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LG Philips LCD Co., Ltd. (NYSE:LPL)

F4Q06 Earnings Conference Call

July 11, 2006 8:00 am ET

Executives

Daniel Kim - Vice President of Investor Relations

Ron Wirahadiraksa - CFO

Bock Kwon - Chief Marketing and Sales Officer

Analysts

Jay Lee - Daiwa Securities

Chong Kim - CLSA

Pranab Sharma - Daiwa Securities

Oliver Lee - Sanford Bernstein

Ivan Goh – DRKW

Christian Dinwoodie – UBS

Mr. Thomas – Prodigy Capital

Chun Tan – Thames River Capital

Frank Lee - Deutsche Bank

Simon Smith – Citigroup

Mark Austin - Sanford Bernstein

Tony Sanders - HSBC

Mr. Pujara -

Presentation

Operator

We will begin the conference of the fiscal year 2006 second quarter earnings results by LG Philips LCD. This conference will start with a presentation followed by a divisional Q&A session. (Operator Instructions) Now we shall commence the presentation on the fiscal year 2006 second quarter earnings results by LG Philips LCD. Please go ahead, sir.

Daniel Kim

Thank you. Welcome to LG Philips LCD's second quarter 2006 conference call. My name is Daniel Kim, Vice President of Investor Relations. On behalf of LG Philips LCD, I would like to welcome everyone to our global quarterly earnings conference call.

I am joined by our CFO Ron Wirahadiraksa, and our Chief Marketing and Sales Officer, Bock Kwon. We have approximately one hour for this call. We will spend the first part of the call reviewing our prepared remarks, which correspond to the slides available on our web site. Following this, we’ll take your questions. Please do not hesitate to contact us if you have further questions after this call.

Before we move into the discussions of the earnings results, you should be aware that this conference call may contain forward-looking statements within the meanings of the US Private Securities Litigation Reform Act, and securities regulations in Korea. Including statements, among others, regarding LG Philips LCD’s expected future financial performance.

You are cautioned that these statements may be affected by the important factors, among others, set forth in the LG Philips LCD’s filings with the US Securities and Exchange Commission and in its second quarter 2006 earnings release. Consequently, actual operations and results may differ materially from the results discussed or projected in these forward-looking statements. LG Philips LCD undertakes no obligation to update publicly any forward-looking statements whether as a result of new information, future events or otherwise.

Now, please take a minute to read this 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.

Ron Wirahadiraksa

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

Please turn to the next slide. Before we get into the specifics of the quarter I want to share with you some of our thoughts on the industry and where LPL stands today. We believe that the growth characteristics of the TFT LCD industry are still undiminished and intact. We are seeing positive signs that reinforce this belief.

The industry shows indications of increased rationality in terms of temporization of production. Also, demand for LCD TV is strong as higher resolution and larger sizes are starting to become mainstream in markets throughout the world. We continue to see steady growth in larger and wider notebooks, as well as high-end monitors; areas we believe will remain profitable segments for us.

Against the backdrop of positive long-term growth prospects, the industry is experiencing several challenges:

  • Greater than expected industry-wide price declines -- which on one hand help drive demand, but on the other hand can temporarily impact us negatively in terms of profitability;
  • Ongoing capital expenditures, although CapEx intensity is diminishing;
  • The start of consolidation of manufacturers, which in the longer term can be positive, but in the shorter term creates future competition among top tier players; and,
  • The need to meet the increasing variety of customer demands with greater flexibility.

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

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

We are temporizing production to address the increase in inventory levels. Current overall inventory is at four weeks. TV inventory is a bit higher due to the faster than expected ramp up of P7, and in preparation of the anticipated TV demands in the second half of 2006.

We have decided to continue evaluating any further investment in a next generation fab. We have also decided to invest in the multipurpose Gen 5.5 fab which will be housed in our P8 facility to better meet the expected strong demand for both high-end monitors and wide format notebooks.

