LG Display Co., Ltd. (LPL) Q1 2020 Earnings Report, Transcript and Summary

Good afternoon. This is Kim Heeyeon, in charge of LG Display’s IR. On behalf of the company, let me thank all the participants at this conference call. Today, I am joined by the CFO, DH Suh; Seung Min Lim, in charge of Corporate Business Management; Matthew Kim of TV Marketing; JY Kwon of IT marketing. The conference call will be conducted for one hour in both Korean and English. Starting with the presentation on the financial results of Q1 2020 and the company’s outlook, followed by Q&A. Please refer to the IR presentation document in the company’s website for more details on the financial results of Q1 2020. For those joining through the webcast, please refer to the details on the widget on your screen. 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, we will now start with the presentation on Q1 2020 earnings results. Let me start off with our business performance in Q1. Revenue in Q1 was KRW 4.7 trillion, down 26% quarter-on-quarter. Production capacity was reduced as part of the activities to improve the LCD business structure. There were some production disruptions due to COVID-19 as well as seasonal factors. Operating loss was KRW 362 billion, an improvement quarter-on-quarter, thanks to the rise in LCD panel price, cost reduction efforts and exchange rate effects. Operating margin was minus 8%, EBITDA margin, 13%, and net loss was KRW 199 billion. Next is area shipment and ASP. Area shipment in Q1 was 7 million square meters, down 24% Q-o-Q. It is owed to seasonal factors, LCD fab downsizing and COVID-related production disruptions. ASP was $567, down 6% Q-o-Q and up 7% Y-o-Y, while LCD TV panel price rose, plastic OLED smartphone shipment fell. The company’s production capacity was reduced by 8% Q-o-Q due to LCD fab downsizing. It is a decrease by 26% from previous year’s peak. Next is Q1 revenue breakdown by product segment. Share of TV revenue was 31%, up slightly Q-o-Q. Although there was LCD fab downsizing, LCD panel price rose, while share of OLED also increased. The respective share was OLED 14% and LCD TV, 17%. Share of IT products, including monitors and laptops and tablets was 37% of total revenue. Share of mobile and others was 32%, down 4 percentage points from the previous quarter. It is owed to volume reduction of P-OLED smartphones for strategic partners. Next is the company’s financial position and ratios. The company’s inventory at the end of Q1 was KRW 2.3 trillion, up 13% Q-o-Q. It was in preparation for new models and early acquisition of strategic materials amidst COVID-19. As for financial ratios, net debt-to-equity ratio rose slightly Q-o-Q, while liabilities to equity ratio stayed flat. Cash flow at the end of the quarter increased to KRW 3.6 trillion, up from the previous quarter due to increase in debt, among other factors. Next is the company’s guidance for Q2 2020. Considerable decline in demand is expected due to retail closings and other measures. Demand for IT, for purposes of work-from-home and online schooling is expected to grow, partially offsetting the demand decline in TV and mobile. But the full consequence of COVID-19 is yet to be determined, and it is basically showing downside risk to demand. Still, blended ASP is expected to rise, thanks to growth in IT share. Next is presentation by the company’s CFO, DH Suh.

