LG Display Co Ltd (LPL) 2004 Q4 法說會逐字稿

Welcome to the LG Philips LCD fourth quarter 2004 conference call. My name is Jay Hong, Head of IR. Sorry, Investor Relations, for LG Philips LCD. On behalf of LG Philips LCD it is my pleasure to welcome you to our global quarterly earnings conference call.

I'm joined by Ron Wirahadiraksa, our Joint Representative Director, President and Chief Financial Officer, as well as Duke Koo, Executive Vice President for Sales and Bruce Berkoff, Executive Vice President for Marketing and other members of the senior management.

As previously, we've allotted approximately 1 hour in total for this call. We will start the present part of the presentation on our prepared remarks that correspond to the slides which you can find on our website, www.lgphilips-lcd.com. Following this we will take questions.

Before moving to the discussion of the quarter and full year results, you should be aware that this conference call may contain forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act and Securities Regulations in Korea, including statements among other, regarding LG Philips LCD expected future financial performance.

You are hereby cautioned that these statements may be affected by the important factors among others, set forth in LG Philips LCD filings with the U.S. Securities and Exchange Commission and in its fourth quarter 2004 Earnings Release.

Consequently, actual operations and results may differ materially from the results discussed or projected in these forward-looking statements. LG Philips LCD undertakes no obligation to update publicly any forward looking statements whether as a result of any information, future events or otherwise. Now please take a minute to read the disclaimer.

Now I'd like to turn the call over to our President and CFO, Mr. Ron Wirahadiraksa.

Thank you. Good morning or good evening ladies and gentlemen. Welcome to our quarterly global conference call. This afternoon we hosted an earnings conference for investors in Seoul where we shared this information.

During this presentation I will review the fourth quarter earnings results, discuss our performance highlights, outlook and conclude with Q&A. We invite you to contact us at any time after this call if you have further questions.

As in the previous quarter, we're reporting today in consolidated Korean GAAP with an appendix to this presentation that includes our U.S. GAAP numbers.

Last quarter we articulated the core differentiators and strengths of LPL relative to other top tier and second tier companies in our industry. At that time we also painted a picture of the industry dynamics and laid out a clear vision for continued growth for both LPL and the TFT-LCD industry. Today, we will reiterate and refine these comments and our views on the LCD market, and reinforce our leading position in the industry.

We believe our core attributes, collaborative customer relationships, high end products, family investments in advanced facilities technology leadership and commitment to continuous cost reduction allow us to post relatively solid results. Particularly in the context of the difficult pricing environment.

1 of the key things I will stress today is execution. We're proud of our view of the need to execute through strong financial management, operational expertise, manufacturing excellence and customer attentiveness. We feel our focus on execution is instrumental in capturing the market opportunities as price elasticity drives demand, especially in the emerging LCD-TV segment.

Now I will focus on our financials for the fourth quarter of 2004. As we announced in December, the industry experienced price declines in the fourth quarter, which were steeper than what we had expected when we reported our third quarter numbers in October.

Prices per square meter of net display area were approximately 14% lower at the end of the fourth quarter, as compared to the end of the third quarter, or a 90% decline on an average quarter basis, compared with the third quarter of 2004.

Despite these challenging market conditions, we continued to execute and perform well against our long term plan. For example, during the quarter, we reported a strong increase of 38% in the net display area shipped. We were able to accomplish this as a result of our manufacturing expertise, commitment to innovation and strong customer relationships.

In particular, the successful launch of P6 allowed us to significantly increase the volume of large panel shipments. Due in part to our increased shipments, Q4 revenues were KRW1.9t, up 3% sequentially from Q3.

Revenues were impacted by lower market pricing and the appreciation of the Korean Won. Due to the increase in area shipments growth, our costs increased by 18% q-on-q to KRW1.8t. Cost of goods sold was also impacted by additional depreciation from P6. As you know, LPL depreciates its fabs over 4 years.

You'll be pleased to note that we made great strides in our cut down efforts. Our cost of goods sold per square meter of net display area shipped was $2,194 for Q4 2004. 9% better, q-on-q. Excluding P6, it improved 12.6%, q-on-q.

Our cut down efforts and improved production efficiency at P6 are further reflected in our improved cash cost of goods sold per square meter of net display area shipped, which decreased 9.8% q-on-q. We will continue to work on increasing our overall cost efficiencies.

We achieved an EBITDA margin of 21% in the fourth quarter of 2004. Our EBITDA per square meter of net display area shipped was $492 for the quarter.

We are focused on prudent management of our balance sheet, our cash position and our long-term debt. As of December 31, 2004 we had KRW1.4t in cash and cash equivalents, and our net debt to equity ratio improved to 23% from 49% a year ago, and was up from 19% in Q3. Our accounts receivable increased from KRW886b -- KRW886b to KRW891b as we continued to increase our penetration with existing clients and add new ones.

On the inventory side, our fourth quarter finished goods inventory was 3 weeks, which is about the same as Q3, and well within our targeted range. As part of our ongoing funding operations, we issued $200m floating rate note and a KRW300b denominated fixed rate bond during the fourth quarter. The capital raised has been used for general investment purposes and to refinance some existing debt.

