LG Display Co., Ltd. (LPL) Q2 2020 Earnings Report, Transcript and 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 call for Fiscal Year 2020 Second Quarter Earnings Results by LG Display. This conference will start with a presentation followed by a Q&A session. [Operator Instructions] Now, we shall commence the presentation on the fiscal year 2020 second quarter earnings results by LG Display.

[Foreign Language] 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. [Foreign Language] 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. [Foreign Language] This conference call will be conducted for one hour in both Korean and English, starting with the presentation on the financial results of Q2 2020 and the company's outlook, followed by Q&A. [Foreign Language] Please refer to the IR presentation document in the company's Web site for more details on the financial results of Q2 2020. For those joining through the webcast, please refer to the details on the widget on your screen. [Foreign Language] Before we begin the presentation, please take a moment to read the disclaimer. [Foreign Language] 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. [Foreign Language] With that said, we will now start with the presentation on Q2 2020 earnings results. [Foreign Language] Let me start off with our business performance in Q2. [Foreign Language] Revenue in Q2 was KRW 5.307 trillion, up 12% quarter-on-quarter. There was increase in IT product shipments despite the slowdown in TV and mobile shipment due to COVID-19. [Foreign Language] Operating loss was KRW 517 billion, showing an increase quarter-on-quarter. Despite the growth in revenue, fixed cost burden increased following the production adjustment to respond to demand uncertainty, and also because of the demand volatility and seasonality due to the contraction in the upstream industries like the smartphone. [Foreign Language] Operating margin was minus 10%, EBITDA margin 8%, and net loss was KRW 503.8 billion. [Foreign Language] Next is area shipment and ASP. [Foreign Language] Area shipment in Q2 was 6.7 million square meters, down 4% Q-o-Q. It is owed mostly to a slowdown in TV shipments, following retail shutdowns under COVID-19. [Foreign Language] ASP was $654, up 15% Q-o-Q and up 44% Y-o-Y. This is due to growth in shipments of IT products, where the company has unique strength. [Foreign Language] The company's production capacity was reduced by 4% Q-o-Q as downsizing of low margin TV fab continues. It is a decrease by 29% Y-o-Y. [Foreign Language] Next is Q2 revenue breakdown by product segment. [Foreign Language] What is noteworthy in Q2 revenue is that share of IT was 52%, going over the 50% mark. This is largely attributable to the COVID-triggered increase in work-from-home and online education. TV's revenue share was 23%, down eight percentage points Q-o-Q due to decrease in TV panel shipments and LCD panel price. Mobile and other products share was 25%, down seven percentage points Q-o-Q, due to demand slowdown in upstream industries like smartphone and auto. [Foreign Language] Next is the company's financial position and ratios. [Foreign Language] The company's inventory at the end of Q2 was KRW 2.0394 trillion, down 12% Q-o-Q. There were production adjustments in response to the pandemic-related demand slowdown and uncertainties. [Foreign Language] As for financial ratios, liabilities to equity ratio and net debt to equity share rose slightly Q-o-Q. [Foreign Language] Cash flow at the end of the quarter was KRW 3.5991 trillion, staying flat from the previous quarter, despite the increase in net loss. Thanks to the stronger financial management such as more efficiency in working capital. [Foreign Language] Next is the company's guidance for Q3 2020. [Foreign Language] In Q3, although the risks from COVID-19 continue as the pandemic lingers on, revenue growth and profitability improvement are expected for the company. Mass production will begin at Chinese OLED [shop], [ph] shipment of P-OLED for smartphones is likely to grow, and differentiated IT products will increase. [Foreign Language] Area shipment is expected to grow at 20% level, and blended ASP is to grow additionally at a mid single-digit. As a result, it is expected that the company recover the revenue before the LCD structural innovation. Thanks to realignments around high value-add businesses, despite the capacity decrease, following fab downsizing. [Foreign Language] Next is presentation by the company's CFO, DH Suh.

