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Executives

Hee Yeon Kim – Head-Investor Relations

Analysts

Nicolas Gaudois – UBS Securities Pte Ltd.

C. J. Muse – Barclays Capital, Inc.

Brian Park – Tong Yang Securities

Andrew Abrams – Avian Securities LLC

Brian White – Ticonderoga Securities LLC

Jeffrey Toder – RBS Asia Ltd.

Arthur Lai – Citigroup Global Markets Taiwan Ltd.

Dan Malkoun – Viking Global Investors LP

Steven Goulden – Tamamasa

LG Display Co Ltd. (LPL) Q2 2011 Earnings Call July 21, 2011 8:00 AM ET

Operator

Good morning and good evening. First of all, thank you all for joining this conference call, and now I’ll 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 division and Q&A session. (Operator Instructions)

Now, we shall commence the presentation on the Fiscal Year 2011 Second Quarter Earnings Results by LG Display.

Hee Yeon Kim

Welcome to the LG Display Second Quarter Year 2011 Earnings Conference Call. I’m Hee Yeon 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. J. S. Park is the Head of TV Marketing; Seong 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 forecast.

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 shipment and branded 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 KRW48 billion, operating margin of minus 1%, and EBITDA margin of 14%. Income before tax was KRW51 billion minus. Net income was KRW21 billion due to deferred tax asset.

Moving on to the slide number 4, looking at our financial position and ratio as of June 30, we had 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 orders, the actual inventory level increased. Our net debt to equity ratio increased to 21% from previous quarter with decrease in cash sheet, which is still at a manageable level.

Moving onto the slide 5, looking at our cash flow, cash at beginning of the quarter was KRW3 trillion. Cash flow from operating activities resulted in cash inflow of KRW513 billion. Cash flow from investing activities, cash outflow of KRW1 trillion, and cash flow from financing activities resulted in an outflow of KRW143 billion. As a result, the change in cash sheet outflow of KRW648 billion.

Moving to slide 6, 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 7.5 million square meters. ASP based on LCD model price also increased to $743, with a 6% rate quarter-on-quarter increase. This is mainly due to a shift to our higher value-added products such as FPR 3D high-end monitors and smartbook, smartphone based on our AH-IPS technology.

Moving on to our product mix on slide 7, 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 with the employed AH-IPS technology showed the increase – a rising increase in portion.

Moving on to slide 8, and looking at our capacity, with our third 10A ready for a full-scale production, our capacity increased by 5% quarter-on-quarter to 11.2 million square meters.

Next I would like to update you on the coverage of our FPR 3D TV panels continuing from previous quarter. If you look at the chart, in China FPR 3D has shown effective pace to growth in a very short space of time, from 5% 3D TV market penetration in January. (inaudible) and currently showing nearly 60% of Chinese 3D TV market share. However, in the U.S. 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 TV market penetration to speed up in second half of the year and show ten double-digit in Q4.

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

Hope you understand. Firstly, as of this day we’ll speed up the efforts, differentiated products, and business structure – portion of higher valuated products such as FPR 3D, as mentioned in previous slide, high-end monitors, smartbook, and smartphones 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 (inaudible) total solution and OLED TV next year.

Secondly, reserves allocation will be carried out under a more conservative market forecast scenario. We – as we expect our customers to continuously adopt our 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 other CapEx adjustments in this quarter.

And lastly, we plan to maximize the overall operational efficiency of our overall research team. Tighter (inaudible) 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 the second quarter and our management forecast for second half.

Operator, please proceed to Q&A session.

Question-and-Answer Session

Operator

Now Q&A session will begin. (Operator Instructions) The first question will be presented by Mr. Nicolas Gaudois from UBS Securities. Please go ahead, sir.

Nicolas Gaudois – UBS Securities Pte Ltd.

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.

Hee Yeon Kim

In every application you want to get the price?

Nicolas Gaudois – UBS Securities Pte Ltd.

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

Hee Yeon Kim

Actually, in second quarter overall price increase is limited to 1%. In case of TV, which is around 1%, and monitor 3% up, notebook is around 2% up. So overall apple-to-apple price increase, this should be limited to only 1%. However, if you look at our branded area ASP in second quarter, we showed a 6% price increase in mix. Our mix impact for the high-end premium product is around 5%, on top of the apple-to-apple price increase at around 1%.

Nicolas Gaudois – UBS Securities Pte Ltd.

