LG Display Co Ltd (LPL) 2005 Q3 法說會逐字稿

Good morning and good evening. First of all, thank you all for joining this conference call and now we will begin the conference of the fiscal year 2005 third quarter earnings results by LG Philips LCD. This conference will start with a presentation followed by a divisional Q&A session. [OPERATOR INSTRUCTIONS]. Now, we shall comment the presentation on the fiscal year 2005 third quarter earnings results by LG Philips LCD. Please go ahead, sir.

Welcome to the LG Philips LCD third quarter 2005 conference call. My name is Jay Hong, Head of Investor Relations for LG Philips LCD. On behalf of LG Philips LCD, I would like to welcome everyone to our global quarterly earnings conference call.

I am joined by Ron Wirahadiraksa, President and Chief Financial Officer of LG Philips LCD, as well as Duke Koo, Executive Vice President for Worldwide Sales, Bruce Berkoff, Executive Vice President for Marketing, and other members of management -- senior management.

We have allotted approximately one hour in total for this call. We'll spend the first part of the call reviewing our prepared remarks, which correspond to the slides which you can find on our website. Following this, we'll take questions until the end of the call.

Before we move into discussion about the earnings results, you should be aware that this conference call may contain forward-looking statements within the meaning of the U.S. Private Securities and Litigation Reform Act and Securities Regulations in Korea, including statements, among others, regarding LG Philips LCD's expected future financial performance.

We'll caution that these statements may be affected by the following factors, among others set forward in LG Philips LCD's filings with the U.S. Securities and Exchange Commission and its third quarter 2005 earnings release. Consequently, actual operating 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 both as the result of any new information, future events or otherwise. Please take a minute to read the disclaimer.

I would now like to turn the call over to our President and CFO, Mr. Ron Wirahadiraksa.

Thank you, Jay. Welcome to our Q3 '05 global conference call. It is my pleasure to spend the next hour with you, during which I will review our third quarter earnings results, discuss our performance highlights, and conclude with our outlook.

Following the presentation, we will have a session to answer your questions. Please do not hesitate to contact us if you have further questions after this call. We are reporting in consolidated Korean GAAP with an appendix to this presentation that includes our reconciled U.S. GAAP numbers. Please turn to the next slide.

I would like to begin with a review of our third quarter results, highlighting this quarter's accomplishments and discussing a number of issues we are addressing. As we expected, the industry pricing continued to stabilize while also experiencing sequential shipment growth during the third quarter. This was due to both seasonal demand and positive momentum in the Notebook and TV segments.

In the TV segment, we have seen increasingly attractive retail sweet spot pricing levels that are further driving demand, especially in high definition, 32-inch wide screens. We are pleased with the growing consumer demand, and we believe this will further increase with the continued rollout of HDTV in many applications and markets around the world.

We also want to emphasize the future growth in the European markets, which we will address with our recently announced decision to establish a new module plant in Poland. This plant will enable us to better serve the fast growing European LCD TV market, while strengthening relationships with our customers there.

While our industry remains highly competitive, we continue to be a market leader, with 22% market share by area, according to a recent Display Search estimate. Please turn to the next slide.

Revenue grew to KRW2.7 trillion in Q3 '05, up 19% sequentially from Q2 '05. This was due to increased production, seasonal demand and stable module prices. We achieved a growth of 14% in net display area shipped. Our quarter average sales price per square meter of net display area shipped increased 2.9% in dollars.

On a quarter-end to quarter-end basis, prices in dollars per square meter shipped increased 2.3% to $2,120. Average sales prices increased due to tightness in supply and the continuing shift towards larger sized panels. Our total cost of goods sold increased 9% Q-on-Q to KRW2.4 trillion, due to our increased shipments.

Our COGS per square meter in dollars decreased by 6% in the third quarter of '05, and cumulatively for the first three quarters of this year declined 16%. On a cash COGS basis, these numbers were 5% and 14% respectively. On a Korean won basis, COGS per square meter decreased 4% Q-on-Q and cumulatively, by 21%. Cash COGS in Korean won per square meter decreased 3% and 19% respectively.

The combined result of higher volume, higher ASP per square meter and ongoing cost reduction was margin expansion, with EBITDA margin improving by 6 percentage points to 25% and net margin improving by 6 percentage points to 8%. Due to tax credits, our net income of KRW227b actually exceeded our income before tax by KRW10b. Please turn to the next slide.

As of September 30, 2005, we have KRW2.1 trillion in cash and cash equivalents, which is an increase of 60% from the end of Q2 '05. This increase can be credited to both our $1.4b equity offering last July and strong working capital management. In particular, the equity we raised strengthened our balance sheet and improved our net debt to equity ratio from 40% to 20%, leaving us sufficient flexibility for future capital needs.

Our third quarter finished goods inventory level remained unchanged from Q2 '05 at approximately two weeks. We believe one of the core differentiators of our company is our balance sheet, which is one of the strongest in the industry. Please turn to the next slide.

Cash flow from operations increased to KRW764b, based on improvements in net income and working capital. CapEx spending was KRW1.4 trillion, due to ongoing investment in our P7 Paju facility, which is now scheduled to begin mass production Q1 '06. In total, cash and cash equivalents increased by KRW798b. Please turn to the next slide.

