Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  
TRANSCRIPT SPONSOR
Better Than AdSense

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

Q1 2007 Earnings Call

April 10, 2007 8:00 am ET

Executives

Daniel Kim - Vice President, Investor Relations

Ron H. Wirahadiraksa - President, Chief Financial Officer

C.S. Chung - Vice President of Monitor Sales

Analysts

Chris Muth - Lehman Brothers

Chong Kim - CLSA

Jae Lee - Daiwa Securities

Jeffrey Totter - ABN Amro

Evan Erlanson - Bear Stearns

Andrew Abrams - Avian Securities

Eric Reubell - Miller Tabak Roberts

Ivan Goh - Dresdner Kleinwort

George Chang - Citigroup

Jeff Evanson - Sanford Bernstein

Celia Huawei - Sensor Capital

Presentation

Daniel Kim

Welcome to LG Philips LCD’s first quarter 2007 conference call. My name is Daniel Kim and I am the 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 the Vice President of Monitor Sales, C.S. Chung.

We have approximately one hour for this call. We will spend the first part of the call discussing the key issues for the quarter, which correspond to the slides available on our website. Afterwards, we will take your questions. Please do not hesitate to contact us after the call if you have further questions.

Before we move into our discussion of the earnings results, you should be aware that this conference call may contain forward-looking statements within the meaning of the U.S. 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 important factors among others set forth in LG Philips LCD’s filings with the U.S. Securities and Exchange Commission and in its first quarter 2007 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 publicly update any forward-looking statements, whether as a result of new information, further events or otherwise.

Now, please take a minute to read the 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.

TRANSCRIPT SPONSOR

Better Than AdSense

What if there was a way to promote your company to a perfectly targeted group of potential customers, partners, acquirers and investors? What if you could tailor your pitch to them at the moment of maximum interest? And what if you could do this for a no-brainer price?

This is exactly what Seeking Alpha is offering with transcript sponsorships.

Seven types of companies are sponsoring earnings transcripts on Seeking Alpha:

1. Company sponsors its own earnings call transcript (example).

2. Company sponsors partner's transcript (example).

3. Company sponsors competitor's transcript (example).

4. Issuer-sponsored research firm sponsors client's transcript (example).

5. Investment newsletter sponsors transcripts of successful stock picks (example).

6. IR firm sponsors transcript of micro-cap company (example).

7. Consulting company sponsors company's transcript in sector of interest (example).

Your company's name and promotion could have been on this transcript! Learn more, or email Zack Miller for details.

Ron H. Wirahadiraksa

Thank you, Daniel. Over the next hour, I will review our earnings results from the first quarter of 2007, discuss our performance and conclude with the outlook for the second quarter. Afterwards, we will take your questions. Please turn to the next slide.

Let me begin with a few general comments on the first quarter. We are seeing positive factors at work in the market and are encouraged that these strengths, along with our solid progress on several initiatives to bring us back to profitability, are positioning us well for future growth. There are of course still challenges we face, both as a company and as an industry, but important progress was made in the first quarter. The results achieved were better than expected but of course, not satisfactory yet.

There are several emerging industry trends I would like to talk about briefly. First, we are seeing demand for LCDs outpace demand for PDPs, largely due to the technological advantages offered at comparative pricing. Next, we saw signs of price stabilization as well as improvement in the supply demand environment, with improvements in TV and notebook segments exceeding our expectations. In addition, we have seen stabilizing inventory levels and pricing. We believe that all of these factors strengthened the market this past quarter and played a role in LG Philips LCD’s better-than-guided performance.

At the same time, we made significant improvements in both cost reductions and operational efficiencies this past quarter. We expect these improvements to continue and anticipate their positive impact on COGS and cash COGS going forward.

We are also benefiting from the addition of several new executives, including our CEO, Mr. Y.S. Kwon. The new management team is adding a tremendous amount of value to our customer-centric mindset. We believe that this commitment to our customers, coupled with a focus on production efficiencies, prudent CapEx strategy and sound balance sheet management, will have a direct and positive impact on our expected sequential improvement in profitability.

Now, let me give you a bit more color on these areas of improvement. Please bear in mind that LPL last year started a strategy of value over volume. We refocused our purchasing, defined a restructuring agenda, cut CapEx, rationalized production and adopted a more customer-centric focus.

During this first quarter, we further enhanced relationships with our customers and introduced an expanded number of new cost competitive products in cooperation with them. Reflecting our success in these efforts, major customers have ranked us as a top supplier. We will continue to build upon these efforts.

