LG Display Co., Ltd. Q3 FY2024 Earnings Call

Good afternoon. I am Brian Heo, in charge of LG Display's IR team. On behalf of the company, thank you to all the participants for joining us today in our Third Quarter 2024 Earnings Call. Today, I have with me our CFO, Sung-Hyun Kim; Seung Min Lim, Senior Vice President of Corporate Planning; Joo Dong Kim, Vice President of Finance; Ki-Yong Lee, in charge of Business Intelligence; Joo Dong Kim, Vice President of Large Display Planning and Management; Won Jae Lee, in charge of Medium Display Planning And Management; Jong Seok Park, in charge of Small Display Planning And Management; and Ki Hwan Son, VP of Auto Marketing. The conference call will be conducted in both Korean and English. For more details, please refer to the provisional earnings disclosed today or the IR Events section on the company's website. Also before we begin, please take a moment to read the disclaimer. Also, as a reminder, today's results are based on consolidated IFRS standards prepared for your benefit and have yet to receive an audit by an outside auditor. We now begin with the earnings results for the third quarter of 2024. Against the backdrop of uncertainties continuing in the downstream IT product market, there was an adjustment in shipment for certain product lineup, while we saw a rise in small panel shipment, including smartphone panels, which had a positive impact on this quarter's results. As such, Q3 revenue posted KRW6,821.3 trillion, recording 2% Q-over-Q growth. And on greater impact from the OLED-centric business portfolio transition, there was 43% year-over-year growth. In terms of P&L, we are seeing results materialize from OLED-centric business structure upgrades, while activities around corporate-wide cost savings and operational efficiency gains continued to drive an uptrend in performance. In Q3, hence, operating loss came in at KRW80.6 billion, including a one-off expense of more than KRW100 billion related to the ERP program that took place during the quarter. But even with this cost impact, we narrowed the loss versus the previous year and it's also worth noting one positive fact that despite greater market uncertainties, there has been significant profitability improvement year-over-year. Next is on area shipment and ASP per square meter. Third quarter area shipment declined 3% Q-over-Q due to lower shipment of mid-sized IT products, i.e., notebook PCs and tablets versus the guidance. While on a year-over-year basis, higher TV panel shipments drove area shipment growth of 32%. In terms of ASP per square meter, there was an increase of 6% Q-over-Q to $825 on the back of shipment growth in small OLED products, including panels for smartphones. Next is product revenue mix. In Q3, mobile and others accounted for the biggest portion of the revenue mix at 36%. This was driven by growth in small product shipment, including smartphone panels, which was up 13 percentage points Q-over-Q and 10 percentage points year-over-year and we expect there to be accretive Q-over-Q expansion in the fourth quarter IT segment revenue was 33% less than the previous quarter on the back of sluggish downstream demand, which is slowing down the industry's overall recovery, which in turn is driving higher volatilities across different product lineup. TV panel revenues stayed relatively flat with no fluctuations accounting for 23% of the revenue mix in Q3. Auto segment revenue is sustaining its annual growth trajectory, but in Q3, it accounted for 8% of the revenue mix down by 1 percentage point Q-over-Q due to the differences arising from quarterly shipment planning. OLED share out of the total revenue increased 16 percentage points year-over-year and up 6 percentage points Q-over-Q, reaching 58% as we continue to solidify the benefits of business structure upgrades. Next is on the financial position and key business metrics. Q3 cash and cash equivalents amount to KRW1.787 trillion after accounting for assets of China's Guangzhou fab, which was reclassified under assets held for sale. So if we were to include back this item, total cash and cash equivalents would amount to KRW2.751 trillion. Part of the borrowings was also separately classified under held for sale, which explains the Q-over-Q change, while assets and liabilities are all inclusive of held-for-sale line items. The debt-to-equity ratio and net debt-to-equity ratio recorded 297% and 156%, respectively, which is somewhat of an increase Q-over-Q. Next is on Q4 guidance. We continue to see uncertainties in the downstream market for IT products, which may cause shipment volatilities depending on the product segment. But on shipment expansion for TV and notebook PC panels Q-over-Q, we project mid-single-digit percent growth. ASP per square meter is also expected to rise by mid-single-digit percent driven by growth in smartphone panel shipments following the trajectory of the previous quarter. Next, I will turn it over to our CFO, Sung-Hyun Kim, who will walk you through the key highlights.

