LG Display Co Ltd (LPL) 2006 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 2006 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 commence the presentation on the fiscal year 2006 third quarter earnings results by LG Philips LCD. Please go ahead, sir.

Welcome to LG Philips LCD's third quarter 2006 conference call. My name is Daniel Kim, Vice President of Investor Relations. On behalf of LG Philips LCD, I would like to welcome everyone to our global quarterly earnings conference call. I am joined by our CFO, Ron Wirahadiraksa, and our Vice President of TV Sales, Champ Shin.

We have approximately one hour for this call. We will spend the first part of the call discussing the key issues for the quarter, which correspond to the slides available on your website. Following this, we will take your questions. Please do not hesitate to contact us after the call if you have further questions.

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 U.S. Private Securities Litigation Reform Act and Securities Regulations in Korea, including statements, among others, regarding LG Philips 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 Philips LCD's filings with the U.S. Securities and Exchange Commission and it -- in its third quarter 2006 earnings release. Consequently, actual operations and results may differ materially from the results discussed or projected in these forward-looking statements. LG Philips LCD undertakes no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise. Now please take a minute to read the disclaimer.

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

Thank you, Daniel. Ladies and gentlemen welcome to our third quarter 2006 global conference call. During the next hour I will review the third quarter earnings results, discuss our performance, and conclude with the outlook for the fourth quarter. After this, we will take your questions.

Please can we turn to the next slide.

Our performance during the third quarter was clearly not up to our expectations, principally due to the challenging pricing environment for LCD TV's, where the average ASP declined by 17%. As a result, we are focused on several key areas that will help us to better respond to the severity of the ASP decline in the LCD TV segment.

We described some of these areas on our conference call last quarter, including a greater commitment to significant cost reduction, temporization of production, a considered effort to reduce inventory turnover levels, better alignment with customers and prudent CapEx planning.

Let's review the progress we've made so far.

First, on the cost side of the equation, our COGS per square meter declined 12% in U.S. dollars. While this decline was important, it was not sufficient enough to offset the LCD TV price decline we experienced during the third quarter.

On the manufacturing side, our decision last quarter to temporize production, coupled with an increase in overall shipments, led to a reduction in inventory turnover levels from four weeks at the end of the second quarter to over two weeks at the end of the third quarter for large panels.

In addition, we have introduced a new organizational structure last quarter to emphasize responsibilities and performance evaluation by business unit, namely, TV, IT and small and medium applications business units. We also expect to improve profitability and customer alignment with this.

Customer collaboration is also an area where we focused a great --- sorry, a great deal of our resources. During the quarter, we worked diligently with our top customers to achieve better alignment. Activities include co-designing products, as well as customer co-location. This strategy will ultimately allow us to better meet our customers' needs in a very fast-moving industry. Toshiba's equity participation in our new Poland module plant is an excellent example of the progress we have made in this area.

Following the substantial reduction in 2006 CapEx to KRW3 trillion, our 2007 CapEx will be approximately KRW1 trillion. This should allow us to have more flexibility regarding future funding needs, focusing on investment in Gen 5.5, enhancement of production efficiencies and maintenance of our existing facilities. We believe our CapEx plans are aligned with the realities of the market, as consumers have yet to show strong demand for LCD TV panels over 50 inches.

It is important to note that we remain committed to manufacturing 42 and 47 inch panels, as we anticipate the demand for these sizes should continue to increase. Further ramp up of our P7 facility should adequately fill the demand in this area.

Please turn to the next slide.

For the third quarter, revenue was KRW2.8 trillion, up 20% sequentially from the second quarter. The quarter-on-quarter rise in sales was the result of increased seasonal demand across all segments and improving market conditions, especially in the Monitor and Notebook segments.

In the third quarter, total cost of goods sold increased 19% quarter-on-quarter to KRW3 trillion, mostly due to increased shipment levels. COGS per square meter, in U.S. dollars, decreased by 12% quarter-on-quarter, and decreased 14% year-on-year. In KRW, this was a decrease of 11% and 20% respectively. Cash COGS, in U.S. dollars per square meter decreased by 8% quarter-on-quarter, and decreased 17% year-on-year. In KRW, this was a decrease of 8% and 23% respectively.

Quarter-on-quarter, our EBITDA margin increased to 11% and net margin improved by two percentage points to minus 12%. Despite the noteworthy cost reductions we made this quarter, additional improvements are necessary, given the likelihood of continuing sales price declines for LCD TV panels. Therefore, we are working on plans to achieve a significantly higher [cost down] for 2007 in order to better prepare for the anticipated price declines.

As discussed, we are taking the necessary steps to correct the issues that are limiting our profitability. While we are hampered by certain issues, such as ASP decline, we expect that some of the initiatives that are either in place, or are about to be implemented, should show immediate impact and others would have a more substantial effect in the future.

Please turn to the next slide.