[Foreign Language] Good morning to our shareholders, investors, and analysts. I am DH Suh, CFO of LG Display. [Foreign Language] COVID-19 and its repercussions are lasting longer than expected, heightening uncertainties in the market and business environment. First and foremost, I wish everyone in your family health and safety. [Foreign Language] Allow me to add some more details on the company's Q2 performance. There were both positive and negative impacts from COVID-19. [Foreign Language] Area shipments fell 4% Q-o-Q. Shipments of OLED TV panels fell sharply, following the global spread of COVID-19, and subsequent offline retail shutdowns. Market demands for mobile products also shrink. [Foreign Language] On the other hand, work-from-home and online schooling have emerged as new opportunities as part of our new lifestyle. This has led to increase in sales of IT products, where the company has unique strength. ASP rose 15% Q-o-Q and 44% Y-o-Y, while total revenue was up 12% Q-o-Q. [Foreign Language] ASP recovered to the mid $650 level, the highest in 22 quarters, since Q4 2014, as the company's business realignment around OLED steadily progressed. [Foreign Language] Despite the growth in revenue, operating loss increased Q-o-Q. There was production adjustment of TV and mobile products in response to demand uncertainty and slowdown in upstream industry, which increased the fixed cost burden, and there was also decline in ASP, mostly coming from LCD, which could offer the drag on profitability. [Foreign Language] Next is Q3 outlook and the company's direction. [Foreign Language] Although the macro environment in Q3 will not be favorable due to the lingering COVID impact, the company will be able to show part of the outcome of its business realignment efforts, such as mainstreaming large OLED, P-OLED business turnaround, and LCD structural innovation. [Foreign Language] On OLED TV, there were some challenges due to COVID-19, such as difficulty sending our engineers, but we were able to establish the optimum conditions for mass production and enabled mass production to begin in July. As the fab has newer equipment compared to domestic fab, which can support high efficiency and productivity, we will start seeing valuable impacts soon. [Foreign Language] Based on this, we will improve the mass production yield for our 77-inch 48-inch, and 65-inch, 55-inch [MMG] [ph] line to the existing fab level in a short period of time, and ensure that we can respond to the market demand in the second-half. The annual sales target stand at high 4 million to 5 million, but given the persistent COVID risk, we will remain flexible to the market environment as we try to maximize sales opportunities. [Foreign Language] As for P-OLED, the favorable seasonality is expected to pull up the shipment of new products for the strategic clients. There have been many challenges, but we were able to stabilize the product quarter and yield, and we will now focus on ensuring reliable supply. [Foreign Language] For IT, the new COVID-led trends of working from home and online education are expected to remain opportunities. The company will keep capturing such opportunities by responding without delay to client's needs with IT products, where the company has unique strength. [Foreign Language] Let me also say a few words about the track of our LCD's structural innovation. The purpose of this is to further strengthen the company's already competitive fab and products. This is especially sold for IT, and for TV, we will also keep strengthening our competitiveness based on the Guangzhou fab, where the company has market competitiveness. [Foreign Language] Based on the performance to be achieved in our major business areas, significant improvement in profitability is also expected in Q3 from the previous quarter, but to make sure we have a fundamentally sound business structure, we need to see results from the three core projects at the same time. The company's performance will be on an upward trend, but there will be some ups and downs from quarter-to-quarter, depending on factors like COVID-19 or demand for individual products like the smartphone. [Foreign Language] Next is management direction and financial management. [Foreign Language] The ongoing pandemic deceives easy prediction. To respond to an environment with growing volatility, the company will undertake early financing and stronger CapEx and working capital management under the worst case scenario. [Foreign Language] That concludes the company's presentation on Q2 performance and Q3 outlook. I hope to come back to you at the next earnings release in October with more improved performance and outlook. Thank you very much for your attention.

[Foreign Language] That brings us to the end of earnings presentation for Q2 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.

[Foreign Language] I have two questions about OLED. First is about the ramp up plan at the Guangzhou line in the second-half of this year, and along with that, what is the company's plan for the production of large OLED? And the second question is about P-OLED. So, what is your outlook for the P-OLED utilization as well as plans for improving profitability?

[Foreign Language] Now, this is in response to your first question. As was reported earlier, there have been many challenges in the early part of this year, but in the end, we were able to start mass production in July this year, and also based on this, the ramp up will move on as scheduled. In other words, we will try to enable loading of the full capacity 60,000 as soon as possible. And for the year, now of course in the second quarter there were sales slowdown because of the COVID-19 impact, but then for the year the target is to have the high 4 million to 5 million units according to our sales plan. Of course, this also depends on the situation with COVID-19, for example, the lockdowns in many economies or the reopening of the economies, and also the retail shutdown or reopening of the shutdown. So, of course, there would still impact from COVID-19, but then, since we have already gone through the difficulties and challenges in the second quarter, we now have the experience to deal with these challenges. So, now if there are continuing difficulties, then let's say if there are continued shutdowns in the retail side, then we could do some expansion of sales on the online channels. We will also work with the customers to have promotions or other events in order to drive sales. So, we believe that through such efforts we will be able to meet the sales plan of high 4 million to 5 million units. [Foreign Language] And regarding your second question about the utilization of the small to medium P-OLED in the second-half of this year, of course, we have the fab in Gumi and Paju, but especially for the Paju fab, the plan is to have full utilization. So, assuming full utilization, then we believe that this is also going to have a meaningful impact on improving profitability.

[Foreign Language] The next question will be presented by [Samuel Gong from TB] [ph] Financial Investment. Please go ahead with your question.