I would now like to go into more detail about several specific performance metrics. Next slide please. The average sales price for the third quarter was $2,121 per square meter of net display area shipped. The average sales price in Korean won was KRW2.2m. While ASP per square meter was up Q-on-Q, this was slightly less than we expected, mainly due to a lower than expected ASP for monitors.

Growth in all segments, along with the successful ramp-up of P6 to its initial design capacity, resulted in our continuous leadership in the large area TFT-LCD segment, with a total of 1.2m square meters shipped, an increase of 14% Q-on-Q.

In 2006, we expect to strengthen our market leadership in the large screen TV segment by commencing production at our state-of-the-art P7 plant, the world's largest Gen 7 facility. P7 has been strategically designed for efficient mass production of 42-inch and 47-inch wide LCD panels at 8 cuts and 6 cuts respectively.

As a result, LG Philips LCD will continue to lead the market in standardizing large LCD TV sizes, in addition to capitalizing on the emerging HDTV market. Please turn to the next slide.

Revenue for the third quarter, by product segment, is as follows. Monitors represented 45%, TVs 29%, Notebooks 22% and other applications accounted for 4%. Monitors have decreased as a percentage of overall revenue. This is due to both mix and pricing effects, such as better than expected prices in Notebooks and increased demand in both Notebook and TV segments.

As we transition to even larger and wider TVs, we face the need for continued investment, coupled with competitive pressures. We at LG Philips LCD are focused on these challenges and we are convinced we have the innovation, commitment and expertise to maintain our market leadership role.

LG Philips LCD prides itself on being the largest merchant supplier with the broadest customer base and product portfolio. These are factors that collectively differentiate us from our competition. Please turn to the next slide.

We are constantly refining our manufacturing efficiency through process innovation. P6 is a prime example. Our P6 facility has already achieved its initial design capacity of 90,000 input sheets per month and thus has greatly contributed to our overall capacity. With P6, we are committed to continue meeting the needs of our valued customers, who range from top IT and CE brands like Dell, HP, Apple, Panasonic, Toshiba, LG Electronics and Philips, to the emerging Chinese players.

We look forward to continuing our strong relationships with all of our strategic customers as we create solutions to serve the expanding market together. Next slide please.

In the third quarter of 2005, our cash ROIC was 35% compared to 25% in Q2 '05. It increased as a result of both a higher EBITDA margin and an improvement in asset productivity, as measured by sales over invested capital. As we have previously highlighted, cash ROIC is the key metric we focus on to assess our performance. Next slide please.

We now turn to our outlook discussion - next slide. For the fourth quarter of 2005 we expect to increase net display area shipped by a low-teens percentage Q-on-Q. We anticipate our Q4 sales price per square meter shipped to be flat to slightly down quarter-end over quarter-end, largely due to potential weakness in monitor pricing. We expect our EBITDA margin to be in the mid to high twenties in Q4 '05.

Our forecast for 2005 CapEx remains KRW4.6 trillion, of which KRW3.1 trillion is allocated for P7, which will now start mass production in Q1 '06. Looking forward, we maintain our CapEx estimate for 2006 to be in the range of KRW3.5 trillion to KRW4.5 trillion, with KRW1 trillion to KRW2 trillion for future production facilities, such as our new module plant in Poland and preparations for P8.

We see opportunities to further build the business but we recognize that a large group of consumers may be affected by challenging macroeconomic conditions, such as high oil prices. This may have an impact on sell-through. The macroeconomic conditions may impact demand, as will seasonality factors in the first half of 2006. Also, in this timeframe, we expect to see additional supply coming online, which could be a factor in the pricing dynamics.

Countering this, demand may be helped by consumers responding to ever more appealing sweet-spot retail prices, and an increasing amount of HD content. Additionally, China's Lunar New Year has evolved as a strong buying season and we have seen interest growing in China for larger and wider LCD TVs.

Finally, we expect that the 2006 World Cup could be a unique catalyst for LCD TV sales growth in the first half, especially in the European region. We intend to maintain our leadership role in the TFT-LCD industry, as we remain focused on manufacturing productivity, innovation and cost reduction. In addition, our strong balance sheet enables us to continue with this leadership strategy.

We would like to thank you for your continued support and confidence in LG Philips LCD.

Thank you, CFO. This concludes our third quarter earnings presentation. We'll now take questions. Please limit your questions to one per call, so we can ensure that everyone can have a turn. We appreciate your cooperation.

[OPERATOR INSTRUCTIONS]. The first question will be given by Mr. Chris Muse from Lehman Brothers. Please go ahead, sir.

Yes, good evening. You guys showed pretty strong cost-down efforts on COGS in the third quarter and throughout '05. I'm curious, looking forward to 2006, where you see you'll be able to drive down panel costs even further to get that sweet spot at the retail price even lower, so we can stimulate demand.

Okay, thank you for that question. Well, what we usually guide for is 10 to 15% on an annual basis. This year, it will probably come out at the higher end of that and we will have to review in Q4 what's going to be the cost guidance for 2006.

Are there any particular areas of focus driving down costs of, say, IC drivers, CCFLS, glass?

Yes, of course we focus on three key areas. That is, as you mentioned already, building materials, and exactly the components that you mentioned. Bakelite is the most expensive unit. We focus very much on that. With the EEFL solution we already made some quite good cost inroads, and we intend to further roll that out.

On glass, glass has been somewhat difficult throughout the year to bring it down substantially but still, we were able to bring this down a few percentage. We also increased a lot in scale, so we have some expectations there.