We are reinforcing our strong collaborative relationships with our customer base to ensure appropriate production levels and a high quality standard for our products. This and other actions, such as better alignment with our customers’ needs, are ongoing tasks to which we remain committed.

The impact of some of our initiatives is immediate. We expect that these actions will strengthen the long-term value for our shareholders and enable us to leverage the industry’s strong growth opportunities. These efforts would allow us to better compete in what is now a more crowded space in the top tier of the industry.

Please turn to the next slide. For the second quarter, revenue was KRW2.3 trillion, down 6% sequentially from the first quarter due to fewer shipments than expected and continued declines in ASP across the TV, monitor, and notebook segments.

In the second quarter, total cost of goods sold increased 10% quarter-on-quarter to KRW2.5 trillion, due mostly to increased shipment levels relative to last quarter. Cost of goods sold per square meter in US dollars decreased by 3% quarter-on-quarter and decreased 9% year-on-year. Cash COGS in US dollars per square meter increased by 1% and decreased by 14% respectively.

In Korean won, cost of goods sold per square meter decreased 5% quarter-on-quarter and 14% year-on-year. Cash COGS in Korean won per square meter decreased 1% quarter-on-quarter and decreased 19% year-on-year.

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

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

Next slide please. As of June 30th, 2006 we reported KRW779 billion in cash and cash equivalents. The reduction, compared to March 31, 2006, is primarily a result of ongoing spending at P7 and growth of inventories. As I previously mentioned, second quarter finished goods inventory turnover levels increased due to the faster then expected ramp of P7 and anticipated TV demand in second half of ’06. The current level of inventory is approximately four weeks. We will continue to actively manage our level of inventory to remain within four to five weeks.

This quarter, total debt increased to KRW4.2 trillion due largely to CapEx spending. This borrowing has increased our net debt to equity ratio to a level of 46%. We will continue to adjust our debt to such levels that ensure future business developments are supported appropriately.

Please turn to the next slide. Cash flow from operations decreased to KRW111 billion due mainly to a decrease in net income and partially offset by a quarter-on-quarter improvement in working capital. This offset was due to lower account receivables compared to the last quarter.

CapEx spending of KRW990 billion was according to plan and largely allocated to P7. As stated, we have taken steps to reduce our capital expenditures for the reminder of 2006, primarily through our initiative to postpone additional capacity expansion in existing fabs. This will be further elaborated upon in the outlook section.

I would now like to go into more detail about several specific performance metrics. Please turn to the next slide. The average selling price per square meter of net display area shipped for the second quarter decreased at a greater than expected rate of 18% to $1,598. Quarter-end to quarter-end price per square meter decreased 19% $1,479. The total display area shipped for the second quarter of 2006 was 1.5 million square meters, an increase of 17% quarter-on-quarter.

As discussed, the area shipment and the ASPs were lower than initially anticipated, mainly because of industry-wide over-capacity and to some extent, delayed purchasing decisions by customers.

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

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

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

We now turn to our outlook discussion, next slide. Looking ahead, we expect to see prices begin to stabilize and anticipate sustained growth in consumer demand for LCD TV’s in the second half of 2006, particularly in the fourth quarter.

For the third quarter of 2006, we expect our area shipments to increase quarter on quarter by a mid to high 20% range, driven by continued growth in the expanding LCD TV segment, continued ramp up at our P7 facility and the stabilization of pricing.

We expect our average selling price per square meter of net display area shipped at the end of the third quarter of 2006 to be relatively flat, as compared to the end of the second quarter of 2006, largely due to increased seasonal demand leading into the holiday season.

We expect the average ASP per square meter in the third quarter to decrease by a mid single-digit percentage.

Our EBIDTA margin for the third quarter is anticipated to be in the low teens range.

Given the current market conditions, we have decided to postpone incremental investment in existing fabs and we continue to evaluate any further investment in a next generation fab. As a result, we have revised our capital expenditure guidance for 2006 downward from KRW4.2 trillion to KRW3 trillion.

I would like to reiterate a few key thoughts. First, we believe that the growth characteristics of the TFT LCD industry are still undiminished and intact.