In terms of COGS reduction, we achieved a quarter-on-quarter COGS reduction of 9% and a cash COGS reduction of 12% per square meter in the first quarter. Not only did these COGS reductions contribute to an EBITDA margin that was better than expected, they also positioned us well to achieve this year’s guided COGS reduction of 25% to 30%. This data point is, at least directionally, indicative that our efforts to reduce costs and improve operational efficiencies are working well and that LPL is regaining its strength.

As communicated in the fourth quarter of 2006, we expect to maintain our 2007 CapEx at KRW1 trillion. We plan to utilize part of this amount to expand P7 design input capacity to 110,000 input sheets per month in the third quarter, which will gear us for the expected demand increase in the second-half of this year.

Overall health in channel inventories led to a fairly healthy market in the first quarter of 2007. We expect the market situation will continue to improve as well as LPL’s internal performance. Next slide, please.

In the first quarter, on page six, of 2007, revenue was KRW2.7 trillion, down 11% sequentially from the fourth quarter of 2006. This sequential sales decrease was largely due to the decline in ASP. Total cost of goods sold decreased 10% quarter on quarter to KRW2.8 trillion, which largely was the result of our cost down strategy.

COGS per square meter in U.S. dollars decreased 9% quarter on quarter and 28% year on year. In Korean Won, this represents decreases of 9% and 31% respectively.

Cash COGS per square meter in U.S. dollars decreased by 12% sequentially and 27% year on year. In Korean Won, this represents decreases of 12% and 30% respectively.

Quarter on quarter, our EBITDA margin increased one percentage point to 19% and net margin remained unchanged sequentially at minus 6%. Next slide, please.

As of March 31, 2007, we reported KRW980 billion in cash and cash equivalents, which represents a KRW26 billion increase over the previous quarter. Overall, our finished goods inventory turnover levels for large panels decreased from just under three weeks at the end of the fourth quarter of 2006 to approximately two weeks this past quarter. TV inventory levels held constant at around three weeks, while IT decreased from slightly under three weeks to about two weeks. We will continue to carefully manage these inventory levels.

Total debt increased by KRW0.2 trillion to KRW4.3 trillion due to long-term borrowing. Our net debt to equity ration as of March 31, 2007 was 50%. Next slide, please.

Cash flow from operations decreased to KRW327 billion, mainly due to the net change in working capital. The cash out capital expenditures of KRW492 billion was greater than our CapEx amount for this in the fourth quarter of 2006 and consisted primarily of amounts for investments in P7 and our Poland module plant. Delivery-based CapEx was KRW345 billion compared to KRW522 billion in the fourth quarter of 2006. Next slide.

Now I would like to provide more detail about our key performance metrics. Next slide, please.

During the first quarter of 2007, we shipped a total display area of 2.2 million square meters. This represents a decrease of 1% sequentially, which can be attributed primarily to the decline in TV shipments, and which was offset to some degree by the increase in IT shipments.

On average, ASP per square meter of net display area decreased at a rate of 9% to $1,287. Total ending ASP per square meter decreased 10% to $1,246. Please note that the overall decline in ASP was primarily due to seasonality.

For the TV segment, average ASP per square meter in the first quarter fell 9% while ending ASP per square meter fell 8%. For IT, average ASP fell 11% and ending ASP decreased 13%. Next slide, please.

The revenue breakdown by product segment for the first quarter of 2007 was as we expected. TV accounted for the largest portion of sales, representing 45% of total revenue. This was followed by monitors at 28%, notebooks at 22%, and other applications at 5%. The sequential decrease in the TV share reflects the greater relative impact of seasonality on the TV segment compared to the IT segment. Next slide.

P7 continues to perform efficiently and averaged about 70,000 input sheets per month during the first quarter and is expected to reach its initial design capacity of 90,000 input sheets per month in the first half of 2007. As announced, we plan to expand the design input capacity of P7 to 110,000 sheets per month in the third quarter of this year. P7 is optimized for the production of 42- and 47-inch LCD TV panels and we expect that the planned capacity expansion at P7 will enable us to promptly respond to the increasing demand of customers. Next slide.

Cash ROIC in the first quarter of ’07 declined from the fourth quarter of ’06 by three percentage points to 20%. This decrease is attributable to lower sales over invested capital. Next slide.

Now let’s discuss our outlook on the next slide. Generally, our results in the first quarter of ’07 came in better than the guidance provided last quarter. Looking ahead, we expect continued execution on our core operational drivers and a healthier market situation. This will have a direct and positive impact on our sequential improvement in profitability.