LG Philips LCD positive cash flow from operations is the reflection of our focus on execution from both a cost and from a working capital management perspective. We have consistently been able to manage our costs through our cut down efforts. We have also managed our inventory while working closely with our customers and partners. At the end of the quarter our cash flow from operations was KRW147b, down by KRW697b q-on-q, and by KRW632b year-on-year. Cash flow before financing was negative KRW326b, mostly because of the expected P6 spending. Overall cash balance increased by KRW149b.

Let me now spend a few minutes going into more detail on several specific performance metrics, including panel shipments and ASPs per square meter of net display area shipped, product mix, Q4 capacity update and cash ROIC.

We shipped 771,000 square meters of net display area in the fourth quarter, an increase of 38% q-on-q, and an increase of 42% year-on-year. LG Philips LCD continues to be one of the top players worldwide from both an overall market share perspective, as well as in the high end segments with key products in monitors, notebooks and TVs.

P6 is one of the key contributors to the growth of our capacity. The ongoing successful ramp up of P6, coupled with our success in expanding and deepening relationships with our global customers, has allowed us to meet the growing market demand in 32 and 37 inch wide TVs.

Total average ASP per square meter of net display area shipped was $2,304, which is down 19% q-on-q. On a quarterly average basis, it was 14% lower from the end of Q3 to the end of Q4. Our average price per square meter is about one-third higher than the average price per square meter of the standard 17-inch monitor panel. The pricing decline reflects the overall market conditions. Yet it is important to note that our ASP per square meter of net display area tends to be stronger than most of our competitors, due to the large portion of our sales in the high end product category.

I will now focus on the TV segment for a moment. In Q4, our TV mix was 15% of our total revenue. LCD-TVs are a fast growing segment by display area and destined to be an engine of growth for the TFT-LCD industry. We have a clearly defined strategy to drive the growth of the TV segment over the next several years, by continuing to work very closely with top brands, providing the right product at the right time with the right scale.

The IT channel and Chinese TV players are becoming increasingly important to the distribution of LCD-TVs. They are now beginning to have a positive effect on the market in terms of lowering the channel mark up. As a result, the set price is being lowered to many end users, which in turn should fuel customer demand.

Large and wide TVs are fast approaching what we call sweet spot pricing. We believe that when more TV sizes approach these target levels, demand will increase significantly. As for the larger displays such as 26, 32 and 37 inch wide TVs, we are seeing standardization across many suppliers and brands, driven by the successful ramping of sixth generation factories, of which P6 is the world's largest.

I'm sure many of you saw the stories about flat panel TVs coming out of this year's Consumer Electronics Show in Las Vegas. We were heartened by the industry's commitment to the growth of LCD-TVs. With HDTV becoming an emerging trend, the advantages of LCD-TVs will become even more compelling, as higher resolution display solutions are sought out by consumers.

Looking at capacity. Our strategy is to bring the most advanced fabs online as soon as the demand for technology and risk characteristics justifies that investment. As we noted earlier, our input capacity, measured by square meters of net display area, increased by 24% this quarter, while our output of display area shipped increased by 38%. The difference is primarily due to increased manufacturing efficiency at P6.

We believe timely investment means that we are consistently able to maintain our skill and capacity advantage, versus most competitors. I would like to note on this slide the remarkable increase in our capacity at existing fabs. For example, P5, we began production in May 2003, with a design capacity of only 60k inputted per month, averaged about 100k per month in Q4. These significant increases in capacity are due to our vast amount of technology know-how, as well as our investments in R&D.

Our engineers are the best in the industry, are sources of our sustainable competitive advantage, as proven by the expansion in capacity. With the new capacity online we will be ready to meet the growth opportunities in 2005 and 2006. Ushering in this growth and the era of large and wide displays is P6, as it has an average monthly input capacity of 35k in Q4, and is performing well, and will continue to ramp up this year.

During the quarter we gave more detail on the roll out of our investment in the next fab, P7, which will be built in a state of the art new display technology cluster in Paju, Korea, close to Seoul. We continue to build towards an initial ramp of P7 in the first half of 2006 to support our customers and direct the emerging HDTV opportunity. We are confident that Paju will provide ample infrastructure for LG Philips LCD to grow and to maintain our market leadership in TFT-LCD industry.

For 2004, LPL produced a cash ROIC of 52%. We sustained our asset productivity which is an important driver of the ROIC. I believe this cash ROIC demonstrates a strong commitment to share the value creation.

Now on to our Outlook. I would like to first discuss our views on demand in the industry. Then we will discuss our views on market pricing and the impact on our projected EBITDA. We will conclude with our CapEx plans.

On the macro level we expect the industry supply/demand balance will begin to stabilize in the second quarter and then show signs of strengthening later in the year. For the first quarter of 2005 we see our area shipments increasing approximately 9% q-on-q. P6 will continue to play an important role in sheets per month by the third quarter of 2005.

We believe prices at the end of Q1 '05 will decline at a high single digit rate, compared to the end of the fourth quarter, on an ASP per net display area basis. As a result, we expect our EBITDA margin, in the first quarter of 2005, to be in the range of the mid teens.

LG Phillips inventory is 3 weeks. We intend to maintain the target level within 4 weeks of inventory, going forward.

