Today, I am joined by the CFO Dong-hee Seo, Ki-hyun Kim, Senior Vice President of Corporate Strategy Group, Hyun-min Kim, Vice President of Corporate Planning, Stephen Ko, Vice President of TV Marketing, Tae-Yong Kwon, Vice President of IT Strategy Marketing, and Son Kyu-hyun, 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 Q2 2021 and the Company's Outlook for Q3, followed by Q&A.
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Please refer to the IR presentation document in the company's website for more details on the financial results of Q2 2021. For those joining through the webcast, please refer to the details on the widget on your screen.
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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 Q2 2021 earnings results.
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Let me start off with our business performance in Q2.
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Revenue in Q2 was KRW 6.966 trillion, up 1% QoQ despite the seasonality. There was increase in TV shipments, including OLED TV, and continued solid demand for IT. Operating profit was KRW 701 billion, an increase QoQ, thanks to rise in LCD panel price and improvement in OLED TV profitability.
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Operating margin was 10%, with EBITDA margin at 25%. Net profit was KRW 424 billion.
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Next is area shipment and ASP.
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Area shipment in Q2 was 8.91 million square meters, up 4% from the previous quarter.
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Individual panel price kept up its rising trend in Q2, led by large size panels. Area ASP was $703, down 4% QoQ but up 7% YoY. There was reduced shipment of mobile products owing to seasonality.
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The company's production capacity in Q2 increased 3% YoY.
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Next is Q2 revenue breakdown by product segment.
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In terms of share out of revenue, IT panel maintained its highest portion at 39%. TV panels came in next with 38%, up seven percentage points from the previous quarter, thanks to OLED shipment growth and LCD price hike. Mobile and others accounted for 23%, due to reduced shipment from seasonality.
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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 Q2 was KRW 4.3 trillion. Inventory was KRW 2.723 trillion, increased by KRW 371 billion QoQ. As we increased the share of high value add products and prepared for the seasonality in the second half.
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Financial ratios kept showing improvement. Liabilities to equity ratio was 164%, improved by 11 percentage points. Current ratio was 96%. Net debt to equity ratio came in at 69%, improved by six percentage points QoQ.
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Next is cash flow. Nothing was out of ordinary in the net cash flow, and cash equivalent was KRW 4.317 trillion, largely unchanged quarter-on-quarter.
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Let me now move on to guidance for Q3.
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In Q3, area shipment is expected to grow by mid-single digit QoQ. It may be susceptible to some variability due to part supply issues.
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Area price is expected to rise by mid-single digit QoQ, driven by the growth in mobile shipments.
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Next is presentation by the company's CFO, Dong-hee Seo, on business performance and strategy.
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Good morning. This is Dong-hee Seo, CFO of LG Display.
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Let me first thank all of you, all stakeholders, including our shareholders, investors, and analysts, for your support and interest in LG Display, even as uncertainties continue from the extended impact of COVID-19. First and foremost, I wish for your health and safety.
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I will now brief you on the company's Q2 performance.
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Revenue was KRW 6.966 trillion, the highest ever in Q2. Operating margin recovered to double digits, and EBITDA margin at 25.4% was the highest since Q3 2009.
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Breaking down the performance by business, large OLED TV shipment in the first half was 3.5 million units, which is around 80% of last year's shipment. It has significantly bolstered its position in the premium TV market.
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The actual global sales of OLED TV sets in the first half of 2021 was over 60% YoY in growth. Thanks to this development, we have been expanding our market share in the over $1,000 premium TV market.
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IT also kept up its improvement despite some parts supply disruptions, thanks to a solid demand for enterprise and education. The company also has strong competitiveness in both the products and customer base in IT, and has been achieving solid performance.
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For mobile business in Q2, there was some typical seasonality, but we focused on stabilizing our development, production, and quality to respond to the large volume for strategy clients in the second half.
