LG Display Co Ltd (LPL) 2006 Q2 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 2006 second quarter earnings results by LG Phillips LCD. This conference will start with a presentation followed by a divisional Q&A session. [OPERATOR INSTRUCTIONS] Now we shall commence the presentation on the fiscal year 2006, second quarter earnings results by LG Phillips LCD. Please go ahead Sir.

Yes thank you. Welcome to LG Phillips LCD's second quarter 2006 conference call. My name is Daniel Kim, Vice President of Investor Relations. On behalf of LG Phillips LCD I would like to welcome everyone to our global quarterly earnings conference call. I am joined by our CFO Ron Wirahadiraksa and our Chief Marketing and Sales Officer Bock Kwon. We have approximately one hour for this call. We will spend the first part of the call reviewing our prepared remarks which correspond to the slides available on our website. Following this we will take your questions. Please do not hesitate to contact us if you have further questions after this call.

Before we move into the discussion of the earnings results you should be aware that this conference call may contain forward looking statements within the meanings of US Private Securities Litigation Reform Act and Securities Regulations in Korea, including statements among others regarding LG Phillips LCD's expected future financial performance. You are cautioned that these statements may be affected by the important factors among others set forth in LG Phillips LCD's filings with the US Securities and Exchange Commission, and in its second quarter 2006 earnings release. Consequently actual operations and results may differ materially from the results discussed or projected in these forward looking statements. LG Phillips LCD undertakes no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise. Now, please take a minute to read this disclaimer.

We are reporting in consolidated Korean GAAP, with an appendix to this presentation that includes our reconciled US GAAP numbers. I would now like to turn the call over to Ron.

Thank you Daniel. Ladies and gentlemen welcome to our second quarter 2006 global conference call. During the next hour I will review the second quarter earnings results, discuss trends in the industry, review our performance and the steps we are taking to address the challenges we are facing, and then I'll conclude with the outlook for the third quarter. After this we will take your questions. Please turn to the next slide.

Before we get into the specifics of the quarter I want to share with you some of our thoughts on the industry and where LPL stands today. We believe that the growth characteristics of the TFT LCD industry are still undiminished and intact. We are seeing positive signs that reinforce this belief. The industry shows indications of increased rationality in terms of temporization of production. Also demand for LCD TV is strong as high resolution and larger sizes are starting to become mainstreamed in markets throughout the World. And we continue to see steady growth in larger and wider notebooks as well as high-end monitors, areas we believe will remain profitable segments for us.

Against the backdrop of positive long-term growth prospects, the industry is experiencing several challenges: greater than expected industry-wide price declines, which on one hand help drive demand, but on the other hand can temporarily impact us negatively in terms of profitability; ongoing capital expenditures although CapEx intensity is diminishing; the start of consolidation of manufacturers, which in the longer term can be positive, but in a shorter term creates fiercer competition among top tier players; and the need to meet the increasing variety of customer demands with greater flexibility.

While industry issues have certainly impacted our results, we are focused on how and what we can do to better –- sorry, can do better to improve our overall performance. That said, we want to assure our investors that we are committed to taking these actions to sustain ourselves as a leading company going forward.

I will now provide you with some detail on the specific initiatives we are implementing.

We are temporizing production to address the increase in inventory levels. Current overall inventory is at four weeks. TV inventory is a bit higher due to the faster than expected ramp up of P7 and in preparation of the anticipated TV demands in the second half of 2006. We have decided to continue evaluating any further investment in a next generation fab. We have also decided to invest in a multi-purpose Gen 5.5 fab which will be housed in our PA facility to better meet the expected strong demand for both high-end monitors and wide-format notebooks.

We are reinforcing our strong collaborative relationships with our customer base to ensure appropriate production levels and a high quality standard for our products. This and other actions such as better alignment with our customers’ needs are ongoing tasks to which we remain committed. The impact of some of our initiatives is immediate. We expect that these actions will strengthen the long-term value for our shareholders and enable us to leverage the industry’s strong growth opportunities. These efforts would allow us to better compete in what is now a more crowded space in the top tier of the industry. Please turn to the next slide.

For the second quarter revenue was KRW2.3t, down 6% sequentially from the first quarter due to fewer shipments than expected and continued declines in ASP across the TV, monitor and notebook segment. In the second quarter total cost of goods sold increased 10% quarter-on-quarter to KRW2.5t, due mostly to increased shipment levels relative to last quarter.

Cost of goods sold per square meter in US dollars decreased by 3% quarter-on-quarter and decreased 9% year-on-year. Cash costs in US dollars per square meter increased by 1% and decreased by 14% respectively. In Korean won cost of goods sold per square meter decreased 5% quarter-on-quarter and 14% year-on-year. Cash costs in Korean won per square meter decreased 1% quarter-on-quarter and decreased 19% year-on-year.