Let me conclude with our CapEx plans for 2005. In 2004 the greatest portion of our CapEx was for P6. This is an excellent example of our manufacturing strength and our commitment to our customers and to growing the LCD-TV market. As we look at 2005, we are reaffirming CapEx to be KRW4.6t. This is within our previously guided range of KRW3.9t to KRW4.8t, with P7 as the primary focus.

During the fourth quarter we announced a total investment of KRW5.3t for P7. The first phase, which should commence in the first half of 2006, will include production capacity of 45k input sheets per month. We continue to invest in our industry and remain committed to developing the most advanced fabs in the world.

In summary, LPL executed well on its plan this quarter. Input increased by 21%, whilst shipments increased by 38% in area basis. We maintained our high end product strategy, our strong customer relationships and achieved shareholder value creation as shown by our 52% cash ROIC.

Ladies and gentlemen that concludes our fourth quarter earnings presentation. We are now happy to take your questions.

Now the Q&A session will begin. [OPERATOR INSTRUCTIONS]. The first question will be given by Christian Dunwoody from UBS. Please go ahead sir.

Thank you. I'm just curious about the outlook for cost reduction in the first half of the year? And I wonder if you might be able to remind us of some of the major methods of cost reduction and perhaps even, if possible, give a hierarchy of what you expect to be the most impactive forms of cost reduction in the next 6 months or so? Thanks very much.

Okay. So basically our cost reduction plans remain on track as we've communicated in the Q3 earnings event.

Basically it’s split up between reducing cost of operations, reducing cost of materials.

If you would like, hierarchy, I'll start with cost of materials first. We are focusing on developing strategic alliances. And an example is the co-location of NEG our P7 partner site.

We will also talk to more local suppliers. We realize that the material cost in the back end is very important. And with our facilities in Nanjing on stream -- the second fab opened, as you know, end of last year. We expect the module infrastructure there to develop. And we foresee that we also in the future will source materials from there.

Then there is standardization of components. You have the different models. And there is also simplification of components. 1 of the areas that we've been working on is the multi-channeling of driver IT.

We also applying new material technology. As communicated last time, we introduced a new back light technology for TVFL versus CTFL and we're rolling it out at this moment through more of our products. We started with the 32-inch wide television for that.

So of course, then there is sales. As we have said earlier that P6 will, on a total ramp basis, which is at about 3 million square meters of glass. And that will increase the Company's capacity by 80, 85%. And that will give us significant scale advantage. And it will make it very interesting for our supplying partners with which we have back [indiscernible] relationships to continue to invest for an industry leader like LG Philips LCD.

Then on the reducing costs of operations, we are exploring initiatives in reducing our back [fabs] further. We are now in 1 of the older generation fabs, having some small panel production in pre-mass motors and depending on the success thereof, we will roll that further out.

Then, also reducing costs of operations is the increase in re-use of design. So we try to have the design commonality of device products to a higher level. That will be able to create synergy and scale effects.

Also our [P6] efforts, decreasing product variations were reinforced. And we'll also increased effort on the P6 degree of equipment localization. This is some of the initiatives that we are working on -- the main focus. I hope we've answered your question there, Christian.

Very thoroughly. Thank you very much.

The following question is by Young-ju Park from LG Securities. Please go ahead sir.

Thanks for the conference. I just have 2 questions on shipment growth for 2005 in terms of square meter?

And second question is estimated depreciation and amortization number for year 2005 and first quarter '05, please? Thank you.

I did not really get your second question. We're not seeming to understand you. Could you repeat it slowly please?

Sure. Second question was that depreciation and amortization amount for year 2005 and first quarter '05.

Okay. Start with your first question. You asked us for total square meter. As you know we come from a history of having about 20% CAGR in the past years on overall cost basis. And we think we can maintain that 10 to 15%, annually. Sustainable level.

Depreciation for P6, as we said in the third quarter was KRW60b. It is around KRW115b fourth quarter of this year. As no fabs run out of depreciation because again 5 is the target in 2002. We don't have any fab running out of depreciation next year. So you can add that according to the ramp schedule, which I just mentioned.

Okay.

Q3, 90,000 [indiscernible] and you have a pretty good idea.

Alright. Thank you. My first question was shipment growth rate for the year?

We said in the first quarter the shipment growth rate is 9%.

Yes.

And we expect that the P6 line ramps will further significantly increase that number.

So you don't have the estimated number for 2005, yearly?

If you look at the Gen 6 capacity ramp, 90,000, with a set rate price. You get a fairly good imitation of what kind of supply growth LPL is able to sustain.

Okay. Thank you so much.

The following question is by Charlie Parks from Samsung Securities. Please go ahead sir.

Hi. Thank you for taking the question. I have a question on inventory. If you could comment on the current inventory situation? I note that you have mentioned that you have finished the inventory over the last few weeks. What kind of inventory do you see in the channel, and if you could talk about items in process, that would be helpful?

Inventory in the channel, we saw coming out of the December into January, about 3 to 4 weeks. Our current inventory will be 3 weeks. Also at the end of the year it was the 3 weeks. So it was well within the target range. And I remind that at the end of the Q3, inventories were also 3 weeks. So actually we have been able to keep inventories on a fairly normal level.

Thank you.

