LG Display Co Ltd (LPL) 2011 Q2 法說會逐字稿

Good morning and good evening. First of all, thank you all for joining this conference call, and now we begin the conference of the fiscal year 2011 second-quarter earnings results by LG Display. 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 2011 second-quarter earnings results by LG Display.

Welcome to LG Display's second-quarter year 2011 earnings conference call. I am Heeyeon Kim, Head of IR Department of LG Display. On behalf of LG Display, I would like to welcome everyone to our global quarterly earnings conference call.

I am joined by our IR staff, as well as representatives from TV Marketing and IT Marketing. JS Park is the Head of TV Marketing. Sang Hun Lee is Vice President of IT Marketing department.

Next slide, please. Before we move on to the earnings results, please take a minute to read the disclaimer. I would like to remind everyone that results are based on the consolidated IFRS accounting standards and are unaudited.

Next slide. This conference call will take about one hour. Before we go on to the Q&A session, please allow me to highlight our second-quarter results, performance highlights, followed by future management forecasts.

Moving on to the revenue and profits on the next slide, revenue in the second quarter was KRW6 trillion, up 13% quarter on quarter. This is due to 11% quarter-on-quarter increase in panel shipments and blended ASP increase, driven by product mix improvement. We aimed turning profit on second quarter. However, volatile order change and lower than expected panel price movement resulted in operating loss of KRW48b, operating margin of minus 1% and EBITDA margin of 14%. Income before tax was KRW51b minus. Net income was KRW21b, due to deferred tax asset.

Moving on to the slide number four. Looking at our financial position and ratio as of June 30, we have KRW2.4 trillion in cash and cash equivalents. Inventory increased to KRW2.8 trillion, 13% quarter-on-quarter increase. Despite the mid 80% utilization rate in second quarter, due to uncertain demand and changing panel order, the actual inventory level increased. Our net debt to equity ratio increased to 21% from previous quarter with decrease in cash, which is still at a manageable level.

Moving on to the slide five. Looking at our cash flow, cash at beginning of the quarter was KRW3 trillion. Cash flow from operating activities resulted in cash inflow of KRW513b. Cash flow from investing activities, cash outflow of KRW1 trillion. And cash flow from financing activities resulted in an outflow of KRW143b. As a result, net change in cash was outflow of KRW648b.

Moving to slide six, I would like to go over our key performance index. Looking at our shipments, based on area and ASP, our area shipment increased 11% sequentially, recording 7.5m square meters. ASP based on LCD module price also increased to $743, with 6 percent point quarter-on-quarter increase. This is mainly due to a shift to a higher value-added product, such as FPR 3D high-end monitors and smartbook, smartphone based on our AH-IPS technology.

Moving on to our product mix on slide seven, you will see that during second quarter the TV segment is 48% of our total revenue, followed by monitors at 20%, notebook at 14%, smartbook 10% and mobile and others at 8%. Smartbook, which employs AH-IPS technology, showed a increase -- a rising increase in portion.

Moving on to slide eight and looking at our capacity. With our third Gen 8 ready for full-scale production, our capacity increased by 5% quarter on quarter to 11.2m square meters.

Next, I would like to update you on the progress of our FPR 3D TV panel, continuing from previous quarter. If you look at the chart, in China FPR 3D has shown a fast-paced growth in a very short space of time. From 5% 3D TV market penetration in January, it has surpassed shutter glass and currently showing nearly 60% of Chinese 3D TV market share.

However, in the US and Europe, the penetration of FPR 3D TV has been slower. The inventory of shutter glass type 3D has been persistent in the retail, in addition to lower than expected TV demand in second quarter. As the clearance of shutter glass inventory is nearly complete, we expect FPR 3D market penetration to speed up in second half of the year and show [10 double digits] in Q4.

Lastly, we turn our attention to our management focus on the next slide. As the uncertainties over the market demand persist in the third quarter, rather than giving you misleading forecast and guidance our Company, we would like to highlight our future management focus. We believe our sharing our management thoughts and plans are more valuable to investors under these vague and uncertain circumstances. Hope you understand.

