Earnings Call Transcript - LPL Q2 2021

Daniel Lee, IR Head

Good morning. This is Daniel Lee from LG Display's Investor Relations. I want to thank everyone for participating in this conference call. Joining me are CFO DH Suh, Heeyeon Kim, Senior Vice President of Corporate Strategy Group, Seung Min Lim, Vice President of Corporate Planning, Stephen Ko, Vice President of TV Marketing, Jae Yong Kwon, Vice President of IT Strategy and Marketing, and Ki-Joon Jin, who handles Auto Marketing. The call will last for one hour and will be conducted in both Korean and English, starting with the presentation on the financial results for the second quarter of 2021 and the outlook for the third quarter, followed by a question-and-answer session. For more details on the Q2 2021 financial results, please check the IR presentation document on the company’s website. Those joining via the webcast can refer to the details on the screen widget. Before we start, please take a moment to read the disclaimer. Today's results are based on consolidated IFRS standards prepared for your reference and have not yet been audited. We will now begin with the Q2 2021 earnings presentation. Starting with our business performance for Q2, revenue was KRW 6.966 trillion, a 1% increase quarter-on-quarter despite seasonal effects. We saw a rise in TV shipments, including OLED TVs, along with sustained strong demand for IT products. Operating profit reached KRW 701 billion, also showing a quarter-on-quarter increase due to rising LCD panel prices and improved OLED TV profitability. Our operating margin was 10%, with an EBITDA margin of 25%. The net profit for the quarter stood at KRW 424 billion. Now, looking at area shipments and average selling prices (ASP), we shipped 8.91 million square meters in Q2, marking a 4% increase from the previous quarter. Prices for individual panels continued to rise in Q2, particularly for larger panels. However, the area ASP was $703, which was down 4% quarter-on-quarter but up 7% year-on-year. The shipment of mobile products decreased due to seasonal factors. Our production capacity in Q2 grew by 3% quarter-on-quarter. In terms of revenue breakdown by product segment, IT panels retained the largest share at 39%, followed by TV panels at 38%, which improved by seven percentage points from the previous quarter, driven by growth in OLED shipments and increased LCD prices. Mobile and other products accounted for 23%, affected by reduced shipments due to seasonality. Moving on to our financial position and ratios, cash and cash equivalents at the end of Q2 were KRW 4.3 trillion. Inventory rose to KRW 2.723 trillion, an increase of KRW 371 billion quarter-on-quarter as we focused on high-value products and prepared for seasonal trends in the latter half of the year. Our financial ratios showed continued improvement, with the liabilities to equity ratio at 164%, a decrease of 11 percentage points, and the current ratio at 96%. The net debt to equity ratio improved by six percentage points, coming in at 69%. Regarding cash flow, there were no unusual changes in net cash flow, with cash equivalents remaining largely unchanged at KRW 4.317 trillion quarter-on-quarter. Looking ahead to Q3, we expect area shipments to grow by mid-single digits quarter-on-quarter. We are entering what is typically a positive season, although there may be some variability due to parts supply issues. Area and prices are anticipated to rise by mid-single digits quarter-on-quarter, driven by increases in mobile shipments. Next, CFO DH Suh will present on business performance and strategy.