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Next is the company's outlook on Q3. As we move into positive seasonality, shipment growth is expected across all segments. TV, IT to mobile. Panel shipment for OLED TV is planned at low two million units, while improved performance is expected quarter-on-quarter in all products of IT on the back of strong demand. In mobile, expanded production of customers' new models are expected to have positive effects.
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At the same time, it is believed that uncertainty remains with the prolonged impact of COVID-19, as well as issues with key part supply. The company will strengthen market monitoring and ensure preemptive management so as to minimize volatility.
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Next is on the company's strategic direction for each business.
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First is the large OLED. Large size OLED has staked out a firm position in the premium TV market with stronger internal capability, such as yield and productivity, along with enhanced product lineup and size diversification. We believe it has laid the basis for generating profit.
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Going into the second half, we will try to further boost OLED TV's position in the ultra-large segment while broadening the 40-inch specialized premium market that we have been working on. We will also identify applications beyond the existing TV market, where OLED can unleash its distinct inherent value and focus our capabilities on developing them into high-margin, high-growth business.
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For the large OLED business, we will try to turn around to profit in the second half of the year, achieve mid-single digit operating margin or higher in 2022, and double-digit margin or higher for the longer term.
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Next is pOLED. The pOLED business has been stabilized thanks to improved internal capability. We have also laid the basis for stable volume and built up a revenue structure by solidifying our trust with customers. We will work toward growing the volume and preparing for new models based on stronger partnership with customers, and reinforce our revenue base by broadening our high-margin portfolio, such as wearables.
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Third is our operational plan and strategy for LCD.
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Under the principle of focusing on where we are competitive, we shifted part of our capacity to high value-add IT products and will focus our TV business on high margin products like ultra-large and commercial products. We are enhancing our mid- to long-term cooperation with major customers to build a stable operating basis, stay resilient against market changes.
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Next is on financial activities. Borrowing was reduced by around KRW 500 billion in Q2. For the mid to long term, we will improve our financial structure and keep financial ratios stable without increasing borrowings as we maintain the principle of keeping CapEx within EBITDA.
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Last is an update on the current discussion regarding dividend policy. One of the frequently asked questions of late. The company is currently working on a policy to use a certain percentage of the consolidated net profit as the dividend resource. Once we finalize a dividend policy that will be predictable and sustainable for the mid to long term, we will communicate with the market without delay. We will also strengthen IR activities in the second half to better communicate with the recently increased individual shareholders. Thank you very much for your attention.
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That brings us to the end of earnings presentation for Q2 2021. We will now take questions. Operator, please commence with the Q&A session.
[Non-English content] The first question was presented by Kim Dong-won from KB Securities. Please go ahead with your question.
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First of all, congratulations on the good performance. I have one question each for LCD and OLED. First, when we look at the revenue share, it seems as if it is the LCD TV where the profitability is the most susceptible to change depending on the changes in the pricing. I wonder what was the share of the revenue in the second quarter of the LCD panels and also, looking ahead to the second half of the year, what do you see in terms of the price trend for the LCD panel? For next year, the company plans to have the LCD exit. Are there any changes to your exit strategy for LCD? The second question is regarding OLED.
I do agree, according to the first presentation, that the company was able to lay the basis for profitability, thanks to improve the cost structure in the small to mid-size panels, as well as the increased sales of large-size panels. There are also some press reports saying that there could be a need for additional ramp-up of the Guangzhou plant or the E6 line. If that does happen, then it will increase additional cost, including depreciation amortization. Do you believe that if this does happen, then it could potentially delay the timing of the OLED business turning around to profit?
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I take it that you asked questions about the LCD followed by OLED. Let me respond to the second question first.
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For both the large-size OLED and small to mid-size Plastic OLED, doesn't the company need additional investment, meaning that it could potentially delay or turn around to profitability? Is the gist of your question, as I understand it. First of all, let me say that for the past few years, of course, on one hand, there was the sluggishness of the LCD market. Also, on the other hand, the company had to invest a large sum into OLED, but at the same time, was not able to have a timely mass production or secure revenue in a timely manner. These are also some of the issues that pose challenges for the company.