Firstly, LG Display will speed up the efforts, differentiated products and business structure, pushing our higher value-added products such as FPR 3D. As mentioned in previous slide, high-end monitors, smartbook and smartphone will increase continuously. AH-IPS panel, which has proven to be the high performance panel compared to OLED in small to mid sizes, has been received well by our customers. With a wider customer base and increase in market share, we are expecting improvement in our revenue. We expect such differentiation strategy will lead to an advantageous market position in touch total solution and OLED TV next year.

Secondly, resource allocation will be carried out under more conservative market forecast scenario. As we expect our customers to continuously adopt a conservative approach in their inventory strategy, CapEx delay and inventory reduction for better cash flow management will be our top priority for the time being. In case of CapEx, we will lower our CapEx to meet KRW4 trillion level in advance from previous over KRW5 trillion. We are also reviewing further our CapEx adjustments in this quarter.

And lastly, we plan to maximize our overall operational efficiency over our resources. Tighter [SG&A] control will be carried out. And by improving the inventory strategy, we will lower the relevant inventory level by about one week from the previous standard.

In conclusion, market outlook continues to be uncertain, and it's difficult to see significant recovery or improvement for the time being. But we will do our best to accelerate our product differentiation from peers, resulting in sustainable profit generation.

With that, we will end our summary of second quarter and our management focus for second half.

Operator, please proceed with the Q&A session.

(Operator Instructions). The first question will be presented by Mr. Nicolas Gaudois from UBS Securities. Please go ahead, sir.

Yes. Hi. Good evening. Could you maybe firstly help us clarify what were the changes in ASPs, percentage wise, by product categories in Q2? That will be helpful. Thank you.

In every application, you want to get the price?

The price change, yes, vis-a-vis obviously the increase you indicated overall, which obviously we understand was driven by mix.

Actually, in second quarter, overall price increase is limited to 1%. In case of TV this is around 1% and monitor 3% up. Notebook is around 2% up. The overall apple-to-apple price increase should be limited to only 1%. However, if you look at our blended area ASP in second quarter, it showed a 6% price increase. It means our mix impact for the high-end premium products is around 5%, on top of the apple-to-apple price increase at around 1%.

Right. So I guess what I was after was more the blended increase for TVs, monitors, notebooks, or notebooks, smartbooks separately, so that we actually can get an assessment of what the mix impact was on each of these product lines, especially TVs.

I already answered the TV, monitor and notebook. In case of tablet size, we only have one big -- we have major one customer, so it is prohibited to mention about that. These are the (multiple speakers).

Right. Okay. But you're saying your blended TV ASP increased only by 1%, whilst the total increased by 6%.

Actually, what I mentioned, the apple-to-apple price increase for the TV, that's also the blended.

Right.

But it is calculated based on the price change.

Okay. And maybe if you could clarify a little bit comments you made in the Korea meeting on utilization rates. Did I understand correctly that you're currently operating at 70% and that you intend to be at full capacity by September as a base case? And my question, I guess, is A, is that your current thinking; B, any differences in utilization rates in any areas? Have you lowered utilization rates more aggressively in one specific area versus the other? And C, if you can define a trajectory for utilization rates, why wouldn't you define a trajectory for area shipment as well? Thank you.

Actually, as you already heard about our utilization ratio in July, that should be 70%. We are very aggressive to adjust our utilization ratio, to lower our inventory to below our normal standard, because we understand the market situation is very uncertain. And also, our plan and our hope for the full utilization in September, that's also our expectation. That's not base case scenario; that's our favorable scenario.

So, actually, in this time we are not delivering our guidance for the third quarter. That's because of uncertainties, and we don't want to mislead the market. So it's very difficult to mention about the overall shipment situation and the utilization ratio.

Okay.

However, I can deliver you -- actually, if you look at the normal historical seasonal pattern in third quarter, that usually was low teens and mid -- low-teen or mid-teen area growth. So we think this seasonal pattern should be slightly lower than historical pattern.

Right.

It should be a good hint for you to make your earnings model.

Okay. No, that makes sense. I appreciate that. So basically you're saying full utilization rates by September is a goal, is not a guidance, essentially, and overall we should expect a below seasonal pattern or slightly below seasonal pattern, basically, in the third quarter?

Correct.

Okay. And that's just probably 70% right now. Have you lowered the loading factors more aggressively on the IT side or the TV side, or is that broadly the same? If you exclude, I guess, smartbooks, which I would assume is more or less fully utilized.