On the driver IC side, we're continuously working on multi-channeling of driver ICs. But we are not simply putting the channels of two driver ICs on one or from 6 to 4, something like that.

Then we of course have process improvements; capacity conversion factor, which we are always striving to increase for the de-bottlenecking processes. And as we have many times emphasized, the main area we focus on is cost innovation from design. That means the simplification or reduction of components, of course with keeping the functionality of the products at all times.

Those are the key areas that we are looking at. Of course, in 2006 we will have a very strong emphasis, as already this year, in the TV segment because of course the success there will be very crucial for sustaining profit. And this year we have been able, as we communicated on an earlier occasion, the 32-inch wide TV quite significantly.

We still maintain, by the way, the [$14.99] sweet-spot price by Christmas this year average for a branded product, and a panel price with that that will be slightly above $500, and we do intend to make a profit at that level. Also for 2006, we will focus very strongly on the 42-inch wide television and, at a slightly later stage, at the 47-inch wide.

Okay. That was very helpful. Thank you.

Thank you.

Only six participants are waiting with their questions and the following question will be given by Mr. Chong Kim from CLSA. Please go ahead, sir.

Hi. Thanks, Ron. Ron, I just had a couple of questions, first in terms of your cost efforts. Looking at your cost decline in the first half of the year, that's been pretty strong. Is there a sense that they're going to slow, maybe, going into the fourth quarter or actually do you think they might actually accelerate?

The other question has to do with monitor demand and inventories. It looks like 19 inch really hasn't caught on as much as we might have thought at the beginning of the year. And I was wondering if your marketing people had any thoughts on why that was, and what this implies for 17-inch monitor panel demand. And also what you're seeing in terms of inventories for monitor panels and what do you think inventories are, maybe, across your other application products.

All right. Thank you for that question. We'll start with the first point. Q4 cost reduction. Well, we expect to be slower than [guided] in Q3. We have plans for Gen 6 beyond [inaudible], which has been expected well beyond that. We have communicated earlier that we will do our best to bring the capacity further, as we have done with the Gen 5 fabs.

Of course, we do not expect that the increase in capacity will reach the level of that of a Gen 5 because we are faced with a much bigger glass substrate and also there will be some space constraints coming in. So the cost down will be somewhat slower, so we will still guide for 15% annually at this moment, average to average with '04, and we probably will come out at the higher end of that region.

In the 19-inch inventory you asked me, that is true. 19 inch has been slower than many people expected. I think one of the explanations is that many flocked in the beginning of the year out of the 17-inch, which was not a really good product, certainly not for the lesser cost competitive players. So there's been a lot of emphasis on 19 inch, wondering whether it would be in line with -- was in line with the market expectations -- with market expectations in that segment would warrant that.

In any quarter that we have seen so far, the supply has exceeded demand but we expect that 19-inch will grow year-over-year. The inventories right now are with some of the customers and some of the players are quite high also with us. 19-inch monitors is basically higher than average. But as I said, we will -- we expect 19-inch will grow. We also expect that production from 19-inch will be somewhat lower.

Then we come to your third question, on inventories across applications and also for monitors. Our overall inventory level was about two weeks. We think the inventory at the system makers is very healthy at this moment. And also, I could say that for IT we think in the channels there is about four to five, four to six weeks of inventory.

For TV, as you know, TV lead-time is somewhat longer. For TVs, you know products have to be in the shop one month ahead of sales, basically. So we see the TV level of this month in about two months, and we think that it's quite healthy for this time in the season. Okay? Hello?

Yes, that's fine.

Okay, good.

Okay. The following question will be given by Mr. Christian Dinwoodie from UBS. Please go ahead, sir.

Thank you. Thanks, Ron. You mentioned this a little bit before, the profitability of the 32-inch LCD TVs. I notice that LCD TVs are now 29% of revenue as of the third quarter. Could you characterize a little bit your expectations for improved profitability, with the ramp-up of 6G and the oncoming 7G facilities? What are you looking for in terms of better than -- better cost reduction from the better utilization? Thanks.

Yes, that's a good question. The P6 line, as I said, averaged 90,000 input sheets and we're trying to bring it to a higher level. I elaborated on that earlier. However, the 90-inch -- as the 90-inch has already been reached, basically, the growth from TCF improvement, process improvement, will start to dampen out a bit on an improvement level basis.

TVs, 32-inch wide, end of Christmas 32-inch, or 550, 500, 550 [indiscernible] 2.8 to 3x to the retail will be a good price for us. We were able to make profit there. Come the Q1, P7 will ramp and that will mean that, as you know, the mass production immediately triggers depreciation in the months that we basically start to sell the commercial products. Then there will be a dip in the profitability in TV because that's quite a big burden to carry in depreciation. And we'll give you more guidance, basically, there, in the next update.

Okay. The following question will be given by Mr. [Kumar] from [Tierman]. Please go ahead, sir.

Yes, thank you. I think in your press release you suggested that there could be ASP pressure, particularly on the monitor side. And particularly in our business, as you know, with the expectation of price decline, particularly customers start to postpone their buying decisions and that further magnifies the impact on pricing.

Could you tell us -- also give us some range of what type of price decline we could expect on monitor and TV between now and end of the year?

