康寧 (GLW) 2003 Q2 法說會逐字稿

Hello and welcome to Corning's second quarter conference call.

Following the presentation there will be a formal question-and-answer session.

Until that time, all lines will remain in a listen-only mode.

At the request of Corning this conference is being recorded.

I would now like to turn the conference over to Mr. Ken Sofio, Manager of Investor Relations, sir, you may begin.

Thank you, Catrice.

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

This call is also being audio cast on our web site.

Jim Flaws, Vice Chairman and CFO 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, except for the published results and the historical comparisons, today's remarks constitute forward-looking statements within 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 S.E.C. reports.

Jim?

Thanks, Ken, good morning, everyone.

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

Sales for second quarter were $752 million, an increase over the first quarter and slightly higher than our expectations.

In fact, this was the second quarter in a row we have posted an increase in revenues.

We were also very pleased with our bottom line results for the quarter which were two cents per share excluding special items.

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

As expected, we saw the continued benefits from previous cost reduction actions.

Gross margins for the second quarter were 24%, compared to 26.8% in the first quarter.

However, in the second quarter, we wrote off almost $9 million in inventory associated with our conventional television business.

Excluding this write off, gross margins would have been 25.2%.

Even though this represents a slight decline from the first quarter, we were pleased with the improvement in gross margin for our ongoing operations.

As many of you know, we announced the sale of our photonics business and the closure of our conventional television business during the first quarter.

These businesses have been losing money and currently have negative gross margins.

Although we are working hard to complete these transactions, the impact of these businesses is still included in our results for the quarter.

Excluding the negative gross margins from photonics and KAV, our gross margins would have been 28.9% for the quarter.

SG&A was $148 million for the second quarter, down $4 million from the first quarter RD&E came in at $85 million compared to $93 million in the first quarter as we continue to streamline our research and development costs.

Other income reflected the impact of an unusually high receipt of royalties by CAV of $17 million.

This nets to only $6 million after tax and minority interest but also had some minor foreign exchange gains.

Our tax benefit rate, excluding special items was 33% for the second quarter compared to 30% the first quarter.

The change in tax rate was due primarily to improved profitability in foreign operations with lower tax rates.

Lastly, equity earnings for the second quarter was $60 million compared to $59 million in the first quarter.

Equity earnings include a $7 million impairment charge exit some photonic equity investments.

Net of this charge, equity earnings increased primarily due to the strong second quarter at Dow Corning which contributed $25 million in equity earnings.

Samsung/Corning Precision also had higher earnings but these were offset by lower than expected earning at Samsung/Corning Television which recorded disappointing results in May and June and at Corning Tech.

Now, let me take a moment to update you on the progress we have made on the closure of our conventional television business and the pending sale of our photonics business, as well as other restructuring events.

As we announced in May we're in the process of selling our photonics business to Avanex.

We originally expected the transaction to close around September 30th; however, as you may have read, the S.E.C. recently decided not to review Avanex's proxy, a process that would have added a few weeks at best from the one we originally budgeted for in our timetable.

With that step now passed we anticipate the transaction to be completed around July 31st. pending anti-trust approval which we received last night and Avanex's shareholder approval.

We recorded a pretax restructuring charge of 33 million, 21 million after tax related to the exit of photonics business, this charge related primarily to severance and noted exit costs.

We also wrote off approximately $21 million in a deferred tax asset that related solely to the photonics business.

Lastly, we impaired three small equity business within photonics for 7 million after tax.

We anticipate recording the final restructuring charge in the third quarter when this sale is complete, this restructuring charge should be less than $10 million pretax.

We will also book the impact of the transaction, the fair value of the shares of Avanex we will receive, less the cash and assets given to Avanex at the closing transaction.

On the date the sale was announced the fair value of the 21 million shares of Avanex we would receive was valued at $25 million.

With Avanex stock currently trading around $3.50, that value is about $70 million.

As Avanex stock has moved significantly within the last few months, it's difficult to predict the exact value at closing, however, we currently expect the impact of the deal to only be a very small gain or loss.

Now moving to CAV, the shutdown of this business has proceeded according to plan.

The facility seized production at the end of June and we recorded a final restructuring charge during the second quarter of $50 million pretax, and $15 million after-tax and minority interest.

This charge related primarily to severance and other exit costs.

Total restructuring charges for CAV in the first half were $116 million which was less than our original estimate of $140 million due to lower severance and benefits and other exit costs.

In addition, you may have read that we recently announced the potential sale of certain manufacturing assets of CAV to a conventional television manufacturer in China.

The sale is contingent upon government approvals in China and other customary conditions you would expect with an asset purchase.

This sale is expected to be completed during the second half of the year.

Upon completion of the sale and satisfaction of certain customary conditions, we anticipate recording a pretax gain of approximately $40 million, $13 million after tax and minority interest.

The good news about this sale, if it occurs, is CAV will receive significant cash that will partially offset each partner's cash obligations related to the closure.

We have not reached a conclusion on whether it's appropriate for Corning to report CAV or photonics as discontinued businesses in our financial statement.

The accounting rules in this area are now under review by the emerging issues task force.