Actually, we start to ramp up third Gen A fab in this March, for the expectation of our FPR 3D demand. But as you already understand, our third Gen A fab's utilization ratio is severe, so it will be a good hint which area will be the most big cut in terms of utilization ratio.

Understood.

Actually, what -- the FPR demand is quite strong, but the overall TV demand is very uncertain and slightly lower than our expectations. So most of the adjustment comes from the normal LCD side.

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

The following questions will be presented by Mr. CJ Muse from Barclays Capital. Please go ahead, sir.

Yes. Good evening. Thank you for taking my question. I guess the first question, I was hoping you could talk a little bit more in depth about the TV inventory situation, I guess both internally at LG Display and what you're seeing throughout the channel at your customers and end customers, and if you can discuss, I guess, geographically that would be very helpful.

This is JS from Sales and Marketing. Your question is set-makers inventory level? Do you want to know --?

I'm sorry?

Do you want to know set-makers inventory level? Set retailer?

Just whatever color you have in terms of the food chain and where there are pockets of either excess inventory or not enough.

Okay. First of all, retailer; we have -- we don't have any excess inventory from retailers currently. And the set-makers, most of set-makers have around two weeks' excess inventory they have now, because they reduced their sales target of second half this year very dramatically. In March, we're gathering our customers' sales targets for this year. Total set sales target was 230m, but now it will be reduced to around 210m, so 20m set sales -- set demand disappeared. So the inventory level in March or beginning of May, all customers' inventory level was normal. But because of they reduced their sales target, now they have around two weeks' excess inventory.

And about the sell level?

We don't have our competitors' sell inventory level. But in general, panel makers, you don't carry excess inventory. Only we have a strong and confirmed demand from our customer in the future, in that case we build excess inventory, because we need a long lead time component like silicon driver IC.

Sure. That's very helpful.

Actually, if I may add some on top of the JS mention, recently, inventory -- excess base of inventory is not a big issue, because actually set-makers and distributors didn't have any confidence on the demand side from second half last year, so they carried their inventory at a very conservative level. However, the actual demand was not that big to meet that kind of already lowered their expectations.

So, right now, although there's still some inventory issue, but the absolute level itself is not that big burden. Actually, the inventory understanding is the function of the confidence level of third quarter and fourth quarter demand itself. So, if there's some slight increase of demand, recent inventory situation is not an issue. So what I'm trying to say is inventory is not a big issue. Inventory should be okay. However, if there's another disappointment in the demand side in second half, let's say low seasonality, yes, recent inventory would be an issue.

Sure. Makes sense. If I can move over to the utilization front, I just want to confirm what you said earlier in the prepared remarks. So you were at the mid-80s level overall in Q2, but then in July you took that down to 70% something. I guess, A, is that correct? And I guess, B, how do you see that trajectory into the August timeframe? What are you preparing internally? Is July the trough or does August see the same kind of weakness that you're seeing in July?

Actually, in terms of utilization ratio, July should be the bottom. We try to reduce -- actually, in this July, we try to change our standard of our inventory holding period. In the past, our inventory holding period was around one month, slightly over one month, but right now we try to reduce one week further. So our normal inventory standard should be changed from previous one month to maybe three weeks.

So, because of that, our utilization adjustment should be very big in July. So, in August and September, we will continue to increase our utilization ratio further. So we are targeting mid-80% utilization ratio in third quarter. That's our target.

However, right now, our priority to handle the order trend and the inventory. Our inventory -- reasonable inventory and conservative inventory carrying is our priority. That's the reasonable way to overcome this kind of uncertain demand situation.

Sure. That makes great sense. I guess last question from me. Capacity grew 5% in Q2. What do you see capacity growing in Q3?

And then, in terms of your CapEx plans, how should we think about 2012? Thank you very much.

Actually, in case of third quarter, our capacity increase should be limited to low single digits. That's not because of new ramp-up. That's because of the efficiency improvement and the longer number of days of production period.

And then, next year, it's very difficult to mention right now, because we are adjusting our CapEx plan. So, based on our original scenario of early this year, that should be around mid-teen percentage. But right now, we are building our CapEx and capacity plan especially for the P9A. Maybe 60% or 70% of P9A capacity increase should be delayed by one or two quarter, depending on the demand situation. So, based on this situation, next year capacity growth should be lower than 15%.

