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LG Philips LCD Co., Ltd. (LPL)

Q1 2006 Earnings Conference Call

April 11th 2006, 8:00 AM EST

Executives

Daniel Kim - VP IR

Ron Wirahadiraksa - President and CFO

Bock Kwon - EVP for Marketing and Sales

Analysts

Chong Kim - CLSA

Andrew Root - OTA Asset Management

Christian Dinwoodie - UBS

JJ Park - JP Morgan

Oliver Lee - Alliance Capital

Chong Han Ong - JL Capital

Analyst - Rabo Securities

Ivan Goh - DRKW

Analyst - ABN Amro

Mr. Bryant - Darby Capital

Frank Lee - Deutsche Bank

Jae Lee - Daiwa Securities

Lok Jinjaq - JP Morgan

Operator

Good morning and good evening. First of all, thank you all for joining this conference call. We will begin the conference of the fiscal year 2006 first quarter earnings results by LG Philips LCD. This conference will start with a presentation, followed by a Q&A session. (Operator Instructions). Now we shall commence the presentation on the fiscal year 2006 first quarter earnings results by LG Philips LCD. Please go ahead, sir.

Daniel Kim

Welcome to LG Philips LCD’s first quarter 2006 conference call. My name is Daniel Kim, Vice President of Investor Relations. On behalf of LG Philips LCD, I would like to welcome everyone to our global quarterly earnings conference call. I am joined by Ron Wirahadiraksa, President and Chief Financial Officer of LG Philips LCD. Also joining us is Bock Kwon, Executive Vice President and Chief Marketing and Sales Officer.

We have 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 into the discussions 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 the important factors, among others, set forth in LG Philips LCD’s filing with the U.S. Securities and Exchange Commission, and in its first quarter 2006 earnings release.

Consequently, actual operations and results may differ materially from the results discussed or projected in these forward-looking statements. LG Philips LCD undertakes no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise. Now please take a minute to read the disclaimer.

I would now like to turn the call over to our President and CFO, Mr. Ron Wirahadiraksa.

Ron Wirahadiraksa

Thank you, Daniel. Ladies and gentlemen, welcome to our first quarter 2006 global conference call. During the next hour I will review our first quarter earnings results, discuss performance highlights, the trends in the industry and conclude with the outlook for the next quarter. After this, we will take your questions.

We are reporting in consolidated Korean GAAP with an appendix to this presentation that includes our reconciled U.S. GAAP numbers.

In the first quarter, greater than expected seasonal weakness in notebooks and monitors and a number of companies shifting production from low-end monitors to notebooks and LCD TVs caused greater than anticipated price erosion. The seasonal weakness also led to lower shipments.

LCD TV demand remained strong, but was slightly below market expectations. There was also less than anticipated IT demand from Europe. Based on these factors, we publicly revised our financial guidance for the quarter on March 21. In line with our revision, Q1 ’06 panel shipments fell by 5% QonQ, and ASP at quarter end declined by 10% compared to the end of the fourth quarter of 2005.

Due to operational efficiencies, cost reduction and a smooth ramp up of P7, we are pleased to report a 27% EBITDA margin, which we believe is impressive in the context of the quarter’s weaker pricing environment.

It is important to note that, while we continue to invest in meeting the volume needs of our global customer base and increase our output, we are also very mindful that profitability is a critical metric of our success. We believe that the first quarter is a very good example of this focus.

We remain encouraged by the level of demand for our LCD TV products. We saw our TV shipments grow 20% QonQ in square meters, as more and more consumers are choosing to purchase large and wide LCD TVs, recognizing LCD technology as the flat TV technology of choice.

We expect LCD TV set demand to reach 45 million units for the year, given: the expected decline in retail prices, the expected demand surge from the World Cup soccer event in June, and the increased availability of HD and full HD content.

Last year, for the holiday season, we indicated that sweet spot price levels of $1,999 for 37-inch and $1,499 for 32-inch LCD TVs would be achieved. We believe that these price points have been met last year, and by the end of this year we expect prices to reach $1,999 for 42-inch, $1,499 for 37-inch, and $999 for 32-inch LCD TVs. These attractive price levels will further drive demand.

Operational efficiency at all of our fabs, most notably P7, played a key role in driving cost reduction this quarter, countering price erosion. With a lower ASP and less than anticipated panel shipment levels, revenue was KRW2.5 trillion in the first quarter of 2006, a decline of 17% sequentially from the fourth quarter of 2005. Year on year, revenue increased 20%.

In the first quarter, our COGS decreased 7% quarter on quarter to KRW2.3 trillion. Our COGS per square meter in U.S. dollars increased by 5% Q on Q, while declining 14% year on year. On a cash COGS basis, these numbers decreased by 5% and 23% respectively. In Korean won, COGS per square meter decreased 2% QonQ and 18% year on year. Cash COGS per square meter decreased 10% and 26% respectively in Korean won.

Foreign exchange in the first quarter had a slightly negative impact on our income statement. We continue to hedge against committed and anticipated exposure. We are pleased with these results and will continue to focus on our cost-reduction efforts as cost competitiveness is key to long-term success. We maintain our expectations of achieving annual cost reductions in the range of 15% on a square-meter basis.