As we had anticipated this quarter's cost reduction was sequentially lower due largely to some early cost down benefits we realized from the efficient ramp up of P7 in the first quarter. We will continue to drive our production strategy with cost reduction including process innovation and material cost reduction efforts. Through these initiatives we expect costs down per square meter to be close to 15% for the year. In this we have considered some temporization of production.

Quarter-on-quarter our EBITDA margin decreased by 17 percentage points to 10% and net margin decreased by 16 percentage points to -14%. These results are less than satisfactory and we have, as we previously indicated, taken the necessary steps to address these results by focusing on our cost down initiatives, bringing a stronger customer base, postponing investments and temporizing production. Next slide please.

As of June 30, 2006 we reported KRW779b in cash and cash equivalents. The reduction compared to March 31, 2006 is primarily a result of ongoing spending at P7 and growth of inventories. As I previously mentioned second quarter finished goods inventory turnover levels increased due to the faster than expected ramp of P7 and anticipated TV demand in the second half of ’06. The current level of inventory is approximately four weeks. We will continue to actively manage our level of inventory to remain within four to five weeks. This quarter total debt increased to KRW4.2t due largely to CapEx spending. This borrowing has increased our net debt to equity ratio to a level of 46%. We will continue to adjust our debt to such levels that ensure future business developments are supported appropriately. Please turn to the next slide.

Cash flow from operations decreased to KRW111b due mainly to a decrease in net income and partially offset by a quarter-on-quarter improvement in working capital. This was offset –- this offset, excuse me, was due to lower account receivables compared to the last quarter. CAPEX spending of KRW990b was according to plan and largely allocated to P7. As stated we have taken steps to reduce our capital expenditures for the remainder of 2006 primarily through our initiative to postpone additional capacity expansion in existing fabs. This will be further elaborated upon in the outlook section. The next slide.

I would now like to go into more detail about several specific performance metrics. Please turn to the next slide.

The average selling price per square meter of net display area (technical difficulty) US$2,598. Quarter-end-to-quarter-end price per square meter decreased 19% to [US$1,479]. The total display area shipped for the second quarter of 2006 was 1.5m square meters, an increase of 17% quarter-on-quarter. As discussed, the average shipment and the ASP's were lower than initially anticipated mainly because of industry-wide over-capacity and, to some extent, delayed purchasing decisions by customers. Please turn to the next slide.

Revenue breakdown by product segment for the second quarter is as follows. TV continues to grow as a portion of revenue, representing 48% of the total revenue, followed by monitors at 26%, notebooks at 21% and other applications at 5%. This revenue breakdown reflects the company's strategy to focus on TVs, high-end monitors and wide-format notebooks and move away from items such as low-end monitors. Please turn to the next slide.

We continue the smooth ramp up at P7. However due to the temporizing of production in June to alleviate LCD TV inventory, we averaged 34,000 input sheets per month for the quarter. In line with our revised capacity plans the ramp up schedule of P7 will be adjusted from 90,000 input sheets per month to 75,000 by the end of 2006. Should market demand require it we will have the capability to increase P7's capacity to 90,000 input sheets per month. Next slide please.

Cash return on invested capital in the second quarter was 10% compared to 30% in the first quarter. This decrease was mainly the result of eroding prices and higher reinvested capital in the second quarter. Please turn to the next slide.

We now turn to our outlook discussion. Next slide. Looking ahead we expect to see prices beginning to stabilize and anticipate sustained growth in consumer demand for LCD TV's in the second half of 2006, particularly in the fourth quarter. For the third quarter of 2006 we expect our area shipments to increase quarter-on-quarter by a mid-to-high 20s percentage, driven by continued growth in the expanding LCD TV segment, continued ramp up at our P7 facility and the stabilization of pricing. We expect our average selling price per square meter of net display area shipped at the end of the third quarter of 2006 to be relatively flat as compared to the end of the second quarter of 2006, largely due to increased seasonal demands leading into the holiday season. We expect the average ASP per square meter in the third quarter to decrease by a mid single digit percentage. Our EBITDA margin for the third quarter is anticipated to be in the low teens range. Given the current market conditions we have decided to postpone incremental investment in existing fabs and will continue to evaluate any further investment in a next generation fab. As a result we have revised our capital expenditure guidance for 2006 downwards from KRW4.2t to KRW3t.

I would like to reiterate a few key thoughts. First, we believe that the growth characteristics of the TFT LCD industry are still undiminished and intact. Second, the actions we have taken to temporize production, carefully managing investment in future capacity, significantly reduce capital expenditures and focus in on our customers with greater flexibility, will help us respond to current short-term market conditions and are also meant to strengthen our position for the long-term. While we anticipate that we will begin to see an improved market environment in the third quarter, more meaningful progress will likely take place in the fourth quarter.

