LG Display Co Ltd (LPL) 2010 Q2 法說會逐字稿

Welcome to LG Display's second quarter 2010 conference call. My name is Anthony Moon. I'm Vice President of the IR department. On behalf of LG Display, I'd like to welcome everybody to our global quarterly conference call. I'm joined by the IR staff here, as well as Kevin Choi from --- he is the Vice President of TV Marketing department. Also joining us is Davis Lee, Vice President of the IT Marketing department.

Before we go into the Q&A, again, allow me to highlight some of the key points from our second-quarter results and touch upon the third-quarter outlook as well. If you look on the next page, the disclaimer, please take a few seconds to look at that. I would like to remind everybody the second-quarter results are unaudited and based on IFRS accounting standards. Moving straight along to slide number three and the revenue and profit, sales increased 10% (sic - see press release) Q-on-Q and 35% year-on-year to KRW6.5 trillion. This is mostly on the back of a 5% increase in volume and a 3% increase in blended panel ASP.

Our operating profit fell 8% Q-on-Q but is up 106% year-on-year. The sequential fall in operating profit is mostly due to ForEx-related valuation losses due to the Korean won's depreciation in the second quarter. Note that due to the IFRS accounting, some of our ForEx exposure is recorded on the operating item line this quarter. Operating margins fell to 11% while EBITDA margins reached 22% in the second quarter.

Moving on to slide four and looking at our financial position, as of June 30, 2010 we have KRW3.2 trillion in cash and cash equivalents. Our inventory increased by KRW540 billion to KRW2.6 trillion. While overall inventory is three to four days above normal, this is due to a better procurement of key strategic components and the rise in semi-finished goods. The rise in semi-finished goods is mostly due to a shortage in LED components. So we had a little more than what we needed in what we call cell phones. Note that the finished goods inventory is a normal two weeks level at the end of the second quarter. Switching to the financial ratios, our net-debt-to-equity ratio increased slightly to 7% from 5% in the previous quarter.

Moving to the next slide, on the cash flow, cash flow from operating activities resulted in cash inflow of KRW1.2 trillion. Cash from investing activities reached KBW1.1 trillion. The [net] cash inflow was before financial activities of KBW85 billion.

Looking at slide six on shipments and ASP, our shipments increased 10% sequentially to 6.4 million square meters and our blended area feet per square meter increased by 3% to USD863. The rise in average selling price is mainly due to a higher proportion of high-end panels, much of that increase due to LEDs and an increasing proportion of IPS technology incorporated panels as well.

Moving on to slide seven, looking at our product mix, you will see that during the second quarter, the TV segment represented 53% of our revenues while monitors came in at 23%. Notebooks increased from 18% to 19%. That is mostly due to strong demand for smart book panels in the quarter. Also, our applications increased from 4% to 5% as we acquired the module production facilities from LG Innotek in the second quarter.

Moving on to slide eight and looking at our capacity, you'll see our capacity did increase 6% sequentially to 8.6 million square meters. But in actuality, the first quarter was lower than fourth quarter if you recall mostly because of the working days. So in actuality, if you look at it from fourth-quarter increase, the increase was actually closer to 3%, adjusting for the days.

Moving on to our outlook for the third quarter, we do expect our shipments to increase somewhere in the mid-teen levels on a sequential basis. We will head into the normally seasonally strong period, while the first two months of this quarter we may see some weakness in demand because of overall inventory in the channels. We do expect some recovery towards the later half. That is also our guidance for the pricing trend. We do expect probably the first portion of the third quarter we will see a gradual decrease in panel prices, as the inventory starts to clear and we get back to normal levels. Right now, inventories in the channel we estimate to be one to two weeks above normal throughout the world. As that comes down, we do expect some price stability and perhaps even prices rebounding before we end the quarter.

Our CapEx guidance -- last quarter, as most of you recall, we said it would most likely exceed KRW5.5 trillion. Our new guidance is somewhere in the middle of between KRW5 trillion and KRW6 trillion, somewhere right probably smack in the middle at this time, depending what our utilization is and how quickly we can ramp up our new second Gen 8. That number is in a little bit of a flux, that's why we are not giving the exact number at this time.

I'll end the summary there and I'll open the floor to questions. Again, I'd like to remind everybody, to give everyone equal opportunity to ask questions, if you could limit each person's questions to three, I would really appreciate it. Thank you.

(Operator Instructions) [Mr. Brian] from Ticonderoga. Please go ahead, sir.

