LG Display Q2 2023 Earnings Call Transcript

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July 26, 2023

Key Takeaways

  • Q2 revenue was KRW 4.739 trillion, up 7% QoQ, with area shipments rising 11% QoQ led by OLED TV and IT panels, reducing operating loss to KRW 881 billion.
  • ASP per square meter was $803 (–6% QoQ) due to seasonal mobile weakness; revenue mix in Q2 was IT 42%, TV 24%, mobile 23%, and auto 11%.
  • Continued cost innovation and operational efficiency, alongside planned downsizing of LCD TV, improved results; the company targets over 50% OLED revenue mix this year and 70% contract-based business within 2–3 years.
  • Strong liquidity with KRW 3.853 trillion cash and KRW 2.682 trillion inventory, though debt-to-equity reached 293% (net 143%); a Q4 turnaround is expected as healthier inventory and rising contract volumes boost margins.
  • Q3 guidance calls for mid-single-digit area shipment growth and high-single-digit ASP increase, while H2 strategy focuses on expanding OLED across panel sizes and growing auto display orders (KRW 4.1 trillion received, KRW 20.1 trillion backlog) toward mid-teens CAGR by 2027.
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Earnings Conference Call
LG Display Q2 2023
00:00 / 00:00

There are 2 speakers on the call.

Operator

Good morning. This is Brian 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, Kyun Kim, CSO Seungmin I'm, Senior Vice President of Corporate Planning Ki Hwan Seon, Vice President of Auto Marketing Ki Yong Lee, in charge of Business Intelligence Won Jae Il Bi, in charge of Large Display Marketing and Changwon Kim, in charge of Medium Display Marketing. The conference call will be conducted in both Korean and English.

Operator

Please refer to the provisional earnings release today or the IR Events section in the company's website for more details on the financial results of Q2 2023. 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. I will start with Q2 business results. In the midst of intense inventory correction continuing in the downstream industries since last year, especially in TV and IT, panel inventory in the channels has been falling.

Operator

With improving inventory soundness across the industry ecosystem leading to gradual recovery in panel demand, shipment of medium and large panels grew in Q2, led by OLED TV and IT. Revenue in Q2 was KRW4.739 trillion, up 7% p0q. There was operating loss of KRW881 billion reduced from the previous quarter following growth in shipment, improved operational efficiency and strong cost savings like cost innovation. LCD TV panel price keeps trending upward, but its impact on the company's Q2 results was limited with the company continuing with downsizing of LCD TV business as planned. Next, on area shipment and ASP per square meter.

Operator

Q2 area shipment was up 11% QoQ to 4,720,000 square meters on the back of increased shipment of medium and large sized panels. ASP per square meter was $803 down 6% QoQ and in line with the previous quarter's guidance from the seasonal decline in mobile shipment. In terms of revenue breakdown by each product segment, TV panels revenue mix was 24% owing to the QoQ growth in OLED TV panel shipment. IT accounted for 42%, up 4 percentage points QoQ, while mobile and others took up 23%, down by 9 percentage points following the seasonal decline in mobile panel shipment. Auto business is showing steady growth with its revenue mix remaining unchanged QoQ at 11%.

Operator

OLED revenue mix was lower QoQ due to seasonal decline for mobile OLED falling 3 percentage points to 42%. Next is on the financial position and key metrics. Company's cash and cash equivalents was KRW3.853 trillion. Inventory value was KRW2.682 trillion resulting from the company's effort to minimize inventory. Key financial ratios were up Q o Q resulting from the strategic financing activities to strengthen liquidity as well as net loss in the quarter.

Operator

Debt to equity ratio was 293% and net debt to equity ratio 143 percent. Cash flow in Q2 was KRW3.853 trillion, almost flat from the previous quarter, with cash inflow from financial activities and cash outflow through investment balancing out each other. Next, on Q3 guidance. With inventory level moving down across the industrial ecosystem, shipment of medium and large sized products is expected to grow again in Q3 following Q2. Area shipment is thus expected to grow by a mid single digit in Q3.