Our balance sheet continues to be very strong, with a net debt to equity ratio of 33% at the end of the quarter. We believe this provides us with the necessary financial flexibility. As of March 31, 2006 we reported KRW1.1 trillion in cash and cash equivalents. The reduction in cash and cash equivalents compared to December 31, 2005, is the result of ongoing spending on our facilities.

Our first quarter finished goods inventory turnover level increased in line with first quarter seasonal weakness from the fourth quarter of 2005, to just over three weeks. We consider this level healthy for this time of the year, and will continue to actively manage our inventory levels.

Cash flow from operations decreased to KRW261 billion quarter on quarter. Working capital declined by KRW500 billion QonQ, largely due to inventory, fuelled by our P7 ramp up and seasonal weakness during the quarter. We also reduced air shipments.

CapEx spending of KRW0.85 trillion was according to plan and largely allocated to our ongoing investments in the P7 facility, which began mass production on January 1 and is ramping in line with our expectations. CapEx spending in the first quarter also included ongoing construction of the P8 facility. We have not yet made any final decisions on the substrate size for P8, but of course we will update you in due course.

I would now like to go into more details about several specific performance metrics on the next slide. The ASP for the first quarter decreased at a greater than expected rate to $1,953 per square meter of net display area shipped, or KRW1.9 million.

The total display area shipped for the first quarter of 2006 was 1.3 million square meters, a decrease of 5% QonQ. As discussed, the area shipment was lower than initially expected, due to greater than expected seasonal weakness in notebooks and monitors.

Revenue for the first quarter by product segment is as follows: TV continues to grow very rapidly and for the first time, has overtaken our monitor segment with 45% of revenue; followed by that monitor segment, at 30%; notebooks at 20%; and other applications accounting for 5%.

We have continued to increase TV and reduce monitors as a percentage of overall revenue. We balanced our segment and product mix to better respond to high customer demand for LCD TV panels. The breadth and flexibility of our facilities allow us to make timely production shifts to respond to customer needs. Our P7 facility enables us to meet the demand for larger LCD TV panels, furthering our leadership in the industry.

We are pleased with the ramp up and efficiency of our new P7 facility. In Q1, P7 averaged 16,000 input sheets per month. P7 is the world’s largest 7th generation fab, not only in size but also in terms of production capacity. The short time it took to achieve mass production reaffirms our industry-leading capabilities in line construction and process technology. P7 is now ramping smoothly in line with our expectations, and should reach its initial design capacity of 90,000 input sheets per month by the end of 2006. P6 has also performed well this quarter.

In the first quarter of 2006, our cash ROIC was 30% compared with 39% in Q4 ’05. This decrease was mainly the result of lower sales caused by eroding prices, a shipment decline, and higher invested capital in the first quarter.

We now turn to our outlook discussion. For the second quarter of 2006, we anticipate area shipments in square meter of glass to increase by a mid to high 20 percentage QonQ, due to continued expansion of the LCD TV segment. In fact, with the ramp up of P7, we expect TV shipments to grow more than 50% QonQ.

We expect the ASP per square meter shipped at the end of the first quarter of 2006 to decrease by a mid to high single-digit percentage QonQ, as we believe the pricing environment for notebooks, monitors, as well as TVs will continue to see erosion. We believe this will help to reduce retail sweet spot price levels and also further driving demand for LCD TVs as a result of that.

Our Q2 EBITDA margin will be impacted by continued ASP erosion and the expected further depreciation of the Korean won relative to the U.S. dollar. This we expect to offset partially by ongoing price reduction and the growing demand for LCD TVs. As a result, we anticipate our projected EBITDA margin will be approximately 20%.

Our CapEx guidance for the year remains unchanged from the fourth quarter of 2005 and is KRW4.2 trillion. Furthermore, we are also seeing ongoing growth opportunity for LPL in notebook panels, particularly for the large and wide product segments, as more consumers move to notebooks as a desktop replacement. In 2006, approximately 80% of LPL’s notebooks will be in wide format.

In the monitor segment, we expect growth will still continue as the shift continues towards larger and wider monitors, as well as multiple monitors. For example, we see monitors becoming larger as they emerge as a part of the multimedia package offering both TV and PC functionality.

We will continue to drive our growth strategy with cost reduction, including process innovation and material cost reduction efforts. Through these initiatives, we expect to be within the sustainable range of about 15% cost down per square meter for the year.

At the end of 2006, we expect over 20% LCD TV penetration due to reduced sweet spot price levels which will drive growth. During the second half of the year, we expect to see stronger seasonal demand. We would like to thank you for your continued support and confidence in LG Philips LCD.

Daniel Kim

This concludes our first quarter of 2006 earnings presentation, and we would like to now answer your questions. Thank you.

Question-and-Answer Session

Operator

(Operator Instructions) The first question will be given by Mr. Chong Kim from CLSA. Please go ahead, sir.

Chong Kim - CLSA

Hi, Ron. Just a couple of questions. The first one for your guidance in the second quarter; and then, the other question is related to not being able to announce yet what you’ve decided for P8.

For the second quarter guidance, obviously you’re looking for a contraction in margins. Just doing the math on what you’re suggesting for revenue growth where you’re seeing, it looks like very good recovery in volumes. Pricing doesn’t seem that much worse than what you experienced in 1Q. Revenue growth looks pretty robust and, in fact, it’s the best revenue growth I’ve seen in nine quarters.