As of September 30, 2006, we reported KRW472b in cash and cash equivalents. The reduction last quarter was mainly due to improved working capital management, a decrease in borrowing and less CapEx spending. Finished goods inventory turnover levels decreased from four weeks, at the end of the second quarter, to over two weeks at the end of the third quarter for large panels. This reduction consisted of a decrease from more than five weeks to three weeks for TV, and a decrease in IT by more than one week to two weeks.

The reduction in inventory turnover levels is largely due to temporizing production and an increase in seasonal demand last quarter. We expect to be able to maintain this level throughout the fourth quarter.

Total debt increased by KRW0.3 trillion to KRW4.5 trillion, primarily due to CapEx spending. Our net debt to equity ratio, as of September 30, was 57%.

Please turn to the next slide.

Cash flow from operations increased to KRW322b, mainly due to our improved working capital. CapEx spending of KRW908b was below our second quarter CapEx amount and mainly used for P7, P8 constructions for Gen 5.5 and our module facilities in China and Europe. Last quarter, we have substantially lowered our 2006 CapEx plan, and our current spending is in line with that. Again, we have taken a more prudent approach to capital spending and believe that current market conditions continue to necessitate this.

Please turn to the next slide.

I would like now to go into more detail about several specific performance metrics.

Next slide please.

The average selling price per square meter of net display area shipped for the third quarter decreased at a greater than expected rate of 11% to $1,430. Quarter end to quarter end, prices per square meter decreased 3% to $1,428. While Monitor and Notebook segments began to show price increases last quarter, the overall decline in ASP was primarily the result of the greater than anticipated drop in LCD TV panel prices.

ASP for square meter --- per square meter for the third quarter in the TV segment fell 17% on average and 10% quarter end on quarter end. For IT, ASP per square meter fell 5% on average and increased 4% quarter end on quarter end.

The total display area shipped for the third quarter of 2006 was 2m square meters, an increase of 34% quarter-on-quarter. In the TV and IT segments we experienced 44% and 27% growth respectively due to increased seasonal demand.

Next slide.

This quarter's revenue breakdown by product segment remained the same as the second quarter, with the TV segment being the largest portion, accounting for 48% of total revenue. This was followed by Monitors at 26%, Notebooks at 21%, and Other Applications at 5%.

Next slide.

P7 continues to perform efficiently and averaged 52,000 input sheets per month during the quarter. In line with our capacity plans in the future outlook, P7 is expected to reach 75,000 input sheets by the end of Q4. We will ramp P7 towards 90,000 input sheets per month in line with market development.

Next slide.

Cash ROIC in the third quarter rose slightly from the second quarter to 12% as a result of an improved EBITDA margin and an increase of sales over invested capital. Improvement in the sales to invested capital ratio is primarily due to the further ramp up of P7.

Next slide.

We now turn to our outlook discussions.

Next slide.

For the fourth quarter of 2006, we anticipate continued growth and an increase in area shipments per square meter by a mid 20's percentage quarter-on-quarter. For the TV segment, we expect a shipment increase in the low 40's, and in the IT segment, a mid single digit increase.

We expect our average selling price per square meter, at the end of the fourth quarter 2006, to decline by a low single digit percentage, largely due to the continued decline in TV prices.

The average ASP per square meter is expected to be flat. For the TV segment, we expect our average selling price per square meter, at the end of the fourth quarter of 2006, on average, to fall by a mid single digit percentage. The average selling price at the end of the fourth quarter for the IT segment is expected to be flat, and increase on average by a mid single digit percent.

Our cost reduction per square meter will be approximately a mid single digit percentage in the fourth quarter. Our EBITDA margin for the fourth quarter of 2006 is expected to be a low teens percentage as a result. We are working on plans to achieve a significantly higher cost down for 2007 in order to better prepare for the anticipated price declines.

Our CapEx guidance for 2006 remains, as said, unchanged at KRW3 trillion. In line with us continuing to take a more prudent approach to capital spending, and in anticipation of a difficult first half in 2007, we expect our CapEx for 2007 to be approximately KRW1 trillion, substantially lower than that of 2006. This CapEx will be used for the investment in Gen 5.5, enhancement of production efficiencies and maintenance of our existing facilities.

This year we have seen our industry consolidate, affected by pricing pressures more severe than previously anticipated. Competition is fierce and we know that the winners will be those companies who are best able to quickly adapt to changing market conditions and respond to customer demands with the highest quality product.

LG Philips LCD has not been immune to these pressures. We are now at a crucial inflection point. Without additional measures relating to product mix, cost and productivity, we will not be able to deliver value to our shareholders in the coming months. LG Philips LCD will take the required actions in these areas to better respond to a new reality on pricing, demand and competitive pressures.

We are confident that we at least --- have at least taken the right first steps, maintaining healthier inventory levels, reducing cost at an expedited rate in Q3, and aligning ourselves in a more substantial way with our customers. Management remains committed to do what is necessary to generate acceptable returns. We look forward to sharing our progress with you.

