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LG Philips LCD (NYSE:LPL)

Q4 2005 Earnings Conference Call

January 12th 2006, 8:00 AM

Executives:

Daniel Kim, Vice President of Investor Relations

Ron Wirahadiraksa, President and Chief Financial Officer

Bock Kwon, Executive Vice President, Chief Marketing And Sales Officer

Analysts:

Chong Kim, CSLA

Christian Dinwoodie, UBS

Brian Young, Mortar Rock Capital

Abd-Al-Aziz (ph), ABN AMRO

Jay Lee (ph) , Daeto Investment Trust

Chris Ames, Lehman Brothers

Helen Huang, Goldman Sachs

Sunil Gupta, Morgan Stanley

Evan Golf, DRKW

Toni Simonetti, HSBC

Karl Richter, Darby Capital

Oliver Lee, Alliance Capital

Adam Hinkley (Matthew Smith), CIBC World Markets

Operator

Daniel Kim, Vice President of Investor Relations

Welcome to the LG Philips LCD Fourth Quarter 2005 Conference Call. My name is Daniel Kim, Vice President of Investor Relations. On behalf of LG Philips LCD I would like to welcome everybody to our global quarterly earnings conference call. I am joined by Ron Wirahadiraksa, President and Chief Financial Officer of LG Philips LCD. Also joining us is Bock Kwon, Executive Vice President and newly appointed Chief Marketing And Sales Officer. We have allotted approximately one hour in total for this call. We will spend the first part of the call reviewing our prepared remarks which correspond to the slides, which you can find on our website. Following this we will take your questions, please do not hesitate to contact us if you have further questions after this call.

Before we move on into the discussion of earnings results, you should be aware that this conference call may contain forward-looking statements within the meaning of US Private Securities Litigation Reform Act, and Securities Regulations in Korea. Including statements among others regarding LG Philips expected future financial performance, you are cautioned that these statements maybe affected by the important factors among others set forth in LG Philips LCD filing with the US Securities and Exchange Commission and in this fourth quarter 2005 earnings release. Consequently actual operations and results may differ materially from the results discussed or projected in these forward-looking statements. LG Philips LCD undertakes no obligation to update publicly any forward-looking statements whether as a result of new information, future events or otherwise. Now please take a minute to read this disclaimer, and I would like to now turn the call over to our President and CFO, Mr. Ron Wirahadiraksa.

Ron H. Wirahadiraksa, President, CFO

Thank you Daniel and welcome to our Q4’05 global conference call. I would like to take this opportunity to wish everyone a happy and prosperous new year and to further introduce Bock Kwon and Daniel Kim. Recently we made a decision to combine sales and marketing under a single leader, Mr. Kwon, who I’ve worked with closely over the years in an excellent choice for this important job. Prior to his position as Chief Marketing and Sales Officer, Mr. Kwon served as President of LG Philips, Taiwan; Vice President of Notebook Sales; and lastly Vice President of the Sales and Planning department for LPL, and has been in the industry for nearly 28 years. He has been with us since the inception of the company and has extensive experience in marketing and sales. Daniel Kim, who you just heard that the introduction of this call is our newly appointed Vice President of Investor Relations. He has been the President of LG Philips LCD of America for the past 3 years. Prior to this Daniel was Vice President of monitor sales and before joining LPL, Daniel gained experience in the semi-conductor industry and also has an extensive engineering background. During the next hour I will review our fourth quarter earnings results, discuss performance highlights and conclude with the outlook. After this we will take your questions. We are reporting in consolidated Korean GAAP with reference to this presentation that includes our reconcile US GAAP numbers. Please turn to the next slide.

Before we review our fourth quarter financial performance I would like to highlight the quarter’s accomplishments and describe the dynamic environment in which we are operating. During the quarter we continue to advance and invest in our technology leadership, improve our operational efficiency and execute on our growth strategy left by LCD TVs. We remained encouraged with the level of demand for our TV products as more and more consumers are choosing to purchase large and wide LCD TVs recognizing LCD technology as ‘the’ flat technology of choice. As I am sure many of you have seen in the media during the holiday season much of this consumer demand has also been fuelled by reduced pricing at retail which is reaching even more attractive sweet spot prices. In the fourth quarter as we expected, the sweet spot price for 32" branded TVs reached 1499 US dollars, and this demand actually created some shortages in our 32" TV panels.

In addition, we’ve experienced greater than expected demand in our 37" and 42" TV panels. We know that much of this consumer demand is being driven by the continuance emergence of the HDTV in many applications, and we believe this will continue into 2006. Even more compelling, we experienced strong demands across all geographies including Europe, the United States and especially China, where we currently hold close to 50% of the LCD TV panel market. The demand in China has been stronger than expected with an LCD TV growth rate of more than 600% year-on-year according to DisplaySearch, in part due to a greater consumer demand for large and wide LCD TVs.