When we look at --- first of all, I just want to get something clear. You said volume increased 10% but the press release says 5%, so what's the right number?

5%. Did I say 10%?

5%? You said 10%.

I'm sorry, my mistake.

Okay, so volume was up 5%. I'm just curious when you take a look at --- because I think you guided low to mid-teens. So what was really the factor that impacted your volume shipments? That's a pretty big miss. A lot of tech companies are blowing through numbers right now.

No, for us, some of our customers towards the latter half of second quarter were adjusting -- going through -- started their adjustment period for their inventories. Also, from our standopoint, there was also strong demand for LEDs, more than what we had anticipated, and there was a shortage of LED components.

Okay. So, was the impact more in the television market or more in the monitor market?

More so on the TV side, particularly for LED component shortage.

Okay. When we think about September quarter, you're saying you think pricing will start to stabilize in the month of September? Is that correct?

I think that's what we're anticipating.

Okay. When we look around the world, where are you seeing the most weakness? Is it Europe? Is it with companies selling into the US or where is the weakness right now, China?

This is Kevin Choi. The weakness or strong -- it's hard to tell, because the euro market, everybody expects that because of Southern part of Europe's economic situation may hurt demand of the TV. But data actually showed in May and June, because of World Cup issue, Europe sales data is pretty good actually. So the growth ratio in Europe in second quarter around -- slightly below 30%. First quarter actually, the Europe area -- Eastern Europe, Western Europe total is around 12% or 13% level, but second quarter is almost 30% level. So actually retail sales in Europe has not been [much bad].

So why is it weak for you, because they're reducing their inventories over there?

No, no, no. Issue is that, actually, [test manufacturer] and the TV brands actually, they were very aggressively -- tried to increase their business, because they thought that this second quarter should be very good. So they actually expect good business and they built and they purchased channel and then compared to their expectations actually the sales actual result is low. So they have some inventory right now, so --

Okay. Then how about the US? Some of the data, I think, has been pretty negative in May and June?

Yes. So US actually -- last year May and June, because of analog cutoff in the US market [started to engender and] that kind of model -- the sales was very high last year. So comparing last year May and June, this year May and June, it's not just the normal way of comparison. So even we think that May and June the y-o-y growth ratio should be low, but actually the actual number is lower than actually expectation. So US market is actually lower than expectation.

Okay. Just finally, the surge in inventory of 31% -- how does that bode for pricing your costs down in the September quarter? It seems like you have plenty of components, so are we going to see costs down -- what are we going to see costs down in the September quarter?

Right now because everything is in -- the word I want to use is many moving parts, both demand, inventory, component supply. I am afraid right now it's difficult to say how much our costs will come down in the third quarter, to be honest with you. Any number I give you, I'd probably be misleading you at this stage.

Okay, thank you.

Matt Evans, CLSA.

Thanks for taking my question. Firstly, you mentioned that under IFRS you now have FX translation losses and gains on the OP line. Would you be able to sort of tell us how much cost would come out of the OP line if you were to restate (multiple speakers)?

Yeah. It's roughly a little over KRW100 billion (multiple speakers).

That's great. Second question is on the SG&A. It just seems very, very high. What was the driver behind that?

The FX I've just mentioned is in the SG&A.

Okay. All right. So there's no FX translation losses under --?

Oh, no, mind you, the FX translation gains and losses from our debt -- IFRS (inaudible) continues to be on a non-operating basis. But other debt -- for example, from our receivables, payables, short-term debt -- also is included in the operating level.

Okay. So under the old Korean GAAP the cost of goods sold would be similar but the SG&A would be KRW100 billion lower?

Right. Correct.

Okay. Great. Then --

No, under the old GAAP, the operating would be KRW100 billion higher than the other way, yeah.

Okay, understand. Lastly, what would be the depreciation -- could you give us a specific guidance for depreciation in the coming quarter, in the third quarter, with the AG ramp etc.? I presume it would go up?

It comes up a bit. Somewhere in the mid 700 -- a little over 700.

Okay. That's great. Thanks.

Andrew Abrams, Avian Securities.

Hi, I wondered if we could talk about the supply side a little bit. You mentioned that in the second quarter, LED components were still in short supply. Can you kind of update us as to where they are right now? Is it actual hard components? Is it the backlight units, the assembled backlight units? Also, could you talk about the glass side and what you are seeing in terms of capacity or ability to receive as much glass as you need?