This concludes our third 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 hello. I just wanted to know if you can break down the TV revenues by 40 inch segment and 30 inch segment.

Okay thanks for the question. Champ.

Well, revenue for 40 inches, [spoken in foreign language], 43 inches and [about rapidly and remarkable growth] in the third quarter, and for the percentage of the revenue would be about 30% out of my sales and then about 45% to 50% would be 30 something inches.

Right, I see. Thank you. Regarding third quarter numbers, I was also wondering if -- was there any inventory write offs?

No. As you have seen, we have substantially lowered our inventory.

Right.

And actually there wasn't a write off, there was a write up as a result of that as prices have increased. And also we made efforts to keep our inventory very current. So that means the aging effect was also positive.

Okay, great. Thank you very much.

Thank you.

Sir, the following question will be given by Mr. [Vijay Mewes] from Lehman Brothers. Please go ahead, sir.

Good evening. Two quick questions. First, I was wondering if you could possibly break out the TV mix on a unit basis by size.

Okay, thanks for the question. Champ, you again.

Please let me have just a minute. I am looking for the whole details in my book.

How about your second question first?

Sure, okay. Can you comment on whether or not the Asahi tank issue, I know that's in Taiwan, but is that impacting your ability to secure glass at all?

No, we're not that heavily weighted in Asahi, and we have made agreements, so there is no significant impact to LPL for that.

And has that altered the conversation in terms of trying to drive down prices for glass?

Well we feel the glass situation is getting, for us, better and better. As you have also seen, we're slowing down capacity builds. We expect others to follow. Schott of Germany has entered, so we're doing business with them already on a small scale, but it's basically good [to keep costs down]. So --

But your --

I don't think that there will be any material impact to the glass price.

Okay, and what size glass are you using Schott for?

At this moment, for our fourth and fifth --- three and a half and fifth generation fab.

Great. Thank you.

But, as I said, it's on a modest basis. We just started.

Sure.

Okay Champ.

Yes. The [about] 30-wide, 30-something inches, was about close to 50%. It's a similar one compared to the [revenue line]. Also, the 42 and above would be about close to 20%.

Right, thank you.

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

Thank you. I was just looking at a couple of the positive trends in, for example that you mentioned, the inventory numbers come down 10%, and it looks like the net change in working capital is also improving. Could you make a few more comments? I know you mentioned that the inventories improved on temporizing production and improvement in shipment seasonally, but could you give a little more attention to the temporizing of production? Is that -- I notice your P7 actually went up in volumes. Are other fabs getting less utilized?

And could you make some comments on the working capital improvement? Thanks.

Well, as we said --- thanks for the question. And we said last quarter that we would slow down the ramp of P7 to 75K and in, basically, the second half, fourth quarter. So we're now at 52K, so we're well underway. So, in making that comment, that is a big impact because, as you know, we --- our previous plan was to be in Q3 already starting with between 45 and 50. But the growth would have been larger. So that helped a lot. And also, in other factories, we have not expanded very fast in there. But the main impact is from the temporization of P7, as we said.

Other improvements in working capital, we think we have done a lot, also in TV. As I said, they came down by about two weeks, a little more than two weeks to three weeks, and IT came down by a week to two weeks. That, overall, gives us a --- the inventory number that we set. We think we can sustain that. We think that the production discipline and better alignment of demand requirements with customers has improved a lot. We put many resources on that and that has led to a very smooth improvement of working capital.

If you look at the other elements, working capital, the receivables, we have made some more discounting of receivables than we anticipated. So that helped, although AR, because of the sales growth, has shown an increase. And in accounts payable we are more or less at the same level.

Thank you.

Yes.

The following question will be given by Mr. [Mauzon Lourg] from BNP Paribas. Please go ahead, sir.

Yes, hello. Good afternoon. I've just got a question regarding the price trends you forecast for year end and, especially, on the IT or the PC panels. If I am right, you are still anticipating some mid single digit growth for the price in the fourth quarter. Could you come back a bit on this assumption? What did you see in the third quarter? Do you assume that the discipline is all across the sector, or do you assume that the volume on your end market is growing a bit --- maybe a bit more rapidly than anticipated in the third, and probably in the fourth quarter?

Well, on the IT side, let me specifically talk about Monitors and Notebook PC's separately. So what we have seen in the third quarter is actually that Monitors, certainly quarter end to quarter end, prices went up to around 10%. And the average price down, as we started still quite negative in the beginning of the quarter, was only about a percent.

And in Notebooks, we have seen quarter end to quarter end, a little higher price erosion, about 5 --- [close to] 5%, and average was about 10% down -- both down in Notebooks. That is because in Monitors there was more tightness coming earlier in the quarter.

Going forward, we see for IT the trend that I've discussed with you earlier. And if I look, again, more specifically in Notebooks than we see for Monitors, the quarter end to quarter end coming down because we're reaching the end of the fourth quarter. But average, as we're still enjoying the tightness in many products, for October/November the average is still up about single digit.

