LG Display Co., Ltd. (NYSE:LPL) Q2 2016 Results Earnings Conference Call July 27, 2016 9:00 PM ET
Hee-Yeon Kim - Head, IR
Don Kim - CFO
Young Kwon Song - SVP, Strategy and Marketing Group
Matthew Kim - Head, TV Marketing
Nicolas Gaudois - UBS
J.J. Park - JP Morgan
Hyun-chul Soh - Shinhan Investment
Daniel Kim - Macquarie Securities
Seong-ryeol Kwon - Dongbu Securities
Kyung Min Kim - Daishin Securities
Rob Stone - Cowen & Company
Simon Wu - BoA Merrill Lynch
Ladies and gentlemen, welcome to LG Display’s Second Quarter 2016 Earnings Release Conference Call. We will begin with a presentation, followed by a Q&A session. [Operator Instructions] Now we will start the presentation. I hand over to the speaker. Ma’am, please begin.
Good morning, on behalf of our Company, I extend my deep gratitude to all of you for joining LG Display’s second quarter 2016 earnings conference call. I am Hee-Yeon Kim, Head of IR. With us today we have CFO, Don Kim, of LG Display; Young Kwon Song, SVP of Strategy and Marketing Group; Duck Young Kim, Head of Corporate Business Management division; Head of Market Intelligence, Stephen Ko; and Matthew Kim, Head of TV Marketing.
Today’s earnings presentation will last around one hour, conducted in both Korean and English. We will begin with the second quarter business results, followed by outlook, then the Q&A session.
Please refer to our website and attachments to our disclosures for more detail regarding the second quarter results. For those of you joining us via the webcast, please refer to the references in the widget on the bottom left corner.
Also, before we begin the presentation, please take a moment to read the disclaimer. Please note that today’s results are based on consolidated K-IFRS standards, prepared for your benefit and have not yet been audited by an outside auditor.
With that said, our CFO, Don Kim, will now start the presentation on second quarter 2016 earnings results and key highlights.
Good morning, I am Don Kim, CFO of LG Display. I would like to thank our shareholders, analysts and investors for joining LG Display’s second quarter 2016 earnings conference call. Let me begin with Q2 earnings results, followed by future market outlook and our Company’s strategic direction going forward. Looking back to the second quarter, we saw uncertainties heightened in the external environment in the wake of Brexit, leading to higher than expected currency volatilities. Average exchange rate was KRW1,200 in Q1, while Q2 average was KRW1,162 which is a move by KRW38. As such, currency, which is a non-business factor, had a big impact on the profit.
On the other hand, for the display industry with production constraints on the supplier side and migration to bigger TVs on the demand side, supply and demand dynamics were more robust than expected. Panel prices have also turned upwards, all boding well for the overall market trend. Notwithstanding unfavorable currency movements, with expanded profitable product mix such as for UHD, In Touch products, among others and driven by continuous cost saving efforts, whilst the industry overall recorded a loss, we were able to stay in the black for two consecutive quarters.
Also, we are seeing achievements on the OLED side as well. For large sized OLED, number one, there were improvements in yield, productivity and increasing shipments. Number two, the customer has seen profitability improvement by expanding its position in the high end market segment. Number three, with higher consumer awareness for OLED TV and based on the visibility and acceptance we have gained, we started product line up with various different customers. As such, it seems that we are entering a virtuous cycle. For small to mid-sized OLED, we made investment decisions for E6, following E5. We are building a foundation to expand our OLED business in large and as well as in small to mid-segments as well.
Now let me move on to Q2 earnings results in more detail. Revenue was down 2% Q-on-Q to KRW5,855.1 billion. Area shipment was of mid-single percent Q-on-Q. Although there was profitability focused product mix improvements with FX impact of strong won and decline in blended ASP on lower tablet revenue, revenue overall declined slightly on a Q-on-Q basis.
Operating income came in similar to last quarter at KRW44.4 billion, with profitability focus part of mix, such as for UHD and In Touch products and continuous cost savings efforts, despite the fall in the FX rate, we were able to stay in the black against the overall loss in the LCD industry.