If I can answer the last question first, the availability of glass has eased up quite a bit. I think ourselves and the industry as well probably were -- the trouble -- availability of glass is a lot better than it was three, four months ago. As to LED, I would have to describe it as still being tight for some components. For ourselves, we have made some strategic moves to procure components and also we made some strategic moves with key component suppliers to make sure we have enough that we will continue to be able to ramp up our LED production in the third quarter.

If you had to characterize it, would you be ahead, equal to or behind where you kind of thought you would be at this point in the year?

The year, right now, I would say, ahead.

Ahead. Okay. (multiple speakers). Right. If you could also talk a little bit about your -- the China impact, meaning how much of your business do you see going into the Chinese brand market? I mean, either on a module basis or on a sale basis. Can you give us some kind of perspective there?

Most of our business is in modules. The vast majority of our business in China is in module form.

Right. Can you give us an idea of what that percentage would be of your overall production in terms of the modules?

We are not telling -- our sales is basically the module. We don't do sales business in China. That's our -- basically it's the module.

Right. But could you give us an idea of how much of your module business goes into China and how much goes into the rest of the world?

Just a second. I'm afraid I'm going to have to get back to you on that.

Okay.

I don't have that in front of me.

All right. Thank you. I appreciate it.

[Stephen Golden], [NextKey Capital].

Thanks for taking my question. Would you be able to give me the breakdown between -- because you said ASPs were up 3% in the quarter. Would you be able to split that between notebook, monitor and TV?

I can't give it to you in that kind of detail, granularity. But it was slightly more on the TV side because they had a greater increase in LED. But also on the IT side, there was a greater proportion of IPS panels as well as then -- and then monitor side as well they moved more towards the larger panels as well as IPS as well.

Okay, that's helpful, thanks. I'm trying to get an understanding of what the effect of LED could be on cost down. Because as far as I see it, there are a number of effects. You've got the fact that you -- obviously as you develop LED panels, you are working out ways to be far more efficient with the light bars. So as far as I understand it, you are now -- well, the industry is now transitioning from four light bars to two light bars. Is that correct? And then may be one next year, are you able to give any guidance on that and also kind of what effect that would make on your cost down within LED?

Yeah, industry-wide, everybody tried to reduce the LED costs and then yes, it used to be four bar but people is developing two bar type and some small screen size. Some people develop a one bar type. So it's an industry trend. So I think that this year's model is already developed, so now it's shipping. So development side is actually focusing on next year model right now. So next year model, I think they can improve the design and they can reduce the cost. But right now, is already designed, is done and now only we'll need to reduce the cost is just component cost reduction. So I think that maybe end of this year, as the company develop new models and then new model design can reduce cost. So that's actually going for the next year business.

Okay. That's interesting. So that's probably pretty powerful, really, given that that's going to be around 50% of your shipments moving on to far less light bars. When I looked at your COGs per square meter, I think we were up about 5% this quarter. I am just trying to get an idea of going forward and particularly for 2011, what kind of cost down you are expecting? Because obviously this is crucial when working out and kind of modeling your OP.

Right. I can appreciate you're trying to model us out. Right now, our ability to give, especially next year's cost down as well as second half this year is very difficult at this movement, because of a lot of moving parts. But I think you can assume the trend that we've been showing over the years, somewhere between 15% to 20%. I would think that we will be able to continue that on.

Okay, that's very helpful. Thank you very much.

Jeffrey Toder, RBS.

Thank you for taking my question. I wonder if you could talk about the supply-demand situation. You've talked about what's happening with the inventory adjustment. But as we move into the end of third quarter into fourth quarter, how do you see the overall market supply-demand developing?

I would think that there's going to be some utilization adjustments from panel makers. As to what degree by each manufacturer, each maker, depends on the customers and their own level of inventory. LG Display ourselves, we have no plans to increase inventory from where it is now. That is the strategy.

So, just based on your forecast in the fourth quarter to have a balanced supply-demand -- and I guess in third quarter as well -- what would you estimate the industry-wide utilization rate should be?

I am not -- if I go into those numbers, I get into a little trouble here with my lawyers here. But suffice it to say, I think, in order to get balance, especially during the first two months of this quarter, shipments can't be as strong as it was in the second quarter. As to what level, again, it's difficult for me to say, unfortunately.

Do you have any plans to address utilization?

Yes, as I mentioned, we have no plans to increase inventories from where they were at the end of the second quarter. So, if need be, we will adjust utilization accordingly. If our orders decline, we will adjust accordingly.