We'd like to thank you for your continued support and confidence in LG Phillips LCD. This concludes our second quarter 2006 earnings presentation and we would like to now answer your questions.

Now Q&A session will begin. [OPERATOR INSTRUCTIONS] The first question will be given by Mr. Jae Lee from Daiwa Securities. Please go ahead sir.

Yes hi. Previously you were giving the global TV market projection, LCD TV market, at about 45m units, and I was wondering if that number has changed any bit? And also the second question would be for the TV revenues, I understand it accounted for about 48% in the second quarter. Is it possible to break down in more details like how much, like 40 inches and 30 inch products accounted for?

Alright, thank you for that question. On your question on revision of the previous indicators 45m LCD TV sets in the market, that remains for us unchanged. And we still see that pattern emerging and also we still see the seasonality as we expected, meaning one third about in the first half and two thirds about in the second half.

For the second question on the TV revenue indication I will ask Mr. Bock Kwon to give you the answer.

LCD TV revenue increased more for the larger size and definitely from our P7, and also we increased the 37 [inch]. We mostly increased the 37 and 40 inches. So when I say that by the 43 inch around the 22% and the 37 inch at 24%.

Okay, great, thank you very much.

Okay.

Yes, the following question will be given by Mr. Chong Kim from CLSA. Please go ahead Sir.

Hi. It seems like from your EBITDA margin guidance in the third quarter there's really no improvement versus the first, and it seems that's the case despite the fact that your guidance for volumes and pricing suggests a less hostile environment. Can you talk a little bit more about why you don't expect any -- or there doesn't seem to be a big improvement in EBITDA for the third quarter?

Alright, thank you for that question. Well actually the EBITDA as such will grow significantly because if you add up the prior guidance and the shipment guidance then you will find that the sales amount from Q3 over Q2 will increase significantly. So here of course the denominator also increases and therefore the percentage is more or less the same; that is true. As I said, earlier indicated, we expect more meaningful percentage improvement in the fourth quarter. But EBITDA as an amount will increase.

Is there -- does that -- if we look at the margin though if it's in the lower teens, and given that historically a lower-teen percentage of EBITDA margin has meant an operating loss, is it fair for us to expect that you will post another operating loss in the third quarter? Maybe magnitude will be smaller, but still?

I think this is a fair assumption because if you look at the depreciation as a percentage of sales then you will find it is around 25%, 26%. So yes.

Okay. Just one last question Ron. Given that your CapEx for this year has been cut back significantly, just thinking about how capacity forms for you over the next 12 months, could you just give me a growth rate for the square area of capacity you will have achieved in '06 and what you think -- well what you think a target growth rate of square area capacity for you will be in '07?

Well it's a little bit early to guide for '07. For '06 I will say that the figure is about 55% to 60% growth of the capacity.

Do you have, just have a target range for '07?

Well we ramp up the Gen 7 more, although it's at a slower pace than we anticipated. And as I mentioned we're investing in a Gen 5.5, so I think the number overall will have to benefit, stabilize or slightly diminish, although you have to also remember that for 2007 we will have the whole year of the P7 facility.

Okay, thanks very much.

Okay.

The following question will be given by Mr. Pranab Sarmah from Daiwa Securities. Please go ahead Sir.

Thank you. My first question is on that ASP guidance. You have mentioned the ASP averages will decline about mid single digit percentage point, and if I see probably your exit ASP on the end of second quarter was 1479, which is about eight percentage points lower than the average point of second quarter, and even if you see like your whole quarter ASP remains at the same level 1479, I guess your ASP should decline at least 8% quarter-on-quarter.

Actually I understand the question and thank you, it's a very good point. We expect that in the beginning of Q3 prices will come down a little bit more, but the average sales price will start to increase slightly again from that low point in the latter part. So that means actually we believe that the ASP square meter glass basis will be flat. However, in the quarter, you are right, we will see a mid single digit decrease. So I hope -- did I clarify what may seem as a puzzle but if you look at the pattern and the relatively [static] indicates that quarter-into-quarter [are quite] the same as you indicate. So the clarification I hope you will understand or I hope I'm making it clear that in the beginning of the third quarter again we see prices come down a bit more and at the end it will go up, and that is because prices start to stabilize and we're bringing more of the 42 and 37 in the mix.

Okay.

Yes.

And second one is, do you have any inventory write-down on second quarter?

We write down inventory for 42 inch because the production costs of the 42 inch are still not in line with the market price. As you know the market price came down more. So yes, there has been some write-down of that.

So it's about KRW40b?

No, I don't have the figure in my head.

Okay, and last one is, out of your -- all these key product lines, TV, monitor and notebook, which of the product lines are now currently running below cash cost?