To elaborate more on Q2 area shipment and ASP, area shipment was 9.96 million square meters, up 5% Q-on-Q. For TV, area shipment increased on higher demand for large sizes, but in terms of unit, it was flat Q-over-Q. Through our max capa activities, our capacity increased mid-single digit percentage Q-on-Q, supporting the second quarter area growth requirements. Panel ASP was overall stable. With growth in large size panel shipment whose ASP is lower compared to small to mid-panels, blended ASP declined 4% Q-on-Q. As mentioned before, in line with the trend towards larger sizes, TV area shipment increased. Underpinned by higher share of premium products such as OLED TV and UHD, TV share against a total revenue showed a slight growth Q-o-Q.
For mobile revenue, on growth in China bound shipment and mixed improvements around differentiated products such as In Touch products, revenue expanded 4 percentage points Q-on-Q. But for IT product offerings, including monitors, notebooks, PCs and tablets, we saw fluctuations depending on different customers and product sales.
In terms of the financials, inventory declined KRW78.8 billion Q-on-Q to KRW2,453.1 billion. During the second quarter, in order to prepare for the future and respond preemptively, we issued corporate bonds, which led to somewhat of an increase in the net debt to equity ratio.
As we move to focus on the OLED business, timely investment has become critical. We expect higher than average CapEx spend for the time being. As such, we will be flexible in implementing reasonable level of investment in light of our financial standing and strategic direction. To that end, by maximizing profitability for the LCD business and through tight operation management, we will maintain cash generating, sound financial position and engage in strategic financial activities to equip ourselves for the future through borrowings if need be. Under such a backdrop for the cash flow, cash as at the end of quarter was similar to the previous quarter level, after accounting for investing and financing activities.
Next is on future market outlook at the Company’s strategic direction in more detail. We expect improved supply and demand dynamics of first half 2016 to continue into the second half of the year, based on which panel ASP will continue to rise for the time being.
On the supply side, we expect some cutbacks driven by industry restructuring. On the demand side, with large size trend expanding for TV, tight supply and demand is expected to continue for some time. But we need to keep a close and continuous watch on demand trends and currency volatilities as macro uncertainties in the wake of Brexit may exist.
Moving on to Q3 guidance, we expect mid-single digit growth in area shipment on higher seasonality demand for large and small to mid-sizes, as well as from continuing size migration to bigger screens. As mentioned previously, ASP is expected to show an upward trend on size migration and supply cutbacks. With higher portion of high value added product shipments, like the UHD TV and touch smartphones and OLED TV, as well as positive seasonality for small to medium size products, we expect blended ASP to also trend upward.
We expect our Company’s profitability to improve Q-on-Q on market recovery, positive seasonality, higher share of differentiated products and continuous efforts and cost savings. However, despite certain rebounds in the market, wider currency volatility may impact Q3 results, a point to watch out for.
Lastly, let me elaborate on our corporate strategy. For LCD through product and cost differentiation, we will continue to maximize profitability, in so doing, we will continue to reorganize our business around the OLED business.
Large OLED TV is expected to see profitability improvement driven by higher volume in the second half and higher productivity. Also, many customers have shown great interest in OLED TV and we expect customer diversification to come through based on higher capacity next year. For small to midsized OLED, plastic OLED needs continue to rise. Accordingly, we plan to gradually expand our plastic OLED capacity.
Following E5 15K capacity investment, we decided to make additional investment for E6, which is a Gen-6 plastic OLED fab, with a capacity of 15,000 sheets per month. Through this investment, we will not only expand on capacity, but also secure technological edge in future display technologies such as for foldable display and auto applications. By responding to customers’ various product needs, with agility we will expand small to midsize OLED business going forward.
Through timely investments, we will capture opportunities for the future, but also enhance efficiencies by rigorously controlling resources, spanning for investment, expenses and working capital. Through our different and singular strategies in LCD and OLED, we will prepare ourselves to grow, despite the difficult market backdrop and do our utmost to deliver bottom line results that differentiate us from our peer group. Thank you.
We will now begin our question and answer session. [Operator Instructions] Our first question is from Nicolas Gaudois at UBS. Please ask your question.
Yes, good morning, thanks for taking my question. First question is on profitability improvement in OLED. Could you maybe help us a little bit more understand how much approximately was the improvement in profits in Q2 versus Q1 coming specifically from OLED margins improving? When you talked about further improvements in profitability into the second half of the year, if you could maybe quantify this a little bit.
And my follow up question will also be on OLED. So regarding the E6 investments in [indiscernible] when you find today two, three and one spending, does this effectively cover the 15,000 sheets per month of capacity you talked about? If you could bring a bit more clarity on when actually this should be ready for production and whether this is all a flexible OLED for the full process line up, including obviously requirements for laser [indiscernible] encapsulation or if it’s a mix of rigid and flexible. Thank you.
