Morning, this is Brian Heo, LG Display's IR team leader. On behalf of the company, let me thank all the participants at this conference call. Today, I'm joined by the CFO, Dong-Hee Suh , Hee-Yeon Kim, Senior Vice President, Corporate Strategy Group, Seung Min Lim , Vice President, Corporate Planning, Stephen Ko, Vice President, TV Marketing, Jae Yong Kwon, Vice President, IT Strategy and Marketing, and Ki-Joon Jin, in charge of Auto Marketing.
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The conference call will be conducted for one hour in both Korean and English, starting with a presentation on the financial results of Q3 2021 and the company's outlook for Q4, followed by Q&A.
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Please refer to the provisional earnings release announced today, or the IR Events section in the company's website for more details on the financial results of Q3 2021.
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Before we begin the presentation, please take a moment to read the disclaimer.
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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.
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With that said, we will now start with the presentation on Q3 2021 earnings results.
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Let me start off with our business performance in Q3.
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Revenue in Q3 was KRW 7.223 trillion. Operating profit was KRW 528 billion. Revenue was up 4% QoQ, and operating profit was down 25% QoQ. YoY, revenue was up 7% and operating profit was up 222%. Operating profit fell QoQ due to a drop in LCD panel price, rise in materials cost, and increased costs from new facility operation.
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Operating margin was 7%, with EBITDA margin at 23%. Net profit was KRW 463 billion. Next is area shipment and ASP.
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Area shipment in Q3 was 8.36 million sq m, down 6% from the previous quarter due to decrease in TV panel shipments from soft global demand and later than planned shipments of IT panel from parts supply issues.
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Area panel price was $750, up 7% QoQ despite the drop in LCD TV panel price on the back of increased mobile product shipment from seasonality. It was up 6% YoY.
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The company's production capacity in Q3 increased 3% QoQ, mostly coming from the 30,000 ramp-up in OLED plant in Guangzhou.
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Next is Q3 revenue breakdown by product segment.
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In terms of share out of revenue, IT panel maintained its highest portion at 45%. TV panels came in next with 32%, down six percentage points from the previous quarter. Mobile and others accounted for 23%.
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Next is the company's financial position and ratios.
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The company's cash and cash equivalent at the end of Q3 was KRW 4.2 trillion. Inventory was KRW 3.58 trillion, increasing by KRW 857 billion QoQ, owing to deferred shipment to Q4 and build-up of safety stock to prepare against supply chain uncertainties, such as power shortage at the production site and continued parts supply issues.
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Financial ratios kept showing improvement. Liabilities to equity ratio was 157%, improved by seven percentage points. Current ratio was 95%. Net debt to equity ratio came in at 63%, improved by six percentage points Qo Q.
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Next is cash flow. Cash and cash equivalents were KRW 4.209 trillion at the end of the quarter, down by KRW 108 billion from the KRW 4.317 trillion at the start of the quarter.
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Let me now move on to the guidance for Q4.
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In Q4, area shipment is expected to grow by mid-single digits QoQ. The shipment decrease in Q3 coming from parts supply issue is expected to recover in Q4.
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Area price is expected to rise in low single digits QoQ, even with continued drop in LCD TV panel price, thanks to shipment growth in mobile that has higher area price. Next is presentation by the company's CFO, Dong-hee Suh, on business performance and strategy.
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Good afternoon. This is Dong-hee Suh, CFO of LG Display. Let me thank the shareholders, investors, analysts, and all stakeholders who are participating in today's earnings release conference call.
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I will first brief you on the main performance and operation strategy for each business in Q3, followed by Q4 outlook.
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First is main performance of each business in Q3.
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There were meaningful results in Q3, such as solid performance in IT and strengthening of large OLED positioning in the high-end TV market, despite the volatility in LCD markets.
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In IT, there was some shipment delay due to supply disruption of some components, but the company was able to achieve consistent performance, thanks to our differentiated competitiveness and customer base.
