LG Display Co Ltd (LPL) 2007 Q2 法說會逐字稿

Welcome to LG Philips LCD's second quarter 2007 conference call. My name is Daniel Kim and I am the 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 Vice President of Marketing, Brian Kim.

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 our website. Afterwards, we will take your questions. Please do not hesitate to contact us after the call if you have further questions.

Before we move into our discussion of the earnings results, you should be aware that this conference call may contain forward-looking statements within the meanings of the 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 important factors, among others, set forth in LG Philips LCD's filings with the U.S. Securities and Exchange Commission and in its second quarter 2007 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 publicly update 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. Good evening, ladies and gentlemen. Before we get into the details of last quarter's financial performance, I want to first offer some observations on our business and the industry.

While we all saw a strong turnaround in the second quarter in our financial performance, which was better than the previously-stated guidance, and likely an indication of our growth prospects moving forward, our improved financial performance is the result of several factors.

First, the programs we put in place last summer when we first introduced our profitable growth strategy is bearing fruit.

Second, last quarter marked the second full quarter with our new management team in place. This team brings significant operating experience which has enabled us to meet many of our long-term objectives in an expedite manner.

Finally, the reorganization we implemented last year focuses accountability directly on each business unit which can react more quickly, therefore, to changing market dynamics and energize their members.

We are a Company sharply focused on a customer-centric value over volume mindset. This philosophy drives all of our decisions and has been responsible for our continued focus on reducing cost, visible in CapEx spending, smart and efficient capacity expansion and maintenance of more prudent inventory levels.

At the same time, we benefited from the improved market conditions. A better and more healthy supply/demand environment led to improved shipments and pricing for both the Monitor and Notebook segments. And in our TV segment, shipments also increased as pricing continued to stabilize.

These are important dynamics that we will continue to keep a close eye on as we go into the second half of the year.

Next slide -- sorry, I will just continue. Now let me take a moment and provide you with a bit more insight on the areas where we made improvements.

In terms of cost reduction, we are focused on lowering purchasing price, developing lower cost models and process cost innovation. These activities resulted in a sequential decrease in COGS on the square meter basis.

We also achieved a quarter-on-quarter COGS reduction of 12% and a cash COGS reduction of 8% per square meter in the second quarter. These [cost] reductions contributed to a better-than-guided EBITDA margin and we are now well positioned to meet our objective of approximately 30% in [cost] reductions for 2007.

In terms of capacity and investments, we continue to believe that our 2007 CapEx plan of approximately KRW1 trillion reflect the current realities of the market. Our goal is to utilize part of that capital to expand P7's design input capacity in the third quarter. This will also prepare us for the demand increase that is expected in the second half of this year.

In terms of supply, healthy channel inventory levels led to a fairly healthy market in the second quarter of 2007. We expect the market situation to continue improving over the second half of the year.

Before we get into the specific financials, I want to say a quick word on our decision to cancel investment in Gen 5.5 equipment. We currently believe that by improving input capacity and production excellence at existing facilities, we will be able to generate enough capacity to fulfill expected demand.

And to prepare for the fast-growing large LCD TV market, we are studying an investment in Gen 8 equipment, targeting ramp-up in the first half of 2009 in our already constructed building. We will let you know at the appropriate time our progress on this investment.

Please turn to the next slide. This is the income statement. Here are some details on our financial performance in the second quarter. Last quarter, revenue was KRW3.4 trillion, up 23% sequentially from the first quarter of 2007. This sequential sales increase was due largely to the improved ASP, increase in shipments and the overall strong market demand.

Total COGS increased 10% quarter on quarter to KRW3 trillion, due to increased sales. As a result of our cost reduction strategy, COGS per square meter in U.S. dollars decreased 12% q on q and 35% year on year. In Korean wan, this represents decreases of 13% and 37% respectively.

Cash COGS per square meter in U.S. dollars decreased by 8% sequentially and 34% year on year, which in Korean wan is 9% and 35% respectively.

Quarter on quarter, our EBITDA margin increased six percentage points to 25% and net margin increased sequentially to 7%.

Net income reached KRW228b, due to the positive turnaround in earnings before tax of KRW124b and the change in deferred tax assets.

Next slide.