We will let you know, as soon as we decide but we do not expect an answer until the fourth quarter.

Regardless of the official outcome reporting the losses and cash drains from these businesses are being put behind us.

In the second quarter we also recorded a pretax charge of $38 million, $26 million after tax for other cost reduction programs primarily in our telecommunications businesses.

We also made an adjustment to restructuring reserves recorded in prior years, this adjustment was actually a benefit of $76 million pretax.

This adjustment was caused by several items.

First, we sold some assets for cash amounts recorded above our recorded salvage value.

Good news for us.

Second, we are seeing lower cost on some personnel reductions; although as a percent of of our original charges, it is small, it does need to be reversed.

The very good news here is this will lower our estimate of our ongoing cash outflow for restructuring by approximately $40 million.

Finally, we had a small income business up for sale and if we are unable to sell it, we plan to abandon it.

We got no offers however in the interim, we improved its performance and have decided to keep it, thus requiring a reversal of the original accrual.

Therefore the net restructuring charge taken the second quarter was $49 million pretax but only about $3 million after tax and minority interest, Ken with walk you through the details, which you will find disclosed in our footnotes in form 10-Q to be filed next week.

In addition to the restructuring impairment charges we also completed a very success tender offer to repurchase a significant amount of zero coupon debentures.

We accepted for purchase a total of $652 million of accreted value in zero coupon bonds for $623 million in cash, approximately $265 million of this cash requirement was funded through the sale of 50 million shares issued through a block trade in late April.

This repurchase resulted in the net pretax gain of approximately $13 million, $8 million after tax.

As a result of the tender offer, the created balance of our zero coupon debentures at the end of the second quarter was just under $700 million, down significantly from a $1.3 billion accretive balance at the end of the first quarter.

In July, we have repurchased an additional 55 million of zero coupon debentures and 68 million of Euro denominated notes in open market transactions.

One other point on our liquidity, even after this significant repurchase, we still maintain a cash balance of $1.5 billion at the end of the second quarter versus $1.85 billion at the end of the first quarter.

And lastly, I would like to tell you about the mark-to-market adjustment we made during the quarter.

As part of the Pittsburgh Corning asbestos settlement we announced last quarter, Corning will be contributing 25 million shares of common stock to the trust, along with approximately $130 million cash, spread out from 2005 for six years after.

We expect to contribute the stock to the trust in mid 2004 after the plaintiffs have approved the plan and all appeals have been resolved.

Until the stock is contributed to the trust, changes in its market value must be recognized in our quarterly results.

At the end of the second quarter, we recorded a charge of $39 million pretax, $24 million after tax to reflect the increase in Corning stock price over the last quarter.

Now, let me move on to our business results for the quarter, starting with telecommunications.

Revenues in this segment were $347 million the second quarter, down slightly from the first quarter.

Segment posted a loss of $53 million which is an improvement over the $70 million loss we incurred last quarter.

Revenues in optical fiber and cable were $178 million in the second quarter compared to $193 million the first quarter.

Fiber volume declined about 20% sequentially in the second quarter which was slightly better than we anticipated.

The sequential decline in volume was primarily due to the expected seasonal slowdown within the Japanese fiber market, which is typical for their fiscal first quarter.

This slowdown was offset slightly by a modest increase in fiber demand in North America.

It's interesting to note that despite the slowdown in fiber demand the second quarter, Japan remains the largest fiber market in the world.

Pricing pressure, as expected, was much more moderate the second quarter compared to the first quarter.

For the second quarter, pricing was down approximately 5% sequentially.

The mix of premium fiber in the quarter was consistent at slightly less than 10%.

Sales in our hardware and equipment business in the second quarter were $136 million, an increase of 11% over the first quarter.

The increase was a reflection of normal seasonal strength driven primarily by demand in North America and in photonics sales were $15 million in the second quarter, compared to $18 million in the first quarter.

Now, before moving on to the technology segment I would like to spend a moment discussing the latest news regarding the fiber initiatives many of you have been reading about recently.

While the industry still awaits the final detail ruling from the FCC on broadband, three of the RBOCs have decided to move forward on their own broadband initiatives.

As part of this move forward, the RBOCs recently issued RFPs to various system providers and telecommunication and equipment manufacturers.

While I cannot discuss the details beyond the RFPs received by Corning, I can tell you that the RBOCs have been important customers of ours for many years and that we will continue to work with them closely regarding the equipment needs going forward.

In fact, I would like to remind all of you that any broadband initiatives undertaken by the RBOCs will not only benefit our fiber and cable business but also, to a large extent, be a driver for growth in our hardware and equipment growth.

The access in fiber to the home markets reported a much larger area for the hardware and equipment markets, so we would not be surprised if that business experienced growth at a rate equal or greater than our fiber cable businesses.

That being said, we believe that the telecom industry will benefit from these broadband initiatives over the long term, we are not anticipating any significant change for our outlook to telecommunications demand this year.

We do hope for benefit in 2004.

I'm sure Wendell can amplify more in the Q&A on the RBOCs outlook.

Now let me move into the technology segment.

Revenues in the second quarter were $400 million, a 3% increase over the first quarter.