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Obviously, this was also an opportunity for us to remind ourselves of the very fundamental principles of making investment, especially large-scale ones. For the future, whenever we make large-scale investment, the decision will be based on a very thorough and objective analysis of the status quo, as well as the outlook. Whether we have the capability and whether it will be possible for us to support the volume as well as profitability as a result of making investment. Again, this was a chance for us to further consolidate our principle in investment, meaning that we should move ahead with any type of large-scale investment only when such conditions are fulfilled. No matter the type of investment, we will make sure that those principles will be fulfilled. Also we will make sure that mass production will follow in a timely manner, as well as ensuring of the volume and profitability.
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To sum up my answer to your question, in our decision-making for any investment, obviously this will not lead to delay in a turnaround to profit or gain profitability.
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Regarding your second question about the LCD. In terms of the share out of sales for the LCD TV, of course, it depends on the quarter. Overall, it is around 15% of the company sales. It's on a double digit.
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Regarding the panel price. Of course, this is an obvious point of interest for the company, and we are always closely monitoring the trend. I understand your question to be the panel price outlook for the second half of the year and perhaps into next year. I remember reiterating this in the last IR session as well, when it comes to the panel pricing, then there are largely two perspectives, supply and demand. Where the supply and demand dynamics meet, then that's where the price is formed. For the time being, for IT, we believe that the demand growth will remain solid into the second half of the year. The question is whether there will be a point where supply exceeds demand in the near future.
When we look at the parts, as well as the module readiness, then it appears likely that price will remain strong for some time. Of course, looking ahead to next year, there would be various factors at play, including, not the least, COVID-19.
Also, we have to take a look into the peers' readiness, for example, whether they have sufficient IT parts supply and so forth. At this point, it is difficult for us to decisively say what the IT panel price trend is going to be for next year. We will be running our business under the assumption that panel price could stabilize or even go into a downward slide. Regarding the LCD TV, especially for the 30-inch or the 33-inch, in other words, the small to mid-size LCD TV. We see that the I'm sorry. 30-inch or the 43-inch, which is small to mid-size LCD TV, the demand appears to be dwindling. Perhaps, of course, there could also be various factors, and perhaps one factor is the COVID-19. Perhaps it has also driven down the pseudo-demand.
Another factor, also related to COVID-19, is that I understand that the sales of 30-inch or the 43-inch LCD TVs were occurring mostly in emerging markets. Now, with another surge in COVID-19 in major emerging markets, including India, we understand that the retail sales are suffering. The question is whether this is going to be transient, in other words, whether it is only limited to the COVID-19 impact, or is it more of a structural phenomenon? We will have to wait and see and also closely monitor the situation. Our assumption is that unlike IT demand for LCD TV is probably going to fall faster. As a result of that, the pricing is likely to be weaker than IT.
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Your next question, not sure whether I understood this correctly, but then I think you're asking about the LCD exit strategy. Let me first off say that this is actually not the right way to call it for the company.
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Now, I believe I have had the chance to repeat this point at various channels, including quarterly IR and other communication channels regarding the company's LCD operation strategy. Of course, out of our three major innovation projects, LCD business realignment was one of them. Our LCD structural innovation project was not about reducing or even abandoning the LCD business.
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For the LCD business, the key to the LCD business realignment was to strengthen where we are differentiated, where we are competitive already. In our operation of the LCD business, of course, we have the LCD fab in China as well. What we had intended to do was to remain flexible in the utilization of the LCD fabs, so that from the, let's say, less competitive areas, maybe we can shift the resources to the more competitive areas as we have done so for the TV capacity. Much of the TV capacity has been shifted to IT, and there would be some additional capacity to be shifted further. This is what we have been intending to do so that we will be able to shift from less competitive areas to more competitive ones.
