Earnings Call Transcript - LPL Q4 2020

Operator, Operator

Good morning and good evening. First of all, thank you all for joining this conference call. We will begin the conference for the Fiscal Year 2020 Fourth Quarter Earnings Results by LG Display. The conference will start with a presentation, followed by a divisional Q&A session. Now, we shall commence the presentation on the fiscal year 2020 fourth quarter earnings results by LG Display.

Daniel Lee, Head of Investor Relations

Good afternoon. This is Daniel Lee from LG Display's Investor Relations. On behalf of the company, I want to thank everyone for joining our conference call today. Joining me are our CFO, DH Suh; Hee Yeon Kim, Senior Vice President of Corporate Strategy; Seung Min Lim, Vice President of Corporate Planning; Stephen Ko, Vice President of TV Marketing; Jae Kwon, Vice President of IT Strategy and Marketing; and Ki-Joon Jin, who oversees Auto Marketing. This conference call will last one hour and will be conducted in both Korean and English, starting with our financial results for Q4 2020 and the company's outlook, followed by a Q&A session. Please check the Investor Relations presentation on our website for more details about the Q4 2020 financial results. For those joining via the webcast, you can find information on the widget on your screen. Before we start the presentation, please take a moment to read the disclaimer. Also, be aware that today's results are based on consolidated K-IFRS standards prepared for your benefit and have not yet been audited externally. Now, let's begin with the presentation of Q4 2020 earnings results. First, our business performance in Q4 showed revenue rising by 11% quarter-over-quarter, totaling KRW 7.460 trillion. The increase was driven by strong demand for TV and IT products as well as higher shipments of OLED and P-OLED, which contributed to our top-line growth. Operating profit rose by KRW 521 billion to reach a record KRW 685 billion, aided by shipments of high-value products and strategic tasks yielding visible results. The operating margin stood at 9%, while the EBITDA margin was 24%. Due to a change in tax law, there was a reversal of deferred corporate tax credit, resulting in a net profit of KRW 621 billion. Next, regarding area shipment and average selling price, Q4 area shipment increased by 5% quarter-on-quarter to 8.7 million square meters. Thanks to growth in large OLED and small to mid-sized mobile panel shipments, along with rising LCD panel prices, the blended average selling price increased by 12% quarter-over-quarter and 30% year-over-year, reaching $790. Our production capacity remained unchanged sequentially. Moving on to the revenue breakdown by product segment, IT panels represented the largest share at 37%, TV panels accounted for 29%, while mobile and other segments made up 34%, up 5 percentage points quarter-over-quarter due to increased shipments of small to mid-sized OLED panels. Concerning the company's financial position and ratios, cash and cash equivalents at the end of Q4 totaled KRW 4.3 trillion, with inventory at KRW 2.170 trillion, a decrease of KRW 230 billion quarter-over-quarter. Q4 borrowings decreased by KRW 305 billion from the third quarter. Regarding financial ratios, the liabilities to equity ratio was 175%, the current ratio stood at 101%, and the net debt-to-equity ratio was 77%, all showing improvement quarter-over-quarter. Cash flow for the quarter rose by KRW 929 billion, reaching KRW 4.297 trillion at the end of Q4. Finally, for our guidance in Q1 2021, we expect area shipments to remain flat quarter-over-quarter, while the blended average selling price is projected to decrease by high single digits due to seasonality. Now, I will turn it over to our CFO, DH Suh.