During Q4 we continued to experience sequential shipment growth due to strong seasonal demand and positive sales momentum. In the TV and notebook segments, which helps soften the impact of a challenging monitor segment. While our shipments grew sequentially in Q4 that were lower than expected due to a production shift in our existing facilities. During this period, we began to experience an unprecedented increase in demand for larger and wider TV panels from our global customer base particularly in 42" TV panels. This one-time production shift impacted our overall shipment growth to a certain extent. With this however we were able to meet the shifting demands of our customers during critical period and it also facilitated our sooner and expected P7 to ramp-up in the first week of January 2006. P7 is the world’s largest 7th generation line, not only in size but also in terms of production capacity. The short time it took to achieve mass production, refurbish LG Philips LCDs leading ability in-line construction and process technology. In addition, this facility start will enable the company to respond to the expected surge in demand for LCD TVs that will be further stimulated by upcoming events such as the Luna New Year holiday and the World Cup soccer in Germany. Please turn to the next slide.

Revenue grew to KRW 3 trillion in Q4’05, up 8% sequentially from Q3’05. However, the US dollar sales price per square meter of net display area shipped decreased 0.5% compared to the third quarter. Quarter end to quarter end prices per square meter decreased 4.1% to 2035 US dollars. Average sales price per square meter increased due to a weakening pricing environment in monitors and notebooks towards the end of the year. In the quarter total cost of good sold increased 4% Q-on-Q to 2.5 during Q1 due to increased shipment levels. Our costs per square meter in US dollar decreased by 4% Q-on-Q and declined 19% year-on-year. On the cash costs basis, these numbers were 6% and 90% respectively. In Korean won costs per square meter decreased 3% Q-on-Q and 25% year-on-year. Cash costs in KRW per square meter decrease 5% and 25% respectively. We are very pleased with these results and will continue to focus on our cost reduction as ongoing cost management is a critical component for the long-term success. Q-on-Q EBITDA margin improved by 3 percentage points to 28%, and net margin improved by 3 percentage points to 11 percent due to the greater than expected cost reduction, particularly in the larger size TV panels. Please turn to next slide.

As of December 31st 2005, we had KRW 1.6 trillion in cash and cash equivalents. The reduction in cash and cash equivalents compared to September 30, 2005 is a result of previously announced spending on our P7 facility. Our fourth quarter finished good inventory turnover level remains unchanged from Q3’05 at approximately 2 weeks. Our balance sheet continues to be one of the strongest in the industry with a net debt to equity ratio of 26%. We believe our balance sheet provides us with a financial flexibility we need to fund the future growth opportunities. Please turn to the next slide.

Cash flow from operations increased to KRW 889 billion based on improvements primarily in net income, as we stated CapEx spending was KRW 1.4 trillion due to the ongoing investment in our P7 facility, which began mass production on January 1st. Please turn to the next slide. I would now like to go into more detail about several specific performance metrics. Next slide please.

As I described earlier, the average sales price for the fourth quarter decreased to USD 2112 per square meter of net display area shipped or KRW 2.1 million. Total display area shipped for Q4’05 was 1.3 million square meters, an increase of 8% Q-on-Q. Both our P6 and P7 facilities will drive our shipment growth in 2006, particularly as we strengthen our leadership in the large and wide LCD segments. P7, which I will discuss in more detail shortly is primarily focused on the 42" and 47" LCD TV panels, which compliments our P6 plans that produces 32" and 37" LCD TV panels. Please turn to next slide.

Revenue for the fourth quarter by our product segment is as follows: Monitors represented 38%, TV 34%, Notebooks 24% and other applications accounted for 4%. As you can see TVs increased from last quarter, and monitors continue to decrease as a percentage of overall revenue. We expect these trends to continue as we balance our segment and product mix to optimize profitability and as we respond to our customer’s need to a more LCD TV panel. In fact according to DisplaySearch, LG Philips LCD was the dealer in LCD TV panel sales in 2005 and we expect to maintain leadership going forward in 2006 with the launch of P7. Please turn to next slide.

And with the demands of our customers we were able to increase the capacity of P6 in Q4’05 to 112,000 input sheets per month, significantly more than its initial design capacity of 90,000 input sheets per month that was achieved in Q3’05. This increase is a good example of how we strive to continue to improve our operational efficiency. Our industry leading portfolio of production facilities allows us to meet the needs of our customers across product categories hence equally important respond flexibly as these needs change. As I noted earlier we have recently begun mass production at P7 for which the first phase is scheduled to reach the production capacity of 45,000 input sheets per month by the third quarter of 2006, and it is expected to reach its initial design capacity of 90,000 input sheets per month by the first quarter of 2007.

P7, the world’s largest seventh generation facility has been strategically designed for the efficient mass production of 42" and 47" wide LCD panels at 8 cuts and 6 cuts respectively. As a result LG Philips LCD will continue to lead the market instead of using a large LCD TV sizes in addition to capitalizing on the emerging HDTV market. Please turn to the next slide.

In the fourth quarter of 2005, our cash return on invested capital was 39% compared to 35% in Q3’05. This increase is a result of both the higher EBITDA margin and a slight improvement in asset productivity as measured by sales over invested capital. Please turn to the next slide. We now turn to look to our outlook discussion. Please turn to next slide.

