康寧 (GLW) 2003 Q1 法說會逐字稿

Hello and welcome to the Corning's first quarter results conference call.

Following today's presentation there will be a question-and-answer session, and at that time, instructions will be given.

Today's telephone conference is being recorded for instant replay purposes.

If anyone has any objections, you may disconnect at this time.

I'd now like to turn the call over to your host, Mr. Ken Sofio, manager of investor relations.

Sir, you may begin.

Thank you.

Good morning and welcome to Corning's first quarter conference call.

This is also being audio cast or our Web site.

Jim Flaws, Vice Chairman and Chief Financial Officer will lead the discussion.

Wendell Weeks, President and Chief Operating Officer will join for the Q&A Before I turn the call over to Jim I should mention accept for the published results and the store (ph)comparison, today's remarks constitute forward-looking statements which is the meaning of the Private Securities Litigation Reform Act of 1995.

These statements involve a number of risks, uncertainties and other factors that could cause actual results to differ materially.

These risks are detailed in the company's SEC reports.

Jim.

Thank you, general.

Good morning.

Last night we released our results for the first quarter and we were obviously very pleased.

Sales in the first quarter were 746 million, an increase over the fourth quarter and higher than our expectations.

Put this in perspective, this was the first sequential increase in revenues since the fourth quarter of 2000.

We were also very please with our bottom line results, as we reached break even for the first quarter, excluding special items.

Before I go flew the details of our special items let me walk you through the rest of the income statement.

Clearly the cost reduction actions that we have taken are working, as evidenced by the substantial improvement in gross margin, SG&A and RD&E.

Gross margins for the first quarter were 26.9 percent compared to 14.2 percent in the fourth quarter.

This substantial improvement is largely a reflection of our aggressive cost cutting actions, led by the closings of two of our fiber manufacturing facilities in January as well as the strong demand we had in the quarter for fiber.

SG&A was 153 million in the first quarter compared to 183 million in the fourth quarter.

This decline reflects our continued cost cutting efforts across the entire organization, especially in telecommunications.

RD&E came in at 93 million compared to 113 million in the fourth quarter.

This decline is a result of our efforts to streamline our facilities and staff.

We also made very significant progress in shifting our R&D focus to programs relating to our Corning technologies business.

Our tax benefit rate excluding special items was 30 percent, consistent with the fourth quarter.

In addition, we also began to recognize equity, from Dow Corning, our joint venture with Dow Chemical for the first in several years.

Dow Corning contributed about 17 million to our bottom line.

Now, let me summarize for you the various announcements we made during the first quarter, starting with our decision to shut down our conventional television business which is located in State College, Pennsylvania.

This was not an easy decision to make.

We have been involved in the North American cathode ray tube industry since the 1950 and for almost two decades it was our fastest growing and most profitable business.

In fact, we have always viewed color television as one of the many life changing inventions that Corning has helped bring us.

This business was wholly owned until 1998, when we sold a 49 percent to Asahi glass, a subsidiary of the Asahi Glass Company Limited of Tokyo, Japan.

The resulting partnership was named Corning-Asahi Video Product Company, but it became simply as CAV.

CAV had been profitable and a cash generator for many years after that transaction.

Unfortunately in the first quarter it gun to burn cash as a result of market events we now believe to be permanent.

At annual invest or meeting on February seventh I told you we would continue to monitor the performance of this business while running it strictly for cash.

I was also anticipating we would be running the business for at least two more years.

In fact, at that time we about expecting certain customer orders to come through based on their input to us and in fact we had restarted a tank for them.

These orders would provide improvement in sales and profitability as we moved through the year.

Obviously we never got these orders which drastically reduced the demand for CAV products.

This was compounded by a significant increase of glass and tubes from foreign imports.

We now believe the decline we experienced in the fourth and first quarters was anything but temporary which led us to conclude there was no prospect for a sustainable recovery.

Our top priorities the pass year have been to drive the company towards profitability while protecting its financial health.

As a result we knew with could no longer afford to sustain a mature business that was losing money and cash.

This was the main reason behind our decision.

The closing of CAV resulted in the pretax charge of 62 million in the first quarter, 19 million after tax and minority (ph) interest.

The charge relates primarily to the impairment of the remaining fixed assets.

As you may recall, we impaired a substantial portion of CAV assets in the first quarter.

In addition, Corning will record a second quarter pretax charge in the range of 80 to 100 million, 20 to 35 million after tax and minority interest.

This charge will relate primarily to severance and other costs.

This action will result in the elimination of approximately 1000 positions.

We expect a majority positions to be eliminated by the end of the second quarter.

