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LG Display Co., Ltd. (NYSE:LPL)

Q3 2013 Earnings Conference Call

October 17, 2013 08:00 AM ET

Executives

Heeyeon Kim - Head of IR

J.S. Park - Head, TV Marketing

Analysts

Nicolas Gaudois - UBS

Brian White - Cantor Fitzgerald

Vivian Tan - AllianceBernstein

Jerry Tsai - HSBC

Kim Kyung Min - Hyundai Securities

Operator

Good morning and good evening. First of all, thank you all for joining this conference call. And now we’ll begin the conference of the fiscal year 2013 third quarter earnings results by LG Display. This conference will start with a presentation followed by a division of Q&A session. (Operator Instructions).

Now we shall commence the presentation on the fiscal year 2013 third quarter earnings results by LG Display.

Heeyeon Kim

Welcome to LG Display’s third quarter conference call. My name is Heeyeon Kim, Head of IR Department. I would like to welcome everyone to our quarterly earnings conference call. I am joined by our IR staff as well as representatives from TV Marketing and IT/Mobile Marketing. J.S. Park is heading up the TV Marketing department and [Seong Choi] IT/Mobile Marketing department.

Next slide please. Before we move on to the earnings results, please take a minute to read the disclaimer. I would like to remind everyone that results are based on consolidated K-IFRS accounting standards and are unaudited.

Next slide please. This conference call will take about an hour. Before we go into the Q&A session, please allow me highlight our Q3 results, performance and Q4 outlook.

Moving on to revenue and profits on the next slide. In third quarter we have recorded the quarterly revenue at KRW 6.6 trillion similar to last quarter. TV set makers inventory adjustment in the third quarter led to larger than expected adjustment in the panel shipment and price decline throughout the quarter. Despite the shipment enterprise decline, we continued cost reduction efforts and increased the small and medium size panel shipment. Operating profit recorded KRW 389 billion, 6% quarter-on-quarter improvement. Operating margin was 6% and EBITDA margin stood at 20%. Pre-tax profit KRW 403 billion and net profit over KRW 239 billion.

Moving on to slide four looking at our financial position and ratios. At the end of September year 2013, cash and cash equivalents decreased to KRW 2.6 trillion while liabilities declined by KRW 388 billion. With utilization ratio adjustment during the quarter end, the inventory remained at KRW 2.4 trillion despite third quarter being our traditionally inventory stocking period. Looking at our balance sheet, liabilities to equity ratio recorded 110%, decline of 8 percentage point from the previous quarter. The current ratio remained at 113%. Net debt to equity ratio recorded 13%, maintaining a stable rate.

Moving on to slide five and looking at our cash flow. Cash flow from operating activities resulted in cash inflow of KRW 417 billion, cash flow from investing activities resulted in an outflow of KRW 711 billion and cash flow from financing activities resulted in an outflow of KRW 294 billion. As a result, the net change in cash was outflow of KRW 326 billion. The cash at end of quarter recorded KRW 2.6 trillion.

Moving on to slide six, I would like to go over our performance highlights. TV set customers inventory adjustments affected the panel shipments during third quarter and our shipments declined by 1% to 8.8 million square meters. Although TV price decline continued throughout the quarter, ASP per square meter rose by 3% quarter-on-quarter to 678 towers. (inaudible) shipment of small and medium size panels which has higher ASP per square meter compared to the larger panels.

Moving on to our product mix on slide seven. In third quarter the TV segment was 44% of our revenues, monitors 20%, notebook 11%, tablet 10% and mobile applications 15%. The tablet and mobile segment’s portion rose, thanks to shipment increase while the TV portion declined gradually due to relatively higher TV price decline during the quarter.

Moving on to slide 8 and looking at our capacity. Our producible capacity declined by 3% quarter-on-quarter to 11.2 million square meters as allocation to high resolution [models] increased.

Next, return to our outlook section. Looking at Q4, we expect the shipment to increase by mid single digit percentage and ASP decline to slowdown going forward. Considering the overall industry supply demand attrition and set makers profitability, it is difficult to expect the panel prices to rebound soon but the rate of decline is anticipated to slow down.

It is important to note that the industry cyclicality has been [slowed] meaning both [less help] for big upside, (inaudible) the level of the price decline should be slowed going forward based on our [mutual] understanding.