Net income, including equity earnings was $50 million in the second quarter, a 12% sequential increase versus the first quarter.

The increase in both sales and net income was led by strong volume in our display technologies business which offset weak demand at our semiconductor business and weakness at our equity companies, Samsung Corning Television and Corning Tech.

In our displays technology business, sales in the second quarter were $135 million, up 16% over the first quarter.

Volume, which is defined by us in square feet of glass, increased more than 15% sequentially in the second quarter, led by strong demand in Taiwan.

As expected, pricing in the second quarter was stable, as were exchange rates.

Net income, which includes equity earnings from Samsung Corning Precision grew 43% in the second quarter.

The substantial increase in earnings is a reflection of the strong volume growth, as well as improved 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 of record production shipments during the second quarter.

In fact, at Corning's family of LCD businesses which includes our consolidated facilities in Japan and Taiwan and joint venture with Samsung, volume was up almost 20% sequentially in the second quarter.

In comparison to the second quarter of last year, revenues in our display technologies business have grown 33%, led by almost a 40% increase in volume.

Volume growth in Corning's family of LCD businesses is more than 50% year-over-year.

Net income is doubled in comparison to last year led by volume increases at Samsung Corning Precision of 55%.

This volume growth was driven by desk top LCD monitors which experienced record retail shipments during the second quarter.

In fact, more than 50% for all desk top monitors shipped in the United States are LCDs, representing the first time LCDs have outpaced CRTs, although most of the monitors sold today are either 15 or 17 inch, sales of 19 inch monitors increased 27% during the quarter.

As you know, the larger the screen size, the more demand for our glass.

In addition to LCD monitors the use of notebook computers continued to grow during the quarter and notebooks represent now 40% of all PCs shipped in the United States.

Lastly, we were very pleased to hear of Sony's announcement to enter the LCD television market.

We believe this adds further credence to the industry's acceptance of LCD technology.

Just a brief aside on LCD televisions.

We regard this as an important future market for LCD technology.

Today, the impact is small and LCD televisions count for only 1% of the television market last year.

However, our customers are investing for this future demand and we are also investing in larger size manufacturing technology and capacity to be ready.

Although flat plasma television gets much coverage in the popular press, LCD TV unit sales in sizes greater than 20 inches were equal to plasma last year.

To meet this growing demand for LCD glass, our consolidated businesses continue to ramp up in shipments of gen 5 glass last year.

In fact, gen 5 glass is about 30% of our glass volume production today, including Samsung Corning Precision and we expect that percentage to increase as our customers bring more gen 5 fabs online.

You may have also read our recent announcement regarding gen 6 glass.

Corning is the first manufacturer in the industry of gen 6 glass with shipments beginning in earnest later this year.

Gen 6 glass is our most advanced glass to date and measures an impressive 29 square feet which is basically twice the size of our gen 5 glass.

The LCD industry is currently moving towards gen 6 as evidenced by recent announcements by two of the world's top LCD manufacturers, Sharp and LG Philips to build gen 6 fabs.

We believe that our gen 6 glass will be an important product in meeting the industry's gen 6 needs.

Of course the pace of sales of gen 6 glass may vary depending on the exact timing of our customers fabs coming online.

In looking ahead, we are already in the process of developing gen 7 glass substrates as some of our customers have recently announced plans to build gen 7 fabs.

To meet the increasing demand for LCD glass, we will continue to add manufacturing capacity in Taiwan, Japan and the United States.

In fact, we are typically adding capacity almost each month around the world to keep up with demand.

As a result, you should expect to see announcements from us on a regular basis, as we approve capital requests.

The capital for these expansions is in our capital forecast for the corporation.

Similar capacity expansions are also underway at Samsung/Corning Precision in Korea.

Now, I know some of you are concerned about the pace and the timing and costs of our LCD expansions especially in light of our previous rabbit growth in fiber.

Our thinking on this is that these are two very different technologies and end markets but we have not forgotten the hard lessons we learned from the telecom bubble.

So, let me walk you through, now, how I think about our LCD capacity expansion.

First the equipment required here is much more modular than the five-story draw down towers necessary for fiber production and have shorter lead times.

Those of you on the call would recently visited our LCD factory in Harrisburg, Kentucky know what I'm referring to.

Additional equipment can be added on a tank by tank basis to meet market demand.

We are also fortunate because we have a good line of sight into what our direct customers are doing.

It takes them more than a year to build one of their giant fabs while we can add equipment in as little as six months.

This gives us more time to assess current market conditions and demand before committing to add capacity.

And speaking of demand, there actually are no dark displays.

Unlike the fiber market the end market sales of desk top monitors and notebook computers are tracked by a variety of sources in the industry including some notable ones in the computer industry.

We believe we have very good line of site where the end products are going and the pace and demand from these reputable industry sources.

The other point I would like to make, it is possible we could be wrong.

If market demand for glass is not 40%, closer to 30%, or 20%, it could be the case but fortunately unlike our fiber capacity additions which took two years to build, to supply the growth in three to five years LCD expansions are added to supply demand today and over the next year only.

So if the industry turns out to be wrong in its demand projections for example only 20% volume instead of 40%, this is an issue that would impact us only for a few quarters not for years.