Operator

ASP per square meter is expected to increase by high single digit QoQ, thanks to seasonal growth in mobile panel shipments. Thank you for your attention. Next, CFO, Sung Hyun Kim will walk us through the key highlights. Good afternoon. This is the CFO, SeongHyun Kim.

Operator

Looking back to the first half of the year, actual set sales fell short of expectations with macroeconomic uncertainties persisting and consumer sentiment dampening. But inventory soundness began to improve in Q2 across the ecosystem, leading to actual growth in panel purchase. It appears that the market is now over the worst, but not yet starting a full recovery backed by real demand. Consequently, the company further propped up liquidity through strategic financing activities in Q2 as well for the purpose of upgrading our business structure with our priorities strengthening our financial structure. Cost saving initiatives like reducing fixed cost, manpower deployment efficiency and flexible operation of fabs are still ongoing.

Operator

To upgrade our business structure, we will keep increasing the share and performance of contract based business in the second half, including mobile products. Contract based businesses revenue mix is expected to top 40% this year and 50% next year. The target is 70% in the next 2 to 3 years. The company will also strengthen the share and business competitiveness of OLED in all categories that cut across all the different sizes of panel. With improving market awareness of OLED value, its company wide revenue mix is expected to surpass 50% this year and keep growing thereafter.

Operator

By product category, large OLED business will keep running on the basis of real demand, while broadening the customer base and consolidating its market position in the premium TV market. It will not be bound to the traditional TV market as the product portfolio keeps diversifying into new applications like gaming and transparent. It will also keep implementing cost innovation and improving expense structure efficiency. For midsize OLED, the company is steadfastly building up the structure to respond to mass production in the first half of twenty twenty four. We will keep strengthening its business capability by preempting the market and ensuring stable operations.

Operator

For medium LCD, we will focus on recovering profitability by enabling high efficiency production system and cost innovation, while solidifying our leadership by targeting the premium monitor and laptop markets based on differentiated competitiveness. In small OLED business, we will grow the shipment volume and improve business consistency based on production ramp up and technological capability. In auto, we continue to improve business performance on the basis of reliable supply, thanks to dedicated capacity as well as technology that can provide differentiated value like tandem OLED. The company will focus on growing our revenue and increasing orders on top of differentiated technological competitiveness and customer relations across OLED and high end LCD and boost our position as the world's number 1. Going into the second half, turnaround to profit is expected in Q4 on anticipation of high panel demand by set makers following the return to healthy inventory levels and growth in contract based business.

Operator

But as explained earlier, the market is yet to start full recovery driven by real demand. The company will keep a close eye on the external environment as we strive toward more meaningful performance by focusing on recovering financial soundness and upgrading the business structure. Thank you very much for your attention. That brings us to the end of earnings presentation for Q2 2023. We will now take your questions.

Operator

Operator, please commence with the Q and A session.

Speaker 1

Now, Q and A session will begin. The first question will be provided by Dong Won Kim from KB Securities. Please go ahead with your question.

Operator

Now my questions are with regards to OLED as well as the consolidated performance. Now first of all, for the small and midsize OLED, last year due to technical issues, the shipment of panels was reduced. So does the company expect a similar technical issues this year for small and midsize OLED panels? And does the company believe that there would be similar issues that would also reduce the shipment than the initial plan? And my second question is, now the company has now been seeing losses for the past 5 quarters straight, but then in the presentation, it was mentioned that the company is now expecting a turnaround in the Q4 of this year.

Operator

Then from which business the biggest contribution will come? So will it be the large OLED or the small to midsize OLED or any other businesses? And what are the reasons or the drivers for such contribution from that particular business? Thank you very much for your questions. This is Ho Seok, Brian in charge of LG Display's IR.

Operator

Now first of all, let me clarify that we are not able to comment on any situation involving the customer. But then for the second half of the year, based on our expanded mass production capability, the company intend to increase shipment and by doing so, we also plan to improve our consolidated earnings. Now, this is the CFO responding to your second part of the question. And as the CFO has already explained in his presentation of the highlights, we see that the inventory level is going down across the market. And as a result, we see that the profitability is going to improve on both the large as well as the medium sized OLED.