And for Notebook PC's, the price erosion has, basically in our view in Q4, reversed through price increases. I would say that both on quarter end to end on average, looking at about high single digit increase.

Okay. And I've just got a follow up regarding inventories. Going a bit downstream, do you have a view about the situation on the TV underside of the TV panels? Do you think that the inventories have normalized on your client base?

Thanks, I'll let Champ answer that.

Yes, thank you for your question. The inventory level of TV was extremely high at the end of our second quarter. And then with several kinds of effort, we reduced it to the --- close to three weeks at the end of the third quarter. And also there --- we are trying to continuously reduce debt inventory level through the end of this year. Also, the demand of --- demand increase of TV [aerials] will help us to do that.

Okay.

Okay. Is it okay?

Yes, I think it's okay. Thank you.

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

Hello. Good evening. A couple of questions. First of all, in July, I think you mentioned that your 37 inch panel in the second quarter was about cash cost, and the 42 inch panel in the second quarter was below cash cost. Can you give an update of this --- these two sizes in the third quarter please?

Actually the 37 inch, I'm not sure, but that was not below cash cost, or near cash. It was well above cash cost and it remains that way. And the 42 inch has also moved away from cash cost, so well above cash cost.

Okay. And can you, perhaps, comment about whether P7, now that you have ramped to 52,000 substrates per month, is profitable in the third quarter? And, going to maybe 75,000 substrates per month, will you profitable in Q4? I mean my guess is not, but maybe you can say something about that.

Well I think it will take, seeing the current price erosion in LC TV's, I think the breakeven time for P7 will have to wait until we are around 90,000 input sheets. And, as I said earlier, we'll ramp to 90,000 input sheets, depending on market development. So right now that could be in the latter part of the first half of next year.

Okay. So, I mean the real question I have is that the --- we're probably in a situation where you could ramp to full maximum design capacity. And with your bearish view of the market in the first half, it looks like you might not actually be profitable, even if you had ramped to 100% of your design capacity. And, as you pointed out, you had a critical inflection point and you talk repeatedly about the additional steps that you will take to meet the challenges of the new realities of the pricing environment. But, can you be more specific as to what steps you will take so that you could at least break even at a lower utilization level at P7?

Yes, okay. That's a very good point. Of course, we're not only --- and very rightfully you point that out, we're not just sitting and waiting on ramping the fab to break even. At the same time, we will, as I indicated, basically speed up and intensify our efforts to deliver a much better cost down program for 2007. For this year we'll remain, despite the ramp and all the production temporization we have, we'll remain to get closer to 15% on a square meter basis for the year, Company wide, as I've indicated.

But, for next year, we have to be substantially higher. How high, I think it's too early to communicate that with you right now. As I said, we're looking into many areas in terms of productivity and product mix, and [then] other areas all related to bring costs further down. More specifically, we need to have much faster, a much more broader increase on overseas sourcing. As you know, last quarter I indicated that. We've started with that. We just need to do it faster and further scrutinize the existing supply base.

We also need to look at the product mix and that means that, in P7, we will also make some Monitor products. I think we'll start with the 19 inch Monitors in P7. And, as I said, the ramp of the fab, well that depend on the market developments.

So those are some of the more specific measures that we're thinking about.

Okay. And my second question is, if you recall, in July you forecasted that TV panel prices will increase in the fourth quarter. But today the forecast is for a mid single digit decrease. Maybe you can, Champ, if you can help us understand what has changed between July --- in your views, between July and today?

Basically, probably 30 --- 32 inches and below, the price has to be stable even in Q4. But still there is some room to reduce the price in 40 something inches because now, currently, Samsung is trying to ramp up their second Gen 7 fab. So, in order to fulfill that new fab, probably there is some risk for the price on other --- price dropping of 40 something inches. So, our price forecast on TV area is mainly due to the [much larger] screen size price drop and not the middle and smaller sizes.

Also, I think we indicated it would -- basically TV relatively flat. But indeed, as we guide now, the average for Q4 will be mid single digit down.

Okay. And my last question, if I may, is -- can you, perhaps, give your views on what you --- be more specific about what you see in the first quarter of '07? I know you say that it will be a very challenging environment but, perhaps, you can talk about what do you think could happen to the industry in the first quarter of '07? Maybe talk a bit about what the seasonal swing could be?

Yes, typically the seasonality is largely in TV, about 35/65, but sometimes one third, two third. Let me begin by saying that, as you noted, we have significantly reduced the CapEx ambitions and are now at about KRW1 trillion. We would expect that other people, other players, would follow. Maybe not everybody, but some of them would follow suit by recognizing that, due to the economics, it's probably a wise idea to -- not to ramp that fast all that capacity in the first half, as everybody was used to.

