Earnings Call Transcript - LPL Q2 2020

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 call for Fiscal Year 2020 Second Quarter Earnings Results by LG Display. This conference will start with a presentation followed by a Q&A session. Now, we shall commence the presentation on the fiscal year 2020 second quarter earnings results by LG Display.

Kim Heeyeon, IR Lead

Good afternoon. This is Kim Heeyeon, in charge of LG Display's IR. On behalf of the company, let me thank all the participants at this conference call. Today, I am joined by the CFO, DH Suh; Seung Min Lim, in charge of Corporate Business Management; Matthew Kim of TV Marketing; JY Kwon of IT marketing. This conference call will be conducted for one hour in both Korean and English, starting with the presentation on the financial results of Q2 2020 and the company's outlook, followed by Q&A. Please refer to the IR presentation document on the company's website for more details on the financial results of Q2 2020. For those joining through the webcast, please refer to the details on the widget on your screen. Before we begin the presentation, please take a moment to read the disclaimer. Please note that today's results are based on consolidated K-IFRS standards prepared for your benefit and have not yet been audited by an outside auditor. With that said, we will now start with the presentation on Q2 2020 earnings results. Let me start off with our business performance in Q2. Revenue in Q2 was KRW 5.307 trillion, up 12% quarter-on-quarter. There was an increase in IT product shipments despite the slowdown in TV and mobile shipments due to COVID-19. Operating loss was KRW 517 billion, showing an increase quarter-on-quarter. Despite the growth in revenue, fixed cost burden increased following the production adjustment to respond to demand uncertainty, and also because of demand volatility and seasonality due to the contraction in the upstream industries like smartphones. Operating margin was minus 10%, EBITDA margin 8%, and net loss was KRW 503.8 billion. Next is area shipment and ASP. Area shipment in Q2 was 6.7 million square meters, down 4% Q-o-Q. It is owed mostly to a slowdown in TV shipments, following retail shutdowns under COVID-19. ASP was $654, up 15% Q-o-Q and up 44% Y-o-Y. This is due to growth in shipments of IT products, where the company has unique strength. The company's production capacity was reduced by 4% Q-o-Q as downsizing of low margin TV fab continues. It is a decrease by 29% Y-o-Y. Next is Q2 revenue breakdown by product segment. What is noteworthy in Q2 revenue is that the share of IT was 52%, going over the 50% mark. This is largely attributable to the COVID-triggered increase in work-from-home and online education. TV's revenue share was 23%, down eight percentage points Q-o-Q due to a decrease in TV panel shipments and LCD panel price. Mobile and other products share was 25%, down seven percentage points Q-o-Q, due to demand slowdown in upstream industries like smartphones and automobiles. Next is the company's financial position and ratios. The company's inventory at the end of Q2 was KRW 2.0394 trillion, down 12% Q-o-Q. There were production adjustments in response to the pandemic-related demand slowdown and uncertainties. As for financial ratios, the liabilities to equity ratio and net debt to equity share rose slightly Q-o-Q. Cash flow at the end of the quarter was KRW 3.5991 trillion, staying flat from the previous quarter despite the increase in net loss. This was thanks to stronger financial management such as more efficiency in working capital. Next is the company's guidance for Q3 2020. In Q3, although the risks from COVID-19 continue as the pandemic lingers on, revenue growth and profitability improvement are expected for the company. Mass production will begin at the Chinese OLED line; shipment of P-OLED for smartphones is likely to grow; and differentiated IT products will increase. Area shipment is expected to grow at a 20% level, and blended ASP is expected to grow additionally at a mid single-digit. As a result, it is expected that the company will recover the revenue before the LCD structural innovation, thanks to realignments around high value-add businesses despite the capacity decrease following fab downsizing. Next is the presentation by the company's CFO, DH Suh.