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In large OLED business as well, demand for OLED panel, which is premium TV, achieved 90% growth year-to-date in Q3 YoY, despite the globally weak demand for TV sets. It was able to further consolidate its positioning in the high-end market. The company began capacity ramp up in Guangzhou by 30,000. Profitability also improved QoQ and is now expected to turn around to profit for the year.
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Let me now explain the operation strategy for each business in more detail.
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Although volatility in the LCD market keeps growing, the company has continued to make preemptive preparation and strengthen stability by focusing on competitive IT through LCD business innovation. Large and small to mid-size OLED business has been stabilized after being deep in the red last year, and we now have the basis to turn -around to more than BEP this year. From next year, we will focus on stable growth and profitability.
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As a result, we believe that should there be additional worsening of the LCD market, we can maintain stable business operation and absorb a considerable part of the market volatility based on a business structure built for sustainable growth and profitability. By business, large OLED shipment will increase in Q4 thanks to its stronger positioning in the high-end TV market. It is expected to turn around to profit for the year and achieve the sales goal of 8 million units.
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With the additional 30,000 capacity in Guangzhou that started operation in Q3, we will build the infrastructure to produce 10 million units a year, which will further help drive growth in OLED business. In terms of the market, the mainstream market is contracting in the second half, but the high-end keeps growing, creating a wider gap in the market. This is due to the consumer's willingness to pay more for higher specifications, as TV increasingly becomes a multi-use device with more time spent and higher quality content. Based on such change, LG Display intends to segment the consumer market more finely and develop product offerings customized for each segment.
This wi ll help build the basis for profitable growth for large OLED to keep growing and improve profitability at the same time.
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For small and medium OLED, we intend to turn it into another pillar of future profitability by steadily increasing its volume, by strengthening mass production, quality competitiveness, and strategic client relations. We will keep solidifying our partnerships with clients to drive volume and new product development, and improve our profit structure by broadening product portfolio into wearables, for example.
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Next is the direction of LCD business. We have been improving our profit structure by preemptively converting part of the capacity from highly volatile LCD TV to IT, and broadening high-end production in IT by downsizing the business that is directly linked to the market cycle.
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We also secured stability in longer-term volume management in cooperation with strategic clients, and continue to generate profit in differentiated business in IT and commercial. Market volatility keeps growing, but we will preemptively manage changes in the LCD TV market and maintain flexible fab operations with the goal of profitability and competitiveness.
LCD TV mark
Next is Q4 outlook.
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Shipment growth of mid-teen percentage is expected in Q4, where shipments fell in Q3 due to components issues. It will recover in Q4. Mobile shipment will also increase thanks to seasonality.
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The company also believes that supply-demand uncertainties could continue due to worsening of the LCD market, continued issues with key components, and power shortage in China. The company will try to minimize risks by strengthening market monitoring and ensuring thorough preemptive management.
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Next is on financial management activities. Borrowing was reduced two quarters in a row by about KRW 370 billion. CapEx for the year is expected at mid KRW 3 trillion. It will be finalized depending on the timing of equipment moving at year-end.
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Next year, CapEx is expected to increase YoY due to the new investment on small to medium OLED, which was already announced. We will abide by the principle of CapEx within EBITDA. We will stably manage our cash flow as we improve financial soundness.
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Last, allow me to respond to the question that was left at the time of registration and frequently received at the IR team. The most frequently asked questions are on OLED business performance, profitability, LCD operation, and dividend. I will explain about dividend, which was not covered so far.
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As was explained at the last earnings release, the company is currently working on a policy that will ensure predictability and practicality over the mid to long term.
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Operating profit year to date until Q3 was KRW 1.73 trillion, and net income was KRW 1.1531 trillion. This is a meaningful year for the company as we achieved a turnaround after three years of deficit. We are reviewing dividend for the year, and as soon as we finalize the dividend amount, w e will immediately communicate with the market.
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Thank you very much for your attention. One correction from the interpreter. Earlier, it was mentioned that in Q4 area shipment will grow by mid-single- digits, but let me make a correction that it is actually mid-teen QoQ. So in Q4, area shipment is expected to grow by mid-teen QoQ. Thank you.