As a result of shifting the capacity from TV to IT, does this mean that we now are able to have a stable operation of the IT capacity? Now, perhaps so. What we intend to do now is to look ahead from a more mid to long-term perspective. That is why we are strengthening our partnership with major clients, as I have explained in my presentation earlier, to remain resilient to short-term volatility or variability. Especially for the IT business of LCD, we have the technology and the competitiveness as well as the customer base and fab competitiveness. For the LCD business, especially for the IT, we will continue to differentiate and strengthen our competitiveness and solidify our customer base.
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For the LCD TV. Compared to the maximum level, the capacity is now about half of that. For the LCD TV, I would say that it has become much leaner and lighter. Utilizing this lighter capacity, we would be focusing more on the high profitability businesses like commercial or large size products. Similar to IT, we would also be strengthening our partnership with the strategic clients so that we will be able to be resilient to market changes. Of course, still it could be subject to some variability down the road. As I mentioned earlier, we also have the capability to have flexible operation and utilization among the different fabs. Whenever there are some changes, then we would also exercise the operational agility to be flexible toward the market circumstances.
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[Non-English content] The following question will be presented by Kim Hyun-soo from Hana Financial Investment. Please go ahead with your question.
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I have two questions. One is regarding the EBITDA guidance, because it was mentioned earlier in the presentation that the company will maintain the principle that the CapEx execution will remain within EBITDA. Of course, because of the higher earnings expected for this year and next, perhaps it would be difficult for you to give us a definitive response to this. What would be the EBITDA guidance for this year and next? The second question is for the CapEx. There are talks of pOLED ramp up in response to IT demand and also further investment in mobile area as well. Regarding the investment, you have been conservative and even now your response has been conservative. Of course, we do understand that this requires cautious review and decision making.
I also do understand that it would be difficult to give a conclusive response at this point. Do you believe that investing into the pOLED ramp up would be necessary?
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First, regarding the EBITDA guidance. Now, as it stands today, the company's depreciation and amortization for this year, and also will be similar for next year, but it would be around KRW 4.5 trillion. Assuming that there is going to be a BEP in the second half of the year, KRW 4.5 trillion plus operating profit of KRW 1.1 trillion would be about KRW 5.7 trillion. Of course, at this point, we cannot pinpoint what the operating profit is actually going to be in the second half. Looking at the market expectations, perhaps that is where it is going to be. With the KRW 4.5 trillion in depreciation and amortization, then also with the operating profit, then I would say that the EBITDA would be around KRW 5 trillion-KRW 6 trillion, and that is what we need to achieve, and I believe that that would be achievable.
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For the Plastic OLED, especially investment in IT and mobile. What I can tell you at this point is that these issues are under review at this time. There has been some progress in the review. Once we have something final and concrete to share with the market, we will do so without delay. I would like to ask for your patience a bit longer.
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We will take the next question.
[Non-English content] The following question will be presented by Dong-j e Woo from Bank of America. Please go ahead with your question.
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Congratulations on the excellent performance. That makes me also feel a lot better. Regarding the quarterly performance, I see that the number one contributor to the quarterly earnings this time was once again the LCD, despite the seasonality. It appears as if the company feels that it is also in a good position with the LCD, perhaps because of its differentiation. Looking at the IT use LCD, for example, with the oxide. What are the reasons, if any, that the companies in Taiwan, Japan, or China not do as well as the company today? Also looking at China then, it seems as if they are making large scale investment, not only Gen 8 LCD, but now in Gen 10.5 LCD.
This means that the LCD TV price, which had gone up by over 100% recently, is now at the risk of falling dramatically. Of course, the company mentioned its response strategy, for example, strengthening its partnership with the strategic clients and also strengthening your differentiation. Still, when we look at the history of LCD so far, especially for the past 10 years, whenever there has been an oversupply, without exception, it led to plummeting prices. Perhaps that is a risk that could materialize as early as the end of this year or next year. I would say that that could be one of the biggest risks for the company. What can the company do regarding this potential risk? Also, this is the last question, and it seems as if the facility investment has been consistently going over KRW 1 trillion for every quarter.