The following question is by Sunil Gupta from Morgan Stanley. Please go ahead sir.

Thank you. I had a follow up question on some of the attrition rate on cost reduction. It seems like in fourth quarter you were able to reduce your costs by about 10% on per square meter basis? The kind of guidance that you are providing -- it looks like the cost reduction in Q1 is going to be only 2 to 3%. Why such a radical change and is that likely to be the norm – 2 to 3% - on a quarterly basis?

As I indicated, we think we're able to sustain a level of 10 to 15% on an annual basis.

The 9% in the fourth quarter also is reflective of the fact that the industry was still in over supply. And as I said in the Q3 earnings call, the costs down in the first half was not very impressive. So there is some kind of a catch up effect if you will.

And also during the last quarter, as we communicated, we've been working together with suppliers to help them understand what kind of cost structure we will be needing.

So the natural high level in the first quarter is also caused by the fact that we're introducing some new models in our factories. And that always gives somewhat of a blip.

Thank you.

Thank you.

The following question is by Wolfgang Fickus from WestLB. Please go ahead sir.

Yes. Good afternoon. I do have a question on CLCD-TV industry and the price pressure going forward in the first quarter. I spotted some comments on Reuters and Bloomberg following the Korean conference this morning that you were quoting about 5 to 9% price pressure in Q1 '05. Is that the reading for your high single digit price pressure range, which you indicated in the slides?

Yes. The Bloomberg reading on that core indication, yes.

Okay. Is that something which you actually say? Is that the most of the reading on high single digit price declines? Can you--?

Yes. Well we think high single digit target. You know about 6, 7. So, but it won't approach 10. So, I think it's fairly consistent.

Okay. Perfect. And then the second thing is Samsung was pretty bullish on sequential growth in the LCD-TV market, seeing sequential growth in that segment. Is that something you would share, or do you rather see a sequential drop in that segment?

Well, we see certainly sequential growth increasing. As we ramp the P6 line further – P6 that is - which is optimized for 32 inch and 37, amongst others. So the 30 inch segment and also 26 inch, we're talking all wide products. The unit growth will increase significantly but the glass growth associated TVs, as we remarked earlier, at an earlier event, will also significantly grow faster than the unit growth. And we can see that the glass supply for TVs is already approaching the level of notebooks, we can say. But it goes very fast. So we share the sequential ongoing growth in LCD-TV.

That's okay. And then the last question maybe on the LCD-TV side. Now current consensus estimates look for round about 60m units. Now given that the price points are already falling sub $2,000 for 30 inch and bigger squeeze and flat screen TVs, and given that you have a significant ramp up in your P7 and Samsung is coming on stream with its P7 in -- over the next quarters, don't you think that 60m units for the LCD-TV market is--? Would you rather qualify conservative or an aggressive guidance for this financial year?

From where we stand we think that it's pretty conservative. We've seen very aggressive scenarios in 20 and above. We think --

How much was that?

Sorry?

20 and above?

Yes. That's what we're seeing from some of the -- IDC for example, have said that. We think it's going to be more in the 18, 19m range.

Okay. That's perfect. Thank you very much.

The following question is by Chris Hughes from Lehman Brothers. Please go ahead sir.

Yes. Good evening. Thank you for taking my call. I guess my first question revolves around material, and particularly glass, and whether you see enough glass supply for Gen 6 and above for 2005?

We certainly see for LPL enough glass supply for Gen 6. We'll be supplied from basically 2 suppliers, and we're also talking with another supplier on glass supply.

As you know, we have a long term agreement. We have not -- do not outgrow our supply base. So for LPL we don't see any supply difficulties for Gen 6 a lot.

Okay. Excellent. And in terms of the bigger picture in your guy’s goal to drag down raw material costs, where do you see the most leverage over the next 12 months or so?

Well as I said, we are strongly focused, as you already remarked, on material costs. We have aligned long term agreements with standardized components. As you know the backlog unit is a very high cost item. We're also looking to reduce that area. In other words you know glass, which already I mentioned and driver IT. So with that, we have already the main, the key cost components together. We're working very hard to bring those costs down.

And 1 last question. What's your plan for driving down ASPs for LCD-TV in the retail channel? Because my understanding is that for 30, 32 inch LCD panel roughly $700. Add in electronics, you're already $1,000. Yet you go to a retail outlet like Best Buy, and it's still $2,500. What are you guys going to do to really [indiscernible]] to drive down prices?

Actually for us, is not an easy task because of our place in the chain. We see also more task for our customers to influence consumers. But what we can do is first of all help communicate the story line of LCD as being certainly, as I mentioned, with the emerging LCD trend. We think it's quite a superior product. And furthermore, by offering volume. As we said earlier, when volume comes more on stream, the retail will be inclined to lower margin in exchange for more absolute dollars of profit.

In other words, the emergence, and also to put that emergence of the Chinese TV players and IT players in the industry. Those channel players typically will help bring down prices faster. And you have seen that happening in the previous quarter where those kind of players brought down TV prices faster than the more traditional ones.

Do we think that the channel structure will change a lot over night? We don't really think that. But the signal that will come from these players to the traditional channel we think will be one that will make the traditional side make prices more available -- I'm sorry, affordable -- for the consumer.