Yes. Overall, we have set prices on a square meter of glass -- average sales price on a square meter of glass basis would be flat to slightly down. That is mainly because we expect some weakness in the monitor prices. And other than that, notebooks probably will be holding out on prices, with maybe even a slight increase. And TVs will be trending somewhat down, but because of the mix, there will not be a loss. So monitors probably in Q4 will be the weakest in price, okay.

And if I may just ask a follow-up question, and as you move into first quarter '06, you get into a seasonally weaker quarter. And at the same time, a lot of supply, including yours, starts to kick in. So would it be fair to assume for the industry that prices will continue to decline into 1Q '06?

If you look at the typical best quarter for LCD, it's actually September, October, November, typically. Those are -- that's the best quarter. It's not a calendar quarter, actually. So we see the price weakness mainly trending towards the second half of the quarter. So that means, in the first half of the quarter, pricing will be quite reasonable, we feel.

Okay, thank you.

Okay. The following question will be given by Mr. Connor O'Mara from HSBC. Please go ahead, sir.

Hi there. In terms of your product mix, could you help me first understand how much of the 45% in monitors is actually in 19-inch?

We actually don't really break it down like that, but 17 and 19-inch together are the main core of the monitor sales that we have.

Okay. Because if we just look at trends, notebook unit sales are doing better than expected, so I can see pricing benefits there, but everybody seems to be sold out of 32-inch wide screen. So why would you expect prices to fall down when they haven't over the last few months?

Well, if you look at what's happening in the -- throughout the chain, the panel maker prices have actually increased there in past quarters. The trend was basically upward now, trending down a bit. The retail margin is coming down but it goes quite fast, but it could go faster. So there will probably be some additional pressure to bring the panel prices further down. That's what we reckon with at this moment.

You're right in saying that there is a shortage in 32-inch panels at this moment. That's also basically driven by other people not being up to scale yet with 32-inch and therefore have some profitability issues. But in order to make the sweet-spot pricing for the consumers more attractive, the TV prices definitely have to trend down further.

Okay. And could you maybe comment on the competitiveness of LCD TV versus plasma in the 42-inch market next year?

Yes. We have built the Gen 7 facility. We optimize for 8 cuts 42-inch wide, as you know. So when that fab has ramped, basically, we expect to be in a very good position to compete head-on with PDP. Also, when we look at other cost and price issues, when we look at the performance of the product in terms of the content that you're going to see offered, and especially full AVD content, then we feel that LCD TV will be definitely the technology of choice. And I mentioned the increasing -- also in the U.S. the increase of primetime TV; 70% already AVD and 70% of that full AVD is my understanding.

As you know, there is some discussion going on between Blu-ray and HD-DVD. Well, for us both are good because it supports full AVD content. We have the next generation of game consoles coming on, and also supporting full AVD we have cameras that people would want to use more and more for their photo content. And all that is best represented, we feel, by -- or reflected by LCD TV over plasma.

Super. And one last question, if I may. Obviously there have been some kind of macro concerns about consumer demand. Are there any data points you could point us to in terms of sell-throughs actually beginning to build?

It's too early to really comment on the sell-through. That will become more apparent, we can say, in well -- actually, of course, in eating the Christmas pudding. At that time it will be really apparent. Probably in November we can get some figures about the sell-through.

Macroeconomic effect, we have mentioned it because it is much on everybody's mind. I do like to call into memory that we have said penetration of LCD TV is probably around 10%, well over 10% this year. And that is a very early buyer's group who will not be particularly much influenced by high oil prices. We feel, of course, it's a mindset. It's a psychology. Are people going to be in the mood to buy LCD TVs? But we think the product is actually quite hot.

There's also -- we did some research on that time when oil prices were also very high, and did people not buy color TVs? And there is not a lot of correlation between an entering product in the market like that, and also we feel for LCD and high oil prices. But we were not really sure about what the exact mood is going to be. So for now, I would still say we expect the sell-through to be strong, but we retain some caution on macroeconomic factors.

Okay. That's great, Ron. Thank you very much.

You're welcome.

The following question will be given by Mr. Brian [Searle] from [Walter Ross]. Please go ahead, sir.

Yes. Thank you. My question is on energy prices and their effect on you. What type of impact have the prices of energy and resins and plastics, etc., had on your facilities?

Of course, there is an impact, although in Korea in the summertime the rates already go up. So we know about that because in summertime too many people use air conditioners, so there is some kind of discouragement policy, so slightly higher rates. So actually, for us, the rate came down a bit after the summertime.

There is, of course, an impact in terms of heating and cooling of the fabs in terms of energy use. But the impact at this moment is not very, very significant.

But what about on the transportation side?

The transportation side, we have seen -- indeed, you ask about the facilities, but on the transportation side we have seen some increased trends. We have been able to offset a lot of that with the increase in volume that we have. But the shipment costs are such, especially to destinations like Europe, are of course always an issue that we are watching. And one of the countermeasures that we're taking as one of the reasons is to build a module plant in Poland, to have more efficient supplier lines and to be closer to the customer over there.

And as we look at your CapEx plans for next year versus what you are hearing from the competitors, will your CapEx plans enable you to at least keep your market share, or do you think that you will be growing your market share with these CapEx plans? And can you explain to me the difference between KRW3.5 trillion and KRW4.5 trillion? What would make that KRW1 trillion difference?