Next, I would like to touch upon our business strategy going forward. Looking at overall supply demand situation and recent slow in the industry growth, it is (inaudible) outlook. However, we aim to overcome the industry difficulties with the continued product and cost differentiation. For TV, while strengthening the infrastructure for OLED television, we would continue to maximize our profits for the LCD TV.

In terms of product lineup we'll try the TV line up really greatly expanded as well as the increased focus on the order size and cross competitive models. In terms of the customers, enhancing collaboration with existing customers while obtaining [used traded] customers will be our key focus.

In terms of operations, achieving operational efficiency and cost competitiveness will be our top priority in conjunction with business expansion. For smartphones, product differentiation really LTPS based AH-IPS products, customer diversification plus OLED will be our key strategy going forward.

Next year investment plans are under review. We are trying to find optimal balance between future preparation and financial stability. The investment for the future competitiveness such as LTPS OLED will be the continued focus, but the investment timing and execution stepped up (inaudible) depending on our industry environment.

This is our presentation for third quarter presentation and I would be glad to take your questions. To use the time efficiently please limit to three questions per person. Operator please proceed to Q&A session.

Question-And-Answer Session

Operator

(Operator Instruction). The first question will be presented by Mr. Nicolas Gaudois from UBS. Please go ahead sir.

Nicolas Gaudois - UBS

First question would be on your execution for capacity utilization rates in Q4, I mean it seems you have indicated earlier today broadly the same utilization rate but you have made unlike you are telling some production reduction in September. So is it effectively you’re assuming recovery of capacity addition rates for large panels in the second half of the quarter. And if so what is actually supporting this deal? And I have got two follow-ups. Thank you.

Heeyeon Kim

Overall our utilization ratio should be similar as third quarter. Third quarter utilization ratio was low 90% in this, Q4 should be low 90%. However when you look at our month-by-month in detail, at the end of third quarter, we adjusted our utilization ratio significantly resulting in low 90% utilization ratio average in third quarter. So it means in Q4 in average, our utilization ratio is expected to be low 90%.

Nicolas Gaudois - UBS

Okay. But that mathematically would imply some recovery in production in this passing November or mid November basically?

Heeyeon Kim

Actually for this September, yes our production will increase because of our inventory adjustment efforts during September. After centralizing our inventory at a lower level, yes we will increase our utilization ratio to the low 90% from previous, somewhere 80%.

Nicolas Gaudois - UBS

Right, okay thanks. That's fair. On the operating profit side, you indicated down Q-over-Q in Q4, but assuming you have, you do reach mid-single area growth, you have ASPs probably up a bit of a mix, depreciation flat Q-over-Q. So is the decline coming basically from cost going up? And if so, could you help us a little bit in modelling COGS in Q4 and operating expenses?

Heeyeon Kim

Actually in third quarter price decline for TV was much higher than our expectation. We think this kind of price decline trend for TV will be done somewhere in Q4. So when you look at this kind of price decline, we think Q4 operating profit is likely to be lower than third quarter that cornered our assumption.

Nicolas Gaudois - UBS

Okay, but that [OLEDs] cost going up Q-over-Q as well assumingly?

Heeyeon Kim

Yes actually we are expecting blended ASPs to offset the mix improvement and this cost curve is also increased due to the product mix improvement driven by mobile and tablet increase.

Nicolas Gaudois - UBS

Right. And last question is maybe to get your perspective on some of your recent industry chapter. So I think just as search came up saying a couple of day ago that they think there is about eight weeks of excess panel inventories and work in progress Chinese TV makers although downstream inventories have come down post, October first 20 days. I mean what is your perspective on that and more broadly in terms of more work in progress and panel inventories of few TV customers beyond China as we get into Q4?

Heeyeon Kim

For China panel makers inventory situation for now we think we are not that level person to answer, information for the kind of competitors that they are limited for us. And why we think that the price decline should continue during this quarter, actually as far as we understand that make us inventory situation has been recovered through the normal [weather], thanks to the efforts of adjustments during Q3, however there is some inventory, still there is some inventory for panel makers.

Nicolas Gaudois - UBS

Okay, now I think that comment was not on your competitors, the comments was on inventories at set makers in china of panels and work in progress of set makers in China particularly?

Heeyeon Kim

Actually as far as we understand set makers inventory looks fine, that’s their third quarter issue, but now it is okay, but there is some inventories for panel makers.

Nicolas Gaudois - UBS

Okay, all right.

Heeyeon Kim

You said our set makers.