DH Suh, CFO

Good afternoon. This is DH Suh, CFO of LG Display. Before I discuss our Q4 performance, I want to extend my best wishes for good health to all our shareholders, investors, and analysts during the COVID-19 pandemic. In Q4, we experienced quarter-on-quarter growth in shipments for large OLED and plastic OLED panels for mobile devices, and strong demand for TV and IT products led to continued increases in LCD panel prices. Consequently, our revenue rose by 11% quarter-on-quarter and 16% year-over-year. Regarding our P&L, we’ve observed a rise in shipment volume along with a significant enhancement in our product mix, which resulted in an operating profit of KRW 521 billion on a quarter-on-quarter basis. Year-over-year, we also saw a significant turnaround to profit. Notably, the new OLED factory in Guangzhou ramped up production, boosting sales of OLED TVs. Furthermore, stable management of our plastic OLED business underpinned increased production, leading to substantial performance improvements. The IT business has also consistently performed well, capitalizing on the shift towards remote work and increased indoor activities. Additionally, LCD TV sales have contributed positively to our profit margins. With these results, our Q4 EBITDA margin reached 24%, the highest in 15 quarters. Looking ahead to Q1 2021, we anticipate solid demand for TV and IT products despite typical seasonal patterns. We expect area shipments to remain flat quarter-on-quarter, with a projected blended average selling price decline in the upper single digits due to product mix changes influenced by seasonality. While we foresee strong overall market demand in Q1 compared to previous years, we acknowledge the potential for unexpected fluctuations driven by exchange rate and seasonal factors. Therefore, we will closely monitor and adapt to the business environment. Regarding each business segment's update and outlook, the new Guangzhou factory has been performing well, resulting in steady shipments. Q4 OLED TV panel shipments reached approximately 1.6 million units, a 50% increase year-over-year. It’s encouraging to see consumers recognizing the unique value of OLED. The pandemic has altered lifestyles, making TV a more significant aspect, with OLED’s advantages in picture quality, design, and eye health gaining even more emphasis, solidifying its place in the premium TV market. We are targeting annual sales of seven million to eight million units in 2021, supported by a broader product lineup to meet diverse consumer needs and strengthen our earnings base. For the mobile segment, we aim to reinforce our stable operational foundation around plastic OLED this year, focusing on enhancing our internal capabilities, productivity, and customer relationships to mitigate first-half seasonality and improve year-over-year results. In IT and LCD TV, we plan to leverage our strong production capabilities and customer relationships to enhance our product and market leadership while continuing to drive profitability. For LCD TV, we will remain adaptable to shifts in demand dynamics and customer requirements to maximize available opportunities. Lastly, regarding financial management, we expect overall market demand to remain robust in the first half of the year, though seasonal factors may impact some products. However, uncertainty surrounding COVID-19 could lead to renewed volatility. We intend to respond swiftly to opportunities while monitoring risks and maintaining flexible yet stable financial management practices. We have reduced our CapEx expectations for 2020, aiming for a mid KRW 2 trillion level and will adhere to the principle of keeping CapEx within our EBITDA levels. We have noted significant improvements in key financial ratios for Q4, and we are committed to maintaining this trend towards financial stability. Thank you for your attention.

Daniel Lee, Head of Investor Relations

That concludes the earnings presentation for the fourth quarter of 2020. We are now open to your questions. Operator, please start the Q&A session.

Operator, Operator

Now the Q&A session will begin. The first question will be provided by Hyung Soo Kim from Hana Financial Investment. Please go ahead, sir.

Hyung Soo Kim, Analyst

Thank you. I’m Hyung Soo Kim from Hana Financial Investment. First, I want to congratulate you on achieving such impressive results. I have two questions. The first is about more details on Q4 earnings performance. Your Q4 results have been strong, largely due to a positive market environment. Could you give us a detailed breakdown of the factors driving performance in each of your business areas? My second question concerns the demand dynamics around LCD. We've noticed that domestic players are extending the operation of their LCD fab lines. How do you think this will affect demand dynamics in the second half? Additionally, could you share your projections for LCD panel prices going forward?