Yes, that's a good question. Well, we always try to sustain our leadership. That's why we are quite advanced in our fabs and have always built a very balanced fab portfolio with P7. We are thinking about a next generation factory but are not sure what that's going to look like. So depending on the decision on input sheet capacity, and CapEx efficiency and glass side, substrate side, that actually makes the bulk of the difference, and when we start to build the fab. That makes the big difference in the swing that you see.

So, right now, we are reviewing our plans. We need to bring it before the Board. And after that approval has come through, we are going to update the market further.

Thank you.

Okay.

Okay. The following question will be given by Mr. Andrew Abraham from ABN Amro. Please go ahead, sir.

Hi. I wonder if you could give me a little help on the P6 plant, in terms of monitors versus TV production? I know the numbers have changed a little bit over the last six months as to what you thought you were going to be doing, and now that it's at full input glass, you probably have a better idea of how that's breaking out.

And also, if you could break down a little bit more in detail on the TV production by size, meaning what's coming out of P6? Are we talking about a lot of 20-inch monitors and a few 36s, or if you could give us a little color in that direction?

And then, on P7, I'm assuming that it will be exclusively TV oriented since it's optimized in that direction. Can you just give us a little guidance there, if that's not correct?

All right. Thank you for those questions. On the mix on P6, we run the fab at this moment about 40, 45% for monitors and the rest for TV. We have said earlier, and I'd like to reconfirm that, that we start to have a mix by the end of this year to the original intended mix - one-third, two-thirds. So you're right, basically, in saying that at the 90,000 input sheets the mix is not one-third monitors, two-thirds TVs, but we expect to have that by the end of the year. As you know, we started the fab with 100% TVs, 32-inch wide IPS screen.

In terms of what size comes out of the fab, well, the fab is churning out 17-inch monitors and 32-inch and 37-inch wide LCD TV panels. So it's 8 cuts 32-inch wide, and 6 cuts 37-inch wide, for example. So those are the main sizes out of the P6 facility.

In P7, the fab, and I'd like to maybe emphasize this, the newer fabs are not only used for TVs, not the P6 one, as I said earlier, but also the Gen 7 line will not solely be used for TVs. We intend to use the fab with the same ratio, one-third for monitors and two-thirds for TVs. We will start ramping the fab with the 42-inch wide television. So we'll follow, basically, the same pattern as with the P6 line.

Thank you.

You're welcome.

Okay. The following question will be given by Mr. Ivan Goh from Dresdner. Please go ahead, sir.

Hi. Thank you very much, yes. I have maybe two questions. The first one is, Ron, can you perhaps comment about the seasonality or the difference in seasonality between the IT area and the TV area, and perhaps talk about what your views are for whether the seasonality factor will be mitigated by surging TV demand in the first quarter of next year?

All right, thank you. The seasonality for IT is typically 35 to 55 -- sorry, 45/55, 45 first half, 55 second half. The TV seasonality for TV will typically be 35 to 40, 65/60 in the second half. And we think that in the first quarter of next year, we will see basically the seasonal pattern as we have always seen, so no real deviation from that.

And the next question is in regards to the profitability of P6 and P7 lines, but I would like to focus on the TV area. As you go from 32-inch to 42-inch to 47-inch and if you just strip out the effect of depreciation due to the ramp-up schedule of P6 and P7, as you move from one size to the next larger size, does your profitability improve or is it basically the same?

If you -- for example, where we went to the 32-inch wide, of course that was last August and prices barely came down. But if we start with a new product like TV, we set ourselves on a learning curve, and that means in the beginning the product is certainly not profitable. And we need, next to the ramping of the fab, also the experience with the new launch in a wide product like 32-inch wide.

So the 32-inch wide, and 37 are made in P6 and the move to 37-inch at that time for P6 also brought with it some blip in cost reduction. We have managed to reduce overall costs of 37-inch. When that came on, there was some hiccup. The same will hold true for the Gen 7 line. So when the 42-inch wide is introduced, we set ourselves on a learning curve, so we have to learn how to do the product cost efficiently, manufacturing wise, to the best models and get the experience with the larger substrate size.

And then, when we will shift to 47, we will see a corresponding blip, although the fab then will have ramped more to a mature design capacity. The fact that there is a new product, large and wide, certainly 47-inch, will certainly have some impact on the costs there.

Let me ask the question in a different way. Now that you have ramped 32 and 37 and maybe reached a stable state, is 37-inch giving you a better margin than 32, or are they basically the same?

Well, actually we don't really comment on individual margins but the margin difference between 32 and 37 is not very large.

Thank you very much, Ron.

Okay.

Okay. The following question will be given by Mr. Chong Kim from CLSA. Please go ahead, sir.

I've already asked with regard to CapEx spend in 2006 and how it obviously affects your rollout of Gen 8 capacity in 2007. At what point do you think -- at what point, I guess, do you think you would have to firm up CapEx commitments and your investment numbers in order to start production, if we were to, say, start production of Gen 8 in the first quarter of 2007? At what point does the window start to close for you, to get that production of Gen 8 started in the first quarter of 2007? And I have just one follow-up question.

Okay. Well, the whole thing on ramp-up schedules fluctuates by the capacity we are going to turn on. It's all still in flux, so we have not decided on when we will have the next generation fab ramp. Should we decide on a particular time, then from construction to mass production, that includes the whole [indiscernible] of ordering equipment and everything, will take about 18 to 20 months, 18 to 22 months.

18 to 22 months?

Yes.