[Foreign Language] I also have two questions. Now, first is about the panel for IT products. Now, perhaps the IT panel products have become the -- let's say, they have become the most commodified, but also on the other hand, we see that it is the most profitable for the company. So, how do you see as the -- what do you see as the success factors in the high profitability for the company's IT products? So, in other words, how do you differentiate yourselves in your IT products from other companies? And also related question is, now, if the products where IT are still profitable then it's also likely that the peers might decide to allocate more capacity to IT products as well, then, does this mean that it's likely that the IT products would also walk the path of LCD TV like before? So, does the company have any plans against this possible scenario? And the second question is about your plans to utilize the plastic OLED line. So, specifically the E6, Page 2, Page 1, the E5 line, so, of course, in the second-half, given that this is the high season for the overseas strategic client, I'm sure that there are no worries about utilization of the lines, so much so that you even mentioned full utilization, but then going into next year, then the situation is going to be different, so to make sure that you have stable operation of the lines for the year, and this means that you also have to wisely overcome the non-high season, the slow season. So, that means that you need to have careful planning on utilization of each line. So, I just like to hear about such details if there are.

[Foreign Language] Regarding your first question, that was about expectations or concerns about IT products. So, I take it that your question was about the reasons for the company's high profitability being gained from IT products and how we are able to differentiate ourselves in our IT products from others. [Foreign Language] As you would know, for our IT panel, we have 100% IPS. So, it is 100% based on IPS, and on top of that there is the oxide technology that we utilize. So, I believe that this is the combination of this IPS and oxide technology that give us the differentiating factor compared to other peers, and thus, the competitiveness. And also in the course of that, we have also restructured the low value-add businesses for the products like the TN Type, for example, for notebooks. So, the fact that we have focused on the high value-add products I believe is the success factor in the IT products today. [Foreign Language] And also regarding your question on concerns over the -- perhaps the possible repeat of the LCD business in the plastic OLED as well, in the IT products as well. Now yes, I think in this case, all we can do is make sure that we look ahead one to two years, or even three years in terms of our technology, especially for oxide. And in the oxide-based technology, we already have our strength and competitiveness, but I believe that we need to continue to differentiate, so that even as the peers try to catch up with us, we would be able to keep the distance between ourselves and the rest, and regarding this point, the representative from marketing side will deliver further details.

[Foreign Language] This is JY Kwon of IT marketing. When we look at the trends in the IT products, then we see that there is still much room for further differentiation, for example, a high resolution or high pixels and low power design. So, these are the areas where we can continue to differentiate, and also, as the CFO has explained, now, the company already has competitiveness in IPS technology as well as oxide, and it is based on such technological conservativeness that we will continue to keep up with the trends and continue to lead, so that we will be able to maintain our competitive advantage and continue to lead the IT market. [Foreign Language] And before I move on to the second question, I would like to respond -- I would like to say a few words about the LCD business. Now, after the -- one of our peers announced that they would be withdrawing from the LCD business, there appears to be some misunderstanding in the market and industry that the company might also withdraw from the LCD business entirely. [Foreign Language] But as I have explained already, as I was explaining about the direction of the company's LCD structural innovation, what we intend to do with the LCD business innovation is to strengthen the competitiveness of the already-competitive fab and products. And so, we already have the strong fabs and products, and what we are trying to do is make sure that they will become even more competitive. So, in such a case, I would say that our portfolio of IT products are very much different from the competitor, and so, in terms of the product volume or the customer base, or the product portfolio, we are quite differentiated from the peer and from the other players. So, what we are planning to do is to innovate the LCD business structure, so that the IT products will remain a key driver of revenue for the company, and we will continue to promote this business sector. So, I do hope that there would be no misunderstanding about the company's LCD business. [Foreign Language] Now, moving on to your question about the utilization of plastic OLED fab, now, of course, it is true that there is seasonality in the smartphone. So, there's probably no avoiding the trend of low demand in the first-half and high demand in the second-half, but then when we look at our capacity and also the market trend and combining that with our capacity balance, so if we can -- so, on top of this, if we can continue to have trust from the customers and have a stable supply, then I believe we will be able to overcome the seasonality. [Foreign Language] And specifically about the operation plan for Paju fab and Gumi fab, now for Paju fab, as you would know, it is specialized for smartphones; whereas for Gumi fab, it produces a diversity of products. So, we are already producing a diversity of products, and also we are making preparation for further diversity. So, we're currently making preparation for small volume production of a variety of products in the Gumi fab. So, for example, auto products are already being produced at the Gumi fab, and also the variable products will be produced in the Gumi fab soon, and also for the future products that we are preparing, for example, [foldable], [ph] they will also be produced out of Gumi, and aside from that, there can be many other attempts that can be made based on plastic OLED, and they would be mostly be produced out of Gumi fab as well.