DH Suh, CFO

Good morning to our shareholders, investors, and analysts. I am DH Suh, CFO of LG Display. COVID-19 and its repercussions are lasting longer than expected, heightening uncertainties in the market and business environment. First and foremost, I wish health and safety to everyone in your families. Allow me to add some more details on the company's Q2 performance. There were both positive and negative impacts from COVID-19. Area shipments fell 4% Q-o-Q. Shipments of OLED TV panels fell sharply following the global spread of COVID-19 and subsequent offline retail shutdowns. Market demands for mobile products also shrank. On the other hand, work-from-home and online schooling have emerged as new opportunities as part of our new lifestyle. This has led to an increase in sales of IT products, where the company has unique strength. ASP rose 15% Q-o-Q and 44% Y-o-Y, while total revenue was up 12% Q-o-Q. ASP recovered to the mid $650 level, the highest in 22 quarters since Q4 2014, as the company's business realignment around OLED steadily progressed. Despite the growth in revenue, operating loss increased Q-o-Q. There was a production adjustment of TV and mobile products in response to demand uncertainty and slowdown in the upstream industry, which increased the fixed cost burden, and there was also a decline in ASP, mostly coming from LCD, which could drag down profitability. Next is the Q3 outlook and the company's direction. Although the macro environment in Q3 will not be favorable due to the lingering impact of COVID-19, the company will be able to show part of the outcome of its business realignment efforts, such as mainstreaming large OLED, P-OLED business turnaround, and LCD structural innovation. On OLED TV, there were some challenges due to COVID-19, such as difficulty sending our engineers, but we were able to establish the optimum conditions for mass production and enabled mass production to begin in July. As the fab has newer equipment compared to domestic fabs, which can support high efficiency and productivity, we will start seeing valuable impacts soon. Based on this, we will improve the mass production yield for our 77-inch, 48-inch, 65-inch, and 55-inch product line to the existing fab level in a short period of time and ensure that we can respond to the market demand in the second half. The annual sales target stands at a high 4 million to 5 million, but given the persistent COVID risks, we will remain flexible to the market environment as we try to maximize sales opportunities. As for P-OLED, we expect favorable seasonality to pull up the shipment of new products for our strategic clients. There have been many challenges, but we have been able to stabilize the product quarter and yield, and we will now focus on ensuring reliable supply. For IT, the new COVID-led trends of working from home and online education are expected to remain opportunities. The company will continue to capture such opportunities by responding without delay to clients' needs with IT products, where the company has unique strength. Let me also say a few words about the track of our LCD structural innovation. This aims to further strengthen the company's already competitive fab and products. This is especially true for IT, and for TV, we will continue strengthening our competitiveness based on the Guangzhou fab, where the company has market competitiveness. Based on the performance we expect to achieve in our major business areas, significant improvement in profitability is also expected in Q3 from the previous quarter. However, to ensure a fundamentally sound business structure, we need to see results from the three core projects simultaneously. The company's performance will be on an upward trend, but there will be ups and downs from quarter to quarter, depending on factors like COVID-19 or demand for individual products like smartphones. The ongoing pandemic complicates predictions. To respond to an environment with growing volatility, the company will undertake early financing and stronger CapEx and working capital management under the worst-case scenario. That concludes the company's presentation on Q2 performance and Q3 outlook. I hope to return to you at the next earnings release in October with more improved performance and outlook. Thank you very much for your attention.

Kim Heeyeon, IR Lead

That brings us to the end of the earnings presentation for Q2 2020. We will now take questions. Operator, please commence with the Q&A session.

Operator, Operator

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

Dongwon Kim, Analyst

I have two questions about OLED. First is about the ramp-up plan at the Guangzhou line in the second half of this year, and along with that, what is the company's plan for the production of large OLED? And the second question is about P-OLED. So, what is your outlook for the P-OLED utilization as well as plans for improving profitability?

