Hee-Yeon Kim - IR Don Kim - CFO Stephen Ko - Head of Market Intelligence Young Kwon Song - SVP, Strategy and Marketing Group.

Nicolas Gaudois - UBS JJ Park - JP Morgan Peter Yu - BNP Paribas Rob Stone - Cowen and Company Andy Abram - SCML Kyung Min Kim - Daishin Securities Simon Wu - Bank of America, Merrill Lynch.

Ladies and gentlemen, welcome to LG Display's Inc. Third Quarter of 2016 earnings release conference call. We will begin with a presentation followed by a Q&A session. [Operator Instructions] Now we will start the presentation. Ma'am, please begin..

Good morning, thank you for joining LG Display's Q3 2016 earnings conference call. I am Hee Yeon Kim, Head of IR and I would like to thank everyone for joining us on this conference call.

Joining me at the conference call today are CFO Sang Don Kim; Young Kwon Song, Senior Vice President of Strategy and Marketing Group; Duck Young Kim, Head of Corporate Business Management Division; and Stephen Ko, Head of Market Intelligence. Today's earning presentation will last around one hour.

There will be a presentation on Q3 earnings and market outlook, followed by Q&A. Please refer to our website and attachment to our disclosures for more details regarding Q3 results. For those of you joining us via webcast, please refer to the references in the widget on the bottom left corner.

Before we begin the presentation, please take a moment to read the disclaimer. Please note that today's results are based on the consolidated IFRS standards prepared for your benefit and have not yet been audited by an outside auditor. With that said, our CFO, Sang Don Kim, will now start the presentation on Q3 2016 earnings results.

[Audio-Video Presentation] across the display industry as production constraints on the supply side and migration to bigger TVs on the demand side continued. Amidst the positive market dynamics, the Company was able to stay in the black for several quarters with a sizeable operating profit despite unfavorable currency movements.

We expanded our premium product mix and stepped up cost saving efforts. We also look forward to more qualitative earnings improvement in OLED TV. For large sized OLED TVs, EBITDA remains in the black thanks to productivity improvement and shipment increase.

Next year, there will be increase in both the volume and customers as we ramp up capacity, but currency movement held back our profit improvement. Whereas the average exchange rate in Q2 was 1162, it was 1118 in Q3, a move by 44. Now let me move on to Q3 earnings results in more detail. Revenue in Q3 was 6724 billion, up 15% quarter-on-quarter.

This is largely owed to the general rise in ASP in large size products, increase in shipment due to seasonality and migration to bigger size. Operating income came in at KRW323 billion, an increase by 634%. The Company was able to achieve higher profit despite the strong won.

This is largely owed to the upward trend in ASP in Q3, premium focused product mix such as UHD TVs, IPS monitors and new mobile products, as well as continuous cost saving efforts. To elaborate more on Q3 area shipment in ASP, area shipment was 10.86 million square meters, up 9% quarter-on-quarter, outperforming the guidance.

Shipment increased across large size products, including TVs, on seasonality and continuous size migration. Now, we were able to support the area shipment growth in Q3 by increasing our capacity by 7%. The additional capacity in Guangzhou China went into operation and we improved the efficiency of the line and process to prepare for seasonality.

Blended ASP was also up by 10% quarter-on-quarter, thanks to the general rise in ASP in large size panel and product mix effect. For TVs, ASP rose significantly for 40 inch and above following the ASP rise in 32 inch as area demand keeps rising and supply for large size remains tight due to industry restructuring.

For IT as well, ASP continued to rise thanks to the IT supply constraints related to TV and inventory reduction. With shipment and ASP increasing in all product categories explained so far, revenue share by product remains little changed from the previous quarter.

Small to mid panel share, which had been rising, remained flat quarter on quarter, unlike in the previous year, because of the base effect coming from the ASP increase in large size panels. But we expect its share to rise again in Q4 on seasonality and new product shipment.

As for our financial performance, inventory was KRW2492 billion, almost flat quarter on quarter as we prepared strategic inventory to be ready for new small to mid size products in Q4.

But for large size panels, much of the inventory has been used up in response to seasonality and high end product shipment increase, leaving the inventory very tight as at the end of Q3.

Overall, the Company remains in sound financial position, although debt to equity ratio rose slightly on increased accounts payable for components and materials to prepare for seasonality in small to mid size products.

Cash at the end of the quarter was KRW2481 billion, similar to the previous quarter after accounting for investing and financing activities. Now next is on market outlook at the Company's strategic direction in more detail. We expect continued improvement in supply demand in ASP in to Q4.

Supply is expected to remain tight in TV and IT as a result of continued size migration and industrial restructuring. ASP for 32 inch will stabilize after having risen sharply, but for 40 inch and above, it will maintain an upward trend.