Okay. I guess you would also adjust the ramp-up pace of P8E as well?

That's included in the discussion, yes, as what I talked about -- a need for adjustment.

Okay, great. Thank you very much.

Ben Lu, J. & W. Seligman.

Thank you for taking my call. A few quick questions. You said at Q3, your shipments will be up mid teens. Can you give me a sense of how much of that is coming from inventory versus capacity increase?

As I mentioned, we don't plan to increase inventory from second quarter. So much of that increase will be from production.

Okay. Got it. Just to follow up on an earlier question -- I apologize if I have missed this. As you work down your inventory, which presumably has maybe a little bit higher cost in Q2, what's the impact on the gross margins in Q2, as you continue to expect panel prices to come down, but [either] working down (multiple speakers)?

Good question. If you -- you're very observant. Remember, a lot of the semi-finished goods inventory is due to lack of LED components on the module side. So because much of it is in cell form, I don't see our costs increasing all that much as we're getting -- if you assume -- if we assume LED module prices to come down, our production costs to come down then I don't think you'll have that usual material impact on our cost of goods sold.

Got it. Okay. Then within your own inventory, do you have a sense of how much is CCFL modules? I think one of the worries right now in the industry is that there is a bit of oversupply of CCFL, simply because there's LED shortages?

Right. Mind you, our finished goods inventory is at a normal level. Demand has been so strong for the last, what -- how long has it been strong? A good year and a half now. We've been carrying less then optimal inventory, if you recall, for the last 12 months. So now we're about two weeks inventory on finished goods. So I wouldn't say we have excess inventory of CCFL.

All right. Great. My last question, if I may, is -- you said that inventory globally was about couple of weeks, one to two weeks above normal. Do you have a sense of what that is by geography -- China, Europe and US?

The US market now is slightly higher than normal. So we think that the inventory level is not higher than one week compared to normalizing data less than one week over, slightly over. The euro market -- we think that the lamp model after World Cup I think that they have some lamp model inventory. That's, I think, slightly higher than one week. The China market I think that last three or four months they adjusted their inventories. So I think that after July -- end of July when they start August, I think that the inventory level will just normalize. So I think that after August, the China market should be okay.

Got it. Okay. Thank you, guys.

C.J. Muse, Barclays Capital.

Thank you for taking my question. I guess first question on your shipment guide -- can you tell us what you expect in terms of linearity of shipments in each of the three months of the quarter?

Sorry, no. But if you read into the tone of message I think the first two months will probably be most likely weaker than the latter part of the quarter.

So I mean, is it fair to say that in the month of September you think 50 plus percent shipments will come?

I can't confirm, or I don't -- I don't know. I can't go into that. (multiple speakers).

Okay. That's fair. Then just last question, just to follow up on a prior question -- you talked about no plans to grow your inventory and considering the outlook for weaker shipments at least in the first two months of the quarter. Have you already adjusted your utilization rates or not?

No, not yet.

Okay. Thank you.

Yair Reiner, Oppenheimer.

Could you update for us your annual viewpoint for the whole industry-wide shipments of TVs, monitors and laptops, both on a sell-through and a panel shipment basis?

Can you give me a second? For TVs we're looking at about 190 million, a little bit higher.

Okay.

Notebook is 230 plus million units year total and the monitor case 193-something, that range, not much different from previous months that we maintained.

Okay. Got it. Can you give us just a little more detail about your LED mix in the quarter and if there is any change for you for the annual outlook?

LED, I think that our second-half LED portion is -- I think that's total I think about between 35% to 40% range.

That's across the different applications. Is that right?

Yeah.

That's for TV.

TV.

TV? Okay.

Monitor side is also at this moment same range, but year-end target, maybe the fourth quarter LED transition definitely could be higher than 50%. We expect year average is about 35%, but we are ahead of our schedule.

Okay. Got it. Then final question on inventories, I think that the weakest inventory that you cited had to do with retail inventories, if I am not mistaken. Do you have a sense of what the inventories might look like at the set makers, even kind of directionally?

We cut down the inventory levels from our factory to the system [integrated] side. Since we get more of accessibility of the information. Based on that kind of data in the IT side, notebook and monitor, about a weak increase as a result of slow retail sell-through. That's what we have, but there is a time lag between retail sales data with our inventory data. But we can only interpret that the slow sales (inaudible) retail channel is affecting the inventory days of our supply chain. That's all I can say.

