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LG Display Co Ltd. (NYSE:LPL)

Q3 2013 Earnings Call

October 17, 2013 8:00 AM ET

Executives

Hee Yeon Kim – Head, IR

J.S. Park – Head, TV Marketing

Analysts

Nicolas Gaudois – UBS

Brian White – Cantor Fitzgerald

Ben Lu – Redtail Capital

Vivian Chen – AllianceBernstein

Alex Lee – JP Morgan Asset Management

Jerry Tsai – HSBC Securities

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.

Hee Yeon Kim

Welcome to the LG Display’s third quarter conference call. My name is Hee Yeon 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 Hyeong Choi [ph], 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 to 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 shipments and price decline throughout the quarter.

Despite the shipment and the price decline, with continued cost reduction efforts and increase in small and medium size panel shipments, operating profit recorded KRW 389 billion, 6% quarter-over-quarter improvement. Operating margin was 6% and EBITDA margins stood at 20%. Pre-tax profit was KRW 403 billion, and net profit of KRW 239 billion.

Moving onto Slide 4, looking at our financial position and ratios. At the end of September 2013, cash and cash equivalent decreased to KRW 2.6 trillion, while liabilities declined by KRW 388 billion. With the utilization ratio adjustment during the quarter end, the inventory remained at KRW 2.4 trillion, despite third quarter being traditionally inventory stocking period.

Looking at our balance sheet. Liabilities to equity ratio recorded 110%, decline of eight percentage points from the previous quarter. The current ratio remained at 113%. Net debt to equity ratio recorded 13% maintaining a stable rate.

Moving onto Slide 5 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, with cash at the end of quarter recording KRW 2.6 trillion.

Moving onto Slide 6, I would like to go over our performance highlights. TV set customers inventory adjustments affected the panel shipment during third quarter, and our shipment declined by 1% to 8.8 million square meters. Although TV price decline continues throughout the quarter, ASP per square meter rose by 3% quarter-on-quarter to $678, thanks to increased shipment of small and medium sized panels, which has larger ASP – higher ASP per square meter compared to the larger panels.

Moving onto our product mix on Slide 7. 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 portion rose, thanks to shipment increase, while TV portion declined largely due to relatively higher TV price decline during the quarter.

Moving onto 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, we turn to our outlook section. Looking at Q4, we expect the shipment to increase by mid-single-digit percentages and ASP decline to slowdown going forward. Considering the overall industry supply/demand situation and set makers profitability, it is difficult to expect panel prices to rebound soon, but the rate of decline is anticipated to slowdown.

It is important to note that the industry cyclicality has been slowed, meaning lesser hope for big upside, there is [indiscernible] level of price decline should be slowed going forward. That’s our basic 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 a matter of [indiscernible]. However, we aim to overcome the industry difficulties with continued product and cost differentiation.

For TV, while strengthening the infrastructure for OLED television, we will continue to maximize the profit for the LCD TV. In terms of product line ups, we’ll try it in TV line up will be greatly expanded as well as the increased focus on the order size and the cost comparativeness – cost comparative models.

In terms of customers, enhancing collaboration with existing customers while obtaining new strategic customers will be our key focus. In terms of operations, achieving operational efficiency and cost comparativeness will be our top priority in conjunction to our business expansion. For smartphones, product differentiation with LTPS-based AH-IPS products, customer diversification and plastic OLED will be our key strategy going forward.

Next year, investment plans are under review. We are trying to find the optimal balance between future preparation and financial stability. The investment for the future comparative needs such as LTPS, OLED will be the continued forecast, but the investment timing and execution steps are flexible depending on our industry environment.

This ends 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

Now Q&A session will begin. (Operator Instructions). The first questions will be presented by Mr. Nicolas Gaudois from UBS. Please go ahead sir.

Nicolas Gaudois – UBS

Yes, hi. Good evening. First question would be on your executions for capacity utilization rates in Q4. I mean you seem to have indicated earlier today broadly with same utilization rate, but you have made unlike your Taiwanese peer some production reduction in September. So is it effectively assuming recovery of capacity utilization rates for large panels in the second half of the quarter? And if so, what is actually supporting with you and I’ve got two follow-ups. Thank you.

Hee Yeon Kim

In overall, the utilization ratio should be similar as third quarter. Third quarter utilization ratio was low 90%. It means 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, the utilization ratio is expected to be low 90%.

Nicolas Gaudois – UBS

Okay, but mathematically it would imply some recovery in production in the starting November or mid-November basically?

Hee Yeon Kim

Actually versus September, yes our production will increase because of our inventory adjustment efforts during September. After stabilizing our inventory at a normal 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 opening profit side, you indicated down Q-over-Q in Q4, but assuming you have – you do reach your mid-single-digit area of growth, you have ASPs probably up a bit of a mix, depreciation flat Q-over-Q. So is the decline coming basically from costs going up, and if so, could you help us a little bit in modeling COGS in Q4 and operating expenses?

Hee Yeon 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 neglect this kind of price decline, we think Q4 operating profit is likely to be lower than third quarter. That’s current our assumption.