Good afternoon. I'm CFO, Sung-Hyun Kim. Thank you for joining our earnings call today. Despite sluggish downstream demand and high volatility seen in the external environment, the company was able to drive business performance on a sustained basis, underpinned by stronger fundamentals following the OLED-centric structural upgrades. We are also focusing our capabilities around gains in operational efficiency and improvements in profit, supported by rigorous cost innovation activities. As previously mentioned, Q3 earnings reflect one-off ERP-related expenses, but excluding this impact, we saw business performance improve both on a Q-over-Q and year-over-year basis in a meaningful way. Please note that one-off expenses reflected in Q3 results amount to around mid-KRW100 billion and although we cannot disclose the headcount number and details of the ERP program, we expect there will be more than KRW100 billion of annual labor cost reductions following the implementation of this year's efficiency program. In the fourth quarter, we will continue to scale up the business structure around OLED to drive improvement in fundamentals and business performance. And ensure earnings stability through company-wide activities such as operational efficiency gains against the backdrop of a highly uncertain and volatile macro environment. Next, moving on to plans and strategies for each of our business domains. For the medium OLED business, underpinned by stable supply and technology leadership, we will solidify our business competitiveness. For OLED technology, we will keep reinforcing our leadership in tandem OLED technology, known for superior durability and performance like long life, high luminance, and low power. We plan to build up an efficient framework that can maximize the use of current production infrastructure in step with the changing market environment. OLED for mobile will leverage stronger production capacity and capabilities to drive shipment expansion and also secure top line growth and profitability through product diversification. In large OLED business, based on close collaboration with customers, we plan to expand our high-end differentiated product lineup such as gaming monitors and ergonomic products incorporating even the health-related needs of the users, on top of focusing on ultra-large and ultra-high definition products. We will also push forward with quality-centric growth that drives bottom line enhancements by innovating the operational structure around cost savings and efficient production and sales strategies underpinned by end-user demand. Next is the auto business. Although EV market growth seems to have dampened and there are, to a certain extent, signs of downstream volatility, based on robust customer relationships and our differentiated product and technology portfolio, like the P-OLED using tandem technology and high-end LTPS LCD, we will make sure there are no interruptions in winning orders across not only EVs but also IC vehicles. Our plan, thus, is to build out a stable earnings structure through cost competitiveness and by expanding customer segments and increasing the share of OLED products. Next is on the company's investment activities. With external uncertainties continuing for longer and higher volatilities seen on the demand side, we will take on a conservative approach in running and reviewing the CapEx plan. For the time being, our priority is placed on strengthening business fundamentals, financial soundness while securing a steady stream of profitability. We plan to maximize use of current infrastructure while cautiously proceeding with new investments for expansion. Under this overarching approach, in full consideration of the external environment and demand growth, we will be enhancing investment efficiency by focusing on ordinary recurring basis investments and essential investments required for business structure upgrades and for gaining technological competencies. CapEx for the year hence is expected to be in the mid $2 trillion level down by around KRW1 trillion year-over-year, as CapEx plan will be managed based on the cash flow generated under a profitability-centric approach. Despite continuing market and external uncertainties and volatilities in end-user demand, through profitability-centric business operations underpinned by the outcomes of business structure upgrades and operational efficiency gains, we will continue to bring gradual improvement in earnings as we go forward.

That brings us to the end of the earnings presentation for Q3 of 2024. We will now take your questions. And I would like to ask the operator to please commence with the Q&A session.

The first question will be provided by Dongwon Kim from KB Securities.