Right. So I guess what I was after was more the blended increase for TVs, monitors, 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?

Hee Yeon Kim

I already answered the TV, monitor, and notebook. In case of tablets out there, we only have one big – we have major one customer, so it is prohibited to mention about that.

Nicolas Gaudois – UBS Securities Pte Ltd.

Right, okay. But you’re saying your blended TV ASP increased only by 1%, whereas the total increased by 6%?

Hee Yeon Kim

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

Nicolas Gaudois – UBS Securities Pte Ltd.

Right.

Hee Yeon Kim

But it is calculated based on the price change.

Nicolas Gaudois – UBS Securities Pte Ltd.

Okay. And maybe if you could clarify a little bit comments you made in the Korea meeting on utilization rates. I mean, if I understand correctly that you’re currently operating at 70% – 70 – and that you intend to be at full capacity by September as a base case. And my question, I guess, is (a) what’s 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 RI shipment as well? Thank you.

Hee Yeon Kim

Actually, as you already heard about our utilization ratio in July, that that should be 70%. We are very aggressive to assess our utilization ratio to lower our inventory to below our newer 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 just because of uncertainty, and we don’t want to mislead the market. So it’s very difficult to mention about the overall situation and the utilization ratio.

Nicolas Gaudois – UBS Securities Pte Ltd.

Okay.

Hee Yeon Kim

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

Nicolas Gaudois – UBS Securities Pte Ltd.

Right

Hee Yeon Kim

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

Nicolas Gaudois – UBS Securities Pte Ltd.

Okay. No, but it make sense. (inaudible). So, basically you’re saying full utilization rates by September is a goal is not, is not a gallant century. And overall we should expect below seasonal pattern or slightly below seasonal pattern basically in the third quarter?

Hee Yeon Kim

Correct.

Nicolas Gaudois – UBS Securities Pte Ltd.

And that’s just probably 70% right now. I mean, have you lowered the loading factors more aggressively on the IT side, or with TV side, or is that volume the same, if you exclude, I guess, smartbooks, which I would assume is more or less fully utilized?

Hee Yeon Kim

Actually, we started to ramp-up (inaudible) in this March for the expectation of our FPR 3D demand. But as do you or maybe understand our 3rd generation best utilization ratio could be severe, so you’ll be able to think which area will be the most big cut in terms of utilization ratio.

Nicolas Gaudois – UBS Securities Pte Ltd.

Understood.

Hee Yeon Kim

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

Nicolas Gaudois – UBS Securities Pte Ltd.

Okay, okay, that’s clear. Thank you very much.

Operator

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

C. J. Muse – Barclays Capital, Inc.

Yes, good evening. Thank you for taking my question. I guess, 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, as your customers and end-customers? And if you can discuss, I guess, geographically that would be very helpful?

Hee Yeon Kim

(inaudible) I’m – Your question is set-makers inventory level. Do you want to know set-makers inventory level? Set, retailer?

C. J. Muse – Barclays Capital, Inc.

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

Hee Yeon Kim

Okay. First of all, the retailer, we don’t have any excess inventory from retailers currently, and the set makers, most the 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 gathering our customer sales target, sales target for this year. Total set sales target was 230 million, but now it will be reduced to 200 million, around 10 million. So 20 million set sales demand has disappeared, so the inventory level in March or beginning of May, all customers’ inventory level was normal. But because that they reduced their sales target, now they have around two weeks excess inventory.

C. J. Muse – Barclays Capital, Inc.

And about the sell, the sell level?

Hee Yeon Kim

We don’t have our – to compare this sale inventory level, but in general, panel makers, we don’t carry excess inventory. Only we have strong work and confirmed demand from our customer in the future, in decades we build excess inventory, because we need a long lead-time component like a t-con drive by c.

C. J. Muse – Barclays Capital, Inc.

Got you. That’s very helpful.

Hee Yeon Kim

Actually, if I may add some on top of the JS mentioned. Recently, inventory – actual 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 of last year, so they carried their inventory at a very conservative level. However, the actual demand was not that big to meet the kind of already lowered expectations.

So, right now, although they feel some inventory issue, but the actual level itself is not that big burden. Actually, the inventory understanding is the function of the confidence level of the third quarter and fourth quarter demand itself. So if there is 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 is another disappointment in the demand side in second half, let’s say no seasonality yet, recent inventory would be an issue.