For the second quarter of ’07 in the TV segment, we expect shipments to increase by a high 20s percentage with an average and ending ASP decline of a mid single digit percentage.

In the IT segment, we anticipate shipments to increase by a low teens percentage with an average ASP decline of a low single digit percentage and an ending ASP increase of a mid single digit percentage.

Overall, we expect shipments in the second quarter of 2007 to increase by a high teens percentage with an average ASP decline of mid single digit percentage and an ending ASP decline of a low single digit percentage.

Our COGS reduction per square meter is expected to be a low teens percentage in the second quarter. As a result, EBITDA margin for the second quarter of ’07 is expected to be a low 20s percentage.

As previously discussed, we plan to maintain our capital expenditures on a delivery basis at approximately KRW1 trillion. On a cash out basis, this amount will probably approach about KRW1.7 trillion. The difference is caused by the fact that we purchased CapEx on a lower level and therefore equipment on credit at the end of ’06 was much higher than we expected it to be at the end of ’07. This difference is cash out.

Let me conclude by saying that we remain encouraged about the growth opportunities that exist in this industry and we believe we are making the right moves to bring about greater shareholder value creation. We will continue to update you on our progress and thank you for your ongoing support of LG Philips LCD.

Daniel Kim

This concludes our earnings presentation for the first quarter of 2007. We would like to now answer your questions.

Question-and-Answer Session

Operator

(Operator Instructions)

The first question will be given by Mr. Chris [Muth] from Lehman Brothers. Please go ahead, sir.

Chris Muth - Lehman Brothers

Good evening. A couple of quick questions here. I guess first off, can you talk a little bit about the status of P8?

Ron H. Wirahadiraksa

Okay. You had a couple of questions. Do you want to take them sequentially?

Chris Muth - Lehman Brothers

Yes, please.

Ron H. Wirahadiraksa

All right. As you know, P8, we are building the shell of P8 and as you also know, some of the clean room, although on a flexible basis, equipment but we have not decided yet on equipment for the Gen 5.5 line. That decision we expect to be taken probably at the end of the first half of this year, this quarter.

Chris Muth - Lehman Brothers

Okay, and in terms of teeing up your equipment suppliers and having the clean room and the factory ready by then, does that suggest you could have capacity from this plant by the end of this year or would it be a 2008 event?

Ron H. Wirahadiraksa

No, that will be a 2008 event and, depending on the decision time, as we said we thought tentatively if we would go ahead with Gen 5.5, it would be towards the end of the first quarter next year.

Chris Muth - Lehman Brothers

In the other presentation this morning, you talked about lowering or developing a low-cost TV model. Can you help me understand what exactly you are doing there? Are you removing certain films? Are you changing the driver ICs? Any help there would be greatly appreciated.

Ron H. Wirahadiraksa

That is correct. As you have just mentioned, the lower cost TV model would be eliminating certain parts or certain components which we use to apply in doubles, for example.

Chris Muth - Lehman Brothers

Are those panels being purchased by all your customers or is it more just tier two type of customers?

Ron H. Wirahadiraksa

That is also right. It would be more purchased by the tier two customers.

Chris Muth - Lehman Brothers

Last question for me; you had talked about increasing utilization at P7. Is that simply the fact that it has been underutilized and so trying to get more customers in there, or are you adding selected equipment to try to drive increased utilization and output from that factory?

Ron H. Wirahadiraksa

Actually, what I said was we are going to expand P7 to 110K in the third quarter. It is now running at 78, and of course utilization by that time will depend on market circumstances. We expect that Q3, P7 will be fully utilized for the capacity there.

By the way, I would like to come back a little bit on P8, the postponement of the Gen 5.5 equipment decision. That is because in our value over volume strategy, we would like to see first how much we can max out capacity in existing fabs. We feel that there is still room to improve. As you know, LPL has always been good in ramping fabs beyond design capacity and we like to give that another effort. So we would like to first see how much we can squeeze more out of the existing capital base before deciding on new capital.

Chris Muth - Lehman Brothers

Sounds good. Good luck with it.

Operator

The following question will be given by Mr. Chong Kim from CLSA. Please go ahead, sir.

Chong Kim - CLSA

Thank you. Just talking about -- just revisiting the question again about P8. I don’t mean to harp on it but in terms of equipment commitments that you have already made, is that a potential sort of challenge in terms of scrapping a Gen 5.5 fab altogether? Have you made certain capital commitments to your equipment vendors that requires you to take on that equipment? That would be my first question and then I have just a couple of follow-ups related to other issues, please.