So I’m a little puzzled as to what’s driving margin contraction in the second quarter to the degree that it is. If I could follow this question up with what I mentioned about P8.

Ron Wirahadiraksa

Thanks for that question. Well actually, the margin contraction is still caused by ongoing price erosion. Even though the quarter-end to quarter-end number you say is relatively modest, it’s still quite high and very impactful on the results. As you know, pricing is the biggest value driver, basically, in the industry.

So we will, as I said, offset that, probably by ongoing cost reduction efforts. We’ve been very successful with that in Q1, not only in the ramp of P7 but also in the other fabs. Operational efficiency and cost down has been very good.

P6, I mentioned it in the remarks, also had a very good performance that quarter. But the main driver of this contraction is basically the price erosion.

Chong Kim - CLSA

Okay. On the P8, at this point, when do you anticipate you’re going to make a final decision? I guess there’s some speculation, obviously, between whether or not you’ll decide to do what they call that super gen 5.5 or whether you’ll do gen 8. Depending on what you choose to do, what do you think the time schedule will be in terms of when this new capacity will come online?

In terms of the decision-making process right now and why you haven’t come to a final decision, can you help us in understanding what the variables are here in terms of your decision making, what the strategies are and how that influences whether you’ll do a smaller fab versus a much larger next generation fab? Thank you.

Ron Wirahadiraksa

Of course. Thanks for the question. Yes. We have very strongly emphasized the growth in LCD TV and we would like to capitalize on that. We are very well positioned for that. We will, as usual, gear the ramp of the fab and the substrate size choice to what we expect the market for large and wide TVs will do exactly. I think that just needs a little further timing and decision-making for us. We’ve also indicated that -- and I repeated that also during the first remarks -- we’d like to grow further in notebook PCs. So we’re focusing on these two.

We have not taken any decision. I’m saying that to you simply because it’s true. We have not issued any POs or have any approval of the Board of Directors. So when we do so we will, of course, communicate with you. We expect that to be the case at the next earnings call.

Chong Kim - CLSA

Could you give us a loose timetable, then, just something we can work with in terms of when you would bring this capacity online?

Ron Wirahadiraksa

Well, typically you know that it will take 18 to 22 months from the start of construction of a fab to mass production, basically. So generally speaking, that is, I think, the correct dimension. You also know that we have started construction at the end of December.

Chong Kim - CLSA

Alright. Thank you very much, Ron.

Operator

The following question will be given by Mr. Andrew Root from OTA Asset Management. Please go ahead, sir.

Andrew Root - OTA Asset Management

Thank you very much for taking my question. What was the average size of TV panels in the first quarter, and how does that compare to the fourth quarter?

Bock Kwon

In the industry I think the 20 to 26 inch was the main size in Q4, and it’s moving towards the 26 and 32 size. And also the demand for the 37 inches in the States and other countries are getting very strong.

Andrew Root - OTA Asset Management

Thank you. I’m just looking at your TV business, which grew about 10% in revenue terms. On an average square-inch or square-meter basis, what was the change in first quarter for LPL, for LG Philips?

Bock Kwon

I’m sorry. I didn’t understand your question. Could you repeat that question, please?

Andrew Root - OTA Asset Management

Just looking at your segmented revenue, your TV business grew a little more than 10% in the first quarter over the fourth quarter. What was the average size of your panel sales in the first quarter compared to the fourth quarter?

Bock Kwon

Our average panel size, we are focusing more for the larger size TV and we are less for the small size. So our average size for the fourth quarter was slightly increased. We are increasing more 32 and 37 inches, and also the 42 inch is increasing. So our average size in the Q4 was the same as the industry at the 22 to 26 inches, and is getting to the larger 32 inches.

Andrew Root - OTA Asset Management

Finally, on the TV panels, in the June quarter the panels that are shipped for TV units, how much do you expect that to grow in June? You indicated that TV revenue will be up a lot. Do you know what the units will be shipped to TV makers June over March?

Bock Kwon

We are expecting a strong demand for the World Cup event. It’s going to start from June 9. Also some strong events from China also, the Labor Day holiday, and also the 50-year special season for the Chinese for the wedding ceremonies. So we expect some growth of TV demand from China also.

Total demand, usually the first half and second half is around one-third in first half and two-thirds in the second half. But still this year, still the first half is quite strong and also more strong in the second half.

So I cannot figure exactly what is the total quantity, but actually the total demand maybe would be the 45 million in total year, and one-third can be in first half and two-thirds can be in second half.

Andrew Root - OTA Asset Management

On the level of cash that you have, is there an amount where, like if you drop below KRW1 trillion, would you want to raise additional cash or liquidate some inventory? Is there a level you don’t want to go below, or you’re quite comfortable going well below KRW1 trillion?

Ron Wirahadiraksa

I think for LPL the ideal level of cash will be somewhere sub KRW1 trillion.

Andrew Root - OTA Asset Management

And you’re comfortable with that, given your CapEx and KRW500 billion burn this quarter, or you would want to look to raise capital or liquidate inventory?

Ron Wirahadiraksa

Well, we will raise more debt, as we have already indicated. Of course, you will be updated on the possibility of an international bond offering. There will be no equity issue this year, as I have emphasized on many occasions.