We also pay close attention to inventory builds in the distribution change.

It is this phenomena that could cause any given quarter to not meet our expectations.

Now turning to environmental technologies business, we were also very pleased with the results here.

Sales were $117 million, basically flat for the first quarter.

On our last conference call, I told you that environmental business could be impacted in the second quarter, by manufacturing shutdowns in the auto industry.

Obviously, this did not happen and as a result, we experienced another quarter of steady volume, favorable exchange rates and a continued shift in mix to our premium thin wall and ultra thin walled products.

In fact, almost half the revenues in this business today are being generated by our line of premium products.

Net income in environmental technologies did fall about 35% in the quarter, but this was almost exclusively due to a decline in equity earning from Corning Tech, our joint venture with Mitsubishi.

This business continues to be impacted by the falloff of industrial pollution spending.

Without this negative impact for Corning Tech net income for Corning's consolidated metal business would have been consistent with the first quarter.

Before I move on, I would like to take a minute to address a concern that I know a few of you expressed over the last few months regarding inventory levels at auto manufacturers.

While inventory levels appear to be slightly higher than normal recently we believe they have actually been trending down over the past few months.

Overall, we believe the supply chain of inventory is in good shape.

In addition, there have been several rumors in the industry that U.S. auto manufacturers have been stockpiling inventories of vehicles in anticipation of a strike.

We do not believe they have been building inventories.

This was also the conclusion drawn by "Automotive News" in their July 7th report.

However, a prolonged strike could have an impact on our sales in quarter three.

Moving to the life science business, revenues here were $72 million, consistent with our first quarter.

Net income fell by 25% sequentially due to increased research and development spending on new growth platforms.

Sales at our conventional television was $24 million in the second quarter, basically flat with the first quarter.

We were actually anticipating a much steeper drop in revenues after our announcement to sell this business.

However, several of our long-term customers decided to take advantage of the opportunity to purchase some of our inventory after hearing that we were exiting the North American T.V. market.

Equity earnings at Samsung/Corning Television were down sequentially due to lower sales volume and price declines.

This weakness was a surprise to us and we are evaluating the causes, likely duration of the weakness and potential actions with the debentures management team.

In our other technologies business, which includes semiconductor materials and photonic products, revenues in the second quarter were $52 million compared to $58 million in the first quarter.

This decline was primarily due to the continued softness in the semiconductor market, which more than offset the improved demand for upcoming products.

The semiconductor business, although small has disappointed us.

We were clearly wrong in our original forecast for the year anticipating recovery in the second half.

We are not seeing this recovery and, in fact, we saw declines in the first half, as customers reduced inventory.

We are now taking action to reduce fixed costs in light of this disappointment.

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

For reporting purposes their earnings are not included in our segment results.

As mentioned, during our annual investor meeting, we expect Dow Corning to contribute between $10 to $20 million of earnings to our quarterly results this year.

Clearly, they exceeded that amount in the second quarter with $25 million in equity earnings.

While we are pleased with the results for the quarter it's too early to speculate whether this is a trend that is expected to continue.

Therefore, for your modeling purposes I would continue to estimate Dow Corning's quarterly contributions to be in the estimated $10 to 20 million range.

Now, moving on to the balance sheet, we are very pleased at how it's improved over the last several months.

During the second quarter alone, we were able to reduce our debt by over $650 million while maintaining $1.5 billion in cash and short-term investments.

As a result, our debt-to-capital ratio fell from 45.6% in the first quarter to 40% in the second quarter.

Before I go into more details about cash flows let me finish walking through the balance sheet.

The DSOs for the second quarter were 58 days down 60 days from the first quarter.

A decrease is a reflection of ours to accelerate payment terms at some of our customers particularly those located overseas.

Inventories also fell nicely from $556 million in the first quarter, to $538 million in the second quarter.

Inventories increased from 3.9 to 4.2.

Regarding cash flows, the major cash flow-- inflow during the second quarter was the 267 million raised from the block trade of 50 million shares of common stock in May.

We also received approximately $40 million in cash dividends from our equity companies, primarily Euro Care.

Major cash outflows were the $623 million for the tender offer, as well as $49 million in restructuring payments.

In addition we made a $15 million contribution to our pension plan, which I'll discuss more in about a minute.

I would like to make a few comments on capital spending and restructuring.

First, cash spent on capital in the quarter was only $55 million, however the actual committed capital spending during the quarter was close to 100m and consistent with our capital spending plans.

The difference is simply due to the timing of the payments to our vendors.

Looking ahead, we still anticipate spending between $350 and $400 million this year, primarily in our technologies businesses, especially LCD and diesel.

Now moving to restructuring.

We had originally anticipated total cash payments to approximately $300 million this year.

We're currently on track to spend less than that, about $275 million.

This decline is primarily due to the restructuring reserve adjustments we made in the first and second quarters.

In addition the timing of some of cash payments will fall in 2004.

Looking ahead, we believe the cash payments from our actions for next year will be be about $95 million.

Now, regarding pensions, you may recall we decided late last year to increase our voluntary contributions to the plan from $25 million a year to $60 million and anticipated that we might need to sustain this level for several years.