Ron H. Wirahadiraksa

Thanks for the question. Of course, when you discuss with equipment suppliers, you have to make sure that you have slots available and that is an ongoing discussion but we have not placed any PO at this moment.

Chong Kim - CLSA

Okay, so there are no POs related to Gen 8 right now?

Ron H. Wirahadiraksa

No, you mean P8, which is Gen 5.5.

Chong Kim - CLSA

Yes, that’s right. Sorry. The other question is related to your existing P7 line -- 110,000 by the third quarter. In terms of squeezing out more capacity, more throughput, what is the maximum you could see in terms of glass input or output basis with no incremental dollar spend on that fab?

Ron H. Wirahadiraksa

With no incremental dollars, or at least very little -- hardly, let’s say -- I think there should be at least another 10%, 15%.

Chong Kim - CLSA

So up to as high as 120, 130, if I read you correctly, Ron?

Ron H. Wirahadiraksa

Yes, we are going to do our best to bring that about.

Chong Kim - CLSA

Okay, and then my last question is related to depreciation. If I recall correctly in your last quarterly results, you mentioned that some time in the second quarter depreciation of one of your Gen 5 fabs would end. Could you give us a little bit more color on that? I believe it’s P5 -- sorry, probably P4, and what you anticipate for depreciation in the second and third quarter please?

Ron H. Wirahadiraksa

Yes, that’s correct. So the second Gen 5 line, which is P5 because P4 has already by and large run out depreciation, so we are talking about P5, that will run out depreciation after April. So the depreciation amount for the fab now is about KRW32 billion. It will go down to about KRW9 billion.

Chong Kim - CLSA

What is your guidance for total depreciation?

Ron H. Wirahadiraksa

The same as before, KRW2.7 trillion.

Chong Kim - CLSA

For the full year?

Ron H. Wirahadiraksa

Yes.

Chong Kim - CLSA

All right. Thank you.

Ron H. Wirahadiraksa

Oh, okay. I wanted to give you a little more.

Chong Kim - CLSA

Please, by all means. Don’t let me stop you.

Ron H. Wirahadiraksa

You almost did. We think that depreciation actually this quarter is a peak in depreciation for ’07, so it is not going to go down dramatically but it will be slightly under 700.

Chong Kim - CLSA

Okay.

Operator

The following question will be given by Mr. Jae Lee from Daiwa Securities. Please go ahead, sir.

Jae Lee - Daiwa Securities

I would like to know if you could provide color in terms of your capacity utilization during the first quarter, like January, February, March? Also, I would like to know if you can also provide the portion for the full HDTV in the second half.

Ron H. Wirahadiraksa

I think the utilization was about 96%, 97% in the first quarter, average.

Jae Lee - Daiwa Securities

So it has been picking up since March?

Ron H. Wirahadiraksa

We expect in the second quarter that it will pick up slightly.

Jae Lee - Daiwa Securities

Right, I see.

Ron H. Wirahadiraksa

And the portion for full HD versus -- we will be running full HD, TV wise, the full HD portion will be by the end of the year about 20%, slightly higher.

Jae Lee - Daiwa Securities

That is the overall or will it be among the larger size?

Ron H. Wirahadiraksa

That will be overall.

Jae Lee - Daiwa Securities

Overall, all right. How aggressive will you be in terms of marketing to full HD, in terms of price premium that you are planning to charge over the regular HD TVs?

Ron H. Wirahadiraksa

Currently, we are charging about 10% on top of HD. Over the year, maybe that might come down slightly but basically the premium on full HD versus HD will be in general 10%.

Jae Lee - Daiwa Securities

Okay, great. Thank you so much.

Operator

The following question will be given by Mr. Jeffrey Totter from ABN Amro. Please go ahead, sir.

Jeffrey Totter - ABN Amro

Good evening. I would like to start with just a couple of questions. I would like to start on page 11 of the presentation, just to understand that slide a little bit better. Is it showing that capacity at all of your fabs actually decreased sequentially in 1Q07?

Ron H. Wirahadiraksa

Yes, the input sheets slightly decreased.

Jeffrey Totter - ABN Amro

But that’s capacity for input sheets, not a reduction in utilization rates?

C.S. Chung

It also depends on how you load the fabs. Some products that are newer could run on a five mask mode and a four mask mode.