Second, the actions we have taken to temporize production, carefully manage investment in future capacity, significantly reduced capital expenditures and focus on our customers with greater flexibility will help us respond to current short-term market conditions, and are also mean to strengthen our position for the long-term. Well we anticipate that we will begin to see an improved market environment in the third quarter, more meaningful progress will likely take place in the fourth quarter.

Daniel Kim

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

Question-and-Answer Session

Operator

(Operator Instructions) The first question comes from Jay Lee - Daiwa Securities.

Jay Lee - Daiwa Securities

Yes, hi. Previously you were giving the global projection of the TV market at about 45 million units. I was wondering if that number has changed?

Also, the second question will be for the TV revenues, I understand it accounted for about 48% in the second quarter. Is it possible to breakdown in more details how much the 40-inch and 30-inch products accounted for?

Ron Wirahadiraksa

Thank you for that question. On your question on the revision of the previously indicated 45 million LCD TV sets in the market, that remains unchanged for us. We still see that pattern emerging and also we still see the seasonality as we expected, meaning about one-third in the first half and about two-thirds in the second half.

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

Bock Kwon

TV revenue increased more for the larger size, definitely from the P7; also, we mostly increased 37-inch and 43-inch. So when I say that, 43-inch by around 24%, and the 37-inch at 24%.

Jay Lee - Daiwa Securities

Okay great. Thank you very much.

Operator

Our next question comes from Chong Kim - CLSA.

Chong Kim – CLSA

Hi. It seems like from your EBITDA margin guidance for the third quarter there is really no improvement versus the first. It seems that’s the case despite the fact that your guidance for volumes and pricing suggests less hostile environments.

Can you talk a little bit more about why there doesn’t seem to be a big improvement in EBITDA for the third quarter?

Ron Wirahadiraksa

Thank you for that question. Actually the EBITDA, as such, will grow significantly. Because if you add up the price guidance and the shipment guidance then you will find that the sales amount from Q3 over Q2 will increase significantly. So here, of course, the number changes, the denominator also increases. Therefore, the percentage is more or less the same, that is true.

As I earlier indicated, we expect a more meaningful percentage improvement in the fourth quarter, but EBITDA as an amount will increase.

Chong Kim – CLSA

If we look at the margin though, it is in the lower teens, and given historically a lower teen percentage of EBITDA margin momentum operating loss; is it fair for us to expect that you will post another operating loss in the third quarter? Maybe the magnitude will be smaller, but still.

Ron Wirahadiraksa

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

Chong Kim – CLSA

Given that your CapEx for this year has been cut back significantly, just thinking about how capacity forms for you over the next 12 months, could you just give me a growth rate for the square area of capacity you will have achieved in ’06? What do you think a target growth rate of square area capacity for you will be in ’07?

Ron Wirahadiraksa

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

Chong Kim – CLSA

Do you have a target range for ’07?

Ron Wirahadiraksa

Well, we ramp up the Gen 7 more, although it is at a slower pace than we anticipated. As I mentioned, we are investing in our Gen 5.5 so I think the number will have the benefit to stabilize or slightly diminished. Although you have to also recognize that for 2007 we will have the whole year of the P7 facility.

Chong Kim – CLSA

Thank you very much.

Operator

Our next question comes from Pranab Sharma - Daiwa Securities.

Pranab Sharma - Daiwa Securities

Thank you. Your ASP guidance, you have mentioned the average ASP will decline about mid single-digit percentage point. Your exit ASP at the end of the second quarter was $1,479, which is about 8% point lower than the average point of second quarter. Even if you see your whole quarter ASP remain at the same level of $1,479, I guess your ASP should decline at least 8% quarter-on-quarter?

Ron Wirahadiraksa

I understand the question. Thank you, it’s a very good point. We expect that in the beginning of Q3 prices will come down a little bit more. But the average sales prices will start to increase slightly again from that low point in the later part. That means actually we believe that the ASP square meter glass basis will be flat. However, in the quarter you are right, we will see a mid single-digit decrease.