For the first quarter of 2006 we anticipate our area shipments in square meter of glass were increased by a mid single-digit percentage Q-on-Q due to the rapidly expanding TV segment. In fact, with the ramp of P7 we expect TV shipments to grow more than 20% Q-on-Q. We expect LG Philips LCDs average selling price per square meter shipped at the end of the first quarter of 2006 to decrease by mid single-digit percentage Q-on-Q as we believe the pricing environment for not only monitors but also for notebooks for further weekend. This and the cost associated with the ramp-up of P7, we believe below our EBITDA margin percentage for the first quarter of 2006 to the high teens.

Overall as we look at 2006 we are well positioned to retain our leadership role in this dynamic industry by further meeting our customer’s needs, improving our operational efficiency, including our technology leadership and executing on our growth strategy particularly in this fast growing large and wide LCD segment and in the notebook segment. The LCD market will continue to grow as more and more consumers respond to ever more appealing sweet spot retail prices and then increasing amount of HD content. We expect that special sporting events such as the Super Bowl in United States, the Winter Olympics in Italy and the World Cup soccer in Germany will be catalyst for LCD TV demand in the first half of 2006. In addition to the sporting events, we have seen the Luna New Year involve into a strong buying season, and we have seen interest growing in China for large and wide LCD TVs.

In 2006, we have seen a starting growth opportunity for LPL in notebooks particularly for the large and wide product segment. LPL has a leadership position in this segment and we expect to maintain and grow this lead in the future. From a financial perspective, we anticipate growth in sales and EBITDA for the year. We also expect an increase in depreciation costs primarily due to P7, which will impact our EBIT hence net income.

Our capital expenditure guidance for the year is KRW 4.2 trillion which will be used for ongoing investment in P7 and future production facilities. As part of these future production facilities, our Board of Directors have approved KRW 453 billion to be utilized for the construction of a clean room and utilities for P8. In conclusion 2005 was a positive year for LG Philips LCD, highlighted by our position as a No.1 producer of TFT-LCD panels for the year according to DisplaySearch. We successfully ramped up our P6 facility to meet the growing demand for 32" and 37" large and wide LCD TVs and successfully prepared P7 for mass production. We expect to set the industry standard with production of 42" and 47" TV panels. We also continue to be one of the best companies in Asia in terms of best practices in corporate governance. We would like to thank you for your continued support and confidence in LG Philips LCD. This concludes our fourth quarter earnings presentation, and we would now like to take your questions.

Question-and-Answer Session

Operator

Now Q&A session will begin please press 1 and 4 if you have any question. Okay the first question will be given by Chong Kim from CSLA, please go ahead sir.

Q – Chong Kim

Just couple of questions on the margin in the fourth quarter and obviously your guidance for the first quarter. In terms of the operating margin it appears that you know at 11% it seems that some of your major competitors you know are on track to have a higher margin than you maybe to what which you attribute to GAAP in terms of profit margin, you did mention a product shift that maybe influence your shipment volumes in the fourth quarter, could you also give us some more color on that? And I will just have a follow-up question on the first quarter margin items, thanks.

A - Bock Kwon

Okay thanks for your question. Actually there is you know basically on our continuing basis, over and somewhat of our GAAP because of the differences in depreciation policy, as you know we depreciate in 4 years while others do in 5 years and longer. Other than that we have indeed produced some of the larger and wider panels like 42" in the Gen. 6 facility to anticipate the ramp-up of P7. Other than that we would have to see what our competitors has come out with, so it is too early I think to make those kind of comparison.

Q – Chong Kim

For the first quarter then we are looking for this large contraction in your EBITDA margin, could you just give us a little bit more detail, I think if we look at the history of you know your other fabs that you have brought online, whether it was Fab5 or Fab6 and also if you compare it to lets say the history of some of your competition that has Gen. 7. It feels as thought the kind of impact on profit margins was not as great, so could you just give us a better sense of what’s driving up your cash cost in the first quarter and dragging down your EBITDA margin as much as it is? What maybe your yield assumptions, obviously that’s a sensitive subject but any detail would be greatly appreciated?

A - Bock Kwon

Right, let me try to answer your question. First of all we have guided for a mid single digit price decrease and that drives I would say most of the EBITDA margin guidance that we have given, and on top of that we have indeed you know Gen. 7 lined P7 to ramp-up, this P7 is of a scale that basically has a very impactful on the company. And therefore the initial ramp were heavier than previous generation for fab, which has less of that kind of an impact. So we have to ramp up the fab, you know starting with capacity conversion factors that are much lower than the ones we are driving for 60-65%. Depending that cost of material will go up a lot, and added to that is of course the increased of the depreciation expense, we expect our depreciation expense for the year to increase about 50% on overall company basis.

Q – Chong Kim

When do you – could you model out the trend in margins for that G7 fab so that you could make some sort of assessment about what the pattern of profit margins might be going forward after you take this big drop in the first quarter? Do you anticipate margin improvements starting in 2Q and now?

A - Bock Kwon

We certainly expect the fab as it ramps further to improve so the first quarter is always basically the most impactful and hence we have guided for the EBITDA margin, so based on that we would expect certain performance improves, and that improvement we will see throughout the year.

Q – Chong Kim

Okay thank you.

Operator

Okay, currently there are 10 participants are waiting with their questions, and the next question will be given by Christian Dinwoodie from UBS, please go ahead sir.