Nicolas Gaudois - UBS

Understood. Thank you very much.

Operator

The next question will be presented by Mr. Brian White from Cantor. Please go ahead, sir.

Brian White - Cantor Fitzgerald

I am wondering if you could talk a little bit about what you expect to grow sequentially in the fourth quarter in terms of product segments and what you expect to decline in terms of product segment volume?

Heeyeon Kim

Our average area growth in Q4 is mid single-digit. So actually large-sized panel for that TV and IT should be similar or slightly lower than mid single-digit related, but smart device shipment increases should be double-digit.

Brian White - Cantor Fitzgerald

Double-digit increase, okay. And how do we think about the Golden Week in China. What is the sell-through numbers that you have seen so far for TVs?

J.S. Park

We don't have a detailed number of sell-through data, but the forecast Y-O-Y growth rate for this can't measure how these were around minus 5%. But the results, the previous results were almost flat. But depends on the research companies, some cost research company forecasts saw a push and another research companies are slightly minus. So I think average is almost flat. So it's a 5% better than our forecast, this is okay.

Brian White - Cantor Fitzgerald

Okay. And I just want to be clear, smart device is up double-digit, is that, I mean is that 10% or is that 40%. Can you just narrow it down a little bit?

Heeyeon Kim

Actually it is more close to latter part.

Brian White - Cantor Fitzgerald

Closer to what?

Heeyeon Kim

It is more close to higher part, higher numbers.

Brian White - Cantor Fitzgerald

The higher part. Okay, okay. And finally I didn’t hear the utilization comment, can you just go through that again what it was in third quarter what it will be in fourth quarter?

Heeyeon Kim

Utilization ratio both for third quarter and fourth quarter will be low 90%. It is the same.

Brian White - Cantor Fitzgerald

Okay. And you did not take down utilization in the third quarter?

Heeyeon Kim

Actually our initial assumption for third quarter utilization ratio was mid to high 90%, but it was decline to lower 90% due to overall adjustment in September, so now we think mid 90% will be reasonable for Q4 for numbers when you consider the additional inventory reduction at the end of the year.

Brian White - Cantor Fitzgerald

Perfect. Thank you.

Operator

The following questions represented by Mr. Ben Lu from (Inaudible) Capital. Please go ahead sir.

Unidentified Analyst

Hi. Thank you for taking my call, a few questions. One, can you talk a little bit about whether mobile margins will actually be better than the large panel margins in Q4 given the big increase that you’re seeing in Q4?

Heeyeon Kim

In Q4, yes our small size margin should be better than the bigger screen margin, because bigger screen price should continue to decline.

Unidentified Analyst

Okay. Great. And then Heeyeon earlier you said that there is still some excess panel inventory, can you probably quantify how much and how long you think that will be digested? In a longer front, if you think that there is still some excess panel inventory, it sounds like from your competitors, will that continue to place pricing pressure on panels into Q4?

Heeyeon Kim

Actually that’s our assumption for the panel inventory. Actually when you look at our situation, our inventory was recovered to the normal level, thanks to our adjustment in the September. However we didn’t hear about the reasonable utilization adjustments showing third quarter. So we can reasonably guess inventory in the industry as a whole should be an issue in Q4. But the level of inventory wouldn’t be that high because some of industry participants already adjusted.

Unidentified Analyst

Okay. Great. And also, because we've seen pretty big panel price declines, can you talk a little bit about what you guys are doing on a cost reduction front? For a past year or so you guys benefited from the yen weakening which obviously is good for glass procurement because you procure in yen, but now that yen stops depreciating in a past several months, so can you talk a little bit about what you guys can do to further reduce costs?

Heeyeon Kim

Well, actually even in this kind of situation, every quarter, we’ve reduced our percent of won low single-digit every quarter. We hope that kind of level cost reduction will be done even without any yen impact

Unidentified Analyst

Okay. But if the low single-digits that you have done in the past how of that came from a natural weakening of the yen because glass is like 30%, 40% of your cost and naturally we have the yen weakening so that naturally reduces your cost without ever having to go back to the glass makers to get price concessions?

Heeyeon Kim

Actually glass portion among our [bid] of material is not 30% to 40%, it’s around 10% to 15% so the impact from the yen is not that high is just a minimum portion for us. In the past it was high, but nowadays thanks to the continued price decline and FX impact from the yen, the glass portion is just 10% to 15%.