Well we don't look at cash cost per product line. The fact that the production costs for the 42 inch, that we're still ramping the fab, are still below the cash cost and for most other products we are capable. For 17 inch we are very close to cash cost, but we see that improve in the second half as well as for the 42 inch due to ongoing costs now.

Okay 17 inch monitor is just near cash cost and 42 inch TV panel is also below cash cost now right?

Slightly below cash cost, but we see that improve in the second half.

Okay, thank you very much.

Alright.

Okay the following question will be given by Mr. Oliver Lee from [Ely & Bernstein]. Please go ahead Sir.

Hi Ron. I have a few questions. My first question is, if I look at the OP margin trends over the cycles, in the second quarter you actually have a larger than active OP margin. Can you actually give us some color of why this happened and do you think it's more of the industry situation or you are -- know some corporate specific issue?

If I understand you correctly you would like to know why we have two sequential quarters of operating profit -- negative operating profit, right?

Yes, it's largest historically.

Okay. Well if you look what we guided for and what actually came out, the analysis shows that it's mostly related to price, but that certainly in quantities we had anticipated much of an improvement. Of course if you look at the comparison with quarter one then we -- the quantities grew as we indicated, but price erosion has been beyond basically our expectations. And that is the main reason why the operating profit basically persisted: no improvement in the pricing. We have already communicated I believe in the first quarter that we had pulled in some of the cost benefits due to a good ramp up of P7 in the first quarter and the second quarter costs down would be relatively modest. But we feel that in the third quarter that we will pick up again and hence I guided for the year close to 15% costs down, and that includes some of the production temporization. Should we have, or could we have sold more 42 inches as well, as we mentioned the generation 7 facility ramped very, very smoothly and there was not enough uptake in the market for that. This also has to do with qualification of the product by customers, so we were simply -- heard the music. And even though the inventory is within the target range, on average 28 days is within the 45 weeks that we guide for before we take action, we feel that the TV inventory is above that and that is why we are there coming down in production. So there's also some impact of temporization of production.

Okay. So the current situation -- given the current situation, so you -- would you actually consider the future -- the fact that expansion for example like the Gen 8 for example? Would you actually give us some color -- how do you deal with the expansion?

Yes. As I hopefully explained earlier, for any next generation fab, so not next fab but for any next generation fab which could be a Gen 8, we have decided not to go into that now but to study further the feasibility. In earlier discussions we have put on the table that at least 20% CapEx efficiency should be warranted and maybe it should be higher, the way the price erosion is emerging. And also we feel that the large-panel market at this moment doesn't warrant us to rush into a Gen 8 decision. That's how we see the World. What we have decided is to go into a Gen 5.5 for which we had already built a shelf. Therefore I've identified .5 [sic] will be housed in the P8 facility, not to be confused with Gen 8. So in the P8 facility in Paju, it will occupy a part of that. And we will initially ramp up 30K, so we will do the Gen 5.5 also in probably three phases as we think now. That is the flexibility that we have built in to mitigate any adverse business conditions.

Okay thank you.

Yes.

The following question will be given by Mr. Ivan Goh from DRKW. Please go ahead Sir.

Good evening. Just three questions. First of all, you talked about having a more appreciable improvement in your margins in Q4 -- in your operations in Q4, and given that Q3 it's fair to say that you'll be unprofitable on your operating line, I would just like to find out your thoughts on what kind of price trend would be needed in the fourth quarter in order to propel yourselves to profitability?

You have three questions, this is one question?

Yes, that's the first question.

Okay. Well it's too early to give price guidance because we like to see the stabilization first in Q3 as we have said in the trends emerging. But we do feel that for Q4 prices should on average show an increasing trend, and that is driven by notebooks where we see the biggest improvement. We expect things will become tight for notebooks. Monitors will stabilize and TV's will go up because we keep growing larger panels in the mix.

But if I do the math, your operating margin in Q3 could be about -8%. And would you be able to say what kind of price trends would be needed in Q4 in order for you to be profitable on an operating line?

Well, if you put it like that, then it would be the percentage that you indicate because it's overall over sales. The 8% that you mentioned, that is the number. I'm not confirming it. Yes.

Okay. Thank you. And the second question is you talked about the industry taking a more rational approach towards capacity additions, and if you look at the last downturn I think it was in 2004, many LCD companies such as yourselves also temporized production. What we’re seeing today isn’t that much different from what happened in the last downturn. So, my question is do you see any further evidence of your competitors and yourself taking a more rationale approach besides temporizing production?

Well, we certainly think that many people are considering. There has not been any very firm announcements at this moment, but -- other than the temporization of production, which we have heard from some of the Taiwanese competition and also ourselves.

But we will delay the Gen 8, as I said. If we would rush into that at all or go into that at all. And so we’re simply not ready for it; we are not sure about the economics. So, having said that, we think that will be something that other companies will start to consider, because the fundability and the risk management around bundling large CapEx disbursements is something that will be very difficult to sustain.