Q - Christian Dinwoodie

Thanks very much, Ron, and thank you for answering the previous question, and I have to understand the situation in the first quarter a little better but would you mind telling us what your embedded forecast is for FOREX in the first quarter and maybe what you are doing end ways to mitigate what might be an appreciative one and maybe could you give a little bit of detail of your exposure, thanks very much to the US dollar versus the one depreciation? Thanks.

A - Ron Wirahadiraksa

Okay, well as you know Christian, first of all thanks for that question. As you know LG Philips LCD as it is 100% with committed exposure. And I had just thought if its anticipated exposure, so we had basically the larger part of our transaction. We are not completely immune to the FOREX impact, as you know we are also long involve ourselves, we use exchange rate, that’s our inline, that’s the reason markets for development often depreciating one. And if the one would depreciate that’s further, then there will be somewhat more of an impact but part of that as I’ve said is all set by HD.

Q - Christian Dinwoodie

So your forecast is actually more inline with what’s currently the exchange rate?

A - Ron Wirahadiraksa

Oh yes, so we do that dynamically. So we don’t stick to the, you know the kind of plan that we do when we make a business plan in the fourth quarter.

Q - Christian Dinwoodie

Okay thank you very much.

Operator

Sir, the next question will be given by Brian Young from Mortar Rock Capital, please go ahead sir.

Q – Brian Young

Hi yes good morning, thank you. In terms of your forecast for notebooks and monitors with declining ASPs during the quarter, so is there a way you could quantify that and when do you see stabilization?

A - Bock Kwon

Okay, thanks, I think in answer for your question, you know the monitor, generally we are you know represented for our forecast for the ASP down is the mid single-digit during the Q1 so when you see the product by product, I cannot give you actually in detail by product because I – I can say you the TV product is still the demand they had just thrown so we could maybe the price is not so much down, but its monetarily they are still slow and relatively the demand they had just thrown, so we think as contributing low seasonality during the Q1 so that’s why the demand is a little bit slow but still the supply is coming. That’s why we have forecasted a price for the mid single-digit.

Q – Brian Young

Now your capital expenditure forecast for this year is slightly higher than what it was, how does that CapEx get spent throughout the year and should we anticipate that perhaps going up as your facilities come online?

A - Bock Kwon

Actually the CapEx guidance that we have given is slightly lower than what is was, the actual outcome for ’05 was 12.4 and we have guided for 4.2 trillion won so there has not been an increase in that respect, what we spent it on is basically part of P7, which still remains to be dispersed that’s about 1.8 trillion won, and there is 870 for other mainly maintenance CapEx and there is an amount of 1.6 trillion won for future production facilities. Now as we have mentioned earlier on, the amount that was today approved of 453 billion won is for clean room and utilities for P8. Now on P8 we have announced last December that we would spend 504 billion won to construct the building. We as yet have not made of our determination on the fixed rate size and the capacity but we want to still keep you updated and posted on how the process goes, so hence the announcement we have made, and when we have made up the determination we will of course inform you in due course.

Q – Brian Young

Current with your report of earnings result, two of your competitors announced a cross licensing arrangement, can you give us any way to think about that?

A - Bock Kwon

Yeah we an say its quite remarkable transaction, its actually what it means is it turnout very shortly before, we are not very sure how to assess this, but for the time being we take it as an input and if there is anything that would concern us in this respect, of course we will give an update as we go into the earnings event.

Q – Brian Young

Thank you.

Operator

Sir, the following question will be given by Abd-Al-Aziz (ph) from ABN AMRO, please go ahead sir.

Q – Abd-Al-Aziz

Thank you. I just wanted a bit more flavor again on the cash costs down for first quarter ’06. Could you help us break it down between XP7 and P7 as to what kind of cash cost are you expecting in the first quarter? And you know in a trend basis, when P7 fully ramps up, will the cash cost per meter square be any different than what you are seeing for the other fabs since its more focused on TV production?

A - Bock Kwon

Okay thank you for that question. While larger and wider TV panels use typically more material, they use you know more lamps for example the tech-light (Ph) unit, it has the a larger part of the total cost. In terms of cash costs we don’t give out specific guidance on that, but the large part of the cash cost in the first quarter for P7 is related to what I said earlier on the ramp of P7, not being to the 60-65% capacity conversion bracket before CE so that will improve quarter by quarter as we ramp the fab to its full capacity of 90,000 input use in Q1’07.

Q - Abd-Al-Aziz

Great, before there was a big increase in depreciation in the fourth quarter in the absence of any big asset commissioning, how do you explain that and for the first quarter what kind of sequential growth and depreciation would you guide for?

A - Bock Kwon

Well actually if you look in Q4’05 depreciation it is higher than Q3’05, did I understand you correctly?

Q - Abd-Al-Aziz

Yeah there was a fairly big jump there from about 440 billion won to about 490. What’s the reason for that big jump in depreciation in the absence of any big asset commissioning, and going on to first quarter ’06 because of P7, what kind of depreciation increase should the budget for?