C. J. Muse – Barclays Capital, Inc.

Sure, makes sense. If I can move over to the utilization front, I just want to kind of confirm what you said earlier in the prepared remarks. So you were at the mid-80s level overall in Q2, but that 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 kind of the same kind of weakness that you’re seeing in July?

Hee Yeon Kim

Actually in terms of utilization ratio, this month should be the bottom. We tried to reduce – actually in this July we tried to change our spend of our inventory holding period. In the past our inventory holding period was around one month, slight over one month, but right now we tried to reduce to one-week quarters. So our normal inventory spend as it should be changed from previous 30 – one month to maybe three weeks.

So because of that our utilization I just mentioned shouldn’t 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; this is 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.

C. J. Muse – Barclays Capital, Inc.

Good. 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.

Hee Yeon Kim

Actually, if you take the third quarter occupancy increase, it should be limited to low single-digits. That’s not because of new ramp up; that’s because of the efficiency improvement and longer number of days of production per year. And then next year it’s very difficult to mention right now, because we are adjusting our CapEx trend. So based on our original scenario over all of these years, they should be around mid-teen percentages, but right now we are dealing our CapEx and capacity plan specially for the P98. Maybe 60% or 70% of P98 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%.

C. J. Muse – Barclays Capital, Inc.

Very helpful. Thank you very much.

Operator

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

Brian Park – Tong Yang Securities

Okay. Thank you for taking my question. Well, recently set makers have maintained tight inventories policy for component. Then is there any possibility they would change processing pattern for component? I mean, on shifting to adjusting time pattern? In the afternoon session, you said you would change – down grade your level of your inventory standard. So I guess it is a kind of signal of changing food chain? Thank you.

Hee Yeon Kim

Yes, Brian?

Brian Park – Tong Yang Securities

Yes?

Hee Yeon Kim

This is Seong Lee, Head of the IT Marketing. As you know very well, we see the market is getting a little softer than our expectation. Most of the customers are scaling down. They are buffering inventory; thereby, they are downsize, downsizing the processed volume. So managing buffer in the first half, and now they are going through some adjustment period. So most of the customers are downsizing the – moving the process for you. Just they want 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 has 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.

Brian Park – Tong Yang Securities

Okay. Okay, great. Thank you.

Operator

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

Andrew Abrams – Avian Securities LLC

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 kind of the percentages on where you think tablets might be? And any changes, any more significant changes they need to the monitor or the notebook side?

Hee Yeon Kim

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

Andrew Abrams – Avian Securities LLC

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?

Hee Yeon Kim

FPR and IPS monitor, and smartbook – that’s tablet – and smartphone. And also we have spec products BMS, through BMS.

Andrew Abrams – Avian Securities LLC

Okay.

Hee Yeon Kim

So mostly FPR and smartbook.

Andrew Abrams – Avian Securities LLC

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?

Hee Yeon Kim

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 costs in the high-end premium product update. They should be at a rate of low single-digits. But in case of existing commodity products, it’s not that easy to reduce the cost. So all in all, we will reduce our cost of order high-end product side. That’s the answer.

Andrew Abrams – Avian Securities LLC

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

Hee Yeon Kim

The more generic products, that’s, yes, good – relevant understanding.

Andrew Abrams – Avian Securities LLC

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

Hee Yeon Kim

Actually, if you look at financial statement for LCD makers and component suppliers, their income statement looks to be very bloody, so that’s the main reason.

Andrew Abrams – Avian Securities LLC

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?

Hee Yeon Kim

LED should be around close to 40% in second quarter. And second half it should be very volatile, although we are targeting close to at least 40% or 50% for the LED; however, there’s some variable factors affect the FPR 3D. So if there is good response from the U.S. market (inaudible) the portion of LED should decrease, but anyway, until now it’s around 40%.

Andrew Abrams – Avian Securities LLC

All 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?

Hee Yeon Kim

Actually, in China market (inaudible) type FPR 3D demand was quite strong. So if we are very successful in the U.S. market, it will impact our LED penetration, our LED portion in our company.

Andrew Abrams – Avian Securities LLC

Okay, and that would be a negative implication if FPR is more popular in the U.S.?

Hee Yeon Kim

It’s positive, very positive implication.

Andrew Abrams – Avian Securities LLC

Oh, positive. Okay, I’m sorry, I misunderstood you.

Hee Yeon Kim

Because of the volume scale should be quite significant.