Approximately 20 percent of the positions are salaried.

The facility will be completely shut down by the end of the third quarter if not sooner.

Approximately half the first and second quarter charges will be in cash and this cash obligation will be shared with the Asahi.

We anticipate about a third of the cash to be paid in 2003, another third in 2004.

As a reminder we pay severance over a period of time, depending on length of service.

It is important to note that this decision did not impact our other conventional television business, Samsung Corning.

Samsung Corning is our Korea based joint venture with Samsung.

Samsung Corning continues to perform very well.

Market dynamics mix that impacted CAV are specific to the North American television market.

Samsung Corning main markets are Korea, China, Malaysia as well as parts of Europe.

In addition Samsung Corning continues to benefit from its ability to produce flat conventional television glass for the flat television market, a market that's been growing rapidly as a percentage of all conventional televisions sold.

CAV did not participate in this market.

To help you with your modeling we estimate CAV would be contributed about 60 million sales this year.

I now some of you are anticipating an upside to our (inaudible) of this decision, since CAV has been incurring a loss.

Keep in mind while we did have a loss for CAV in our 2003 forecast we were counting on some improvement in their performance as the year progressed, therefore you should not count on any material aside to our 2003 MPAT (ph) as a result of this decision.

In addition to the second quarter restructuring charge to CAV we will also have to record a charge for certain exit costs including a write off of inventory of about 20 million pretax and about 6 million after tax and minority interest.

Do you to the nature of this charge, it will directly impact our gross margin line and is in our guidance.

One final note on CAV.

We are still considering whether we will treat this as a discontinued operation.

We will let you know as soon as we reach a decision.

Now, let me move on to our first quarter announcement regarding our decision to settle the Pittsburgh Corning asbestos claims.

We reported an after-tax charge of 192 million in the first quarter to settle all current and future claims against Corning and Pittsburgh Corning.

As a result as we stated previously in our public filings we have always felt the company had strong legal defenses in many claims of direct liability from asbestos products relating to Pittsburgh Corning.

However, it is no secret that asbestos litigation is inherently complex and carries a certain level of uncertainty.

Therefore, we excluded (ph) it was more important to bring this matter to closure and remove the uncertain rather than going through the court system.

The agreement is expected to be incorporated in a settlement trust fund as part of the reorganization plan for Pittsburgh Corning.

The plan will be submitted to the federal bankruptcy court in Pittsburgh for approval and is subject to a favorable vote by 75 percent of the asbestos claimants.

We believe the claimants will be able to vote on a plan sometime this summer.

Final court approvals could take up to a year.

Once the claimants have approved the plan and any appeals are resolved, Corning and PPG, the other shareholder of Pittsburgh Corning will be able to make their contributions to the settlement truss fund.

Our portion of the settlement consists of Corning's equity interest in Pittsburgh Corning.

Our one half equity interest in Pittsburgh Corning, a Belgian corporation, and 25 million shares of Corning stock.

In addition will be making cash payments with the current value of 130 million to the trust beginning in June of 2005.

The first payment that year will be 25 million and the reminder will be spread out fairly equally over the next six years.

We expect to contribute the stock to the trust in mid 2004.

Rules Accounting rules state that any changes in market value of Corning's common stock will need to be recognized in our quarterly results until the stock is contributed to the trust.

As a reminder these shares will not be included in our weighted average shares outstanding until they are issued to the trust.

We also announced during the first quarter our decision to exit the optical switching product line.

This resulted in a pretax charge of 17 million in the first quarter and about 11 million after tax.

We will also report a pretax charge of 10 million in the second quarter to cover the exit cost related to this decision.

This decision was part of our overall strategy to narrow our product scope down to these technologies where we have clear competitive advantage.

Our following the strategy over the past year we've exited a variety of product lines in which either the market volumes or technology trends had resulted in commodization (ph).

For certain products the pace of innovation industry has also slowed tremendously.

This has resulted in market opportunities pushed out by a number of years.

Optical switching was a product line that was impacted by these lighter trends.

As Wendell and I discussed with you during our annual investor meeting in February we continue to explore all strategic options for our photonics business.

The options range from continuing to run the business in its current form, seeking out a partnership opportunity, or simply exiting the business.

We will make our decision no later than the end of the second quarter and will communicate that decision to the investment community.

As a reminder we built our plan around running this business throughout the year, so partnering or exiting represents a modest operational upside.

Total restructuring payment charged related to CAV and optical switching in first quarter were about 80 million pretax or three cents a share.

We also made an adjustment to restructuring reserves recorded in 2001 and 2002.

This adjustment was a benefit of 29 million pretax or 2 cents per share.

