Earnings Call Transcript - LPL Q1 2023

Operator, Operator

Good morning and good evening. First of all, thank you all for joining this conference call and now we will begin the conference for our Fiscal Year 2023 First Quarter Earnings Results by LG Display. This conference will start with a presentation, followed by an additional Q&A session. Now we shall commence the presentation on the Fiscal Year 2023 First Quarter Earnings Results by LG Display.

Brian Heo, In-Charge of IR

Good afternoon. This is Brian Heo, In-Charge of IR at LG Display. On behalf of the company, I would like to thank all the participants for joining this conference call. Today, I'm joined by the CFO, Sunghyun Kim; CSO, Hee-Yeon Kim; Senior Vice President of Corporate Planning, Seung-Min Lim; Vice President of Auto Marketing, Eric Ki Hwan Son; and those in charge of Business Intelligence and Large Display Marketing. The conference call will be conducted in both Korean and English. Please refer to the provisional earnings released today, or the IR Events section of the company's website for more details on the financial results of Q1 2023. Also, before we begin the presentation, please take a moment to read the disclaimer. Please also 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 first start with Q1 business results. In the midst of sluggish demand for TV and IT products and inventory corrections continuing in the downstream industries, there were added impacts from slow seasonality and the company's downsizing of its LCD TV business, which all drove Q1 revenue down 40% Q-on-Q and 32% year-over-year, reporting KRW 4,411 billion. Meanwhile, underpinned by preemptive inventory downsizing since Q4, we continue to rationalize our large panel business, undertaking intense cost savings, introducing cost innovations; thanks to which we were able to narrow the fluctuations in profit and reported an operating loss of KRW 1,098 billion. Next on area shipment and ASP per square meter; first quarter area shipment was down 46% Q-on-Q, reporting 4.24 million square meters on the back of muted downstream demand and seasonal shipment declines across all product segments, as well as downsizing of the company's LCD TV business with the closure of the domestic LCD TV fab at the end of last year. Typically, ASP per square meter follows a downward trajectory during the first quarter, as mobile demand seasonally declined during this period. But this quarter, on a lower LCD TV mix whose ASP is the lowest, ASP per square meter actually increased 20% Q-on-Q, reporting $850. In terms of the revenue breakdown by each product segment, on the back of downsizing of the LCD TV business, revenue mix of the TV panel was down six percentage points Q-on-Q, reporting 19%, while IT panel mix reported a relative increase, recording 38%. Driven by seasonality and ensuing decline in panel shipments, mobile and other products saw their revenue mix dip by two percentage points Q-over-Q to 32%. Auto business continued to show steady top-line growth, reporting mid-20% revenue growth year-over-year with its revenue mix at 11% this quarter. OLED revenue mix was lower Q-on-Q due to seasonal declines for large and mobile OLEDs, but on a year-over-year basis, driven by sustained efforts towards business structure upgrades, OLED revenue mix was up 13 percentage points, reporting 45%. Next is on the financial position and key metrics; company's cash and cash equivalent was KRW 3,894 billion, maintaining above the mid-KRW 3 trillion level. While, on the back of active inventory management to keep it at the minimum level, Q1 inventory was flat Q-over-Q at KRW 2,811 billion. Key financial ratios were up Q-on-Q on rise in debt, with a debt-to-equity ratio of 248% and net debt-to-equity ratio at 126%. In terms of cash flow, the opening cash balance was KRW 3,547 billion, and with an increase in cash inflow from financial activities, there was an increase of KRW 347 billion Q-on-Q, reporting ending balance of KRW 3,894 billion. Next on Q2 guidance; although market volatilities and uncertainties persist, we expect a pickup in seasonal demand following the launch of new models from each product segment in the second quarter, driving Q-over-Q shipment growth for large and mid-sized panels. As such, area shipment is expected to rise by around 10% Q-on-Q. On seasonal declines in mobile panel shipment, ASP per square meter is expected to fall mid-single digit on a Q-over-Q basis. Next, our CFO, Sunghyun Kim will walk through key highlights.