Cash and cash equivalents were KRW1.2 trillion, as of June 30, 2007. This represents a KRW258b increase over the previous quarter. Overall, our finished goods inventory turnover levels for large panels remained steady from the first quarter of 2007 to this past quarter; around two weeks. TV inventory levels were just above three weeks, while IT remained at under two weeks.

Total debt increased by KRW0.3 trillion to KRW4.7 trillion, mainly due to the Convertible Bond issuance in April.

Our net debt to equity ratio at the end of June 30 was 49%.

Next slide.

Cash flow from operations increased to KRW388b. The increase was mainly due to the improved net income which was largely offset by a reduced net change in working capital. Net change in working capital was reduced mainly by the increase in AR, which was directly affected by the increased shipments and also the reduction in our accounts receivable sales programs compared to the first quarter.

Cash [out-based] capital expenditures of KRW512b were slightly higher than the first quarter of 2007 and consisted primarily of invested -- of the investment in P7.

Delivery-based CapEx was KRW244b, compared to KRW345b in the first quarter of 2007.

Next slide.

And now I would like to provide more details about some of our key performance metrics.

Turn to the next slide please.

During the second quarter of 2007 we shipped a total display area of 2.8m square meters. This represents an increase of 26% sequentially, which can be attributed to the increase of TV shipments as well as from IT shipments.

An average ASP per square meter of net display area decreased at the rate of 1% to $1,274. Total ending ASP per square meter increased 5% to $1,314, which can be attributed to the relatively healthy inventory level and strong demand.

For the TV segment, average ASP per square meter in the second quarter decreased 2%, while ending ASP per square meter increased, also 2%. Sorry, let me say that again.

For the TV segment, average ASP per square meter in the second quarter decreased 2%, while ending ASP per square meter increased 2%.

For IT, average ASP increased 1% and ending ASP per square meter increased 11%.

Next slide please.

For the second quarter of 2007, the TV segment represented 47% of revenues, maintaining its position as the largest portion of sales. This was followed by Monitors at 27%, Notebooks at 21% and other Applications accounted for 5% of our revenues.

Revenues in the TV segment improved, due, as I said before, to the increase of shipments in the second quarter.

Although overall ASP and shipments in the IT segment increased, its share slightly decreased due to a higher portion of shipments in TV.

Next slide.

P7 successfully reached production input capacity of an average of 99,000 sheets per month during the second quarter, which was greater than previously communicated.

Also, we are planning further ramp-up of P7 beyond its initial designed input capacity of 110,000 sheets per month in the third quarter, expecting around 130,000 sheets per month on average.

We believe that this capacity expansion will enable us to continue meeting the needs of our valued customers and better respond to the increasing demands of the 40 inch flat LCD TV market.

Next slide.

Cash ROIC in the second quarter of 2007 increased from the first quarter of 2007 by 12 percentage points to 32%. This increase is attributable to a higher EBITDA margin and improved sales over invested capital in the second quarter.

Next slide.

I would like to now discuss our outlook.

Next slide, please.

For the third quarter of 2007 we anticipate total area shipments in square meters will grow by a mid-teens percentage sequentially, due to the increased shipments in the LCD TV segment.

With strong demand and the capacity expansion of P7, we expect TV shipments to increase by a high-20's percentage, with an average ASP decline of a low single-digit percentage and a quarter ending ASP decline of a mid single-digit percentage.

In the IT segment, we anticipate shipments to be flat, with an average ASP increase of a low-teens percentage and an ending ASP increase of a high single-digit percentage.

Overall, we expect shipments in the third quarter of 2007 to increase by a mid-teens percentage, with an average ASP increase of a low single-digit percentage and ending ASP to remain flat.

We will continue to drive our cost-reduction strategies and expect our COGS reduction per square meter basis to be a mid-single digit in the third quarter. As said before, we also believe to be on track to achieve around 30% in cost reductions for the whole year.

EBITDA margin for the third quarter in 2007 is expected to be in the high-20's percentage range. Our forecast for 2007 CapEx, on the delivery basis, remains approximately the same; about KRW1 trillion.

Let me conclude by saying that our performance in the second quarter is very encouraging and underscores our ability to successfully deliver on the initiatives that we believe will restore profitability and make us more competitive, in what has become a very crowded and more global environment.