Very helpful. Thank you very much.

The following questions will be presented by Mr. Brian Park from Tong Yang Securities. Please go ahead, sir.

Okay. Thank you for taking my question. Recently, set-makers have maintained tight inventory policy for component. Then, is there any possibility they will change purchasing pattern for component, I mean shifting to just-in-time pattern? In the afternoon session, you said you would change -- downgrade your level of your inventory standard, so I guess it is a kind of signal of change in food chain. Thank you.

Brian?

Yes.

Yes. This is Sang Lee, Head of the IT Marketing. As you know very well, we see the market is getting a little softer than our expectation. The -- most of customers are squeezing down their buffer inventory. Thereby, they are downsizing the purchase volume. So managing buffer in the first half, and now they are going through some adjustment period. So most of customers are downsizing the moving -- the purchase volume. That's the one -- some change in pattern.

But on the other hand, there are some customers who are very cautious in some slight potential possibility. Still, some customers are predicting some seasonality. Seasonality is not gone yet. So it's kind of some mixed feeling, mixed pattern, in both downsizing the inventory but on the other hand still chasing the potential opportunity. So we see some different -- two types of the buying purchase pattern.

Okay. Okay, great. Thank you.

The following questions will be presented by Mr. Andrew Abrams from Avian Securities. Please go ahead, sir.

Hi. Thank you. Could you talk a little bit about where you expect the mix to be in third quarter on a relative basis, FPR versus plain LCD on the TV side, and then the percentages on where you think tablets might be and any changes -- any more significant changes in either the monitor or the notebook side?

Actually, unfortunately, we don't have the data for each segment. We only have the total target number. In second quarter, our high-end product portion was close to 40%, from 30% in the first quarter. So we are now targeting, Q3, high-end premium portion should be close to mid-40.

Okay. And when you say the high end, how do you define the high end? Is that just FPR or is that other products besides FPR?

FPR and IPS monitor and some smartbook, that's tablet, and smartphone. And also, we have some set products, BMS, through BMS. So mostly FPR and smartbook.

Got it. Okay. And what about cost reductions in the quarter and in the coming quarter? Can you give us a little bit of guidance there?

In second quarter, our cost reduction was limited to only 1%, because of the procurement issue driven by the Japan earthquake. In third quarter, the procurement situation should be easier than before, so we might reduce our material cost in the high-end premium products bit. That should be at least low single digit. But in case of existing commodity products, it's not that easy to reduce the costs. So, all in all, we will reduce our costs for the high-end products side. That's the answer.

So it will be -- the real cost reduction would be on the high-end side, not in the more generic products?

The more generic products, that's -- yes, good, that's relevant understanding.

Right. Okay. And is there any issue with availability of anything that you need in the supply chain? We've heard about rare earths costs and difficulties underpinning various sundry things there. Have you seen any of that, or is that still on a normalized basis for you?

Actually, if we look at the financial statement for LCD makers and component suppliers, their income statement would be very bloody, so that's the main reason.

Okay. And for LED backlights, can you give us a percentage of where you were in the second quarter and where you expect to be in the third?

LED should be around close to 40% in second quarter. And second half, it should be very volatile, although we are targeting close to mid-40% or 50% for the LED. However, there's some variable factors; that's the FPR 3D CCFL type. So if there's a good response from the US market through video, the portion of LED should decrease. But anyway, until now, it's around 40%.

Right. I'm confused as to what you said. You said that, going forward, the FPR is going to make a difference to the LED percentage and that would reduce it slightly, or you mean overall. Or is that -- am I missing that?

Actually, in China market, CCFL type FPR 3D demand was quite strong. So, if we are very successful in the US market, it will impact the LED penetration or LED portion in our Company.

Okay. And that would be a negative implication if FPR is more popular in the US?

It's positive, a very positive implication.

Positive, okay. I'm sorry. I misunderstood.

Because of the volume scale should be quite significant.

Got you. Okay. And there were a couple of comments made on your previous call last night about OLEDs, and maybe you could talk a little bit about that. It kind of said that you were shying away from small panels but you were moving to large panel, in terms of how you're perceiving of the OLED space going forward.