Therefore, the net restructuring impairment charge taking the first quarter was 51 million pretax or 1 cent a share.

One more note on this restructuring reserve adjustment which was for previously recorded severance and exit cost.

We also reduced our estimated future cash payments related to these charges by about 25 million.

As a result we continue to believe that the total estimated cash payments for 2003 will remain consistent with our previous begins for restructuring even though we have had an increase in cash severance payments for CAV.

In addition to the impairment restructuring and settlement charges we also repurchased debt during the first quarter using a combination of cash and equity.

We repurchased a total of 274 million, an accreted value our zero coupon diventures (ph) using a combination of 189 million in cash and 6 million shares of stock.

This resulted in a pretax gain of approximately 5 million in the first quarter.

As a result of these repurchases the accreted balance of our zero coupon diventures (ph) at the end of the first quarter was approximately 1.3 billion.

We also used 62 million in cash to retire normal maturing debt during the quarter.

One other point in our first quarter results.

Our cash and short term investment balance was 1.85 billion versus the 2.1 billion at the end of the year.

This decline was primarily a result of the cash used to repurchase existing and maturing debt.

In addition, our cash flow included a tax refund of 191 million, which we are happen to have received a month earlier than expected.

Now let me turn to our business results for the quarter.

Starting with telecommunications, revenues in the segment were 352 million in the first quarter, down slightly from the fourth quarter.

Sales were driven by strong fiber volume in Japan and China, offset by price decline.

The segment posted a loss in the first quarter of 70 million which was a significant improvement over the 171 million loss incurred last quarter.

This improvement is a direct result of the cost savings achieved from the various restructuring actions we implemented during the quarter.

Revenues in the optical fiber and cable business were 193 million, basically flat with the fourth quarter.

Fiber volume increased about 15 percent sequentially by a higher than anticipated demand from Japan and China.

Fiber demand in North America continued to be soft but at a level that was consistent with the fourth quarter.

Pricing pressure as expected was stronger in the first quarter as we closed a number of our annual long term supply agreements with customers.

For the first quarter pricing was down 10 to 15 percent sequentially.

As we stated during our annual invest or meeting we believe that pricing pressure will be more moderate for the reminder of the year.

Mix premium fiber in the quarter was consistent, slightly less than 10 percent.

Before moving on to the rest of the segment I'd like to spend a moment discussing the February ruling made by the FCC regarding broadband.

Clearly, we are pleased with the FCC's decision.

We wanted the FCC to set a policy for leading fiber to the home (ph), unbundling wholesale pricing rules.

This is exactly what the FCC did.

We believe this ruling will help the telecom industry tremendously over the long term, however, we have no illusions that this ruling will benefit the industry or Corning this year.

There are still regulatory hurdles and the threat of appeal that will take some time to be worked through.

In decision the industry is still awaiting the final detailed ruling for the FCC before proceeding forward.

Nevertheless, this ruling was a step in the right direction.

Sales in our hardware and equipment business were down 5 percent from the fourth quarter and photonic technology, sales were 18 million in the first quarter down only slightly from the fourth quarter.

Now I'd like to move on to our technology segment.

Revenues in the first quarter were 388 million, a 6 percent increase over the fourth quarter.

The increase was led by strong demand and display technologies, environmental technologies and life sciences.

Net income including equity earnings was 45 million in the first quarter, consistent with the fourth quarter.

In our display technologies consolidated business, sales for the first quarter were 117 million, up 12 percent over the fourth quarter.

Volume, which is defined by us in square feet of glass, increased about 10 percent sequentially in the first quarter led by strong demand in Taiwan.

As expected, pricing the first quarter was stable and the impact at the end was favorable to all results.

Net income which included our equity earnings from Samsung Corning Precision grew 20 percent sequentially in the first quarter.

This substantial increase in earnings is a reflection of our strong volume growth as well as approved manufacturing performance.

Consistent with the last several quarters, our entire family of LCD businesses continues to run at full capacity as we again reached a new level production shipment during the first quarter.

In comparison to the first quarter of last year, revenues and display technologies businesses have grown 25 percent, led by an 20 percent increase in volume and federal exchange rates.

Net income has also grown substantially compared to last year up 40 percent led by volume increases of Samsung Corning Precision of over 50 percent.

Demand this quarter was again driven by the penetration of flat panel LCD monitors and the desktop monitor market as well as an increase in screen sizes.

At the end of 2003, we expect 50 percent of all LCD desktop monitors to be 17 inches or greater.

As a reminder, the shift from 15 to 17 inches translates into a 30 percent increase in glass.