Even withstanding the many positive signs that we saw across both our Company and the entire market this past quarter, we still have more to do and will continue to apply strategies that will further improve the fundamentals of our business.

As we noted earlier, one good example of these tough decisions was our judgment to cancel the investment in Gen 5.5 equipment and, instead, focus on ways to improve capacity at our existing production lines.

We believe that decisions like this are directly aligned with the realities of the market and respond specifically to the needs of our customers. That is quite a change from only 18 months ago, when volume was the name of the game in the industry.

We look forward to continued improvement in the second half of this year. And, while we realize that we will likely meet additional challenges, we are confident that we now have the right strategies in place to quickly and efficiently respond to the constantly changing market dynamics and to create additional value for our customers, employees and shareholders.

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

This concludes our earnings presentation for the second quarter of 2007. We would like to now answer your questions.

Our Q&A session will begin. (OPERATOR INSTRUCTIONS). First question will be given by Chris Muth from Lehman Brothers. Please go ahead, sir.

Yes, good evening. Thank you for taking my call. A couple of quick questions here. First off, in terms of your decision to go ahead with Gen 8 investment, and I guess you're talking about the first half of '09 ramp, does that suggest you'll start ordering equipment, say, 4Q '07?

Well, we have decided to go into a Gen 8 facility initially. We will have to study the substrate size, the capacity and also the CapEx amount. So with having said that, it's not very clear when exactly we'll release a [POs].

But, as you know, we already built the shell for P8 where the Gen 8.8 equipment will be housed. So if you look at that, usually, from ordering to [Fab in, it] takes about six to nine months.

Great. And considering that you already have [a] shell built, if you do see strong and unexpected demand for 42 inch and above, could you see yourselves pulling in that Gen 8 investment?

We don't think so. And, of course, you know that first half of the year there's always some seasonality, so we don't feel that we need that capacity in the first half of '09. So we'll start ramping the Fab in the first half, probably second quarter.

And what does that mean for your CapEx plans for 2008?

It will be higher than 2007, but we don't feel that we will go to the ranges of KRW3 trillion to KRW5 trillion CapEx budget any more. So -- but probably [we're] below that.

Okay. Switching over to your customers, you talked about pretty healthy panel inventory levels on the TV side, internally. But can you talk about what you're hearing from your customers and inventory levels at TV makers?

Yes, we feel that the inventory levels throughout the channel are still quite healthy. There's been some increase, but please bear in mind that previously, previous quarter and also the beginning of this quarter, inventory levels were quite low. We think that, by and large, TV inventories is around two months, which is very normal for this time in the season.

Great, and final question. I missed some of your comments on the P7 ramp. Could you go through that? I think you said 99,000 as of 2Q, and I guess your target is 110,000, 3Q and 130,000 exiting the year?

That's correct.

Great. Thank you.

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

Hello. Just in terms of your CapEx, if I look at your cash flow statement, it looks like you've already spent close to KRW1 trillion on the first six months of the year but your full-year CapEx, obviously, is unchanged at KRW1 trillion. Is it too simple to believe that, basically, second half of the year your CapEx outlays are going to come down significantly, basically, go to zero?

Hello.

Sorry, that's a good question, Chong. It's -- the KRW1 trillion is the delivery CapEx, as we also explained last quarter, but the actual cash out is KRW1.7. So you should relate to the one -- almost KRW1 trillion you saw in this first half to the KRW1.7 trillion.

Okay. So on a cash out -- so on a cash flow basis, it's actually KRW1.7 for this year?

Yes.

Okay, understood. And just following up on capacity, it looks -- obviously, your shipments did very well, much greater than what your capacity did in the quarter. Even if you have your ramp to 110,000 substrates per month on Gen 7, what will your capacity growth be quarter on quarter, because you're targeting mid-teens? So can we see the same type of shipment growth out-stripping [mere] capacity growth, is what I'm getting at?

Well, of course, the base is now higher. So probably, quarter on quarter, it will be down a little bit. And also depending on the success of the ramp of -- further ramp of P7. So overall for the year, we expect our shipments to grow by about 55% or 60%.

Okay. But the capacity in the third quarter, what do you anticipate will be the change q on q?

Give me a second, Chong.

Okay.

Yes. It's around 12%.

It's around 12%, is it?