So then, if you would effectively spend or allocate your funding for construction starting in the first quarter of 2006, you probably wouldn't see the first Gen 8 glass inputs until the second quarter or even the third quarter of 2007, very roughly speaking?

Well, 2006 is the Gen 7 line, basically. That is in Q1. And for the Gen 8 line, as I said, we have not really targeted that. But from the moment we start mass production, we will be in a position to sell commercially, generally speaking, for the fab.

And then my last question, Ron, is maybe a little bit big picture. I guess with this new consumer electronics segment of the market coming into your revenue mix, I guess the different aspects of producing TVs, the larger substrates that are required, etc., etc., the whole gambit of moving parts there, how do you see margins ultimately ending up for you? Do you ever see what's in the next 18 to 24 months, another stretch of time where you achieve those fantastic 20-plus margins? It seems like forever ago, but really just one year ago or 18 months ago. Do you ever see that coming back?

And I guess the other thing is related to that. How do you see the dynamics of your business changing over the next 24 months because, as I said, of televisions and consumer electronics?

Yes, I'll with the latter. The dynamics of the business are changing a bit. That's what we see. They have basically more -- longer design cycles, longer pricing cycles. There are also fewer offers of TVs. So generally speaking, we feel that TV will help stabilize the LCD TV industry for the reasons that I mentioned. That is basically what we basically want.

And two, you asked me about will those times will ever come back? Well, we always hope for the best. But generally speaking, we think EBITDA margins for us, as industry leader, should be about 25 to 30% sustainable.

Right, thank you.

You're welcome.

Okay. The following question will be given by Mr. Kumar from [Tierman]. Please go ahead, sir.

Thank you. As you highlighted, there's a bit of inventory build on the 19-inch, and I do not know what is your total inventory there end of third quarter, could you tell us if going into fourth quarter, have you adjusted your production run-rate? In other words, your utilization rate in the fourth quarter, what that level will be and is that lower than what you have planned earlier?

Well, thank you for the question. Actually the number of finished goods inventory days is about two weeks, so that's the same as the previous quarter. In terms of production, our facilities are running at full capacity and at this moment, there are no indications why we should alter that. So we also expect a quite healthy inventory moving forward. I described that the inventory situation in the industry, according to what we can see, is quite okay.

Okay. Thank you very much.

You're welcome.

Okay. The following question will be given by Mr. [Neil Stanford] from Rabo Securities. Please go ahead, sir.

Good afternoon. I've got a question on the ramp-up of your P7 plant. Are you still targeting an initial pace of 45,000 input sheets or -- so, when will you move into [indiscernible]?

And the second question is can you tell us something about the ramp-up on a quarterly base? Would it be about the same as you did with P6 or will it be going faster? Those are my questions.

All right. Thank you for that. When we announced the approval of P7, we said that we will do 90K and that we will do it in two phases. And the two phases, basically, will hinge on how we would see demand developing. Right now, we are very encouraged by the demand that we have seen. So we do expect to ramp the fab in two phases but the connection between two phases from where we stand now will be seamless.

In terms of quarterly ramp of the fab, it will follow a similar pattern. We do expect to come to the design capacity of 90,000 input sheets in 12 months' time, so that will be Q1 of '07. And the pattern will follow largely a linear trend.

Thank you very much.

Alright.

Okay. The following question will be given by Mr. [Artesius Azkhabar] from ABN Amro. Please go ahead, sir.

Thank you. Ron, you mentioned that TV demand is very seasonal and given that, can you speak on the distribution of the mix? Are demand patterns [indiscernible] becoming more seasonal?

As the leading player in the industry, do you think -- what do you think is a rational strategy for a market player? Do you think ramping up as fast as you can and selling all you produce is still the best play strategy, or do you think there should be some other rational strategy or object to tide over this seasonality which is coming into the market?

Okay. Thanks for the question. Well, you see the market is developing very good, which we see. The industry is quite attractive and competitive and we see good growth prospects. And, as LPL, you are in a position that you avail of the best customer portfolio that one can think of. There is all reasons -- it should follow your goal, which we also do to remain our industry leadership position to ramp fabs, according to market development, of course.

But within that, within the market we see, of course we'd like also to be in the lead in ramping fabs. And as you know, we did that quite fast. We -- basically I can only repeat what I said in earlier conversations. If we would see that inventory, due to demand set back, would not be good, then we would start to temporize production. So far, we have not been in a position of having to do that. And you have seen the track in our inventories so far has been actually quite good. So, at this moment we don't see a reason to slow things down.

Are you saying that basically if you see significant panel price weakness in the first half '06 and too much inventory build up due to oversupply, you will cut back on your CCF and P7, and try to rationalize the industry demands in that scenario?

Yes, we will basically temporize production if we would be in a position that the order portfolio that we see, and the orders and contracts that we have, would not warrant the full use of the fabs. And, as I said, we have not been in that position. We don't expect to be. So, for us as the industry leader, the position is quite different, we think, than for other players.

Do you think that in your discussions with other industry players there is some kind of consensus emerging that this is a problem to be tackled and lowering CCFs during the seasonally weak period would give a way to rationalize industry players in going forward?

Well, I cannot really speak for them. But if you -- as you know, I guess the CCF of LG Philips LCD is quite high industry leader status. We have 60, 65% of CCF, while non-leaders typically accept that level.

Thank you.

Okay.

[OPERATOR INSTRUCTIONS]. Okay. The following question will be given by Mr. Jeff Kim calling from Hyundai Securities. Please go ahead, sir.

