Heeyeon Kim - Head, IR and VP Don-Sang Kim - CFO, SVP & Standing Director.

Simon Wu - BofA Merrill Lynch.

Ladies and gentlemen, welcome to LG Display's Third Quarter of 2018 Earnings Release Conference Call. We will begin with the presentation, followed by a Q&A session. Throughout the call, all participants will be in listen-only mode [Operator Instructions]. Now we will start the presentation. I hand over to the speaker. Ma'am, please begin..

Good morning ladies and gentlemen. I am Kim Heeyeon the Head of IR and before begin I would like you to first read our disclaimer. And please be informed that the numbers and the disclosure today have yet to be audited by an outside auditor. And let me now introduce the Executives present here with us today.

First, we have the CFO, Kim Sang Don, and we have Han Sang Beom and also from MI, Mr. Kim Cheong Wun [ph] and from TV, Mr. Ko Bi Yung [ph] and from IT we have Mr. Kwon J Young [ph] and also from Mobile and also from the Management Support, Mr. Tung Dong Young [ph].

And now I will hand over to CFO, Kim Sang Don to deliver the presentation on the company's financial performance for quarter, the Q3 of 2018..

Good morning this is LG Display CFO, Sang Don Kim. I would like to thank our shareholders, analysts and investors for joining us at the Q3 2018 earnings release conference call.

Looking back to the third quarter favorable conditions continued such as robust shipment, following demand for inventory buildup within channels and general rise in the panel ASP.

As was explained in the previous earnings release call, the company sees this as temporary improvement and has maintained a conservative view in our operation with a clear recognition that the LCD industry is going through cycles that are different from the display industry. The company successfully turned around to operating income in two quarters.

Thanks to expansion of high value add LCD products such as commercial and high-end IT, continuous work to improve OLED profitability and the favorable exchange rate.

Particularly noteworthy is OLED TV's turnaround to profit in the quarter although by a small margin, which represents a milestone for the company that can be benchmarked in its preparation for a broad portfolio of OLED products. We see this as the beginning, a momentum to carry on and we'll do our best to show better performance from OLED.

Let me now turn to financial performance from Q3. Revenue in Q3 was KRW6.1024 trillion, up 9 percentage points Q-on-Q, operating income was KRW140.1 billion. As mentioned earlier, there was shipment growth coming from channels inventory buildup, rise in ASP, favorable FX movement of an average 4% in the quarter.

In addition, OLED TV turned around to profit and the push to strengthen IT high-end business continued. Area shipment in Q3 was 10.8 million square meters, up 5% Q-on-Q on par with our guidance.

ASP was generally on the rise, but area ASP was flat Q-on-Q as shipment of small panels with relatively high area ASP was partially delayed due to tight supply of parts. The company's capacity in Q3 was 13.38 million square, an increase of 4% quarter-on-quarter.

As for the product mix in Q3 monitor was 18%, notebook and tablets were 20%, up 1 percentage point quarter-on-quarter respectively, thanks to increase in the shipment of high value add products on the back of the company's technological competitiveness.

This resulted in the mobile and TV's share going down by 1 percentage point each to 21% and 41% respectively. Next is the company's financial positions and ratios. Inventory at Q3 end was recorded at KRW2.5874 trillion, an increase quarter-on-quarter.

This is attributable to the strategic inventory build-up in the lead up to seasonality, as well as the growth in share of high value add products like OLED. Inventory in days remains stable. As for financial ratios liabilities to equity ratio and net debt-to-equity ratio rose slightly.

Cash flow at the end of Q3 was KRW2.8 trillion, down KRW359 billion quarter-on-quarter due to the continued investment into the company's shift to OLED. Next is the company's guidance for Q4. Area shipment growth in Q4 is expected at a low to mid-single percentage Q-on-Q due to seasonality.

As for the panel ASP, the rise is not expected to continue, but there will be divergence by product and size. Area ASP is expected to rise at the 10% level, part supply issue was resolved for mobile products, which normalize shipment of this product category with high area ASP. Last is the supply demand outlook and the company's strategy.

As was explained in the previous quarter the LCD market is still expected to see double-digit growth in supply. As for demand market volatility continues to grow as macro uncertainties persist such as tariffs, trade friction and FX risks in emerging economies.

But many other factors will affect the panel price in the future as we have seen the panel ASP rebound in Q3 despite the oversupply in theory [ph]. If the determinant of the panel price used to be supply and demand dynamics, there are now many more other factors that play today.