DH Suh, CFO

Good morning. This is DH Suh, CFO of LG Display. I want to express my gratitude to all stakeholders, including shareholders, investors, and analysts, for your support and interest in LG Display during these uncertain times and the ongoing impact of COVID-19. First and foremost, I hope everyone is staying healthy and safe. I will now provide an overview of the company's Q2 performance. Our revenue reached KRW 6.966 billion, which is the highest in Q2 to date. The operating margin has returned to double digits, and our EBITDA margin of 25.4% is the highest since Q3 2009. In terms of performance by business segment, large OLED TV shipments in the first half of the year totaled 3.5 million units, representing about 80% of last year’s shipments, significantly enhancing our position in the premium TV market. Global sales of OLED TVs in the first half of 2021 showed over 60% year-on-year growth. This development has allowed us to increase our market share in the over $1,000 premium TV segment. In IT, we maintained our improvement despite some supply chain disruptions due to strong demand in enterprise and education markets. Our competitiveness in IT products and customer base remains strong, leading to solid performance. In the mobile segment, we experienced typical seasonality in Q2, but we focused on stabilizing our development, production, and quality to meet increased demands from our strategic clients in the latter half of the year. Looking ahead to Q3, as we enter a typically positive season, we anticipate demand growth across all segments—TV, IT, and mobile. Our annual shipment target for OLED TVs is set at under 2 million units. We expect improved performance quarter-on-quarter in all IT products, driven by strong demand. In mobile, the increased production of new models for customers is predicted to have favorable outcomes. However, we remain cautious due to ongoing uncertainties from COVID-19 and challenges with the supply of key components. To mitigate volatility, the company will enhance market monitoring and adopt proactive management strategies. Now, concerning our strategic direction for each business. For large OLED, we have solidified our position in the premium TV market through improved internal capabilities, product lineup, and size diversification, laying the groundwork for profitability. In the second half, we aim to strengthen the position of OLED TVs in the ultra-large segment and broaden our reach in the specialized premium market. We will also explore applications for OLED technology beyond the TV market to develop high-margin, high-growth business opportunities. Our goal for the large OLED business is to achieve profitability in the second half of this year, with mid-single-digit operating margins in 2022, aiming for double-digit margins in the long term. In the P-OLED segment, our business has stabilized due to enhanced internal capabilities. We are positioned for consistent volume growth and have established a reliable revenue structure through solid customer trust. Our focus will be on increasing volume and preparing for new models by strengthening partnerships with customers while expanding our high-margin product portfolio, such as wearables. Regarding our operational strategies for LCD, we are concentrating on areas where we are competitive by reallocating capacity towards high value-added IT products and focusing our TV operations on high-margin offerings, including ultra-large and commercial products. We are also enhancing our cooperation with major customers to build a stable operating base and maintain resilience against market fluctuations. In terms of financial activities, we reduced borrowing by approximately KRW 500 billion in Q2. Moving forward, we aim to improve our financial structure and maintain key ratios without increasing borrowings, adhering to our commitment to keeping capital expenditures within our EBITDA. Lastly, regarding our dividend policy, which has been a common inquiry, the company is developing a policy to allocate a portion of the consolidated net profit for dividends. We will communicate any finalized policy that is predictable and sustainable for the medium to long term as soon as it is ready. In the second half, we will enhance our investor relations efforts to better connect with our growing number of individual shareholders. Thank you for your attention. This concludes our earnings presentation for Q2 2021. We are now open to questions.

Operator, Operator

Now the Q&A session will begin. The first question comes from Kim Dong-won from KB Securities. Please proceed with your question.

Kim Dong-won, Analyst

Now first of all, congratulations on the good performance. I have one question each regarding LCD and OLED. First, when we look at the revenue share, it seems that the profitability of LCD TV is most vulnerable to changes in pricing. What was the revenue share for LCD panels in the second quarter, and what do you anticipate the price trend will be for LCD panels in the second half of the year? Additionally, with the company's plan to exit the LCD market next year, are there any changes to your exit strategy? My second question pertains to OLED. I agree that the company has established a foundation for profitability due to an improved cost structure in small-to-mid size panels and increased sales of large size panels. However, there have been reports suggesting a potential need to ramp up the Guangzhou plant or the E6 lines, which could lead to increased costs, including depreciation and amortization. Do you think this could delay the timeline for the OLED business to become profitable?

Daniel Lee, IR Head

I understand you asked about the LCD followed by OLED, so let me address the second question first. Your core question seems to be whether the company needs additional investment for both large-size OLED and small-to-mid-size plastic OLED, and if that could delay our path to profitability. First, I want to highlight that for several years we have faced a sluggish LCD market on one side and significant investments in OLED on the other, while struggling to achieve timely mass production and secure revenue. These challenges have posed significant obstacles for us. This situation has provided us with an opportunity to reaffirm essential investment principles, particularly for large-scale investments. Going forward, our decisions regarding significant investments will be based on a comprehensive and objective assessment of our current situation and future possibilities. We will consider our capability to achieve volume and profitability as a result of such investments. This reinforces our principle that we will proceed with large-scale investments only under defined conditions. We will ensure that mass production is timely and that we achieve desired volume and profitability. In response to your question, our investment decisions will not hinder our return to profitability. Regarding the LCD, the share of sales coming from LCD TVs fluctuates with each quarter but is generally around 15% of total sales, reflecting a double-digit figure. Regarding panel prices, this remains a key concern for the company, and we continuously monitor market trends. I gather you're interested in the panel price outlook for the second half of the year and possibly into next year. We've previously discussed that panel pricing is influenced by supply and demand dynamics, where prices are formed at their intersection. For now, we believe that demand in the IT sector will remain robust in the second half of the year, but we need to watch for any potential oversupply. Currently, it seems that the readiness of parts and modules suggests that prices are likely to remain strong for the foreseeable future. Various factors will play a role next year, including the ongoing effects of COVID-19 and the readiness of our competitors in terms of IT part supply. Therefore, it’s difficult to predict the IT panel price trend for next year definitively, but we will base our operations on the assumption that panel prices will stabilize or potentially decline. As for LCD TVs, especially smaller sizes like 30-inch and 43-inch, we are noticing a decrease in demand. This can be attributed to several factors, including COVID-19, which has dampened demand. It's largely understood that sales for these sizes have been primarily in emerging markets, and with a resurgence of COVID-19 in places like India, retail sales are being impacted. It's unclear whether this decline is temporary or indicative of a larger trend, but we will need to monitor the situation closely. We anticipate that, in contrast to IT, demand for LCD TVs may decrease more rapidly, leading to weaker pricing than seen in IT. Regarding your next question about an exit strategy for LCD, I believe there's been a misunderstanding. I've emphasized numerous times through various channels that our LCD business strategy is not about reducing or abandoning the LCD sector. The focus of our LCD business restructuring is on strengthening our competitive advantages. We have an LCD facility in China, and we intend to utilize our LCD fabs flexibly, diverting resources from less competitive areas to more competitive ones, as we’ve done with TV capacity. Although we have shifted much TV capacity to IT, we recognize that stable IT capacity operations are not yet assured. We are looking at our strategies with a mid-to-long-term perspective, which is why we are strengthening our relationships with key clients. As previously mentioned, we remain robust against short-term market fluctuations, particularly in the IT LCD sector where we possess the necessary technology, competitive edge, and customer base. We will continue to enhance our competitive stance and solidify our customer relationships in the IT segment. For LCD TVs, we see our current capacity is about half of its peak level. The capacity has become leaner, and we will focus on more profitable segments like commercial or large-sized products. Similar to our IT strategy, we will strengthen partnerships with strategic clients to remain resilient against market changes, acknowledging that variability may still occur. However, our ability to operate flexibly among different fabs will enable us to adapt to market conditions as necessary.

