康寧 (GLW) 2003 Q3 法說會逐字稿

Welcome to the Corning Inc. third-quarter conference call.

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

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

At the request of the Company, today's conference is being recorded.

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

I would now like to introduce today's conference host, Manager of Investor Relations, Mr. Ken Sofio.

Good morning, welcome to Corning's third-quarter conference call.

This call is also being audiocast on our Website.

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 that except for the published results and 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 SEC reports.

Good morning, everyone.

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

Sales for the third quarter were 772 million, an increase over the second quarter and slightly higher than our own expectations.

In fact, this was the third 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 4 cents per share excluding special items, ahead of our guidance and 2 cents above consensus.

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

Gross margins for the third quarter were 29.2 percent compared to 24 percent in the second quarter.

About a third of this improvement in our gross margins was due to strong operating performance in fiber cable and display.

The rest was due to the completion of the sale of our photonics business and the closing of our conventional television business.

Those two businesses have been operating between breakeven and negative gross margins, including inventory write-offs, for the last few quarters.

So even though their July results are included in our third quarter numbers, our gross margins improved significantly in comparison to the second quarter as a result of the exit of these two businesses.

SG&A was 147 million for the third quarter, down one million from the second quarter.

RD&E came in at 80 million in the third quarter compared to 85 in the second quarter.

This decrease was due primarily to the sale of the photonics business.

Our tax benefit rate, excluding special items, was 33 percent for the third quarter and consistent with the second quarter.

Equity earnings for the third quarter were 75 million compared to 60 million in the second quarter.

This increase was due to stronger equity earnings from Samsung Corning Precision, our liquid crystal display joint venture in Korea, which offset a slight decline in equity earnings from Dow Corning.

Now let me take a moment to walk through the special items we had in the third quarter.

On July 31, we completed the sale of our photonics business to Avanex in exchange for 21 million restricted shares of Avanex Stock, which Corning has valued at $52.8 million.

This generated a loss of 13 million pretax, 21 million after-tax.

The after-tax charge exceeded the pretax charge due to the difference in methodology between book and tax.

We also recorded a restructuring charge of 3 million pretax, 4 million after-tax related to the exit of the photonics business.

This charge related mainly to some employee severance costs.

The after-tax amount also includes a 2 million write-off of deferred tax assets related to a state net operating loss.

We do not anticipate any further restructuring charges related to this transaction.

Going forward, we will have to revalue a portion of the Avanex shares each quarter to reflect changes in the stock price.

However, for your modeling purposes, these adjustments will flow through the investment and equity line items of our balance sheet, not the income statement until we sell the shares.

And as a reminder, these shares are restricted until the second half of 2004.

We also made an adjustment to restructuring reserves reported in prior periods.

This adjustment was a benefit of 26 million pretax, 21 after-tax.

This adjustment was the result of two items.

First, we had severance and other exit costs that came in lower than our original estimates; and second, we sold some assets for cash amounts that were above our recorded salvage value.

Specifically, these assets related to CAV.

As you may remember from the last conference call, we are in the process of selling certain manufacturing assets of CAVs to a conventional television manufacturer in China.

The total pretax gain when the sale is completed is estimated to be 40 million, 13 million after-tax and minority interest.

The sale is contingent upon certain governmental approvals and other customary asset purchase conditions.

In the third quarter, some of these government approvals and conditions were met.

As a result, we are recorded a small gain on a portion of the purchase price that was received.

We anticipate receiving the remaining purchase price in cash in 2004 as additional conditions are met.

Therefore, the net of restructuring charges and the adjustment in the third quarter was a credit of 10 million pretax, 8 million after-tax minority interest.

Ken can walk you through the detail, which you'll find disclosed in the footnotes and our Form 10-Q to be filed at the end of the month.

In addition to the restructuring items, we also recorded a mark-to-market adjustment on the Corning shares to be contributed to the Pittsburgh Corning settlement.