Now looking ahead to 2017, supply demand is expected to remain robust and ASP generally stable as migration to bigger TVs continues and supply capacity becomes limited due to some companies' fab closing.

It appears that the key for supply-demand balance for next year will be panel suppliers' size and mix strategy and said companies' change in purchasing stance according to profitability. We will closely monitor these factors.

Moving on to Q4 guidance, we expect continued size migration to bigger screens and increase in shipment of small to mid sizes for major customers. But area shipment is projected to be generally flat quarter-on-quarter due to low inventory and capacity limitation.

As for the ASP, as explained already, it is expected to remain on an upward trajectory on size migration and supply cutbacks. In particular, ASP for 40 inch and above is expected to rise, which will help strengthen and expand the Company's profit improvement in Q4 as we have a high share of large size panels against total revenue.

Now, let me elaborate on our corporate strategy. Going into next year, we expect the overall supply and demand dynamics in the panel market to improve further. But we will keep a close eye on market movements as different patterns might emerge in different sizes depending on the supply demand.

We will deploy fab mix strategy with an eye toward maximizing profitability. Other factors requiring careful monitoring are currency movements and inventory risks from changing demand as they could affect our financial performance next year.

To elaborate, in large size LCD, there appears to be high growth potential in bigger sizes and high resolution products. We will thus strengthen our work to develop differentiated products based on our technology such as IPS and M-Plus. We will also try to maximize profitability by sustaining our cost-saving efforts.

For OLED TV, we will prepare to solidify our position in the premium market. We plan to keep improving productivity such as yield and processes, reduce costs and successfully implement mass production of 25,000 capacities for Gen-8 to be added in the first half of next year. This will help expand and diversify our customer base.

In the small to mid-size mobile device market next year, transition from LCD to POLED is expected to accelerate. The Company will lay the groundwork next year to expand the small to mid-size plastic OLED business.

We will secure mass production stability for the Generation 6 E5 and technological competitiveness, while strengthening business cooperation with various customers.

The Company will maintain timely investment in OLED to capture opportunities for the future, while rigorously controlling resources spanning from investment expenses and working capital to deliver better profitability going forward. Thank you..

That brings us to the end of earnings presentation for Q3 2016. We will now take your questions. Operator, please commence with the Q&A session..

We will now begin our Q&A session. [Operator instructions]. Our first question is from Nicolas Gaudois at UBS. Please ask your question..

Yes, good morning, thanks for taking my question; I've got one and a follow up.

The first question is, if I recall in the second quarter, you were close to EBITDA break even for OLED TV panels, if you could update us on where you stood in Q3 and what you expect in Q4 and what are the key areas of improvement we've seen promises for the reduction of OLED TV panel losses. Then I have a follow up after this, thank you..

Now this is the CFO speaking. Now for the OLED TV panel, now as we have explained earlier, now we have turned around to a stable profit in the second half. So for next year we are going to increase the capacity and, along with that, of course there's going to be some additional depreciation and amortization.

But we do believe that, overall, we will be able to maintain the EBITDA in the black. As for the key areas of improvement that helped improve the profitability of the OLED TV panel, well I would say that it's the improvement in productivity. First of all, yield remains quite stable and also there has been increase in shipment..

Thank you, and as a follow up, it looks like you're basically broadly on track to meet your CapEx guidance for the full year.

Could you elaborate a little bit where you think you would land within the initial guidance you gave us back in January? And how do we split this between LCD large panel OLED and small panel OLED, and your initial view on how these three buckets will trend into 2017? Thank you. Now, first, let me take your questions about the CapEx for 2016.

Now as you have rightly observed, yes, the CapEx spending for this year is largely in line with our initial guidance offered at the earlier part of this year, and for the year we believe that this will be around mid 4 trillion one level.

And now moving onto our CapEx plan for 2017, now per our very firm strategic direction, we believe that it is inevitable that we increase CapEx for OLED, especially plastic OLED, in order to prepare for future opportunities.

Now, for your information, for the year 2016 the percentage of CapEx going to OLED was about 50%, and for next year we believe that it's going to be at least 70%, so there is going to be more focus on OLED.

Regarding your question about the CapEx breakdown per the different products, now actually we have not completed our investment review regarding the large-size OLED and the small- to medium size OLED and so forth. So we will have to share this with you in the first quarter of next year..

Our next question is from JJ Park at JP Morgan, please ask your question..

Now my question is first about the plastic OLED, so I would like to know about your plans for ramp-up and the total capacity for E5 and E6. Then for the LTPS line, it seems as if the utilization rate is going to be reduced, so I'm just wondering how this is going to be utilized going forward.