Jeffrey Totter - ABN Amro

But looking ahead into 2Q, I ran some quick numbers and it seems to indicate based on 90K capacity for P7, that your capacity conversion factor will increase substantially in the quarter. Is that calculation correct? If so, could you explain where that improvement in efficiency is coming from?

Ron H. Wirahadiraksa

I do not think it will dramatically improve because we are loading more cost-effective models which have in the beginning slightly lower capacity conversion. They need a little bit of running time, but it will improve slightly, yes.

Jeffrey Totter - ABN Amro

Then, finally, could you give any guidance on your taxes or tax credits for the next several quarters?

Ron H. Wirahadiraksa

The tax variation is just mainly because of the deferred tax assets increase as we made a loss this quarter. That has to do with investment tax credits and other credits that we have. Depending on how the results develop this year, that will be either a plus or a minus. I cannot really comment on that right now.

Jeffrey Totter - ABN Amro

Okay. Those were my key questions. Thanks very much.

Operator

The following question will be given by Mr. Evan Erlanson from Bear Stearns. Please go ahead, sir.

Evan Erlanson - Bear Stearns

Good evening, gentlemen. Thanks very much. My first question is on the cost down that you reported for Q1 and also looking out. The cost down was better than I had expected, at any rate, down 12% for cash COGS was pretty impressive in particular. I guess that if we are looking forward into Q2 and you are expecting to see COGS per square meter come down at an even faster pace as TV shipments increase in terms of area, I was wondering if anything is happening on the raw materials cost side that gives you particular confidence that you will be able to bring down COGS per square meter at a faster rate in Q2, even though the mix of the product seems to be shifting a little bit unfavorably in terms of the profitability.

Ron H. Wirahadiraksa

Yes, certainly, thanks for that question. On the purchasing side, we have had supplier conference in January where we made it very clear that we would like to go over our model to share the burden now, share the profits later and we had a very favorable response from suppliers. We expect to repeat such activity in this month, so that has worked particularly well. We have achieved major cost downs in the area of [back-lighting], but also in glass, [drive IT], polarizers -- actually, more or less across the board.

In terms of development CI, as we earlier answered, we have redesigned out a few components without sacrificing product screen performance, of course. We are going to increase the loading rate of more cost effective models.

And then, on process efficiency, we have been a little bit more productive than we anticipated and we expect that trend to increase, so we expect to become more productive. I think those three activities sum up and we are confident that we can prolong this and achieve the indicated guidance that we gave for COGS for the whole year versus ’06 whole year. That would be 25% to 30%.

Evan Erlanson - Bear Stearns

Thanks for that. On the low-cost models that you are coming out with, my other question was more on the customer side. What do you think is the key change in your customer base that will happen in 2007? Do you think you will become less concentrated with the top three customers, or perhaps more concentrated? For these low-cost models, who is that really going to be focused on from a customer side?

Ron H. Wirahadiraksa

Let’s talk about this low-cost, or these lower cost models. They are not lower end models. Actually, the lower cost models apply throughout the customer base so I know earlier, we maybe have given a not-so-good indication of our second tiers. It is basically across the board for all customers. We are simply giving them the same screen performance but for us, at a lower cost.

Now, will the customer base change significantly? The major customers are certainly getting more aggressive in their TV sales, so we will grow the customer base but as major customers have aggressive plans, I think the ratio is not bound to change much for this year. There will not be a lot of movement in there.

We do add new customers to our base and try to make more and more long-term agreements with new customers in the U.S. and also with the Chinese customers. That is an ongoing process, so no major shift from the top customers in ratio of take on LPL.

Evan Erlanson - Bear Stearns

Okay. Thanks very much.

Operator

The following question will be given by Mr. Chong Kim from CLSA. Please go ahead, sir.

Chong Kim - CLSA

Just a couple of questions I forgot to ask, one was on the Poland facility. What is the module capacity there? Or to put it differently, what percentage of your panel output do you think will ultimately funnel through your Poland operations?

The last question I had basically looking at your volumes into the second quarter. I know seasonality is not everything but volume growth seems very strong. Just wondering what is driving that TV volume growth into what ostensibly is a weak season?

Ron H. Wirahadiraksa

I think C.S. Chung of sales is in a better position to answer, but I think the uptake and the preparations for second half has a lot to do with that.

C.S. Chung

From the IT side, Q2 is going to be a little bit slow season but as we mentioned, notebooks, the demand is quite stronger than we expect. In terms of a unit base, I think we could have more than 10% growth. TV also, as you see, since we really hit the sweet spot, the price point, and as you see these days, the demand for 32- and 37-inch is kind of really big, so I do not think we have such a big problem to have that quarter-over-quarter growth.