Excellent. Thank you very much.

Alright.

The following question is by Tony Sandhu from HSBC. Please go ahead sir.

Yes. Hi. Just a couple of questions. First trying to reconcile this input and output figures. Input up 21%, output up 38%. Is this higher yields basically?

Yes. And as I said, high yields and increased productivity mainly in the G6 line.

Okay. And you would expect that once the yields at let's say P6 would stabilize, then the input and the output capacity would then stable -- equal each other?

It would come more in line. But you also have – you always will have some productivity activity going on in the fab. Last year -- sorry, last quarter -- we had the reverse and that was because the ramp of the G6 line. But eventually the 2 will tend to get more close. That is right.

So the gap will narrow?

Yes.

Okay. Great. Other question was on the cost related to television and -- other people have touched on this. Would you say that as higher percentage of television panels come into your product mix, that the average cost per square meter would actually be higher, because you're using more components -- higher end components. Would that be a fair assessment?

Well, as for the time being we're ramping those bigger TV products in the G6 line. So actually we think that the cost per square meter will come down more in 2005. That's our assessment.

Okay. And -- I've heard various industry numbers on the size of the LCD television. Currently the average is about somewhere north of 20 inches. Do you believe that more than 50% of televisions sold by, let's say, the holiday season this year will be around 32 inches or higher?

This holiday season you mean this Christmas?

Yes.

Yes. Well 50%. I don't want to be pinned down on the number. But we see significantly increase. And we'll help drive that, ramping the P6 line with 32 inch and 37 inch wide which we feel that for the coming year is the main segment of the market. So, the answer is it will be significantly increased from 20 inch.

Okay. Great. And I'm sorry to hold you but just the last question is on your comment that IT players and Chinese TV players playing a significant role. But do you have these people, these brand players are actually concentrating on 32 inch and wider sizes, or are they just at the entry level televisions?

Well actually that's a very good question. What we have seen happening is that they are many active. I mean active in the 23 inch, but also in 30 inch wide in the case of Dell for example. While the more traditional players, like for example, Sony or Sharp now are on 26 and 32 inch. So I don't -- I wouldn't call the 23 inch an entry level TV. But it is indeed sold at the -– the IT and the Chinese players seem to focus on a slightly lower segment at this moment. But we don't think that will last for long. We think there will also be the 32 inch and the 37 inch, eventually.

Okay. Great. Thank you very much.

You're welcome.

The following question is by [Eric Lin] from UBS. Please go ahead sir.

Thank you. Good morning Ron. Just -- I think the Company has done a great job in terms of managing operating expense and ForEx. Just wondering if you can give us a break down on the operating expense and what about operating expense for Q4? And what about Q1 trend on this operating expense?

Well as you have seen from the financial statement the SG&A percentage is about 5%. The cost of goods sold is 95%. Depreciation in that is around 19% at the moment.

What about R&D?

Say again, what was that?

R&D. Research and development.

Yes. The pure R&D point is about 3% of sales.

Thank you. My next question is you just mentioned that total [indiscernible]. In that case are you expecting something of a price increase?

Sorry. Expecting a [channel] increase as a result of?

Yes. Because you mentioned that Q2 [indiscernible]. So, are you expecting some kind of pricing increase in Q2?

Well we think, as I said, it'll beginning to stabilize. So we still think that the prices have still some slight tendency to go down. But very low. In the second half of the year we see supply and demand tightening and there will be room for more price improvement.

Thank you. I guess my last question is what about the current location -- capacity allocation for P6, in terms of [indiscernible] and [indiscernible]? And what was the operation going forward?

As we said in the earlier event we already re-designated the fab one-third for market and two-thirds for the TV. We're currently running at around 40, 45% which is something we marked for PCs. But as we ramp more 32 and 37 inches, that balance will go back to the original intended consolation of one-third monitors and two-thirds for TVs.

Thanks for answering my questions.

Alright. You're welcome.

The following question is by [Neelkanth Mishra] from CSFB. Please go ahead sir.

Thank you. So what is the cost advantage you think you have over your competitors? And -- I'll follow up on the question later.

Okay. Well, I think a lot of the cost advantages that we think are sustainable is in the vastly better process technology that LPL have. The ability to ramp fabs beyond time capacity and to reduce the mass steps, as I said, earlier on.

We also think that the intimacy with the supplier base is quite outstanding. We have not outgrown, as I said earlier, our supplier base. We are able to conduct long-term agreements with them and suppliers basically invest for an industry leader like LPL.

Then, we think in terms of innovation, in design -- as we see, we are basically the only 1 who has applied a new back light technology, at the moment. There's a lot of talk about LCD back lighting etc. and we're also working on that. But, actually, in operation it's -- the improvement came from ESL. So that is, I think, another demonstration of LPL's capability.

Thank you. So, if you were to quantify, what percentage cost advantage does that give you?

That's a very big question. It would be, obviously -- percentages of points. I find it hard to put an exact number on that. But if you will, if you look at what we tracked in the past and what we communicate over during the IPO, in terms of cash cost to goods sold, for example, we were notches better in the first quarter of last year. It was even, I think, 13% better on a cash cost to goods sold basis. And that's contracted a bit, but we think it's still significantly better than the Taiwanese players.