Andrew Root - OTA Asset Management

Thank you very much.

Ron Wirahadiraksa

You’re welcome.

Operator

The following question will be given by Mr. Dinwoodie from UBS. Please go ahead, sir.

Christian Dinwoodie - UBS

Thank you. Hi, Ron. Just a couple of questions on the inventory for the first quarter. Would you be able to roughly breakdown how much of that is television and how much is PC? You seem to be very comfortable, that it could actually be strategic.

We noticed the SG&A dropped and I think it might have been the first time since Q304. Could you help us understand what some of the major drivers are in that SG&A that might have come down? Thank you.

Ron Wirahadiraksa

Well, the inventory increase is mostly, I would say, 80% to 90% was TV. We’re ramping up gen 7 and growing larger in the business. The increase in TV inventories, to a certain extent, is a quite logical consequence. Yes, we have said a little more than three weeks. At this moment we are not concerned with that level of inventory.

We think actually that last year we’ve been running pretty low inventory levels. This inventory level that we quote here is a consolidated global all-inclusive inventory number, everything shipping, in-house and what have you.

On your second question, on SG&A, that is also something I indicated, maybe I should emphasize a little more. We have decided to ship more by vessel than by air. Air freighting large size TVs is very uneconomic. We have brought that down last quarter. We had to do a fair bit there, as customer demand was very high and strong.

We have now done more vessel shipments, that has also led to a slight increase in the inventory, in the lead time. As a result of that, in SG&A we have actually saved a fair bit on transportation expenses.

Christian Dinwoodie - UBS

Thank you.

Operator

The following question will be given by Mr. JJ Park from JP Morgan. Please go ahead, sir.

JJ Park - JP Morgan

Okay. Thanks for the presentation. I have a few questions on the Q4 results. You mentioned cost per square meter came down by 2% compared to the previous quarter. I’m just looking at your Q4 result presentation. It seems to me that actually cost per square meter actually went up by 2% compared to the last quarter.

Ron Wirahadiraksa

Yes, that is right. I thought that we had said that also under the income statement.

JJ Park - JP Morgan

So that’s a typo in the first quarter presentation material?

Ron Wirahadiraksa

Well, we have two things. We have the cost of goods as a total amount and we have the cost of goods per square meter in dollars.

JJ Park - JP Morgan

Yes, I’m talking about the square-meter basis, cost of goods sold.

Ron Wirahadiraksa

Yes. Per square meter in U.S. dollars - is that what you’re talking about?

JJ Park - JP Morgan

Yes. That’s actually went up or came down?

Ron Wirahadiraksa

It went up.

JJ Park - JP Morgan

Okay. It went up by 2% from the previous quarter?

Ron Wirahadiraksa

It went up 5% QonQ.

JJ Park - JP Morgan

The second question was the depreciation expense. Looking at the first quarter, that should increase in the depreciation expense. I suspect it is mainly driven by the P7 ramp up. Do we expect that the level of the depreciation expense going forward?

Ron Wirahadiraksa

Yes. Of the KRW628 billion depreciation, KRW107 billion was for P7. That will increase because we’re increasing more capacity, we are ramping more lines. I said in the last quarter that 1.7 trillion total company depreciation last year, 2005, will this year increase by approximately 50%.

JJ Park - JP Morgan

Thank you.

Operator

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

Oliver Lee - Alliance Capital

I just want to follow up the margin contraction question. You just mentioned the major factors of the margin contraction is due to the price erosions in the second quarter, about a mid to high-single-digit decline. If we look at the first quarter, you actually got about 8% ASP decline and the shipments actually contracted about 5%.

In the second quarter, assuming you’ve got about a similar price erosion of the first quarter and you have a higher output, about 25% plus output increase in the second quarter, why in the first quarter you can have about 27% EBITDA margin, but the second quarter you’ve got a much lower EBITDA margin, almost like 20%. Is something actually missing here?

Ron Wirahadiraksa

No, no. You’re actually right. But what we have actually seen, maybe I can clarify that better for you. In January, our ASP on a square-meter basis went up as we increased substantially the level of 42-inch production. As I’ve reported already, the quarter-end to quarter-end price down. In the second quarter, the average price decrease in the quarter will actually be higher, as a result of that, than the quarter-end to quarter-end price erosion because you have a slightly higher average rate in the first quarter. You’re starting with a run rate level in March that is much lower than that. That’s what you move into the second quarter.

So, simply again to restate it, the average price erosion in Q2 will be higher than the quarter end to quarter end price erosion. I think that’s maybe the missing part.

Oliver Lee - Alliance Capital

How will the pricing roughly be?

Ron Wirahadiraksa

Well, we’ve guided for mid to high-single-digit price quarter end to quarter end. I think the average will be actually high single digit. More close to 10%.

Oliver Lee - Alliance Capital

Okay. Thank you.

Operator

The following question will be given by Mr. [Chong Han Ong] from JL Capital. Please go ahead, sir.

Chong Han Ong - JL Capital

Hi, Ron. Just to follow up on the inventory side. Could you let me know with the TVs, how much is 32 inch or larger?