Hi. Thank you, Ron. You already mentioned that the LPL is quite interested in Chinese [indiscernible] market. I'm just curious that -- how many percentage of total sales comes from Chinese market? I'll follow up with next question after that.

Well, Chinese -- how much percent from the Chinese market, you say?

Yes.

At this moment the percent is not very high, but it's important and it's growing. The trend is definitely going up.

So, actually what we earlier expected was that the Chinese market, the appetite would be more geared towards the relatively smaller TVs, like 20, 26, something like that. But the biggest that we advertise, the 32 and 37, is getting more and more. So, still the penetration in China is not very high, but it's growing. And within China we are a major supplier.

I see. Okay. So, are you expecting for a special demand in Q1 '06, because of the lunar holiday?

Yes, exactly. That's going on. And that's what I said earlier, that the Lunar New Year generally, and specifically in China, is creating more and more of an opportunity to sell LCD TVs.

Alright. Thank you very much.

Yes.

Okay. The following question will be given by Mr. Ong Chong Ho from SG Asset Management. Please go ahead, sir.

Hi. Good evening, Ron, hi. I just want to check with you, you were talking about your P6, P7 plans is initially to ramp TVs, and then to move one fab to monitors. But 32-inch is in short supply and you are saying that 19-inches are excess inventory. So, I don't quite understand, why don't you just do everything TVs? Is this a strategic thing? Is it a cost thing? What is it behind the decision?

Yes. Well, of course, the monitors have basically many categories. And in the higher end monitors, we're talking about 20-inch and 23-inch monitors, the -- of course, the margins are much more attractive than in, for example, a 19-inch, or even a 17-inch. So, that makes us use the fab also for monitors, not only for TV.

And you are right, there's a shortage in 32-inch, but there's also more capacity coming on in 32-inch. So, at this moment -- and the 32-inch price is not really moving up as the sweet-spot pricing still basically direct -- the panel prices will trend down for the immediate future.

But in that case, are you implying that 20-inch monitors are more profitable than, say, a 32-inch monitor?

32-inch monitor, don't you mean 32-inch TV?

A 32-inch TV, yes, sorry.

Yes, the profitability level on a higher end monitor is higher than on a TV. Yes, that's true.

Right, okay. So, it's deliberate that strategically you will want to do one fab monitor, irrespective of what's the general dynamics of the competitive landscape?

Well, not only irrespective, but taking due consideration of the facts, yes, you're right.

Right, okay. Sorry, just one follow-up question. Is your profitability for sales into China better than, say, U.S. or anywhere?

Actually the panel prices we sell basically at the same level. Of course, it depends if you're a big player or a small player then they, of course, give out the discounts that you have -- volume discounts.

Right, so depending on region, it's still the same?

Yes. So, other than that there is no differentiation.

Right, okay. Thanks a lot.

Okay. The following question will be given by Mr. Connor O'Mara from HSBC. Please go ahead, sir.

Hi there. A couple of questions, first in terms of the TV market. Could you help us understand where the incremental demand growth is coming from? Is it Europe that's now taking over in terms of demand from Japan?

Yes. As you know, in Japan the penetration rate is higher than in Europe. So, definitely Europe holds a bigger potential. So, at this moment the main growth is coming from Europe.

However, we see a very strong demand coming from the U.S. at this moment, certainly in the 32-inch and also 37-inch wide. And that's basically because people with condos in the large cities like that kind of TV.

Okay. Secondly, could you help us understand what the average diagonal size of a TV is right now and where you think that will go?

Well, it used to be so that the 26-inch was the biggest [quantity] in sold TVs last year. But this year it will be definitely 32-inch.

It was 20-inch, actually.

Sorry, I'm corrected here by Mr. Berkoff. Last year was 20-inch TV, VGA, and this year it's going to be 32-inch. So, the diagonal is definitely increasing.

But that just soaks up a lot of 10 meter squared by itself?

Yes.

And lastly, just in terms of your component reduction and pricing strategy. You've obviously been -- started sourcing from new players, like Optimax. Is the capacity in the actual component chain beginning to loosen, because obviously one thing that they've benefited from is they haven't built as much capacity over time as the panel makers? I'm just trying to get a sense of the amount of price pressure you can put down on the supply chain.

Well, we think it varies a bit by components. So, so far, as I said earlier, glass has not been very easy. And, for example, in lamps you see iron ore people talk about some shortage, usually quickly, we straightened out again. And we have not been particularly affected by that, because we're doing business with lamp manufacturers who are not too shy to invest.

We feel that we can still maintain a pressure, specifically as the seasonality in the first half of '06 is going to set in. So, we'll continue the course that we've always been following.

Super, thank you.

Yes.

Currently there are no participants with questions. So far we do not have any participants with a question.

Okay, let's wait for a little while.

Okay. The following question will be given by Mr. Chong Kim from CLSA. Please go ahead, sir.

Sorry guys, just to make the most of the time here. In terms of the Gen 8 glass size, I think it's been -- I don't know if the public information is correct, but 2160 by 2460, have you committed to that glass size now?

We have not committed to any glass size at this point. So, we're still deciding.

I see. And then lastly, in terms of small and medium-sized panels, the -- that's included in your other application revenues, I'm assuming?

Correct.

