LG Display CI. (Photo=LGD)
LG Display also announced a slowdown in its second half of the year, with a operating deficit of 300 billion won in the first quarter of this year. This is because it is feared that the aftermath of the spread of new coronavirus infection will appear in earnest from the second quarter onwards.
LG Display said in a conference call for its 2020 first quarter earnings on 23 June, “The impact of Corona 19 on the industry was shown in the first quarter, mainly in China and Korea, in terms of production. From q2, the impact on demand will expand further,” he said, “and significant market demand reductions are expected in the TV and mobile sectors. We expect to offset the strong demand in IT products, but we are basically considering it to be a difficult situation.”
“Starting in q2, it will be a time of trials and challenges for all companies, including LG Display,” he said, adding that events such as the Actual Tokyo Olympics and The European Cup have been postponed, and the spread of the virus has led to the closure of distribution stores in advanced markets such as the United States and Europe, resulting in a slowdown in demand for TV-oriented demand. Because of the volatility in demand due to the corona 19 situation, we will keep the possibility of downside demand open and manage risk.”
The following is the full text of LG Display’s first quarter 2020 earnings conference call.
Kim Hee-yeon, IR Director, LG Display
First quarter revenue slumped 26% to KRW 4.724 billion due to reduced capa (liquid crystal display) structural improvements, production disruptions due to Corona 19, and seasonal off-season factors. The deficit was reduced slightly compared to the previous quarter, with a deficit of KRW 361.9 billion due to rising LCD panel prices, exchange rate effects, and cost savings.
Operating profit margin was -8%, EBITDA (operating profit before income tax depreciation) was 13%, with a net loss of KRW 199 billion. The price per area is 7 million square meters in q1, a 24% decrease from the previous quarter, the impact of LCD fab downsizing, including seasonal off-season, and production disruptions caused by corona are the main factors.
Despite the increase in LCD price, the price per area decreased by 6% compared to the previous quarter due to poled (plastic organic light emitting diodes) and reduced smartphone shipments. It rose 7% year-on-year to $567. LG Display’s production able capa decreased 8% compared to the previous quarter due to LCD fab downsizing. This was a 26% decrease from the previous year’s peak.
In q1, a share of sales per product increased slightly compared to the previous quarter, with a 31% increase in sales compared to the previous quarter due to rising sales and OLED, despite LCD downsizing. OLED is 14%, LCD TV is 17%. IT products such as monitors and tablets recorded 37%. Mobile and other sales fell 32% in the previous quarter, down 4 percentage points (p) due to a decrease in poled volume for strategic customers.
LG Display’s inventory at the end of q1 increased by 13% compared to the previous quarter to 2.31 trillion through the response to new models and securing raw materials for corona issues. Financial ratio liabilities are similar, but the ratio of net borrowings has risen slightly compared to the previous quarter. Cash flow at the end of the quarter increased to KRW 3.6365 billion due to increased borrowing.
LG Display’s second quarter 2020 guidance shows a reduction in demand due to the closure of the store due to the closure of the distribution by Corona 19. The increase in IT demand is expected to offset the slowdown in the TV sector, such as telecommuting and online education. The wavelength of corona 19 is difficult to predict. Basically, demand is looking down.
Seo Dong-hee, Chief Financial Officer, LG Display
As Corona 19 expands globally, the situation continues to be unexperienced. In the first quarter, the number of shipments decreased by 24% compared to the previous quarter due to continued fab down activity centered on large LCD products and production disruptions at the Chinese module plant due to the Corona 19 issue. The price per area decreased the poled share during the seasonal off-season, falling 6% compared to the previous quarter and up 7% year-over-year. Overall sales decreased 26% year-over-year.
The loss of the word has improved compared to the significant decrease in sales. The proliferation of Corona 19 is due to rising LCD prices and currency exchange rate factors due to supply concerns caused by production disruptions in China. In addition, efforts to reduce material costs have contributed.
Corona 19’s impact on the industry was mainly in China and Korea in the first quarter, mainly in terms of production. From q2 onwards, the impact on demand will be expanded. Significant market demand reductions are expected in the TV and mobile sectors. Fortunately, there is strong demand in IT products, which is expected to be offset, but it is basically a difficult situation.