Ron Wirahadiraksa

Well, we don’t really break that down. I said that the main increase for the inventory was due to TV. That had to do with the new fab ramping and 42 inch. So that’s 42 inch in there, but also 37, and 32 increased a bit.

Chong Han Ong - JL Capital

Right. You can’t tell us how many percent of that inventory is 32 inch and above?

Ron Wirahadiraksa

No.

Chong Han Ong - JL Capital

Okay. Your shipment for 1Q in meter squared is actually down 5% QonQ, while you ramped up your P7. I don’t quite understand why the shipment in meter square is actually down QonQ. Is it because of mix change or is it because it went to inventory?

Ron Wirahadiraksa

Well, the mix change is also there because TV is much higher in the mix at this moment. TV also, I said, grew on a square-meter basis by a little more than 20%. So the rest came down, mainly monitors and notebooks. That is the reason and that was due to more than expected seasonality.

Chong Han Ong - JL Capital

So the downside percent QonQ is because of the transition when you shift to TVs, more to TVs? Is that why you are ramping up P7?

Ron Wirahadiraksa

That is correct. But the monitor and notebook segments were much weaker than we expected, and there lies the main answer for square meter down.

Chong Han Ong - JL Capital

My last question, I just want to understand what happened in 1Q, because back in January you were saying the EBITDA margin would be 20%, and then 2Q would actually go up. Now what we see is actually your 1Q EBITDA margin is 27% and then 2Q is going to go down to 20%. What happened in-between these few months that your forecast is the other way around?

Ron Wirahadiraksa

Yes. That’s a very good question and I will try to answer that for you. Basically, two things. The gen 7 line has ramped much better. That is not so much so in capacity, because I just quoted you the number of 1,600 average input sheets per month for the first quarter, which is basically in line with what we communicated before.

The capacity conversion factor in P7 was better than expected; thereby we have saved a lot on material expenses. So the depreciation was there because that is very predictable, but we have saved a lot in the material cost through a better capacity conversion factor.

Now, also in the other fabs, in P6, as we communicated, we have produced some 42 inch panels last year that was not very economic. We limited that, but for strategic needs we have done so, we have explained that. So that is basically all of it, and that improved P6 performance also.

And then, of course, we have the ongoing cost down through value engineering, through design, as we say, meaning we try to simplify things and get less components and less expensive components in. That was very good. We have also pushed quite hard on cost innovation in the last quarter, Q1 that is.

Now, we have already gotten a lot of the benefits there of P7 versus the expectation. That means that the improvement potential in Q2, although it will improve, is going to be less than we earlier anticipated because the cost benefits came one quarter earlier, were much better. The price erosion that I just guided for is more or less very close to Q1. So that means, as I tried to explain in the previous question, that the EBITDA margin actually is coming down to approximately 20%.

Chong Han Ong - JL Capital

Right. Because in January you were guiding that you will actually be higher than 20%, for 2Q -- 1Q is supposed to bottom at 20% and then 2Q is supposed to be higher than 20% because it’s supposed to rebound.

Now you are saying 20%. So there must be some variable that you estimated wrongly in January. Was that the ASP coming down more than you estimated in January?

Ron Wirahadiraksa

Yes. So actually, at the time we gave you the guidance on our best assumptions, including gen 7. Maybe we have been somewhat on the careful side, but certainly not over careful in our expectations. We had also, as you know, the ramp of the gen 6 with some equipment issues. So we communicated actually the right number, we felt.

Now, as I already explained to you in the previous part of your question, costs in our other fabs was also much better than expected.

Chong Han Ong - JL Capital

Right. No, I’m focusing on the 2Q now, sorry.

Ron Wirahadiraksa

Yes, yes. But I’m trying to start with Q1 first because you had a remark on that. I’m trying to clarify it for you. The ASP came down also more in these than we expected, but the offset was bigger.

Now, we have not given last quarter specific guidance for Q2, as you will recall, but we have said that we would expect a sequential improvement, as we now have had the benefit of a 27% EBITDA margin instead of high teens so we, as I said before, have less potential to improve in the second quarter.

Chong Han Ong - JL Capital

Thanks a lot, Ron.

Ron Wirahadiraksa

Okay.

Chong Han Ong - JL Capital

Thank you.

Operator

The following questions will be given by Mr. de Zwart from Rabo Securities. Please go ahead, sir.

Analyst- Rabo Securities

Good afternoon. Niels de Zwart, Rabo Securities. First question is on your EBITDA margin. The previous conference call you have guided to a sustainable level of between 25% and 30%. Is that still a longer-term target you would be looking for?

Ron Wirahadiraksa

Yes. That is still the case. In the first quarter we actually did quite good on it, 27%. At previous earnings events I have communicated that we expect to be at the level, or close to the level, that we were in the last year end, in Q4. That was 28%. So, we are going to do our best to get more close to that area.

Analyst- Rabo Securities

My second question is with regard to the tax line in your P&L. Could you maybe give us some guidance for the following quarters and maybe for the full year?

Ron Wirahadiraksa

Actually, we give specific guidance on the elements of square meter shipments, pricing and EBITDA for one quarter ahead. We do expect in the second half that pricing will stabilize. It’s not very clear at this moment when exactly that is going to be. So, pricing should improve and it will mainly be on the PC side.