Yes, you are correctly understanding. Actually, in the small space OLED business, actually we did many consumer survey between OLED and our AH-IPS, which is retinal display. But when you look at the consumer usual experience in the mobile side, consumers more prefer high-resolution display with low battery consumption and better outdoor readability. That's our AH-IPS mobile display. So we decided to stop further investment for small-size OLED from now. So we will more highlight on the AH-IPS LCD technology. So that's the strategy for our mobile side.

But in the TV side, we will continue to invest OLED TV. We try to release cost-efficient and high-quality OLED TV in the middle of next year, as a promotional purpose. After checking out the market response for our OLED TV, then we will decide our CapEx plan at the end of next year.

Okay. And so where would you be producing the OLED TV in 2012? Is that going to be in an existing facility, or can you give us a little color there?

Yes, the volume should be very limited. They're just for checking out the market response. So we already have the R&D and pilot fab in our existing 8 generation. But that's not a commercial production base. If the market response for our new OLED TV next year, we will decide the material CapEx next year.

Got it. So that would be in 2012 at some point?

Decision-making should be in year 2012, but actual cash outflow should be in year 2013. Maybe ramp-up should be at the end of year 2013 or '14. This should depend on the market demand situation and the market feedback for our TV.

Great. Well, thank you very much.

The following questions will be presented by Mr. Brian White from Ticonderoga Securties. Please go ahead, sir.

Yes. Good evening. I'm wondering if you could talk a little bit about the TV inventory and demand by the different geographies, US, Europe, Asia Pacific and specifically China.

So your question is the regional inventory level -- inventory level by region?

Yes, the inventory situation by region, and also the demand in terms of what your customers are telling you.

Actually, we don't have regional inventory level information, but we've got some research companies' information, from GfK and NPD. So as I know, in the US and Europe the retailers' inventory level was normal -- now is normal level, but I don't have any idea of different other area.

And the demand by region, China is around 15% growth rate we are expecting now. And also Rest of World, including Asia Pacific, Middle East and Africa and Latin America, we expect over 40% growth rate Y-o-Y. And almost flat we are expecting in Europe. And especially Japan is very strong now. We expect almost a minus 50% growth rate Y-o-Y, because last year Japan demand was really strong, around 23m. The former demand was around 11 something. So we expect around 11m demand in Japan, but already 14m LCD TVs sold in -- 11m LCD TVs sold in Japan and around 4m LCD TVs will be sold in July, so Japanese research company is expecting around 18m to 19m of demand this year. But we expect around 17m.

Okay. And when we think about the TV market at large, you said your customers, I guess in May, had started to significantly reduce forecasts for second half of the year. What do you make of that, in terms of the TV demand really slowing this year? I think we had over 30% growth last year. This, year we're looking at 10% growth. Next year could be even lower. How do you look at this market and the trends that we're seeing here?

Now, everybody think TV demand growth rate is going down, but I don't think demand is going down. Still demand is there. Even in US, people want to buy. But the panel makers have a problem, because our customers, set-makers, they don't want to sell, especially low-end commodity products like 33-inch and 26-inch HD LAMP products, because of profitability. So they cut their demand. Even through retailer request volume, they don't want to sell. They're almost same as major brand, global brand especially. So profitability is most important thing now.

Okay. And when you look at the tablet market, what do you expect your production of tablets this year and what are you looking for next year? That seems to be a strong market.

Yes. This is Sang Lee from IT Marketing. As you agree, the market is growing very fast, but recently we updated annual total market size, a little downsize, from previously close to -- recently we -- our forecast is about 78m unit of tablets this year, and next year still there are some areas we need to define, but possibly a little over 100m units. So there is no doubt this market is growing, as we expected.

And what percent market share will LG Display have in that, in tablets? What do you have now?

At this moment, our market share is about 60%.

And how about next year? Do you think you'll keep that 60%?

No, actually, as the newcomers start jumping in this market, but I think we can maintain over 50% market share.

Okay. Great. Thank you.

The following questions will be presented by Mr. Jeffrey Toder from RBS. Please go ahead, sir.

Good evening. A couple of questions. First, can you explain how the CapEx cut affects your capacity plan for this year?

The CapEx cut will mostly impact on next year.