That brings us to the end of earnings presentation for Q3 2021. We will now take questions. Operator, please commence with the Q&A session.
Now, Q&A session will begin. Please press star one, that is star and one, if you have any questions. Questions will be taken according to the order you have pressed the number star one. For cancellation, please press star two, that is star and two on your phone. In order to allow as many Q&A chances as possible within the restricted time, we would appreciate only two questions for each participant. The first question will be provided by Nicolas Gaudois from UBS. Please go ahead with your question.
The first one is on RGB OLED profitability. You talked about White OLED, but how would you characterize the trajectory for RGB OLED profitability in Q3 and Q4 and for full- year and initial thoughts for next year? Secondly, on the LCD side, you talked about running flexible operations. Would that imply that you would be lowering utilization rates already in for some of the lines? Or would you intend to do that soon or increase effectively downtime for equipment for maintenance, et cetera? How is the current environment influencing the timing of closure of Gen 7 capacity in Korea? Thank you.
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Now first about the RGB OLED or what we call the plastic OLED. Anyways, the plastic OLED profitability. Now we have two plants, Paju fab and Gumi fab, and I'm not going to specify which fab, but in one major plant, we have already gone over the BEP level. For the other plant as well, because of some there have been some reloading issues, but now compared to the past where we had made a large investment and were not able to follow up with proper utilization for some time, we actually had seen losses up to KRW 1 trillion. Now today, the two sites combined, we now have the basis for going over the BEP.
Going into next year, we look forward to achieving or going beyond the BEP and achieving profitability because we believe that we have laid the capability as well as the customer and the product structure to make it happen.
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Regarding your question about the LCD. I believe that you're asking about the flexible operations of the LCD TV side. For overall for the LCD fab Gen 8 capacity. Speaking only about the Gen 8 capacity then compared to the end of 2018 because the LCD business began to sour starting in the second half of 2018. Compared to the end of 2018, then the capacity this year is down by 25%. Now per plant then we also reduced the capacity in some lines. Also, as you already know, we converted some of the TV capacity to IT.
In this process, there is also some capacity loss, as you would know, and especially for the IT, we converted mostly to high-end products like high resolution, meaning that there was some capacity loss. At any rate, compared to the end of 2018, we are down by about 25% in the LCD Gen 8 capacity.
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Out of the 25% decrease in capacity between 2018 and now, if you look at the capacity adjustment by product, then for TV compared to 2018 it is down by 40%. For IT it is up by 30%.
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Now, for the TV, we intend to become even more flexible in our response to the changes in the market. For the TV plants, we have two, the LCD fab in Guangzhou and the P7 fab in Paju. Now the one in Guangzhou, we also call this the CA fab. Anyway, this, the one in Guangzhou or the CA fab, we believe that this is the most competitive among the existing Gen 8 fabs. It has both the competitiveness as well as the profitability to keep competing against the peers for some time.
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The question is, what about the operation of the Gen 7 plant? For the Gen 7 now again, I mean, this is also, we would say one of the few plants of this generation left in all of the world, not only in Korea. Given that it has, it is one of only few Gen 7 plants that are left. We were thinking about what would be the most competitive products to be built out of this plant. As we had explained earlier, we have differentiated competitiveness in ultra-large commercial products, for example, those of 80-inch or larger. We plan to keep focusing the product, the Gen 7 plant on producing such ultra-large products. For the remaining capacity, we would think about how to flexibly put it into use.
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[Non-English content] . The following question will be presented by Sang Yun Kim from Hana Financial Investment. Please go ahead with your question.
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I have two questions. One each for OLED TV and LCD TV. Now first, about the OLED TV, specifically White OLED. There have been talks from the beginning of this year of the possibility of adding a domestic set customer. The question is, what is the possibility of acquiring a new domestic set customer or any other new customer down the road? If you could share that information with us to the extent that is possible, that would be appreciated. It was mentioned in the briefing that the capacity will be now close to 10 million. Under that assumption then for the White OLED, do you believe that in terms of the operating profit for 2022, it will remain similar to the guidance, which was the mid-single digit growth in the operating profit?