TV pricing probably will come down less, because the season, as Bock already indicated in an earlier question, the season is much stronger in the second half, we feel.

Back to your first question, we continue to think that 25 to 30% EBITDA margin would be a sustainable level in this industry.

Analyst- Rabo Securities

Okay. Thank you very much.

Operator

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

Ivan Goh - DRKW

Hi. Good evening, Ron. Just back in January I think you said that you were meeting about 80% of the total TV panel orders that you received. Given that inventory’s actually gone up in Q1 to about three weeks, I was wondering if that TV panel demand has come down? A related question to that is has the World Cup demand been weaker than you had expected up to this point in time?

Bock Kwon

During Q1, when we’re talking about the TV demand during Q1, every customer today is forecasting that they want to buy more panels during World Cup event. But actually when they saw the price down, so they hold their procurement, their buying. They postpone their buying to the Q2. So, at this moment, we see a very strong demand from our major customers. Based on that we calculated the shipment growth will be as we guided.

Ivan Goh - DRKW

Okay. Then, just going back to the inventory in your balance sheet, would you expect your inventory in the balance sheet to be lower at the end of Q2 compared to the Q1? Or will it be up or will it be held steady at about three weeks?

Ron Wirahadiraksa

Well, we think at the current level, we don’t think we will go much above that at the end of Q2.

Ivan Goh - DRKW

Okay. And then a last question is, if you look at your customers, you said earlier that your customers held back on procuring TV panels after seeing that prices are falling. Would it be implied that they are having a very, very lean inventory right now? Is it just across the world in LCD TV sets as well as in panels?

Bock Kwon

Okay. Channel inventories are quite similar to Q4, and maybe slightly high, as they forecasted maybe a bit strong the sales, even they had some inventory carried over from Q4 last year. Actually the sales was not so good as they expected. So, channel inventory is slightly higher than before.

Ivan Goh - DRKW

Thank you very much.

Ron Wirahadiraksa

Thank you.

Operator

The next question will be given by Mr. [Abijit Aptivar] from ABN Amro. Please go ahead, sir.

Analyst- ABN Amro

I’m just wondering upon that last question. You just said that channel inventories are running high on the TV space. What then gives you visibility for this guidance of 50% growth in TV shipments quarter on quarter in the second quarter?

Secondly, you seem to be carrying a fairly high inventory of almost 1 billion. If TV panel sales still continue to come down, you would obviously take an inventory write-down risk. Have you factored that into your assumptions already?

Bock Kwon

Okay. During Q2, as I mentioned to you, demand will be very strong and so we expect the inventory may be down for the TV. But for the TV, as Ron explained before, we’ve started to ship by sea, in order to reduce the logistic cost.

Even now holding inventory just slimmer than before, but still including on board, so that our inventory can be quite maintaining the same level as Q1.

Analyst- ABN Amro

Can you give us a feel of how much of inventory is in-transit inventory and, therefore, has been already committed to buyers? How much, basically, of this 20-odd-percent growth in shipments is already committed?

Bock Kwon

Okay. The 20% of growth is maybe, as I mentioned already, that’s based on our customers’ forecasts during Q2. So, we expect everything going well during the World Cup event. Customers are raising promotion for the World Cup event. They’re doing some activities in the sales floors. So, we expect they will carry on all the other forecasts during the Q2.

Analyst- ABN Amro

Okay. And if you can just answer the question about $1 billion of inventory if you’re looking at 7 to 8% price declines. Is the inventory write down to your forecast already?

Ron Wirahadiraksa

Yes. We have this, of course, always in our accounts on inventories. We have an inventory write-down policy that starts with about three months and then the next bracket is six months. So, we take them out.

You’re right; inventory increases could mean that. But please bear in mind that the demand level is also at a higher stage. So, it’s not so that those inventories should be linked to demand that was in the first quarter, the inventory. That’s why more or less a little more than three weeks is geared to the second quarter and beyond. So, we don’t expect a very big impact from that.

Analyst- ABN Amro

Thank you.

Operator

The following question will be given by Mr. Bryant from Darby Capital. Please go ahead, sir.

Mr. Bryant - Darby Capital

Hi. It looks like your tax credit increased substantially sequentially, and it was actually a pretty big contributor to your reported net income. Could you please help us think about how to forecast the tax credit or tax expense going forward, please?

Ron Wirahadiraksa

Yes. The low tax credit is partly due to the foreign invested part of the Company by Philips Electronics, 33%. Also, results are lower because the tax pressure diminishes, and we have quite some investment tax credit that we get on ongoing CapEx. That’s an investment support that the Korean government gives. So, those three factors have always made our tax burden quite low.

Mr. Bryant - Darby Capital

How would you think about forecasting tax for the next few quarters at least then, considering all those factors?

Ron Wirahadiraksa

Well, assuming that things stay more or less the same in the development of the expectation on dispersing capital expenditures, then we think that the tax rate throughout the year will not go over 10% to 12%.

Mr. Bryant - Darby Capital

So, you’ve gone from a credit in Q1 to actually paying taxes in the second part of the year?

Ron Wirahadiraksa

Yes, as we expect to make more profit.

Mr. Bryant - Darby Capital

Yes. Thank you.

Operator

Okay. The following question will be given by Mr. Chong Han Ong from JL Capital. Please go ahead, sir.