From my perspective, about KRW 500 billion-KRW 600 billion of facility investment per quarter would be sufficient. Because the EBITDA is growing, does this mean that we also have to increase the facility investment in correspondence to the growth in EBITDA? Perhaps you could just stabilize the CapEx at around KRW 3 trillion per year. For the surplus EBITDA, maybe we can utilize that as free cash flow and perhaps use that for DCD conversion or use that for share buyback to assure the shareholders. Perhaps that would be a better strategy than providing cash dividends.
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Regarding your first question about the differentiation of IT products, I understand that your question was about the competitors in China, Taiwan, or Japan. Of course, some are utilizing IPS and some are also utilizing oxide for certain products.
I understand that there is still some entry barrier, especially in infrastructure or the development process. Of course, I'm not in the position to tell you what the other players are thinking or what their judgment is. As far as I understand, at this point, there is still quite a high entry barrier.
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For the LCD TV price potentially falling and how the company intends to respond to this potential risk. Now, as we had reiterated earlier, the challenges for the company last year and the year before, not about the LCD itself, because for the LCD business, although, let's say for the LCDs, the sales were falling, but still we were never in the red with the LCD.
It was not actually the LCD business itself that was the cause of the company's challenges, but rather for the large size OLED or the Plastic OLED. After making the investment, we were not able to go on our scheduled track for batch production and sales. As a result, we were amassing large size deficits. Those were the biggest cause of our difficulties for the past few years. Now these issues are largely going away. Now, what are we going to do about the LCD's potential risk? Regarding the potential fall in the prices, we have our scenario planning, and we would be making preparation in accordance with these scenarios. For the LCD panel capacity, I have already mentioned that the capacity has been halved already.
I also mentioned strengthening our partnership with the strategic clients, and this is to assure operational stability down the road. As for the fabs, for the LCD, we have the Paju P7 as well as the Guangzhou LCD fab. These are where we are able to make the LCDs for TV, and we will continue to ensure operational stability in these fabs as well, so that we will be able to flexibly respond to changes. In line with that strategy, we would also be responding to the price drop in the LCD TV whenever that happens so that we will be able to ensure mid- to long-term profitability in the LCD business.
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Your next question was regarding some concerns about the company's patterns and facility investment, I would say. Let me reiterate that when we said that we will maintain the principle of CapEx execution within EBITDA, does not mean that we will use up all the EBITDA that we earn. For this year, that is what the company intends to do. Our CapEx would be within the depreciation and amortization level. For the additional EBITDA or the incremental EBITDA, we can use it to lower our borrowings or further consolidate our financial structure as we have done this time around. Of course, for next year and on, if there are any strategic investments that are necessary, especially for the purpose of future growth drivers or to ensure future profitability, then those are necessary investment that we will make.
Other than that, we would remain, of course, tight in our investment. I believe that the implication in your question was that perhaps the company was a bit, let's say, going overboard with our investment, and I would like to assure you that no, that is not the case. Some of the CapEx needed this year was to build a stronger safety environment in relation to the ESG management and also to preemptively prepare for the future. I would like to explain that what we are doing in terms of the preparation is a bit different from what we have done in the past. It's more of an aggressive preemptive preparation for the future. Of course, for the EBITDA, yes, this will remain as the large, let's say, threshold for the CapEx.
Aside from the strategic investments, we would remain tight in our investment operation, and we will continue to strengthen our financial structure and also leave room for some strategic financial operation for future preparation as well.
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We will take one last question.
[Non-English content] The last question will be presented by Sung-kyu Kim from Daiwa Securities. Please go ahead with your question.
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I have two questions. One is about the OLED TV. I see that the sales in the first half for the OLED TV were quite high. In the second half, considering the positive seasonality, I believe that it is more than likely that the company will be able to achieve the target of eight million units. For the LCD TV, as was mentioned earlier, it is likely that demand is going to fall earlier than expected, which could then have an impact on the demand and pricing as well. In addition to this, regarding the OLED TV, does the company believe that there are also some, let's say, downward pressure on the pricing, so that you will be able to achieve the target for the second half of the year?