I hope that I clarified what may seem as a puzzle, but if you look at the pattern then the relative flatness indicates that quarter-end to quarter-end the price is the same, as you indicate. I hope I am making it clear that in the beginning of the third quarter, again we see prices come down a bit more; at the end it will go up. That is because prices start to stabilize and we are bringing more of the 42- inch and 37- inch in the mix.

Pranab Sharma - Daiwa Securities

Do you have any inventory writedown on the second quarter?

Ron Wirahadiraksa

We write down inventory for 42-inch because the production cost of the 42-inch are still not inline with the market price. As you know, the market price came down more, so yes, there has been some writedown of that.

Pranab Sharma - Daiwa Securities

So it’s about KRW40 billion?

Ron Wirahadiraksa

I don’t have the figure in my head.

Pranab Sharma - Daiwa Securities

Out of all of the key product lines -- TV, monitor, and notebook -- which of the product lines are now currently running below cash cost?

Ron Wirahadiraksa

We don’t look at cash cost for product line. As I said, the production cost for the 42-inch, as we are still ramping the fab, are still below the cash cost. For most other products, we are okay. For 17-inch we are very close to cash cost, but we see that improve in the second half; as well as for the 42-inch, due to ongoing cost down.

Pranab Sharma - Daiwa Securities

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

Ron Wirahadiraksa

Slightly below cash cost. We see that improve in the second half.

Pranab Sharma - Daiwa Securities

Thank you very much.

Operator

Our next question comes from Oliver Lee - Sanford Bernstein.

Oliver Lee - Sanford Bernstein

Hi Ron. I have a few questions. My first question is, if I look at the, the OP margin trends over the cycles, in the second quarter you actually have the largest negative OP margin.

Can you actually give us some color of why this happened? Do you think that it’s more of the industry situation or some corporate-specific issue?

Ron Wirahadiraksa

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

Oliver Lee - Sanford Bernstein

Yes, it is the largest historically.

Ron Wirahadiraksa

Well if you look at what we guided for and what actually came out, the analysis shows that its mostly related to price but that certainly in quantities we had anticipated much of an improvement.

Of course, if you look at the comparison with Q1 then the quantities grew, as we already indicated, but price erosion has been basically beyond our expectations. That is the main reason why the operating profit basically persisted, no improvement in the pricing.

We have already communicated, I believe, in the first quarter that we had pooled in some of the cost benefits due to a good ramp up of P7 in the first quarter and hence, the second quarter cost down would be relatively modest. But we feel that in the third quarter that will pick up again; and hence, I guided for the year close to 15% cost down. That includes some of the production temporization.

On should we have, or could we have, sold more 42-inch? Well, as we mentioned, the Generation 7 facility ramped very, very smoothly and there was not enough uptake in the market for that. This also has to do with qualification of the product by customers. So we were simply ahead of the music. Even though the inventory is within the target range -- on average 28 days, it is within the four to five weeks that we guide for before we take action -- we feel that the TV inventory is above that. That is why we are coming down in production there. So, there’s also some impact of temporization of production.

Oliver Lee - Sanford Bernstein

So, given the current situation, what you see in the future, the fab expansion for example like the Gen 8, would you actually give us some color? How do you deal with the expansion?

Ron Wirahadiraksa

Yes. As I hopefully explained earlier, for any next generation fab, so not next fab, but for any next generation fab which could be a Gen 8, we have decided not to go into that now, but to study further the feasibility.

In earlier discussions, we have put on a table that at least 20% CapEx efficiency should be warranted, and maybe it should be higher the way the price erosion is emerging.

Also, we feel that the large panel market at this moment doesn’t warrant us to rush into a Gen 8 decision. That’s how we see the world. What we have decided is to go into a Gen 5.5, for which we had already built a shell. That’s why the Gen 5.5 will be housed in this P8 facility -- not to be confused with Gen 8 -- so, in the P8 facility in Paju to occupy a part of that.