Chong Han Ong - JL Capital

Hi. Sorry, just a quick clarification. I understand that the inventory went up because the ASP went down and the channel just postponed their purchase. From what I understand, is that from your panel shipments to the end product, to the inventory, i.e. into the channel, takes three months. Is that still valid?

Bock Kwon

Well, you mean from our production to the consumer?

Chong Han Ong - JL Capital

The TV that has been sold, yes.

Bock Kwon

Well, that depends on before we ship most of the shipments by air, but now we change it to sea, to reduce the logistic cost. That may take a little bit longer but still in that range, yes.

Chong Han Ong - JL Capital

Right. In that case, whatever you ship today is not going to reach the consumer for World Cup, right?

Bock Kwon

Yes.

Chong Han Ong - JL Capital

Okay. Alright. So, when you say they delay their purchase because the ASP is coming down, they’re not delaying it for World Cup any more, right?

Bock Kwon

Right. Yes.

Chong Han Ong - JL Capital

Thank you.

Operator

The following question will be given by Mr. Frank Lee from Deutsche Bank. Please go ahead, sir.

Frank Lee - Deutsche Bank

Hi. Thank you, guys. I just had a question about your unit growth assumptions for the second quarter. You’re looking at 25% or 30% surface area growth, which seems to be quite strong. Can you give us a direction in terms of perhaps are all three applications seeing strong growth as well? I know you’ve mentioned the TV panel side expecting 50% growth, but what about the notebook and monitor side?

Bock Kwon

As we told you already, our TV unit growth over 50%. For the monitors, as we are not trying to increase for the low-end monitors and we are trying to increase the wide-end, high-end monitors. For the notebooks we are expecting significant increases. It’s expanding a lot for the wider notebooks, which we are optimizing and we are focusing on also.

Frank Lee - Deutsche Bank

Okay. And on the monitor side?

Bock Kwon

Monitor side, our shipping growth will be almost the same or slightly grow.

Frank Lee - Deutsche Bank

Okay. Regarding your comment on the TV side, 50% seems to be quite strong in terms of quarter on quarter. Would you say this would be above what you expect the overall market to be? If that’s the case, is it a function of customer mix or product mix?

Bock Kwon

Yes. Definitely it will be above the industry growth, which we are growing more for the 37 inches than 42 inches, as we mentioned, because of the product mix. It’s shifting more 37 inches than 42 inches.

Frank Lee - Deutsche Bank

Okay. I guess one part of the question is that you mentioned earlier part of your inventory build in the first quarter was because of a delay in procurement managers, because they see the decline in pricing. But we’re also looking for a similar price decline in Q2, if not possibly more. Is it possible that the same behavior could repeat itself in the second quarter?

Bock Kwon

But actually we expect good sales during the World Cup event and also from the Labor holidays and from the wedding season in China. So, there maybe it’s time to buy now, otherwise they will miss their sales event.

Frank Lee - Deutsche Bank

When you mean the drivers, it’ll be the World Cup and what other areas? But earlier you said that actually if you deliver in Q2 now for panels, would you still be able to make it for the World Cup?

Bock Kwon

Yes. We are starting shipping from beginning of this month.

Frank Lee - Deutsche Bank

Okay. And that would still be in time for the World Cup?

Bock Kwon

Right.

Frank Lee - Deutsche Bank

Okay. And I guess my last question is based on your EBITDA margin forecast of 20%, it’s about 7% contraction in EBITDA margin. Given the operating margin is only about 2% in the first quarter, is it possible to assume that we could see some potential operating losses in the second quarter?

Ron Wirahadiraksa

Yes. Well, we guided for approximately 20% EBITDA margin, with a depreciation level of 20% or so That’s around breakeven, I would say.

Frank Lee - Deutsche Bank

Okay. Thank you.

Operator

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

Chong Kim - CLSA

Hi, Ron. In the few minutes we have left, just trying to take advantage of that. Just maybe more of a long-term question, thinking about the second half and how this time around the industry and its behavior may have changed.

Do you get any sense from your marketing people or from just internally that maybe panel makers are not as mercenary as they may have been in the past in terms of raising prices, as maybe they may have done in the past just opportunistically? Is that something we’re seeing? And if so, what do you think is potentially driving that change in behavior?

The other thing is, looking at your capacity in one of the charts in your presentation, it’s very clear that outside of P7 you don’t really have any capacity growth. Right? All of the other parts of the bars look pretty much the same. So, in other words, it looks like your notebook and your monitor capacity, presuming that you’re not going to be making 17 or 15 or 14 inch notebook panels at P7, that’s just not growing into the second half of the year, and you are one of the biggest producers.

What do you think that then means in terms of supply and demand for the PC-related products into the second half and then, of course, one half of 2007?

Ron Wirahadiraksa

Okay. Thanks for the questions. I don’t know exactly what mercenary means.

Chong Kim - CLSA

It’s a good thing, Ron. I’d like to see more of it, to be honest with you.

Ron Wirahadiraksa

Okay. We have indeed indicated that we see this irrational behavior diminishing on both sides, I would say. So, we have already seen basically in the last year that, unlike in 2004, suppliers have not increased very strongly the pricing. I think the industry collectively learned a lesson.