Yes.

Alright. Thank you very much.

Okay. You're welcome.

The following question is by Evan Erlanson from Bear Stearns. Please go ahead, sir.

Yes, thank you very much. I am just wondering, regarding the plans to -- or the studies of an 8G Fab versus a 7.5G Fab which, I think, was also considered, what are the pros and cons do you think of going with either solution? And what, specifically, makes you more confident on the choice of 8G than, perhaps, you were previously?

Well first of all, as you know, we now are in a kind of a follower mode; we're not taking the lead. So the equipment will already have been basically, by and large, tested and proven. And probably we'll have some economic benefits from that.

And we also will have a chance maybe to do some more technological renewal in the equipment, like printing -- printing technology, things like that.

And also the Gen 7 is not optimized for 52 inch. And that is a segment that, of course, we also are going to have to address, not very aggressively, but we want to be in that segment once the initial, how shall we say, the initial hands-on with PDP is basically over.

Okay. And also on the cash COGS front, you spoke last time about -- on the last earnings call about being relatively confident that glass pricing per square meter was going to be starting to come down in Q2 and for the rest of the year. And we had already seen some indications that back-light units were coming down on a per square meter basis. How did that actually progress in Q2?

Yes, actually the [work progress] was pretty good, specifically with Asahi and NEG. But with other glass suppliers we met some, how do you say, some resistance, so we are now discussing how to go about that.

Okay. And thanks very much.

The next question is by Andrew Abrams from Avian. Please go ahead, sir.

I wonder if you could break down the cost [down] this -- this quarter and maybe talk about how much came from P7 and higher utilization there versus redesign, or change in procurement. And also if you could break down panel sizes that are being produced at P7 currently?

Okay. Well, in terms of cost down, this quarter still a lot came from the purchasing side. Of course, P7 became also slightly more productive, with a higher CCF and a higher capacity [constellation], and that helped.

And other cost down elements have been in the area of overhead, which we have been reducing quite significantly on a square meter basis, and the same goes for labor. As you know, we basically let go of about 500 people and we are reviewing the optimal size constellation of our workforce. And on the overhead side we have taken very strong measures that will be ongoing in the second half of this year. So we expect also a little more from that.

And could you break down what came out of P7, in terms of panel sizes, how you're skewed toward the larger and smaller panel sizes there?

Yes. The -- sorry, Daniel will answer that.

Monitor [head cam], mainly 19 inches, was about 16% in terms of its area and the rest of them was TV. All the TV, out of the total, 42 inch was about half of it, and in about 15% range was 47 inches. And the rest are smaller panels, such as 32 inches and 20 inches.

Thank you.

The following question will be from Eric Reubel from Miller Tabak Roberts. Please go ahead, sir.

Hello, gentlemen. Good evening and thank you for taking my question. On -- if you could put a little more color around the factors, the levers that drove the cost reduction on the COGS side. Could you clarify how much of the improvement came from on the purchasing side and how much came from better utilization? If I recall, last year P7 was not at a "manufacturing production capacity". If I gather, you achieved that this quarter, and could you colorize how much of the -- if you could say how much came from purchasing and how much from better utilization?

Yes, what we said before for [an] overall year, we have said about half, a little more than half comes from purchasing, about 35% from what we call development CI in our newer lower cost models and the rest, about 15%, 20%, from process innovation. And we always said the first half's, the emphasis is more on purchasing.

Of course, P7, as I said in the answer to [a before] question, also has had a higher productivity. But I would catch that under process innovation. But we think, once we go beyond the 90,000, 110,000 and 230,000, that will probably contribute much more. So at the second half we should see much more out of the loading, uploading of lower-cost models and of the process innovation.

We have started initiatives for what we call Max Capa/Min Loss. So we're looking to reduce as much as possible the waste and waiting and unproductive time and expanding the theoretical capacity of the Fab as much as possible. And that will all -- that is included in the cost innovation of process for the second half of the year.

So I think most of it is purchasing and, to a certain extent, development and a little less on process innovation in the first half.

That's very helpful. On the purchasing side, could you quantify on a percentage basis, what this -- what the total of display drivers are for the bill of materials?

I think it's about 12%. If you give me one second I'll look that up for you.

Okay.

Yes, it was around 10%.