A - Bock Kwon

Yeah I will start with the latter, I have already basically informed early that we expect our depreciation expense to increase by about 50% overall for the company, 2006 versus 2005. The depreciation increase is first of all we have more capacity on the Gen. 6 line, and also we have already started to depreciate part of the P7 facility, the infrastructure and that is included in that amount.

Q - Abd-Al-Aziz

And for first quarter of ’06, given the fact that they have already depreciating some of P7, what kind of incremental depreciation would you be looking for?

A - Bock Kwon

Well the total is basically increasing by 50% so you can assume that is mostly related to P7. One detail maybe I want to mention is that the first Gen. 5 line P4 will run out of depreciation in the second quarter of this year.

Q - Abd-Al-Aziz

Thank you.

Operator

The following question will be given by Jay Lee (ph) from Daeto Investment Trust, please go ahead sir.

Q – Jay Lee

I guess, the year-end sales for the Flat Panel TVs has been quite good and what is your estimate for the LCDs in market in 2005 and what are you expecting for this year and the second question is i guess like you were telling the inventory is about 2 weeks and do you have any breakdowns as far as the products?

A – Bock Kwon

Thank you for your question. For the TV market in general the 2005 is quite good and that the growth as compared to the year 2004 so the DisplaySearch company we are talking about between the 18 to 20 million last year. But this we had already expressed and even the research company that they have forecasted maybe around double or some big big increase and also you may know that and Ron also presented already, that getting the first half we expect a lot of event, usually the consumer electronics market, the first half usually, the slow than the second half but this first half we expect that the Chinese new year in China and the sports event and also some new model launching in Japan. So we expect quite, may be a strong first half and also because of the seasonality the kind of orders and we will be strong. So overall the may be they more than doubled in last year.

A – Ron Wirahadiraksa

To answer your last point on inventories, we saw slightly below 2 weeks for TV in that 2 weeks finished with inventory.

Q – Jay Lee

And i guess like going back to the TV for instance i guess that would there be seasonality between the first half and the second half by assuming 50-50 or are you assuming like 40% in first half and 60% in second half?

A – Bock Kwon

Usually for the consumer electronics product in the first half is around 35% and second half 65%. So may be this year first half we will be stronger and the second half will be a strong also. So this is slightly different from IT and all the portion. IT person user 40% to 60% or 45% to 55% but seeing the consumer electronic market is 35% to 65% or 40% to 60%.

Q – Jay Lee

Okay. Thank you.

Operator

The following question will be given by Chris Ames from Lehman Brothers, please go ahead sir.

Q – Chris Ames

I had couple of questions for you. The first one is clarification. Did you say, your guidance for TV shipment growing 20% sequentially in 1Q or was that material?

A – Ron Wirahadiraksa

Yeah. There is square meters of glass basis and the base of our guidance.

Q – Chris Ames

And what are you assumptions in terms of the average display size from 4Q to 1Q?

A – Ron Wirahadiraksa

As we move into 42" TV production, the average inch size will go up definitely so we started with 32" as you know in 2004 and started with 37" towards to the end of that year. We've ramped up more of 37" even in 2005 and also mainly in the second half, so with the 42" we think the trend will continue of the increase in average inch size.

Q – Chris Ames

Great. I guess in terms of the space for TV and larger displays and we are seeing sharp pulling in GEN 8 7 ½ and also same as GEN 7, are you concerned at all about any component or material shortages out of CCSL or glass?

A – Ron Wirahadiraksa

I think glass shortage, we haven't seen, we don't really anticipate that at this moment there may be in the beginning, when people ramped more capacity for this large high definition glass, some but structurally i don't think there is any huge glass at this moment. We do see as we reported in an earlier conversations in the last quarter for lamps, there were some tightness. And that both for TVs and what is also the case for Notebooks to a certain extent. Other than that we think component situation is not very serious in shortage.

Q – Chris Ames

And as you plan P7 ramp, and TVs coming in the lower end of the range, would you consider producing monitors or notebook panels there, are you strictly producing TVs off on that line?

A – Ron Wirahadiraksa

The Gen 7 line will start with a 42" light TV and later we intend to start 47" so this year will be pretty much big, we are getting certainly 100% for TVs. But those are towards the end, so there will be more waiting in TVs than with the Gen 6 line.

Q – Chris Ames

I guess, if TV demand is not as robust, would you then put monitors after that? Is the cut not efficient?

A – Ron Wirahadiraksa

Well the cut for certain monitors is efficient, for example 24.1" wide and if you look at TV demand and TV situation at this moment, we don't really foresee that the demand will start to disappoint. We feel very encouraged by what we have seen so far, as we guided for earlier. We think the TV demand will remain very strong.

A – Bock Kwon

But we'll be ready to produce high-end monitors. I mean, given the monitors were actually produced, just in case.

Q – Chris Ames

And then last question, i know you don't want to give too many specific details on PA, we talked about funding for clean environment and building a facility, i guess, how quickly could you bring that online if you decided that TVs were so robust and what i guess is the planned capacity at the end of the day there?

A – Ron Wirahadiraksa

The planned capacities will adhere to the requirements of the markets so that that is something we will have to study further. We have, as i said not made up our determination on the substrates exactly. We, if you look at the Gen 7 that took about 19 months, from construction to mass production. So we usually say 18 to 22 months from construction and as we said in last month, we've started construction of that fab.