We will initially ramp up 30k. So we’ll do the Gen 5.5 also in probably three phases, as we think now. That is the flexibility that we have for build in, to mitigate any adverse business conditions.

Oliver Lee - Sanford Bernstein

Thank you.

Operator

Our next question comes from Ivan Goh – DRKW.

Ivan Goh – DRKW

Good evening. Just three questions. First of all, you talked about having a more appreciable improvement in your margins in Q4, in your operations in Q4. Given that Q3, its fab – you stated you would be unprofitable on your operating line, I would just like to find out your thoughts on what kind of price trend would be needed in the fourth quarter in order to propel yourselves to profitability?

Ron Wirahadiraksa

You have three questions. Is that one question?

Ivan Goh – DRKW

Yes, that is the first question.

Ron Wirahadiraksa

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

Ivan Goh – DRKW

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

Ron Wirahadiraksa

Well, if you put it like that, then it would be represented as you indicated, because it is overall sales, the 8% that you mentioned, if that is that number. I am not [affirming] it.

Ivan Goh – DRKW

Thank you. The second question is, you talked about the industry taking a more rational approach towards capacity additions. I do look at the last downturn, I think it was in 2004, many LCD companies such as yourself also temporized production. What we are seeing today isn’t that much different from what happened in the last downturn.

My question is, do you see any further evidence of your competitors and yourself taking a more rational approach besides temporizing production?

Ron Wirahadiraksa

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

We will delay the Gen-8, as I said, if we would go into that at all. We are simply not ready for it. We are not sure about the economics. So having said that, we think that will be something that other companies will always try to consider because the fundability and the risk management around ongoing large CapEx disbursements is something that very difficult to sustain.

Ivan Goh – DRKW

Would LG Philips consider initiating some consolidation moves?

Ron Wirahadiraksa

Well, that is very difficult, as you say. We have already started to show that we are a Company that will not go into market share at the cost of longer term profitability , so that is for us, the main driver. We stay very firm to our commitment that when we see inventories rise to above four to five weeks that we will temporize production. I think we have always communicated that and we see other people following.

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

Ivan Goh – DRKW

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

Bock Kwon

Thanks for your question. The TV market seasonality shows that the first half is 25% and the second half 65%. So, we believe that in the second half that we are expecting a big growth of sales for TV. Also, we are preparing to sell more of the larger size like 42-inch and also an increase in 37-inch. Together with our customers, we are preparing a strong promotional plan.

Ivan Goh – DRKW

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

Ron Wirahadiraksa

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

Ivan Goh – DRKW

But why is that your TV revenues was far less than 25% growth sequentially? Was the pricing down by about 20%, 25%?

Ron Wirahadiraksa

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

Ivan Goh – DRKW

Okay. Thank you very much.

Operator

Our next question comes from Christian Dinwoodie – UBS.

Christian Dinwoodie – UBS

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

Ron Wirahadiraksa

As I said, in the initial stage of P7 we had a much better ramp, so the cash costs were lower due to that reason. In the second quarter, we were not able, as we indicated in Q1, we were below on the cash cost down rate. We expect that to pick up in the third quarter, such that overall costs will come down by close to 15% on a square meter basis.

Christian Dinwoodie – UBS

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

Ron Wirahadiraksa

Well we continue to focus on the strategy we set out; that is the design improvement, designing and reducing. Of course in P7, the key is still operating efficiency, getting P7 up and then the deals improve; and working on more clever ways to put a 42-inch together, we are working on this very hard. The depreciating leverage is still something that we are doing, because P7 even though we are ramping at a slightly slower rate, we are still adding a lot of capacity to the Company. We get to see some of that back towards the depreciating base.

Next to that, we are looking also at our supply base. We are strongly evaluating the sourcing of our raw materials and components. We also expect to see improvement there.

Christian Dinwoodie – UBS

Thank you.

Operator

Our next question comes from Mr. Thomas – Prodigy Capital

Mr. Thomas – Prodigy Capital.

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

Ron Wirahadiraksa

I will ask Bock Kwon to answer that.