Ron H. Wirahadiraksa

Your question on the Poland factory, the initial capacity we expect is about 3 million units gradually on the shorter term. The total capacity will run into 2011 by 11 million units. I think this year, that 3 million initial capacity will quickly go up to about 6 million.

Chong Kim - CLSA

Is this just for TVs or is this across all applications?

Ron H. Wirahadiraksa

It is mainly for TVs.

Chong Kim - CLSA

Mainly for TV?

Ron H. Wirahadiraksa

Yes.

Chong Kim - CLSA

Thank you.

Operator

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

Andrew Abrams - Avian Securities

Just a couple of quick questions. First, housekeeping; on the yearly COGS, 25% to 30%, that is non-cash, I’m assuming?

Second, on the glass side, can you walk us through what your arrangements are with your glass suppliers? Are you doing quarterly re-ups on your glass, or are you doing full-year contracts for better pricing?

Last, can you talk a little bit about your relationship with Philips? Everyone knows what the circumstances are there with the stock and the potential for sale but how is this going to affect your position with Philips as an OEM, as an end user in your eyes?

Ron H. Wirahadiraksa

Okay, your first question, no, the 25% to 30% is COGS, but the cash COGS numbers is almost the same, so they go hand-in-hand.

You asked about how we go about glass. We have our main glass suppliers, Samsung Corning, and Asahi and NEG but also PEG, our joint venture with NEG. Those are the main suppliers and Samsung Corning is the biggest, but we have also started glass supply with Schott from Germany. Right now, we expect to start soon on Gen 7 glass production with them.

The agreements in the pricing is basically on a monthly, almost, basis. We try to renegotiate pricing, certainly at this time.

Andrew Abrams - Avian Securities

And on Philips?

Ron H. Wirahadiraksa

On Philips, as we indicated, I think by media reports earlier, Philips would not fully exit this joint venture. They currently hold 32.9%. We are inclined to believe they will hold that until July of this year, which is the shareholder agreement. After that, they will probably want to sell initially down, maybe somewhere below 20%. But they will remain a strategic partner as a shareholder and also as a major customer.

Andrew Abrams - Avian Securities

So you wouldn’t expect much change from them, from their perspective as an OEM or a major customer?

Ron H. Wirahadiraksa

Of course, what we have always said is if their position as a major shareholder would significantly diminish, then the [robe of love] will come off and it is going to be all about performance -- quality, cost and delivery. Not that there is much love -- it is quite business-like, but the onus is on us to demonstrate that we are truly a worthy strategic partner with high quality and high technology products, as evidenced, for example, by Dell choosing us as the best supplier of the year 2006. We got an award for that, as you know.

So we have developed, apart from the major shareholder shift by Philips, of course, a very strong strategic relationship with Philips and they need us. We are not the sole supplier. They are also second sourcing but we are their main supplier and we would like to keep it like that.

Andrew Abrams - Avian Securities

Thank you.

Operator

The following question will be given by Mr. Eric Reubell from Miller Tabak Roberts. Please go ahead, sir.

Eric Reubell - Miller Tabak Roberts

Thank you. Good evening, gentlemen. Thanks for taking my call. I have a question on the low-cost model panel that you are planning. Can you frame expectations about how much of the cost reduction is driven by lower component pricing, specifically for lower driver LCD costs?

Ron H. Wirahadiraksa

If you look at the annual target of 25% to 30%, we have said that around 50% is from purchasing CI and about 35% is from development CI, so that is where the lower cost model is coming in. 15% is from process innovation.

Driver IC, that is an important point. We are still increasing our multi-channeling of driver ICs and also we are seeking partners who have lower back-end costs, so the driver IC costs I think in the first half of this year will come down at a level of about between 5% and 10% every month.

Eric Reubell - Miller Tabak Roberts

When you talk about multi-channeling, are you talking about multi-sourcing from different suppliers?

Ron H. Wirahadiraksa

No, what I mean is you put the channels of two chipsets basically on one chipset, which will then be slightly bigger but you have still a tremendous cost advantage.

Eric Reubell - Miller Tabak Roberts

So we are talking increasing the IO from 128 to 256, thereabouts?

Ron H. Wirahadiraksa

Yes, exactly.

Eric Reubell - Miller Tabak Roberts

On P7, I believe that factory is optimized for 42-inch and 47-inch, is that correct?

Ron H. Wirahadiraksa

That is correct. Eight cuts 42, six cuts 47.