Operator, Operator

The following question will be presented by Kim Hyun-soo from Hana Financial Investment. Please go ahead with your question.

Kim Hyun-soo, Analyst

I have two questions. The first is about the EBITDA guidance. Earlier in the presentation, it was mentioned that the company would maintain the principle that CapEx execution would stay within EBITDA. Given the higher earnings expected for this year and next, it might be challenging for you to provide a definitive response, but could you share the EBITDA guidance for this year and next? My second question pertains to CapEx. There are discussions about ramping up P-OLED in response to IT demand, along with further investment in the mobile sector. Your previous responses have been quite conservative, and we understand this requires careful evaluation. While it may be difficult to give a clear answer at this moment, do you think investing in the P-OLED ramp-up is necessary?

DH Suh, CFO

First regarding the EBITDA guidance, as it stands today, the company's depreciation and amortization for this year will also be similar for next year at around KRW 4.5 trillion. Assuming there will be breakeven point in the second half of the year, then KRW 4.5 trillion plus operating profit of KRW 1.1 trillion would total about KRW 5.7 trillion. Of course, at this point, we cannot predict the operating profit for the second half. However, based on market expectations, that is where we anticipate it will be. With the KRW 4.5 trillion in depreciation and amortization, combined with the operating profit, I would estimate that the EBITDA would range from KRW 5.5 billion to KRW 6 billion. That is our goal, and I believe it is achievable. Regarding the investment in IT and mobile for plastic OLED, I can inform you that these matters are currently under review, and there has been some progress. Once we have definitive information to share with the market, we will do so promptly. I ask for your continued patience as we work through this. We will take the next question.

Operator, Operator

The following question will be presented by Woo Dong-je from Bank of America. Please go ahead with your question.

Woo Dong-je, Analyst

Congratulations on the impressive performance that is reassuring. In terms of quarterly performance, the primary contributor to this quarter's earnings was again the LCD, despite seasonal fluctuations. The company seems to be in a favorable position with the LCD, likely due to its differentiation. For instance, regarding IT-use LCDs with oxide technology, what are the reasons that companies in Taiwan, Japan, or China aren't performing as well as the company currently is? Additionally, it appears that China is making significant investments not only in Gen 8 LCD but now also in Gen 10 LCD. This could pose a risk to the recent surge in LCD TV prices, which had risen over 100%, as they may fall sharply. The company has outlined its response strategy, such as enhancing partnerships with key clients and further developing its differentiation. However, based on the historical trends of the LCD market over the past decade, periods of oversupply have consistently resulted in steep price declines, presenting a significant risk for the company. What actions can the company take to address this potential risk? It seems that facility investment has been consistently above KRW 1 trillion each quarter. From my perspective, an investment of about KRW 500 billion to KRW 600 billion per quarter would be adequate. Given that EBITDA is growing, should facility investment also increase in line with EBITDA growth? Alternatively, could we stabilize capital expenditures at around KRW 3 trillion annually and utilize surplus EBITDA as free cash flow for potential share buybacks to benefit shareholders? This approach might be more advantageous than simply offering cash dividends.