Operator

Now that having said, where we are expecting the biggest momentum to come in the second half is, as Mr. Brian Hao has just explained, is from the capacity increase as well as the increase in the volume of the small sized panels.

Speaker 1

The following question will be presented by Hyunsu Kim from Hana Securities. Please go ahead with your question.

Operator

Thank you very much. I also have two questions. They are pertaining to investment and EBITDA. Now first, about the annual investment, the company's guidance was somewhere in mid to high KRW3 trillion level for the year. Now having gone through quite a lot of changes in the circumstances, I wonder whether the numbers remains unchanged or is there are there any changes to the number for the annual investment?

Operator

And then also what would be the expected investment for the years 2023 as well as 2024? And also what would be the company's guidance for EBITDA? And then the second part of the question is also about investments, particularly in the OLED IT. So I understand that the company is now investing in the OLED IT Gen 6. So if the company can provide us an update regarding that investment.

Operator

And then now with the company's client in North America, what would be the plan for the IT investment for Gen 8? Thank you. This is the CFO responding to your question. Now yes, the company has given the guidance of mid- to high 3,000,000,000,000 yen level for the annual investment. And currently, investment is underway where the investment is necessary within the guidance range.

Operator

But of course, at the same time, we are conducting efforts in parallel to improve the efficiency of the investment as well as spending. And as the investors would be aware, in this industry, investment is implemented over a long period after preorders. And that means that it is not easy to flexibly adjust the investment amount given the circumstances. And the question there was also a question about expected investment for next year. Now of course, the business plan for next year is yet to be finalized, but then perhaps I can share with you some of the let's say some of the findings of the review that we have had so far regarding our investment plan.

Operator

So for next year, perhaps so our thinking now is that there can be some meaningful reduction from the mid to high level KRW3 trillion level of investment of this year. And also as the company has already disclosed, the investment into IT OLED Gen 6 is currently underway and this will continue into the first half of next year. And there was also another question about investment potential investment in Gen 8. And of course, this is related to a customer and also for ourselves, what we look into. So what some of the factors that we consider are the technological development as well as the progress being made and also whether there is development in the demand from the market that is sufficient to contribute to the company's profitability.

Operator

So there are a host of factors that we consider before we make the decision about investments. So we will do so again this time in due time after considering all the different factors.

Speaker 1

The following question will be presented by Simon Oh from Bank of America. Please go ahead with your question.

Operator

Thank you very much. Now there was a mention about turnaround to profit in the Q4. And just thinking about this simply then we see panel price rising, I believe only in LCD TV and not in others. Then I am trying to better understand the rationale behind the expectation of turnaround in Q4. And especially because the company appears to have done most of the cost reductions that it can.

Operator

And of course, there is going to be some volume increase in the second half compared to the first half, but still I'm not sure whether that would be sufficient to move the company from almost a KRW 1,000,000,000,000 loss in 1 quarter to almost 0 next. So again, I'm trying to better understand the rationale. So I would like to ask for further elaboration. And then the second question is, now I see that there has been steady increase in borrowing. So what would be the company's interest expense in the Q2?

Operator

That would be helpful for us to calculate the financial cost over the year. This is the CFO speaking and the question was about the interest expense or the financial expense for the Q2. But I know that you're simply going to multiply that number by 4. So I would just like to go right ahead and give you the annual number, which is expected to be at low to mid KRW 600,000,000,000. And this is the CSO and I would like to comment about the turnaround, expected turnaround in Q4.

Operator

And as was explained earlier, our small panels, they account for about 20%. And over the next two quarters, there is an expected increase by 10 percentage points each quarter. And because of the small panel, as you would know, has very high seasonality and there's also the new fab that we are operating. And another factor is the mid sized IT, which has taken up the biggest share out of our revenue in Q2. Now of course, the price for TV is moving up, but then compared to that, it is true that for the midsize IT, there is not such a big movement.