I am Don Kim, let me respond to your question about the OLED TV profitability. Internally, when it comes to the large-size OLED panels, we not only have technology related conviction, but we have gained very clear customer related visibility. We’ve seen increases in yield and also we have seen expansion in the shipment, and all of this is being implemented within the realm of our plan. And therefore, in the second half of the year we will be able to see favorable financial results come through.
To elaborate a little more, in the second half of the year, when it comes to the profitability aspect of the OLED TV, large-size TV panels, as we go through the third quarter and the fourth quarter you will be able to see a very steady improvement in profitability. So we will be able to maintain a very stable EBITDA trend in the back.
In terms of contribution to the top line, the revenue, if you look at the contribution that OLED is making against the total TV, we expect that contribution to be very close to two double digit. At this point, if you look at OLED portion as against the TV segment, in terms of units it accounts for 2%, but in terms of revenue we expect that it will surpass 10% going forward.
Let me respond to your third and fourth question about the plastic OLED investment. As we see increases in the need for flexible display and plastic needs for the small to mid size flexible displays, we will continue to gradually invest and expand on our capacity.
We believe that we are the only singular Company that can respond in both LTPS and plastic OLED space. And also in the past we had a lot of experience in converting our fabs and in improving the efficiencies of our fab lines. So we will respond to the changes in the market and the demands of the customer by very flexibly maintaining and managing our capacity.
Young Kwon Song
I am from Strategic Marketing. Let me respond to your second question. With regards to the investment for [indiscernible] facility E6, in the amount of KRW2 trillion, yes you are correct, it will support 15K. We are currently expecting mass production to kick start in the second half of year 2018 and this facility will be to cover plastic OLED, including the flexible and the in cap encapsulation technology.
Our next question is from J.J. Park at JP Morgan. Please ask your question.
I would like to pose first questions on the E6 facility, the KRW2 trillion investment. Now with regards to this year’s and next year’s CapEx, would this have any impact on the changes that you’ve communicated previously? Is this still within the KRW4 trillion to KRW5 trillion range? Or is KRW2 trillion on top of, addition to, the plan that you’ve introduced, communicated, before?
Second question, can you give us a breakdown between LCD, the maintenance CapEx, as versus the OLED CapEx? And then I will follow up with other questions.
I am the CFO responding to your CapEx question. For 2016 CapEx, yes, there could be some possibility of a slight change in CapEx. But having said that, we believe that for the 2016, the mid-KRW4 trillion that we’ve previously communicated, we do not think that that will undergo any significant changes. And as we undertake internal review, there may be some possibility of slight changes in the CapEx. But because we are really focused in efficient investment, basically the overall trend is towards the downside. Its trend is downward. So for the E6 P-OLED investment that we have announced, some of that CapEx is reflected in 2016 CapEx and that will form the main stream for 2017 and 2018 CapEx. Also, for your information, for this year, the proportion of OLED as against the CapEx, we project that it will be around approximately 50%.
Another question I would like to ask is that, as the CFO mentioned, there seems to be some F/X related risk. As against the U.S. dollar, if the won strengthens by maybe KRW10, what impact would that have on your bottom-line, the profit? Can you quantify that impact?
With regards to the volatility in the dollar F/X, just to give you some ballpark impact number, if there’s a KRW10 increase against the dollar, then there is a monthly impact of around KRW8 billion.
Our next question is from Hyun-chul Soh, at Shinhan Investment. Please ask your question.
I would like to know, your 65 inch OLED share compared to the Q1, how much of an increase was there in Q2? Also, as we go towards Q3 and Q4, what will be the trends like for 65 inch OLED product?
As mentioned during the previous conference call, we believe that there is increased need, with respect to the 65 inch when it comes to the customers. Now compared to the first quarter, if you look at 65 inch UHD panels, we believe that there’s been about 10% increase in the share.
Our next question is from Daniel Kim at Macquarie Securities. Please ask your question.
I would like to pose two questions. First question, if you look at this year and next year, I think there’s quite a big CapEx requirement and it will not be ample for you to cover all of that with just your EBITDA. So would like to understand, to what extent is CFO willing to tolerate, in terms of the increase in the financial leverage, because already in Q2 we’ve seen 20% increase in net debt to EBITDA ratio.