So --

Would LG Philips consider initiating some consolidation moves?

Well, that is very difficult. But actually [inaudible], as you see it, but we have already started to show that we are a Company that will not go into market share at the cost of longer term profitability. So, that is one of the main drivers. And we stay very firm to our commitment that when we see inventories rise to about 45 weeks that we would temporize production. I think we have always communicated that. And we see other people following.

Another aspect that I could mention is, will there be more consolidation in the industry? You have seen at AUO and QDI -- AUO is taking over QDI. Formally that still has to happen, but materially there are already signs that the two companies are working together. It is a form of forward capacity expansion mitigation we believe.

Okay, thank you, and my last question, a far simpler question is -- I think your guidance for the second quarter was for TV shipments to increase by about 25% sequentially. And I think the absolute revenue increase from TV was actually far less than 25% sequentially. Can you perhaps shed some light into that?

Okay, thank you for your question. TV usually -- the TV market the seasonality shows that first half is 35% and the second half is 65%. So we believe in the second half that we are expecting a big growth of sales for TV. So -- and also we are preparing to sell more the larger size like 42 inches and also increasing 37 inches. And also, together with our customers, we are preparing a stronger promotion plan together with our customers.

But within the second quarter itself, how much was the unit growth in TVs in area terms if I may?

The shipment growth in square meter in TV was 25%.

Okay. And then but why is it that your TV revenue was pretty -- was far less than 25% growth sequentially? Was that -- was the pricing down by about 20% -- 20 to 25%?

Yes, the pricing for TV was much down from what we expected, mainly in the 42 and 37 inch.

Okay, thank you very much.

Yes.

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

Thanks, Ron. Thanks for taking my question. The way I’m looking at the numbers it seems as though the cash cost reduction per meter squared was quite small in the second quarter versus the first quarter. Could you give us a little bit of light on the third quarter and a little bit of insight into what happened in the second quarter on the cash cost per meter squared?

Yes, as I said, in the initial stage of P7 we had a much better ramp. So the cash costs were lower due to that reason. In the second quarter we were not able, as we indicated in the Q1, we were full on in the cost down -- the cash cost down rate. But we expect that to pick up in the third quarter. Actually that overall costs will come down by close to 15% on a square inch basis for the year.

Okay, and in terms of raw materials or other ways of cost reduction, what are you looking forward to in the third quarter?

Well, we continue to focus on the strategy we already set out. That is the design improvement.

Okay.

Designing-out, reducing. Of course in P7, the key is still operating efficiency, getting TCF up and the deals improved, and working on more clever ways to put a 42 inch together. We’re pitching that very hard. And, yes, the purchasing leverage is still something that we are pursuing. It was P7, even though we ramp it at a slightly slower rate, still adding a lot of capacity to the Company, and maybe to see some of that back towards the purchasing base.

So, we’re still -- we’re next to that looking also at our supply base. So, we are strongly evaluating the sourcing of our raw materials and components. And we also expect to see improvement there.

Okay, thank you.

The following question will be given by Mr. [Tanas] from [Hardagee] Capital. Please go ahead sir.

Hello, thanks for taking my question in advance. I wanted to just touch on a point you raised on Q4 prices firming for notebooks in particular. Can you just substantiate on that point please?

I’ll ask Bock Kwon to answer that.

Sorry, okay. For the price for the notebook in Q4 I said that the IT market is usually following the price of [Halloween] for the supply-demand situation. And we take the Q3 and Q4 in the second half of this year the price -- the supply-demand situation will be slightly tight balance and then tight in Q4. So, that’s why the price will -- maybe it will flatten or will increase.

And also, lately the price some -- the price for, like, the low end money -- model end notebook is reached to the very low. So, that’s a great lot of (indiscernible) -- when supply-demand situation change that’s a lot of opportunity to grow to increase the price.

Added to that we’re bringing more of the high-end notebooks in the mix like, for example, 17 wide. Yes?

Okay. Okay, thank you. That’s fine.

Fine, you’re welcome.

Sir, the following question will be given by Mr. Chun Tan from Thames River Capital. Please go ahead sir.

Hello everyone. Thanks for taking my question. First question is regarding your Gen 5.5. Could you give us an idea of what the ramp up road map will be like in terms of equipment moving in and mass production, and where you expect to get to, say by the end of first half ’07?

Well, for ’07 -- you’re talking about costs right?

No, just in terms of the ramp up and the input per month -- wafers per month.

Well, the 5.5 will not be ramping in the first half. We expect to start ramping that in Q3. So, actually we have -- our earlier plans for Gen 5.5 were to ramp that slightly earlier. But it will now be Q3 of next year. Then we will start mass production. And as I said, we will do it in three phases and the first phase will be 30K. Of course, if market circumstances are okay, then the transition to the second 30K will be seamless. But for now we have the option to delay the second 30K if we want to.