DH Suh, CFO

I will respond to your first question about the Q4 earnings. As I mentioned before, we've seen improvements in revenue compared to the third quarter, primarily due to a shift in our product mix toward more profitable items. Additionally, the overall increase in the selling price of our LCDs contributed to this growth. These two factors more than compensated for the negative impact of foreign exchange rate changes on our profit and loss statement, ultimately improving both. In summary, we increased sales volume and top-line revenue, improved our product mix, and raised prices, which collectively offset any adverse effects from currency fluctuations and enhanced our profits. Regarding your second question, you asked about the impact of domestic competitors extending their fab operations on LCD demand and pricing projections. When examining demand and supply dynamics, it's important to differentiate between the two. In the latter half of the year, we believe the ongoing effects of COVID-19 will influence demand. On the supply side, while it’s unclear whether our domestic competitors will continue to operate their fabs through the end of the year or stop midyear, we must also consider the ramping up of Chinese competitors and their preparations for operating the 10G fab. The timing and scale of their operations will likely have a significant impact. Overall, the pricing mechanics depend on the balance between supply and demand, which involves multiple factors, making it challenging to predict exact pricing levels moving forward. However, we anticipate some improvement in supply and demand dynamics in the second half of the year, leading to a potential easing of tightness that could affect pricing. To further elaborate, one of our key strategic initiatives is structural innovation for our LCD business. We aim to enhance the competitive differentiation of our products, particularly in the IT sector, while rationalizing and improving areas where we are less competitive. Even with changing demand and supply dynamics, our strengthened fundamentals and business resilience will help us manage any potential volatility that may arise.

Operator, Operator

The next question will be provided by Kim Dongwon from KB Securities. Please go ahead.

Kim Dongwon, Analyst

Thank you. I would like to ask you two questions about your OLED business. First, regarding your wide OLED panels, you mentioned that your goal is to ship seven to eight million units. Can you clarify if you have plans to increase capacity at your Guangzhou facility? The second question relates to the plastic OLED business. Could you share your projections for total annual shipments of P-OLED for this year? Additionally, can you provide some insight into your earnings outlook moving forward?

Stephen Ko, VP of TV Marketing

Let me address your first question about our plans for the large OLED panels and the operations of our panel lines in relation to our target of seven to eight million units. Specifically, you asked about the Guangzhou line. To meet the annual target, we are considering our current capacity in Paju, which is 80,000 units, and we have been able to enhance that capacity through productivity improvements. The current capacity of the Guangzhou fab is 60,000. Together, this gives us a total capacity of around 140,000, possibly more. This capacity should allow us to support the seven to eight million sales. We plan to closely monitor OLED TV sales trends. Consumers are now more aware of the value that OLED provides, and our customers are optimistic about their OLED TV offerings. We will keep an eye on the Q1 trend, and if we determine that we need to support eight million OLED panels, we have already made some preparations in Guangzhou that could allow us to increase capacity by about 30,000, bringing the total to 90,000. This would enable us to meet the eight million requirement. It’s crucial for us to observe the Q1 trend closely, and we will communicate details as needed. Regarding your question about plastic OLED, I can't share specific numbers as they involve our customers. However, last year, we did face concerns about whether our P-OLED business could withstand competition in terms of quality, yield, and cost. The experience from the second half of last year reassured us that we operated at full capacity while maintaining quality and stability, which boosted our confidence. We expect to see substantial year-over-year improvements. Now, let's move on to the next question.

Operator, Operator

The next question will be provided from S.K. Kim from Daiwa Capital Market.

S.K. Kim, Analyst

Thank you, and I congratulate you on your strong earnings performance. I would like to ask two questions. First, this year TV manufacturers like Samsung Electronics and LG Electronics have announced their focus on mini LED TVs, which are thinner and offer superior picture quality compared to LCDs. We believe mini LED will enhance the positioning of the premium segment and may help close the gap with OLED in that market. Do you think the launch of mini LED will pose a challenge for you in achieving over seven million OLED TV sales? Also, do you anticipate any price-related pressures? My second question is regarding your Q4 earnings, which were impressive. I believe Q1 will also be strong, especially considering your strategic customers, and mobile phone sales are expected to be robust. The demand and pricing for LCD TVs also appear positive. Given this, your guidance seems quite conservative. Can we expect an upward revision of that guidance?