Is that up or down significantly sequentially in the quarter?

No, it's almost the same.

It's about the same.

Yes.

Okay. You talked about supply and you talked about inventory being very well managed. And you gave some color on the supply chain -- finished TV goods at the panel make -- at the television companies that are about eight weeks. Does that compare favorably to where we were a year ago, or is that -- I know we're going to be heading into the stronger second half?

Maybe it's more or less, could be the same, because last year around this time the main inventory problem was with the -- at the LCD panel makers.

Right.

And I think there was all -- also some higher inventory but I don't think it was a lot actually, at the set makers.

And you said that your finished goods for TVs was three weeks, is that correct?

Three weeks, yes. And IT was under two weeks.

Okay. Thank you very much.

You're very welcome.

The next question is by [Parnef Gower] from Daiwa Securities. Please go ahead, sir.

Yes, thank you for taking my -- thanks for taking my questions. I have a couple of questions. The first one is on your cost down side. You have just guided about mid single-digit cost down for the third quarter. Does it mean your purchase-related, whatever the cost down you can do, more or less over by second quarter?

Actually, we have pulled up a lot of the purchasing cost innovation by giving a very strong push and a very active dialog with our suppliers. So it is true that the second half, probably, as I said in the answer to one of the previous questions, second half purchase cost innovation will be a little less.

However, we are now at the stage with suppliers on an initiative that we have communicated, I think, one or two quarters ago also, to get more into what we call a win/win situation where we try to get on our suppliers still learning an experience curve. And, together, find out how to improve the business in a more -- much more mutual productive dialog. And the results of that remain to be seen. We have some expectation, but it's early to give exactly the direction for that

So overall, as we said last quarter, COGS down will be 25% to 30% but this quarter we guided for more close to 30% on a yearly basis. So, yes, purchasing was pulled up a bit. It will be a little bit lower in the second half, that is correct, but there are other initiatives also coming on.

Do you have some more room to use more vendors from Taiwan versus Korea going forward, or is Taiwan vendor, whatever you can do you have already done that?

I think with some of the Taiwan suppliers we're still on a learning curve, but we have increased back-light sourcing from Taiwan, for example, and also some other materials, so we feel we're on a good track there. As you know, back-light is the most expensive part of the building material, so we're looking at constant ways to reduce cost there.

The second question is on the Gen 8 side. Since you are in the follower mode, do you have to follow the same substrate size Samsung is using now, or you can decide for a different substrate size?

Well, certainly we could decide on a different substrate size, but we're really looking at what's the best way forward and, perhaps, we can think about standardizing on the same size. That remains to be seen. As I said, we have not finalized the substrate size yet, but this is certainly a consideration.

Because there was some talk, like Korea, different display and industries and wanted everyone to standardize their product.

I'm not sure that was the discussion but, yes, there is an initiative ongoing to make the display industry in Korea more competitive by, let's say, mutual cooperation. And if that would lead to the same [class] substrate size, that remains to be decided, but we are considering that also in the [things we are planning].

Okay. These are the few questions. Thank you.

Thank you.

The following question will be given by Jeffrey Toder from ABN Amro. Please go ahead, sir. The following question will be given by Jeffrey Toder from ABN Amro. Please go ahead, sir.

Hello, can you hear me?

Yes, we can hear you.

Okay, sorry, I didn't get through. Thanks for taking my call. I have a couple of questions on CapEx and capacity and then one on strategy. Just for the CapEx numbers, you talked about -- I think you mentioned earlier that next year's CapEx would be higher than this year. Is that correct?

That's correct.

Is that on a delivery or a cash-out basis?

That's on a delivery basis.

On a delivery basis, okay. And can you just quickly explain the difference between delivery and cash out for CapEx?

Yes. It's a very good question. Delivery is what we take to the balance sheet, so what we want to guide you for in CapEx is how much we're actually adding to our fixed asset base, but cash out is a different thing; it's actually cash outlay. And the main difference comes from equipment on credit.

Now if you look at last year, to maybe elaborate a little further if you allow me, it's -- we have CapEx of a little under KRAW3.1 trillion, but the cash outlay for -- that we made was below that, so it was around -- at about KRW3 trillion.