Okay. Okay. Second question, and actually this is a bit bigger picture. This is the first time since you've listed that you haven't given guidance at all, and I think that you've also indicated that you don't really expect a recovery in the business until 2012. So my question is has there been a fundamental change in the business which has decreased visibility? And why do you think 2012 might be a better year than 2011, which has been quite disappointing?

It's a really good question. Actually, the TV demand will not be that strong, going forward. This year will be lower than market expectation. Actually, we understand the reason why; that's the customers' purchasing priority. When you look at our -- from the point of consumers, actually, consumers' big interest for the IT devices, nowadays that's smart devices such as smartphone and tablet smartbook, so -- and also, they start to enjoy new ways of content consuming throughout the smartphone and tablet side.

So this kind of smart device impact for the consumer experience should take time, and also the penetration of the smart devices should be very important for us when will the TV demand would rise. So, when you look at the penetration of smartphone, we think it will be in the end of this year or next year. And also, if there's big demand for the tablet side next year, we believe consumers' priority for the purchasing item among IT device should move to the TV. So that's why we think second half-year 2012 should be a good time for the TV demand increase.

And also, we think when you look at the TV market, this is also the consumer point of view, consumers have lots of choices in the TV segment, shutter glass and FPR and LEDs, etc. On top of that, we have (inaudible) factors from smart TV side, so consumers cannot tell the difference between these kinds of several devices in one TV. So it means there's no strong attractive point for consumers.

So we believe, if our FPR would be standard format in the 3D market and also people understand what will be the real smart TV and smart experience. So the timing will be the TV demand pickup period, so on top -- together with the 3D content. So it's very difficult to explain, but I hope it will be an answer for you.

Well, I understand the points that you're making, but it sounds like -- if you think about it from a wallet share point of view, it sounds like a reversal in the trend that we've seen in the industry so far. So we saw demand going from notebooks to monitors to TVs, and then bigger and bigger TVs, so that you gain demand on a unit basis as well -- excuse me, on an area basis as well as a unit basis.

And it seems like what you're saying now is that, as we introduce tablets into the mix, the area basis is actually shrinking per unit, on average, and it sounds like that trend might continue for a longer period of time rather than just 'til year-end. And I'm still not 100% clear on why you think consumers will move back to TV purchases in the second half of 2012, when tablets are still going to be growing and smartphones will still be growing at that period.

Yes, it's also a good point. Actually, yes, recently, hot items in the LCD side is unfortunately small device such as smartphone and smartbook, so it is very favorable for our profitability but also it is unfavorable for our TV business as well. So we already understand this kind of situation, so that's why we continue to release totally differentiated products such as FPR 3D TV.

Although you don't agree with our outlook for the 3D TV market, actually, we have a very strong response from China market, and also we are expecting very positive our customers' response feedback from the US and EU market in second half this year. So we believe, although it looks very disappointing in terms of TV demand, we can agree, however, 3D TV demand would be very significant next year if we win the standard competition and also if there is more 3D content.

So we think that -- and also, actually, when you look at the replacement cycle for the smartphone, it will be almost ended. And also, when you look at the penetration of tablet side, we think most of early adopters and the fast followers should buy heavily items until first half next year. So that's we understand the second half, maybe Q4 next year, people start to purchase TV again.

Okay. Thank you. That was very helpful. Now, moving back to the utilization rate question, we're going from 70% now to a planned or expected full utilization rate by September, which is a very sharp increase. When you look at yourselves running at 100% in September, where do you think the industry as a whole would be? That's the first part.

And the second is how long do you think you would be able to sustain full utilization before seasonality starts to decrease demand?

Actually, I would say sharp increase lags the recovery for the utilization for our company is not the seasonal pattern. As we mentioned before, seasonal demand in third quarter should be slower than historical pattern, so most of our competitors would follow this kind of low or less seasonal demand increase in third quarter.

However, in our case, in July we changed our inventory standard period by one week less. Because of that, a severe utilization ratio adjustment in July would happen. So if our inventory would get to the below normal level, we will increase our utilization ratio further rapidly in August and September, to meet anyway seasonal demand increase.

Okay. And when you talk about full utilization for September, what capacity level are you assuming for P8-3?

Our design capacity for P8-3 is 68K, so that's the full utilization.

Okay. So you'd expect to be running, based on this assumption, P8-3 at 68K in September?