For example, there are differences in investment by company, change in the cost structure following technological development and product mix alterations and reaction to growing macro uncertainties.

In other words not only supply and demand, but company specific pricing and profitability strategy and fab strategies would also largely affect the price. Thus panel ASP is expected to diverge in movements by company, product and size. Given this backdrop the company will interpret demand and industry situation from a conservative view.

We will also secure a stable LCD revenue structure by changing the product mix toward high value add products like commercial and high end IT. As part of our medium to long-term LCD rationalization project, we will convert low cost competitive LCD fabs for high value added products.

As for the fab conversion to OLED, please understand that we cannot specify the scale or the timing yet. It will be implemented at the optimum timing given the changes in the market and the company's business structure, at which time it will be communicated with the market.

Investment is expected at KRW16 trillion for the two years of 2018 and 2019 per our guidance in the previous quarter. The company will try to maximize profitability in LCD, while preparing for a wide range in OLED portfolio. We will keep trying to differentiate ourselves by shifting to OLED where we have unparalleled competitiveness. Thank you..

We will now begin our Q&A session. [Operator Instructions] Our first question is from Samsung Security. Please ask your question..

Now I have two questions. Now first is you did mention that there has been delay in the shipment of mobile products, and I wonder whether that has anything to do with the depreciation and amortization costs.

Because you can see that the depreciation and amortization cost in the third quarter is lower than the second quarter of this year, but the market usually expects the depreciation and amortization to be higher in the third quarter.

So can you explain why this is so this year? And the second question is you did mentioned that it is too early to tell about the scale or the timing of the OLED fab conversion, but what would be the optimum conditions that would prompt you to have the OLED fab conversion.

So what do you believe would be the conditions that would allow such conversion so that we will be able to make some judgment given the circumstances?.

Now regarding your first question, the issue with the part supply was not for plastic OLED, but for LCD. And as for the depreciation and amortization of plastic OLED it will be reflected in Q4 as planned. And now regarding your second question, which I believe is about the investment into the OLED conversion.

And now as was explained last time, we have already a very thorough planning on the conversion. But then we also have a lot of factors that we must consider. Now first is that we have to keep a very close eye on the market situation and any changes therein. Now so we have to have very close planning for the conversion.

So we have to keep an eye on the sales as well as the demand for OLED so that there would be no opportunity cost in our conversion. So we have to make that in terms of the time to market, there would be no opportunity cost. And second is about the company's internal resource allocation.

As we had explained earlier, we are currently getting ready for volume production at the OLED fab in Guangzhou and we are also getting ready for the plastic OLED setup in Paju. So we have to make sure that we have the right resources in place and also focused resources so that we can carry on the fab conversion on a step-by-step basis.

And also with regards to the OLED TV panel, now we are planning to invest into the conversion in the way that we will be able to capture new clients and new customers whenever they arise.

So in terms of improving efficiency and also rationalizing the LCD business, the company has already decided on the strategy, so we will be implementing this strategy.

But then in terms of the specific timing and scale now as we have - as I have explained so far it largely depends on the circumstances and we have to make sure that there would be no loss either opportunity cost or any other losses. So we have to look for the optimum timing..

Our next question is from BoA. Please ask your question..

First of all congratulations and thank you for returning to profit in OLED TV business finally. And my first question is for the short-term.

So we have seen the depreciation and amortization go down for two quarters in a row according to the IFRS base financial statements and then - but then now for the fourth quarter, we expect the depreciation amortization to go up for plastic OLED.

So can you give us some guidance on where you see the depreciation amortization headed in the future in the fourth quarter and into the next year?.

Now for the plastic OLED. Now as you would know the E-61 in Paju is expected to go into volume production in the fourth quarter of this year and at which point the depreciation and amortization will be incurred. And we believe in the ballpark figure it would be around KRW120 billion per quarter.

So in the fourth quarter depending on our planning for the volume production a part of that depreciation amortization will be reflect - it will begin to be reflected in the fourth quarter. And then also for E-62, which is slated to go into volume production in the second half of next year.

And if it moves ahead on schedule, then it would - there would also be additional depreciation amortization to be incurred from that. So for the year 2018, the overall depreciation amortization is about - will be about KRW1 trillion higher than in 2017..