Okay, thank you. And second question is regarding your area shipment. You’ve got 17% shipment growth in the second quarter and you’re guiding for mid to high 20% in the third quarter. Could you possibly roughly break it down into shipment area by TV, notebook and monitors?

Yes, as I already said earlier, 25% is the square meter growth for TVs. And monitor and notebooks, monitors grew almost 8% and Notebooks grew 14%, almost.

Okay, that’s the second quarter and what about for the third quarter?

For the third quarter we have guided for mid 20% growth and main part of that is coming from TV, by far the main part. That will grow by around 50 -- 40 to 50%. Okay?

Okay. And one final question, you’re seeing negative cash flow basically for the second quarter and possibly the third quarter as well, if you’re going to be suffering operating losses. Is there -- do you have sufficient debt facilities basically to cover to the end of this year? Or is there any chance that you might need to resort to equity financing?

No, as we said earlier, we will not come to the equity market this year. We feel that that funding capability should be sufficient. So the remainder of the funding needs we have we will fulfill the debt. That could be including an international bond offering, but we’re not sure about that at the moment. But the capability we have here otherwise are sufficient. So we expect that net debt to equity ratio will go up to about 50%, a little over 50%.

Okay, thank you very much.

Yes.

The following question will be given by Mr. Frank Lee from Deutsche Bank. Please go ahead sir.

Okay, thank you. I just have basically two questions. The first question is regarding the inventory outlook. In the second quarter you saw another 18% quarter on quarter growth. Inventory weeks seem to have gone from five weeks to seven weeks. I was wondering if you can give us a breakdown between the finished good and the work in progress breakdown percentage and possibly any third quarter inventory outlook.

So, a little more than two-thirds is for finished goods in the inventory number and the rest is for WIP and raw materials and components. Yes?

Okay, and do you have a -- in terms of the third quarter should we expect to see improvement in terms of the inventory, in terms of number of weeks coming down just giving a sense of in terms of third quarter outlook?

Yes, we should see a slight improvement. So, as I said on a point, we always guide for quantity basis. It’s about 28 days or four weeks I said at the end of Q2. And that will go down to, we expect, a little over three weeks.

So, you’re looking at three weeks for the third quarter as a target?

A little over three weeks as a target, yes.

Right. And in terms of reducing inventory, it’s a key catalyst. It’s going to come from just much better demand or is it going to come -- I know you’ve talked about production cutbacks, but if you can give us maybe any color in terms of type of production cutback you’re looking at, either by application or by end product?

Yes, so what we expect, as Mr. Bock Kwon’s already indicated, quite strong demand in the second half and that will be also largely driven by TV. And then we will within that adjust the inventories through -- when needed through temporizing of production.

So, that temporization will not be huge numbers, but it will be enough to balance out the inventory to the targets that I just mentioned.

Okay. And I guess my second question is on the TV growth that you’re giving is quite aggressive for the third quarter, [inaudible] growth. In terms of -- I was wondering if you can give us any color in terms of the pricing outlook, especially on the 42 inch side, which seems to have seen a pretty aggressive decline in Q2. What are your expectations for the third quarter?

Yes, we expect the third quarter TV pricing to come down further, but not to the percentage that we have seen. And the reason that the ASP is, or the square meter, is not showing that big of a decline is because we’re bringing higher product sizes -- larger product sizes in the mix.

Okay. If we look at stand -- I don’t know if you can give us an idea of standalone 42 inch TV pricing outlook for the third quarter?

For TV price for the 42 inch is already maybe reaching to the final sweet spot price. So, it -- maybe it will further down beginning of Q4, maybe (indiscernible) it will go to the -- close to the 2000 retail price. So, that’s the -- the panel price may be slightly more inclined to reach that point of sweet spot price.

So, what kind of magnitude of decline do you think you can expect for the third quarter to get to that sweet spot price?

Okay. [Inaudible] end of Q2 that’s around 3.1x factor and we think into Q3 and Q4 it’s around 2.8.

Okay. Okay, thank you.

[OPERATOR INSTRUCTIONS] The following question will be given by Mr. Smith from Citigroup. Please go ahead sir.

Hello, it’s Simon Smith from Citigroup. I just had a couple of questions. The first was probably quite a simple one, but I was trying to relate the movements in net income to your movements in income before tax. And I just wondered if you could maybe give me any sort of guidance as to what impacts you would expect there. You obviously -- there seems to be a KRW80m gain this quarter, KRW34m gain before. I just wondered if you could tell me what the mechanics of that were.