Afterwards I have some follow-up questions about the large size panels. Now first about the investment in P-OLED, now actually there is some public disclosure made after the BOD approval at the Company. Now for the E51, now this is going to go into mass production in the first half of next year with a capacity of 7500 per month.

Then for E5-2, now this is planned for mass production in the first half of 2018 and again that's for 7500 per month. Per our disclosure in July this year, there is already investment under way for a fab E61 with a capacity of 15,000.

Let me clarify about the E51 and E52, now the investment here for the plastic OLED, in this case this is a conversion of the existing facilities. So we are converting some of the existing LTPS facilities for the plastic OLED investment.

Now our strategy for the investment is that for the existing LTPS lines, we are going to switch some of them to plastic OLED depending on the market demand. And I think I said that, of course the pace would have to largely depend on the demand coming from the market.

So as long as there is demand for LTPS LCD remaining in the market, then of course we will have to pace our speed of the conversion accordingly. As to your question on how we are going to utilize the remaining capacity for LTPS, our plan is to use this to expand our business with other customers..

Thank you for that. Now my second question is, you also touched upon this in your presentation, but now we see that the existing companies, now many of them are phasing out the large size LCD, and likewise for Gen X.

So I wonder what the plan is for LG Display?.

Now I'm sure you already know that the LG Display strategy for securing capacity for OLED TV and plastic OLED is to convert the capacity from the existing LCD lines. So we will try to reduce the LCD capacity, as we try to build up the OLED business as well as the capacity.

So our fab strategy basically is to convert the LCD capacity for our OLED fab for mass production..

Our next question is from Peter Yu at BNP Paribas, please ask your question..

Now my question is about well, in your presentation you talked about the LCD market going to improve next year, and also that the OLED large size panel is also going to see improvements. So it seems as if, just looking at that scenario, this presents a very good picture for LG Display.

But then I actually have a concern, and that is in particular regarding the Chinese companies. We see that they are ramping up their capacity and also for the Gen 11 as well. So for the Chinese companies, so far they have been focusing mostly on the small size, like 32 inch or below.

So, so far there was no competition coming from then in the large size panels. But then they are on a learning curve, so they're gradually moving into larger sizes, like 40 inch and 50 inch. And, in the future, eventually they might also go into, for Gen 11, 60 inch and above.

So in such a case, there is also the risk that this could actually eat away at the profitability of the large-size panels, which is a very big strength of LG Display.

So now my question is then, do you believe that there is the likelihood of the LCD market worsening before your OLED mix improves for the LG Display? So I wonder what your take is on the overall competition?.

Now I am from the market intelligence division and I would like to take and answer your questions in several parts. Now, first it is correct that the Chinese companies are planning for size migration. So up until now, their dominant product is 32-inch, which is taking over 70%, and for the next year or two it will remain at around 60% to 70%.

But then going forward, yes it's likely that they are going to increase their size to 50-inch or even larger. So, in the meantime, we do believe that we will be able to secure sufficient profitability in the high-end zone where we are still enjoying the dominant position, such as the IPS, M-plus and 4K.

Then in the second half of 2018 or 2019, when the Gen 10 will be coming in, of course we will keep upgrading our large-size infrastructure at the LCD fab for a Gen 8 or a Gen 7. Then we believe that we will be able to maintain a sizeable gap in the high-end zone, using 8K or M-plus.

Now later on when the Gen 10 comes in, then perhaps the competition might intensify. But then around that time, perhaps there is going to be another round of restructuring that we have seen this year. So in such a case, then there would be some going up, some going down.

So at that time, perhaps the oversupply is not going to be at such a serious extent as we might be concerned today. Then as the CFO has already explained, LG Display's strategy is to focus more on OLED going forward to 2019 or 2020. So by structure we are actually trying to move away from LCD commoditization.

So, in the meantime, we will keep our competition in the high end LCD, so we believe that we are in a very good position to enjoy good competition in the future environment..

Our next question is from Rob Stone at Cowen and Company, please ask your question..

Hi, I have two questions please. The first one is, if you could provide any more color on the OLED business? Particularly what percent of your revenue came from OLED in Q3, the mix of your TV panels regarding 55-, 65- and 77-inch sizes, and how you see the ASP trend in the general TV market impacting your OLED business.

That's my first question, thanks..

Now first about the OLED panel profitability, please understand that it will be difficult for us to give out the profitability per inch. But now, as we have explained in the earlier part of this year, within this year we were intending to turn around to the black with the EBITDA for the OLED panel.

And for next year we plan to maintain the EBITDA in the black throughout the year and keep improving the profitability, so that by 2019 our target is to see operating profit in OLED panel. As for the percentage out of the total TV panels, for the year it seems that the OLED panel, our of the total TV panel, is slightly under 10%.