This drive for larger sizes is a reflection of the improved retail price environment.

In fact you can now find 15 inch monitors for under $299 and 17 inch monitors for less than $399.

Another interesting market dynamic is the impact notebook computers are having on office workstations.

As the notebook computers continue to replace desktop computers there's only -- as the only computer one needs we are finding that LCD, desktop monitors are becoming a commentary purchase alongside each notebook computer sold.

In fact, purchases of LCD desktop monitors are now tiled to about a quarter of all notebook computers sold.

We are also very excited to be ramping up our production capabilities on the next generation of LCD glass, which is popularly known as gen 5.

This is a substantial increase in size over gen 4 glass will allow our customers to product more substrates from each sheet of glass that they process: It also will provide our customers with the ability to produce larger size substrates for LCD televisions.

With the size gen 5 in perspective, gen 4 glass is only about 6 square feet, gen 5 glass is approximately 14 square feet, more than twice the size.

The advantage this glass brings to the market is clear, more substrate equals more official use of our customer fabs (ph) which translates into cost efficiencies which can be passed on to the end consumer.

Our consolidated business will ramp up its shipments of gen 5 glass in the second half of this year.

Samsung Corning Precision is currently shipping gen 5 glass to its Korean customer base.

On a somewhat related note I'd like to take a note to discuss LCD prize, a topic that has generated questions.

As many of you know, pricing the LCD glass industry, like any technology product declines over time as we reduce our cost was our manufacturing process.

On average, LCD glass prices have declined in the mid single digits on an annual basis.

In some years the decline has been less than this, in some years slightly more.

The key to understanding the dynamics of LCD glass pricing is to look at the pricing by product, which in this case is defined by generation of glass.

As new generations of LCD glass are produced they receive a pricing premium over older generations since they are inherently more difficult and costly to manufacture.

Since the new generations of glass are substantially larger than older generations they quickly become part of the total volume reduced.

This in turn results in favorable pricing mix for the entire business as the new generation of glass helps to offset price declines in older generations.

The good example of this is occurring this year with the production of gen 5 glass.

As we ramp up our production to meet our customer demands, gen 5 will quickly become a substantial portion of our overall volume and thus helping to reduce the impact of price declines on the previous generations of glass.

Turning to our environmental technologies business which had a record first quarter, sales were 115 million, a 20 percent increase over the fourth quarter.

This increase was primarily due to strong worldwide auto production, favorable exchange rates and a continued shift in mix to our premium thin wall and ultra thin wall products.

Net income environmental technologies increased about 20 percent but by the strong volume growth, improved manufacturing efficiencies.

These gains were slightly offset by the decline in equity earnings of Corning Tech, our joint venture with Mitsubishi (ph), which was impacted by the falloff in industrial pollution spending.

Without this negative impact of Corning Tech (ph) net income from Corning's consolidated environmental business would have been up more substantially.

I'd like to make one more comment about our environmental technologies business.

As many of you are aware there have been publicly revised industry estimates regarding the total production of cars in US this year.

In addition, some US auto manufacturers have announced plan to shut down production during the second quarter.

We have not seen any impact from these changes yet, however we recognize we're sensitive to the impact of the economy and consumer spending could have on auto production here in the US.

But you should keep in mind that we are supplier of ceramic substrates worldwide with operations in Germany, South Africa and China.

With the US auto market about 16.4 million autos were produced here last year, compared to a total of 57 million cars produced world wide.

The other point I would like to make is US auto production is less volatile than our telecom business.

The latest estimates for this year peg US auto production at approximately 16 million cars and well within the range of our internal forecast.

In addition, we anticipate our customers will continue to shift to our premium ultra thin wall products, which further help offset declines in auto productions.

Revenues in our life science business were 73 million in the first quarter, an 11 percent improvement over the historically weak fourth quarter.

Net income decreased about 25 percent sequentially in the first quarter led by improved manufacturing efficiencies.

Sales at our conventional television business provide 25 million for the first quarter, a decline of almost 30 percent if the fourth quarter.

Equity earnings at Samsung Corning were down sequentially due primarily to the impact of a one time tax benefit received from the fourth quarter.

In our other technologies business, which includes semiconductor materials and our fiber (ph) products, revenues in the first quarter were 58 million compared to 67 million in the first quarter.

Before I move on to the balance sheet, let me take a moment to discuss Dow Corning.

As many of you know, we began recognizing equity earnings from Dow Corning in the first quarter.

For our reporting purposes these, are not included within the segment results.

As we mentioned during our annual investor meeting we expect Dow Corning to contribute about a penny to a penny and a half earnings to our quarter results this year.

