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Executives

Hee Yeon Kim - Head, IR Department

Sang Lee - Vice President, Market Intelligence

Kevin Choi - Vice President, IT Marketing Department

J.S. Park - TV Marketing Department

Analysts

Brian White - Topeka Capital

Andrew Abrams - Avian Securities

Dan Malcolm - Viking Global

Ben Lu - Seligman Investment

DS Kim - UBS Securities

LG Display Co., Ltd. (LPL) Q3 2012 Results Earnings Call October 26, 2012 8:00 AM ET

Operator

… the Fiscal Year 2012 Third Quarter Earnings Results by LG Display.

Hee Yeon Kim

Welcome to LG Display third quarter year 2012 conference call. My name is Hee Yeon Kim, Head of the IR Department. On behalf of LG Display I would like to welcome everyone to our global quarterly earnings conference call.

I’m joined by our IR staff, as well as representatives from TV marketing, IT marketing and Market Intelligence. Sang Lee, is Vice President of Market Intelligence; Kevin Choi is Vice President of IT Marketing -- IT Marketing Depatment; J.S. Park is heading up the TV 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 outlook.

Moving on to revenue and profits on the next slide. EBITDA lifted from seasonal demand and launch of the new smart devices, the panel shipment rose by 7% in third quarter.

In particular, Chinese Golden [rift] demand was better than expected with type of government subsidy. As the high-end premium product proportion from FPR treaty to smart device continuously rose in third quarter. We recorded the highest quarterly revenue at KRW 7.6 trillion, up 10% quarter-on-quarter and achieved operating profit turnaround recording KRW 353 billion.

Overall panel price has showed this table front and our blended ASP rose as premium product proportion increase. Operating profit margin was 3%, while we recorded EBITDA margin of 19%. Income before tax was KRW 230 billion and net income was KRW 158 billion.

Moving on to slide four, looking at our financial positions and ratios. At the end of September, cash and cash equivalent recorded KRW 2.5 trillion, in preparation for the seasonal demand and the new product launch, the inventory amount rose to KRW 2.7 trillion, while recent inventory fell from last quarter.

The increase in the inventory amount is also due to increase in specialty product portion, as debt decline KRW 104 billion from last quarter, recording from KRW 4.7 trillion. Liability to equity ratio fell 4 percentage points to 154% and net debt to equity ratio remained stable at low 20%. The quarter ratio rose 5 percentage points to 86% improving the balance sheet.

Moving on to slide five, looking at our cash flow. Cash at the beginning of the quarter was KRW 2.7 trillion. Cash flow from operating activities resulted in cash inflow of KRW 1.2 trillion.

Cash flow from investing activities resulted in an outflow of KRW 1.3 trillion and cash flow from financing activities resulted in an outflow of KRW 69 million. As a result, the net change in cash was outflow of KRW 155 billion.

Moving on to slide six, I would like to go over our performance highlights. During third quarter, our shipment increased by 7% to 9.2 million square meters, while ASP per square meter increased by 5% to $733. The rise in price reflects the increase proportion of high-end specialty product itself.

Moving on to our product mix on slide seven. The TV segment represent 47% of our revenue, followed by monitors at 16%, notebook at 13%, tablet is at 15% and mobile applications at 9%. The tablet segment rose this year by 5 percentage points to 15%, due to new model launch by various customers combined with existing tablet product volume increase.

Moving on to slide eight and looking at our capacity. Our producible capacity increased by 8% to 12.1 million square meters in third quarter, due to P98 full impact.

Next we turn to our outlook section. The shipment demand and volume increased from new smart device are expected in Q4. Thus we expect a high single-digit percent rise in the shipment in Q4 and anticipate the overall panel price to show a stable trend.

Next I would like to touch upon our business strategy going forward. Next year the demand is unlikely to improve much further than this year, as microeconomy uncertainties persist. Smart devices are expected to grow by double-digit, but overall panel demand growth is down to be around low to mid single digits.