DH Suh, CFO

Now, this is in response to your first question. As reported earlier, there have been many challenges in the early part of this year, but in the end, we were able to start mass production in July this year. Based on this, the ramp-up will move on as scheduled. In other words, we will try to enable loading of full capacity, 60,000 units, as soon as possible. For the year, of course, in the second quarter, there were sales slowdowns because of the COVID-19 impact, but the target is to have high 4 million to 5 million units according to our sales plan. This also depends on the situation with COVID-19, for example, the lockdowns in many economies or the reopening of those economies, and also the retail shutdown or reopening. There would still be an impact from COVID-19, but since we have already dealt with difficulties and challenges in the second quarter, we now have the experience to manage these challenges. If there are continuing difficulties, such as ongoing retail side shutdowns, we could expand sales on online channels and work with customers to have promotions or other events to drive sales. Through such efforts, we believe we will be able to meet the sales plan of high 4 million to 5 million units. Regarding your second question about the utilization of the small to medium P-OLED in the second half of this year, we have fabs in Gumi and Paju, especially for the Paju fab, the plan is to achieve full utilization. Assuming full utilization, we believe that this will meaningfully impact profitability.

Operator, Operator

The next question will be presented by Samuel Gong from TB Financial Investment. Please go ahead with your question.

Unidentified Analyst, Analyst

I also have two questions. First is about the panel for IT products. Now, perhaps the IT panel products have become commodified, but we see that it is the most profitable for the company. So, what do you see as the success factors in the high profitability for the company's IT products? In other words, how do you differentiate yourselves from other companies? Also, if the IT products are still profitable, it’s likely that peers might decide to allocate more capacity to IT products as well. Does this mean that it's likely that IT products would also follow the path of LCD TV as before? Does the company have any plans against this possible scenario? The second question is about your plans to utilize the plastic OLED line, specifically the E6, Page 2, Page 1, and E5 line. In the second half, given that this is the high season for the overseas strategic client, I'm sure that there are no worries about utilization of the lines, but going into next year, the situation is going to be different. To ensure stable operation of the lines for the year, you need careful planning on utilization for each line. I would like to hear about such details if you could.

DH Suh, CFO

Regarding your first question, the company's high profitability from IT products comes from our unique technology. Our IT panels are 100% based on IPS technology. Additionally, we utilize oxide technology. I believe this combination gives us a competitive edge over other peers. We have also restructured our low value-add businesses for products like TN Type for notebooks. Focusing on high value-add products has been a key factor in our IT product success. Regarding the potential repetition of the LCD business model in plastic OLED, I believe we need to differentiate ourselves at least 1 to 3 years ahead in terms of technology, particularly in oxide technology where we already have strengths. We must continue to innovate to maintain our advantage even as competitors try to catch up. Now, moving to the second part of your inquiry, we indeed experience seasonality in smartphones, typically low demand in the first half and high demand in the second half. However, we believe that with our capacity and market trend, along with our commitment to stable supply and customer trust, we can navigate this seasonal shift effectively. Specifically related to our operation plans for Paju fab and Gumi fab, the Paju fab specializes in smartphones, while Gumi handles a variety of products. We are currently preparing for the small volume production of diverse products in Gumi, and examples include auto products already being produced at Gumi, along with forthcoming variable products and foldables.

JY Kwon, IT Marketing Lead

When we look at the trends in the IT products, we see that there is still much room for further differentiation, for example, higher resolution, higher pixels, and low power design. These are areas where we can continue to stand out. As the CFO mentioned, we already have competitiveness in IPS technology and oxide, and based on such technological advancements, we will continue to keep up with trends and lead, which will help maintain our competitive advantage in the IT market. As for the LCD business, after one of our peers announced their withdrawal from LCD, there appears to be a misconception in the market that we might also withdraw from the LCD business entirely. However, as I previously stated regarding our LCD structural innovation, we intend to strengthen our already competitive fabs and products. Our IT product portfolio significantly differs from our competitors in terms of product volume, customer base, and product lineup. Therefore, our innovation in the LCD structure will ensure that IT products remain a key revenue driver, and I hope this will clear up any misunderstandings regarding our LCD business.