For the first quarter equity earnings for Dow Corning were $17 million.

For listeners less familiar with Dow Corning it is the world leader in silicone products for many industries and operates quarterly.

Dow Corning reports their numbers quarterly and its filings provide details about this world class company.

Let me turn to the balance sheet.

On the balance sheet, DSO's for the first quarter were 60 days compared to 57 in the fourth quarter.

However, this increase is primarily a reflection of our growing LCD business and its oversees customer base which typically has longer payment terms.

You should also noted for Corning DSO's are typically highest during our first quarter.

For comparison of the first quarter last year DSO's actually fell 4 days.

Inventories were 556 million in the first quarter and consistent with the fourth quarter.

We ended the first quarter with 1.85 billion in cash in short term investments versus 2 billion at the end of the year.

I'd like to take a moment to explain in more detail the decease in cash.

As I mentioned earlier, the major cash inflow for the quarter was 191 million tax refund received in March.

We also received approximately 65 million in cash dividends from our equity companies, primarily Samsung Corning and Samsung Corning Precision.

Major cash outflows for the quarter include 251 million in cash used for scheduled debt repayments and open market repurchases I mentioned earlier, as well as 94 million in severance payments.

In decision we made a 15 million contribution to our pension plan.

Now, regarding our debt retirement activity as you know, one of our key objectives is to strengthen our balance sheet, although our scheduled debt repayments for the remainder of the year are modest, about 140 million, we will likely continue to exit open market purchases, certain debt securities using our cash.

As I mentioned earlier, we did do some debt for equity swaps relating to our zero coupons diventures (ph) in the first quarter.

Going forward we may use debt for equity swaps again when the economics appear to be attractive, but we believe cash will be our primary mechanism to reduce debt.

We also continue to have complete full access to a 2 billion line of credit facility which we have not drawn on to date and which we have no intention of doing so.

The credit facility does not expire until August of 2005 and has only one covenant, debt to capital ratio cannot exceed 60 percent.

At the end of the first quarter our total debt to capital ratio was 45.6 percent, decreased from 46.7 percent at the end of last year.

This means we could access the entire credit facility without triggering the covenant.

Now I'd like to wrap up by providing you some information regarding the second quarter.

As a reminder our policy is to give guidance one quarter at a time.

Expect the second quarter to look a lot like the first with anticipating revenues to be in the range of 715 to 745 million and a result to be loss of 2 cents per share and income of 1 cent per share.

Regarding our revenue guidance I'd like to make a few points.

Keep in mind the first quarter was helped by a little extra fiber demand from Japan, which is more than we expected.

We know this level demand will not repeat itself in the second quarter due to typical seasonal slowdowns in that market.

We believe the first quarter benefit of this additional volume versus the fourth quarter was worth about 10 million in revenues.

Second our revenue guidance for the second quarter contains the impact of weakening conventional television business.

We believe CAV's revenues can fall from 25 million in the first quarter to 15 million in the second as a result of the announcement.

Therefore, there's potential if our revenues inform fall about 20 million as a result of these two events.

If both of the events occurs you'll see our revenues in the middle of the mid range of our begins.

Thinking about the upper and lower ends of our revenue begins we look at the potential for upside an downside in two of our other businesses; display technologies and environmental.

In environmental we believe the business could be impacted by the plant manufacturing shutdowns and automotive industry, although there is potential for downside here we have not seen any occasion of this yet in our business.

In display we believe there's potential for some modest upside in addition to our gains which I will go through in a minute.

In summary we feel confident our reference are on track, maintain some levels consistently from quarter to quarter.

Now, let me move on to some specific guidance for our businesses starting with fiber.

We anticipate fiber volumes to fall sequentially in the second quarter by about 25 percent, reflecting seasonal slow down in Japan.

Although our elevated first quarter fiber volumes will be more than offset by the expected decline in the second quarter we continue to support stable fiber volume for the year as a whole.

While we anticipate North America fiber volume to continue to be soft, although at a consistent level, we are forecasting seasonal growth in Japan during the third an fourth quarters.

Expect fiber pricing pressures to continue although at a much more moderate level than we experienced in the first quarter.

We anticipate stable sequential revenues in Corning technologies segment as growth and LCD life sciences may be offset by some weakness in environmental.

In our consolidated LCD business we anticipate volume growth of about 10 percent sequentially and stable pricing again in the second quarter.

We also believe the yen change rate will continue to be favorable during that time.

As a result we believe we're still on track to meet our 40 percent volume growth for if year in this business.

We are also certainly aware for potential for an economic slowdown and looking at all external trends it could impact the economy and our results.