Q – Chris Ames

And i guess last question, assuming you are talking with the equipment suppliers, are they facing any difficulties with large sized mother glass? Any particular areas where you are concerned?

A – Ron Wirahadiraksa

The equipment suppliers or the glass suppliers?

Q – Chris Ames

Equipment suppliers.

A – Ron Wirahadiraksa

Equipment suppliers, at the moment we don't see that, we use both, for example, Nicon and Canon steppers, we don't foresee that we'll have to repeat of what we've seen in P6 that we have some of our equipment trouble. At this moment we can say that the outlook for the Canon equipment looks very promising.

Q – Chris Ames

Right. Thank you very much for your help.

Operator

The following question will be given by Helen Huang from Goldman Sachs, please go ahead ma'am. Okay. The next question will be given by Sunil Gupta from Morgan Stanley, please go ahead sir.

Q – Sunil Gupta

Hi, Ron, i just wanted an follow up on earlier questions about cost reductions. Could you help us understand what kind of cost reduction you hope to achieve for the full year 2006?

A – Ron Wirahadiraksa

We basically guide normally 10% to 15% and for 2005 we've been on the high end of that, as you know, for 2006 due to the ramp of P7 we think the cut down will be on the lower end of the spectrum 10% to 15%. Of course for TVs individually as we saw for example, with the 32" and 37" the cut down percentages will be higher than that for the company overall.

Q – Sunil Gupta

And how about Q1, i understand that there is lot of quarter specific things going on because of your Gen 7 fab, but if i just leave that aside on your existing business do you think you still will be able to do 3% to 4% kind of cost reduction as you did in Q4?

A – Ron Wirahadiraksa

We will of course try to do as we did earlier, to continue our success in bringing cost down, we are not giving specific cost down guidance but with the programs we have in place we should be able to achieve on going cost reduction.

Q – Sunil Gupta

Al right. Thank you.

Operator

The following question will be given by Evan Golf from DRKW, please go ahead sir.

Q – Evan Golf

Hi, good evening, Ron. A number of questions, firstly just to continue on that train of thoughts, where would you most likely derive cost reduction this year outside of the depreciation at P7?

A – Ron Wirahadiraksa

At P7 the material cost were significantly decreased as you ramp this fab further, and that goes basically, for all of the component that we use, of course as we talk about the TFT, we talk mainly about glass, and we have enough activities and project defined around the four joints to say that we expect the 42" cost down will be the same area, the same range as let say 51", 37". As that, earlier our cost down focus are on design and on purchasing and on the process. So the ramping fab, there is going to be large extent on process with the capacity conversion factor ramping further and bringing the fab hopefully quite soon, from 5 math to a 4 math step. But also on the design and the application of more materials and technologies will be on going. And also the purchasing leverage will also help bring cost further down.

Q – Evan Golf

Given that would it be fair to assume that most of the cost down will actually be back end loaded rather than front end loaded?

A – Ron Wirahadiraksa

In the year?

Q – Evan Golf

Yeah.

A – Ron Wirahadiraksa

Yeah. I think that is a good assumption.

Q – Evan Golf

And then on your prepared remarks you said that there is some shortages of tightness in TV panels. I would like to find out at this current point time, are you meeting all LCD TV panel demand that you are receiving?

A – Ron Wirahadiraksa

No. We are not actually. We have some lower end 100% fulfillment rate at this moment. It might be 75% to 80%.

Q – Evan Golf

And if i refer to your last conference call, at that time you had already talked about demand driven by Chinese New Year. And you were talking about anticipated demand that will come through with sporting events like FIFA World Cup. If you look at that time frame from October when you first made those remarks and today if you compared to the two time frames, can you comment on, is that situation in regards to demand that are worst than what you had predicted then?

A – Ron Wirahadiraksa

We feel very encouraged. We think that LCD TV sales have come through. And particularly China 37", 42" is the fastest growing market so we are particularly encouraged by that, so regarding that we at this moment don't see any reason other than that to be positive on the Chinese, year holiday.

Q – Evan Golf

And i have a last question. When i just isolated the market today i noticed there are not many LCD TV are on sale truly high definition, meaning 1080i capable. So i would like to ask if i may know what the price premium between panels capable of owning a 720p and panels capable of 1080i and secondly and if i can also get an answer from you, what is the mix between at LPL currently? And thirdly what is your time line for moving the mix towards true high definition, i.e. 1080i.

A – Bock Kwon

At this moment we don't have full HD production yet, we are wanting to introduce soon the 42" full HD first and that will – so you mentioned about the price premium between the 720p and the 1080i, that is used only 70% material will close the gap at this moment but it is , we expected it will go down, when you ramped up increasing the quantity. So may be i cannot give you the exact numbers and how is the premium but still the premium at this moment is high. But we expect that it will go down and as you may know that all over the industry now is moving towards full HD and with the environment like and other media's like BlueEye or the HDD DVD and also the all the web casting systems are moving towards the full HD. So we expect that the full HD, this will create a lot of demand in the future.

Q – Evan Golf

Thank you very much.