I have two questions. First, can you share your plans for the cash proceeds from the sale of the Guangzhou LCD TV set? I would like to understand how you intend to utilize those proceeds and what impact this cash inflow will have on your financial metrics. My second question is regarding your cash and cash equivalents, which appear to be around KRW2 trillion, including assets classified as held for sale. It seems there has been a change compared to previous figures. Can you explain the difference?

This is the CFO responding to your question. After we made our disclosure on September 30, there had been a series of news articles that followed. Now I also personally had very closely read and followed those articles, but I have to say that there were none of these articles clearly portrayed or accurately portrayed how things were. And I believe that is one of the reasons why the analysts are also having a difficult time understanding the clear structure of this deal and the transaction. So today, I would like to take the opportunity to provide you with an explanation regarding how the deal was structured and how the payment is actually going to be settled without disclosing all the specifics. In the previous conference call, I mentioned that the whole process may take some time. And I said, as such, because if you look at the whole deal process, up until the time that the deal actually closes, there is a certain step that will be quite time-consuming. It is actually right and true that dated September 30, we executed a share purchase agreement, and there is another process that would have to follow after the execution of the agreement, which is that we need to receive approval from seven different countries with regards to the combination of the company entities. It is only after we go through this merger approval that we can actually arrive at the closure of this deal and then the relevant payment will be made to us, and then we will be able to finalize the whole deal process. And in terms of the timing of this, basically, our goal is to finish and finalize the process by the end of the first quarter of next year. And basically, this is the reason why I had previously mentioned that the whole process may be time-consuming. And I think there was also a bit of a misunderstanding with regards to the price, the amount of the deal. As you know, when it comes to an M&A deal, even if the asset is the same asset, the M&A deal structure can take many different forms. As a matter of fact, the whole sale or sell-off process for this asset had actually begun in the early summer of 2023. So in the process of going through this deal, we went through a bidding process in 2024, and we were able to shortlist the preferred potential buyers. That fact has, as you know, been disclosed. Now regarding the bidding process and the price setting process, unlike other types of a deal, the KRW10.8 billion, the figure that we had previously disclosed, was based off of December end 2023 figure, including the facilities, the equipment, the land, the asset, as well as the liabilities in working capital. It once again just to elaborate and highlight it was based off of end of '23 figure. I mentioned that the closing is anticipated in the first quarter of 2025. A notable aspect of this deal is that the asset value, which includes the facilities and production assets, is evaluated as of the end of 2023. From that point forward, this asset will not depreciate. The payment settlement will be determined by the difference between the liabilities, working capital, and borrowings at the end of December 2023 and the figures at the closing in 2025. Only the difference in this amount will be subject to the payment settlement. The earnings and business performance from the Guangzhou LCD TV fab will be reflected, and in 2024, this entity has turned a profit. This indicates that the previously disclosed amount and price will not decline. It would be useful for you to make your projections based on the rationale I've just explained. However, since we have not yet closed the fiscal year 2024 accounts, there might be some variation in the actual payment received once the deal is finalized. After we complete that payment, we will provide more details. Ultimately, the market will evaluate this as it sees fit, but I believe this transaction is beneficial for both the buyer and the seller.

Hello. This is Kim Joo Dong, VP of Finance. I will respond to your question about cash and cash equivalents. So starting this year, we have seen improvement in our business performance. And through equity increase, we were able to stabilize our financial position, and we are also gaining more visibility in terms of future uptrend and corporate earnings. So as such, we are going to focus our efforts on optimizing the appropriate level of cash that we hold in order to reduce any financial expenses and also to allow for a further uptrend or further improvement in financial structure. Since we have in place a structure that allows us to respond to changes in liquidity and to eliminate any mismatch in cash held by different geographies as we can employ and use a global cash pooling mechanism. Hence, we believe that with cash at about KRW2 trillion level, we will be able to operate our business quite steadily. We also have sufficient access to various financing means through the financial markets, including borrowings or loans from banks and also issuance of corporate debentures. That all going forward, we are going to optimize our financing portfolio as well as our internal cash flow generation capabilities so that we could have a laser focus on improving our financial position.