Also the 55 inch, out of the overall OLED TV panels, this year's projection is 70%. And for next year we expect the share of 65 inch to go up..

So my second question was going to be regarding other market segments for OLED technology. You mentioned your expansion plans for TV and the ramp of the first two plastic OLED lines. I wonder if you could comment on how you see customer demand for other applications, such as automotive plastic OLED panels and also OLED lighting panels, thank you..

Now I'm sure you understand that you actually touched upon the very reason why the Company has chosen OLED panel as our strategic path forward.

Now because it has very good applicability beyond IT products, like monitors or even television, so the features and the characteristics of the OLED product and the technology make them very much scalable to other applications like automotive or commercial. That is why we have chosen this as our next generation business.

So using the flexibility of the dynamic form of OLED, we are trying to discover new business opportunities in various fields. So, for example in the automotive sector, already there is collaboration underway with a number of companies.

Then also in the realm of VR which is a hot field these days, now there are a lot of companies that are mulling the possibility of adopting plastic OLED for their products. And then what I mentioned earlier about the commercial applications, so also it's going beyond the public signage.

So, for example in the fields of broadcasting and medical, we are already collaborating with some of the companies for development.

Then also for the lighting that you have mentioned, the OLED lighting, now after acquiring this business, actually we decided to acquire this business because we thought that this is a field where we can also utilize many of the strengths of the OLED application.

So we are going to specifically define the direction of this business going forward and implement the strategy accordingly..

Our next question is from Andy Abram at SCML. Please ask your question..

Thank you for taking my questions.

First, I was wondering if you could give us an idea how much of your LCD capacity will be converted in 2017 and are you looking for a one for one for every square meter that you reduce LCD, will that convert into a square meters of OLED or do you have a ratio in mind?.

Well, I can give you a very simple example as a way of answering this question. So now, for next year, with the E42 mass production of the OLED TV panel, we are going to convert 50,000 capacity out of LCD, for 26,000 of OLED. You could do the math using this ratio..

Our next question is from Kyung Min Kim, Daishin Securities. Please ask your question..

I have two questions and I will ask the second question as a follow up to the first one. The first question is about your guidance for the Q4 area shipment, you mentioned that it is going to be almost flat.

But then my understanding is that traditionally, October and November, they have a positive seasonality so usually, the area of shipment would increase.

So I wonder why your guidance is to be more or less flat?.

Well, yes, the guidance for the area shipment to be flat in the Q4 or quarter-on-quarter, now that is because of the capacity which is going to be remaining unchanged quarter-on-quarter.So as we have explained earlier, the LCD capacity will be converted to OLED and also, there is also the continued size migration into larger panels..

Please ask your second question..

And the next question is simply about your non-operating income. Because you did not give out any comments about that in your presentation so if you could shed light on that..

Now, there was non-operating expense in Q3 and mostly because of the exchange rate.

So as I have explained earlier in my presentation, there was a movement of KRW44 in the exchange rate and our positioning is that we actually have more assets in foreign currency than liabilities in foreign currency and that is why there has been some transaction loss via exchange rate transaction loss..

Our next question is from Simon Wu of Bank of America Merrill Lynch. Please ask your question..

My question is about the percentage of OLED TV production, the OLED TV panels production. So now, I believe that LG's biggest strengths are differentiated and more premium OLED TV and especially the larger sizes.

I wonder when the 65 inch and 77 inch are going to surpass 55 inch in which quarter, so more specifically, the 65 inch, when do you think that this is going to surpass the 55 inch share? And also, now currently, the 65 inch OLED TV retail price is about 5,000 to 6,000 dollars and for the 65 inch LCD, it is in the high 1,000 dollar range.

So you see that there is almost like a threefold price difference between these product groups.

Do you believe that such a price gap is going to be maintained?.

Now basically with OLED, our strategy is now compared to LCD, we are going to keep differentiating our product and also maintain a price premium. An analysis into the OLED TV sales trend in 2016 also shows us that such premium strategy has worked quite well for us.

Now from the customer side, looking at the demand coming from the market, it seems as if there is a trend underway for a size migration, for example, moving from 55 inch to 65 inch or larger. Generally speaking, currently the share of 65 inch and larger is about 40% and we believe that this percentage will keep climbing up.

But then, this is also subject to change by region as well as the differences in the demand. From the perspective of the panel makers, changes in the demand for the different sizes, now they would also have a lot of implications for our own fab mix as well as our productivity so this also has a direct bearing on our next generation investment.

So for next year, now based on our increased capacity, there is going to be even more customers joining in from different regions so we would have to wait and see until we make our decisions about the investment and productivity..

Because of the time constraint, this shall be the last question. [Call Ends Abruptly].