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Tuesday shares of LCD panel maker LG.Philips (NYSE:LPL) declined 7% after the company announced disappointing earnings. After reviewing their conference call (via SeekingAlpha), we believe they are moving in the right direction:

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

We’re all for reducing LCD inventory! Unfortunately, the overall results were less beneficial. Sales were up almost 20% sequentially (but just 1% year/year) to 2.78 trillion Korean won. Meanwhile, inventory was down nearly 10% to KRW1.15 trillion. But if we take the ending inventory and divide it into quarterly sales (we couldn’t find the more appropriate cost of sales data for Q2) we end up with 37 days in Q3 compared to 49 days in Q2. An improvement, to be sure, but not nearly as strong as the halving of inventory days suggested on the call. Besides, we thought the growth was all in the “large panels” but that is where LPL cut their inventory.

That puzzle aside, the more important news was what LG.Philips is doing to solve the problem over the longer term:

Following the substantial reduction in 2006 CapEx to KRW 3 trillion, our 2007 CapEx will be approximately KRW 1 trillion. This should allow us to have more flexibility regarding future funding needs, focusing on investment in gen 5.5, enhancement of production efficiencies, and maintenance of our existing facilities.

We believe our CapEx plans are aligned with the realities of the market, as consumers have yet to show strong demand for LCD TV panels over 50 inches. It is important to note that we remain committed to manufacturing 42- and 47-inch panels, as we anticipate the demand for these sizes should continue to increase. Further ramp up of our P7 facility should adequately fill the demand in this area.

That’s what we like to hear, as long as competitors follow suit. That point was not lost on one of the call participants:

Tejinder Sandhu - HSBC

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

Management responded that:

Our understanding is there is actually one very aggressive player, but the rest is getting less aggressive. In Japan, people do things on a more modest capacity basis.

We hope they are right.

LPL 1-yr chart:

lpl 1-yr

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Source: LG.Philips Finally Moving in the Right Direction