LG Display Co., Ltd. (A034220) Earnings Call Transcript & Summary

[Foreign Language] Good morning, and good evening. First of all, thank you all for joining this conference call. And now we will begin the conference of the Fiscal Year 2022 Third Quarter Earnings Results by LG Display. This conference will start with a presentation, followed by a divisional Q&A Session. [Operator Instructions] Now, we shall commence the presentation on the fiscal year 2022 third quarter earnings results by LG Display.

[Interpreted] Good morning. This is Brian Heo in charge of LG Display's IR. On behalf of the company, let me thank all the participants at this conference call. Today, I'm joined by the CFO, Sung-Hyun Kim; Hee-Yeon Kim, Senior Vice President of Corporate Strategy Group; [ Sung-Min Kim ], Vice President of Corporate Planning, [ Kee Yong Hee ] in charge of Business Intelligence; Daniel Lee, in charge of Large Display Marketing; Seong Gon Kim, in charge of Medium Display Marketing; and Ki Hwan Son, Vice President of Auto Marketing. The conference call will be conducted in both Korean and English. Please refer to the provisional earnings released today or the IR Events section in the company's website for more details on the financial results of Q3 2022. Before we begin the presentation, please take a moment to read the disclaimer. Please note that today's results are based on consolidated IFRS standards prepared for your benefit and have not yet been audited by an outside auditor. Let me start off with our business performance in Q3. With worsening macro economy in Q3, panel demand fell more sharply than expected, with sluggish sales by set makers, large inventory reduction and stronger standards for inventory operations. In Europe, the biggest market for OLED TV, consumer confidence contracted rapidly following the Russia-Ukraine war and energy crisis, pulling down actual set sales to the negative territory. Demand reduction has been most pronounced where the company is strongest in high-end TV and IT, and our business performance in Q3 underperformed our guidance. Revenue in Q3 was KRW 6.771 trillion, up 21% Q-o-Q, but down 6% Y-o-Y. There was growth in shipment of IT products that have been affected by lockdowns in our Chinese production bases last quarter and growth in shipments of mobile and wearables, but LCD panel price kept declining. There was operating loss of KRW 759 billion. Aside from soft sales of large OLED, there were accelerated decline in LCD panel price and delay in supply of new mobile models. Operating profit margin in Q3 was minus 11%, with EBITDA margin at 6%. There was net loss of KRW 774 billion. Next is area shipment and ASP trend. Area shipment in Q3 was 7.68 million square meters, decreasing 2% from the previous quarter. There was a decrease in shipment, mainly in OLED TV and monitor products. ASP per square meter was $675, going up 19% Q-o-Q. This is owed to the increase in portion of smartphones and wearables. The company's production capacity in Q3 decreased 3% Q-o-Q as the exit strategy for domestic LCD TV fab picked up speed. Next is revenue breakdown by product segment. TV panels accounted for 25%, down 6 percentage points Q-o-Q. OLED panel shipment decreased, and LCD panel price continued to decline. Share of IT panel was flat Q-o-Q at 45%. There was decrease in monitor panel shipments, but also recovery from shipment disruptions resulting from Chinese lockdowns in Q2. Mobile and others were 30%, up 6 percentage points Q-o-Q with growth in shipment of smartphones and wearables. Next is the company's financial position and ratios. The company's cash and cash equivalent was KRW 3.264 trillion, staying above the KRW 3 trillion line. Inventory was KRW 4.517 trillion, decreasing by KRW 205 billion Q-o-Q. As for the main financial ratios, debt-to-equity ratio was 181% and net debt to equity ratio, 84%, both up Q-o-Q. Next is cash flow. The company's cash and cash equivalent at the start of Q3 was KRW 3.669 trillion. It decreased by KRW 405 billion and stood at KRW 3.264 trillion at the end of Q3 after OLED investment and net loss in the quarter. Let me now move on to guidance for Q4 2022. Market volatility and uncertainties are expected to persist, but the effect of seasonality in response to year-end demand in Q4 will push up area shipments Q-o-Q by a low to mid-single digit. ASP per square meter is also expected to climb up by mid- to high single-digit, thanks to increase in new mobile product launches. Next is presentation by the company's CFO, Sung-Hyun Kim, on operational strategy.