The second question is about the LCD TV. Now, we see that the LCD TV price continues to decline, but the company's LCD TV business remains in the black. Now, for the company to maintain such a profitability, how much further drop in the LCD TV price can the company accept? LCD TV panel. So the pricing. So how much further drop can the company accept?
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Now, regarding your first question about the OLED TV and the acquisition of a new customer, potentially, as you would understand, it is difficult for us to disclose information about customers. I ask for understanding. Now for the OLED TV business, of course, we have been working very hard to have the quality at the level that we wanted, as well as the yield, and also to secure the production capability. Now that we have them, then we believe that we will be now able to lay the basis for both growth and profitability at the same time.
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Now from that perspective then so far, our customers in this for the White OLED had been, traditional TV set makers. Now we are looking at the market in finer segmentation, and we are in talks with some of the potential customers. We believe that we will be able to acquire new customers, aside from the traditional TV set makers, so new customers who would be able to deal with the White OLED and would also be able to appeal to the consumers utilizing the White OLED.
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Next year, as I mentioned earlier, we are able to sell 10 million units. If things go as planned then, we believe that we will be able to achieve a mid-single-digit growth in profitability.
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Regarding the LCD TV, your question was how much, so what is the extent of the further drop in the price in the LCD TV panel that will allow the company to remain profitable? If I may rephrase your question, then what is the extent of the drop in the price that will still allow us to maintain our business operation?
Now, for the LCD TV capacity, as I explained earlier, compared to the end of 2018, the capacity is almost half of it, and most of it is for commercial products. Commercial products, meaning that the specifications are discussed prior with the customers. In this case, the pricing is quite different from the market price, and this gives us a room for maneuver in the LCD business. Of course for the commodity products now offer both the Guangzhou plant and the Korea plant. Well, we have no further burden of the depreciation and amortization. I would say that the cost structure is quite different from, the peers. Also now then, compared to the peers, I would say that in comparison of the COP, then it would be about 5%-10% that would allow us to stay at least a t the BEP level.
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[Non-English content] The following question will be presented by Dong-je Woo from Bank of America. Please go ahead with your question.
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Now, first of all, my question is about the CapEx. As we're able to understand from the conference call, for the OLED business, there has been the 30K capacity ramp up in the China plant. There was already the ramp up in Gen 6. I wonder why you, the company still needs to have higher CapEx next year compared to this year. Does this mean that the company's business model fundamentally shifted to one that requires higher maintenance costs? I would like to follow up with my next question after the response.
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For the CapEx next year, as was disclosed already, we have the investment plan for the 15K for small to midsize OLED, and that is the reason why there is going to be higher CapEx required.
[Non-English content] The following question will be presented by Kim Sung-hwan from Korea Investment Securities. Please go ahead with your question.
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Now, I also have two questions. First is about the TV panel or actually the TV panel price. We have already discussed this at some length, but then I do not believe that we discussed the IT panel price. What is the company's view on the IT panel price trend down the road? Because we see that for like PC or notebooks, the said demand has been strong in the first half but it started to slow down recently. Based on this environment, what is the company's view on the IT panel price? And the second question is about the depreciation amortization schedule.
Given that, as we see that, it is almost certain that OLED will now be turning around to at least BEP and perhaps on one hand it is due to the higher utilization rate, but perhaps it is also due to the lower depreciation and amortization. I wonder if you could explain this part. Also for the LCD, is there also a schedule for the depreciation and amortization for LCD to also go down?
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Now first about the IT panel price, for the LCD TV, yes, the market changes are also affecting the panel price. Now for the IT, relatively speaking, it has sort of, I mean, its growth has slowed down somewhat, but still relatively speaking, we believe that the price will remain solid into Q4.