Sunghyun Kim, CFO

Good afternoon. This is CFO, Sunghyun Kim. Looking back over the first quarter, the difficult market backdrop continued as last year's macro uncertainties persisted, while inflation squeezed down on consumption, which drove muted demand for display panels, with inventory corrections continuing in the downstream industries. In particular, sluggish demand for high-end products was more pronounced versus what was seen previously for general B2C products, and as the company downsized its LCD TV business as part of the strategy to advance its business structure, shipment and revenue declined by a substantial margin compared to previous years. To respond to such business environment, the company has engaged in preemptive inventory cuts, rationalized the operation of the large panel business, and actively and intensely reduced and innovated our cost base in order to narrow the extent of fluctuation in profit. Under the continuing slump of the downstream industry, the market dynamic has been such that panel shipment has been weaker, below actual set sales for around one full-year now, making it difficult to predict the exact timing of recovery or normalization of sell-through demand. Accordingly, the company is focusing on recovery of its financial soundness and upgrading to an advanced business structure in order to pull forward its execution capabilities. First, to strengthen our liquidity position, in Q1, we entered into a strategic financing arrangement with LGE. Through this arrangement, we were able to expand business cooperation while at the same time strengthening stability in operating our funds in the face of the uncertain external environment. The funds raised will be used to bolster financial strength, develop products and technologies to strengthen our OLED business, and to further advance the company's business structure, such as through driving market-creating businesses, including transparent and gaming OLED applications. Also, throughout the first half, we plan to tap into multiple financing options to further strengthen our liquidity position and build up an agile financial structure to flexibly respond to the challenging environment. This will push up some of our financial ratios, but after the start of the second half on gradual earnings improvement, we will enhance financial metrics in stages. In terms of upgrading the business structure, by growing the contribution from order-based business, where volume and price can be managed favorably based upon close collaboration with our customers, we plan to focus our capabilities on future-proofing and bolstering competitiveness towards differentiation. Share of order-based business increased to early 40% this year and our target is to reach 70% in two to three years' time. High value-added mobile products, slated for additional mass production this year, will see an increase in shipments, while we will solidify our Global #1 positioning by securing orders and growing revenue from displays for automobile applications. For the mid-sized OLEDs, including OLED for tablet PCs where investment is currently ongoing, we plan to thoroughly prepare for supply and mass production in 2024, underpinned by technology leadership. For the supply and demand-based business where market volatilities are high, we are focusing on high value-add segments. For large OLEDs, we are broadening the lineup of differentiated products, underpinned by stronger fundamental competitiveness in, for instance, brightness and power consumption; and through cost innovations, we plan to solidify our Premium TV market positioning and accelerate market-creating businesses, which include transparent and gaming OLED applications. Market uncertainties and volatilities still run high, and although demand is muted and inventory adjustment continues in the downstream, driven by intense cost-saving efforts, we expect Q2 profit to marginally improve versus the first quarter. As we bottom out in the first half following the recovery of inventory levels and soundness across the overall ecosystem of the industry, in the second half of the year we will see a rise in demand for panels, and with an increase in shipment for mobile products and positive performance from the order-based businesses, we plan to achieve a turnaround in profit in the second half of the year and drive earnings improvement on a full-year basis. Notwithstanding unprecedented weakness in the market, by advancing the business structure that will form the basis for steady earnings going forward and stronger financial soundness, we commit to do our utmost to overcome this difficult situation with speed and drive meaningful results. Thank you.

Brian Heo, In-Charge of IR

This brings us to the end of the earnings presentation for Q1 2023. We will now go into questions. Operator, please commence with the Q&A session.

Operator, Operator

The first question will be presented by Dong-won Kim from KB Securities. Please go ahead with your question.

Unidentified Analyst, Analyst

Thank you for taking my question. I have several questions relating to your large panel business, as well as your mid-to-small-sized panel business. First, can you provide some color on how things are going with regards to your plan to sell off your plant and fab in Guangzhou and Paju? If you could also provide a little more color on the entire LCD TV fab exit roadmap, that would also be quite helpful. According to the press coverage, I would like to understand your assessment regarding the likelihood of your success vis-a-vis the large panel OLED and acquiring new customers compared to your past endeavors? And also, would that mean that we can expect to see some improvement on your profitability in your white OLED business going forward? Secondly, your P-OLED business; your profitability has not been all that great, and also the amount of sold volume was quite low, below by about 40 million. Would you like to understand whether you see that going forward as we enter into the second half of the year, we will see improvement in profitability in a meaningful manner, as well as improvement in volume? Another question relates to your tablet OLED business for next year. What is your assessment of your positioning on your key customers vis-à-vis your competitors? And can we look forward to profitability improvement from this business as well?

Sunghyun Kim, CFO

Yes, I will respond to the first question on our LCD exit planning. As you are already aware, we closed down our domestic LCD fab at the end of last year, and we are currently running our China 8th Generation fab at about 50%. We have downsized the operation of that China fab. Now with regards to the LCD TV fab, we are looking at various different aspects to come up with ways to meaningfully utilize the LCD TV fab, and at this point, we are carrying out initiatives to sell off our domestic Gen 7 TV fab. And with regards to other fabs, we are at this point tapping into various different options that could help us maximize the profit of the company by looking at potentially transitioning it or migrating it for different use cases, or through selling it off, or maybe engaging in strategic partnerships.