However, you have to understand, actually, that's our expectation because we don't have any strong confidence on our outlook and customer order base, so we cannot deliver any guidance. So you have to understand our expectation would not be a correct answer.

Okay. I appreciate you're giving some guidance in a very unclear situation, and I agree that the market's very unclear right now. Do you think that in your own forecasts, when we look into next year, that there will be enough CapEx cuts for the industry to allow utilization rates to be higher for the year and that you might be able to gain pricing power during that period?

Actually, that should be reasonable. If there's below full utilization stage, it's very difficult to raise our price. That's common sense. So that's why we try to release totally differentiated products. In case of our FPR 3D TV panel, although our utilization ratio hit 70% or 80%, somewhere around 70% or 80%, in this situation we can make money. So, if we see the generic product, your question should be very valid, but we already understand this kind of situation. So, going forward, we will increase our differentiated product portion.

Okay. And then just one final question. Can you just tell me what your revised panel and set demand numbers are for this year for TV, monitor, notebook and tablet?

Do you want to get the unit number?

Yes, just for the numbers. Because you've mentioned that you've cut your TV number, I think your set number, earlier in the call, and I was wondering what your numbers are for the other demand metrics as well.

In case of the TV, the total unit shipment should be 220m.

220m.

Yes, 220m. And monitor 190m, notebook 225m.

And what about tablet or smartbook?

Smartbook, we only have the IT segment. That should be 63m. So if we add the mobile side, that should be 78m.

That includes -- that's all LCD based tablets? Or does that include readers as well?

No, excluding readers.

Excluding readers. So 63m tablets, and what was the 78m number?

The remaining 16m from mobile companies.

From mobile companies.

Yes.

Okay. Okay. Great. Thank you very much.

The following questions will be presented by Mr. Arthur Lai from Citigroup. Please go ahead, sir.

Hi. Thank you for taking my questions. I have a question for IT Marketing Director. Since you mentioned you want to develop the value-added products, I recall that right now the tablet and also smartphone they require a touch panel, which that many panel makers try to do. So do you plan to do the so-called in-cell/on-cell? And if yes, when and which kind of clients you will target? Okay. Thank you.

Yes. In-cell is still under development. Right now, commercially, we only supply touch add-on, so at this moment I cannot tell the exact timing, the time to market for in-cell and on-cell. The only thing that I can confirm is that we are working on that.

So, excuse me, let me clarify. So you're working on both in-cell and on-cell?

Yes.

Okay. Thank you.

The following questions will be presented by [Ms. Dan] from Viking Global. Please go ahead, ma'am.

Yes. I was just curious on your slide deck, the ASP that you guys reported changed. Just, what's the difference between the ASP that you were reporting this quarter versus the old ASPs that you used to report?

Yes, that's a good question. Actually, in the past we only had one product segmentation; that's LCD module. However, actually, from early this year our shipment to joint venture have increased, so our shipment delivered the set products from our -- set products, so we have to include our joint venture final production. But, however, if we add the final set price to our LCD module price trend, it would overstate price trend. So we just add the area unit for that joint venture sales, but the price itself is reflected based on the LCD module price. So, all in all, that's because of the reflection of our joint venture sales.

Okay. I'm not sure I understood that answer, but I will follow up with you guys afterwards.

Just in terms of COGS per square meter, you might have addressed this earlier and I might have missed it, did you talk about what you think you guys can do on a COGS per square meter basis in the third quarter and the fourth quarter?

Cost per square meter?

(Multiple speakers).

Actually, yes, as I mentioned before, our actual cash cost reduction should be limited. Maybe for the premium products such as FPR and smartbook, we will have around low-single-digit cost reduction. For the generic side, it should be very limited. It means total cash cost reduction should be limited to half of low single digit. It means our cost per square meter is likely to increase, backed by our product mix improvement.

Okay.

Actually, higher ASP, product mix, the higher cost products.

COGS per square meter. Okay.

But the (multiple speakers).

Understood. And just when I look at your inventory, again, I think you guys were talking about this getting back down under a month, but if I just look at it purely on a days basis, based on what you've reported it's about 45 days of inventory. If you look back, it was kind of in the 20 to -- the high 20s to mid 30s. What's the range you guys want that to be in now? Is that -- do you want that to be 35 days, 30 days? What's the thought on that?