Do you believe that there is such a risk of the downward pressure on the OLED TV pricing? The second question is, it seems as if this year the shipment is to double. Of course, in the Guangzhou fab, there is an additional capacity of 30,000 that is available. For next year, what is the company's target capacity? Sorry, target shipment. Because there are talks of 10 million or even 11 million, could you give us a guidance about the company's target shipment next year? The second question is about the automotive display business. In the first half, there have been a lot of issues regarding the automotive semiconductor supply.
In the second half, we see that the issue has been somewhat eased for EVs. Overall, the semiconductor supply issues continue, and perhaps all the way into late this year as well. I would just like to ask for the company's update on the automotive display business as well as OLED.
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First question was, I believe on the pricing of OLED in relation, especially to the LCD price. Whether the fall in the LCD price will come around to affect the OLED price, especially what is also going to be the shipment for next year. For the first question about the pricing. Yes, it is true that because the LCD and OLED are the two leading panels for TV, they tend to exchange impact with each other. As you would also know, for the LCD TV, while the price for the LCD TV has close to doubled compared to last year, it has actually not affected the OLED TV pricing much. That is because we set the OLED pricing not in relation to the LCD, but based on a very thorough market research.
Based on the market research, we try to determine the sweet spot in terms of the OLED TV pricing that will be acceptable to as many consumers in the market as possible. Based on this, we also discuss the panel pricing with the set makers. Because of this, of course, changes in the LCD price could have some impact on the OLED price as well. This will not directly affect the price because we look to the market to come up with the acceptable, appropriate pricing. Given this situation, we believe that any changes in the LCD pricing in the future, despite that, we would be able to manage the OLED price.
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Regarding the OLED shipment for next year, of course, we are in the preparation for this, but yes, we do have the capacity of additional 30K in Guangzhou. Based on that, we can ship 10 million next year. Also with some enhanced productivity and other preparation, we could also potentially ship 11 million the year after that.
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Next, about the auto display. It is true that there have been semiconductor shortage issues, especially among the OEMs and the Tier 1 suppliers. They have been intermittent and some have been in large-scale shortage. Yes, for the company, it is also a risk. So far, there have been no disruptions in our production because of shortage of these semiconductors. Still, yes, as you have mentioned, it is a risk, and we are always remaining vigilant regarding the risk of parts shortage, not only for the company, but also for our clients as well. We will keep a very close eye on the situation so that we will be able to manage any circumstances or changes, so that we will not be losing out on valuable opportunities.
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Some update on our overall LCD business operation. Now, so far for the auto panels, they have been based on amorphous. We have been shifting to LTPS, at least for the LCD. The orders that we are receiving recently for LCD are mostly LTPS. For the next two to three years, once we finish supply of the LCD based on amorphous for the next two to three years, then we believe that we will no longer be producing based on the amorphous technology. From then on, it would be solely LTPS or LCD.
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For the Plastic OLED, we believe that this is the panel that is optimized for electric vehicles, and we have been trying to increase the orders received for Plastic OLED, and especially for the EV OEMs and also new OEMs and some of the OEMs that are preparing to enter the EV. We are trying to target them for the Plastic OLED. Yes, for the Plastic OLED as well as the large-size OLED, we believe that it is important to first define the right target segment and then try to improve the profitability and also the business feasibility of the auto display. We need to create the kind of mechanism that will allow us to ensure profitability in this business as well.
Again, we are focusing on receiving the orders for the Plastic OLED, and this is our strategic focus at this moment. Once we get good results in this front, then we would also communicate this with the market in due time.
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We will now close Q2 2021 earnings conference call for LG Display. Thank you once again for joining us today. Please do contact us at the IR team for any additional questions. Thank you.