Unidentified Analyst

Okay, great. Thank you.

Operator

Currently there are no participants with questions. (Operator Instructions) The next questions will presented by Ms. Vivian Tan from AllianceBernstein. Please go ahead ma’am.

Vivian Tan – AllianceBernstein

Hi. I have a question regarding to CapEx and to depreciation because I think your year-to-date CapEx is above KRW 2.5 trillion, so I think your full year guidance CapEx is about 4 trillion. So you are tracking behind your CapEx plan. So are we going to expect pickup in the CapEx in fourth quarter? That’s my first question?

Heeyeon Kim

Actually our total CapEx for this year is slight below KRW 4 trillion, so the Q4 CapEx should be similar or less like higher previous quarter numbers.

Vivian Tan – AllianceBernstein

Okay. And for your depreciation number, we see the depreciation drop in second quarter and third quarter, so can we expect that your depreciation number will continue to drop throughout the year and maybe in 2014 as well?

Heeyeon Kim

Actually depreciation expense for Q4 and first quarter next year should be flat and then we will have another drop in second quarter next year because our second and eighth facility depreciation will be ended. Also will be flat for two quarters and then so they are down in second quarter 2014.

Vivian Tan – AllianceBernstein

Okay, I see. So do you have any thought in mind about your CapEx plan for 2014?

Heeyeon Kim

Actually it’s too early to mention about that, however we will be focused on the future preparation such as early (inaudible) while we are reducing CapEx for the Asian side except China facility. It is likely our CapEx to be less than this year.

Vivian Tan – AllianceBernstein

Okay. I see. Okay. Thank you.

Operator

The following questions will presented by [Mr. Alex Lee from JP Morgan Asset Management]. Please go ahead, sir.

Unidentified Analyst

We only have two questions, we promise. One question that we have is

Heeyeon Kim

Thank you.

Unidentified Analyst

We promise and it will be short. Could you explain for your Q3 sales? I am looking at page, the revenue product mix page, page seven, for the major products, I know you are reluctant to give a lot of color, but could you talk about how Q3 sales mix was from a customer perspective, whether it's LG Electronics or others? And how Q3 compared to say the first three quarters, were there major changes or was it similar?

Heeyeon Kim

In terms of our customer mix, with two giant customers LG Electronics and a U.S. customer which is around 50% in third quarter.

Unidentified Analyst

Those two combined.

Heeyeon Kim

Those two combined.

Unidentified Analyst

Okay.

Heeyeon Kim

And then it will be a bit higher than 50% in Q4.

Unidentified Analyst

For those two combined?

Heeyeon Kim

Yes.

Unidentified Analyst

And let's say what about for monitor?

Heeyeon Kim

In terms of monitor, we have giant three customers actually they are HP and U.S. customer, are almost to 60% together.

Unidentified Analyst

And no major change and third quarter versus year-to-date?

Heeyeon Kim

Yes. There is no major change.

Unidentified Analyst

No.

Heeyeon Kim

We have four major customers Lenovo, HP and U.S. customers. They are altogether around 70%.

Unidentified Analyst

And similar third quarter as, similar for third quarter?

Heeyeon Kim

(inaudible).

Unidentified Analyst

Yeah. Okay. And we’ll skip tablet.

Unidentified Company Representative

And Alex has a question. Thanks Alex.

Alex Lee – JP Morgan Asset Management

Yeah. So my question is GP margins. When you exceeded your GP margins to 50% of Q2 and on y-o-year? But considering a major refresh months, big ASP and a lower utilization ratio, how could you do this? Could you please explain some more detail for the improving GP margins? Thank you.

Heeyeon Kim

Actually there is a mixture of several issues. One is depreciation expense reduction and second is continued cost from the mature side and also our LED improvement for the new product such as mobile and tablet and TV side. That kind of three factors should be the major issue for our GP margin improvement.

Alex Lee – JP Morgan Asset Management

So do you think that you guys continue to improving GP margins next quarter or 2014?

Heeyeon Kim

Next quarter, it should be challengeable. In ‘14 we try to improve our GP margin further, thanks to our continued cost reduction and also the cost innovation product model.

Alex Lee – JP Morgan Asset Management

Okay.

Operator

Thank you. The following question will be presented by Mr. Ben Lu from [Redtail] Capital. Please go ahead sir.