Bock Kwon

The price for notebooks in Q4 is that the IT market is usually following the price for the supply/demand situation. We expect Q3 and Q4, the second half of this year, the supply/demand situation is going to be a tight balance, and then tight in Q4. That is why the price will increase.

Also, lately the price for the low-end notebooks has reached very low. When the supply/demand situation changes, that is an opportunity to grow and increase the price.

Ron Wirahadiraksa

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

Mr. Thomas – Prodigy Capital

Thank you.

Operator

Our next question comes from Chun Tan – Thames River Capital.

Chun Tan – Thames River Capital

Thanks to taking my question. My first question is regarding your Gen 5.5. Could you give us an idea of what the ramp-up roadmap will be like, in terms of equipment moving in and mass production? Where do you expect to get to, say by the end of the first half of ’07?

Ron Wirahadiraksa

For ’07, you are talking about cost, right?

Chun Tan – Thames River Capital

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

Ron Wirahadiraksa

The 5.5 will not be ramping in the first half. We expect to start ramping that in Q3. So actually, our earlier plans for Gen 5.5 were ramped up slightly earlier, but this will now be in Q3 of next year. Then we will start mass production.

As I said, we will do it in three phases. The first phase will be 30K. Of course, if market circumstances are okay, then the transition to the second 30K will be seamless. But for now, we have the option to delay the second 30K if we want to.

Chun Tan – Thames River Capital

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

Ron Wirahadiraksa

As I stated earlier, 25% is the square meter growth for TVs. Monitor and notebooks, monitors grew almost 8% and notebooks grew almost 14%.

Chun Tan – Thames River Capital

That’s the second quarter -- what about for the third quarter?

Ron Wirahadiraksa

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

Chun Tan – Thames River Capital

One final question: you are seeing negative cash flow, basically, for the second quarter and possibly the third quarter as well; you are going to be suffering operating losses. Do have the sufficient debt facilities, basically, to cover to the end of this year? Is there any chance that you might need to resort to equity financing?

Ron Wirahadiraksa

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

Chun Tan – Thames River Capital

Thank you very much.

Operator

Our next question comes from Frank Lee - Deutsche Bank.

Frank Lee - Deutsche Bank

Thank you. I have two questions. The first question is regarding the inventory outlook in the second quarter. You saw another 18% quarter-on-quarter growth; inventory weeks seem to have gone from five weeks to seven weeks. I was wondering if you could give us a breakdown between the finished goods and the work-in-progress breakdown percentage; and possibly, any third quarter inventory outlook?

Ron Wirahadiraksa

A little more than two-thirds is for finished goods in the inventory number. The rest is for WIP and the raw materials and components.

Frank Lee - Deutsche Bank

In terms of the third quarter, should we expect to see improvement in terms of inventory, in terms of number of weeks coming down? Just giving a sense in terms of third quarter outlook?

Ron Wirahadiraksa

Yes, we should see a slight improvement. As I have said, we always guide for quantity basis; it is about 28 days or four weeks at the end of Q2. That will go down to we expect a little over three weeks.

Frank Lee - Deutsche Bank

So you are looking at three weeks for the third quarter as your target?

Ron Wirahadiraksa

A little over three weeks as a target, yes.

Frank Lee - Deutsche Bank

In terms of reducing inventory, is the key catalyst is going to come from just much better demand? I know you have talked about production cutbacks, but if you can give us any color in terms of the type of production cutback you are looking at, either by application or by end product?

Ron Wirahadiraksa

What we expect, as Mr. Bock Kwon already indicated, quite strong demand in the second half. That will be of the market driven by TV. Within that, we will adjust inventories when needed through temporizing of production. That temporization will not be huge numbers, but it will be enough to balance out the inventory to the targets that I just mentioned.

Frank Lee - Deutsche Bank

The TV growth that you are giving is quite aggressive for the third quarter, surface area growth. Can you give us any color in terms of the pricing outlook? Especially on the 42-inch side, which seemed to have seen a pretty aggressive decline in Q2. What are your expectations for the third quarter?