Andrew Abrams – Avian Securities LLC

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? And 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?

Hee Yeon Kim

Yes, you are correctly understanding. Actually, in the small-size OLED business, actually we did the – did many consumer survey between OLED and our AH-IPS, which is right in our display. But when you look at their consumer user-experience in the mobile side, the consumers more prefer high-resolution display with low battery consumption and better outdoor visibility. That’s our AH-IPS mobile display, so we decided to stop other 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 focus, after checking out the market response for our OLED TV. And then we will decide our CapEx plan at the end of next year.

Andrew Abrams – Avian Securities LLC

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?

Hee Yeon Kim

Yes, the volume should be very limited, as it’s just for checking out the market response. So we already have the R&D and high-light reps in our existing 8th generation, but that’s not the commercial production base. If the market responds for our new OLED TV next year, we will decide material CapEx next year.

Andrew Abrams – Avian Securities LLC

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

Hee Yeon Kim

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

Andrew Abrams – Avian Securities LLC

Great. Well, thank you very much.

Operator

The following question was presented by Mr. Brian White from Ticonderoga Securities. Please go ahead, sir.

Brian White – Ticonderoga Securities LLC

Yes, good evening. I’m wondering if you could talk a little bit about the TV inventory and demand by the different geographies: U.S., Europe, Asia-Pacific, and specifically China?

Hee Yeon Kim

So, your question is of regionally inventory level of – inventory level by region?

Brian White – Ticonderoga Securities LLC

Yes, the inventory situation by region, and also the demand in terms of what you’re customers are telling you?

Hee Yeon Kim

Actually, we don’t have regional inventory-level information, but we gathered some research companies’ information from JFK and MPD. So, as I know in the U.S. 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 the world including Asia-Pacific, Middle East, and Africa and Latin America reached over 40% growth rate YoY, and almost flat we are expecting in Europe. And unexpectedly, Japan is very strong now. We expected almost minus 50% growth rate YoY because of last year Japan demand was really strong, around 23 million. The former demand was around 11-million something, so we expected around 11 million demand in Japan, but already 14 million LCD TV sold in – 11 million LCD TVs sold in Japan, and around 4 million LCD TVs will be sold in July. So Japanese research companies expecting around 18 million to 19 million of demand this year, but we expect around 17 million.

Brian White – Ticonderoga Securities LLC

Okay. And when we think about the TV market at large, that your customers, I guess in May had started to significantly reduce forecasts for second half of the year. I mean, 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 are looking at 10% growth; next year could be than lower. I mean, how do you look at this market and the trends that we’re seeing here?

Hee Yeon Kim

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 U.S., people want to buy. But the panel makers have a problem because our customers, set makers, they don’t want to sell if it’s a low-end commodity product like a 32-inch, 26-inch HD lamp product because of profitability. So they cut their demand. Even though retailer recast volume, they don’t want to sell. They’re almost same as major brands, global brands especially. So profitability is most important thing now.

Brian White – Ticonderoga Securities LLC

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.

Hee Yeon Kim

Yes, this is Seong Lee from IT Marketing. As we agree, the market is growing very fast, and recently we updated annual total market size, a little down sized from previously close to – recently we – our focus is about 78 million of tablets this year. And next year, still can have some area we need to define, but possibly a little over 100 million units. So there’s no doubt here this market is growing as we expected.

Brian White – Ticonderoga Securities LLC

And what percent market share will LG Display have in tablet? What do you have now?

Hee Yeon Kim

At this moment our market share is about 60%.

Brian White – Ticonderoga Securities LLC

And how about next year, do you think you’ll keep that 60%?

Hee Yeon Kim

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

Brian White – Ticonderoga Securities LLC

Okay, great. Thank you.

Operator

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

Jeffrey Toder – RBS Asia Ltd.

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

Hee Yeon Kim

For the CapEx, cost will mostly impact on next year.

Jeffrey Toder – RBS Asia Ltd.

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 the 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?

Hee Yeon Kim

Really good question. Actually the TV demand, it will not see that strong going forward. This will be lower than market expectation. Actually we understand the reason why as the customers purchasing priority. When you look at our – from the point of consumers, actually consumers speak interest for the IT devices. Nowadays, there’s two smart device, such as smartphone and tablet smartbook. So – and also they start to enjoy new ways of content consuming through all this smartphone and tablet side. So these kind of smart device in the product consumer experience should take time, and also the penetration of the smart device should be very important for us when will the TV demand would rise.