Yes, it is true that compared to the first quarter of this year, the increase rate has slowed down and is almost becoming flattish.
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For next year, we believe that much of the online demand that we had enjoyed is going to go away. Of course it's not that they will go away completely because there would still be some demand for non-face-to-face business and remote education and so forth. The base effect will remain for some time. Also, on the other hand, much of the B2B market, for which the demand had been much declined because of the need for non-face-to-face, we believe that there is going to be recovery in the B2B market next year.
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For the panel price, we believe that the price correction would probably start from commodity monitors, perhaps in the first quarter of next year. For notebooks, the price correction is likely to start sometime in the second quarter or the third quarter of next year. We see that the patterns of the price correction are going to be different between commodity products and high-end products, because for the high-end products, we discuss the specifications with the customers ahead of time and determine the pricing based on that. Meaning that for the high-end products, the pricing is not closely linked with the market. It actually does not depend on the supply and demand dynamics, but it is more affected by the client's TAM.
For the commodities, we believe that the price correction is likely to start in the first quarter of next year, and for notebooks, the third quarter.
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Your question about the OLED TV profitability. In other words, what are the factors that are driving up the profitability for the OLED TV business is how I understood your question. There are several factors behind this. The first and foremost, I would say it is thanks to the company's internal capability because we are able to achieve considerable improvement in the yield. Of course, I have to thank the employees for such hard work in achieving this because we are able to improve the yield at a much faster rate than expected, almost to a point of reaching the critical point. Of course, we have to do the exact calculation to determine that, but I believe that we are almost there.
Another is the cost reduction, thanks to cost innovation efforts and the fact that the sales are more than double. This also helped because it then allowed the leveraging effect of the fixed costs, such as the R&D or the marketing cost. Also for the Paju plant, you would know that it has been built quite some time ago. Most of the depreciation and amortization has gone away.
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Your question about the depreciation and amortization for the LCD plant. Now, of course, for the investment into any fab plant, then there would be a major investment or some additional investment for improvement or financial investment. Some of the other types of investment might remain, meaning that some depreciation and amortization might remain. Depreciation and amortization coming from a major investment for all of our plants and fabs, that is almost completed.
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[Non-English content]The last question will be presented by Dong-je Woo from Bank of America. Please go ahead with your question.
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Now then, I am back with my follow-up question, and this may be a simple but meaningful question, I believe. Now, for the fourth quarter, the company is projecting a volume increase of about 15% but then, it would be good if we can have the volume deferred from the third quarter actually be realized in the fourth quarter. Does this mean that the OEMs might be trying to secure excessive volume of panels? Or does the company believe that there is real demand coming from the OEMs? Despite the uncertainty in the macro environment. Perhaps the OEMs are trying to make up for the lost production in the fourth quarter? If that is the case, then that is going to be a good sign.
More specifically, for the approximately 15% volume increase or the increase in the area shipment, can you explain by application, from which application it is going to come the most? Perhaps not the LCD.
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Now for the area shipment, there is much of the area shipment increase will come from IT. There is the volume deferred from the third quarter. As far as we understand, not only the company, but also other companies struggled with the shortage of component supply. For the said demand, still the supply falls short of demand. Currently what we need to do is try to do our best to fulfill the customer's demand that continues.
Also a part of it will come from the OLED TV because traditionally, Q3 and Q4 are where the OLED TV volume is most concentrated. Given that the 30 [inaudible] ramp up in Guangzhou is also going into operation, we believe that the OLED TV is also going to make a contribution to the increase in the volume. For the plastic TV, perhaps its contribution to the overall area shipment growth is not going to be much, but in terms of the sheer percentage of its own growth, we believe that there is also going to be some growth coming from the plastic OLED in Q4.
In sum, yes, as you have mentioned, not much is expected from the LCD TV, but I would say that, in other applications, there is expected volume increase coming from customers' demand.
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We will now close the Q3 2021 earnings conference call by LG Display. Thank you once again for joining us today. Please do contact us at the IR team for any additional questions. Thank you.