As we have disclosed previously, as part of Corning's asbestos settlement, we will be contributing 25 million shares of common stock to the trust, along with some cash.

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

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

At the end of the third quarter, we recorded a charge of 51 million pretax, 31 after-tax, to reflect the increase in Corning's stock price over the last quarter.

You can find a reconciliation of all of these special items on the Investor Relations Website at corning.com.

Now let's move on to our business results for the quarter.

Starting with Telecommunications.

Revenues in this segment were 370 million in the third quarter, up from the second quarter revenues of 347.

This increase was primarily due to stronger fiber volume and additional revenues from cable service contracts.

The segment posted a loss of 30 million, which was an improvement over the 53 million loss incurred in last quarter.

The improvement was primarily the result of the sale of the photonics business during the quarter, as well as improved results in our optical fiber and cable business.

Revenues in our optical fiber and cable business were 209 million in the third quarter compared to 178 million in the second quarter.

Fiber volume increased almost 20 percent sequentially in the third quarter, which was better than we anticipated.

The sequential increase in volume was primarily due to seasonal demand in North America and Europe, as well as continued strength from Japan and China.

In addition, we also had higher project-related sales in our cable business during the third quarter.

Price pressure, as expected, continued to be moderate.

In the third quarter, pricing was down less than 5 percent sequentially.

And the mix of premium fiber in the quarter was consistent at slightly less than 10 percent.

Sales in our hardware and equipment business in the third quarter were 134 million, down slightly from the second quarter.

Now let's turn to the Technology segment.

Overall revenues in the third quarter were 396 million, basically flat with the second quarter.

Revenue growth in both our display and environmental technologies businesses was offset by the fall-off in revenues from the exit of our conventional television business.

Without this impact of the conventional television business exit, sales in Technology segment would have been up 6 million over the second quarter.

Net income, including equity earnings, was 61 million in the third quarter, a 22 percent increase over the second quarter.

The increase in net income was led by strong volume in our display technology business, including our equity venture, Samsung Corning Precision.

In our display technologies business, sales for the third quarter were 144 million, up 7 percent sequentially over the second quarter.

Volume, which is defined by us as square feet of glass, increased 7 percent sequentially in the third quarter, lead by strong growth in Japan.

This represents the 8th consecutive quarter of volume growth for this business, and as expected, pricing in the third quarter was stable, as were exchange rates.

Net income, which includes equity earnings from Samsung Corning Precision, grew 21 percent sequentially in the third quarter.

This substantial increase in earnings is a reflection of the strong volume growth, as well as improved manufacturing performance.

Volume growth for the Corning family of businesses, which includes Samsung Corning Precision, was up 12 percent over the second quarter.

In comparison to the third quarter of last year, revenues in our display technologies business have grown 35 percent, led by a year-over-year 45 percent increase in volume.

Net income, including earnings from Samsung Corning Precision, have almost doubled in comparison to last year, led by volume increases of 60 percent, including the family.

Volume growth again was driven by demand for desktop monitors and notebook computers.

To put the size of those markets into perspective, a record 13 million LCD desktop monitors were shipped in the third quarter, almost double the number of LCD monitors shipped a year ago.

Demand for notebook computers in the quarter grew 8 percent sequentially and over 20 percent in comparison to a year ago.

In addition, for the first time in history, the LCD television industry shipped over one million units in the quarter.

This is an impressive statistic.

The glass demand generated from LCD televisions, however, still represents only a small portion of our LCD glass sales today.

The biggest driver of LCD glass demand today and throughout the near-term will continue to be from the penetration of desktop monitors.

That being said, we do anticipate LCD televisions to be a larger driver of our demand towards the end of 2004, as we ramp up our production of Gen 6 Class.

In fact, we were quite pleased by Dell's announcement that they were entering the LCD television sales business by leveraging their existing distribution and marketing channels, and we are also enthused by the announcement from Samsung to potentially set up a joint venture with Sony, two of the world's premier television companies.