Thank you. My last question is you said that the declines would lessen in the second quarter and perhaps we could see an inflation in the third quarter and fourth quarter. At what level do you see prices stabilizing?

We basically have no communication on individual pricing. And we gave a guidance of high single digit for the first quarter, and we think the second quarter that, because of the stabilizing situation, it will be below that. But there will still be some slight price erosion, as we -- as I said earlier.

Okay. Thank you.

[OPERATOR INSTRUCTIONS]. The following question is by Ivan Goh from DrKW. Please go ahead, sir.

Hi, good evening. I've got a couple of questions. First of all, I know you mentioned that you think pricing could stabilize in the second quarter, with a tendency to decrease and then perhaps room for improvement in the second half. But clearly, different product segments will trend differently. For example TV pricing still needs to come down for 18 or 19m units, according to your forecast. So, if I were to ask, given the situation as you have described earlier, what do you think TV pricing would do this year?

Well, actually, that's correct, the TV pricing at this moment has not achieved yet what we call a so-called sweet spot pricing point. Those are points where consumers will typically start to buy the product, as we have seen in monitors. So I concur with you that for TVs, the prices in general would have to go down. However, don't forget that the mix of TVs will increase. So on an average square meter – or a square meter glass basis, let me put it like that, the impact is actually less than on a pure pricing perspective, we feel. But it's true that TVs are not yet at the level that -- in retail, certainly not -- close to the sweet spot pricing point.

So prices have to come down. 32, 37 is the new ramped up product, and we are reducing costs. So the prices of those products will also come down further. That is correct.

What kind of magnitude of price decline in any particular size would you like to drive costs down -- I mean price down this year? Just pick any 1, 32 or 37. What is the decrease that is required, do you think, that will stimulate demand through the market?

Well, as I said earlier, in the first quarter, the end quarter to end quarter see high single digit rates overall. And for TVs, we actually think that we because the mix on a square meter of glass basis, they will actually not be that high. It will actually be lower for TVs. So, moving forward in the year, as the mix stabilizes and prices will come down further to meet the pricing levels required for sweet spot prices for the newer products. We think that TVs will have the tendency to go down a bit further. That's really all I'd like to say right now.

Okay. Can I just ask 2 more questions? The first 1 is if you look at your cash position today, versus your CapEx, obviously you have to make up a bit of that through some means. Either through cash flow for operations or financing. Can I just ask if you have a budget -- according to your budgeting plans, are there any plans to go out and finance further?

Yes. We intend to raise more external debt. I think we communicated that also at the earlier event. So that is correct. And we will not exclude equity linked instruments in that, so --. But we are finalizing our plans.

Okay. And my last question is, I very much like the fact that you have presented, the cash ROIC for your operations over the last 2 years, I think that's a very good indication of performance. My question is, more out of curiosity, is that have you ever done a study on what is ROIC for, say, your P6 versus your P5 or your earlier fabs? Is it possible for you to share is that trend rising as you go from 1 generation to the next, or not? Or is it very difficult to say, too many factors involved?

Well, basically we don't judge fabs basically on ROIC basis. But it is true that a new generation fabs like P6 is more asset productive than a P5, so also should be more cost efficient. So imminently that would lead to a slightly better ROIC. But we don't follow our fabs on that basis.

Alright. Thank you so much for your time.

Alright. Thank you for your questions.

The following question is by Sunil Gupta from Morgan Stanley. Please go ahead, sir.

Thank you. I wanted to follow up on some of the earlier comments about cost reduction. You mentioned that, in the past, you've been able to reduce your costs by 20% per annum, but you expect the future reductions to be more like 10 to 15%. Why do you see this decline in the pace of cost reduction, despite your very successful migration to P6, P7 and also the fact that you are reducing market sales?

Well, it is because fabs, basically, the new generation fabs CapEx efficiency per square meter of glass -- CapEx per square meter of glass tends to be less in the previous generation. So that should be taken into account when we say that. And that basically it is mainly driving the 10 to 15% range.

So, if your CapEx per square meter is less, you should be reducing costs more.

Well, exactly. We are reducing costs more, for all the reasons that I mentioned before. And we will continue to do that. But what I'm saying is -- you're asking me why actually, with your successful ongoing cost program, can't you maintain 20%. I think that's what I believe you asked. My answer to that is 1 of the main reasons is the decrease in CapEx efficiency in the newer generation fabs and that is quite a significant impact.

Okay. And, on the basis of the change in mix that you have seen between, say, monitors and TVs as you roll out further P7, and you commented earlier that it's possible that the TV price points need to come down for the price points to reach the sweet spot of pricing. When do you anticipate the quarterly change in your, on a per square meter basis, and [indiscernible] right now to be less than the decline in the cost per square meter. And given, I think cost per square meter you're talking about 15% per annum which should be, what, 4% per quarter on average.

Yes. We've had 10 to 15% sustainably on an annual basis. Of course, we keep working on cut down, basically, regardless of the price development, because we know that to keep [indiscernible] for developing over the larger panel market is having a very sustainable cost model. So I find it difficult to indicate when exactly that moment comes, other than I can tell you that we said that supply/demand will start stabilizing in Q2 and there's room for improvement in more tightness in the second half, as we said. So you can see the costs down effort, that's an ongoing trend. And I said earlier that in the beginning of the first quarter we have a number of new models ramping with typically some concession to yield. So we have to get fastly on the learning curve. But other than that, the cost trends will follow a gradual pattern throughout the year.