Unidentified Company Representative, In-Charge of Large Display Marketing

Hello. I am in charge of Large Display Marketing. Before I provide you with an answer, I hope that you could appreciate and understand that it will be difficult for us to provide you with any specific information that relates to our customers. The company is currently endeavoring to bring improvements regarding our overall customer relationship and the overall dynamics of the structure. We will very actively engage in collaborations with any customer who we deem we could create mutual synergies and who truly appreciate and understand the value of OLED. At the same time, we are at this point continuously strengthening our other businesses, including gaming and transparent OLED applications that fully utilize the strengths of OLED technology, so that we may further bolster our business portfolio in the future. Now, if you look at the recent macro environment, the volatilities are running high and we have seen the market significantly dampen. If you look at the sluggishness in the market demand, what we experienced in the high-end market, including the OLED TV, is much weaker compared to what we previously explained regarding our general-purpose B2C products. So under this backdrop, we have seen, during the first quarter, in terms of the OLED panel shipment, really perform weaker compared to the actual set sales or sell-through, due to the fact that there has been an inventory adjustment in our set customers, as well as from the channel, and also influenced by the slow seasonality. On the other hand, from our major customer, GE, we have seen, through preemptive inventory adjustment as well as cost efficiency efforts, significant improvements in performance for Q1. Going into Q2, we expect to see a gradual improvement in volume, as well as our market position. Based on this assessment, our positive expectations going forward for the large OLED market still stand, it is still valid, and despite the difficult situation, by utilizing and leveraging our competitive edge that we have in the OLED business, we will continue to strengthen our positioning in the high-end TV market.

Sunghyun Kim, CFO

Yes, this is the CFO. I will respond to your question about the volume growth for smartphones. Now, if you look at our company's smartphone capacity based on Generation 6, our capacity is 30,000, and this year we'll be adding 15,000 more. We expect our volume growth will be aligned with such capacity additions.

Seong Gon Kim, In-Charge of Medium Display Marketing

Hello, I'm Seong Gon Kim, In-Charge of Medium Display Marketing. I will respond to your question about tablet OLED. As we start to enter into the OLED tablet segment in the first half of the year 2024, we are expecting to have a share of about 50% in our strategic customer in the OLED tablet segment. In terms of the overall OLED tablet market, we are seeking to have more than 60% positioning. Now, as we enter into this tablet OLED business, we are looking forward to two areas of improvement in terms of profitability and narrowing the volatilities of earnings performance. Now, because the panel price is 2x higher compared to the LCD price, we are looking forward to higher levels of revenue growth. Additionally, compared to smartphones, tablets have much lesser seasonal volatility across the first half and second half of the year; hence we believe or hope to see a reduced extensive volatility experience in the first half of the year.

Brian Heo, In-Charge of IR

We will take the next question, please.

Operator, Operator

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

Junghoon Chang, Analyst

Thank you for taking my question. I'm from Samsung Securities. During the presentation, the CFO mentioned that you are looking to increase the revenue mix from the order-based business from 40% to above 70% going forward into the future. I would like to ask for more detail regarding this. In the first half of the year, I see that your Auto Application business accounts for 11% of the total mix. Then can we expect to see this increase to 40% at the end of the year and what will be the key driver that will enable that? Also, if you are seeking to expand your Auto Display business and your order-based business, I would assume that your customers would want to confirm the level of capacity that you can provide them. I would like to hence understand what your business management plans are with regards to capacity management.

Sunghyun Kim, CFO

Yes, hi. This is Sunghyun Kim, I'm the CFO. I will respond to your question. When we say order-based business, we are not just referring to the Auto business. The concept of order-based business is in contrast to what we are used to in the display industry, whereby the display industry has usually been based off of supply and demand dynamics based upon the growth of the market. Normally, companies build out capacity, adding capacity before the actual orders come in, exposing themselves to significant market fluctuation. So the order-based business is a concept that is contrary to this demand and supply-based dynamic. In that sense, the order-based businesses manage volume based upon agreements or contracts, as well as communications with the customers. This provides clearer visibility and stability compared to the demand and supply-based business. Based on that definition, this order-based business will include tablet, mobile phone, watch, and auto applications. For Auto, as you've correctly mentioned, its mix will be around 10%, whereas everything else will account for around 30%. In terms of the Auto business, regarding its order backlog and business visibility, it is very high and quite clear, and with regards to how the Auto business will play out going forward, I will turn it over to Mr. Son from Auto Marketing to respond to that question.

Eric Ki Hwan Son, Vice President of Auto Marketing

Yes, I'm Ki Hwan Son from Auto Marketing. Now responding first to the overall growth trend in terms of the top-line revenue and order backlog for Auto business, allow me to speak on that first. As of the first quarter, we actually reported above KRW 3 trillion in the orders booked, and on a year-to-date basis in terms of the order backlog, this is a 20% growth when compared to the end of 2021, a 70% growth. For the Auto business, the revenue for year 2023, in three years' time, we expect to see about a twofold growth going forward, going above the KRW 2 trillion.