Operator, Operator

The next question will be presented by Nicolas Gaudois from UBS. Please go ahead with your question.

Nicolas Gaudois, Analyst

Hi, good afternoon. Thanks for taking my question. If you could, first of all, comment a little bit about automotive and OLED. You just mentioned. You announced a couple of weeks ago a design win with Mercedes, and that comes after another from Korea this year. So, if you take a five-year view, how much do you think automotive could become a part of total RGB OLED revenues for Edge display, and how profitable are those automotive contracts compared to mobile? Secondly, if I may, a clarification on what you said earlier about profitability for RGB OLED and specifically plastic OLED for the Paju fab—did you actually say that even at full utilization rates, you may not reach profitability later this year? Thank you.

DH Suh, CFO

Let me clarify first. What I mentioned earlier was that assuming full utilization, we anticipate meaningful or significant improvement in our profitability. Regarding your first question about the plastic OLED auto business, I understand you’re asking how much growth we foresee from the RGB OLED auto business over the next five years. As for the current status, out of all orders we receive for auto, approximately 20% is for plastic OLED. For the next five years, we’re examining the market from various angles, and as far as I understand, we have about 25% global market share in the auto display market. The question is how fast and how widely we can penetrate with plastic OLED, which will largely determine our numbers for the next five years. However, since we are still in the early phases of this trend, discussions with different customers are ongoing, and the situation remains fluid, making it difficult to provide concrete numbers at this time. Regarding the profitability of the auto plastic OLED, the nature of the auto business involves long-term supply commitments, typically lasting at least five years, within a small volume and multiple variety framework. Therefore, it is crucial for us not just to focus on absolute profitability, but whether the profitability is sufficient to cover the risks associated with such long-term supply. So, the target isn’t necessarily higher or lower profitability compared to other plastic OLED products, but ensuring profitability that can effectively manage risks involved in long-term supply.

Operator, Operator

The next question will be presented by Han-Su Kim from Hana Financial Investments. Please go ahead with your question.

Han-Su Kim, Analyst

I have two questions, one about LCD TV, the other about plastic OLED. For the LCD TV, this question is specifically about the scrap schedule. I'm sure you have the schedule for the sequential scrap in the LCD TV, but recently we have seen a very fast recovery in demand for TVs, and panel prices are on the rise. I wonder if you plan to adjust the schedule for the TV scrap and, looking at the panel price and the current rising trend, how far do you believe this will continue? My second question is about the plastic OLED and the E6 line. There have been media reports that the company has plans to increase investments in the third line of the E6 line. Is this true? Additionally, your domestic customer will utilize an integrated touch panel in their next product. What is the company's progress on the TOE technology?

DH Suh, CFO

Regarding your first question about LCD, I've fully explained earlier on the IT products for the LCD. For TV, when considering our LCD structure innovation, we are focusing on what would make our fab most competitive. The answer seems to be the Guangzhou LCD fab, which among global Gen-8 fabs is likely one of the most competitive. Because of this, the Guangzhou LCD fab will remain the main fab for LCD TVs for the company. Consequently, as for the production in Korea for consumer LCD TVs, the earlier plan was to cease domestic production. This principle remains unchanged; however, due to the COVID situation and issues with certain customers, we intend to be flexible in the short term. In summary, our overall direction remains unchanged, but we are considering flexibility for the short term. Regarding the media reports about plans for additional investment in the E6 line's third line, let me clarify that there are no such decisions to invest in additional 15K capacity currently being made. That said, we do have deposition equipment, and we plan to improve the deposition line to prevent capacity loss that may arise during development. As for the company's readiness for TOE technology, we have already completed preparations regarding technology and equipment for TOE, and while I won't name customers, we are already supplying TOE products to some of them.

Kim Heeyeon, IR Lead

Thank you very much for your questions and your interest. With that, we will now close the Q2 2020 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.