Ron Wirahadiraksa

We expect in the third quarter TV pricing to come down further, but not to the percentage that we have seen. The reason that the ASP per square meter is not showing that big of a decline is because we are bringing higher product sizes, larger product sizes into the mix.

Frank Lee - Deutsche Bank

Can you give us an idea on stand-alone 42-inch TV pricing outlook for the third quarter?

Bock Kwon

TV price for the 42-inch is already reaching to the sweet spot price. It will maybe be a little further down in the beginning of Q4, it will go close to the $2,000 retail price. So that said, the panel price will maybe be slightly modified to reach that point of the sweet spot price.

Frank Lee - Deutsche Bank

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

Bock Kwon

At the end of Q2, that’s around 3.1 X factor, and we think Q3 and Q4 it is around 2.8.

Frank Lee - Deutsche Bank

Thank you.

Operator

Our next question comes from Simon Smith - Citigroup.

Simon Smith – Citigroup

I just had a couple of questions. The first is probably quite a simple one. I was trying to relate the movements in net income to your movements in income before tax. I just wondered if you could maybe give me any sort of guidance as to what impact you would expect there? There seems to be a sort of 80 million gain in this quarter, 34 million gain before. Can you tell me what the mechanics of that were?

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

Ron Wirahadiraksa

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

Simon Smith – Citigroup

At the same level?

Ron Wirahadiraksa

Yes, more or less.

Simon Smith – Citigroup

Thank you.

Daniel Kim

The relationship with our customers, we have our major shareholders like Philips and LG Electronics. They are focusing a lot on bigger growth, big potential for sales of, especially larger sizes; and also focusing a lot on the customers looking for the big growth of their TV sales in the second half.

Also, we are looking for a bigger growth of sales in the China market also. They are looking forward to the national holiday, a big season, and we expect that there will be growth. Especially for the larger size TVs.

Also, our customers in the European countries also, they are looking for the big growth of the TVs.

Simon Smith – Citigroup

How much of your sales in the third quarter would be covered by forward contracts agreed with customers?

Bock Kwon

Yes. As you know for the TV, they are talking well in advance because they need to build their systems also. So, already we are talking about the sales plan for Q3 and Q4, so we are quite comfortable for the growth of our TV sales.

Simon Smith – Citigroup

I am sorry to carry on, but if I may, just one quick follow-up to that. If they are disappointed in the ultimate end market demand that they are seeing, do they have any commitment to you to purchase TV? As in, are they able to put any panels back to you, or just to cut back their demand? Or, are they committed to actually owning those panels?

Bock Kwon

Well, every customer, they have planning for the second half because they feel a little bit the slow sales in the first half; so they are preparing some kind of promotion on how they can move the TV sales. Also, they are already looking with channels on how they can move their part of the sales.

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

Ron Wirahadiraksa

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

Simon Smith – Citigroup

Thank you very much.

Operator

Our next question comes from Mark Austin - Sanford Bernstein.

Mark Austin - Sanford Bernstein

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

Ron Wirahadiraksa

Yes.

Mark Austin - Sanford Bernstein

How do you see that comparing to overall industry growth, on an area basis?

Bock Kwon

We are growing more than the industry growth, especially our focus for the larger size TV and also a larger and wide types of monitors, and high-end notebooks also. So, we think our total area growth will be higher than the industry.

Mark Austin - Sanford Bernstein

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

Bock Kwon

I don’t have the exact numbers.

Mark Austin - Sanford Bernstein

That’s fine. I was just wondering if you could give a rough sizing. Can you give us a little bit more color on where you think the big levers for reducing cost through improved sourcing are? Are we talking about backlight units, substrates -- what are we looking at here?

Ron Wirahadiraksa

Yes, those are exactly the areas. So backlight units and polarizers, and to a certain extent, driver ICs.

Mark Austin - Sanford Bernstein

I am sorry, backlights and polarizers; you didn’t mention the substrates, is that correct?