So far this year, we've contributed $30 million and had anticipated funding the remaining $30 million in the third quarter.

We are also considering making an additional contribution to the pension plan this year, above and beyond our planned $60 million total.

We're evaluating the impact of our business exits, noticeably CAV with long service employees, defining interest rates and the weak pension investment performance over the past three years.

While we are not subject to mandatory contribution requirements, we have always believed it's more prudent to fund on a consistent basis.

I think it's appropriate for you now to think our cash contributions would average closer to $90 million per year over the next several years.

We'll keep you posted on our final contributions plans.

One last note in this area, we did achieve our FAS 87 investment assumption in the pension plan in the first half of 2003.

Before I move into our outlook for the third quarter, I want to spend a moment on debt retirement plans.

A year ago, the amount of debt, plus our need to restructure weighed heavily on equity and bond investors alike.

As you know, one of our key objectives has been to strengthen the balance sheet and we feel we've made significant progress so far.

As noted earlier the 2005 put was now down to slight less than $700 million, versus over $2 billion 18 months ago.

However, there is still a fair amount of debt that will be maturing over the next two and a half years including these remaining zero coupon debentures that we would like to address.

As a result, we are likely to continue our debt through open market, private negotiated or other transactions.

On a side note, this month we repurchased an additional 55 million zero coupon debentures along with 68 million in Euro notes for a total of $114 million in cash.

We intend to continue to drive down our debt.

We do have cash balances to use for this effort, but we must remain -- maintain a significant amount of cash as long as we remain sub-investment grade.

Now on that note, we have visited the rating agencies recently.

The news remains the same.

They are pleased by our actions.

However, we must pay down more debt, get the company profitable, especially our consolidated operations and see stability in telecom before we can expect an upgrade.

We think these are all possible and we are driving to achieve them.

I know many of you are wondering whether or not we'll look to the capital markets in conjunction with our debt repurchase strategy.

We believe the capital markets are available to us and we may use them going forward.

As though the timing of any transact will depend on market conditions at that time.

I would like to wrap up with some information about our outlook for the third quarter.

We're expecting revenues to be in the range of $740 to $765 million and our results between 1 and 3 cents per share before special items.

Regarding our revenue guidance I would like to make a few points; first our revenue guidance for the third quarter contains the impact of the two businesses we are processing to shut down or to be sold, the conventional video products and photonics.

These two transactions are on pace to be completed during the quarter and we'll begin to see the impact of their declining revenues in the third quarter.

For conventional television, we expect to see revenues fall from $25 million in the second quarter to about $18 million in the third quarter as we sell the final glass products that were manufactured at the factory before it was shut down in June.

For photonics, we are forecasting revenues for only a portion of this quarter in anticipation of selling the business to Avanex on August 1st.

Thus with photonics currently running about $5 million in revenues per month, we expect $15 million in the second quarter revenues to translate somewhere between $5 and 10 million revenues in the third quarter.

Therefore, if you field this 12 to 15 million expected drop off in revenues from these two businesses, you get to the lower end of our guidance.

In summary, we believe our revenues are on track to maintain a level of consistency quarter to quarter with some possibility for growth.

Now, let me move on to some specific guidance for our continuing business with fiber.

We do anticipate fiber volumes to grow sequentially in the range of 5 to 10% as we expect strong growth to resume in Japan, as well as a modest uptick in fiber demand in North America.

In fact, for Japan, we have already experienced a sequential pickup for June and July, which gives us confidence there will be be continued growth in the second half of the year.

We expect fiber pricing pressures to be moderate, at the levels consistent with the second quarter.

In our consolidated LCD business, we anticipate volume growth of about 5 to 10% sequentially in stable pricing in the third quarter.

We believe the exchange rate will also continue to be stable.

While our expected third volume growth may appear to be slightly light compared to the comparison to growth we've seen in the last two quarters this is not a reflection of a falloff in the end market demand.

As we have said before, the growth rates in this industry are not smooth and often times there's a fluctuation.

In the end, we are very much still on track to meet our volume growth target of 40% this year.

We are obviously well along the way after experiencing 27% volume increase in the first half.

We also anticipate our gross margins to improve substantially in the third quarter as a result of closing CAV and the sale of photonics.

Ken?

Thanks, Jim.

Catrice, we are ready to take some questions, now.

Thank you.

If you would like to ask a question, you may do so by pressing star one.

To withdraw or cancel your question, simply press star two.

Our first question will come from the line of Nikos Theodosopoulos with UBS.

Please go ahead with your question.

Actually this is Luon Joung, for Nikos.

For the volume you are expecting more for us, and my question is, is this treatment by a selective few carriers or you are seeing, you know incremental improvements across the board?

And also, the incremental improvements in North America, is that tied to a specific application?

For example, is it tied to a perforation for any potential fiber to the home front or is it driven by the existing application?

And a related question on Japan, you are seeing sequential pickup in Japan and given our understanding that, you know, Japan's fiber coverage has reached a pretty broad percentage and how do you view the sustainability of your Japan fiber volume going into next year?

Thank you.

Let's start with your first question around the potential gains in North America and their source.

First, we do not anticipate an impact from the fiber to the premises initiative by the ILEX in that period of time.