Next question, please.

The following question will be presented by Hyon NamKung from Shinhan Investment & Securities.

My question relates to your smartphone business. Recently, there seems to have been more heightened competition amongst your peers for this business segment. Would like to understand what your thoughts are regarding the competition that you're seeing to gain wallet share of your customers. Would like to know what your strategies are in order to respond to such competition? What's your strategy? And also, I believe that you would need to manage seasonality, especially regarding the first half of the year. What are your plans to further enhance the company's value and also to strengthen your business capabilities? And then the second part of the question is that as LG Display's core business, what is your plan to further grow the top line revenue, the profit as well as its share out of your total revenue mix? My last question relates to the recent interest and emergence of the foldable product. There seems to be heightened interest around this product segment. What is LG Display's plan for this product segment? If you could provide some color, that would be appreciated.

Responding to your question, yes, you are correct. We see supply competition heightened across different providers. But our panel shipment continues to show an uptrend. And our product mix around the new model is also strengthening. So we have seen our capabilities regarding technological leadership around the high-end products actually improved over the years, and we have steady supply capabilities. Hence, we expect that still going forward, we will be able to show a continuous uptrend in terms of performance. When you look at the smartphone business, it is inevitable due to the product cycle that there is, to a certain extent, a seasonality factor. But at LG Display, through diversifying our product models and also further growing and expanding the volume, we are going to increase the fab utilization so that we may minimize the gap that we see between the first half and the second half of the year. If you look at the mix from the small businesses, in 2021, the revenue mix was 26%. It increased to 33% in year 2023. So this has been on a growing trend. Going forward, we will continue to make the most of our current production infrastructure and diversify the models as well as increase the shipment so that we may drive improvement in product mix, thereby ensuring top line growth and securing bottom line profitability. Regarding the changes in the form factor, particularly around high-end products, we do expect there is a specific space for these types of high-end products in the total market. However, with the continuation of the macro uncertainties as well as heightened volatilities that we are seeing on the demand side, we are very closely monitoring the acceptance of these differentiated and unique products as well as the pace of market growth as we adjust and respond accordingly. At this point in time, we are mass producing and supplying notebook foldable products to one of the global customers. We are once again very closely monitoring the user response and acceptance and we are also experiencing a broader application of these product segments. In so doing, we're building our own technological as well as mass production experience and when our customers make the request, we have the ample capabilities to respond accordingly.

Next question, please.

The following question will be presented by Sun-Woo Kim from Meritz Securities.

My question relates to the demand side. We see that the recovery for the IT product industry is slower than expected. And also, it is quite stagnant as we speak. And I think this is having a bigger impact on the higher-end, more price-tier product. As we entered into the second half of the year, we also saw a very clear downward trend in terms of demand for tablet OLED as well as panel shipment. I would like to know if you, therefore, had changed your forecast for the future.

Now we still believe that we have the differentiated edge and competitiveness when it comes to tablets that are developed based off of the tandem technology because it provides low power and longer life characteristics. Now having said that, because we see continuing macro uncertainties and also delayed recovery in the overall IT device demand and especially for the high-end product as well, we are in the process of adjusting our original shipment plan. But still, since we are in the midst of the fourth quarter, it is a bit too early for us to provide you with a clear-cut direction as to what our annual shipment volume will look like.

Next question, please.

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

I'm Kyuha Lee from NH Securities. I have two questions that I would like to ask. I would like to know what your price projection is going forward in line with the panel as well as the set demand assumptions that you have in place? Has there been any significant changes compared to your original forecast? And also, we see the sluggishness in the IT LCD demand actually being prolonged. When do you think that things will start to normalize? And what is LG Display's countermeasures and response so that you could actually drive improvement in profitability?