DH Suh, CFO

Regarding your first question about the differentiation of IT products, I understand that you were asking about the competitors in China, Taiwan, or Japan. Some are using IPS technology while others are employing oxide for their products. However, there are still significant entry barriers, particularly in infrastructure and development processes. While I'm not in a position to speculate on the thoughts of competitors, the entry barriers remain high. In terms of the LCD TV and the potential price drop, we want to clarify that our challenges over the past couple of years were not related to the LCD itself. Although sales in the LCD business declined, we were never operating at a loss in that area. The difficulties stemmed mainly from issues with large-size OLED and plastic OLED production and sales not adhering to the schedule, which led to notable deficits. These challenges are largely being resolved now. We are preparing for any potential price drops through scenario planning. I previously mentioned that our LCD panel capacity has been cut in half and that we are reinforcing partnerships with strategic clients to ensure operational stability. For LCDs, we are focusing on our Paju P7 and Guangzhou facilities, which will allow us to adapt flexibly to market fluctuations while maintaining operational stability. Our strategy will be to adequately address any potential price declines to ensure mid-to-long term profitability in the LCD sector. You also asked about our approach to facility investment. I want to emphasize that our commitment to keeping capital expenditure within EBITDA does not imply that we will exhaust all our earnings. Ideally, we aim to stay within our depreciation and amortization levels, and that is our goal for this year. We plan to keep our capital expenditure aligned with these levels. Any additional EBITDA we generate will be utilized to reduce our debt and bolster our financial position, as we have done this time. For the upcoming year and beyond, we will make any necessary strategic investments that are crucial for future growth and profitability while maintaining a conservative investment approach apart from those necessities.

Operator, Operator

The last question will be presented by Kim Sung Kyu from Daiwa Securities. Please go ahead with your question.

Kim Sung Kyu, Analyst

I have two questions. The first is about the OLED TV. I noticed that sales for the OLED TV in the first half were quite strong. In the second half, considering the positive seasonality, I believe the company can meet the target of 1 million and a total of 8 million units. However, regarding the LCD TV, as previously mentioned, demand is likely to decrease sooner than anticipated, which may affect both demand and pricing. Additionally, concerning the OLED TV, does the company anticipate any downward pressure on pricing that could hinder achieving the target for the second half? Do you see a risk of such pricing pressure for the OLED TV? The second question pertains to the planned shipment increase this year. There is an additional capacity of 30,000 at the Guangzhou facility, but what are the company's capacity targets for next year? There have been discussions of reaching 10 million or even 11 million. Can you provide guidance on the new target shipment for next year? Lastly, I’d like to get an update on the automotive display business. In the first half, there were significant challenges related to automotive semiconductor supply. In the second half, the situation appears to have improved somewhat for electric vehicles, but overall semiconductor supply challenges seem to persist and may continue into late this year. What is the company's update on the automotive display business as well as OLED?

Daniel Lee, IR Head

The first question was about the pricing of OLED in relation to the falling LCD prices and how that might affect OLED pricing, particularly regarding shipments for next year. It is true that LCD and OLED, being the two main types of TV panels, influence each other. However, while the price of LCD TVs has nearly doubled compared to last year, it has not significantly impacted OLED TV pricing. This is because our OLED pricing is determined through extensive market research rather than being tied to LCD prices. We aim to establish an optimal price point for OLED that appeals to a broad consumer base. Although we discuss panel pricing with our customers and manufacturers, changes in LCD prices might influence OLED prices but not directly, as we rely on market factors for defining prices. Therefore, we anticipate that any future changes in LCD pricing will not negatively impact our management of OLED prices. Regarding OLED shipments for next year, we are preparing for this. We have an additional capacity of 30K in Guangzhou, which allows us to ship 10 million units next year, with the potential for 11 million the following year. Concerning the automotive display sector, there have been issues related to semiconductor shortages, particularly among OEMs and first-tier suppliers, which have been intermittent and at times severe. Despite this risk, we have not encountered significant production disruptions due to these shortages. However, we remain vigilant in monitoring the situation to avoid missing valuable opportunities. As for our overall LCD business updates, our auto panels have primarily utilized amorphous technology. We are currently transitioning to LTPS for LCD, and the orders we are receiving are predominantly for LTPS. Within the next two to three years, we will complete our supply of LCDs based on amorphous technology and will exclusively use LTPS moving forward. Regarding plastic OLED, we view it as a panel well-suited for electric vehicles, and we are actively working to limit orders for plastic OLED, particularly from new and existing EV OEMs entering the market. It's essential to accurately define our target segment to enhance profitability and business visibility in the automotive display sector. We aim to create a system that ensures profitability in this business, focusing on receiving orders for plastic OLED, which is our current strategic priority. Once we start seeing positive outcomes, we will promptly share this information with the market. We will now close the Q2 2021 earnings conference call for LG Display. Thank you once again for joining us today. Please do contact us at the IR team for any additional questions. Thank you.