Okay. So it's [one week] increased during the second quarter?

Not during the -- at the very end of the second quarter, to be a bit more precise.

Then, you said that's on the IT side. Any sense of what that's like in the TV side?

TV side, end of first quarter actually, the inventory was shortage. Then after April inventory was still slightly low. May and June actually TV set maker and also retailer, they were building up their inventory to prepare for the World Cup. Then, I think that some inventory left over happened in June. So now, after middle of June, the inventory adjustments started. So now it's ongoing right now.

Got it. Thank you very much.

Mr. Malkoun, Moore Capital.

Just curious on the shipment guidance for the third quarter. What's the breakdown by TV versus IT, monitor versus notebook (multiple speakers) area growth?

TV is in the (inaudible) mid-double digits -- in the teens, and IT, mid-single digits.

Ok, so IT mid-single overall and TV mid-teens. The overall number is mid-teens?

Low to mid-teens.

Low to mid-teens, okay. Then the inventory on your balance sheet I saw was up about 31%, 32% sequentially, just in won. What is driving that? Is that finished goods panel inventory? Is that glass? What's the driver behind that?

Our finished inventory did increase a bit. Mind you, remember, because demand was so strong we were carrying less inventory than was optimal for the last 12 months. Finished inventory is about two weeks, which is normal.

Okay.

What's increased is semi-finished goods, because of the lack of LED component. Also, raw material components -- we procured some strategic components that we thought would be in shortage in the third quarter.

Okay. So it's basically the raw materials and then you've got 90% of what you need to do in the LED panels, the other 10% you don't have, so you built the inventory up around that for LED?

Well, I don't know about those numbers, but the logic is correct.

Right. Making those numbers up. Can I just ask then if you're feeling like inventory is a little bit higher in the channel, in both IT and in TV, why do you think you can do kind of normal seasonal type shipment growth in the third quarter, given the fact that we're still in this kind of inventory correction phase -- it seems like it just started -- what you were saying a couple of minutes ago?

If we were going to normal seasonal, we'd be up a little over 20% actually.

I see, okay. So the mid-teens is less than normal.

Close to mid-teens is lower than normal.

Understood. Then on the cost down side, I just wanted to clarify what do you think you can do on the cost down side? How does the pricing look for components?

It's difficult to say. It's difficult to say, because too so many moving components are -- again, what the -- how well the inventory clears, how quickly it clears, that will have a big gauge on our ability to reduce cost (inaudible). So it's difficult to say right now. I don't want to mislead you or any of our shareholders. That number. we internally -- it's too many moving parts to make an estimate right now.

Understood. Have you guys given any guidance at all on what you think EBITDA margins will do quarter over quarter in the third quarter?

No.

No, okay. So no guidance on that for now, we are just going to --- directionally, could margins be up sequentially, or is it (multiple speakers)?

Well, I think if you -- we said a gradual decline in prices, most likely towards the second part of the third quarter, we expect some price stability or perhaps even some rebound. But overall, third quarter from second quarter, overall pricing will most likely be down.

Down, okay.

To what degree, it's difficult to say.

Hard to say, okay. So the EBITDA margins then will take into account that, and then whether or not you actually get the cost down will drive --?

Right, exactly. It all depends on how quickly or how fast in demand either maintains or what the set manufacturers that Kevin mentioned, their fear is that in demand will not come through in the third quarter. But if it remains as strong as it has been in the second quarter, then we should be through this inventory correction relatively quickly.

Understood. Do you guys have an estimate for -- if pricing just -- I know that the display (inaudible) pricing is not always exact. But if pricing stayed flat from where it is in, say, second half of July through to the end of the quarter, didn't go up, didn't go down, what would your average price be for the quarter? Would it be -- it would still be down a couple percent, is that right?

If it stayed where it is because of our mix change, I would guess there isn't that big of a change for us.

Okay. Then last question for me on the inventory just on the TV side. Did you guys clarify where you think it's -- is it US, Europe, China? I know you said that they built up for the World Cup and now that event is obviously over. So would you feel like there is more inventory prepared for the European market? Or is it kind of all three geographies, US Europe and China?

I think that Europe, some inventory left over for lamp model. In US market I think that May/June was a little slow, so because of that, the inventory buildup. The China market, all of the inventory buildup in April and they adjusted that inventory last three months. I think that China is -- nowadays, China inventory, I don't worry then much about China.

Okay. That's great. Thanks.

Just to be clear, when Kevin mentions lamp model, he is talking about CCFL model.