Stephen Ko, VP of TV Marketing

I am Stephen Ko, VP of TV Marketing. So if you look at mini LED from the whole display evolution path, looking back at the evolution path, it starts with CRT LCD and then the next generation which is OLED. So does mini LED fit into any of these evolutionary paths? We think that it is actually an adjustment that is made on the LCD technology on the backlight side. So one would have to question whether that actually represents an evolutionary step forward. We think that it is just a type of LCD. To compare mini LED vis-a-vis OLED head-to-head may not be all that appropriate but I would still like to echo what our CFO has said in terms of the value that's offered by the LED. We believe that the value of OLED has been more strengthened and is receiving a new spotlight. Definitely that was triggered by the COVID-19 pandemic era, and people were able to during the pandemic to really understand the value that OLED was offering. We think that will still be valid in the post-COVID era. There are some backdrop changes, the fact that because of COVID people's time spent on watching TV has definitely increased. On top of that, the way people enjoy and consume video content have also changed. We've seen streaming services grow, and also the respective subscriber numbers also go up. We think that these types of changes have been quite critical. So in terms of what's happening, in the past, the way people understood the value that was offered by large-sized, large-area screens was picture quality. They thought that brighter color rendering was what was good. But nowadays, they understand that when it comes to picture quality, accurateness is important. All the Hollywood studios and production houses are 100% using OLED to edit their videos and do all this other work. So these days, the accurateness of picture quality and natural reality conveyed by the OLED screen is considered to be the intrinsic superiority that this technology will offer. Second point, I would like to emphasize is that there were certain pain points that consumers have experienced when they were watching these large panel displays. Based on the survey results that we took in the U.S., U.K., China, and Korea, when people were watching these displays over an extended period by watching streaming services, OLED has been proven to be less harsh on one's eyes. There are global accreditation agencies who have issued that OLED is the most safest display in terms of eye health and comfort. A U.S. agency called Eyesafe has also issued that announcement, and also many eye doctors in the United States recommend people using OLED displays. So OLED has been proven to be the most safe and comforting to human eyes. This value has been very much highlighted during the COVID pandemic and we think that this value will stay feasible and valid even in the post-COVID era. Last but not least, when we look at the evolution and development of OLED since its first launch back in 2013, it has gone through many cycles of evolution. It transcended just a mere improvement in brightness, resolution, or certain technical specifications; it was able to bring about differentiation in terms of design, setting itself apart compared to other technologies, like mini LED and others. There has also been integration and further execution development in different areas, such as gaming, education, conferencing, and subway transportation, etc. All through this evolutionary process, OLED was able to prove to others the intrinsic value it actually offers and it was also able to further solidify the value offering. Thus, we believe that in terms of the sales of seven million to eight million units that we've projected for ourselves, it is feasible for us to look forward to that figure.

DH Suh, CFO

This is the CFO responding to your second question about whether we plan to adjust our guidance upward based on our Q1 performance relative to the market consensus. At this stage, I can't provide a specific figure. However, analyzing our P&L trends for Q3 and Q4, we've managed to mitigate some of the challenges faced, thanks to the dedicated efforts of the company and our employees. As for the structural elements affecting P&L volatility, we've successfully eliminated those negative factors. Looking at our projections for this year, comparing Q1 to Q4 of last year, we expect area shipments to remain flat, though seasonality will inevitably affect product mix changes, which could influence our top-line revenue. Hence, we might experience a decline in top-line revenue due to certain technical factors. Nevertheless, if we examine the overall trends in ASP and FX rates, while the outlook appears positive, these could present both opportunities and risks for the company. Therefore, it's crucial for us to manage these key factors in Q1. Thanks to the commitment of all our employees, we've established a strong foundation to achieve a turnaround in profitability. I assure you that we will continue to strive to enhance our profitability.

Daniel Lee, Head of Investor Relations

Next question, please.

Operator, Operator

The next question will be provided by Nicolas Gaudois from UBS. Please go ahead.