Good morning to our shareholders, investors and analysts. I am DH Suh, CFO of LG Display. With the ongoing global spread of COVID-19, we continue to be in an uncharted territory. First and foremost, I wish everyone in your family, health and safety. Allow me to add some more details on the company’s Q1 performance. Area shipment fell 24% Q-o-Q as fab downsizing for large LCD TV continued and COVID affected production at China’s module assembly plants. Area ASP was down 6% Q-o-Q and up 7% Y-o-Y due to seasonal factors and the reduced share of the higher ASP P-OLED products. Revenue was down 26% Q-o-Q. Despite the drop in revenue, operating loss improved slightly. This is owed to the exchange rate as well as the rise in LCD panel price. Stemming from concerns over COVID-related production disruptions in China and potential supply crunch. The company’s push to reduce material cost and overall input cost also helped. Next is Q2 2020 outlook and the company’s direction. In Q1, COVID’s impact on the industry stayed on the production side that mostly takes place in China and Korea. But starting in Q2, we are seeing it affect the demand side as well. Demand for TV and mobile is expected to significantly decline. Fortunately, the strong demand increase in IT will partially offset the decline. But overall, it will remain a challenging environment. We are seeing demand shrink starting with TV, with major sporting events like the Tokyo Olympics and EuroCup having been postponed and retail stores shutting down in developed markets like the U.S. and Europe. The short-term impact is made more severe by work suspension in customers' production lines that are approximate to major global markets. In comparison, shipment growth is expected in IT products, Q-o-Q and Y-o-Y across all categories like monitors, notebooks and tablets, following increase in working from home and other online activities. It is also due to the growth in online sales as retail stores remain shut. In particular, IT segment is where the company has a differentiated competitive edge with unique technology, high-end product lineup and a global clientele. It is expected to somewhat smooth the impact of the fall in revenue in the second quarter. For mobile, impact in the first half is relatively small as large-scale shipments this year are concentrated in the second half, but concerns of weakening actual sales by strategic customers are likely to affect the company’s sales as well. There are challenges, but the company will make forward preparation for new models in the second half as we strengthen our operational capability and reduce risk factors in collaboration with strategic customers. Next is management direction and crisis mode management. To prepare for an environment with growing volatility, the company is now in crisis mode management under the worst-case scenario as we see the current situation as a combination of global financial stress and real economic challenges. Specifically, the company is swiftly and thoroughly analyzing retail sales trends and customer status so that we can assess the level of volatility in the market. We are also preemptively reducing the inventory level to respond to the growing risk of demand contraction. We are also strengthening our cash management plan where we can respond to even worsening scenarios by optimizing resource input and tightening monitoring of financial risks. In particular, the company is also modifying the production system to rapidly address new opportunities that always arise even as demand decreases. Work from home and online classes are such opportunities that are driving demand for IT products. Next is the status and planning for OLED fab in Guangzhou, China. There were some difficulties in the Guangzhou OLED fab as COVID delayed the deployment of our technical personnel. We plan to complete the work needed to ensure optimum volume production conditions within Q2. Thereafter, full capacity operation will be subject to the market situation. As for the LCD fab operations, the capacity was reduced by 31% from the peak last year as the result of continuous business reshaping efforts. Thus, the impact from weakening demand for LCD TV will be less for the company. The shrinking demand signals a downward pressure on panel price. But given the situation today, we cannot expect the kind of price elasticity where falling price will trigger demand growth. Our work in improving the general purpose LCD business structure will stay the original course with some flexibility to be exercised to ensure profitability in the short term. Q2 is shaping up to be a time of challenge and hardship for all companies, including ourselves. The company will keep managing risks while remaining open to potential demand downside as COVID has worsened the demand volatility. But once again, we have seen that there are opportunities even in the worst of times, such as structural changes in IT demand and growth in online sales of TV. The company will try to wisely overcome the current challenges by focusing on capturing short-term and longer-term business opportunities while making painstaking preparations in our investment and financial position. I hope to come back to you at the next earnings release in July with more positive post COVID outlook. Until then, let’s all stay safe and healthy. Thank you very much for your attention.

That brings us to the end of earnings presentation for Q1 2020. We will now take questions. Operator, please commence with the Q&A session.

[Foreign Language] [Operator Instructions] The first question will be presented by Dongwon Kim from KB Securities. Please go ahead, with your question.

Now I have one question each for OLED and LCD. Now first is, now there had been some delay in the Guangzhou ramp up because of the COVID-19 situation. And then now I wonder then, because of this, have there been any changes to the company’s plan for the large OLED shipment for this year? And the second question is, when do you expect the profitability to improve for plastic OLED? And then the next question is about the PC. Now we see that there is a rapidly rising demand for PCs these days. Then given the current situation, then is the company also considering perhaps converting some of the TV capacity in the Paju P8 line to IT panel production so that you will be able to improve profitability?