Operator

But it appears as if the price for midsize IT is also bottoming out, and we have been seeing slight increase and we believe that that is also going to contribute to profitability.

Speaker 1

The following question will be presented by Jong Hoon Jang from Samsung Securities. Please go ahead with your question.

Operator

Now the first question, yes, the CFO commented on a possible turnaround in Q4. And I think for Q3, it was just about improvement, so no specific guidance as far as I understood. Then I wonder whether this is incorporating the possibility of delay in mobile shipment in the second half? Or is it regardless of that, meaning that it is just in consideration of the overall market circumstances and that the company believes that it would be difficult to go over the BEP in the 3rd quarter? And the second question is now, yes, there have been press reports about a new customer in the large IT OLED.

Operator

And but then the company's guidance was simply about the possibility of starting a new partnership. So if there could be some further highlights regarding this, then it would be appreciated. And then now based on this, then of course, the business plan, I'm sure, has not been finalized, but then now what would be the company's expectation of the volume for next year? This is the CFO speaking, and the question was about the potential turnaround in Q4 and improvement in Q3. Now overall, it is clear that there is improvement in Q3.

Operator

And then the questioner also asked about whether the mobile shipment delay is reflected in this projection or whether it is simply based on the rise in LCD prices in the market? Now for mobile shipment delay, I must clarify that the company has never commented on it. But in principle, regarding the market volatility or the company's inside operations, in principle, we always remain conservative. So for the Q3, what we are expecting is that there is going to be a faster improvement in Q3 than what we have seen between Q1 and Q2. And then that improvement is going to accelerate in Q4 to achieve a turnaround.

Operator

And also you asked about a new customer in large size, but please understand that given the nature of our business, our industry, we are not in the position to comment on anything related to the customer. And that is the set maker's position. So please understand. And that also means that there are no highlights for me to present to you at this time. And there was another question about the potential volume next year and again there is nothing for me to comment on at this time.

Speaker 1

The final question will be presented by Sonook Kim from Merit Securities. Please go ahead is your question.

Operator

Now, of course, demand remains uncertain in many categories, but then now in TV as well, I mean, the demand is uncertain, but then now thanks to some correction in supply, the pricing for TV continues to rise. But then we do not see such conviction in IT. So for the mid to long term, what we believe to have almost a certain growth in demand is the auto display category. And so that is what the market tends to believe and I believe that the company also has a similar expectation. Then for the medium term, what would be the potential orders received for auto business?

Operator

And also what is the company's plan for the auto orders to be received for this year and next year? So and also what would be the revenue to be recognized in this business again for this year and next? So if such information can be shared with us, then that would be much helpful. This is Ki Hwan Son, Vice President of Auto Marketing, responding to your question. Now up to the Q2, for the OLED orders received for it has been KRW4 1,000,000,000,000,000 and we believe that the orders will so the orders continue to grow.

Operator

So we are currently continuing to upwardly adjust the expected orders for next year and the year after that. And as for the order backlog, it is currently KRW20 1,000,000,000,000,000 and it is going to be helpful in achieving a consistent growth in revenue. And we believe that there is going to be an annual growth by mid-ten percent until 2027. If there is one last question, then we would like to entertain one more.

Speaker 1

The final question will be presented by Jaehyun Kwon from JPMorgan Securities. Please go ahead with your

Operator

question. I have one question and that is about the Chinese about the company's LCD fab business in Guangzhou, China. So what would be the timing of the sell off and also about the tangible asset disposal? So regarding the LCD fab in Guangzhou, China, is there any update that can be shared with us? And in relation to that, when does the company believe that such update can be provided officially in the market?

Operator

Now I do realize that there are a lot of speculations in the market regarding the LCD fab in Guangzhou, but what is for certain now is that about half of it is still running. And in terms of the asset rationalization or so we are trying to rationalize the use of the assets, but then nothing is determined yet. So regarding this, there is really no progress for me to share with the market. Thank you very much. That concludes the LG Display 2023 Second Quarter Earnings Results Conference Call.

Operator

Thank you. And if there are any additional comments or questions, then please contact the IR team.

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