Nicolas Gaudois, Analyst

Good afternoon. Thanks for taking my questions. The first one is related to your LCD capacity in Korea. You've delayed so far the closure of P7 for Gen 7. I think you were suggesting earlier that the production there would last potentially until the middle of this year. Could you update us on the status as to whether this is still the base case, or if you could actually keep that production going for longer than that? Secondly, regarding the plastic OLED market, what is your view on the likely further adoption of OLED in the tablet market beyond the existing position for that month on rate side? Would you participate in that segment if it was to grow? Thank you.

Stephen Ko, VP of TV Marketing

Responding to your first question about the domestic Paju LCD capacity, we based this on the TV panel, specifically Gen 7 and Gen 8. If we look at the Gen 8 capacity, the conversion for manufacturing IT products is nearly complete, with some additional preparations underway. The Gen 8 facility will cater to our IT product offerings. Regarding Gen 7, as we communicated last year, we will adapt to market changes and our customers' needs. We anticipate some shifts in the demand and supply dynamics, so we will closely monitor developments and engage with our customers to ensure we remain flexible in addressing their needs without additional resource investments, within our existing headcount and capacity.

Hee Yeon Kim, SVP of Corporate Strategy Group

I am Hee Yeon Kim, the Senior Vice President of the Corporate Strategy Group. I would like to address the adoption of OLED in tablets. As you know, our OLED technology includes plastic OLED for smaller displays and wide RGB technology for larger displays. We have already introduced a foldable notebook utilizing plastic OLED and a gaming display of 55 inches and 48 inches using wide OLED. OLED offers exceptional picture quality while being thinner, lighter, and more flexible, making it ideal for a variety of IT products. We are well-positioned to respond aggressively to market demands for plastic OLED and wide RGB. We are actively engaging with the market and are prepared to meet our customers' specifications and needs.

Daniel Lee, Head of Investor Relations

Due to the time constraint, we will now take the last and final question.

Operator, Operator

The last question will be provided by Woo Dong-je from Bank of America. Please go ahead.

Woo Dong-je, Analyst

Yes, I would like to ask you some questions about the financials. Although your earnings performance was quite strong, we've noticed a decline in your equity price today. Could this be related to the impact of the convertible bond that was issued previously? I understand the conversion price is KRW 20,000, which may result in about 10% dilution. Do you have any intentions of proactively conducting share buybacks, given your strong performance? My second question pertains to your capital planning. Your cash flow indicates that your CapEx investment was only around KRW 200 billion. With the completion of the Guangzhou fab investment and no investments yet made for the additional 30,000 capacity, can we assume that your quarterly CapEx spending will remain low, as we observed in this quarter's figures? Or are you delaying investments based on anticipated future needs? Given the low cash outflow for investments, should we expect this trend to continue moving forward, or is this situation temporary?

Unidentified Company Speaker, Unidentified

So in response to your first question about the potential for CV holders to convert their holdings into shares, we are actively monitoring that situation. Currently, the CV is trading on the market, and its prices are key indicators of equity movement. At this moment, it appears that CV holders do not feel the need to convert their holdings into company equity, and CV trading is occurring quite actively. As for your question about why the equity price has declined despite strong earnings, we have not yet looked into that, but we think it's unlikely that CV holders will convert their holdings into equity. Addressing your second question on CapEx, last year, our CapEx spending was in the mid to upper 2 trillion KRW, as we've mentioned in our investor relations meetings. We have already invested in large-scale OLED projects, so we expect CapEx to remain low without any significant additional investments. This expectation holds true as of now. Additionally, there are two types of investments: one for large projects and another for developing new models and retrofitting equipment. The latter type was the main focus of our 2020 CapEx spending. Assuming there will be no large projects requiring substantial investment, we believe we can maintain our EBITDA levels. Moving forward, we will determine our investment strategy based on new business opportunities that arise, so CapEx may vary accordingly.

Daniel Lee, Head of Investor Relations

For the Q4 2020 earnings conference call for LG Display. Thank you for joining us today. And for those of you who were unable to submit your questions due to the time constraint, please do not hesitate to contact our IR team, and we will be happy to respond to those questions. Thank you.