I see. So it's really inventory at CCFL that is really built up and left over. Got it. Thank you so much.

In Europe.

In Europe.

In Europe, understood. Thanks, guys.

Ben Lu, J. & W. Seligman.

Hi, Anthony. Sorry about that. One last (multiple speakers) question on my part, I apologize. Remind me again -- your depreciation for PA-2, is that dependent on how fast you ramp it in Q3, or will it come on to over [700 billion] deprecation regardless of how quickly you ramp that?

Doesn't matter.

Okay. So you could be ramping PA_2 as quickly as you can and the depreciation would still be the same?

Yes.

Okay. Great. Thank you for clarifying it.

Frank Lee, Bank of America Merrill Lynch.

Hi. Thank you guys. I had I guess maybe two questions. First, can you talk a bit about I guess the current LED situation? I know that it was quite tight early in the year and there is some build on inventory, and how you guys see that's going into the second half of the year, if things will continue to be as tight as you expected?

I think Kevin will add more on this, but I am not so sure, there is a lot of channel inventory of LEDs in the market. It's just been shipped out now and it's -- I sort of disagree with those comments made by some analysts that there is inventory of LEDs.

LED situation is I think that next two months we have to watch that, because second quarter is LED shortage and people just ship out panel and then after the set maker actually increase their manufacturing of LED sets in April, May, June. So now, retailer side, after May and June they received the LED TV. But before May until April in the market actually there is not that many LED TVs. But now July, I mean, LED TV is in their stock. So if they can sell well, then continuously very strong but if the sales is slow in July, August then inventory situation may happen. So we have to watch that.

But one of the issues in LED is the price is still high. So I think the second half of this year, how we manage this -- the LED, the cost and also set price and also how consumer is actually offsetting that LED price gap is I think that the key area we have to watch.

Okay. Thank you. I guess, regarding the inventory level, I know that there's been a lot of questions. But is there a way you can give us some sort of breakdown in terms of what's the mix between finished goods raw material and/or work-in-progress at the end of the second quarter?

No, sorry. I apologize. (multiple speakers).

Okay. Sorry. My last question is I know you have some targets for the third quarter to try to reduce inventory. Would the reducing utilization rate be a potential option, if demand doesn't hold up as well as you're expecting, or do you think that's not going to be necessary?

First and foremost, there is no plans to increase inventory from current levels. If need be, we will adjust utilization.

Okay. Your ramp on the Gen 8 -- is there going to be perhaps any kind of maybe a slower ramp going into the third quarter of this year? Because I know that was one of the areas that (multiple speakers)?

Again, I have to answer that question the same way. It really will depend on what our orders look like throughout the quarter. We will adjust accordingly. Again, there is no intention to increase inventory.

Thank you.

Tore Minesuk, Moon Capital.

Just two follow-up questions on LED. I know you gave kind of penetration for LED TV for the whole year, but can you give us your shipment of LED TVs in Q1 and Q2?

I can give you percentages, rough percentages, slightly over -- in the neighborhood of about 10% in the first quarter, right into about mid 20% levels in the second quarter and we are looking at, as Kevin mentioned, somewhere between 35% and 40% in the second half, depending on demand.

Okay. My second question -- I remember last quarter there was some -- when you guys were talking about ASP increase or decrease for Q2, you kind of -- you broke it down a little bit between CCFL and LED. What is your view for Q3 at this point? Obviously the demand is somewhat weak on the CCFL but when you said that ASP is going to gradually decline in Q3, how does that break down between CCFL and LED?

You mean the price differential?

Yes, price differential or just the ASP trend for CCFL panels versus LED panels in Q3?

It's a very good question, but it's very difficult to answer also. Because in these days, set manufacturer also, it's very difficult for them also to forecast this LED and CCFL models, which one is selling well or which one is more convenient to forecast. Because last two months, the forecast of those CCFL and LED is continuously changing right now. So because some people say that they need more CCFL, some people say that they need more LED. So it depends on different companies. So it's all very complicated right now. So it's very difficult to say to you that which one is, I mean, correct and which one is different, because all the companies' situation is different.

Right. What is the price premium right now between LED and CCFL for the same size?

It's difficult to tell because each size has different kind of premium. So, you can easily say that the set level, TV set level, the CCFL versus LED is about between 1.4 times to 1.7 times.

Wow. Okay. So, I assume on the panel level, it may not be that much of a premium, but still (multiple speakers).