Eric Reubell - Miller Tabak Roberts

And if I recall, it was sort of with respect to last year, that factory was not -- had not been up and running for a full year, manufacturing yields were slightly lower. As a result, you were possibly less cost competitive in the market. If I understand your outlook for the second half of 2007, you I believe are saying that this factory is now going to be up to a full manufacturing yield, getting close to very full, possibly over-exceeding your capacity requirements. Am I understanding that correctly?

Ron H. Wirahadiraksa

Let me say the following. I think the starting point of P7 was in January last year and it takes some time before you ramp it up to a decent what we call capacity conversion factor -- that is, to a productive output basically divided by the input sheets, which will typically be between 65%, 70%. So we expect P7 in this year with now above design capacity 110K, to fall in that bracket in the second half, so yes, the productivity of the fab will improve significantly.

Eric Reubell - Miller Tabak Roberts

Great, and then I have a last question. I believe that there was an announcement about plans for a small panel LCD factory in China. Could you possibly provide some color on that? When production could be ready -- anything would be appreciated.

Ron H. Wirahadiraksa

Yes, we intend to build a small panel plant in China, a small panel facility. We are looking at what is the best optimal way. I think it will take maybe another year before that plant will be up and running, depending on the business model that we choose. It could be that we go for some form of outsourcing.

Eric Reubell - Miller Tabak Roberts

Some form of outsourcing in terms of the panel manufacturing or --

Ron H. Wirahadiraksa

Yes, that is correct.

Eric Reubell - Miller Tabak Roberts

So when do you think you could be seeing -- just frame my expectations; is this an ’08 event?

Ron H. Wirahadiraksa

Yes, earliest ’08.

Eric Reubell - Miller Tabak Roberts

Early ’08. Okay, gentlemen, thank you very much.

Operator

The following question will be given by Mr. Ivan Goh from Dresdner. Please go ahead, sir.

Ivan Goh - Dresdner Kleinwort

Good evening. One question; in January, you gave an estimate for your capacity growth this year at more than 30% year on year, and you said that your shipment growth, you are targeting more than 50% year on year. With the P7 capacity expansion later this year, can you update those numbers? Thank you.

Ron H. Wirahadiraksa

I think the growth will go over 50%. I think maybe 55% to 60%.

Ivan Goh - Dresdner Kleinwort

This is for capacity?

Ron H. Wirahadiraksa

No, that is for shipment. The capacity will go up by let’s say 35% to 40%.

Ivan Goh - Dresdner Kleinwort

And this is with the effort to squeeze more capacity out of existing capital base?

Ron H. Wirahadiraksa

Yes, that is correct.

Ivan Goh - Dresdner Kleinwort

Okay. Thank you very much.

Operator

(Operator Instructions)

The following question will be given by Mr. Chris Muth from Lehman Brothers. Please go ahead, sir.

Chris Muth - Lehman Brothers

I guess one quick follow-up here. On slide 5, profitability in 2007, you speak to in Q207, Q207 is starting to see panel shortages and in particular in the second half for TVs. Can you talk about what evidence supports that view and whether that view is simply for you guys or your expected view for the whole industry?

C.S. Chung

Q2 in terms of seasonality is not really the hot season at all but in terms of a low price point, that really gives us a lot of demand, not only TV but also IT is the same situation. But anyhow, TV is getting cheaper, especially for the 32-inch area, which is much cheaper now, so it has a very high demand. Is this the right answer to you?

Chris Muth - Lehman Brothers

In terms of saying TV panel supply shortage in the second half, is that your view for the industry or for just you guys?

C.S. Chung

I think for the second half, it is for the industry. In terms of seasonality, we still believe that over 60% is back-end loaded in the second half. Industry wide, there is going to be a shortage.

Chris Muth - Lehman Brothers

In terms of expected shift then of capacity to TVs and a bottoming in pricing on the IT side for panels today, are you seeing any large customers step up and buy in large quantities now to secure capacity?

C.S. Chung

At the moment, we are seeing that, especially on the IT side. People are trying to pull in more volume at the moment.

Chris Muth - Lehman Brothers

How about on the TV side? When would you expect that to start to meaningfully ramp?

C.S. Chung

Even the TV side now, from -- actually, the TV side came earlier than the IT side. From January, we are seeing that they are pulling in more demand and on the IT side, from March we are seeing that, so it is already there.

Operator

(Operator Instructions)

The following question will be given by Mr. Ivan Goh from Dresdner. Please go ahead, sir.