Corning's family of display technologies business continues to run at full capacity.

To meet the needs of our customers going forward, we will continue to add capacity at our consolidated manufacturing facilities in Japan, Taiwan and the United States.

You may have seen our Taiwan capital expenditure plan that was announced in July and recently approved by the Board.

In summary, our Taiwan manufacturing facility will undergo $180 million expansion, which will more than double the plant's capacity for melting, forming and finishing of Gen 5 glass substrates.

It will also provide additional melting and forming capacity for Gen 6 glass substrates.

Initial production from the expansion will begin in the second quarter of 2004 and the entire expansion will be completed by the end of 2004.

For your modeling purposes, the capital in this project to be spent this year has already been included in our 2003 estimates.

Samsung Corning Precision is also in the process of adding capacity in Korea.

Please keep in mind this joint venture funds its own capital spending needs.

Now before I move to our next business, I want to make one comment about the impact of seasonality in the LCD business.

For the time being, we are not experiencing the typical ebb and flow that you would find in consumer electronics driven businesses, particularly as we enter the holiday shopping season.

Since the demand today for LCD glass is driven primarily by the technology substitution of LCDs replacing CRT desktop monitors, the business growth is not impacted by seasonality.

If for example the main driver for LCD glass sales were notebook computers alone, then seasonality would be a factor, as glass demand for those products is driven more by the growth than the end product and not by the substitution of technology.

For the time being, we are currently experiencing growth curves that are greater than any underlying fluctuations and seasonality thanks to the impact of desktop monitors.

As always, our quarterly results are subject to the normal fluctuations, including supply chain backups.

Moving on to our Environmental Technologies business, revenues in the third quarter were 121 million, a 4 percent increase over the second quarter and a record quarter for the business, which is no small feat given they have been around for 30 years.

The increase was primarily the result of the continued shift in product mix from our standard ceramic substrates to our premium thin-wall and ultra thin-wall products.

In fact, the mix of premium products in the third quarter was almost 50 percent.

In comparison, only 34 percent of our sales were from premium products a year ago.

In addition to the growth of premium products, the business has benefited from continued strong automotive production worldwide, especially in North America and Asia.

Net income in the Environmental Technologies business increased over 20 percent in the third quarter sequentially, due primarily to the impact of some one-time charges in the second quarter at our equity venture, Cormetech.

The business also continued to benefit from favorable exchange rates.

Before I move on to our Life Science business, I wanted to give you a quick update on the progress of our diesel business, which is included in our environmental results.

Our diesel business continues to ramp up effectively, and in fact is running at full capacity.

Revenues increased 8 percent sequentially in the third quarter, although on a very small base of sales.

This increase in the quarter was driven by the retrofitting of diesel engines for the city of Tokyo.

We are currently in the process of bringing our new diesel manufacturing facility online in time to meet the demand that is expected to be generated as a result of new regulations in the United States.

We anticipate the new facility will be up and running by the first of the year.

Turning to our Life Sciences business, revenues in the third quarter were 70 million, down slightly from the 72 million reported last quarter.

Net income fell about 17 percent sequentially reflecting the impact of summer shutdowns.

Sales at our conventional television business were 14 in the third quarter compared to 24 million in second quarter.

This decline is the reflection of the closing of that business.

We anticipate some additional sales of conventional TV glass out of inventory in the fourth quarter, which I will discuss further when I talk about the outlook.

The business did incur a small net loss during the third quarter, consistent with the second quarter.

Equity earnings at Samsung Corning were consistent in the third quarter compared to the second, as volume growth offset price declines.

As you may recall, we experienced a decline in equity earnings in the second quarter due to pricing pressure in the industry.

At that time, the decline was a surprise to us, and we promised we would evaluate whether this is a temporary trend or a permanent decline and report back to you.

Our initial review indicates that there was a very large surplus of glass in the industry in the second quarter, which resulted in the severe downward pricing pressure, not just for Samsung Corning's products.

