations of demand recovery and stronger supply capability from Chinese makers. Given these positive and negative factors, the IT panel price is likely to remain stable going into next year as well. Regarding demand outlook, in terms of TV, structural slow demand seems to be established, indicating flat demand may continue into next year. However, there appears to be strong demand for ultra-large products, likely achieving mid-single-digit growth. We expect a slight growth in panel demand compared to this year due to healthier inventory. In the IT sector, negative growth continues, driven by B2B and high-end sectors. Nonetheless, the negative growth has slowed in 2023, and expectations of recovery arise from the second half onward. For IT panels, positive growth is anticipated as inventory remains healthy. Lastly, concerning smartphones, the general market remains saturated; however, it is promising that the OLED market, which is our target, maintains positive growth. For 2024, we expect similar positive growth in both sets and panels.

Thank you. We will take one last question.

The last question will be presented by an analyst from Kim Securities.

I have a question about the preparation for the IT OLED, which you said is going into volume production in 2024. It was mentioned earlier that the preparation is underway smoothly. I wonder whether there are any changes compared to the previous plan? Additionally, what is the outlook for the market size and competition? If the company could provide us with further updates, please.

Now for the IT OLED, as has been disclosed, the plan is to continue investing through the first quarter of next year. After the investment is completed, we will enter mass production, and the preparation is progressing well. We will apply the technology accumulated in auto, as well as the large OLED business, to produce high-end panels that have advantages in low power consumption and long life. Over the mid to long term, regarding the pace of OLED penetration, we believe it will differ depending on the characteristics of IT products and consumer acceptance. It is essential for us to wisely respond to varying customer needs and market opportunities by utilizing the existing infrastructure.

We will now close the Q3 2023 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.