Brian Heo, In-Charge of IR

Next question, please.

Operator, Operator

The next question will be presented by Won-suk Chung from HI Investments and Securities. Please go ahead with your question.

Won-suk Chung, Analyst

Yes. With regards to your long-term horizon approach, you talked about the auto display. But at the end of last year, you started to reduce and phase out your LCD TV capacity. The panel prices started to pick up in Q1, of course, didn't influence your earnings that much because of your downsizing of the LCD TV business. It seems you are facing significant loss-making businesses in OLED TV and your IT business. With regards to improving the earnings, that seems to be quite necessary at this point. From the investors' perspective, as you mentioned during the presentation, you are looking forward to a turnaround in profit in the second half of the year, but would that mean we would just have to wait for improvement in the overall market demand? Or even if the demand recovery is delayed and pushed back to next year, can we still expect a profit turnaround driven by your cost-saving efforts or possibly a human restructuring of your headcount?

Hee-Yeon Kim, CSO

Thank you very much for that good question. I will respond as the CSO to your question. In such a large-scale equipment-based industry such as the display industry, when three factors come into play, including macro uncertainties, inventory adjustment, as well as muted sell-through demand, I must admit it is extremely difficult and not easy to predict earnings improvement going forward. However, we are looking forward to a turnaround next year in returning to profit, driven by one industry-based and three very corporate-specific drivers. Regarding the industry factor, we do admit it will be quite difficult to expect a recovery that is significantly driven by improved or a rebound in actual end-user demand, in light of the macro situation that we foresee next year. However, it's been about one year since the industry underwent significant inventory correction, and adjustments have significantly taken place in the inventory levels. We believe that the inventory adjustment in the channel has occurred quite extensively. Although very minor, we are seeing positive signals, where inventory restocking demand is starting to pick up. Typically, the market dynamic is such that the set inventory and channel inventory and sales are usually at a higher level compared to the panel sales. However, over the past year, it was quite unusual where panel volume or panel sales was much weaker compared to the set sales. As we go into the second half of the year, we will see normalization of the market dynamic, whereby the panel volume or the sales volume finds its alignment with the actual set sales. Additionally, there are three specific reasons from the company's perspective. First is the 15,000 capacity for the mobile fab coming online, which will drive up volume by about 50% and will be the biggest contributor behind a turnaround in profit. Early next year, we will also start to see our tablet fab come online, and as a result, we will be able to see revenues reach around KRW 2 trillion annually. This will also contribute to next year's earnings performance. Simultaneously, our order backlog for the Auto business is also growing. As previously mentioned, we will be able to drive this business from KRW 2 trillion to KRW 3 trillion by next year.

Brian Heo, In-Charge of IR

We will now take the final question.

Operator, Operator

The last question will be presented by Dong-Jun Kim from Shinyoung Securities. Please go ahead with your question.

Unidentified Analyst, Analyst

Thank you. I would like to ask two questions. First, regarding your Auto Electrical business, Display business, you talked about the order backlog. I would like to get some color on what your assessment is in terms of short- to mid- to long-term profitability. The second question is on your OLED business; your domestic competitor has announced a new investment into a bigger or higher generation investment for OLED. What is your take on this and what is your direction going forward?

Eric Ki Hwan Son, Vice President of Auto Marketing

Yes. Hello. I will respond to your question about the Auto business. I am Ki Hwan Son from Auto Marketing. For the Auto business, rather than looking at short-term profitability, what's more important is to look at the profitability off of the order backlog. That is considered more important. Looking at the auto backlog, our profitability is in high single digits, and we will manage our order in a steady manner until the time they accrue revenue.

Seong Gon Kim, In-Charge of Medium Display Marketing

Yes, I am Seong Gon Kim, In-Charge of Medium Display Marketing. Before tackling your question on OLED investment, allow me to just provide our market outlook and the company's strategy on IT OLED. From a mid- to long-term perspective within the IT Products segment, depending on the level of consumer acceptance for each product segment, OLED penetration will vary for different products and customers. Through the tablet OLED fab, we will maximize our mass production efficiency supported by our proven experience in mass production to bolster our technological leadership. Against our global customers, we will be testing the economics of the OLED market by taking our white OLED-based monitor as well as notebook panels, which have the Tandem OLED technology applied. We will do this to test the feasibility of our capabilities and build a high-end IT product portfolio supported by OLED. In light of all of these aspects, our investment decisions will consider the IT OLED market size, the speed of growth, our financial strength, and the amount of available investment capital. All of those aspects will be thoroughly considered in our decision-making.

Brian Heo, In-Charge of IR

With that, we will now close the first quarter 2023 earnings conference call. Thank you very much for joining us today. Please contact the IR team if you have any further questions. Thank you.