Okay. And my final question is you commented earlier that the asset efficiency or the asset productivity on G6 is significantly higher than G5. So do you anticipate the operating asset turnover for the company as a whole to rise steadily as you increase your -- as you ramp up your P6 and eventually P7?

I'm sorry, what is on the rise? Sorry, I didn't get that.

Operating asset turnover. Do you expect the operating asset turnover to rise?

Well, it has risen very significantly and as we always emphasize the asset productivity is one of the key drivers for the return on investment capital and cash ROIC equation. As you have seen, it has leveled off a bit in 2004, under the impact of the price erosion that we've experienced. But still, at 52% of cash ROIC, the asset turnover is at quite good level, we feel. So we think, basically, 1.5, 1.6 for the immediate outlook, is probably a good number.

Thank you very much.

Okay, you're welcome.

The following question is by Michael Vaughn (ph) from Macquarie. Please go ahead, sir.

Thank you for taking my call. I actually have 3 questions. Earlier, in your guidance for the P6 ramp-up, it seems similar to what you were saying earlier in third quarter, suggesting that the Canon issue is not really going to have an impact. So if you can just comment on that.

Second, in December you also gave first half EBITDA margin guidance of in the low 20s. Given that we see 1 tier now in the mid teens, I'm wondering if this EBITDA guidance is still valid for the first half.

And third, there are some local press reports suggesting that you paid, or LPL paid, a bonus of about 130b in the fourth quarter. I would just like to confirm that as well.

Okay. Well, start with the latter point. That is certainly not true. So, we don't know where these rumors come from.

Let me see what was the -- oh, the EBITDA guidance, yes. So, mid teens now, and we have said stabilizing in the second quarter -- stabilizing demand supply starting to stabilize demand -- supply demand situation. So we think that the EBITDA margin in the second quarter should be commensurate with that. That's all I'd like to say, for now, on the EBITDA margin for the second quarter.

And the Canon issue, yes. What we have said last quarter is -- we issued a statement also on that, because it was not well understood. At that time, we said we are reviewing with Canon the situation. It's too early to tell the exact impact. It could be that there was a delay, there could be a delay to Q4, and I'm referring to the 90,000 sheets targeted for the ramp of the P6 line. But we have to work very hard with Canon, and also we have reviewed our internal plans on taking countermeasures to make this effect basically neutral. And we're very happy to inform you that, as I said earlier, we think we will be able to maintain, at this stage, the 90,000 target of mass production in sheets in the third quarter of this year. So there will be no change. We're quite confident about that.

Thank you very much.

You're welcome.

The following question is by Jeff Pim (ph) from Hender Securities (ph). Please go ahead, sir.

Thanks for your conference. I have a couple of questions for LCD-TV panel shipments. The first thing is what would be a global LCD-TV market share are you targeting this year and next year?

Well, our target -- our market share is now about 20 or so, 26 to 27%. Yes, that's the targeted market share that we're at.

The second thing is what would be the apportion of the 32 inch and higher size out of the total LCD-TV shipments this year?

Well, on a unit basis, the 32 inch will grow, but on a glass basis the impact will be even more significant as well as the 37 inch. So there will be significant growth in both of these products. And that will also help drive, as we discussed earlier, the increase from the 20 inch average in time for the next Christmas season.

Could you tell me the portion of the LCD-TV panel shipments? What portion?

Well, for the first quarter of this year -- let me see, hold on a second. It will be 15 to 16%.

Between 15 and 16%?

Yes, 15 to 16% in the first quarter of this year.

Oh, excellent. Thank you very much.

The following question is by Gareen Vernukabel (ph) from CSFB. Please go ahead, sir.

Hi, this is Gareen Vernukabel from CSFB. Good evening and thanks for the question. My first question is, as a leader in the TFT space, you clearly have a mega influence on industry level pricing. And, if you could run us through the dynamic between increasing market share versus profitability. You have a Gen 6 driving down the costs. You can gain market share and hurt some of your weaker competitors, but that clearly affects near term profitability. So how does the senior management play between, or looks at these 2 possibly near term conflicting issues of market share versus profitability?

Okay. Well, I think, as you can also see from what we've done in the fourth quarter, that there is a tremendous amount of execution discipline in LPL. And, once again, we've been able to bring costs down significantly in the fourth quarter. We're very proud of that and basically that will be a key driver. As I said, I think, earlier, that cost down potential that we have will be a key driver to move this industry forward. And LPL is in a very good position, with its manufacturing base and its supply base, to drive costs down further and make that affordable, not only for the consumer but also for ourselves.

I -- if you are referring to remarks made in previous quarters by some other players in the industry, we don't recognize that. LPL has, as you very well know, never been a price leader. We do, of course, if that is wanted. And with that I mean, if it fits the sustainability goal of the Company, to fund it, it grows opportunities, we will pass on some economies to our customers to help grow the business. I think that is very normal. But we are not the price down drivers in the industry, and you have seen recently that [Dick Fraser] came out with some average price for the total industry, and that's a number that we don't recognize. So other people are driving prices down more. And the management of this Company makes, I think, a very sensible tradeoff based on cost down developments and funding needs to drive for business and attain their target of market share. And I think we've been so far very successful in doing that.