My second question is that, going forward, it seems like large-size OLED panels are going to gain more popularity. You just mentioned the 65 inches are gaining popularity and that will mean that you would need to build capacity to cover for that requirement. But if you look at eighth-generation 65-inch glass, the mother glass efficiency is not very good. So considering that, is it the right way to go to convert the LCD eighth-generation facility? Or would it be a better way for you to actually build new backplane capacity?
Responding to your question about CapEx, as I said before, for the time being -- for 2016, 2017 and 2018 -- we will focus our CapEx in order to prepare for the future and focus it on OLED business. So it will surpass the EBITDA level on an average basis, but the size of the EBITDA is actually dependent on the market and the industry situation, so we do not foresee the extent of that additional surpassing level to be that significant. Also, if you look back a little more into the past starting 2012, basically the investment was relatively quite low. So over this period of time, we were able to build on our financial soundness and our financial health is in a very good condition. So for the coming two to three years, even if there’s a bit of an increase, we believe that, financially speaking, there will not be a problem and everything will fall under our mid to long-term plan that we have previously set.
Basically, when it comes to the investment principal that we stick to within our Company, we are very mindful of the customer needs as well as the market trend, and we want to make sure that we don’t miss out on any golden opportunities. So timely investment is important for us and we very much focus on efficient investment as well. So for the 65-inch, and 77-inch products also, we will be very keen on looking at the market responses, as well as the up-turn trends in the market. Based on those such analysis, we will review and determine whether to convert the HN facility or to build out new facilities.
Our next question is from Seong-ryeol Kwon at Dongbu Securities. Please ask your question.
I would like to ask two questions. One has to do with the large size OLED panels and second is mobile display. The first, you mentioned that your OLED business will be in the black, in terms of the EBITDA basis. But what about the operating income, as against the operating profit, when will it turn in profit? Also what is your annual OLED volume guidance.
Second question is on mobile display. We see a very strong trend towards OLED displays for mobile applications. I think for LG Display that means that in year 2017 your mobile LTPS LCD volume is then bound to decline and you are not yet fully equipped to respond to the OLED demands on the mobile segment. So I think that creates a bit of a weakness on your part. How do you plan to respond to this?
Just to revisit once more our basic strategy for large size OLED TVs, basically we are focused on the gaining of the market premium position, based on which a stable pricing can be enjoyed. So through such scale and merit, we will first approach and secure the volume, which will then lead to the profitability.
So currently we believe that we’ve entered into a virtuous cycle. And I think, going forward, we will focus on building on the economy of scale, the economic scale aspect, which will work as an advantage and merit on our side. So starting next year in full swing, we will be expanding the volume and we plan to, thereby, enhance the profitability. Your question specifically was about when we will turn in profit, in terms of the operating income, the operating profit. It’s very cautious for me to give you a specific number, but what is very clear is that there will be profitability improvement. I say that because next year there will be 60,000 mass production which will come under full ramp-up, the mass productions will come under full ramp-up, so that will have a very positive economic benefit to the Company as well.
Young Kwon Song
I’m from Strategic Marketing, I will respond to your second question. As you have mentioned, for the overall smartphone we’ve seen increases in upgrades and the level of specification. So there is higher requirement for low power and high definition and also the hardware differentiation is now being dissipated and we now see more focus and more interest on P-OLED. As you know, for LCD we focus on high definition based on LTPS, and we have a cost competitiveness. And, as mentioned previously, we are the only Company that can actually respond to both LTPS and P-OLED. So we are going to very rigorously prepare for P-OLED, plastic OLED, through our E5 and E2 facilities as well. And, as you know, we have a prior experience in converting amethyst silicone to oxide, and also LCD to large-size OLED and amethyst silicone to LTPS. So, based on those very firm experiences that we have, we will respond to the market needs by taking the LTPS if need be, and also P-OLED appropriately. I think your question had to do with the profitability for the mobile side. Our E5, if you look at its capacity of 15,000 based on that capacity we will be getting more than KRW13 million for 5.7 inch products. So that is the amount of volume that can be produced. And if you look at plastic OLED’s ASP, it is about two times higher compared to LTPS product. So we believe that, as we stabilize our production and increase our yield, we will be able to secure good profitability.
Our next question is from Kyung Min Kim at Daishin Securities. Please ask your question.