Regardless of these potential external factors our plan is to return to profitability is mostly dependent on the strong performance of our LCD business and our cost cutting actions that have been implemented to date.

Clearly as evidence we are able to deliver on both of these fronts during the first quarter and based on our EPS guidance for the second quarter, it's clearly believed we have the ability to improve the results even further without increase in revenues.

As a result we remain confident that we will meet our goal of reaching profitability before special items in the third quarter.

Ken?

Lisa, we can take questions now.

Thank you.

At this time if you would like to ask a question, simply press star one your touch tone phone.

And if you're using speaker equipment lift your hand set prior to pressing star one.

Cancel your question with star 2.

Once again, star one to ask a question and star 2 to cancel.

Our first question comes if Steven Fox with Merrill Lynch.

You may ask your question.

Hi, good morning.

Jim, first question is with regard to -- I recognize it's a small amount of stock that you used to buy back debt but given all the equity you have issued in the last year and a half can you explain the economics behind the decision to use stock to buy back the debt?

About felt we were able to achieve favorable overall trade with the price on the bonds that people offered to us and price of where our stock was.

I won't go into specifics but overall we felt we did well on the small trades we did.

I will emphasize it was a very small amount of stock.

And then looking at the LCD business, it looks like you're now pretty comfortable with the high end of the unit outlook that you provided in February.

How much of mix could even play beyond the units in terms of boosting profits at a greater rate than unit volumes this year?

I won't give guidance on the full year there.

I think as you know, we have high fixed costs in our business so volume is good for us, but we are adding fixed cost to keep up with this dramatic demand from our customers.

I think the pricing could be favorable depending on how much gen 5 goes up but we feel very good about the potential for profits in this business in this year.

You say your customers may have trouble getting glass or is the timing such with the ramp that you think she will be all right in terms of the supply standpoint?

Demand for our glass we see continuing to be very tight throughout the year.

We're going to be able to meet the requirements we believe of our alliance customers, but it's going to be tight.

Thank you, our next question comes from John Roberts with Buckingham Research.

You may ask your question.

When Dow Corning comes out of bankruptcy does the equity contribution step down as they take on debt to fund the settlement and then it starts to agree more rapidly because it's a leveraged entity?

No.

When they merge from bankruptcy what they will do is take on debt and fund the commercial credit obligation which is already accrued, so what you are seeing from equity earnings from us will continue to grow as their profits hopefully continue to grow.

Secondly you indicated a decision of Photonics as coming by the end of the current quarter her but their range of earnings benefit from actions you take sounds like it's relatively narrow, I would have thought it's a reasonably wide range if you were to shut down a substantial amount of the business versus continue to operate it.

I think you would see more of the impact in next year, John, because even if we were to choose exit, which I want to remind you we haven't done yet, we do have some wind down costs and obligations to customers and also there would be some write-offs we can't take as a special - accounting rules have to flow through operating results.

But you are correct, you know, if we have an exit totally or if it were to move to some kind of partnership we would expect to see significant improvement in our results.

But you'll see most of that next year.

Why is it you would have to o if you were to select the option of substantial exit why is it you would have to eat the cost in the operating numbers?

I because the accounting rules say you can't separate that as a special restructuring special.

We will obviously highlight to you in our numbers just as we recently did on CAV today but we can't take that out as a separate item any longer.

Thank you

Thank you.

Our next question comes from Jim Junjohann with CIBC.

This is Chris Dizrenko (ph) for Jim.

I had some questions on gross margins you said this quarter it was up because of some restructuring done as well as increased fiber sales.

Can you talk about where you see the overall gross margins the next quarter with fiber being down so much?

I don't think we'll be will go for any improvement gross margins this upcoming quarter as a result of fiber down but we do expect to see gross margin climb in the third and fourth quarter.

I don't see you'll see it move substantially downward in the second quarter, other than the one item that I highlighted to you, which is the unfortunate impact of the $20 million of inventory we have to write off in CAV.

But concluding that I think you'll see gross margins to be relatively stable in the second quarter despite the reduction of fiber because we continue to improve elsewhere.

: Could you also give some color on the opex line.

You did a good job bringing that down for the restructuring coming through.

Where do you see that moving in terms of magnitude of reductions going forward.

I don't expect to see the same kind of order magnitude step downs as the year goes along.

Most of those changes were made as we entered the year.

But I expect it to drift down gradually over the course of the year because the remaining cost reductions there comes smaller pumps.

Thank you.

Thank you.

Our next question comes from the Max Schuetz with Credit Suisse First Boston.

Please ask you question.

Thanks Two questions, first on the fiber and cable outlook.