I guess the second question was really related to your relationship with your customers. Obviously, there’s been quite a sharp surprise this quarter in the actual volume sold by yourselves. And I just sort of wondered in your planning for the rest of the year what visibility do you have in terms of forward demand purchased by your customers or guidance given by them as to panels they would be purchasing? Clearly, for you, I think particularly of Philips when asking that question.

Okay. If you look at the net income, yes, there was a tax benefit. And that has basically driven off the fact that we -- and we’re not proud of that, but we’re making a loss. And also we have ongoing investment tax credit. So, there is an incentive by the Government when you invest in hi-tech industry. And that basically makes the number a beneficial one. We expect that by and large to prolong to -- into the third quarter.

At the same level?

Yes, more or less.

Thank you.

Relationship with our customers, so we have our major shareholders, like Philips and LG Electronics, they are focusing a lot on our bigger costs, a big potential to sales of especially larger sizes in the second half of this year and also, focusing a lot on our Japanese [retail] to customers who is looking for the big growth of their TV sales in the second half. And also, we are looking for the bigger growth of sales in China market also. They are looking for the national holidays -- for the national holiday, big season. And we expect that there will be growth, especially for the larger sized TVs. And also, our customers in the European countries also, they’re looking forward to the big growth of the TV.

And do you have -- how much of your sales, say into the third quarter, would be covered by forward contracts agreed with customers?

Yes, already we are talking about -- as you know for the TV -- the business they are talking earlier demands, because they need to build their system also. So, already we are talking about there the sales plan for the Q3 and Q4. So, that’s quite -- we are quite now comfortable for the real growth of our TV sales.

And, sorry to carry on, but just one quick follow up to that is if they are disappointed in the ultimate end market demand that they are seeing, do they have any commitment to you to purchase TVs? As in, are they able to put new panels back to you or just to cut back their demand, or are they committed to actually owning those panels?

Well, every customer they are having those the ratio planning for the second half, because they are -- they felt a little bit on the slow sales in the first half. So, they are preparing some kind of a promotion how they can move the TV sales. And also, they are already talking with channels how well they can move the sales.

So, based on their purchasing plan we are talking about our business plan for the second half.

So, if just -- if your question is if we sell panels to the main shareholders, do they have possibility to send them back to us, the answer is no, they don’t. But that is no different from any other customer. As you know, we do business at arm’s length basis as the biggest merchant supplier. So, there is not any agreement to take panels back and so it remains so.

Thank you very much.

Yes.

The following question will be given by Mr. Mark [Anstey] from Sanford Bernstein. Please go ahead sir.

Yes, my question is, first of all, a clarification. You mentioned 55 to 60% area growth for ’06 and that’s reflecting the new CapEx guidance, correct?

Yes.

And just how do you see that comparing to overall industry growth on an area basis?

We are growing more than the industry grows for the -- especially we are focusing for the larger size TV and also large and wide types of monitors, and high-end type – high-end, multiple person. So, we think the total area growth will be higher than the industry.

Can you give us a rough sizing? Are we talking 500 basis points or 1,000 basis points more?

Excuse me, I don’t have any exact numbers and then --

Okay, that’s fine. I was just wondering if you could give a rough sizing. Second question, last question, can you give us a little bit more color on where you think the big levers for reducing cost through improved sourcing are? Are we talking about back light units, substrates? What are we looking at here?

Yes, those are exactly the areas, so back light unit and polarizers and to a certain extent [inaudible].

I’m sorry, back lights and polarizers. You didn’t mention substrates, is that correct?

Well, substrates, we are basically -- we don’t have a lot of alternatives. At the moment, and as you know, we have a glass joint venture with NED called [PEV] and Value. And the last pricing they’re actually slightly more favorable than we thought, which helps in the cash cost.

But, of course, to our operating leverage on ongoing operations and hopefully shops will start to produce, then we see a possibility to come down. But what I was more specifically referring to was back light unit and polarizer. We are looking at the supply base there.

Okay, thank you very much.

Okay, the following question will be given by Mr. [Tony Sanders] from HSBC. Please go ahead sir.

Thank you. Ron, a couple of questions here, first on the CapEx cut. Can you just tell me this CapEx cut will begin to affect your supply growth in which quarter?

Well, basically already it has done so, because we already temporized some of the production. But the main point I can mention is the delay or the slower ramp schedule of the Gen 7 will not be in 90K but 75,000 -- 75K as I mentioned earlier. That’s the main part.

But then you had resigned and paid for advance probably some of the equipment. So, basically you’re just slowing down the delivery orders from the equipment companies?

We’re -- there’s still, say, cash to be saved -- well, to be saved, to be postponed from that.

Okay.

Until we ramp further. And secondly, it’s we also had in mind for post the 90,000 ramp up to increase the capacity further. And we have also shelved those plans.

Okay. But that would have come in 2007 possibly, because you had plans to ramp this up to 90K by -- before the end of the year.