Kyung Min Kim
So, thank you for a very clear explanation on the investment plan and cash flow, going forward. I have some questions on the technological side. In order to attain high definition requirements in low power consumption, I think that you’re focusing on the oxide TFT, and for large sizes you’re looking at, you’re using LTPS. On the encap side is there, is it going to be the same structure for the large panels and the mobile applications?
Young Kwon Song
I’m from strategic marketing. When it comes to the backplane, depending on the resolution level and the needs of the customer in light of the low power requirement and bezels, these different things are considered. And, based on that, we are currently responding with either oxide or LTPS.
On the encap side, for the large OLED and small plastic OLED, for the encap side also, depending on the resolution and the customer needs, same technology can be used; same technology may be applied. And also for the plastic OLED and the flexible OLED, different technologies can also be applied.
Our next question is from Rob Stone at Cowen & Company. Please ask your question.
Hi, thanks for taking my questions; I had a couple. One, I think by now you’ve been very successful in signing up external TV customers for your OLED TV panels. I think it’s 10 or something like that by now. Can you say to how many of these TV panel customers do you expect to be shipping this year and next year?
And then my second question is, if you could comment on how many OLED TV panels you shipped during Q2.
Yes; I’m the CFO. Let me respond to that question. As I said at the very onset, large-sized OLED TV panel makers have shown interest and we -- they’ve contacted us. And we are really in the stage of very specific and detailed collaboration talks at this point. Now, please understand I won’t be able to cite a specific number of customers, but they are global customers from Japan, China and Europe. We are currently in specific collaborations with these companies.
Our next question is from Simon Wu at BoA Merrill Lynch.
Thank you for a very good earnings conference call. I think a lot of questions ‘til now have been very much focused on OLED. I have a question on LCD because I think LCD in the second half of this year, as well as next year, will play a very important role in improving your operating profit. If you look at LCD prices, there has been a significant rise in the 32-inch segment. For the larger panels, there weren’t that big of a rise, but I think there was a significant cost improvement on the large LCD panel side. So in the second half, for your LCD business, the size of the profit would it be commensurate to what we’ve seen to one or two years ago when your performance was at its prime?
And moving to OLED TV, I think by the end of next year you will have a significant capacity of 60,000 sheets per month. And by that time your competitor will also be selling quite a bit of quantum dot TV product. And I think from consumers’ perspective, they would be confused when it comes to the 65 inch product, whether to choose QD or OLED. So what is your differentiating factor that you wish to emphasize on? And also for LCD TV panel production, there will also be some quantum dot LCD production from your side as well. What is the percentage of that out of your total LCD TV panels?
Yes; I am from TV marketing. I will respond to your question about price outlook. You are correct; we’ve seen significant price rises in the 32 inch segment. Now will this trend spill over to the larger segment? Now, that is something that is closely related to the improvement of the market fundamentals. We will be exerting our efforts so that there will be that spillover to the larger sized segment, but we will have to watch and observe the market.
I’m the CFO. Let me respond to your profitability related question. As, in our Company, we are maintaining a very steady profitability for our LCD business. The decline in the ASP has slowed. And in some inches we are actually seeing upturns and increases in prices. So, with the lapse of time, we believe that profitability is bound to further improve.
Now, for the LCD profitability, based on our fab mix, as well as highly profitable models increasing their share, and with differentiated premium models, we will be able to sustain the profitability. And also, with improvement on the OLED profitability side, which will have an overall portfolio impact, a corporate wide portfolio benefit, there would be further profitability improvement.
Young Kwon Song
Now, I will respond to your third question. I am from strategic marketing. As you know, quantum dot LCD basically what it is doing is there’s an additional layer of QD that’s placed on top of LCD -- LED backlight on this -- from the CCFL backlight there’s a LED backlight and all you’re doing is you’re adding another layer of quantum dot.
Now in that sense, even some years ago we’ve introduced technology. And whether or not to use this technology will be dependent on the needs of the customers. So responding to the question about the consumers, whether they should buy QD LCD or OLED, I think that decision basically boils down to one’s decision to either buy an LCD or an OLED TV.
Thank you very much for all of the questions, especially the LCD questions at the very end. We will not be taking any more questions due to the time and we will now close the Q2 2016 earnings conference call.
Once again thank you for joining us today. And please contact our IR team if you have any additional questions. [Operator instructions]. Thank you all for attending. You may disconnect now.
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