Ivan Goh - Dresdner Kleinwort

Yes, hi, one more question for me. I just wanted to find out how much of P6, P7 capacity right now is being used for IT panels and how you think that will change, given your outlook for the second half of ’07?

Ron H. Wirahadiraksa

P6 has used about 20% for IT, and I think P7 is around 10 to 15 -- let’s say closer to 10%.

Ivan Goh - Dresdner Kleinwort

Will that all be converted to TV panels by the second half of the year, given the shortage that you project?

Ron H. Wirahadiraksa

It depends on which one is more profitable.

Ivan Goh - Dresdner Kleinwort

Thank you.

Operator

The following question will be given by Mr. George Chang from Citigroup. Please go ahead, sir.

George Chang - Citigroup

Hi, thanks for taking my questions. Number one, you have been achieving double digit cost downs per quarter for --

Ron H. Wirahadiraksa

Hello? Operator, is it us falling away or is it --

Operator

Okay, the following question will be given by Mr. Jeff Evanson from Morgan Stanley. Please go ahead, sir.

Jeff Evanson - Sanford Bernstein

It’s Jeff Evanson from Sanford Bernstein, actually. You have talked about your lower cost panel strategy in terms of reducing the number of film layers and in reducing driver cost circuitry. I am wondering if you are also looking toward using glass with lower technical specifications -- for example, more defects per unit area -- in an effort to get costs down?

Ron H. Wirahadiraksa

We are studying the possibilities of that but at this moment, that is not being done yet.

Jeff Evanson - Sanford Bernstein

Overall for the year, how do you expect to see your glass prices decline and what are the sources of that decline?

Ron H. Wirahadiraksa

We think P7 glass will come down significantly compared to last year because we are in a very higher volume mode, and also the fab is more productive and glass makers have gone through their learning curves. So the price should go down by I would say 15% to 20%. I think overall glass will come down by more than 10%.

Jeff Evanson - Sanford Bernstein

Thank you.

Operator

The following question will be given by Miss Celia [Huawei] from Sensor Capital. Please go ahead.

Celia Huawei - Sensor Capital

I have a question about the shortage that you were alluding to in the second half. Do you think that yourself or other panel makers will be building inventory to address this shortage right now?

C.S. Chung

I think the capacity increase industry wide does not do much this year, so even Q2, I mean Q1, we are going to produce about -- you can charge around 90% but since the customer ask us more of the panels, I think second quarter most of the panel makers are going to run their capacity at 100%. I do not think that they have any room to pile up some inventory for the second half, because the [sales in and sales out] is very hard to see.

Operator

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

Andrew Abrams - Avian Securities

Just one quick follow-up; can you talk about transportation time and what is in your inventory that is actually moving inventory, that’s not in production or sitting at the plant? I know we have gone from air shipments to sea shipments and it is a little hard to judge how much inventory is floating at any given time.

C.S. Chung

Inventory sailing is, from us to our subsidiaries, is about three to five days. From overseas subsidiaries to customers, it will be about eight days in transportation.

Andrew Abrams - Avian Securities

Thank you.

Operator

(Operator Instructions)

There are no participants with questions anymore. Would you like to go ahead with the conference?

Ron H. Wirahadiraksa

All right. If there are not anymore questions, then we will end this conference call. Daniel.

Daniel Kim

In that case, on behalf of LG Philips LCD, we thank you for participating in our first quarter earnings conference call. Should you have any further questions, please contact either me or my colleagues. Thank you for your participation. Thank you.

TRANSCRIPT SPONSOR

Better Than AdSense

What if there was a way to promote your company to a perfectly targeted group of potential customers, partners, acquirers and investors? What if you could tailor your pitch to them at the moment of maximum interest? And what if you could do this for a no-brainer price?

This is exactly what Seeking Alpha is offering with transcript sponsorships.

Six types of companies are sponsoring earnings transcripts on Seeking Alpha:

1. Company sponsors its own earnings call transcript (example).

2. Company sponsors partner's transcript (example).

3. Company sponsors competitor's transcript (example).

4. Issuer-sponsored research firm sponsors client's transcript (example).

5. Investment newsletter sponsors transcripts of successful stock picks (example).

6. IR firm sponsors transcript of micro-cap company (example).

7. Consulting company sponsors company's transcript in sector of interest (example).

Your company's name and promotion could have been on this transcript! Learn more, or email Zack Miller for details.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: LG Philips LCD Q1 2007 Earnings Call Transcript
This Transcript
All Transcripts