That’s correct, but if you want to continue you would also have to already issue purchase orders before then and pay some of the cash.

Right.

And we held off on that.

Okay.

Yes?

Okay, good. The second question is on the 42 inch television. Obviously, you’ve seen a lot of growth in the 42 inch. Can you given a sense of -- which customers are we focusing on? Is there a lot of demand from the so-called white box brands for your 42 inch panels as well?

Okay, 42 inch customers, we are focusing more for the major shareholders Philips and LG Electronics, and also the customers from Japan. And especially for the 42 inch we’re also focusing a lot with the Chinese market also. Chinese market, we are working with most of our local manufacturers, which is they’re maintaining a good proportion of sales in China market.

Okay, thanks for that. But just a follow up on this question, you have 42 inch TV panel in inventory. Would you just make 42 inch panels without orders from, specific orders from customers? Or is this inventory because people have placed orders and then haven’t picked up the product yet?

No, that’s because of the half the ramp of P7, and then also some –-less than our customers than on our expectation. That’s why build up some 42 inch inventory.

But can you just sell these 42 inch panels to -- in the spot market? Or if just any new customer comes in then they may have their own specification. So, how do you sell these panels into the market? That’s what I’m trying to figure out.

Okay. As I mentioned before, the second half we expect a big growth of TVs considering seasonality. So, we are -- based on our discussion with our major shareholders and our major customers, we think we can clear all the inventories and then we normalize our inventory level.

Okay, thanks. Last question, Ron, the depreciation for this quarter was flat over first quarter, but the ramp of the 7G went from 16,000 to 34,000 a month. Do you expect this to stay flat in the third quarter or should we expect an increase?

Yes, it slightly increased because the main effect is that we stopped largely the depreciation on P4. It ran out a bit the depreciation largely this -- the first Gen 5 line.

Yes.

And so we won’t have that effect because we’re taking into account and the P7 line will continue to ramp. So, you can expect some increase.

Alright thank you. Thank you very much sir.

Okay.

Okay, the following question will be given Mr. Chun Tan from Thames River Capital. Please go ahead sir.

Hello, I’ve just got one quick follow up question. Your SG&A expenses as a percentage of sales seems to have risen significantly both on the prior quarter and based on historical numbers. And that’s -- even assuming the decline in revenues it seems to have risen more than I would expect. Could you shed some light on that?

I think we’re struggling a bit. Can you clarify the question there one more time, sorry about that?

Yes, yes. The question’s about your SG&A expenses as a percentage of sales. The percentage seems to have risen quite significantly. So, I’m just wondering if there’s a particular spike in expenses in the quarter or something that you can explain.

Yes, this has a lot to do with the transportation expenses. As you know, we are building a module plant in Poland, but that will ramp next year by, I think, about Q3. In the meantime we have to live with quite high transportation costs on shipping 42 inch modules to Europe. So, most of that increase, I would say, is for transportation. Yes?

Okay, okay. So, it’s something that we might see again in third quarter until the module plant in Poland’s up?

Yes, correct.

Okay.

And with the price erosion ongoing the percentage of sales also becomes higher, relatively. Yes?

Okay, alright. Thank you.

Okay, the following question will be given by Mr. [Bujara] from [Turner]. Please go ahead sir.

Yes, hello. I had a question on the Korean won. Do you see that as a primary risk, especially as it moves against the Taiwan dollar competition from AUO and are you doing anything to mitigate that risk?

Yes, we certainly see that as an issue, although I must say that for the second quarter it was more or less in line with our expectations. So, the ForEx impact was a little worse than we thought but not very significantly.

Yes, against the Taiwanese dollar that is giving us a set back in the financial outcomes and we’ve seen it also very clearly in the Q4 last year and Q1 of this year.

And LG Philip’s LCD actually has a very active hedging policy, where we hedge 100% of our committed exposure on a 12 month -- sorry, 100% of our committed exposure, yes, and about 30 to 40% of our anticipated exposure on a 12 month rolling basis. So, we have some shielding, although we’re not very immune from it. But we think -- we’re quite satisfied with our ForEx performance.

Okay, thank you.

Yes.

Okay, it’s about that time. We’ll take one or two more questions please.

Currently there are no participants with questions.

Okay, then let me clarify on the depreciation for the participants. So, I was early asked a question if the depreciation go up. Yes, it will go up somewhat, mainly due to the Gen 7 line. The depreciation on Gen 7 in Q2 was KRW135b and depreciation in Q2 for P6 was KRW177b. Yes, so that will go up certainly for P7 in Q3, alright?

Okay, thank you, Ron and thank you everybody. On behalf of LG Philips LCD we thank you for participating in our second quarter earnings conference call. Should you have any further questions please call me or my colleagues. Thank you.

Thank you.