We had a lot of equipment on credit, but this year our CapEx delivery budget is much lower. This means with all the ordering taking off less capital equipment, that means the equipment on credit at the end of the year is also much less. Basically, that difference in accounts payable for equipment is the difference between CapEx out and delivery basis.

Okay. [Your] --

Did I clarify it for you, or did I make it more complex?

No, I understand what you're saying. It's basically, when you make an order it becomes an account receivable and you haven't paid the funds yet, so it doesn't hit your balance sheet. It means the equipment that you've already ordered.

Well, it's an account payable.

Thinking about it.

Well, it's [funded right], so it's an account payable that hits the balance sheet but it's not -- it doesn't need cash out yet, so you make the payment later.

Right. Okay. So it's kind of the total amount that you have on order during the period.

Yes. Basically, the amount is invoiced to you, but that we still have to pay.

Okay. Okay. And then you said that the number would increase next year on a delivery basis?

The CapEx number on a delivery basis is increasing, yes, [for] this year because we're reckoning with the fact that we're going to go into a new Fab, wherever that may be and, as you know in this year, there's no CapEx for a new Fab included.

Okay, got it. Okay. And for your third quarter capacity at P7, that's 130,000?.

Third quarter is 130, yes.

Third quarter is 130 and 130 is maximum?

Well, that remains to be seen, so I know (inaudible) very difficult, but we are studying on ways to also experience with the new initiatives on Max Cap -- Max Capa and Minimizing Losses to see how much more we can squeeze out of P7.

Okay. And so if we're thinking about next year's capacity, P7, maybe you can get a little bit more of that and the rest of the Fabs you need to be fairly -- you've been squeezing additional output out of those for a couple of quarters. What increase in capacity would you expect next year, assuming that the [AT] Fab comes online in '09?

Well capacity, that remains to be seen, but in terms of shipment, we expect to grow in line with the market next year.

And that would be a 20% increase?

We think a little higher, maybe mid-20s.

Okay. Okay, great. Now -- okay, on the strategy side, I'm just looking at some of the comments from the local -- our people that went to the local meeting have written down and I think you made some comment about vertical integration. Could you elaborate on that a little bit?

Yes. This is what we call reviewing how we should adapt the business model for future profit sustainability and it's in a very initial stage. But we are reviewing what is the best way forward, as the CEO said at that conference on both ends, basically, the front end and the back end of our operation.

Okay. So that means that you might consider going into physical product in the end markets; TV, Notebook? Well, maybe not -- maybe TV and Monitor. I don't know if you go to the Notebook business. And then perhaps vertically integrating into component supplies?

Yes, TV may be a little more difficult, but maybe some of the commoditized Monitor side, that would be possible. But, again, nothing has been decided. We are basically considering it right now.

Okay.

Okay?

That's great. Thank you very much.

Thank you for your questions.

The next question is by Chong Kim from CLSA. Please go ahead, sir.

Hello, just a follow-up question on TV -- sorry, the PC-related shipments for the third quarter. You're guiding for a flat volume growth in IT. Is that a function of demand? I would have thought seasonality was more biased towards growing into the third quarter for volume, or is that really just a function of supply, your capacity in the more IT-devoted substrate sizes not growing as fast?

Your second -- I think you have, you have [hit us] correctly in the second point. As for the IT product -- production capability, we have -- until we can come up with the additional capacity out of our Max Capa/Min Loss program we have come to a -- almost to the limit of what we can produce. So in the third quarter the limitation in the growth in the IT products, it looks like the amount of capacity that we can utilize for IT products.

Sure. And my last question is for you, Ron. Given on the CapEx, on an outlay basis, it's still going to come down into the second half of the year and you have -- obviously, your operating conditions are improving second half versus the first. So I think it's probably straightforward that your cash position will probably improve dramatically into the next six months of the year.

As the CFO, what are your first priorities in terms of those cash outlays, that cash -- cash build and given that your balance sheet still is actually quite -- it's not -- the debt position is not that burdensome?

And the other thing is, in terms of your -- obviously everybody talks about the Philips overhang. Is there any possibility, maybe not immediately or in the second half of the year, that 12 months out, as your cash balance continues to improve, is a buyback potentially something on the cards?