Operator

The following question will be given by Matthew Smith from CIBC World Markets, please go ahead sir.

Q – Adam Hinkley

Hi, guys this is actually Adam Hinkley for Matthew. I was just wondering if you can comment on TV pricing given that Samsung Gen 7 is optimized for 40" and 46" production, i was wondering if you expect to see some pressure on 32" and 42" TV panels during the calendar year '06?

A – Bock Kwon

As you may already know, in the market, the TV, the dictated price that is very close to the already some of the street spot price. So it is the 32" and 37" which we believe is reaching to the street spot prices. They are directly provided to the consumers, so even they introduced the 40" and 46" the pricing down but still there is gap between the 30" and 40". And also this year, we speak for the 42" and 47", the 40" grade will increase a lot of demand in the market. But still there is, the mainstream up to the last year was 30", 32" and 37". Even the Q4 37" portion is increasing. So vis-a-vis, the 30" will remain as the mainstream, also it is increasing a lot 42" and 47". So the pricing impact, we don't expect a lot of pricing impact going back, but still there is strong demand extended already for the 32" and 37". Even the 42" also, so that is the as you may see there is not so many manufacturers who produce the 40" and 46" so that is going to be some different market.

Q – Adam Hinkley

Okay. Thank you.

Operator

The following question will be given by Karl Richter from Darby Capital, please go ahead sir.

Q - Karl Richter

Well. I had two questions actually. Please excuse me, for the first one, i am somewhat new to the story. But as i look at your CapEx plans of 4.2 trillion and your cash i think of under 1.6 trillion and it looks like you are burning cash and probably it's get a little worse, with the decline in profitability in Q1. i guess i am wondering how do you plan to address that and should we expect an equity rate and any increase in debt and how much longer you can put that off?

A – Ron Wirahadiraksa

You had two questions or this is all?

Q - Karl Richter

That is the first question, the second question is around how to think about operating margins going forward, it seems like you are operating margins in the first part of the year are going to be somewhat depressed, but hardly pulling forward some capacity expansions but just kind of looking at the business somewhat cyclically, it looks like in Q2 of '04 the last time you guys have had a peak in OP margins, OP margins at that time i think, were over 30%, if Q4 of '05 is also kind of another peak in OP margins, it looks like you are peaking again in Q4 '05 at around 30%. I guess what i am trying to figure out is how to think about future OP margins potential is at the next peak, do you think you can never get back to 30% again, or do you think kind of the peak from here is going to be closer to teens?

A – Ron Wirahadiraksa

Okay. Thanks for the questions, on the first one, expense 4.2, cash, you said was under 1.6 and due to the ramp of P7 how it is going to work out, hope we are going to come out with new equity issue this year. As we said in earlier quarterly earnings events, and also earlier given guidance we don't intend this year to come to the equity markets. If you look at the cash position that we have that seems quite comfortable, we have a net debt equity ratio of 26% so we can add debt to the balance sheet without much hurdles and also the EBITDA growth will be significant, i already pointed to a increase and depreciation of 50% so the operating cash flow will actually increase substantially in 2007. So with the three combined we feel will give us sufficient flexibility confront the future CapEx needs and also in this year.

On operating margins, the time, you mentioned in Q2 '04 was a time when EBITDA margin, the metric we prefer to speak about in terms of guidance was a 45% and indeed operating margins above 30%. We have guided basically for a sustainable EBITDA of 25% to 30%. And in last quarter that was 28%. And we have guided for high teens for Q1. So probably due to the ramp of P7 combined with some price erosion we have for guidance will also this year we will come out on EBITDA margin to the lower end of that range. Does that answer your question?

Q - Karl Richter

I guess i am still not understanding on the – so you finally use debt rather than a equity rise? is what you are communicating?

A – Ron Wirahadiraksa

That's correct. And what i ill also say our funding situation, the flexibility with the balance sheet will not be heard off to incur more debt.

Q - Karl Richter

Do you have the option of going to either Philips or LG for Catalog fusion or that is not part of the plan either?

A – Ron Wirahadiraksa

I think from the reasons spelled down by Philips we can conclude that, that is not really an option going forward. And so we don’t intend to do any recapitalization incurring new equity.

Operator

The following question will be given by Oliver Lee from Alliance Capital, please go ahead sir.

Q – Oliver Lee

I have two questions, the first question is, your guidance, the mean single digit down ASP in the first quarter, can you just give me some color about of what percentage actually on the monitor side, notebook side and what percentage up on the TV side. And my second question is on the forth quarter the expense rate, actually was about 5.8% about 1% higher than the third quarter, is there any specific reason for that and I actually expect that that ratio will continue throughout the ’06.

A – Ron Wirahadiraksa

Okay. Thanks for the question. If you look at the price guidance we’ve given with single digit, quarter end to quarter end from Q1 to Q4 TV pricing will be slightly down, we feel so basically the PC segment a little more than that number. On the operating expenses in the fourth quarter, we had to do some stimulation of the markets, so we have done some promotion, that was not a very large amount, main aspect driving this is the increase in transportation cost, as we ship larger and wider panels to further destinations for example Europe, the transportation cost are really high and so that is one of the reasons why we are engaging in constructing a model plan at this moment in Poland, that will take a quite for that to fill the ramp. So until that time we will have to live with, slightly higher transportation expenses. That is basically the reason behind the increase.