However, we anticipate supply situation to improve in year 2013 with capacity loss due to industry fab conversion trend and new technology adaptation. As I mentioned, the uncertainties within the micro situation is difficult to escape or scatter. However, we aim to overcome our predictable uncertainties such as the seasonality and supply within the industry.

In order to achieve stable profit going forward, we will continue with following actions. First, differentiated specialty product and technology such as IPS, FPR and White RGB OLED will be used to maintain a trends and relationship with our strategic partners.

Second, we will carry our prudent inventory control and CapEx discipline, contributing to improve industry supply situation. With this action, LG Display will continue efforts to become a structurally different company among our peers.

This ends our presentation for third quarter year 2012 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 Instructions) The first question will be provided by Brian White from Topeka Capital. Please go ahead, sir.

Brian White - Topeka Capital

Yeah. Good evening. When we think about the PC and the TV market in the December quarter, where were we see faster sequential volume growth, TVs or PCs?

Hee Yeon Kim

Mostly TV, when you look at PC market, the demand is itself will not be that great versus TV, but if you look at our guidance, our guidance is rising, single-digit shipment growth that is mainly driven by TV and also our new cutoff line up in the tablet and smartphone segmentation.

Brian White - Topeka Capital

Okay. Now you had a big uptick sequentially in the tablet, PC market for the September quarter is very strong. Can that growth rate continue? Can you deliver a similar quarter-over-quarter growth rate for tablets in the December quarter?

Kevin Choi

Yeah. Last quarter I expected around 40% to 50% of tablet growth from Q2 to Q3 and we, slightly over 50% growth compared to last quarter. And we -- if you look at same growth rate from Q3 to Q4, but we are not sure about the Q1 yet, but at least Q4, we think we can expect the same growth rate.

Brian White - Topeka Capital

Okay. And finally, when we think about ASPs, it seems like your ASP outlook is a little conservative, just is there, it seems like prices for panels are rising. Is there another dynamic that only allows for your prices to be stable in the December quarter as opposed to rising?

Sang Lee

Yeah. This is Sang Lee at Market Intelligence. I think market price will vary stable, overall current supply and demand is quite balanced in every segment. Of course, there might be some balance in level of the supply/demand relationship, depending on the panel, but overall, I think the price will vary as stable.

Brian White - Topeka Capital

Thank you.

Sang Lee

It can be, yeah, okay.

Operator

The following question will be presented by Andrew Abrams from Avian Securities. Please go ahead, sir.

Andrew Abrams - Avian Securities

Hi. I wonder if you could kind of specify a little further on tab business. Is the growth in fourth quarter coming from additional new models, or is this running higher volumes on existing products and just beginning the real high volume ramp?

Kevin Choi

Most of them, one is coming from existing product line and the other one is coming from the new product line, so combination of the two segment.

Andrew Abrams - Avian Securities

Got it. And would you expect a similar decline in your non-tablet business, meaning, maybe ex-TV business in the IT side, in terms of percent of revenue in fourth quarter that you had in third quarter?

Hee Yeon Kim

Because of the stronger shipment in the tablet side, yeah, we are expecting small decline in other segmentation in terms of revenue portion. But the degree of proportion, we are not sure about that.

Kevin Choi

And the impotency is, why we are decreasing our other product segment. We are trying to reduce some relatively low flat-panel product segment. While we are maintaining or increasing flat panel product segment volume and revenue.

Andrew Abrams - Avian Securities

Okay. And what are your expectations for capacity in fourth quarter. Would you be expanding further, is there room to expand further since your utilization is running pretty high?

Hee Yeon Kim

Actually, in case of capacity, we are expecting only 2% growth sequentially and our utilization ratio should be similar as third quarter, because we try to reduce our inventory at the lowest level.

Andrew Abrams - Avian Securities

Right. Lastly, could you -- you mentioned OLEDs in your comments. Could you talk a little bit about what your guys are doing there?