Well, thank you. That's actually a very good question. It is true that our cash position will improve. It's a very correct observation. The results improve, operational cash flow improves and the CapEx is going to be a little bit less in the second half, so we will be free cash flow positive, probably Q3 and also Q4.

What are we going to do with the excess money? The first priority is on repaying debt. You have said maybe debt is not so burdensome, but our net debt to equity ratio is still 49% and you know, maybe from earlier communications, that our preferred state would be around 33%. But even having the experience of the last year, we wonder if 33% is the optimal level, and when we look more at high-tech companies, we're saying the best [tier] companies, there seems to be a tendency for negative net debt to equity, so we are now reviewing what is basically the best net debt to equity moving forward. Should we stay on 33% or should we even improve further in the environment that we're in?

So, first, is repayment of debt; we think it is necessary. And secondly is, of course, we need to keep some money for strategic investment in, most likely as we said, the Gen 8 facility. It remains to be seen how much that is going to be. Probably things like share buyback, I would not expect that to be coming within the next two years at this moment. [Those thoughts could] change, but this [is] how we view it at this moment.

Okay. Thank you.

The next question will be given by Luke from JPMorgan. Please go ahead, sir.

Hello, it's Luke Szymczak at JPMorgan. Could you just clarify for me your capacity and demand outlook for the next -- for this year and this year? What I gather, I heard -- I thought I heard earlier that you said this year you expect 55% to 60% growth and I assume that's area growth for panels, but maybe I misheard that. And then I heard for next year 20% and, if you could just help me understand how you will grow your capacity, particularly next year, given that your new plant really doesn't come on until '09.

Yes. So, let me first clarify it for you. It's almost [gone on]; it's 55% to 60% is the square meters shipment growth, that is basically what that is. And what I said is for next year we're probably going to look at mid-20's growth in line with the industry as we expect now. So, mid-20s, that is to be achieved by further ramping existing Fabs; we think maybe mainly P7 and also P6 to a certain extent.

This is taking into account that we expect some benefits from the reduced loss of waiting and idle time and squeezing out more capacity through, maybe, better line balancing and other techniques we want to apply. Now those plans have not been puzzled out yet. There's many ideas going on, but we feel we will be able, with that, to grow in line with the total market.

So, if I could just follow up. What that means is it's not a substantial investment in equipment, but rather more tuning and not in increasing the footprint of the existing lines, is that correct?

By and large, yes, although with line balancing, if you have some bottleneck equipment you could -- we could add some additional equipment, but real big footprint increases are not foreseen, that's right.

Thank you.

The next question is by Chris Muth from Lehman Brothers. Please go ahead, sir.

Yes, thanks again. A quick follow up for you. When we look at the second half of the year, can you comment on how you see your TV mix shifting in terms of size?

We believe that in the second half, the 42 inches, the larger sizes, will continue to be quite strong. And especially in the second half what you -- what we will be focused would be more in the full HD [definition] of our larger sized TVs. Therefore, 42 inch full HD, 47 inches full HD and also we will be developing and producing 37 inches in full HD definition.

I think on your last call you suggested that 20% of the mix would be full HD. Is that [still] number good, or could it come in better than that?

It should be around that [also].

Sorry?

It should be around that number, yes.

Okay, great. And how about for 120 Hz panels? What percentage of the mix will that come in?

Most -- we are at the closure of that development and will be going into production with it and most of our full HD resolution will be incorporating that 120 Hz technology in there.

Good. Thank you.

Alright.

Currently, there are no participants with questions. (OPERATOR INSTRUCTIONS). The next question by [Oliver Loyn] from Allianz. Please go ahead, sir.

Yes, thank you. Can you actually give me some color about average size of the TV Monitor and Notebook in the second quarter?

Yes. Mr. Brian Kim will answer that question for you.

Yes, we have several products in Monitor, in 17 inch and 19 inch and 19 inch [normal] and 4 inch wide and 22 wide. And now we are preparing, now we are 24 wide. And Notebook case, so we have 14.1 and -- [14.1] wide and 13.3 wide and normal 15 inch and 15.4 wide and 17.21 wide inch.

Oliver, If you are asking for the average size of each product segment --

Yes, the average size.

-- then I would say in the Monitor segment it would be around 19 inches or 19 inches normal, or 19 inches wide. Notebook will be 15 inches -- 15.4 inches wide --

Okay.