Q – Oliver Lee

Referring to the information of the ASP in first quarter you mentioned that TV was probably will decline a little bit, and you just may change earlier on the rate now it is about 70% to 72%, so are there any specific reasons for the TV panel, no price decline, the fulfillment rate is so low.

A – Ron Wirahadiraksa

Actually I think I said 75% to 80% fulfillment rate, if you look at TVs then still we see the trend of set down price requirements, so set price will have to come down further, in order to reach even better suite spot pricing to trigger more demand from consumers, and if you look at 32" wide that was 40.99 at Christmas for branded products, around Christmas 2005 coming from about $3000 in 2004. So probably this year Christmas the price will go more to $1000 space. That means that the next suite spot price for an 37" wide which is around $18, $1900 will also go down further. So TVs will have to on an ongoing basis to come down to tickle more demand and go for higher penetration. That is basically the reason behind that. I understand your question, why would you not increase the prices if you have that low order consuming rate. Pricing are coming down and we are competing of course with PDP in the launch in wider sizes particularly in 42" we will compete with P7 as we have said once that fab is ramped we will compete more head on with 42" HD TV. That is the reason why TV is slightly going down on an ASP per square meter basis.

Q – Oliver Lee

Should I actually expect the profit margin on the TV panel production would be, will have not any impact because of this price reduction because you have cut down program, or you actually expect profit margin will have an impact on that?

A – Ron Wirahadiraksa

Due to P7 ramp actually there will be as I said earlier, quite an impact on TV and that is what will improve throughout the year. As we move on this quarter. But TV profitability which was at the end of last year was positive will come under pressure because of the P7 ramp and will have to go through that phase to enter the 42" wide TV area.

Operator

The following question will be given by Toni Simonetti from HSBC, please go ahead sir.

Q – Toni Simonetti

I just wanted to get some more information on the TV market, what is your outlook for the TV market in 2006 in terms of the number of units and if I can get the break down for two categories only, greater than 40" and then 30" to 40" please.

A – Bock Kwon

Okay. The total market demand, I explained already that is may be last year was around the 20 or they depend on the research and it is still not finalized yet, but the forecast is 18 to 22 so may be averaging around 20. So this year everybody I speak around achieving the quantity. So when you see the 40" overall this year the displays are focused around 13% for the 40" overall and the 30" is around 51% so that is the forecast by DisplaySearch.

Q – Toni Simonetti

And do you think that is a reasonable forecast that is conservative or-?

A – Bock Kwon

I think that, when you see as we have mentioned those already, that last year they are shifting from 30" to 37" and the 42" are very well accepted by customer and our customer, they invested for the tooling for 30" a lot, and we just picked from the full HD TV in the later part of this year. So we expect may be that is some conservative numbers.

Q – Toni Simonetti

Okay. Coming to the next on the customers, is there any difference you see in the customer profile for people that were buying the in terms of your customers they were buying the 32" 37" product from P6 and now customers are in line to buy the 42" or 47" product from P7. I mean is there white box top brand, Japanese, is there a shift in that?

A – Bock Kwon

You know, the large size TV you have to buy in the European market, European market is 30 to 40" is quite suitable for the European home, and also now it is increasing a lot 37" and the larger size in China market, and so for the definition market even it was, their home is small but before they are well off by 20" but now it is 30", it is, the increasing, so that is maybe that is giving you some ideas about your customer.

Daniel Kim, Vice President of Investor Relations

Because of time constraint we may just have one more question. Thank you.

Operator

The last question will be given by Christian Dinwoodie from UBS, please go ahead sir.

Q – Chirstian Dinwoodie

Just one question on the Gen 7 fab ramp, in the forecast you have spread it over several quarters, and looking back what you said before you typically tend to beat your forecast if fab ramp schedule, is there something this time that should make us think that you might actually require the full forecast period to ramp the 7th generation fab or just being little bit cautious in your guidance. Thanks very much.

A – Ron Wirahadiraksa

We intend to ramp the fab in about 12 months, in 9, 2000 it was designed, in which capacity, but we will always strive to end that earlier than that however the Gen 7 line is a good line for engineers much a lot of substrates size, the scale is much bigger, so we tend to be little bit more, shall we say realistically prudent in giving out ramp schedules. Should we foresee that ramp will significantly improve in terms of ramp up speed. Then we will communicate with you on time.

Q – Chirstian Dinwoodie

Okay. Just to clarify, it is not necessarily reflection of what you think the demand will be your component supply, it just might actually take that long to ramp?

A – Ron Wirahadiraksa

Yes. It would take that long to ramp the fab.

Q – Chirstian Dinwoodie

Okay. Thank you.

Ron H. Wirahadiraksa, President, CFO

Okay. Thank you. This concludes our Q4 '05 earnings conference call. You may contact the investor relations department if you have more questions. Thank you very much for joining us and good night, or good morning depending on where you are. Thank you.

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Source: LG Philips LCD Q4 2005 Earnings Conference Call Transcript (LPL)
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