So when you look at the penetration of the smartphone, we think it will at the end of this year or next year. And also, if there is big demand for the tablet side next year, we believe consumers product for the purchasing item among IT device should move to the TV. But this is 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, (inaudible) and FPR and LEDs. On top of that we have left out our own inspectors from Smart TV side.

So consumers cannot tell the difference between these kind of several devices in one TV, so it means there’s no strong attractive point for consumers. So we believe if our FPR will be based in that format in the 3D market, and also people understand this will be the real Smart TV and Smart experience, so the timing will be during TV demand pick-up period, together with 3D content. So it’s very difficult to explain, but I hope it will be an answer for you.

Jeffrey Toder – RBS Asia Ltd.

I mean, 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 as – 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 till 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?

Hee Yeon Kim

This is also a good point. Actually, yes, recently top items in the LCD side is unfortunately small device, 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 U.S. and EU market in second half of this year. So we believe, although it looks very disappointing in terms of TV demand, we can agree. However, 3D TV demand will 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 we get 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 all the early adopters and first followers should buy tablet items until first half next year, but it’s going to be on just in second half. Maybe Q4 next year, people start to purchase TV again.

Jeffrey Toder – RBS Asia Ltd.

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?

Hee Yeon Kim

Actually the sharp increase in elective recovery for the utilization for our company is not a seasonal pattern. As we mentioned before, seasonal demand in third quarter should be slower than historical pattern, where most of our competitors who follow these kind of low or relatively low demand increase in third quarter.

However, in our case, in July we changed our inventory standard period by one week less. Because of that severe, our utilization ratio adjustments in July would happen. So if our inventory would be – would get to the lower normal level, we will increase our utilization ratio further rapidly in August and September to meet any rate signal demand increase.

Jeffrey Toder – RBS Asia Ltd.

Okay. And when you talk about full utilization for September, what capacity level are you assuming for P83?

Hee Yeon Kim

Our design capacity for P83 is 68K, so that’s the full utilization.

Jeffrey Toder – RBS Asia Ltd.

Okay. So you’d be expecting to be running, based on this assumption, P83 at 68K in September?

Hee Yeon Kim

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 will not be a correct answer.

Jeffrey Toder – RBS Asia Ltd.

Okay. I mean, I appreciate you’re giving some guidance in a very unclear situation. And I agree that the market is 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 gain pricing power during that period?

Hee Yeon Kim

Actually that should be reasonable if there’s below full utilization staging. It’s very difficult to raise our price; that’s common sense. So that’s why we try to release totally differentiated products. So 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 to your question should be very (inaudible). But we already understand this kind of situation, so going forward we will increase our differentiated product portion.

Jeffrey Toder – RBS Asia Ltd.

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?

Hee Yeon Kim

Do you want to get the unit number?

Jeffrey Toder – RBS Asia Ltd.

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?

Hee Yeon Kim

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

Jeffrey Toder – RBS Asia Ltd.

220?

Hee Yeon Kim

Yes, 220. And monitor 190, notebook 225.

Jeffrey Toder – RBS Asia Ltd.

And what about tablet or smartbook?

Hee Yeon Kim

Smartbook, we only have the IT segment, they should be 63, so if we add the mobile side they should be 78.

Jeffrey Toder – RBS Asia Ltd.

That includes – that’s all LCD-based tablets or does that include readers as well?

Hee Yeon Kim

No, excluding readers.

Jeffrey Toder – RBS Asia Ltd.

Excluding readers, so 63 million tablets, and what was the 78 number?

Hee Yeon Kim

The remaining 60 million from mobile companies.

Jeffrey Toder – RBS Asia Ltd.

From mobile companies?

Hee Yeon Kim

Yes.

Jeffrey Toder – RBS Asia Ltd.

Okay. Okay, great. Thank you very much.

Operator

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

Arthur Lai – Citigroup Global Markets Taiwan Ltd.

Hi. Thank you for taking my questions. I have a question for IT Marketing Director. Since you have mentioned you want to develop a very healthy product, recall that right now the head brake also smartphone may require a touch panel, which that many panel maker try to do. So do you plan to do the so-called in-cell, on-cell, and if yes, when and which kind of client are you target?

Hee Yeon Kim

Yes, in-cell, on-cell is still under development. Right now, commercially we only supply a 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.

Arthur Lai – Citigroup Global Markets Taiwan Ltd.