Hee Yeon Kim

OLED remains our strength for the OLED television, like you are asking. Actually, we are targeting to release some promotional purpose -- we’ve done some promotional purposes. We try to release our 55-inch OLED TV within this year with White RGB technology, because it has cost efficient with production efficient, but as volumes scale should start somewhere in year 2013.

Andrew Abrams - Avian Securities

Okay. And there was an article recently about the fact that you guys are about to start a mass -- building a mass production facility. I know you’ve talked about kind of your general plans. Has anything changed there as far as your TV OLED mass production?

Hee Yeon Kim

Actually, there is nothing changed materially. We understand for the OLED fab decision making is that we try to take up some market, market response for our actual release of our new products. Maybe that time segmentation should be near, at year-end or early next year after then we will give you more detailed ideas for the fab investment?

Andrew Abrams - Avian Securities

Got it. Thanks very much.

Operator

The following question will be presented by Brian White from Topeka Capital. Please go ahead, sir.

Brian White - Topeka Capital

I’m just wondering I know last call you talked about ramping in-cell technology. I guess it was in August. How should we think about yields today and when can you reach kind of that 90%, 95% yield rate, is that by the end of the quarter?

J.S. Park

Actually, the in-cell technology yield, production yield is being stabilized right now and we are not sure, what is the saturation point. But the yield rate you mentioned like 99.5%, we do not expect.

Hee Yeon Kim

Even as to indicate our profit ratio is around mid to high 90%, extreme ratio of 99%, something, but anyway, we try we will deliver our in-cell product to over 90% yield ratio.

Brian White - Topeka Capital

Okay. Yeah. That’s what I said, 90% to 95%. So you can hit 90% to 95% by the end of the December quarter, is that true?

J.S. Park

We hope so. We hope so. We are trying to do.

Brian White - Topeka Capital

Okay. What’s the typical way like, where are you today and you are at 60% level or 50%? Just help us understand the ramp on that.

J.S. Park

We are heading to 90% ranges.

Brian White - Topeka Capital

Okay. But you know where you are today? You are 90% today or you are heading to it?

J.S. Park

We are heading to it.

Brian White - Topeka Capital

Okay. Where are you today, though?

J.S. Park

We are not able to disclose our specific yield rates in public.

Brian White - Topeka Capital

Okay. That’s fine. In the mobile market, help us understand the mobile market in the December quarter. Is that going to grow as faster than the tablet market?

J.S. Park

You mean mobile, between tablet and the notebook, is it.

Brian White - Topeka Capital

Yeah. Just mobile phone, mobile phone.

J.S. Park

Mobile phone. Actually, we are thinking even smartphone area also growing faster and the volume wise the growth rate was a mobile phone is slightly lesser than smartphone, I mean tablet.

Brian White - Topeka Capital

Really okay. Okay. And finally, when we think about the CapEx for next year, what should we model for CapEx in 2013?

Hee Yeon Kim

Actually, we -- we’re in the process for the balancing next year. So, we don’t have any final lines to data, but we have some guideline. Next year, CapEx was not higher than this year. This year CapEx is expected to be KRW 4 trillion. So, we’re trying to not to be over KRW 4 trillion in the 2013.

Brian White - Topeka Capital

Okay. And one thing I wanted to be clear on, the mix continues to improve, which is great. How much of the positive impact, I mean as we go over the next year, a lot of new products ramping. Over the next one to two quarters as yields improve is that going to have a meaningful impact on margins, positive impact or only a minor impact?

Hee Yeon Kim

Actually, in Q4 you might witness our early improvement impact. It means our earnings improvement in Q4 could be relatively much higher than the level of third quarter improvement.

Brian White - Topeka Capital

Okay. Fantastic. Thanks a lot.

Operator

(Operator Instructions) The following question would be presented by Dan Malcolm from Viking Global. Please go ahead, sir.

Dan Malcolm - Viking Global

Hi. I apologize. If you guys said this already I missed it. But did you give your guidance in terms of what you think area shipment growth will be by application for the fourth quarter? So, what do you think for IT, what do you think for notebook and then also for tablets, sequentially a TV? Thanks.