I think the industry is starting to find out, step by step, that the volume ambitions should be, basically, changed. Of course, we always have to have volume. The emphasis should be more on value. And we'll try to take measures to mitigate the impact of the first half. It will be still challenging, as I said. So a lot depends on what capacity actually is coming on and, in the case of LG Philips LCD, it will probably be less than we anticipated earlier, also, as I said, following P7's ramp to market developments.

I think, on the TV area, the seasonality is highest in the first half. And maybe I can let Champ, without -- that we can give you very specific guidance, we give you an indication of what we would see in the first quarter, first half.

According to the -- most of the research companies, they are forecasting it's going to be a kind of a over-supplying the beginning of next year. But they're actually -- as Ron mentioned, we do not have any details about the other [TV] makers ramping [program]. Most of them became very conservative comparing to the past. So we don't know how they will ramp up their new fab and then how they will utilize their current fab.

Also, some of the demand, even including IT [i] areas, demand [is] how it will [grow]? We do not have any concrete idea yet, so such kind of a demand situation and supply situation is not the picture yet. So this --- it seems to be a little bit early to say what will be happened in the first quarter of next year. But, compared to the beginning of this year, we have prepared a lot, especially, the flexibility in model mix in our new fabs, and then our current fabs. So, relatively, we have better preparation for the next quarter. I mean the first quarter of next year. So we are preparing it.

Thank you very much.

Okay. The following question will be given by Mr. Michael Bang from Macquarie Securities. Please go ahead, sir.

Thank you very much. Your cost reduction in third quarter was quite impressive. I was just wondering if you could give some color as to where the cost reduction came from. For example, was it mainly raw material reduction, or the lower inventory, or new production processes, or the P7 ramp?

You actually gave the answer. It's a little bit of all that. As you're seeing, the cash cost came down by about 8% and, other than that, we have been able to reduce cost due to productivity, meaning ramping of fabs. So it's a real cost down, as evidenced by the cash cost down.

Right. Then just in terms of your guidance for the fourth quarter cost down. Is there something that you're doing differently that would not allow for a similar type of reduction that you saw in 3Q?

Well, you start from a lower base. That's to start with. But the guidance that I gave is based on the current information we have. What I said is we will look, for 2007, into higher cost reduction efforts. We need to do that faster, as I very clearly indicate, and we'll start already in Q4. I cannot be specific at this moment because we are looking at various things that we need to do. But we'll try to go beyond that guidance, so there should be some upside to that.

Thank you.

Thanks.

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

Hello. Just a few questions. First of all, the difference in price now between a 40 inch television panel and 42 inch, it seems that the 42 inch, oddly enough, seems to be getting a lower price, something like $20 or so. How long do you think that that will continue where the larger panel size, it seems to be trading at a discount to a smaller panel in that market? That would be my first question.

Thank you for your question. Area difference between 40 inches and 42 inches is approximately about 10% here. Current average panel price difference will be about 7 to 8%. We are trying to maintain that price gap up to now. But the retail price [we do a] kind of a larger screen size will be --- would have a different story because retail price really depend on the brand power. So some of the top ranked TV makers may [push on] their retail price, even with 40 inches, much higher than our second tier of 42 inches retail price.

Okay so --- yes.

And then there are not so many TV players that have both 40 and 42 inches in their product line. [Some of the finest] they have 40 and 42 inches. And, according to our --- according to their experience during these couple of months, if the retail price between a 40 inch and a 42 inch has about 7 to 8% with the same brand name, 42 inches was a little bit better positioned than 42 inches. So, according to that experience, we learned a lot. So we are trying to maintain the panel price gap about 7 to 8% up to now.

So, sorry, are you saying that the 42 inch panel price is 7 to 8% gap? The 42 inch is 7 to 8% cheaper than the 40 inch?

No, no.

It's more expensive.

More expensive than that of 40 inch, yes.

I see. Okay. The other question I had was in terms of CapEx, the number that you have for next year, KRW1 trillion, and what that naturally implies for your Gen 8 plans or ambitions? Given that CapEx of KRW1 trillion, if you hold to that number what, then, does that mean for a Gen 8 fab at LG Philips LCD? Does that come on -- is it possible to even bring that on by the end of 2008, given the time and logistics and the money involved?

Okay. Thanks for the question. As we said earlier, Gen 8 fab is, at this moment for us, not in discussion. We have to really see two things, substantial improvement of the economics and the market being ready to absorb product coming out of that fab, from the larger size. As I said earlier, probably the 50 inch is not growing that fast. So that is at this moment not included in that number. And on the Gen 5.5 that we announced, that amount includes, definitely, the ongoing construction of the fab. Probably the ramp of the Gen 5.5 will have to be postponed.

I'm sorry, the Gen 5.5?

Yes.

Will have to be postponed?

Correct, and we're looking at that right now. We've given you that number because we like to give you an indication of what our thoughts are at the moment, as we do every year. It's not crystalled out 100%. We will construct a Gen 5.5 but at this moment, perhaps, the ramp of the fab will be pushed out a bit.