Panel level is lower than that, but actually set price level is pretty high.

Right. So if I look at, what you said earlier about Q2 penetration at mid 20% LED (multiple speakers).

Can I correct myself on that? I was looking at the wrong data. Second quarter was about 30% level. Second half, we're looking at somewhere between 40% and 45%.

40%, 45%. So, you're going to increase penetration quite a bit in Q3 from 30% to say 40% in Q3, and then your shipments also going to grow a lot as well. If LED has set 50% price premium to CCFL, why would your average selling price be down gradually? Because just the mix shift alone, you should have like a lot -- a pretty big bump there. I am trying to figure on a like-to-like basis, what kind of ASP decline are you seeing in --

Right. At this point in time, to give you any guidance on what level of ASP erosion there will be is difficult, I apologize.

But is your guidance based on a blended basis, or is that based on --?

No, our guidance is on like-on-like basis.

Oh, is on a like-on-like basis.

Right.

So on a blended basis, your ASP could actually be [fine] (multiple speakers).

Depending on what the like-on-like price does in the third quarter -- and again, again to give you any indication as we did in the past -- because things are so unclear right now, as to how quickly the inventory will clear or how long it will last or what have you. Any guidance that we give you right now, really I would be misleading you because a week later, I maybe have to change it.

Got it. My last question -- I apologize. You mentioned earlier that you also prepared some raw materials that you were envisioning to be in shortage in the second half. What are those raw materials?

Sorry, very strategic component.

Okay. Got it. Sorry, just to squeeze in one more -- your capacity growth for Q3 and Q4, can you give us that? Just your capacity, not your shipment or production?

Overall capacity, you mean?

Yeah, overall capacity (multiple speakers).

Irregardless of utilization?

Yes. Regardless of utilization.

Roughly around 20% in the third quarter and mid single in the fourth quarter.

Mid single in the fourth quarter. Okay. Great. Thank you so much.

Eric Lee, Barclays Capital Japan.

Thank you for taking my question. Just so I can quickly confirm, you mentioned that currently you run at full capacity, and you would adjust if necessary. I just wondered -- so your basic plan is to run at 100% for Q3, assuming nothing happens.

If demand remains strong and if we still require those -- we can still run at 100% without having to increase inventory, yes.

Okay. Understood. That's all.

Thank you.

Jonathan Hwang, Daewoo Securities.

I just have a question on your OLED strategy. You announced this morning that you'd be expanding your [LCDF] line; will this be mainly used for your high-end LCD or maybe your OLED?

High-end LCDs.

All right. I was just curious because your OLED strategy's mainly focused on the TV side. I was just wondering if you had any changes recently, because we are hearing a lot of annualized shortages in the mobile applications?

No, our initial steps -- the capacity we are building second half this year and the capacity we are building next year is mostly for the mobile applications including smartphone.

All right. Thank you.

Mr. Malkoun, Moore Capital.

Sorry, one follow-up. On the fourth quarter, what's normal for seasonal shipments? If you were saying I think like 20% plus would be normal for third quarter, what's the normal fourth quarter for you guys in terms of volume. would you say?

Normally, the panel shipment side -- normally third quarter, fourth quarter -- fourth quarter is slightly higher than third quarter.

Fourth quarter typically slightly higher. Okay. Would you expect that normal seasonality fourth quarter this year or is it too hard to say?

It's hard to say but I hope so.

Okay. Got it.

It's the best answer.

Okay. Thanks guys.

The following question will be presented by Mr. Stephen Golden, NextKey Capital.

Sorry, I know you've already answered a few questions on it. Just in terms of inventory in the channel, just to absolutely clarify. So, I think you were saying that in -- well, would you be able to reiterate between US, Europe and China and also CCFL versus LED?

In the US because of last year (inaudible) to put it all into perspective, in the same first half and particularly the second quarter, TV set manufacturers or set manufacturers overall were quite aggressive in their expectations for the market. So, they ordered a lot of panels. Some of it for the World Cup, some of it to put initially -- put the LED TVs into the channels themselves. Now, we've come to a point where there are concerns about the financial situation in Europe, perhaps a potential double-dip in the US. Now what I think is happening is larger set manufacturers having built this inventory for the anticipated sales, now they are waiting to see if those sales actually do come through. For Europe and the World Cup, there is some inventory hangover from the World Cup. A lot of that is in the CCFL. As Kevin mentioned, we believe that is around a little less than a week. US inventory, again, a little less than a week of what is normal. If sales continues to remain strong, we anticipate this inventory will be cleared through within the next month or month and a half. China, as Kevin mentioned, we think China is -- distribution inventory is back to normal.