Though the fiber to the premises opportunity is very, very large, like everything that's very, very large, it will take sometime to begin to click in and gain momentum.

So, I would characterize our view of the North American sequential increase to be more broad based, pretty evenly spread between the ILEX and cable TV company, as well as the independents.

Turning now to your question on Japan.

The coverage levels in Japan, to understand those takes a high degree of precision of language.

What's been reported is that 70% of NTTs central office to the node build out is done, but remember that only 35% of the node to subscriber build out is complete.

Now we believe that the CO to node and node to subscriber volume amounts each average about one kilometer for any given installation.

So based on that assumption, really the total build out is still only about 50% complete.

So there's still a great deal of deployment ahead of us in Japan, and the sequential growth that we anticipate seeing in the coming quarters will reinforce that belief.

Thank you.

You're welcome.

Thank you.

Our next will come from Daryl Armstrong with Smith Barney.

Thank you very much.

Two questions.

First, given the impressive substitution rates that we're seeing for LCD displays in comparison to the CRT and the desk top market, would you expect to see the same type of slope in terms of the penetration rates or having reached 50% type of level would you expect to see a slower ramp going forward?

And then second of all, more on fiber to the home side, given the number of satellite regional bale announcements that we had yesterday, one from SBC and one from Qwest, do you those ventures have the potential to push out the actual deployments of fiber to the home, given the fact that they have sort of a short-term solution for being able to provide a video product?

Darryl, I'll take the first question and let Wendell take the satellite question.

We are very pleased, and frankly was surprised to see the jump up over 50%.

We did expect to achieve that level at the end of the year, and we think this reflects people's attractiveness of LCD monitors due to pricing and the other attributes in terms ever brightness and weight and size.

We believe that ultimately that the penetration level of climb up into the upper 80%.

It's hard for us to judge whether, you know, we're going to achieve that at the same rate we have been recently.

What we have noticed is it appeared that the switch over is accelerating.

So it's hard to predict exactly but we see no change in people's appetite for wanting these things.

The other thing that's happening is we are continuing to see people buy larger sizes here.

Mm-hmm.

Wendell?

Adding one brief addition to Jim's answer on LCDs, as you considered the long-term growth rate of our LCD business, also remember that we are now in the very beginning of the adoption for entertainment TV as well about a percent of the market this year growing to about 2% next.

And we would expect that to follow technology adoption curves and contribute greatly to our growth over time.

Very similar to Jim's point on the size increases on monitors, that having a significant impact on glass demand.

It is even more dramatic, of course in entertainment TV because the size of the given unit is -- is so much larger.

Now as to satellite and the ILEX, I think the right way to think about this, you also ought to talk directly to them --

mm-hmm.

-- is that as they take a look at their fiber to the premise potential and builds, there's three businesses there.

There's of course telephony, which is the largest of all the different revenue opportunities today and where they're strongest.

Then there is data where they have a position with DSL, but clearly cable TV, who has been winning about two out of every three of any new adoptions to the home, due to the fact that they have a higher capacity and, therefore, the user experiences a higher speed, the ILEX have some work ahead of them in data.

Finally, is video, which is their main competitors for serving all of us, all consumers, cable TV is strongest and also they have the least experience.

Mm-hmm.

So I view these moves with satellite, the co-billing arrangements and the alliances of being more about developing skills in the video area, having customers begin to feel comfortable about paying for video together with telephony and then as they roll out other services data.

And that, overall, we would view that as good because as they gain business experience, and point of presence with the customer, that provides the business case with which they can support being able to put in the super high bandwidth capabilities of fiber to the premises.

Right.

That makes sense.

Thanks very much.

Thank you.

Our next question will come from Raj Srikanth with Deutsche Banc.

Thank you.

Two questions.

One, the Corning being the number one in terms of LCD displays going into gen 5, gen 6 and so on, is that sort of increasing sort of market share gain play there?

And second thing for Wendell, can you also tell us about the fiber demand in China and the dynamics there as far as pricing volume, et cetera for the next two, three years, especially what we are hearing is that China is in a build out phase for the Olympics coming in 2008.

Thanks.

For gen 5 and gen 6, they require much larger glass substrates, of course and that really is our strength.

If you think about it, gen 4, the square footage of glass we would ship to a gen 4 device, call it around 6 square feet, gen 5, call it around 15 square feet and gen 6 call it around 30 square feet.

So you see the dramatic increase in size.

That increase in size plays to the strength of our fusion technology.

We selected it originally because we believe it had the ability to scale very effectively while being able to also go thinner, and maintain a perfect surface without finishing.

So this moved to larger sizes, plays to our strength and as having the very first available substrates for special production in gen 6, we're, of course, doing very well with those customers that are adopting gen 5 and gen 6.

Well, Wendell, can you get into how much of the market do you -- your market share you have today, including GMEs and where do you expect to get to?

We don't comment directly on market share.

We are a leader in the market.

What we try to do is be about three times the size of our nearest competitor and that would be the level of disclosure that I feel comfortable with on market share.

Okay.

As to China, the dynamics there, China remains strong in quarter two.