You had mentioned -- I think you had guided, Ron, that originally the Gen 5.5 fab would start ramping in the third quarter?

Yes, that's correct.

Obviously, that's a floating plan as you said, but when you say postponed is it 4 -- just give me an indication, is it 4Q or could it even be pushed up further to 2008?

It could be towards the end of Q4 or beginning of the following quarter. That means Q1 '08.

Okay. And my last question is, looking at the third quarter shipment numbers on the Monitor side, it seems like you had a very big spike up in Monitor shipments. Could you just give me some color on what's driving that Monitor volume? Is it back to school PC demand, just [a mill] of seasonality or are you seeing a big shift towards higher end, higher resolution, wide-type panel screens? Thank you.

Actually, because of some kind of seasonality during the first half of this year, the monitor demand was not that much strong. Also the PC makers had a very slow season -- have a very slow season in the first half of this year, so probably it's a kind of cooperation between [ST] makers and then the PC makers to catch up and make a recovery in the second half of this year, to make the whole year records. So on top of the seasonality issues, the seasonality demand, such kind of effort among the companies in this industry make such kind of [demand up] in the third quarter.

Okay, thank you.

You're welcome.

Currently there are no participants with questions. [OPERATOR INSTRUCTIONS]. The following question will be given by Mr. Jae Lee from Daiwa Securities. Please go ahead sir.

Yes, I just wanted to know if you can provide a number, the depreciation amount for the P6 and P7 during the third quarter.

Just give me one second. Yes, P6 was KRW179b and P7 was KRW159b.

KRW159b? Okay.

KRW159b, yes. Total was about KRW670b.

Right, and the total depreciation amount has increased, I guess, around 9% in the third quarter compared to the second quarter.

Yes.

So shall we expect mid single to high single digit increase for 4Q?

Yes, I said -- I guided for about KRW2.5 trillion to KRW2.6 trillion depreciation. That is still valid.

Okay great, thank you.

The following question will be given by Mr. Ali [Cohen] from [DVI]. Please go ahead sir.

Hi, I got on the call a little late, so I might have missed this if you already said it, and I apologize. But can you give us an indication of what area growth might be, sequentially in Q4, and then year-on-year in 2007, given your shifting in CapEx plans?

Yes, area growth, we guided for mid 20s, so that's in square meters, and that is a combination of low 40s for TV, and mid single digit for IT.

And that's in 2007?

No, you asked for the fourth quarter, right?

Oh right, but then, do you also have an indication for 2007?

Oh, not that specific but probably the input capacity, that's what I'd like to say now, is going to be around 30%.

30%, okay great, thank you.

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

You had mentioned in terms of cost cutting efforts or just improving your business franchise some organizational changes, incentive programs, things like that. Could you just describe what those programs are a little bit more, Ron, just give me a better -- just give me more confidence in terms of what types of -- what's happening in terms of your organizational structure that will obviously put an end to the losses that we're seeing? Could you talk a little bit more about that?

Yes, thanks for the question. Actually, it's simply the introduction of a business unit system. So we were a functionally organized Company, meaning we had sales division and manufacturing division, development division, etc., etc. So we had all these functional divisions and discussions. Now we change to a BU system. So, as a first step, the BU includes everything except a split up of the factories on a management basis. We like to keep the factories under one pool for the time being.

But economically, we are, and we have been already doing that for a few years, following the BU economic results on a monthly basis. So we now basically brought the organization in line, what we think is right in a company that became the size and the complexity of LPL. We need a more focused approach. We need a better gearing of people from value -- sorry, from volume thinking to value thinking, more dedication, and resources where it matters and, of course, along the lines of the whole chain, for the value chain for every BU, we like to see what's going on, and where we can take out costs, and that is what I intended to say.

So we're now having more clearly defined business responsibilities, along the segments, TV, IT. And in IT we separately follow Monitor and Notebooks and the third business unit is small and medium. So the performance evaluation is done on a monthly basis with the Business Unit management team, and we expect that this will give us a lot of leverage and platforms to improve our performance.

As a first line, and we've been talking a lot to you about better customer alignment, this is also done by the business units, by bringing sales, marketing and development closer together. We have made quite some inroads in restoring and improving our ongoing activities there.

Okay, thanks for the clarification. My last question is just a quick return to the issue of CapEx. The number for next year in absolute terms is as low as I think we've seen LPL spend, probably in the last five years, and it's quite a small amount. When -- to what degree do you think there is room for that CapEx number to go up? I suspect there's not a lot of room for that to go down. Is there some type of range plan you have in terms of how you see potentially CapEx changing?

Well, that depends on market developments and our financial performance. You are right, we have actually since 2002 been spending a CapEx budget of KRW1.1 trillion, so we're back to that level now. So it means a lot in terms of potential expansion. On the other hand, we remain committed to be a significant player in the LCD industry, and we feel we have to do this now. And we will resume CapEx as soon as we feel that the market is going to be more favorable, and our financial results turn out more favorable than we expect.