The bad news here is this oversupply still exists today and most likely will continue for the foreseeable future, given the maturity of this industry.

The business is taking immediate action to address its crude (ph) cost structure.

They will continue to monitor the market situation by evaluating the future cost competitiveness of their assets used in the manufacture of the CRT glass.

Looking ahead, it's no secret that the market for conventional television glass will continue to be under pressure from newer technologies such as LCD.

Clearly, this market is mature and the companies that produce CRT televisions and monitors, like Samsung Electronics, will continue to look for ways to reduce their overall costs.

Pricing pressure will be one of those levers that they can pull.

Searching for less expensive manufacturing costs is another.

As a result, we fully expect the CRT industry to continue its migration to lower labor rate countries such as China.

In fact, Samsung Corning has already started to migrate some of its capacity to China as we speak.

That being said, we have no plans to exit this venture at this time.

The business is still profitable and generates cash.

If these two factors change over time, we would obviously reconsider our options.

We are anticipating that equity earnings from this venture will be lower going forward until the venture improves its cost position.

We could also see some restructuring charges impairments associated with this venture.

In our other Technologies business, revenues in the third quarter were 47 million compared to 52 in the second quarter.

The decline was primarily due to lower volumes at our semiconductor business and lower volumes and price declines in (indiscernible).

Lastly, equity and earnings from Dow Corning were 21 million in the third quarter compared to 25 million in the second quarter.

Turning to our balance sheet.

We continue to be pleased with its improvement over the last several months.

During the third quarter, we reduced our debt by another 383 million.

We were successful in raising approximately 370 million in cash through the public offering of 45 million shares of common stock.

As a result, we were able to maintain more than 1.4 billion in cash and short-term investments, and improve our debt-to-capital ratio from 40 percent in the second quarter to 35 percent in the third quarter.

Before I go into more detail about our cash flows, let me finish walking you through the balance sheet.

DSOs for the third quarter were 58 days and consistent with the second quarter.

Inventory fell nicely during the third quarter, from 538 million in the second quarter to 491 million.

The decline was primarily due to a reduction in inventory from the exit of CAV and photonics.

Inventories at our ongoing businesses declined 15 million; inventory turns were 4.2, consistent with the second quarter.

Regarding cash flows, major cash inflow during the third quarter was the 370 million through public offering of stock I mentioned a moment ago.

Major cash outflows for the quarter included cash used to repurchase debt, as well as 58 million in restructuring payments.

In addition, we made a 70 million voluntary contribution to our pension plan during the quarter.

One quick comment on pensions -- we don't anticipate making any additional material contributions to the plan for the remainder of the year.

We were again pleased with our free cash flow performance for the quarter and for the nine months year-to-date.

For the third quarter, free cash flow, which we define as cash from operating investing activities less restructuring and changes in short-term investments, was a 22 million outflow.

Excluding the 70 million contribution made to the pension plan, we would have had positive cash flow during the quarter.

For the date (ph), our free cash flow defined by this is 108 million.

Regarding capital expenditures, we are on target to hit our capital spending range of 350 to 400 million this year.

Before I move into the outlook for the quarter, I want to talk to you about our ongoing debt retirement plans.

We have been to the equity markets twice over the last several months, raising almost $1 billion.

I know some of you are concerned that we will continue to dilute shareholders and move forward our debt repurchase plan.

While I can't say that we will never issue equity again, I can tell you we believe that we have more than enough liquidity today to address all our debt obligations between now and the end of 2005, which sums to about 800 million.

Of this amount, the accreted value of the zero coupon debenture due in November of 2005 is now less than 500 million.

If you compare those numbers with the 1.4 billion in cash, as we have today, with the fact that we're driving towards being free cash flow positive, you know why we feel good about our ability to fund our debt repurchase program with cash on hand.

I would like to wrap up by providing you with some information about the fourth quarter.