Nicolas Gaudois – UBS

Okay. But that [indiscernible] costs going up Q-over-Q as well, assumingly?

Hee Yeon Kim

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

Nicolas Gaudois – UBS

Right. And last question is maybe to get your perspective on some of your recent industry chapter. So I think this research came out saying couple of days ago that they think there is about eight weeks of excess panel inventories and work in progress of 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 both work in progress and panel inventories of your TV customers beyond China as we get into Q4?

Hee Yeon Kim

For China panel makers inventory situation, so now we think we are not that leveled person to answer. The information for this kind of competitors is very limited for us. Anyway, why we think TV price decline should continue during this quarter. Actually, as far as we understand, set makers inventory situation has been recovered to the normal level, thanks to the efforts of adjustment during Q3. However, there is some inventories – still there is some inventory for panel makers.

Nicolas Gaudois – UBS

Okay. No, I think the comment was not on your competitors, the comment was on inventories of set makers in China of panels and work in progress of set makers in China.

Hee Yeon Kim

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

Nicolas Gaudois – UBS

Okay.

Hee Yeon Kim

Instead of set makers. Yes.

Nicolas Gaudois – UBS

Understood. Thank you very much.

Operator

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

Brian White – Cantor Fitzgerald

Yes, I’m 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?

Hee Yeon Kim

Our average area growth in Q3 is mid-single-digit. So actually large size panels cost of TV and IT should be slightly – should be slightly lower than mid-single-digit, but smart device shipment increases should be double-digits.

Brian White – Cantor Fitzgerald

Double digit increase? Okay.

Hee Yeon Kim

Yes.

Brian White – Cantor Fitzgerald

Yes. And how do we think about the golden week in China. What is the sell-through numbers that you’ve seen so far for TVs?

J.S. Park

We don’t have a detailed number of sell-through data, but we forecast the y-o-y growth rate for this China national holidays are around minus 5%, because of the result, the previous result is almost flat. It depends on the research companies. Some research companies forecast plus and another research companies are slightly minus. So I think average is almost flat. So it’s 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 digits. Is that – I mean is that 10% or is that 40%? Can you just – could you narrow it down a little bit?

Hee Yeon Kim

Actually it is more close to later part.

Brian White – Cantor Fitzgerald

It’s closer to what?

Hee Yeon Kim

It’s more close to higher part, higher number.

Brian White – Cantor Fitzgerald

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

Hee Yeon Kim

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

Brian White – Cantor Fitzgerald

Okay. So you did not take that utilization in the third quarter?

Hee Yeon Kim

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

Brian White – Cantor Fitzgerald

Perfect. Thank you.

Operator

The following questions will presented by Mr. Ben Lu [ph] from Redtail Capital [ph]. Please go ahead sir.

Ben Lu – Redtail Capital

Hi Hee Yeon, 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 are seeing in Q4?

Hee Yeon Kim

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

Ben Lu – Redtail Capital

Okay, great. And then Hee Yeon, earlier you said that there is still some excess panel inventory. Can you try and quantify how much and how long you think that will be digested and along that front, if you think that there is still some on excess panel inventory, it sounds like from your competitors, will that continue to place pricing pressure on panels into Q4?

Hee Yeon Kim

Actually as 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 adjustment during third quarter, so we can reasonably get inventory in the industry as a whole should be an issue in Q4, but the level of inventory would not be that high, because some of industry participants already adjusted.

Ben Lu – Redtail Capital

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 the cost reduction front? For past year or so, you guys benefits from the yen weakening, which obviously is good for glass, maybe because you procure in yen, but now that yen stopped depreciating in the past several months. Can you talk a little bit about what you guys can do to further reduce costs?

Hee Yeon Kim

Actually even in this kind of situation every quarter we did reduced our cost around low single-digits. Every quarter, we hope this kind of level cost reduction will be done even without any yen impact.

Ben Lu – Redtail Capital

Okay. But if you – the low single-digits that you’ve done in the past, how much of that came from a natural weakening of the yen, I guess glass is what like 30%, 40% of your costs and naturally we’ve got the yen weakening, so that naturally reduces your cost without ever having to go back to the glass makers to price concessions?

Hee Yeon Kim

Actually glass portion among on our build-up [ph] material is not 30% to 40%. It’s around 10% to 15%. So the impact from the yen is not that high. It just is 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%.

Ben Lu – Redtail Capital

Okay, great. Thank you.

Operator

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

Vivian Chen – AllianceBernstein

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

Hee Yeon Kim

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

Vivian Chen – AllianceBernstein

Okay. And for your depreciation number, we see that depreciation dropped in the 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?

Hee Yeon 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 Gen 8 facility depreciation will be ended.

Vivian Chen – AllianceBernstein

So we’ll be flat for two quarters and then further down in second quarter 2014?

Hee Yeon Kim

Yes.

Vivian Chen – AllianceBernstein

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

Hee Yeon Kim

Actually, it’s too early to mention about that. However, we will be focused on the future preparation such as OLED and LTPS, while we are reducing CapEx for the LCD side except the China facility. It is likely our CapEx to be lesser than this year.