It had an uptick as well as North America and that dynamic we see continuing.

We don't see a big surge of growth coming in China but relatively steady improvement in that market.

Thanks.

Thank you.

Our next question will come from Max Schuetz with Credit Suisse First Boston.

I have two questions.

One is about the $17 million in royalties from CAV or the CAV received in the quarter.

Just wondered if that was one-time or if that was ongoing and whether you were expecting anything there next quarter?

And two, I was wondering -- you were indicating that Japan was the world's largest fiber market.

I was wondering if it was also your number one geography or how that split out as well?

Thanks.

On CAV, these were one time.

We will expect some minor royalties going forward coming in television once we wind down but these are by and large, catch ups one on a lawsuit and one on a disputed payment.

Just a reminder, because of how the minority interest works, these net down to a pretty small impact but we were obviously pleased to get them.

Wendell?

On Japan, though it is the world's largest market today, rather an unusual combination of circumstances given that the country is probably the size of California and what that's driven by is that they are driving fiber to the home or fiber to the premise and it shows the power of that type of initiative.

For us, we are the sole western supplier to NTT for fiber optic cable, though we are not as strong in Japan as we are in the other regions of the world.

As a result, our position in North America, despite the fact that today that's a smaller market, our share position is much higher.

So Japan is not our largest overall market for Corning.

We don't anticipate that continuing over time.

Thank you.

Our next question will come from Steven Fox with Merrill Lynch.

Hi.

Good morning.

Jim, could you talk a little bit about -- you mentioned your gross margins from ongoing operations.

Is it safe to assume that those margins should also increase this quarter?

And then the second question would be, on your generation 5 glass, you-- I just want to clarify it was 30% of your volume?

It was 30% in the second quarter and we expect that to climb as we go through the remainder of the year.

We should expect to see a little improvement in the continuing operation gross margin because we will see fiber bounce back a little in the third quarter, and that will help us, as you know, fundamentally, we've got all the fixed costs in place.

So, pretty much at the bottom line and we expect to continue to see improvement in LCDs.

And then lastly, just focusing in on the hardware business, I know historically it hasn't been the most profitable operation.

Is that also seeing profit improvements how would you characterize that?

Let me characterize over a longer sweep.

Actually had very reasonable profitability for us for many years and then almost as all of our telecom businesses got driven down in the in the kind of swoon over the last couple of years but has moved back to profitability now.

It has -- I think we have good prospects for reasonable profitability but it has a different characteristic than what you normally see with a business in Corning, as it doesn't have the same high fixed cost component.

So it doesn't have quite the variability with the dollars worth of revenue.

There are slightly lower variable margins there, but we expect this business to be very reasonable profitability for us, obviously not as good as LCDs as an example, but as we go forward.

Thank you.

Thank you.

Our next question will come from Chris with CIBC World Markets, please go ahead.

Hi gentlemen, this is Chris for Jim.

A few questions for Wendell.

Could you talk a little bit about the competition in the North American fiber space and how that is playing out in terms of how much supply can be given to North American customers, and for Jim, if you could comment on what level of cash you are comfortable going down to on a net basis and also op ex for next all the restructuring or how much more we have to go?

On cash we haven't decided what the ultimate balance is.

Clearly we think we could you really drive it down below $1 billion, but until we get to investment grade, we won't take it back to the levels we used to have when we were an A rated company.

What was the second question?

On op ex, in terms of what we're seeing more for restructuring.

Yeah, I don't think you'll see a substantial change in op ex over the next couple of quarters going forward.

Most of that is behind us.

It would be more dribs and drabs of reductions, offset potentially by some increases for where we have some business opportunities.

We're investing a little bit behind the access of opportunity, and obviously we're investing in our diesel business, which is doing terrific right now.

We're actually sold out with the diesel products and environmental.

Wendell, do you want to talk about competition in North America?

Well, like everywhere there continues to be more fiber than demand, so the competition remains high but we have factored that in to the pricing guidance for quarter three, that Jim just ran through.

I'm sorry, Wendell, are you seeing anyone maybe showing some signs of exiting the market or not?

Well, I wouldn't want to speculate on other people's plans.

Obviously, we don't have any plans of exiting of the North American market and we plan to continue to improve our strength.

I think would you have to ask other people what they're thinking about.

Thanks, gentlemen.

Thank you.

Our next question will come from Steven Koffler with Wachovia Securities.

Hi there, quickly, thanks for the non-GAAP reconciliation on the web.

That was very helpful.

Two quick questions.

If there were any surprises, at least to me, in the telecom results, it was the -- what you talked about, the hardware and equipment, that being up pretty -- pretty nicely.

Wendell, in a conversation we had, I guess in April or so, you made it pretty clear that hardware and equipment is very fiber oriented as far as connections to the fiber and I basically think about those sales being very tied to what's going on in fiber.

Seeing it go up here, is it fair to understand it as kind of the follow-on sales to the strong Q1 that you just had in fiber and in general should we think about it as an even indicator, or even a lagging indicator to what's going on in fiber?

And second, in fiber cable, the overall revenue number was a little below what I was expecting, and it sounded like the fundamentals in fiber were actually a little better than what you projected in the guidance.