Ron Wirahadiraksa

Well, in substrates we don’t have a lot of alternatives at the moment. As you know, we have a glass joint venture with NEG called PEG in Paju. The glass pricing, they are actually slightly more favorable than we thought, which helped in the cash costs.

That is of course, through our purchasing leverage, ongoing operations and hopefully Sharp will start to produce; then we see a possibility to come down. I was more specifically referring to backlight units and polarized. We are looking at the supply base there.

Mark Austin - Sanford Bernstein

Thank you very much.

Operator

Our next question comes from Tony Sanders - HSBC.

Tony Sanders - HSBC

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

Ron Wirahadiraksa

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

Tony Sanders - HSBC

You had already signed and paid for in advance probably some of the equipment. So basically you are just slowing down the delivery orders from the equipment companies?

Ron Wirahadiraksa

There is still cash to be saved, it will be postponed from that until we ramp further. Secondly, we also had in mind for post the 90K ramp up to increase the capacity further. We have also shelved those plans.

Tony Sanders - HSBC

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

Ron Wirahadiraksa

That’s correct. But, if you want to continue, you would also have to already issue purchase orders and pay some of the cash. We held off on that.

Tony Sanders - HSBC

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

Bock Kwon

42-inch customers, we are focusing more for the major shareholders -- Philips and LG. Electronics -- and also the customer from Japan. Especially for 42-inch also, we are seeing a lot for the Chinese market also. The Chinese market, we are working with most of the local manufacturers. They are maintaining a good proportion of the sales in the China market.

Tony Sanders - HSBC

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

Bock Kwon

No, that’s because of the faster ramp up of P7. Then also, less than our customers and our expectations, that’s why we built up some 42-inch inventory.

Tony Sanders - HSBC

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

Bock Kwon

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

Tony Sanders - HSBC

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

Ron Wirahadiraksa

Yes, it’s slightly increased because the main effect is that we’ve stopped largely the depreciation on P4. That ran out of depreciation, largely; this first Gen 5 line. So we won’t have that effect, because we’re taking that into account. The P7 line will continue to ramp, so you can expect some increase.

Tony Sanders - HSBC

All right. Thank you very much.

Operator

Our next question comes from Chun Tan – Thames River Capital.

Chun Tan – Thames River Capital

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

Ron Wirahadiraksa

Can you clarify the question one more time? Sorry about that.

Chun Tan – Thames River Capital

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

Ron Wirahadiraksa

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

Chun Tan – Thames River Capital

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

Ron Wirahadiraksa

Correct. With the price erosion ongoing, the percentage of sales also becomes higher, relatively.

Chun Tan – Thames River Capital

Thank you.

Operator

Our next question comes from Mr. Pujara – [inaudible].

Mr. Pujara -

I had a question on the Korean won. Do you see that as a primary risk, especially as it moves against the Taiwanese dollar competition. Are you doing anything to mitigate that risk?

Ron Wirahadiraksa

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

Yes, against the Taiwanese dollar that is giving us a setback in the financial outcomes and we see that very clearly in Q4 last year and Q1 of this year. LG. Philips LCD actually has a very active hedging policy where we hedge 100% of our committed exposure and about 30%, 40% of our anticipated exposure on a 12-month rolling basis. So we have some shielding, although we are not very immune from it, but we think we are quite satisfied with our forex performance.

Mr. Pujara -

Thank you.

Operator

Currently there are no participants with questions.

Ron Wirahadiraksa

Let me clarify on the depreciation for participants. I was asked a question earlier if the depreciation will go up. Yes, it will go up somewhat, mainly due to the Gen 7 line. The depreciation on Gen 7 in Q2 was KRW135 billion and depreciation in Q2 for P6 was KRW177 billion. So that will go up certainly for P7 in Q3.

Daniel Kim

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

Ron Wirahadiraksa

Thank you. Good-bye.

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Source: LG Philips LCD Co., Ltd. Q2 2006 Earnings Conference Call Transcript (LPL)
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