Hee Yeon Kim

Actually, our shipments items is a higher single-digit sequentially. Among them biggest contributor is used market devices such as tablet and mobile. Tablet and mobile shipment growth is quite meaningful double-digit growth. And in case, our TV that’s around mid-single digit and monitor our specific, trendily our monitor shipment growth should also be double-digit despite our market gloomy situation based also sales to our new product release impact. Is it okay?

Dan Malcolm - Viking Global

I’m sorry. You have new products in the monitor side?

Hee Yeon Kim

Yeah. Monitor as well.

Dan Malcolm - Viking Global

Okay. And when you say quite significant double-digits for mobile and tablet is that -- does that mean like greater than 30%, greater than 50%, 20% can you frame that for me? I apologize. Thanks.

Hee Yeon Kim

In most case, yeah, to be greater than 30%.

Dan Malcolm - Viking Global

Greater than 30%, okay. Thank you so much. I appreciate it.

Operator

(Operator Instructions) The following question will be presented by Dan Malcolm from Viking Global. Please go ahead, sir.

Dan Malcolm - Viking Global

Sorry. I had one last question. I apologize. Just a follow-up. Do you have any thoughts currently on what you think the first quarter will look like from an area shipment perspective?

Hee Yeon Kim

It’s already mentioned about the first quarter shipment growth. We expected there is some seasonal impact, because usually there is a seasonal low timing first quarter. However, recently our customers such as debt makers and distributor are not that rightly able to accumulate to their inventory, because for low expectation after demand amidst the global economic situations. So potentially if there is no inventory adjustment, the seasonality -- seasonal impact should not be that big. On this thoughts our market intelligence Sang Lee will add on that.

Sang Lee

Yeah. Actually, I’m a little more optimistic about the Q1 forecasting at this moment. Even though, we may go into some seasonal -- some adjustment, right after the year-end of sales. But currently, systems set sales in channel is quite healthy and also we can expect some -- currently very strong sales forecast from the market. Overall Q1 will be gone as we expected, so overall I think the market will be locked at that at this moment.

Dan Malcolm - Viking Global

Great. And for the tablet and mobile for the new -- for lot of the new products that you see out there, do you expect that you could see given that they -- that the yields are kind of coming up the curve to some of these products are kind of launched fairly late. Do you expect that you would see somewhat stable demand in the first quarter or do you think you would even see a typical seasonal decline? It sounds like you don’t expect typical seasonal decline really across the Board, but in those areas specifically, how are you thinking about it?

Sang Lee

I think the unlike the conventional PC devices for system monitor and notebook computer, current strongly we are growing the smart devices including a tablet and smartphone, since a little different seasonality. Still, we -- I think Q4 and Q1 there are many new product launch, but I think the -- we can see some sales growth months-by-months even in Q1.

Dan Malcolm - Viking Global

Well, okay. So you could even see some growth in those products than in the first quarter that’s very helpful. Thank you so much. Appreciate it.

Operator

The following question will be presented by Ben Lu from Seligman Investment. Please go ahead, sir.

Ben Lu - Seligman Investment

Hi. Thank you, guys. Just wanted to follow-up on one of Dan’s questions. When you talked about significant shipment growth for tablet and smartphones just one or two clarify, I think earlier you said that you expect to see similar tablet growth in Q4 and I think Q3 was up 40%, 50% something like that?

Sang Lee

For the tablet?

Ben Lu - Seligman Investment

Yeah.

Sang Lee

Yeah.

Ben Lu - Seligman Investment

So Q4 tablet growth will be up about 40%, 50% and I think you said later on that smartphone growth will be even faster than 40% to 50% correct?

Sang Lee

Among the only smartphone yeah.

Ben Lu - Seligman Investment

Okay. Got it. And then…

Sang Lee

Future...

Ben Lu - Seligman Investment

My next question is…

Sang Lee

Go ahead please.