In fact, events such as the Tokyo Olympics and the European Cup have been postponed, and the spread of the virus has led to the closure of retail stores in advanced markets such as the United States and Europe, resulting in a slowdown in tv-centric demand. In particular, the disruption of operations at customer factories adjacent to the global demand market has caused short-term shocks.
On the other hand, in the IT sector, the expansion of telecommuting and online activities is expected to increase shipments across monitors, tablets and laptops, as well as quarterly and year-over-year. Despite the closure of retail stores, it appears to be due to an increase in online sales. In the IT sector, LG Display has high-end products with differentiated technology, and the company is competitive. It is expected to be able to significantly dampen the decline in sales in the second quarter.
In the case of mobile, the first half impact is relatively small due to the concentration of large shipments in the second half than in the first half, but lg display’s sales decline is inevitable due to the strategy of declining sales. Although there are many difficulties, we will work with strategic advisors to reduce risk factors and make every effort to respond to the new model in the second half of the year.
LG Display is conducting emergency management activities, assuming the current global financial situation and real economic situation as a war-scenario scenario in order to respond to the increasing lysis of the business environment. Specifically, we are thoroughly analyzing distribution sales trends and customer situation to determine the significantly increased market volatility. In order to respond to the growing risk of reduced demand, we will reduce inventory upfront and respond to scenarios where management deteriorates, such as resource optimization.
Despite the shrinking overall demand, opportunities are a factor in the increase in IT demand due to telecommuting and online classes. In order to respond quickly, the production system is being established. The Guangzhou OLED fab was struggling due to the corona 19 issue, which delayed the deployment of technical personnel. We plan to finalize work to ensure optimal mass production conditions during the second quarter. Full Capa operations will be promoted in conjunction with market conditions.
LCD fab operation is a continuous structural improvement activity, which reduced shipments of large LCD fabs by 31% compared to last year’s peak. However, it is determined that the weakening impact of LCD TV demand compared to the market is relatively less. There is an impact of falling panel prices due to demand issues, but we believe that the current price reduction is not the time to trigger demand. Structural improvements to general-purpose LCDs, such as LCD TVs, will promote resilient operations while maintaining the original plan.
Starting in q2, it is expected to be a time of challenges and challenges for all companies, including LG Display. Because of the volatility in demand caused by Corona19, we will keep the possibility of down-to-market demand open and risk management. We will also focus our efforts to seize short- and medium-term business opportunities, and we will prepare thoroughly to overcome the crisis wisely.
-Considering the ramp-up delay in the Guangzhou OLED fab due to Corona 19, is there a change in the large OLED shipping target that was originally expected?
The Guangzhou OLED fab did not have enough engineers to coordinate the last-minute coordination of the corona crisis. We will be working on a last-minute coordination during the second quarter. Regardless of the guangzhou fab operation, Corona 19 is expected to see significant demand reductions, especially in the second quarter. Demand is reduced in mostdeveloped markets such as the United States and Europe, and most of the set-up factories are closing production. It seems inevitable that demand reductions will be inevitable.
LG Display is closely watching whether the second quarter impact will be improved in the second half. It is believed that the reduction in demand is inevitable, compared to 10% above the original lyexpected number. Poled profit and loss improvement stipulated earlier in the second half of the year could be a turnaround base due to a significant basin acquisition with strategic trading lines. To date, we have been closely consulting with strategic trading lines, development schedules, and release schedules, but no concrete changes have been made yet.
The impact of the corona crisis on the market, this seems to have an impact. Nevertheless, in the second half of the year, we believe that we can sell at least twice as much as we did in the first half. In the second half of the year, we will do our best to provide a foundation for turnaround.
– The demand for PCs has increased significantly in recent years, and is it possible to improve profitability by expanding IT panels instead of TVs in Paju P8 Fab?
For the Paju P8 fab, most general purpose TV lines have already been withdrawn. We only have eight fabs in line dedicated to IT, but some commercial TVs and these parts are being produced a little bit, so we’re doing a little bit of work to solidify production towards IT while looking at the situation. Rather than the panel’s issue, the backend, so the module-side capa can be an issue. Recently, the demand has increased rapidly, and to secure the capa of the module line, we are making every effort to ensure that there are no material procurement problems by securing the back-end capa, such as switching production of nanjing plant or switching the production line of other products to IT.