[Foreign Language] The next question will be presented by Nicolas Gaudois from UBS. Please go ahead with your question.

Hi, good afternoon. Thanks for taking my question. If you could, first of all, comment a little bit about automotive and OLED, you just mentioned. You announced a couple of weeks ago a design win with Mercedes, and that comes after [another one from Korea, Korea this year] [ph]. So, if you take a five-year view, how much you think automotive could become of total RGB OLED revenues for Edge display, and how profitable are those automotive contracts compared to mobile? And then, secondly if I may, a clarification on what you said earlier on profitability for RGB OLED and specifically plastic OLED for Paju fab, did you actually say that even at full utilization rates, you may actually not reach profitability later this year? Thank you.

[Foreign Language] Now, then let me clarify first. So, that is to your second question, what I mentioned earlier was that assuming full utilization, there is going to be meaningful or a significant improvement in our profitability. [Foreign Language] And coming back to your first question about the plastic OLED auto business, and the question I take in was that for the next five years how much growth do we foresee from the RGB OLED auto business. Now, if I may explain first about the status quo, out of all the orders that we receive for auto, about 20% is for plastic OLED. [Foreign Language] And as for the next five-year projection, now we're looking at the market from various angles and as far as I understand, we have about 25% global market share in the auto display market. And so, then the question is out of the auto display, how fast and how wide can we penetrate with the plastic OLED? That would largely determine the numbers for the next five years, but then this being so early in the current trend we're still having a lot of discussions about various possibilities with the different customers, and because of this, the situation is quite fluid and because of that it is very difficult to give you any numbers at this point. [Foreign Language] And about the profitability of the auto plastic OLED, now the very nature of the auto business demand that the supply continues for a long period for at least like five years, and this also is a small volume multiple variety product. So, in this case, what is important for us is not just absolute the profitability but the question is whether we would have profitability that is enough to cover the risks that would come from such long-term supply. So it's not about the auto plastic profitability being higher or lower than compared to other plastic OLED products. But then it's about whether it is enough to overcome or enough to manage the risk involve it's as long-term supply. So, that is our target, that kind of profitability.

[Foreign Language] The next question will be presented by Han-Su Kim from Hana Financial Investments. Please go ahead with your question.

[Foreign Language] I have two questions, one about LCD TV, the other about plastic OLED. Now for the LCD TV, this question is specifically about this scrap schedule. Now I'm sure you have the schedule for sequential scrap in the LCD TV, but then recently we see that there is a very fast recovery in demand for TV and also the panel price is on the rise. So, I wonder whether you plan to adjust the schedule for the TV scrap and also looking at the panel price and the current rising trend. How far do you believe that this will continue to what level and the second question is about the plastic OLED and about the E6 line because there have been media reports recently that the company has plans to make additional investments to the third line of the E6 line. So, I wonder whether this is true and also for the E6 line now the domestic customers and your domestic customer will also be utilizing integrated touch panel in their next product. So, what is the company's progress on the TOE technology?

[Foreign Language] Regarding your first question about the LCD, now regarding the IT products for the LCD, I believe that I have fully explained earlier. So then more specifically about the TV, in terms of the -- when we were thinking about the LCD structure innovation, we were thinking about what would be the most competitive fab for us? And the answer is probably the Guangzhou LCD fab, and also we believe that even globally, among the Gen-8 fab, this fab is probably one of the most competitive and because of this the Guangzhou LCD fab is going to remain the main fab for LCD TV for the company. [Foreign Language] So, given that then as for the production in Korea of the LCD TV for consumers, now as I have mentioned earlier in the earlier IR, the plan now is to stop the domestic production of the consumer LCD TVs. So, that principle remains unchanged. Now, having said that, because of the COVID situation and because of the situation with some customers, we intend to be flexible for the shorter term. So, if I may summarize then, the overall direction remains unchanged, but then for the shorter term, we are thinking about how to be more flexible. [Foreign Language] And then, regarding your question about some media reports on the company's plan to invest in a third line in the E6 line. So, by third line, I take it that you mean additional 15K. So, is there a plan for the company to invest in an additional 15K? So, defining the question that way, then let me say that there is no such decision to invest in an additional 15K capacity, and no such investment is currently being made either. Now, having said that, now there is a deposition line, so we do have some deposition equipment and what we're planning to do is to make improvements on the deposition line, so that we will be able to prevent a capacity loss that can occur in the course of development. [Foreign Language] And then, pertaining to your question about the competitive -- of the company's readiness for the TOE technology, now as for the technological preparation and the equipment for the TOE, we have already completed the preparation, and I will not be naming the customers, but we're already supplying TOE products to some customers.

[Foreign Language] Thank you very much for your questions and your interest. With that, we will now close Q2 2020 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.