Okay. That's really helpful. So when you say in Europe less than a week and US less than a week, you mean less than a week more than is seasonally normal.

Right. More than what is normal.

Okay. In terms of -- I assume that that's focused on the CCFL side, actually there is not a lot of inventory hangover on LED.

That's a good description, yes.

How many weeks inventory would you say there is in China right now, in the channel?

In China, each company has different standards. So normally when we ask that question, the answer is about one and a half months, that's their normal answer.

Okay. That's really helpful. Finally, just to continue on the OLED question that we had before, when do you see that OLED production on large panel screens, particularly on the TV side, starts taking off?

We're increasing capacity on 4G this year and next year. No timetable has been set -- exact timetable has been set for our investment into 5.5G as of yet, but if you're talking about real TV -- OLED TV output, we'll probably need 5.5G.

Okay, all right. So, you would say probably within the next two years is maybe a bit premature?

Within the next two years is not premature, I would say.

Okay, all right, that's really helpful. Thank you very much.

Jeffrey Toder, RBS.

Thanks for taking a follow-up question. I just wanted to put some numbers together that you were talking about. So you said that capacity in 3Q was up 20%, shipments are up mid-teens or low to mid-teens. You don't want to build any additional inventories that you're going to sell down some inventories. Doesn't that calculation imply that you would have some cuts in your overall utilization rate during the quarter?

You really don't need me to walk through those numbers, do you?

Well, I mean, if the implication is, as I said that --

I don't think I have to spell that out completely, do I?

Nope, I think we got it. That's great. Thank you.

Frank Lee, Bank of America Merrill Lynch.

Thank you. I just wanted to ask, I guess, as a follow-up question -- I guess, as you go into the third quarter, I know you're talking about trying to reducing inventory there. But I guess as far as prioritizing between unit and ASP, what would the preference be? Because it looks like you are assuming still relative better unit growth but ASP, the guidance I think was probably a bit harder to say. So would that imply perhaps more of a focus on the unit growth rather than pricing?

You mean, when we make our decision on our production?

No, because if I look at your guidance for the third quarter, which is still looking for unit growth (multiple speakers) low teens, right. And ASP guidance now is harder to say -- would that imply that the focus or emphasis in the third quarter would be more on unit growth?

Not at any cost, no, not at all. Because the inventory that you mentioned or demand and prices is joined at the hips, so if demand isn't there, prices will fall and if demand isn't there, unless we -- there is a risk that our inventories go up. So we have to make that decision at that time. But again, the majority of our decision will be based on keeping inventories where they are right now. No plans to increase inventory.

No, I understand you have no plans to increase inventory, but I guess if I am looking at, I guess, your growth in the third quarter, you're still planning to grow units, but (multiple speakers).

That is our expectation. That's not etched in stone.

Right. No, I understand, but I am just trying to understand, I guess in terms of prioritizing, let's say between share -- market share or pricing, what would the priority be?

Let me put it this way. The difficulty that Anthony and we are facing is since we are dealing with so many unclear moving parts, that is why we cannot confirm the ASP part. But although we can reasonably project our sales, unit sales growth based on the -- all the demands and inventory situation that we have. That's neutral. We don't have any preference at this moment in time (multiple speakers) revenue or the unit base growth.

I guess, put another way, you talk about a lot of uncertainty, which we understand. But you seem to have much more confidence about your unit growth numbers to give us a forecast, in terms of some sort of numbers, less confidence on pricing. So, I am just wondering if perhaps there is more emphasis on share growth because of that.

Well, that's just more clarity, a bit more clarity on the volumes than on the pricing from our side. That's the only thing. There isn't a greater focus on one or the other, there's just a little more clarity on volumes rather than pricing at this point.

Okay. All right. Thank you.

Thank you. I'd like to thank everybody for participating in this conference call. Some people called in very early morning in their time and stayed up quite late to participate, and we greatly appreciate your participation. Please do understand at this difficult time in the market, I know some of our answers probably did not meet your requirements or your expectations. We hope that you do understand, because we just -- at this time, we don't want to misguide the market with things that we really don't know about. So I hope you can understand that. If there is any follow-up questions, please don't hesitate to give myself or anybody in the IR Department a call. We will try to answer your question to the best of our ability. Thanks again.