Regarding your first question about the OLED TV shipment of this year. Now it is true, as you have mentioned and also as was presented earlier, that because of the COVID-19 situation, there have been some delay in the final tuning work at the Guangzhou OLED fab because of the delay in allocating our engineers there. But we do plan to complete the necessary work within the second quarter of this year. Now having said that, regardless of the Guangzhou fab, there is going to be decline in demand in the second quarter due to the COVID-19. First of all, we see that the retail stores have shut down in the U.S. and European regions, that is going to have an impact on demand and also many of the set plants, the set build plants. They are located close to the markets for the – where the consumers are. And because of the supply disruptions there, so once again, we do foresee demand decline in the second quarter. And now the question is whether the impact from Q2 will last into the second half of this year, and that is the situation where we are closely monitoring as well. But then now, we do expect the impact on demand that we are seeing in the second quarter to have a lingering effect into the second half of this year as well. So we are expecting about a 10% reduction or the 10% decrease to the demand that we – compared to our original expectations. And regarding your second question about the profitability of the P-OLED business. Now as we did mention in the last IR, we have secured some volume for the strategic customers and we do believe that we have laid the basis for a turnaround. And we are maintaining close consultations with the strategic customers regarding development and the launching schedules, but it has not been finalized yet. But then we also are mindful of the impact from the COVID-19 situation, and that is also going to affect our activities here. Having said that, we still believe that we will be able to more than double the revenue in the second half of this year. So we will be able to lay the basis for a turnaround in the second half. And then to your next question about the P8 capacity. So some of the P8 capacity being shifted for IT purpose. So as to seize the opportunity where there is rising demand for IT. Now that is how I understood your question. And as you would know, since last year, in terms of the general purpose TV at P8 in Paju, we have already removed the lines for the general purpose TV. So that means that the P8 plant is already mostly being used for production of IT, with some production of commercial TV at P8. Now having said that, of course, we will be making efforts to allocate some more capacity to IT production. And now the issue would be the back end, the module side rather than the panel. So I would say that maybe there would be where we could have a bottleneck. So we will be trying to improve the capacity there by, for example, reallocating some of the human resources from other products or by allocating other lines to IT production. So by doing so, we hope to beef up the capacity for back-end and also to make sure that we have sufficient procurement of the necessary materials.

[Foreign Language] The next question will be presented by Chuljoong Kim from Mirae Asset Daewoo. Please go ahead, with your question.

Now I have two questions. First is, now it’s been mentioned several times that the demand for IT is better than expected. So the question is by how much, so how much is it better than expected? And a related question is, now if the demand for IT is faring better than expected, then, let’s say, instead of the – so let’s say, for example, in the TV side, where the Chinese competitors are flooding the market with commodities, do you still see any opportunities for the company to differentiate yourself with the product? And the second question is, now, there has been an announcement by the domestic competitor of a faster and larger scale shutdown of their LCD business. So does this change the company’s strategy for LCD? And also how do you expect this to affect the LCD supply and demand dynamics in the second half of this year?

Now to your first question about the IT demand and how much better than expected is it? Now for the short term, so for the second quarter, we expect this be about 20% to 30% growth Y-o-Y. Of course, it is subject to change as we move further into the second quarter. But at this time, the expectation is about 20% to 30% growth. But then now the question is, will this be sustained into the second half of this year? Now regarding this question, there are differing views. Some say that the – because of the sharp increase in demand in the second quarter, there is going to be much softer demand in the second half, while some others contend that the demand will continue to be strong with more households are claiming that there should be more than 1 PC per household and also some growing need to upgrade to better devices. But now as for the second quarter demand increase, we are trying to respond to this growth in volume by flexibly adjusting our production, and we will be closely watching how the situation unfolds into the second half with any changes in the demand situation so that we will be able to fully leverage our advantages. Now this would be the second question – second answer to your first question, and that was about how we are going to differentiate ourselves in TV as the demand for IT continues to rise. So my understanding is that because of the increase in the IT demand, we will be shifting more of the capacity from TV to IT. Then amidst this, how are we going to keep competing. And now as the – yes, we do see that there is growing demand in IT. And then also now there is especially a growing demand for low-end types. But then now for the panels now for the Chinese competitors, they are mostly dealing in PM. And actually, the demand of increasing is for PM panels. But then we – TM, sorry, so TM, but then we are not dealing in that product. And where we are focusing on is IPS and oxide-based technology. And for this, we already have a very close tie-up with the strategic partners. Meaning that this is not the segment where the Chinese companies can enter in the short term. So we will continue to focus on the oxide-based and IPS technology so that we will be able to fully capture the demand here. And your second question was pertaining to the domestic competitor closing down the LCD fabs earlier than expected and whether that would have any impact on the company’s operation strategy and also what the expected landscape is going to be in the second half of this year. Now first of all, let me simply say that the competitors withdrawal from the LCD business will have little impact on the company from a strategic point of view because for the company already, let’s say, for the LCD TV, the general products, we are now producing them domestically anyways. So the domestic fabs are all mostly producing IT products. So then the competitor LCD product portfolio has been basically different from ours. So the competitor withdrawing from the TV based fab LCD business has little impact on the company, meaning that it changes little in terms of our strategy. And regarding how it will affect the operations in the second half, now of course, the competitor’s decision to withdraw from the market would have an impact on the market in general. But then now looking at the market situation now, it is highly complex. We already have the COVID-19 situation. And then on top of that, the competitor’s decision to close its fabs. Now of course, they will have some impact for the short term. But then seeing things from a perspective, then we already see that there are a lot of fabs, a number of fabs that are preparing for a gen-10 LCD production. So even in a normal situation, we are already seeing high oversupply compared to demand. So yes, for the short term, there might be an impact. But then over the longer term, will this have a major impact on the supply demand balance, and will this also have a major impact on the panel price? My answer to that is not necessarily so.