So the question is, The other part of fiber cable, mainly cable, was it down sequentially and if so, what was the reason for that?

I'll let Jim handle the second question.

To the first question, yes, hardware and equipment, especially are the conductivity part of our hardware equipment offering, which is our strongest product line set.

It is closely related to fiber because basically what it's driven by is as you connect fiber you purchase these parts.

Note that there's also significant portion of hardware and equipment that's in private networks which is the premises market, which is small from an overall fiber volume standpoint, it tends to be very rich in connectorization and hardware and equipment so it is a very significant business for us there.

So, that tends to take it a little off track.

But I think the main reason you're seeing the disconnect is the relative degree of our regional participation in the businesses.

We are strong across the globe be from fiber and cable so within North America, as we've noted, we also saw a nice uptick in our fiber and cable businesses, but that is only a portion of our total fiber and cable positions around the globe.

So it's more than offset, for instance, by the seasonal drop that you heard Jim outline related to falloff in Japan.

Jim, would you like to take the second question?

I don't think there's anything really unusual going on there.

There is always -- we did have price reductions in cable.

We tend to talk about fiber more because that has a longer-term impact and also we sell quite a bit of fiber to people who are non-cablers.

And there is a little mix impact from exchange rates sometimes depending on what happens, but I don't think there's anything significant there.

We were not surprised by what we ended up with.

Okay.

Thanks.

Thank you.

Our next question will come from John Roberts with Buckingham Research.

Hi.

Thanks.

Dow Corning doesn't report, I think, until July 25th.

Could you give us any more color on their results given their importance to your overall earnings?

Yeah.

I think that they had a -- you know, going out there this week for a board meeting, but they had a very good quarter.

They are being benefited a little by currency.

But they did not see the -- they were worried about potential weakness in China with SARS, and I think that ended up not to be as significant for them as what they originally anticipated.

But I don't think there's as much unusual going on within the quarter.

We're still trying to get a good feeling for what the real cycle is.

They make a product and then it ends up so many business ranging from automotive, to construction to life sciences and it's trying to get a good feeling for what the pattern of that cycle is for their business, they are in so many different areas of business but I think they would characterize it as they felt very comfortable with it.

Hemlock Semiconductor subsidiary was growing?

No, I don't think it was.

I think that part of the business remains weak.

I think, secondly Jim you said the CRT part of the Samsung/Corning joint venture was weak.

I know that 3M talked about the projection TV business being weak as well and they cited lower demand in China related to SARS, is that what you are seeing or is the Samsung venture failing to see the same effect?

I don't have the results by area at this point in time, but we think it is maybe more related to the opposite problem which is as LCD screens knock out more and more of the display monitors using conventional televisions that caused over capacity in the glass industry in Asia, and therefore we note that as their pricing weakness and that's what we've got to figure out.

We'll be able to give you that more as the months forward.

What our plan had been for Samsung/Corning has always been that gradually they would be reducing capacity in Korea and moving more to China.

I don't know that they had any specific weakness in China.

Thank you.

Catrice, we have time for one more question.

That question will come from Steve Savis with Goldman Sachs.

Good morning.

Thanks.

A guess just a couple of simple questions on the LCD business.

First there is a difference in growth rates between Corning and then the Samsung/Corning JVs.

Did you expect that trend to continue and/or diverge?

Are there, you know, capacity constraints within Corning proper and that's why there's some of of that difference?

And then separately, what was the FX impact on LCD?

I'll take the first question, and I'll look to Jim to answer the second.

The main reason -- the main driver between the difference between what we do in our Korean operation and what we do in our Taiwanese, Japanese and American operations tends to be the relative degree of success or growth rate of those regional customer leaders.

So what's happened here in Korea and why we see nice strong growth rates there -- it's strong everywhere, for all of our operations, our Korean customers, Samsung, LG Philips have been doing very well in the monitor business.

We do anticipate in terms of growth rate over time that Taiwan will continue to gain in strength, and Japan, I think will be tied primarily to the move to entertainment television.

On FX, if you go quarter-to-quarter, quarter 2, verse quarter 1, there was really no impact of FX.

If you want to think about FX going year-over-year, there's been a benefit in our business, probably impacting revenues approximately $20 million, versus quarter two a year ago, but versus quarter one, it's been stable and there's really no impact in display.

Okay.

Thank you.

Any closing comments from Jim?

I would just like to make a few quick comments.

First, we are obviously delighted with our performance in the second quarter and frankly, we are equally excited about our ability to sustain this momentum in the third quarter.

We think we're in a position to improve on our level of profitability, even if revenues remain only consistent in this upcoming quarter and frankly, we have reasons to expect some growth in revenues with the momentum in LCD and the bounce back in fiber.

We believe we've made significant progress on the three priorities we laid out for you at our investor meeting in February.

We have significantly improved the balance sheet in the first six months of the year and frankly, we've done this while we all continue to invest in the future of the company.

We remain very confident that we'll be able to deliver on these priorities in the second half and look forward in the near future when we can again start talking about how we'll grow the overall company, not just talk about cutting costs and restructuring.

With that I look forward to speaking to you again in the future.

Ken?

Thank you, Jim.

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