We are expecting revenues to be in the range of 740 to 765 million, and our results to be between 3 and 4 cents per share of income before special items.

Regarding our revenue guidance, I would like to make a few points.

First of all, keep in mind that our third quarter numbers contain 24 million in revenues from photonics and conventional television.

In the fourth quarter, we expect the revenues from conventional television to be less than 1 million as we sell off our remaining inventory.

For photonics, we still anticipate 9 million in sales as we sell some of our final inventory products to Avanex.

For your modeling purposes going forward, we anticipate no material photonic revenues after the fourth quarter.

As a result, there will be a decrease in revenues from these two businesses of about 14 million in the fourth quarter.

If you also subtract 15 million of Project Submarine sales that will not repeat in the fourth quarter, you get to 740 million, the low end of our range.

Moving to some specific guidance for our business, in general, we anticipate that strong revenue gains in our display business might be partially offset by seasonal declines in our fiber in cable business.

Starting with fiber, we expect volumes to fall between 15 to 20 percent sequentially in the fourth quarter.

This is expected due to seasonal slowdowns that typically take place in the fourth quarter, especially in North America and Europe.

As we said during our annual investor meeting in February, we expect stable volumes for fiber in 2003 compared to the fourth quarter run rate from last year.

So after sequential fiber volume increase of 15 percent in the first quarter, the decline of 20 in the second quarter, increase of 20 in the third quarter, we are on track for fiber volumes this year to achieve this flat objective to the fourth quarter of last year.

For the fourth quarter we also anticipate continued pricing pressure, but again consistent with the moderate level we saw in the third quarter.

In addition, we anticipate a decline in some project-related sales in our cable business in the fourth quarter.

Turning to our consolidated LCD business.

We anticipate very strong volume growth, between 15 to 20 percent sequentially, and stable pricing again in the fourth quarter.

This growth will be driven by strong demand for Generation 5 glass in Taiwan and Generation 6 glass in Japan.

We remain on target to meet our volume growth target of at least 40 percent for the year.

With regards to our semiconductor business, we continue to monitor its progress in light of the apparent never-ending downturn in that industry.

While we have heard rumblings of recovery a few times this year, including some recently, we have not been seen them translate into orders.

Over the past few months, we have implemented some cost and other workforce reductions at this business in order to reduce its cost structure.

We will continue to evaluate whether additional workforce or asset adjustments are necessary going forward.

It is possible we could incur additional charges in this area in the fourth quarter.

Now let me turn to the topic of models.

There has been some confusion regarding the total number of diluted shares which should be used for 2003 and 2004.

Currently, we have approximately 1.3 billion shares of common stock outstanding.

However, in accordance with accounting rules, since we now crossed over into overall profitability, we must take in consideration potential dilutive impact of other convertible securities that are already outstanding, such as options, the Series C mandatory securities.

Taking those into consideration, our diluted shares for this quarter will be close to 1.4 billion.

Looking ahead to the fourth quarter that number will be 1.45, as another convertible security that is currently outstanding is added to the calculation.

For 2003, the average number of shares outstanding will be 1.26.

Looking ahead to 2004, I would use 1.45 billion shares as an average for the year.

Ken can help you out with the specifics behind these numbers.

We are ready to take some questions now.

(OPERATOR INSTRUCTIONS) Nikos Theodosopoulos with UBS.

Two separate questions.

First of all, on a sequential basis, is there a way to isolate the impact to revenues and earnings due to foreign exchanges overall for the Company?

Then my question is on the fiber business and cable business.

Last year, the Company also gave guidance of down meaningful fourth-quarter sequential trends, and in that case, what happened in Japan surprised on the upside.

I'm wondering, what are you factoring in for the sequential trend in Japan and China going into the fourth quarter?

Are you assuming those are down as well?

Are you building in sequential improvement in those businesses?

I'm just trying to get a sense of what your anticipation there is.

Thank you.

As we take a look at quarter 4, we are building into our models increase in demand in Japan.