I know, particularly on the TV side, as you have with Gen 6 and done quite well on that. You effectively planned it. I mean the price point for 32 inch, taking that as an example. What could we, just broadly speaking, what is the cost of production with a cash cost or full cost for a 32 inch panel on a Gen 6?

Well, we basically are not really the price point setters. We start with a product in a new fab, new product, and as you know we ramped the G6 line up with a 32 inch wide product, very successfully. But I've also said already earlier that LCD-TV has not reached yet the sweet spot pricing in the market and, for the newer models, 32, 37, that is certainly the case. So we will be working very hard to bring down cost further and help drive the 32 inch segment. But we don't give out specific details on our cash cost basis for 32 inch.

Sure. Can we ask more as an objective for the management if you look at your TFT-TV business and look at the last [indiscernible]. Is there a target profitability, either as operating or gross margin or ROE?

Yes, what we have said is we want to make it business longer term in an investment grade - bring it to the investment grade level. So we're looking for a net debt to equity ratio for -- of about 25%. And that's what we're working very hard on to achieve, growing the business and seeing the opportunity in the market remains very attractive, particularly towards the second half of this year.

So any margin or ROE target for the TFT-TV business, on the panel basis?

Our longer term ROE is 20 to 25%, and that is commensurate with the net debt to equity ratio that I just mentioned to you. And we want to have an international investment grade, to be able to fund ourselves anytime anywhere when we can. And nothing we need to -- and diversify geographically our funding sources more.

Sure. Thank you.

You're welcome. Okay.

We’re approaching our first hour, we will accept 1 or 2 more questions.

The following question is by Richard Chu (ph) from Indus Capital. Please go ahead, sir.

Hello, thanks very much. Just wondering, just to clarify, actually, on the EBITDA margin trends for the first half and then for the rest of the year. So, first quarter, you said the guidances is at mid teens. So for the second quarter, you're basically looking for improvement on a quarter on quarter basis, for EBITDA margin. Is that correct?

It's correct.

Yes, and then you're looking for that to continue to improve in the second half.

Yes, you bet we're looking for that. And with supply demand tightening without getting a further indication on the direction. That is basically a good indicator of why we see that things should improve.

Okay. And, just for your depreciation as a percentage of your sales. You said that the last quarter was 19%?

Yes, that's correct.

And then, what's the outlook for first quarter and second quarter?

Well, as prices improve, that ratio should come down.

And then, just finally on -- looking at LCD-TVs. Obviously, you're looking at a consumer product and consumers can be very finicky. I'm just curious, on the pricing point on the retailer side, I'm seeing like for apple to apple in terms of like quality and so forth, low end, like basically a 32 inch LCD-TV, you can get the same quality TFT-TV for 42 inches, and a 37 inch LCD-TV. You can easily buy a 50 inch TFT-TV. So what makes you think that the consumer will actually choose a smaller size, versus the option of getting 10 inches more?

Yes, that's a very good question. Actually, of course you realize I'm slightly biased in favor of LCD. We think, certainly with the emergence of HDTV that people will start to see that LCD is absolutely the superior product compared to PDP. And also, we are not only focusing on the U.S. market share, but also on Japan and on Europe.

So, in terms of your clients, then, you're focusing a lot on brands that actually sell well in Japan and Europe?

Yes, that's correct.

And what would you say your market share is in those regions, in terms of branded TVs?

Largely we are a display device maker so it goes to integrate [the trend] and customers around the globe. So for the LCD-TVs market as such, and basis, I would have to look at--. I think it's about 20%. But LCD-TVs, actually, if you look at LCD-TV penetration, globally, apart from the region that I just [indiscernible], we think last year the penetration was about 4 to 5% and in this year the penetration will be 8 to 10%.

Great, thanks.

You're welcome.

The final question will be given by Oliver Li (ph) from Alliance Capital. Please go ahead, sir.

Hi. I have a question regarding you SG&A percentage of sales. I found that in the fourth quarter last year your SG&A percentage increased to about 4.7%, versus 3.4% in the third quarter. Any particular reasons for that? And how's the trend going forward regarding the first quarter and second quarter?

Sorry, actually, that's right. That is because we have grown a lot in volume whilst price erosion, as we said, was still there. On a square meters glass basis, average 19%, end to end. So 14%. And also, we ship larger volume, so that means larger TVs, and we ship it further away, so -- to Europe. So our transportation expenses have also increased because of that. And the transportation also has seen a slight price increase, because of the higher oil prices. So those are basically 3 of the key reasons.

Do you expect that trend of that 4.7% will continue in the coming quarters?

You mean the increase by--. It will slightly go up, but we think as the pricing situation has the potential to improve, the ratio will also stabilize.

Okay, thank you.

Well, thank you very much for participating this evening. And we also thank you very much for your very good questions. We look forward to talking to you again very soon, and good night and good day.

Thank you very much, ladies and gentlemen. It was my pleasure to host this conference call. Thank you.