And we're doing, of course, many things with our own resources and initiatives, along control and pricing. We hope with the capacity mitigation, pricing development is also going to be better for us and, perhaps also, for other players if they follow suit. That's a bit more the lines of thinking. So at this moment, we're not thinking to increase that range. However, if we foresee that things are going to be better than expected, then we could re-think that.

All right, thank you.

You're welcome.

The following question will be given by Mr. Tony [Shander] from HSBC. Please go ahead sir.

Thank you for taking the question. Ron, just to keep harping on this CapEx thing, it's a very gutsy move to actually bring down a CapEx by so much. But I just want to get a sense on, without this CapEx, even with this small CapEx, how much do you think, on a year-on-year basis, your capacity will be up in 2007?

Yes, as I said in one of the previous questions, the input capacity in square meters will grow about 30%.

Oh, okay.

And probably, we have not made definitive sums as the CCF of the capacity conversion factor that is, of the P7 factory. It's expected to be better. At the start, it's now already hovering around 65%. Then you can expect the output to grow more than that number.

Right, so in effect, reducing this CapEx does not really hamper you in any way in participating in 2007 demand? You don't foresee losing a lot of market share, basically, in 2007?

Well, if you're asking me how about your leadership position in the market, I think at this moment, that's what we tried to indicate also by saying we're at a crucial inflection point, if you will. We would like to see a re-defined concept of leadership where leadership doesn't mean having all the biggest capacity. As we see, there is a limitation in skill advantages, certainly for the newer fabs, and that's one of the reasons why we earlier guided not to go into Gen 8.

But we think the new leadership is much more around the concept of creating value, and we're looking at a number of critical areas to do that. And at the forefront of the mind for 2007 is not, per se, to just rigorously increase capacity. As I have said, we think leadership means not any more shipping glass, but basically supporting products, with high quality products, and generating more value throughout the chain.

Right. That's why I say it's a gutsy move. But if the competition is not as rational as you are, and you see people continue to spend aggressively, would that in any way affect your decisions, let's say, three months, six months down the road?

As I said in answering a previous question and it's a good point to emphasize on, so I'm glad that we can elaborate on that a bit more. If we would foresee market circumstances and our financial performance to improve, and we would see that it would stick, then we might. But as you -- I mean, go further with expansion on a modest scale. But you have seen us now already adhering to discipline.

Right.

But LPL has always been at the forefront of the industry direction, yes, but right now, I think, as I said, the leadership should be in quality, mix and having great customer collaboration and satisfaction. And that is what we would like to focus our resources on now.

Yes, because when we look at -- yes, you've had 10% EBITDA margin in the second quarter, 11% in the third quarter so, obviously, there are -- but if you look at the competition, because they're making 20% EBITDA margins, they may not feel the same compulsion to cut back on CapEx. They may see this as an opportunity to gain market share. If your EBITDA margins were 20%, would you be considering such a drastic CapEx cut? I think that's the point.

Well, I think that the cut will be less drastic, I believe. But as we already said before, we started with a CapEx [cut] program. We didn't see how Gen 8 could work out economically.

Right.

Certainly not at current pricing positions. And we would need to have, as we pointed out, I think at various times, we would need to see a greater level of technological renewal to warrant such another CapEx investment. Where glass cost, although as I earlier said, the glass situation becomes more competitive for new fabs still increase a lot, and we think it's just too risky at the moment.

And we don't see, as a third component, the market for 50 inch developing that fast. But yes, you are right in saying that if your profitability will be better, coupled with a better outlook, certainly for the first half, then we will probably increase CapEx a bit more. But we're not in that position right now. And even though 20% EBITDA margin is better than 11%, it's still not a very glorious number to fund risky investments on.

Right, right.

So, to our understanding there is actually one very aggressive player, but the rest is getting less aggressive, and we understand that people do things on a more modest capacity basis.

Okay, fair enough. Just switching a little bit on to the demand side, so I just want to clarify, you were saying that the TV panel area in the fourth quarter would grow sequentially. I just want to check that number. Is -- was that a very high number?

Sequential growth for TV in the fourth quarter? I think we guided you -- let me see in the outlook. About the ASP, right?

No, I'm talking about area, panel area.

Oh, area. Yes, it was in the low 40s for the fourth quarter.

Yes, low 40s. Okay, but that's a significant number, and you imagine you'll be shipping panels, even in December, in very large quantities?

December shipment they will be relatively smaller than that of October and November.

Oh, okay. So basically you can ship a panel in the end of November and do you think that can -- is that for fourth quarter demand, or that's for first quarter demand next year?

Most of the cases we are delivering our panel, just in front of their manufacturing side, so what probably deliver the goods within November would be for the ending year sales.

Oh, okay. So basically you're talking about delivering from the module facilities in everywhere?

Yes. [Somewhere] we do not have a substantial module assembly line. We have a kind of a [hogging] system.

Okay.

So we are doing just the [in hand] delivery.