Look likes you're expecting or you're indicating you're expecting 25 percent drop in fiber and volume, but talked about a $10 million decline in revenue going from like 193 in this quarter to 183 next quarter.

I'm wondering if there's some kind of shift in the type of cabling you're selling or something else that's driving the disparity in revenues and volumes there.

Second on the LCD glass side, I wonder if you could characterize what type of price declines were normal in the years when the industry didn't transition to the next generation of glass substrate.

Thanks.

The fiber and cable, let me, I want to make sure I'm clear on this.

The $10 million I was talking about is the extra amount we felt we got in quarter one from Japan versus the fourth quarter.

Overall, our revenues were down more as a result of the 25 percent reduction.

We are not expecting to see any significant mid shift happening to us.

In LCDs over the longer period of time we have seen pricing go down in the mid single digits.

That in any particular quarter can, you know, be less or more than that.

For example in this most recent quarter it was like one percent.

But over a long period of time we have seen it come down in the mid single digits, recognizing it's still a very new business.

Thank you.

Our next question comes from Dennis Gallagher with SoundView Technologies.

You may request your question.

Thank you.

Whatever seasonality you might think that the North America market fiber for 2003.

I couldn't quite hear the question.

What I thought I heard you ask was what is the anticipated seasonal for the North America business for telecom?

Yes.

Let's take it in two steps.

Typically we see quarter 3 to be a very strong quarter for us in North America and then for things to tail off in quarter 4 and that we would expect to see the North American market start to build some steam towards that quarter three upcycle very late in quarter 2.

I think the more important think that's happening this year and one of the reasons that we think that the north American market is going to be soften here in quarter 2 is that a lot of the major carriers are waiting to see the actual details of the published FCC decision.

This is very important decision coming out of the Triennial review.

As you heard Jim say we think it's very positive for broadband and for fiber, in essence the decision says that to the extent you invest in fiber you are relieved from the burden of selling at the heavily discounted price of the UNEP calls for.

But on the UNEP front, people are looking to see, is it better or worse or is it the same?

And I don't think we're going to see major programs come out of the Rbox until they see that detail.

Verizon has been a bit of an exception though, based on the strength of the press releases you see them saying they are going to increase their investment in broadband technology.

But the real question will be what does it do with total spending?

Clearly there's going to be a shift towards broadband.

But will they be able to afford spending more overall, and I think we have got to wait and see what the details of the order are and how people react to them.

All right.

Thank you.

Thank you.

Our next question comes from Arindam Basu with Morgan Stanley.

You may ask your question.

Good morning, folks.

With your comments about the inventory corrections and the auto industry potentially impacting the environmental technology sale levels were you able to extend margins in that business in the first quarter and do you think - and what are you anticipating a return to previous margin level or more of a correction because of the inventory situation in the second quarter?

We have been able to continue to improve our productivity in this business, primarily aimed at you heard James say at the very beginning about the shift of thin wall and ultra thin wall products.

These are products that are aimed at increasing the geometric area for the catalyst and also reducing the mass of the product, both of which help coders as well as the auto companies and we have been increasing our productivity of these products significantly and we would expect that to continue.

So we do believe that we'll see margins improve.

Once again with regards to the higher levels of inventory within the big 3, so far we haven't seen an impact, but of course if we do see one, less volume will impact our margins.

So it's a part of the margin expansion comes from the cost control side or the productivity side, you should be able to retain some of that?

Yes, sir.

I wouldn't expect to see even with the volume drop-off with our margins we would split quarter 2 in environmental.

: Okay.

And then regarding the goal of returning to corporate profitability in the third quarter can you talk about the LCD glass competitive environment and do you expect any compete I have facilities that can service Samsung and LG gen 5 demand requirements to come on in the latter half of the year in

Well, the competitive capacity plans are pretty well known, and really we're not seeing any changes to the outlook on our competitor's capacity.

Asahi has said they expect to achieve gen 6 volume production in the first quarter of '04.

NEG said they will start up some new capacity later this year and NH Techno has also announced some expansions.

That being said, our technology lead in this business is such that when we do have a shift towards gen 5 we are in an advantage position and it increases demand on us relative to our competitors more I think that's one of the main reasons you hear in our tone that we think pricing pressure is going to be pretty moderate here in this business throughout this year.

Okay.

Thank you.

Thank you.

Once again that's star 1 if you would like to ask a question.

Our next question comes from Nikos Theodosopoulos and he's with UBS Warburg.

You may ask your question

This is actually Liang Ja (ph) for Nikos.