[Interpreted] Good afternoon and good evening. This is CFO, Sung-Hyun Kim, of LG Display. The display market remains subdued as a result of soft set sales and large inventory reduction, as well as tighter criteria for inventory management. The company has pursued business upgrade in the past 3 years, but it was challenging to overcome the severe demand downturn and high market volatility. From a conservative perspective that accommodates a prolonged business downturn, the company will deal with the situation even more seriously with a tighter response based on more stringent operation standards. Given the company's financials, we will place the utmost priority on recovering our financial soundness. We will keep up the business upgrade activities while accelerating business realignment. We will first implement high-intensity action plans to recover financial soundness. First is accelerating LCD TV exit strategy. For LCD TV, where there are little room for differentiated competitiveness and excessive performance volatility depending on market situation, we will pull up the timing of terminating production in Gen 7 TV fab in Korea. We will also gradually reduce production in Gen 8 TV fab in China to speedily move ahead with our LCD exit strategy. The company will accelerate our shift to OLED through more aggressive exit from LCD TV. Second is bold reduction and higher efficiency in investment and cost. The company will minimize investment and operation costs, except for essential ordinary investment until when our financial soundness is improved significantly. We will reduce CapEx by over KRW 1 trillion from the plan earlier this year to keep it within DNA level. We have also revisited our existing plan so that from next year and on, CapEx will remain within EBITDA in terms of cash flow, mainly limited to essential ordinary investment to keep it at half the level of depreciation and amortization. For expenses, the company will also allocate and manage them under more stringent requirements from a conservative management scenario. Third is managing inventory at the minimum level. Inventory at the end of Q3 was KRW 4.5 trillion, slightly lower Q-o-Q, but we will reduce an additional KRW 1 trillion by the end of the year to keep it below the adequate level. Production will also be boldly adjusted in linkage to inventory. As we place the utmost importance on recovering financial soundness, we will also accelerate business realignment. We keep upgrading our business structure with more focus on high-end LCD and OLED. We are also accelerating our move to order-based business to minimize volatility coming from supply-demand dynamics to secure a stable revenue structure and strengthen our future business portfolio. In terms of strategic orientation for each business segment, in large panel products, the company will shift to an operational structure based on real demand. We will strengthen our product and cost competitiveness to secure the basis for profitability and focus on qualitative growth. In addition to ultra large OLED, the company will broaden its life display business by increasing differentiated products based on customer value, such as gaming. But under the conservative outlook that macro uncertainties will persist until next year, we will manage our business under tighter criteria. Medium products used to be an important revenue source based on differentiated technology and a strong customer pool, but general use products are increasingly showing volatility in connection to LCD TV. Against this backdrop, the company will strengthen its customer relations and strategy of concentrating on high-end products. We will first increase market share in high-end monitors and notebooks, where the company already has differentiated competitiveness with the goal of minimizing business volatility. And the company will prepare monitors based on its competitive large OLED technology, starting with tablet OLED, which will go into mass production in 2024. We will also broaden into notebook OLED. Our goal is to keep strengthening medium OLED business portfolio over the mid- to long term. In small OLED, we will further strengthen our capability in order-based business with an eye towards stabilizing business operations and preparing the next-gen technology at the right time to take initiatives in future businesses. In auto, the company is solidifying its leadership and winning global OEMs' trust by running customer-specific strategy that provides differentiated value in each category like OLED and LTPS LCD. The company's hard work over the years in auto business is now bearing fruit, with growing achievements coming out of our early investment. We will keep developing our auto business to be the overwhelming leader in the future by providing differentiated customer value. The company will try to secure stability and upgrade future business portfolio through the aforementioned financial soundness plan and strategy to accelerate business realignment. Some positive signals began to emerge recently from changes in LCD panel price, but the company will still keep up the strong drive to implement our business strategy. The challenging business environment is expected to continue into next year. The company will realign its strategic tasks in line with the changing environment and heighten its execution to position ourselves for another leap forward. Thank you very much for your attention. That brings us to the end of earnings presentation for Q3 2022. We will now take questions. Operator, please commence with the Q&A session.

[Foreign Language] [Operator Instructions] [Foreign Language] The first question will be presented by SK Kim from Daiwa Capital Markets.