On the back of that, also the downside seems to be, although Q1 we just explained to you was quite strong, high; 10% quarter end to quarter end. We think that is still not what we have seen in the past. As we have earlier indicated, we think the growing TV segment will bring more price stability, because TV has longer pricing cycles and other reasons why that will be the case.

Now, on the downside, it doesn’t seem to be a good strategy any more for second and third tier players to go below cash cost. If you want to stay in this game, you have to try to generate cash.

That’s why we have also explained to you in the previous quarter very strong EBITDA growth from a level of 2.2 trillion in the last year with a strong increased depreciation, increase that I also guided for.

So, those reasons make it probably that people are not going to swing so much up and down any more. Of course, in the second half - that relates also to your second question - we will see more tightness, mainly in the PC segment. And you are right in your observation about capacity growth. Although we do our best to bring the gen 6 line with increasing level of input sheet capacity, we’re working on that.

What I’ve also said is that, in our decision making on P8, which is not finalized, we’re still considering, we will also look at the fact that LG Philips LCD wants to grow in notebook monitors. So, going forward, that capacity for notebooks will also increase.

So, I don’t think there will be a very huge -- what we have seen, as I said to you in the prepared remarks, is that last quarter, before we started to maybe switch out a bit, and we have certainly done that low-end monitor segment. And they’re going to TVs, but in the absence of a decent TV infrastructure in terms of fabs and customers, there is no other place to go than notebooks. Hence, we see the strongest price erosion occur there.

But the capacity for notebooks we will bring it -- we will keep it in line with our growth ambitions.

Chong Kim - CLSA

Okay. One last thing, did I hear you give a guidance in terms of the individual product shipments into the second quarter? You said plus 50% for TVs and I believe one of your colleagues said flat, maybe slightly up for monitors. Did you give a guidance for notebooks as well?

Ron Wirahadiraksa

Actually, we think, besides the 50% increase for TV, the PC side will also increase in square meters.

Chong Kim - CLSA

Do you have a figure that you’re willing to share?

Ron Wirahadiraksa

Well, it will not be 50%, if that’s what you’re asking.

Chong Kim - CLSA

Yes.

Ron Wirahadiraksa

But there will be some growth. I think, together with the shipment guidance we gave and the part of TV in our business, it’s not difficult to get an indication of that.

Chong Kim - CLSA

Alright. Thank you.

Ron Wirahadiraksa

Right.

Operator

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

Jae Lee - Daiwa Securities

Yes. Although you gave us a TV guidance for the global market at about 45 million units, and about one-third would be falling in the first half and about two-thirds will be falling in the second half, how about your own shipments for the TVs? Would it be the similar ratio?

Ron Wirahadiraksa

Yes. It would be -- it did follow a similar ratio, let’s say 35, 40 in the first half and 65, 60 in the second half.

Jae Lee - Daiwa Securities

Right. And what kind of market share are you looking for this year for the TV side?

Bock Kwon

Okay. For the TV, essentially we are looking for around 23%.

Jae Lee - Daiwa Securities

23%?

Bock Kwon

Yes.

Jae Lee - Daiwa Securities

Okay. Thank you very much.

Bock Kwon

Thank you.

Operator

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

Ivan Goh - DRKW

Hi. I wanted to find out if you can maybe make some comment about the profitability of the TV business from Q4 to Q1, and also from Q1 to Q2, if it differed significantly from the overall firm trends?

The second question is you’ve said that you’re starting to ship for World Cup demand starting from early April. I wanted to know when is the latest you have to ship to make the World Cup demand. Thank you.

Ron Wirahadiraksa

Bock, maybe you can start with the second question?

Bock Kwon

Before the World Cup, the event, we are willing to ship them by sea, so it started already from beginning of this month. They’ll be shipped during this month and we can reach it for the World Cup event. In the meantime, maybe there are some customers they would like to ship by air during the beginning or first part of May.

Ron Wirahadiraksa

Okay. And on your first question, the operating profitability in all segments is positive in the Company. Of course, TV has been a bit under pressure from the gen 7 ramp. But, as I’ve said, we expect that to improve.

Ivan Goh - DRKW

Thank you.

Ron Wirahadiraksa

Yes.

Operator

The following question will be given by Mr. [Lok Jinjaq] from JP Morgan. Please go ahead, sir.

Lok Jinjaq - JP Morgan

Thank you. I might have missed this, but could you help me think about your inventories over the course of the year? In other words, given the shipment growth you’re forecasting for Q2, would we expect your inventory balance to be flat or even down in Q2? How should it play out over the course of the year? Thank you.

Daniel Kim

Yes. We expect our inventory to be about the same in the second quarter. And it’s going to diminish as we go on in the second half.

Ron Wirahadiraksa

Our inventory policy actually is anything that would go above five weeks we would start to temporize production. Of course, ahead of those five weeks occurring, if we have that view. Right now, we don’t have that view.

So, things seem to be okay and we’ll very carefully watch the inventory development. As Daniel just said, the inventory level would remain relatively flat, maybe slightly up at the end of the second quarter.

Daniel Kim

If there are no more questions, then thank you very much. If you have more questions, you can always call on us. Thank you.

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Source: LG Philips LCD Co., Ltd. Q1 2006 Earnings Conference Call Transcript (LPL)
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