Vivian Chen – AllianceBernstein

Okay, I see. Okay, thank you.

Operator

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

Unidentified Analyst

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

Hee Yeon 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 7, for the major products, I know you’re 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?

Hee Yeon 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?

Hee Yeon Kim

Those two combined.

Unidentified Analyst

Okay.

Hee Yeon Kim

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

Unidentified Analyst

For those two combined?

Hee Yeon Kim

Yes.

Unidentified Analyst

And let’s say what about for monitor?

Hee Yeon Kim

In case of monitors, we have giant three customers. Actually…

Unidentified Company Representative

They are?

Hee Yeon Kim

They are HP and U.S. customer, almost 60% together.

Unidentified Analyst

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

Hee Yeon Kim

Yes, there is no major change.

Unidentified Analyst

Notebook?

Hee Yeon Kim

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

Unidentified Analyst

And similar third quarter – similar for third quarter? Yes. Okay. And we’ll skip tablet. And Alex has a question. Thanks, Alex.

Alex Lee – JP Morgan Asset Management

Yes, my question is GP margins. When you see your GP margins, the 50% is up Q-on-Q and up y-o-y, but considering, I mean the risk response, big ASP and the lower utilization ratio, how could you do this? Could you please explain in more detail for the improving GP margins? Thank you.

Hee Yeon Kim

Actually there is a mixture of several issues. One is depreciation expense reduction, and second is continued cost from the material side, and also our LED improvement for the new products, 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 continuously improving the GP margins next quarter or 2014?

Hee Yeon Kim

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

Alex Lee – JP Morgan Asset Management

Okay.

Hee Yeon Kim

Thank you.

Operator

The following question will presented by Mr. Ben Lu from Redtail Capital. Please go ahead sir.

Ben Lu – Redtail Capital

Hi, Hee Yeon. I just have one follow-up question. When you said that utilization will be improving after September low, can you break out between mobile versus large size panel utilization?

Hee Yeon Kim

Small size is almost full. And then large size is around low 90%.

Ben Lu – Redtail Capital

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

Hee Yeon Kim

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

Ben Lu – Redtail Capital

Got it. Okay, thanks for the clarification.

Operator

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

Jerry Tsai – HSBC Securities

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

Hee Yeon Kim

Second quarter was same at low 90%.

Jerry Tsai – HSBC Securities

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 size display, what would be the trend on a Q-on-Q basis?

Hee Yeon Kim

Taking out the small size impact, there should be decline because apple-to-apple price decline was higher.

Jerry Tsai – HSBC Securities

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

Hee Yeon Kim

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

Jerry Tsai – HSBC Securities

On average, sorry, you mean the average for TV or average for the large size panel?

J.S. Park

Average for TV.

Jerry Tsai – HSBC Securities

Average for TV. It was down 5%?

Hee Yeon Kim

Yes.

Jerry Tsai – HSBC Securities

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 continue to go up?

J.S. Park

The industry size or our company?

Jerry Tsai – HSBC Securities

Well, both if you have it.

J.S. Park

Actually, I don’t have industry average size. But our companies have second half Q3 and Q4 is almost the same.

Jerry Tsai – HSBC Securities

Okay.

J.S. Park

And in the first half – the second half is 0.5 inch higher than first half. So every year, from year 2012, ‘11, ‘12, ‘13 I think one inch continuously bigger than previous year.

Jerry Tsai – HSBC Securities

So the annual increase is about one inch?

J.S. Park

Yes. And we hope again in next year.

Jerry Tsai – HSBC Securities

Okay. All right, that’s...

J.S. Park

And as I know our average size around one and 1.5 inch bigger than industry average.

Jerry Tsai – HSBC Securities

I see, okay. Okay, thank you very much.

Operator

The next question is represented by Mr. Kim Kyung-min from Hyundai Securities. Please go ahead sir.

Kim Kyung-min – Hyundai Securities

Thank you for taking my question. I have two questions. The first question is about new customer segment for smartphone panels. During the Korean version of the conference, the CFO Mr. Jung mentioned that one of the strategies for the next year is to gain new customers, especially in the mobile markets. So can you give us any color of those new customers? Does that mean you can expand your mobile panel sales 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 in Japan Company. So anyhow we try to expand our business in terms of smartphone.

Kim Kyung-min – Hyundai Securities

Thank you. And my second question is about the average size 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 UHD TV size are much larger than the existing LED Full HD TV. So you just mentioned 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 our size mix, right, and we focus on big screen size and 55 and above. But currently we think one inch is because of large size growth rate already matured, so it’s nice to increase jumps. So we think one inch is also big gap in the future. So I think one inch is a big difference. In the past maybe two inches is possible, I think one inch is a reasonable number. But if we possible, we want to increase our average size bigger than one inches.

Kim Kyung-min – Hyundai Securities

Okay, thank you.

Operator

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

Hee Yeon Kim

There is no participations with 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 further questions, please contact either myself or my colleagues. Thank you.

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