Is that revenue stream now with all the -- there's a lot of competition on the small and medium-sized markets. Is that a profitable business for you, and is that up to the average level of margin that you reported in the third quarter?

Yes. The small business actually is quite good business. It's also difficult business, because you have to develop it over a longer period of time. It's very different than -- from, basically, IT and from TV.

We have about 4% of the business in the third quarter. And the business on an absolute basis will grow, because we will grow. So, within that range we are in the small panels mainly focused on telecom applications to around 2-inch size, and on the 6 to 7.5 light DVD player -- portable DVD players, and other portable media devices. But the business is profitable, yes, more profitable than the other businesses.

Thank you.

Okay.

Okay. The following question will be given by Mr. Ong Chong Ho from SG Asset Management. Please go ahead, sir.

Hi, Ron. Sorry, just -- I'm looking for your demand/supply forecast. So, what kind of forecast are you looking at in 1Q, 2Q?

Well, we have not really given an outlook for -- or a guidance for the first quarter of '06 yet, but we have said that we see some seasonality coming in, and that there is new capacity coming on.

We've also said there is, for us, upside in demand on the Lunar New Year sales and the World Cup. So, we still think that seasonality will take the overhead. So, probably the first half the supply/demand is giving us [favorable]. And as I said earlier, that will start by -- towards the end of this quarter -- second half of this quarter.

Right. Would you say it's a high single digit cost of over supply in percentage?

Yes, the over supply, there are -- we always have to hear, not from you, but generally speaking about this basically every quarter, 25% over supply. But that is a so-called unconstrained view. As -- or if all capacity comes on as announced and intended, well, first of all, I think we never had. We're not denying that capacity is coming on stream, but the announced capacity never has. I'd like to repeat that.

And also, if you look at this [later today] a few pages later on, that's what many readers overlook, and say let's look at the constrained supply, because the material and component supply will simply not allow for the capacity to come on. Already there is some shortage in lamps on and off, for example.

So, we think that the numbers that DisplaySearch publishes, which I think is in the mid to high teen -- mid to high single digit, I think, it's not around that. It's not unreasonable.

Right, alright. Thanks a lot, Ron.

Okay. Currently there is one participant with questions. Okay. And the following question will be given by Mr. Ivan Goh from Dresdner. Please go ahead, sir.

Hi. Just a follow up on the P7. Can you perhaps give some idea -- a rough idea as to what kind of depreciation burden you would have to take due to the P7 start up in Q1?

And a follow up and a subsequent question on that is, to what stage must you ramp before you get close to breakeven, given your projections or assumptions on pricing trends next year?

Okay. Well, breakeven on the fab will depend a lot on the market circumstances. We will start, as I said, to ramp the fab with the 42-inch wide television. And, of course, on the cost reduction front here, as I also earlier said, we are developing a quite aggressive approach.

The depreciation schedule of the fab, the fab we're talking about [5 points between one]. And the majority part of that is for machinery and equipment, which will depreciate in four years' time. The buildings we depreciate in about 20 years' time. So, you take the majority of that amount. And then you have to realize that in the beginning the depreciation per square meter is a little bit more inefficient, because at the beginning a lower load of the fab carries the same infrastructure depreciation than the later part -- every square meter up, the higher we carry. So, as I said, that will follow a quite linear approach, the same item basically as a Gen 6 line, I would say.

And will depreciation start in January, or would it be -- will it be one month's worth or 3 months' worth?

The depreciation will start in Q1. We remain, at this moment, open on which one exactly that will be. But as soon as [the application] starts, that month is hit by depreciation.

I see. Thank you very much.

Okay. There is one more participant with a question. And the following question will be given by Mr. Chris Muse from Lehman Brothers. Please go ahead, sir.

Yes, good evening, thanks again. One follow-up question. Given that we won't know about LCD TV sell-through until the latter part of this quarter, I was wondering what kind of visibility you have today for LCD TV panel orders looking into 2006, whether it's into the Chinese Lunar New Year or into World Cup. Can you comment on that please?

Well, if you take the public -- the DisplaySearch numbers, for example, they predict that the market will grow by 75%, or so I believe. We feel that -- we're certainly encouraged by what we've seen this year. And we feel that LCD TV demand will remain very strong, unlike what we sometimes have to read in various reports. Very strong LCD TV demand report, certainly for a company like LG Philips LCD and the position we have in the industry.

So, we are quite confident that we will grow the LCD TV business, according to those lines, very substantially.

Okay. I guess with TV inventory weak, I guess, on two months where you must be starting to see orders for delivery into the New Year. So, can you comment on how certain your customers are in terms of wanting to restock the inventory today?

Yes, very much so. As I said, the inventory in the channel is quite good and it will go up a bit, because October typically in the channels is the peak inventory month in the run up for Christmas.

If you take -- it will take about -- no, let me say it like that. The channel wants -- the retail wants the product in -- ready one month, before one month in the shop. And it takes one month to get across the rest of the chain. So, it's about 2, 2.5 months of inventory that you would typically see. And we are encouraged at this moment by what we've seen. We certainly feel that the strong demand will flow over for TV into Q1, helped by also Lunar New Year, which becomes an increasingly important event, and the World Cup, which is a potential upside.

Thank you.

I believe that is all the time we have for Q&A. On behalf of LG Philips LCD, we thank you for your interest and participation in this conference call. We look forward to speaking with you again next quarter. Thank you.

If you have any further questions, please contact IR. Thank you very much.