Now then my follow-up question is regarding the macro environment. So now this being the earnings release season, there have also been some earnings release by the Taiwanese semiconductor companies and many of them have announced that they plan to reduce their CapEx, including Nanya.

So given these changes in the macro environment what is the management outlook on the demand, specialty panel demand? Do you believe that there are any downside risks in the panel demand side? And also if circumstances continue to worsen then you had given us the guidance of KRW16.1 trillion in investment for this year and next.

But if circumstances continue to worse than do believe that such large scale investment would still be warranted?.

Now this is Kim Cheong Wun from MI speaking. Now first of all regarding the demand for next year, now today what we see is that demand is largely led by emerging economies, but then also at the same time we are fully aware that because of the macroeconomic circumstances, the economies in this emerging countries could also slowdown..

Now, this is the CFO again. Now, yes, as you have mentioned the macro - so we do believe that yes, the macroeconomic uncertainty is still persist. But now for the company, yes the plan is to invest KRW16 trillion across two years.

But then I believe your question was pertaining to what if the circumstances continue to worsen, what is our planning for that. And basically we remain flexible to changes in the circumstances. So we have our contingency planning, which we plan to implement on the step-by-step basis..

Our next question is from Korea Investment. Please ask your question..

Now I have two questions regarding the mid to - small to midsize flexible OLED. Now first, you would start supplying the panel to a major client in the fourth quarter, which will then create a competitive landscape.

Now then given this then what do you - what is your outlook for the panel customers' price trend going into next year? And the second question is another major player in the industry is planning to volume produce foldable OLED panel in the near future, although the volume is not going to be big in the beginning.

So the question is then what is the company's plan, if there is any about the development and volume production of foldable OLED panel..

Now regarding the first question, as you would know we cannot disclose our discussions with the clients, but then I can tell you that the discussions will continue. And second regarding the foldable OLED panel, now we are currently developing the technology for this in alignment with the customer.

But then you would also understand that it would take some time because now first of all the level of technology required for the foldable display is very high. And also we need to have the right circumstances to support this product. For example the right kind of system as well as market demand.

Now having said that as a display company we intent to be fully ready..

Our next question is from Arete Research. Please ask your question..

Now my question is regarding your long-term OLED TV strategy. I understand that the company is right now focused on the high-end TV market, but then now from China we see the Gen 10.5 ramp up and also the competition becoming more fierce because of that. Now, although there are differences between the LCD and OLED.

And then also in terms of the LG Display's share of the market, now of course the numbers vary by institute, but then let's say out of the total 200 million units it's estimated to be around KRW10 million. So the question is I believe that for the long-term ultimately you would have to go toward the largest size TV, like for example, OLED 40 inch TV.

So when do you believe that you will be able to reach that point? And also given that the price is very low, do you believe that there is also feasibility in moving toward that direction?.

Now, this is Ko Bi Yung from TV market business. Now in the OLED TV, we are preparing a lot of innovative new products like for example, CSO, Rollable and Transparent. Now having said that, although it is true that for now for the large size OLED TV is currently the main target, but then that is not going to be so in the future.

So it's not only the TV set, but also the non TV and the commercial for example, IT. So based on our innovations like CSO, Wallpaper, Rollable and Transparent we will be broadening our product category and our portfolio. So, yes for now we are focusing on the high-end TV, but then we will be expanding into other product categories too.

So for the short-term, yes, it is true that we will be focusing on the high end TV. So together those of the TVs for $1,500 to $2,000 range. And we will be establishing and maintaining a dominant position in collaboration with our strategic clients.

But then now in the future, in addition to the high-end TV, we would also be broadening into other areas like commercial and IT in conjunction with our clients..

Now, as there are no further questions in waiting, we believe that we will be able to wrap up the Q&A session at this point. And also there have been some questions received from individual shareholders. But then we believe that through the line of questioning that we have had so far, most of the questions have been answered already.

So there is no need for us to repeat the questions again - repeat the questions-and-answers again..

Let me make one correction about the depreciation and amortization guidance. So what I meant to say was that the depreciation amortization is expected to be KRW1 trillion higher in 2019 compared to 2018, not 2018 compared to 2017.

So to be more specific, the depreciation amortization is expected to be - to increase by KRW400 billion year-on-year in 2018 and by 1 trillion year-on-year in 2019. If you have any further questions and please contact the IR team at LG Display..

Ladies and gentlemen this concludes today's conference call. Thank you all for attending. You may disconnect..