Unidentified Analyst

Hi Heeyeon, I just have one follow-up question, when you said that utilization will be improving after September, can you breakout between mobile versus large-sized panel utilization?

Heeyeon Kim

Small-sized is almost full and then large-sized is around to low 90%.

Unidentified Analyst

So will you be increasing large-sized utilization month-over-month as well or is it primarily in the mobile or small-sized?

Heeyeon Kim

Actually in case of our mobile, utilization ratio should be flat quarter-on-quarter. In case TV, quarter-on-quarter it should to be flat. However month-on-month it should be up.

Unidentified Analyst

Got it. Okay thanks for the clarification.

Operator

The next question will be presented by Mr. Jerry Tsai from HSBC Securities. Please go ahead sir.

Jerry Tsai - HSBC

Hello, hi, just a few quick questions. First of all what your utilization in the second quarter, just as a reminder?

Heeyeon Kim

Second quarter was same at low 90%.

Jerry Tsai - HSBC

Okay, so no change. Okay great. My next question is, your per square meter ASP went up by 3% in the third quarter. And I was just wondering if you take out the small-sized display, what would be the trend on a Q-on-Q basis?

Heeyeon Kim

Taking out the small-sized impact there should be decline because apples-to-apples price decline was higher.

Jerry Tsai - HSBC

Sure. Would you say the price decline is 5% or higher or lower?

Heeyeon Kim

In average actually our TV panel price decline ratio is similar as market price trend, in average it’s around mid single-digits.

Jerry Tsai - HSBC

Average, sorry you mean the average for TV or average for the large-sized panel?

J.S. Park

Average for TV.

Jerry Tsai - HSBC

Average for TV was down 5%?

Heeyeon Kim

Yes.

Jerry Tsai - HSBC

Okay, great. And my last question is can you update us with the size migration of TV, you have seen so far in the third quarter and maybe in the coming quarter do you expect them, the average size to counting to go up?

J.S. Park

The industry size or our company?

Jerry Tsai - HSBC

Well both if you have it sir.

J.S. Park

Actually I don’t have industry average size, but our company’s second half Q3 and Q4 is almost same. And in the first half, second half is 0.5 inch higher than first half. So every year from year 2012, ‘11, ‘12, ‘13 I think 1 inch is continues to be greater than previous year.

Jerry Tsai - HSBC

So the annual increase is about one inch?

J.S. Park

Yes. And we hope again in next year.

Jerry Tsai – HSBC

Okay. Alright.

J.S. Park

As I know our every side is around 1 and 1.5 is bigger than industry average.

Jerry Tsai – HSBC

I see. Okay. Okay, thank you much.

Operator

The next question will presented by Mr. Kim Kyung Min from Hyundai Securities. Please go ahead, sir.

Kim Kyung Min - Hyundai Securities

Thank you for taking my questions. I have two questions. The first question is about new customer segments for smartphone panels. During the Korean version of the conference, the CFO Mr. Jeong mentioned that one of the [strikes] for the next year is to gain new customers especially in the mobile markets. So can you give us any color on those new customers? Does that mean you can expand your mobile panel phase to Chinese customers? Then there is another follow up question?

J.S. Park

We are trying to focus on the Chinese customers and also one of the Japan’s companies, so we try to expand our business in terms of platform.

Kim Kyung Min - Hyundai Securities

Thank you. And my second question is about the average size increase for the TV panel next year. As the CFO mentioned there will be more shipments of UHD TV and as far as I know most of the new UHD TV size are much larger than the existing LED full-HD TV. So you just mention that one inch increase for the next year, but I think there will be more for the size increase for the next year. And could you comment on that?

J.S. Park

It depends on the size mix, right. And we focus on big screen size 55 and above. But currently I think 1 inch is because of large size growth rate is already matured. So it should increase jump. So I think a 1 inch is also a big gap in the future. So, I think of 1 inch is the first -- it depends, maybe 2 inch is possible, but I think 1 inch is reasonable number. But if possible, we want to increase of every size bigger than 1 inches.

Kim Kyung Min - Hyundai Securities

Okay. Thank you

Operator

Currently there are no participants with questions. (Operator Instructions). Currently there are no participants with questions. (Operator Instructions).

Heeyeon Kim

There is no participants for the questions. So we think it's better to end this Q&A session. So we will end the Q&A session. So on behalf of LG Display, we thank you for participating in our third quarter earnings conference call. Should you have any further questions, please contact either myself or my colleagues. Thank you.

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