[Interpreted] I have one question about OLED TV and another regarding auto business. Now first, I would say that it would be very important for the company to achieve turnaround in the OLED TV business. But recently, there have been some news about the suspension of the OLED TV line or production cuts. So then for the company, when does it expect to see a meaningful turnaround in the OLED TV business? And of course, I do understand that the market is currently quite struggling. But when does the company believe that there can be a turnaround in OLED TV business and what are the conditions that you believe will enable such a turnaround? And the second question is the CFO also mentioned this briefly in the presentation about how in the auto business, the company will be seeing meaningful achievements in the second half. And if you could share more details regarding such achievements. So for example, what would be the order backlog in auto business and also any developments related to OLED?

[Interpreted] Regarding the large OLED business, it will be Daniel Lee, in-charge of Large Display Marketing, who will respond to the question.

[Interpreted] Now as we all know, there is the macroeconomic crisis that is ongoing and there is also the assumption that the Russia-Ukraine war will perhaps last longer than initially expected. So, there were also some thinking that it would be inevitable for us to adjust the utilization and -- so in order to not undermine the value of OLED. And so we would -- for the time being, we would be maintaining our capacity in line with the real demand in order to enhance our cost competitiveness. And for the remaining lines, we would also be utilizing them to broaden our business in such areas as life display and also for other development purposes. So regarding the TV business, we will be upwardly adjusting the utilization rate later on as we monitor the real demand developments. And we will also try to broaden our products that offer differentiated value like gaming, as was also mentioned during the presentation.

[Interpreted] And this is Hee Yeon Kim, Senior Vice President of Corporate Strategy Group, and I would like to make additional comments regarding OLED. Now, of course, there is the macro situation that has dampened demand, but also in addition to that, when we look at the overall market, then in terms of the TV, the -- out of the total TV, European market takes up only about mid- to high 10 percentage level. But then for the company, for the company's OLED TV, Europe actually takes up over 45%. So given the Russia-Ukraine war, the OLED TV demand in Europe has shrunk considerably. And this then has also affected the sales of the company's OLED. So not knowing when the Ukraine-Russia war is going to end, the company judged that it would be best to hedge our risks. But we believe that once the European situation improves, then our OLED sales will also pick up.

[Interpreted] This is Ki-hwan Son, Vice President of Auto Marketing, responding to your question about the auto business. Now regarding the order backlog, please understand that I am not at liberty to give you the specific numbers. But then in 2020, the order backlog was around 2 weeks, but now in 2021-'22 period, it had moved up to around 4- to 5-week level. And so this is thanks to the -- sorry, so it's actually -- so in 2020, it was around KRW 2 trillion. And then in '21-'22, it was around KRW 4 trillion to KRW 5 trillion. So on the back of strong sales efforts for both OLED and premium LTPS-LCD, the order backlog has gone up by about 40% in 2022 Y-o-Y. And for the order backlog for the OLED, now in '21, its share was about 30%. In 2022, it went up to 45%. So, we see that there has been a stable and steady shift in our business portfolio toward OLED. And now in terms of the OLED mass production, now to the premium OEM, we are currently preparing about 4 to 5 new OLED.

[Foreign Language] The next question will be presented by Jung Hoon Chang from Samsung Securities.

[Interpreted] I have some questions about the panel price and then the IT panel. Now in October, we see that especially for the TV, the panel prices have begun to rebound. But then for the set makers, regardless of the panel prices being down earlier, the demand -- so in their case, the demand is not really picking up very actively. So then how does the company currently see the developments in demand? So what is the company's projection for demand? And also with regards to the price trends, what is the company's forecast? And the second question is about the IT panel. And we see that the IT panel's share out of the company's total business continues to rise. But we see that the notebook company still maintain quite conservative business plan. So then when the IT demand picks up, then does the company also believe that the IT panel would begin to rebound as well? And if not in the near future, then when does the company believe that, that will happen? So if you could share this information with us, that would be helpful.

[Interpreted] This is [ Kee Yong Hee ], in-charge of Business Intelligence, responding to a question about panel price. Now recently, we are seeing some positive changes in the LCD panel price, so the prices of the LCD panels going to China. Well, the situation in the market is that there is still oversupply. But in order to ensure survival, the panel companies have begun to increase the prices and we believe that this attempt will continue. But still the demand for this year and next year will remain weak due to the worsening macro environment. So given the dampened real demand, the rise in the panel prices, there are a lot of questions on whether this will be sustainable. And in terms of IT as well, the demand is expected to recover after the second half of next year. So the price competition among panel makers is expected to continue. But at the same time, the situation where it is lower than the cash cost cannot continue. So, we also believe that there is going to be some self-adjustment efforts by the industry, for example, restructuring or production cuts. And this will serve to reduce supply. Now when there is still a high level of demand uncertainty, if there is no large-scale adjustment on the supply side, then the panel prices will remain weak.