-How much demand is better than previously expected, even if it’s better than you think?
IT demand is expected to grow by 20-30% year-over-year in the second quarter of the short-term sector. Just after the second half, there is quite a balance of opinion on IT demand.
Contrary to the view that demand may be weak in the second half of the year due to the increase in demand in the second quarter, there is a balance of views that demand will increase considerably in the second half, such as changing it to the concept of a single-family PC. The volume increased in the second quarter, and we will respond by operating the production system resiliently, and we will look closely at the changes in demand after the second half and prepare to demonstrate the advantages we have.
-It seems that domestic competitors will shut down LCD fabs faster than expected. Is there a strategy for LG Display?
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“LG Display deficits KRW 380.6 billion in the first quarter of this year”
NH Investment & Securities said on 31 March that LG Display will record an operating deficit of KRW 380.6 billion in the first quarter of this year. The target price is 19,000 won to 16,000 won.
Withdrawing lcd fabs from competitors does not seem to have a major strategic impact on LG Display. This is because general-purpose products on the LCD TV side have already decided not to be produced in Korea, and domestic fabs will be mostly it-oriented. It is not necessary to change LG Display’s strategy just because the portfolio of competitors and LCD products is fundamentally different, and the control of the competitors operating around the TV is adjusted.
Looking at the overall LCD supply situation, a lot of fabs are preparing around the 10th generation, and the current supply balance continues to be a phenomenon that exceeds the supply considerably demand. From a medium to long-term perspective, we do not expect to have a huge impact on the supply and demand balance or cause rapid fluctuations.
-We believe that demand in the OLED TV sector will be significantly reduced in q2. At this point, the outlook for the third quarter is unclear, but supply is likely to increase further when the Guangzhou fab is up and running. Is there any change in LG Display’s large all-red panel strategy?
OLED TVs can be expected to be 10% less than originally. It’s a story of declining demand. Nevertheless, there are no plans to change the operating strategy of OLED TV. During the Corona crisis, we identified the activation of online sales in developed countries with online distribution systems in North America, Europe, and other countries. Some demand stagnation is expected, but we are considering how we can catch marketing points online to make up for short-term disruptions in existing offline distribution.
-Corona19 issues calmed down in q2, and as TV demand recovered in q3, the Chinese LCD panel maker is expected to aggressively increase its market share. OLED TVs are premium products, so how do you see the weak demand in terms of price?
Although prices rebounded in q1, most LCD TV panels were operating at a level close to the cash cost. In such a situation, there was a slight rebound, but it remains to be seen whether they will be aggressive lying down in the second half at the expense of this level of price cuts.
Since the aggressive development of LCD through the decline in the price price is always a part of the market, we plan to develop an OLED operating strategy with full regard. Although emphasized since last year, oled has increased its new customers a lot compared to the past. This year, huawei in China, Vizio in the United States, and Sharp in Japan have identified new trading lines with significant brand positions and sales capabilities. If this is linked to the operation of Guangzhou Fab in the future, it will be the axis that will strengthen the OLED-based operation regardless of the drop in LCD price.
– Last year, more than 3 million OLED TV panels were sold, and this year, about 6 million units are expected in the market. However, there are concerns about china’s production disruptions and global issues. Can we continue to achieve production capacity of 500 to 6 million vehicles?
He noted that the initial plan for this year’s reduction in demand is expected to be more than 10%, but the specific numbers are difficult to say tentatively due to the large fluctuations in demand depending on how the Corona 19 situation will unfold in the second half of the year. It is also difficult to mention the time of the oled TV’s transition to surplus. When only paju fabs are operated, a kind of depreciation burden arises at an independent factory in Paju, but there is a fixed cost burden when the additional fabs are activated after that. It seems that there will be no major change for the time being to proceed with the cafax within the depreciation range. It’s not a short-term situation, but it’s a story this year or next year. I think it is important to create a ROI through the finished resources because we have completed some investment.