[Foreign Language] The next question will be presented by Gang Ho Park from Daishin Securities. Please go ahead, with your question.

Now I have a question about the large OLED panel. Now as the CFO has mentioned, there is going to be sharp decrease in demand for OLED in the second quarter. And the outlook for the third quarter is not clear either. And then on top of that, the Guangzhou fab is going into operation, which will end up increasing the supply. Now does this mean that compared to the beginning of this year, there will be changes to the company’s strategy regarding the large OLED panel, for example, changes to the lineup or to the target volume and so forth? So if there are such changes to your strategy, then please let us know. And the second question is assuming – now assuming that the COVID-19 were to subside in the second quarter, and the demand for TV were to pick up in the third quarter, then it’s highly likely that the Chinese HD TV makers will become very aggressive in trying to capture the market share. And now in such a case, given that the large OLED is based on premium strategy, the company will not be having a price advantage, meaning that it is also possible that demand for the company’s large OLED could fall. So what would you say to this kind of a presumption?

Now regarding the demand outlook, I have already mentioned earlier that there is going to be about 10% reduction to the demand than we had initially expected. But now this does not mean that we will be changing our strategy regarding OLED TV, so we do not have such plans at this point. Now currently, we expect – now as we experience the COVID-19 situation, there have been a lot of analysis from the market, and let me share with you some of their results. Now one is that online sales are still remaining brisk in the developing markets like North America and Europe, where they have a vibrant online retail and also the logistics as well as strong backup infrastructure. So given this, now of course, there will be some impact on the demand. But now where the off-line retail stores are shutting down and where the off-line are falling short, the online marketing channels can pick up where the off-line left off. So for the short term, we are modeling over how we are going to better utilize the online distribution channels. So in short, this means that compared to the normal situation, we are trying to think of ways to better utilize the online distribution channels. And your second question about the Chinese LCD companies potentially becoming more aggressive in the second half, which would affect the company’s demand for OLED products because of its premium strategy. Now for the TV LCD panel, now the LCD panel for a TV is now they had already been selling at near the cash cost. So that was same for the company as well as the Chinese companies. So given the situation already then, whether there – and of course, there have been some rebound in the ASP, but overall, it has remained quite low. So then the question is whether they will go further in the – let’s say, the price discount in order to compete in the panel market in the second half? Well, that question remains to be seen. But then now, yes, it is also possible that the LCD makers will become much more aggressive in their approach, with even steeper discount in the panel price. So yes, we are also keeping that assumption as we are trying to have our – unfold our strategy for OLED. But now having said that, now there is one thing that was, let’s say, a bit forgotten or was put on the sideline because of the COVID-19 situation, and that is the fact that we were able to increase a new clientele for OLED. So that was – so up until last year, we were able to increase our client – customers. And also this year, we were able to secure customers like Huawei in China, Visio in the U.S. and Sharp of Japan, so the companies with much name value as well as marketing and sales prowess. So we have also secured these new customers, and we do believe that we will be able to better utilize our Guangzhou OLED fab utilizing these new customers. So even if the LCD makers were to have a competition with even lower panel price, we believe that we will be able to maintain our strategy for OLED.