[Foreign Language] The next question will be presented by Won Suk Chung from HI Investment & Securities.

[Interpreted] I have two questions. The first is about the LCD exit strategy. So the presentation mentioned about the shutdown in the Gen 7 TV fab in Korea and also the Gen 8 TV fab in China. So can the company share with us the timeline for the shutdown? And at the time -- so -- and also in relation to the shutdown, will there also be one-off costs incurred? And the second question is now for the large OLED TV, we see that the demand remains quite sluggish. And of course, nobody knows when the Russia war is going to end. But can the company share with us some guidance for the shipment of large OLED for this year and also for next year?

[Interpreted] This is Hee Yeon Kim of Corporate Strategy Group responding to your question about the timeline for the capacity reduction. Now, we would be reducing 130,000 from P7 and 80,000 from Gen 8. And for P7, this will be pulling up the timeline by about 6 months to 1 year from the original schedule. And for Gen 8, the production cut would also occur around the same time. Some are already underway and some will take place, but please understand that it is difficult for us to give you a fixed timeline at this time because we are undertaking this in discussion with the customers as well as related stakeholders. And with regards to the questions that you might have about the milestone as well as the one-off costs, then we would have further discussions with the customers as well as the employees and try to share with you through IR within the year.

[Interpreted] And this is Daniel Lee from Large Display Marketing responding to your question about the guidance for large OLED shipment. No, I'm sure that we all know that the TV market environment continues to be sluggish. But then in the customer's mind, we believe that the value of the OLED TV is already firmly entrenched. So although the market has been struggling, but we see that in terms of year-on-year growth, it continues to grow and also the company's market share continues to increase. But in terms of the panel shipment, we are expecting negative growth this year, Y-o-Y, due to the sluggish real sales in Europe and also adjustment by the set makers. And looking ahead to 2023, the inventory adjustment through the distribution channels and the set makers will come to a near completion by then. So we believe that, that is going to reduce the gap between panel shipment and set sales. So in 2023, the guidance for panel shipment would be about 7 million.

[Foreign Language] The last question will be presented by [ Hyung-soo Kim ] from Hana Securities.

[Interpreted] I have some questions about the OLED IT panel. Now for the medium panel, it was mentioned earlier that the company is also responding to the OLED penetration in the medium panel. Then what about the smartphone market and mobile markets? So does the company also believe that there would be a similar increase in the OLED penetration as we are now seeing in the medium panel? And so what is the LG Display's view regarding the OLED penetration? And also there was announcement last year of about KRW 3.3 trillion investment in Gen 6 IT. So what is the execution of this planned investment so far? And are there any plans for additional investment to be made for the customers in North America?

[Interpreted] Regarding the question about IT OLED, this is Hee Yeon Kim from Corporate Strategy responding. First, let me touch upon the growth potential of the IT OLED market as well as its value. Now for IT OLED, now it is also shaping the market following the mobile and the TV OLED. So, I would say that the mobile and the TV market is serving as the basis for the IT OLED as well. Now for mobile, because of the multifunctional characteristics in terms of the [ POLED ] penetration, it is close to 40%. But then in case of TV, the OLED penetration is only at 5%. And for IT OLED, we believe that it would roughly follow the developments or the characteristics of the mobile devices. So, we are carefully keeping up with the mobile trends for the -- in relation to IT OLED as well. Now when we look at the customer payment scheme, in mobile, there is usually 3-year installment payments. But then in the case of IT, usually it's a one-time down payment. So although the value is high, perhaps the acceptability on the customer side might be lower in IT than in mobile. And regarding the mass production schedule for IT OLED, we have already made the -- we have already given the announcement, and we are on track with this announced schedule. And in terms of additional -- in terms of additional developments, we are currently in discussions with customers, but nothing concrete to report yet.

[Interpreted] If there are no further questions, we will now close Q3 2022 earnings conference call. Thank you once again for joining us today. Please do contact us at the IR team for any additional questions. Thank you.