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

Hee Yeon Kim

Yes.

Arthur Lai – Citigroup Global Markets Taiwan Ltd.

Okay. Thank you.

Operator

The following questions will be presented by Mr. Dan from Viking Global. Please go ahead, now.

Dan Malkoun – Viking Global Investors LP

Yeah, 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 are reporting this quarter versus the old ASPs that you used to report?

Hee Yeon Kim

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

Dan Malkoun – Viking Global Investors LP

Okay. I’m not sure I understood that answer. I will follow-up with you guys afterwards. On just in terms of the – 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?

Hee Yeon Kim

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

Dan Malkoun – Viking Global Investors LP

Okay.

Hee Yeon Kim

Actually higher ASP product means the higher COGS products. But the margin...

Dan Malkoun – Viking Global Investors LP

COGS per square meter. Okay. 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 on a purely, on a day’s basis based on what you’ve reported, it’s about 45 days of inventory. You look back it was kind of in the 20 days to – the high 20s days to mid-30s days. What’s the range you guys want that to be in now? Is that – you want that to be 35 days, 30 days, what’s the thought on that?

Hee Yeon Kim

Actually in the past the normal range should be the 30 days to 35 days, but it now will be 25 days, about 25 days.

Dan Malkoun – Viking Global Investors LP

Right. Okay. So that 45 days needs to go down to 25 days, basically is what you’re saying? So we should see...

Hee Yeon Kim

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 the high end mix. In terms of unit that’s around, slight over the one month, so we can take out one week less.

Dan Malkoun – Viking Global Investors LP

Okay. I see, okay. Okay, fantastic. Thank you guys so much.

Operator

The following questions will be presented by Mr. Steven Goulden from Tamamasa. Please go ahead, sir.

Steven Goulden – Tamamasa

Hi. Just to put 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.

Hee Yeon Kim

The current status?

Steven Goulden – Tamamasa

Yes.

Hee Yeon Kim

As a first phase, we are putting our efforts to stabilize, establish the add-on infrastructure from our supply chain to in-house manufacturing. So from second half of this year until next year, all of resource will be able to stabilize the add-on. Actually there are several types of the – the glass type we call JF2. So phase 1 will be establishing and stabilizing the add-on, but in-cell, on-cell we believe the promise lies, 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 1 add-on touch as a total solution provider.

Steven Goulden – Tamamasa

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 point system, this year looks to be a lot better than expected. Is that because Japan versus other developed markets has much faster, much quicker refresh cycle of LCD TVs.

And sort of 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 sort of totally dependent on 3D content and maybe Smart TVs taking off? Would you think we’d just see a refresh cycle for any other reason?

Hee Yeon Kim

Yes, it’s really a good question. Actually I tried to find that kind of answers from the previous question-and-answers. Actually when you will get the replacement cycle, let me show you very good example. So although the support for the analog broadcasting product, but their replacement power in the different market was last year was very significant.

So we are also waiting for that kind 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 of next year. But, however, the timing was delayed a bit because of the consumers’ purchasing priorities. 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, just a matter of time, we think. So we are not that pessimistic for the LCD demand, eventually. So if there is some replacement cycle at the end of next year or year 2013, that’s a matter of time. So really, (inaudible) demand pump up

Steven Goulden – Tamamasa

And final question. 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 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, costs down’s been kind of limited, but we expected that. And all the high-end demand that you talked about such as FPR TVs and also tablets is also held up pretty well. So given the disparity in those numbers, where would you say that the biggest disappointment has been, and the biggest surprise?

Hee Yeon Kim

The 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 of our trend because of the weak demand and less confidence condition on the demand size.

So actually our assumption for the price increase was wrong, but because of that our operating profit, the direction was changing. So that’s why we are very cautious about our guidance. So generic area is still very bigger portion rather than our high-end mix size. So anyway, our differentiated product style is okay. It’s well in line with our expectation, but we expect – still in the generic area of the industry.

Steven Goulden – Tamamasa

Right. Thank you very much for taking my call – oh, sorry.

Hee Yeon Kim

Okay. And we already have one hour and five minutes conference 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?

Operator

Yes.

Hee Yeon Kim

We could end our conference call now.

Operator

Okay, you may.

Hee Yeon Kim

We would like to thank you for your participation in our second quarter earnings conference call. As I mentioned before, I think our answer would not be that enough for your questions, so further questions, 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.

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