Responding to your question about the demand. Now compared to our early year outlook, the TV set market we are expecting is going to contract versus our original expectation. But conversely, for the IT set and panel market, mostly around the low-end, low-price point products, we are seeing some signs of slight recovery. Looking at first, the TV market, the demand from the TV market set is currently being delayed. But if you specifically look at the OLED TV market, we had worked on clearing up the inventory. So on a year-over-year basis, we believe that performance is going to be more stabilized compared to the past. And for the panel segment, with the fall in the downstream inventory level, the overall TV panel growth was in the low-single-digit. Whilst for the OLED TV panels, we expect to see an outperformance compared to the overall market growth. Now during the second quarter because there was a big global sporting event, we saw a one-off TV panel price uptick. However, this does not mean that there were any structural changes on the demand side. So we do not expect any significant ups and downs or fluctuations when it comes to panel prices. It's too uncertain at this point in time for us to be definitive of any meaningful recovery in the IT product market this year. We are sensing some positive market data on a year-over-year basis for the set and the panel business. But this number actually includes the impact that we've seen in Q2, a tipping impact because of the global logistics issue. And also, we are seeing some migration and transition around the lower end of the B2C market, the general purpose to commoditized products. Hence, that seems to be where we are at this point. But in terms of the B2B and high-end product demand, at this point, we are very closely monitoring how the market plays out. Just to elaborate on some of the factors that may impact the demand would be the changes in the B2C demand with the rate cut environment as well as increases in companies' IT spending, which may further expand B2B demand. And at the same time, with Windows 10 releasing its final version and it's being terminated, as well as increases in the demand for AI-based PCs, which will trigger a replacement demand. We think that these factors may work as catalysts. So there may be some quarterly changes regarding the IT panel prices, but even if there are, we expect it to be not too significant.

This is Won Jae Lee. I'm in charge of Medium Display Planning and Management. Responding to your question on different IT product segments and ensuing demand for those segments, we see differences across different product price points. And so it's very difficult for us to make very accurate predictions as to what will happen in the market. Having said that, the company has really focused on profit over the years and endeavoring to reduce costs and also to reduce the products that are low margin and to grow the share of high-end products underpinned by our technological competitiveness and based upon our partnership with customers. So when the time comes for full-fledged IT demand recovery, supported by our differentiated unique capabilities and product competitiveness, we expect that in the high-end segment of the market, we will be able to expand and solidify our positioning, which will translate into improvement in profitability.

We will take the final question before we end today's call.

The last question will be presented by Suan Kim from Quam Securities.

I am Kim Suan from Quam Securities. I have a question relating to your large OLED panel business. If you look at the shipment, we are looking forward to a year-over-year increase going forward and come next year, your depreciation period would also end. So aside from improvement in the macro backdrop, in order for you to sustain the growth for this large OLED business, what are some of the efforts that the company is currently planning on?

I am Kim Jong Dong, VP of Large Display, and I will provide you with the explanation separating the panels that we supply for the finished product sets as well as our panel business separately. Now first, if you look at the TV set company, the overall total growth is limited at this point, which means that our customers are focused more on the premium, high-end, OLED products. They are also undertaking some value improvements, applying that to the TV set by incorporating AI features. If you look at the total set market from a supply chain perspective, the inventories have become more healthier. So under this overarching backdrop, if you look at our large-sized OLED panels on a year-over-year basis, we are seeing better performance. Now in order to further drive meaningful improvement from an earnings perspective, at this point, our division and in the large OLED business is currently making preparations to further enhance competitiveness. A good case to note is that we're making some technological preparations, especially around the meta technology and also developing technology for eye health and safety. We have been able to communicate this recently to the market. Now last but not least, we are also strengthening our customer base. And for us to further improve on our profitability structure, we are very much focused on our internal cost improvement activities. So our priority that we have placed is on transitioning into a profit-making structure. We will also, based our fab operation, really focus on efficiency in terms of fab operation, production sales, as well as cost reduction, all of this underpinned by the demand that we see from the market.

Thank you. This brings us to the end of the third quarter 2024 earnings conference call of LG Display. Thank you very much for joining us today. And if you have any unanswered questions, please feel free to contact us at the IR team. Thank you.