-- because it's the majority of it. And TV, TV will be, in terms of area, probably 32 -- it will be between 32 inches and 37 inches.

Okay. Okay. And my second question is how the percentage of the full HD [run out] in the second quarter, and your projection for the third quarter and fourth quarter?

So full HD, as Daniel said before, will be this year -- it was this year about 20%.

Okay, 20% for the whole year?

Yes.

Okay.

About 20%. So this -- actually, this quarter it is already increasing to around -- it goes a little below 20%. We had a big increase from Q1 to Q2 and then in Q3 it will probably go to around 30%, so the average for the year is below 20% as we said before.

Okay. My next question is how the profitabilities for the P7 figures are below the corporate average, or pretty much in line?

The profitability of P7? Actually P7 is -- has broken even in this -- in the last quarter. We're very happy with that. But overall it's still behind the other Fabs, but we expect it will be significantly increasing with the initiatives that we're taking.

Okay. Thank you very much.

The following question will be given by (Ching Kanz) from (Meritz Capital). Please go ahead, sir.

Hello, I've got two questions. First question relates to your working capital, which I think had a -- quite a significant impact on your cash flow in this quarter. You talked a little bit about it earlier. I just wanted to -- wonder if you could elaborate a bit more, and if you expect to see this reversing in the second half of the year?

Yes, that's a good point. As I said, mainly, of course, we have grown the sales quite strongly and we have also reduced the accounts -- use of accounts receivable sales programs. Those are basically the two main reasons.

And we think with the increased sales expectations for Q3 that this amount in receivables will tend to go up and also we will probably further -- a little bit further more, reduce the use of AR programs, so the number will tend to go up. I don't know exactly how much it will be. It may -- it may be, say, less than this quarter.

Okay, and basically the AR programs that you were using in the past, were those -- I presume those came at a cost then, which is why you are planning on reducing them from now?

Yes, although the cost was, by and large, [was] on a par with the funding cost, but we have a preference to basically not use those programs in times of high liquidity.

Okay. The second question just relates to your CapEx again. Do you have an estimate of how much it would cost to equip your P8 plant with Gen 8 equipment?

At the moment we're not sure about that. As you know, we've already constructed the building, so the equipment and part of the clean room is what we are studying on right now. We hope the number will be -- also it depends a bit on the capacity that we're going to -- will be there but, let's say comparable. We hope it will be below the Gen 7 equipment cost. And certainly on CapEx efficiency, the CapEx divided by the square meters of input sheets, that ratio, we expect to improve that too.

Okay. Thank you very much.

You're welcome.

The next question is by William Lamb from Invesco. Please go ahead, sir.

Hello, I don't know if I missed this earlier, but earlier in the year you were saying that you expected the Philips stake to come down to the 20% area soon after the lock-up ended, and I was just wondering if you had any update on that, and I have a second question as well.

No, we don't. We don't have a real update on this. We, at this moment, do not know of any specific plans. Of course, we try to keep the dialogue going and the favorite -- we favor a strategic partner and there are still possibilities of that taking place, maybe not for the whole stake, but maybe for the part, or part of the part that Philips is going to sell, but at this moment there is not a real update to be given.

Okay. And secondly, just on the vertical integration that you were talking about earlier, could you just -- maybe just go into a little bit more detail on why you're thinking about that at this stage?

Yes, well, for example, if you know, we have a Joint Venture in Gen 7 glass with NEG and that Joint Venture is called Padua Electric Glass and we have actually very good experience in working together on getting costs down and also the uninterrupted supply.

And there are maybe more areas where we would have to seek further engagement on the front or back end side of the business to get benefits. We don't expect in the short term any very big impacts on that but at this moment we are, as I said earlier, studying what is the best way for LPL to construct its business model for sustained profitability going forward and those discussions are now in progress.

Thanks.

We have just time enough to take one or two more questions.

Currently there are no participants with questions. (OPERATOR INSTRUCTIONS). Currently there are no participants with questions.

Okay. If there are no more participants, then it may be the good time to close the call. Daniel?

On behalf of LG Philips LCD we would thank you for participating in our second quarter earnings conference call. Should you have any further questions, as I said, please contact us, either myself or my colleagues. Thank you for your participation. Thank you.

Thank you.