Okay.

Just to clarify, or re-emphasize, we always guide on a square meter basis, right, so just to understand.

Great, I understand.

Okay.

But Ron, the follow up question on that is that, if you feel that December shipments on TV panels will drop off, at which point on the panel side do you start to lower the utilization rates? Do you continue to run them high in December or from a module side, from the module end, you're already shipping much lower TV panels? So when do you make that decision on cutting back the utilization rates?

Probably till -- we already have a very [serious reputation] in their inventory level at the end of November, so even though the shipment maybe is relatively smaller in December compared to that of November, but still at the end of December, the inventory level will be much healthier than that we had experienced in the second quarter and beginning of the third quarter.

Okay, all right. Thank you. Thank you very much for taking those questions.

The following question will be given by Ms. Irene Liaw from Citadel. Please go ahead, madam.

Hi. Ron, you -- again, you spoke about a lot of cost initiatives that you've got planned, whether it's from productivity improvements, product exchanges and increased customer alignment. In terms of trying to judge how, or when, these cost reduction initiatives could start to come to fruition, do you have any visibility, or any degree of confidence, of when they could start to come in?

Well, thanks for the question. I think I elaborated earlier a bit that we are looking for something very significantly higher in 2007, and we'll only want to start with that in Q4. But right now, it's too early to guide you. We have a number of things that we are working on, and I more specifically told you the areas of product mix, and we have to look at product mix, certainly from a TV perspective, and we're looking at purchasing, and the productivity in general for LPL.

Some of the measures we can see a little earlier, if we decide to switch a supplier, that can go relatively fast. Other things will take a little bit longer. So I think if you want to think about a number for 2007, I think it's significantly higher than the 15% that I have already guided for, for this year. And probably that will materialize mostly in second, third quarter, when you see some more significant impact.

Right, okay, thank you very much.

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

Hello, yes, I'm just wondering if you can give us any insight into the Paju Electric Glass JV and what your earnings from that have been, or losses, and how that trend is changing over time. Thank you.

Paju Electric Glass Company is performing very well. We are very satisfied with the supply that we get from there, and the company is basically quite efficient in its operations. So the results are favorable, and we look forward to expand the corporation [inaudible].

Okay, and is that -- you mentioned that you're very happy with the glass prices you're getting and my understanding was that implies some cost down there. Was that negatively affecting Paju as the supplier of that glass?

No, we don't think so. We think that the more favorable prices that we see, versus our expectations, are really driven by real cost downs. And, as you know, at this moment PEG sources the glass from NEG in Japan, because for the time being PEG is a backhand operation.

Okay, thank you very much.

You're welcome.

The following question will be given by Mr. [Chon Ten] from Thames River Capital. Please go ahead sir.

Hello, good afternoon. I've just got another question following on CapEx again. I'm just having some trouble reconciling your KRW1 trillion CapEx. And you also mentioned that you're looking at 30% year-on-year input area growth. And just taking your KRW1 trillion CapEx and also, you mentioned that P8 might be pushed back towards the latter part of '07 and onto 2008, so how does that -- I don't quite understand how you can get to 30% year-on-year input growth unless P7 is ramping up then substantially further?

Yes, actually, that is the key. Of course, we're trying to squeeze out a little bit more of the existing fabs without making any big investments there. But P7 for -- if we ramp -- let me put it like this, if we ramp the fab to 75K towards the end of this quarter, right, then that is the starting point for the next year, so we have a minimum of 75. We'll go to 90K when market developments warrant it.

That could be towards, as I said, the latter part of the first half. And then from that, there is a big impact on the input capacity growth. So I don't think at this moment there is a big relationship between the CapEx that you see and if you try to explain that with 30%. Just what should I say? Just believe me when I say that these sums are well thought through, and the explanation is in the, basically, higher ramp than 2006 of the Gen 7 line.

Okay. Okay, so the key would be in the ramp up of the P7 line?

Yes, absolutely.

Okay, thank you.

Thanks.

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

Hi, sorry, just one or two more questions. First of all on your cash balance at the end of Q3, you had about KRW472b. Do you have a forecast for what it would be at the end of Q4? The cash balance at the end of Q4 --

Yes, it should be about, similar level, let me see -- yes, it's going to be a little reduced, let's say, around KRW400b.

Okay. And my last question is if you look at your CapEx of KRW1 trillion, can you help us by breaking it up into maybe first half of '07 and second half of '07? What will it look like?

Yes. I think for the first half of '07, that will be -- yes, mostly, I think about 70 or 80% will be in the first half.

And the vast majority of that would be already committed?

Not 100%, but there's a large part of that committed, yes.

Okay, thank you very much.

Okay.

Currently there are no participants with questions.

Okay.

Currently, there are no participants with questions.

Okay, if that's the case, on behalf of LG Philips LCD, we thank you for participating in our third quarter earnings conference call. Should you have any further questions, please call me or Mark [Lees] and thank you very much.

Thank you.