Actually, in the past the normal range should be 30 days to 35 days, but it (multiple speakers) to 25 days. Around 25 days.

Okay. So that 45 needs to go down to 25 basically is what you're saying?

Oh, that's not true.

So we should see it --

That's not true. You misunderstand the situation. Actually, if you look at the amount of inventory itself, yes, you can translate 45 days in terms of amount. But however, in terms of unit, because of high end mix, in terms of units it's around -- slightly over one month, so we can take out one week less.

Okay. I see. Okay. Okay. Fantastic. Thank you guys so much.

The following questions will be presented by Mr. [Stephen Golden] from [Talamanda]. Please go ahead, sir.

Hi. Just to pick you up on the touch panel question before, sorry, just if I could have a bit more clarity there. So you're working on in-cell. What are you currently doing in the touch business? If you could talk a little bit about that, that would be very helpful. Thanks.

The current status?

Yes.

In the first phase, we are putting our efforts to stabilize, establish the add-on, the infrastructure, from supply chain to in-house manufacturing. So, from second half of this year until next year, all of resources will be input to stabilize the add-on. Actually, there are several types of the glass type we call [GF2]. So phase one will be establishing and stabilizing the add-on.

But in-cell/on-cell, we believe the commercialized -- the timing will be possibly year 2013. It will take some time. So, at this moment, we are working with several key customers to establish the phase one add-on touch as appropriate solution provider.

Great. Thank you very much. Second question, one thing that's always kind of interesting about global LCD demand is that Japan always seems to be pretty strong, and obviously you were saying before about after the eco points system this year looks to be a lot better than expected. Is that because Japan versus other developed markets has a much faster -- much quicker refresh cycle of LCD TVs? And on that basis, when, if at all, do you expect something of a refresh cycle in the west? And if that's going to come, is that totally dependent on 3D content, maybe smart TVs taking off, or do you think we could just see a refresh cycle for any other reason?

Yes, it's a really good question. Actually, I try to find the kind of answer from the previous question and answers. Actually, when you look at the replacement cycle, Japan showed a very good example. So although the support for the analog broadcasting cut off, but their replacement power in the Japan market last year was very significant. So we are also ready for the decline of replacement cycle from the western hemisphere. Actually, that was in our original assumption that was next year, so that's why we mentioned about the second half next year.

But, however, the timing was delayed a bit because of the consumers' purchasing priority. Right now, they are more focused on the smart devices, but later on they have to replace their LCD TV, maybe next year or maybe one and a half years later. But anyway, that's the middle of time, we think. So we are not that pessimistic for the LCD demand, eventually. So if there's some replacement cycle at the end of next year or year 2013, it's a matter of time. So, really a key trigger for the demand ramp-up.

Sure. Final question. At the first-quarter results, you said that you were expecting to break even in operating profit for the first half, and obviously that hasn't happened. But when we had those -- that guidance, that was the end of April, so obviously that was after the Fukushima earthquake. And looking at the results, pricing has actually held up relatively well, cost down has been kind of limited but we expected that, and all the high-end demand that you talked about, so that's FPR TVs and also tablets, has also held up pretty well. So, given the disparity in those numbers, where would you say the biggest disappointment has been and the biggest surprise?

Biggest disappointment came from the generic products. Actually, in this May we tried to raise the panel price, yes, we did, but our competitors would not follow the price upward trend because of the weak demand and less confident conviction on the demand side. So, actually, our assumption for the price increase was wrong. So, because of that, our operating profit direction was changed.

So that's why we are very cautious about our guidance. The generic areas is still very big portion, rather than our high-end mix side. So, anyway, our differentiated product side is okay. It's well in line with our expectation. But the risk factor is still in the generic LCD industry. (Multiple speakers).

Great. Thank you very much for taking my -- oh, sorry.

Okay. We already have one hour and five minute conference call session, so we could end our conference call now. So, if you have any further questions, please feel free to contact our IR team. Operator?

Yes?

We could end our conference call now.

Okay, you may.

We'd like to thank you for your participation in our second-quarter earnings conference call. As I mentioned before, I think our answers would not be enough for your questions, so for further questions and if you have any questions that you failed to answer or did not answer, please don't hesitate to our IR team and myself. Thank you for the participation and rest of your questions.