Ben Lu - Seligman Investment

You guys have guided over 400 billion OP in Q4, you guys probably did about I think adjusted OP of little over 300 billion in Q3, can you walk us through how you can increase OP by roughly 100 billion quarter-over-quarter, how much of that is coming from better yields, lower inventory et cetera?

Hee Yeon Kim

Actually, biggest contributor is our mix changes. Third quarter, our specialty product portion declined over 50% but it will be over 6%. So we are expecting 10 percentage points mixed improvement in Q4. And second contributor is early improvement together with a bottom increase.

Ben Lu - Seligman Investment

Got it. Okay. And then are you guys expecting to book any more provisions?

Hee Yeon Kim

For the time being, we might have some provision issue but amount would not be that high because we will prepare some individual loss of case instead of transaction. So we are expecting small size instead of the big points every quarter.

Ben Lu - Seligman Investment

Okay. Great. And then my last question, Sang is when will you guys make the decision on potentially lessening your depreciation period to five years. And then if you can walk us through how we should think about your depreciation expense in Q4 through 2013. Thank you.

Hee Yeon Kim

Actually for this side, it’s not decided yet it’s just getting busy if we plan to more seriously to change our accounting policy, we will deliver the kind of situation to the market immediately. But it is just getting change.

Ben Lu - Seligman Investment

Okay. And then how should we think about depreciation in Q4 through 2013?

Hee Yeon Kim

Actually, this year depreciation should be KRW 4.4 trillion and next year KRW 4.2 trillion which is a slightly worse than this year. And Q4 depreciation should be KRW 1.1 trillion.

Ben Lu - Seligman Investment

Okay. Thank you so much.

Operator

The following question will be presented by DS Kim from UBS Securities. Please go ahead sir.

DS Kim - UBS Securities

Thank you, sir. Firstly, when -- earlier you talked about monitor in fourth quarter new product. Is it fair to assume that it includes something like only non-PC like iMac. This is my first question.

And second question would be how much visibility. I mean order visibility do you have for tablets. I’m just concerned because your major tablet customer can do the inventory adjustment at the year end. So I’m over 30% volume growth should be a bit too bullish?

Sang Lee

The first question, the new monitor, yeah and second question for the tablet event, I’m not just talking about one customer but overall. Our customers demand strong even Q4 and peer valuable Q1. And I will say we are trying to meet our customer’s requirement utilizing our capacity and resources, full resources. That’s our current situation.

DS Kim - UBS Securities

Thank you. Actually, my last question would be earlier this afternoon when CFO indicated over 400 operating profit for fourth quarter. Was it after the potential legal provision or before assuming one-off. Can you please elaborate a little bit on that?

Hee Yeon Kim

Actually, that’s our operating profit assumption. It means that kind of adjustment was already, is already reflected but the rental is not fixed yet. Thank you very much.

Operator

Currently, there are no participants with questions. (Operator Instructions) The following question will be presented by DS Kim from UBS Securities. Please go ahead sir.

DS Kim - UBS Securities

Sorry. One more question, actually if I calculate correctly, I understand the tablet-PC revenue growth in third quarter was not 30%, 40%, was actually 65% but do you still guide similar 60% growth for the fourth quarter, if I understand correctly or are you meant something like 40%, 50% range, tablet revenue?

Hee Yeon Kim

Actually, we were talking about the shipment growth in terms of area, not talking about revenue growth.

DS Kim - UBS Securities

So that means, third quarter shipments growth was something like 30%, 40% or….

Hee Yeon Kim

We’re flexing more than that.

DS Kim - UBS Securities

Okay. Thank you very much.

Operator

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

Hee Yeon Kim

Actually, there is no participant to ask any question. We will end this conference all. Is it okay to end this conference call.

Operator

Yeah. You may.

Hee Yeon Kim

Yeah. On behalf of LG Display, we thank you for participating in our third quarter earnings conference call. Should we have further questions, please contact either myself or my colleagues. Thank you.

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