One question in Photonics, I know the decision is pending by the end of June quarter but you also mentioned during the call that if you are to shut it down you expect modest upside.

Am I understanding this situation correctly because according to what we read about your competitors, the cost of this business is very high despite a low sales run rate so could you give us some insight as to the fixed cost of structure or the profitability of your Photonics business?

So to build on what Jim said previously about this, is clearly if we were to take a look year to year or after we truly -- if we choose to exit or partner after we were truly to fulfill all of our obligations in the business your observation would be correct we would expect significant operational income upside given the fixed cost structure of the business.

What Jim is saying, though, is if you try to look at benefits in this year given a decision of either significant further narrowing, exit or a partnership in the business that we do have these obligations which we won't be able to call out per se as a special, we'll try to highlight them for you.

But those obligations to customers and any losses potentially in that inventory if we were to choose exit, all of those items are why Jim is saying that he only anticipates sort of modest operational upside this year.

As we look beyond that, your observation on the fixed cost structure of this business is quite correct.

Okay.

Thank you.

Thank you.

Our next question comes from Raj Srikanth from Deutsche Bank.

You may ask your question.

Thank you.

Jim, I do have very two short questions.

One, your has stayed pretty much constant at 1.72 million (ph) for the last two quarter, and intangible what - about 205.

Do you expect any changes to this going forward the rest of the year?

Thanks.

No, I am not anticipating any change.

We have modeled if we were to make an decision on Photonics and we don't think that would cause anything significant there and as you may recall, when we did our impairment in the fourth quarter last year we had made a set of assumptions that carried us out several years and felt that and those assumptions were very, very flat business in telecom which is obviously the type of market we're seeing, so we do not anticipate there's a -- you know, that there will be any further impairment or write down of those items.

Thank you.

Our next question comes from CJ Muse of Lehman Brothers.

You may ask your question.

Good morning.

First, can you comment on what the pricing premium was as you move from 4 G to 5 G and what you anticipate it will be in the move to 6 G?

Typically in a size shift like this, the premium approach is double digits.

Okay.

And I apologize if you mentioned this earlier, but how much capacity do you plan to add in the glass in '03?

We anticipate keeping up with demand that we're seeing and right now we're forecasting 40 percent.

Okay.

And when do you anticipate being production ready for 6 G glass?

For competitive reasons we're not disclosing exactly when we are going to have commercial quantities.

What I would point out if you were to take a look at the announcements from our customers on when they are going to gen 6 and gen 7 and the technology loader in this business you could anticipate that we would be relatively far along in sampling of this product.

Okay.

And one last question.

I on the equipment side there's clearly a lot of down pressure in pricing as you try to get that price elasticity ramp.

Can you comment on how you were able to maintain your I guess limited declines in pricing on your glass in

I'm sorry.

Specifically for LCDs?

ANALYST: Yes.

Yes.

Sorry. )) It is the combination of factors that actually Jim commented on in his opening which is first and foremost sort of the shift in mix towards generation 5 is very helpful.

Second, we find demand for our product to be very tight and that as customers take a look at the overall value package that we deliver they're willing to have us have a slight premium.

Thank you.

We have time for one more call.

Thank you, and the last question comes from Steven fox of Merrill Lynch.

Just a quick follow-up on the telecom hardware and equipment business.

Can you talk about how seasonal trends impact and my impression is there's not as much of a mix towards Japan and how should that play throughout the rest of the year?

I think that's a very good observation.

We are not seeing as much seasonality so to speak in our hardware and equipment business in the second quarter.

It's one of the things that sort have helps moderate the potential revenue impact of the fiber and cable short fall after the very strong quarter one demand in Japan.

Beyond that, as you look ahead, that similar to fiber and cable for the North America piece of the market quarter three would tend to be the strongest quarter for hardware and equipment as well but it is a little bit more moderate changes than what we experience in fiber and cable.

Thank you again.

Thank you all for listening this morning.

I'd like to make a brief summary comment.

We are thrilled with our progress in quarter one and hope investors are also.

Revenues were excellent.

More importantly the painful restructuring last year has paid off and very strong I am proved gross margins and operating expenses.

Now we know we remain subject to some external economic pressures but we think we're on track with the things we control and we remain very confident about our goals this year.

Jim?

Thank you.

And thank you for joining us today.

The play back of the call will be available 10:30 eastern time today, and run until 5 p.m. eastern time on Wednesday, May 7th.

To listen dial 402-220-4617, no pass wards required.

The audio cast also available on our Web site during that time period.

That concludes our call.

Operator, please disconnect all lines

Thank you, sir.

At this time, this does conclude today's conference.

Thank you for your participation and have a great day.