[Foreign Language] The last question will be presented by Dong-je Woo from Bank of America. Please go ahead, with your questions.

Now let me first give my first question. Now for the mid-to longer term, I believe that the focus is on the OLED TV. And last year, there were sales of over 3 million panels. And the expectation this year from the market is around 6 million panels. But of course, because of the disruptions in production in China as well as the macro situation globally, there could be some adjustments, but still, do you believe that the shipment of 5 million to 6 million panels can be maintained? And also, when do you believe that you can reach 8 million or 10 million? And thereafter, let’s say, in terms of the operating profit, you will be able to achieve meaningful operating profit following that? And after the response, I will follow-up with a question on CapEx.

Now I did mention earlier about the demand being lower by about 10% than our initial expectation. And also, please understand that in terms of the number, it is very difficult for us specify a number at this point, obviously, because of the COVID situation and the fact that it could have a huge impact on the demand fluctuations. And also, you asked about when we could reach 8 million or 10 million sales of OLED. And of course, this has to be backed by production as well. But again, now as we go through the first half and also into the second half, then there is no telling how COVID is going to develop, whether it is going to be subsiding this year and then will no longer have an impact next year, or will it just simply go away within first half of this year, and then things will recover in the second half of this year. There is simply no way of knowing that. So for us to share our planning, especially for the longer term, and we can only do so by scenario. So I do hope that we could have another opportunity later on to share such long-term planning with you by scenario for both our production and sales. And I’m sorry that I seem to be repeating myself, but the same question regarding – same response regarding your question about OLED turnaround as well. So now the – when we only had the Paju fab, then of course, the depreciation and amortization was solely from the Paju fab. But then now as the CO fab also goes into operations and also, there is going to be the burden of the start-up cost. So in such a case, then we would also have to look at both fabs in terms of the cost. And also the – it’s also related to the question of how the market sees or when our – the market sees our capacity to go into of – our full capacity to go into operation. But of course, that is still a big question mark, that it is highly uncertain. And I believe that we will be able to respond to that only when there is some visibility into the future projection.

And my last question is now we see that finally, in the first quarter, the investment in facilities. So the CapEx in the first quarter was below the depreciation and amortization cost. So do you see this as a sustainable trend into the future? So in other words, the CapEx on a quarterly basis to remain below KRW 1 trillion, while depreciation and amortization to stay above KRW 1 trillion per quarter, which will also improve the cash flow? And also the current exchange rate is working in favor of the company. So there would also be some benefits that as well. And also in terms of the corporate tax, there appears to be a – that you’re set to receive a refund for the tax, so I believe that the situation perhaps means that you will be able to improve your financial position as well as the financial structure. So I would just like to know whether that is so.

Thank you for the good question and the good interpretation. Now yes, I would say that the stance would become much different, whether we are talking of a scenario that is inclusive of the COVID impact and exclusive of the COVID impact. But now having said that, in the first quarter, we did mention that there has been asset impairment in the first quarter. And also, there have been some – as a result of that, there have been some improvement in the financial ratios. And yes, the CapEx falling below the depreciation and amortization cost is not just for the past quarter, and it won’t be for the short term, either because most of the major investment for the time being has been completed. So now what remains to be done is to try to improve the ROI on the already – on the investment already made. And also, it was already mentioned that the demand for TV and mobile will fall in the second quarter, although it would be partially offset by the increase in the demand for IT. But still, overall, it provides a very challenging situation for us. And also, there is a high level of uncertainty. So we don’t know whether it will be ending in the second quarter or whether it will persist into the third quarter and on. So what we need to do is try to wisely overcome the current situation. It is only then that we will be able to improve our financial position by maintaining the CapEx below the depreciation and amortization level. So let me say that, as the CFO, I find it the – my major challenge to overcome the current difficulty.

[Foreign Language] This concludes the 2020 first quarter earnings results by LG Display. Thank you very much for your participation, and please refer to the IR team for any further questions. Thank you.