So that goes to the core of your question.

However, we think that that will be more than offset by the seasonal declines in North America and Europe.

We are also counting on a decline in China to some extent.

That market is a little harder for us to predict accurately on a quarter-to-quarter basis.

On foreign exchange we really didn't see much different impact on the third quarter versus the second.

Obviously, it is a year-over-year favorable, particularly in the environmental business from the euro, but we really didn't see much change from the second quarter to the third quarter.

Okay, thank you.

Daryl Armstrong with Smith Barney.

Two questions.

First of all, you mentioned that in the fourth quarter you thought that pricing in the LCD business would be stable.

I was just curious why you wouldn't expect an uptick, given the higher percentage of business coming from Gen 5 and Gen 6 glass?

Secondly, you said that you thought that the LCD television ramp-up could have an impact, at least a more noticeable impact, on your revenues at the end of next year.

My question is, what type of assumption are you making in terms of the penetration rate of LCD televisions within the overall television market?

Thanks.

Let me start off by the question on pricing.

When we say stable, that can be a range from slightly up to slightly down.

There is no question about it that we are expecting our business in Gen 5 and 6 volume to almost double as a percentage of our revenues in the upcoming quarter.

So that could lead us to a slight uptick in pricing.

Wendell, you want to comment on the penetration over the next couple years?

Our view of penetration of LCD technology in the entertainment TV is that we have moved from about the 2 percent penetration rate that we expect to be by the end of this year to around 13 percent by 2007.

And we would expect the growth to be relatively smooth in terms of penetration rate through that time frame.

This is a very difficult assumption to get accurately.

Historically, we also predicted penetration rates in desktop monitors.

And what ended up was we ended up being more conservative than what reality ended up happening.

So we will continue to monitor this.

The good news is also this is a trend that you can monitor from the outside, as there is very well published documentation around what is happening in consumer electronics and the penetration rate of various technologies.

Thank you very much.

Chris Zoinko (ph) with CIBC World Markets.

Hi guys.

It's Chris for Jim.

A question on gross margins.

Jim, could you talk a little bit about what we should be thinking for incremental gross margins between the two major business lines going forward?

As you saw, we almost got to 30 percent in the third quarter, and I expect us to cross over in the fourth quarter to be above 30 percent.

When you think about the major business lines, obviously in our consolidated business and LCD we are well above that.

We are also in our environmental business, although the diesel factory will have a little bit of an impact as we go forward.

And then in our fiber business, basically the incremental rate is very high right now because we have got a lot of capacity in place and don't need to add fixed cost.

So any revenue from those three businesses basically will continue to give us a mix effect up on our overall gross margin, and we are expecting it to be above 30 percent in the fourth quarter.

Thanks.

Raj Srikanth with Deutsche Bank.

Can you go over in terms of this whole LCD -- you know, the capacity demand situation as it exists today, and how you expect this to turn out as you go into 2004 and 2005, since right now there is a huge demand and everybody is expanding capacity, and how are we sure that we're not get into a situation where one exceeds the other going forward and there's enormous pricing pressure?

Thanks.

What we are focused on is we are certainly adding capacity at a very rapid rate ourselves, and we have a commitment to keep up with the market.

However, we are very much focused on what is the end market.

As we have talked about before, our customers, primarily the fabs, are adding quite a bit of capacity and all think they will win in the end market.

The good news here for us is that we are able to monitor -- no pun intended -- the end market for LCDs, desktop monitors and color televisions, and therefore can get a good sense of what the real square footage is going out to customers.

So we are looking very closely at that.

Also, we are able to have a very modular capacity growth here.

So we bring on capacity with basically six months.

So if we're wrong on a growth rate, we obviously can grow into that relatively quickly and stop the next tank expansion.

Lastly, our own capacity is very small tanks, so we do not have to build a large tank encompass growth over a longer period of time.

This allows us to react very rapidly to both downs and ups in this business.

We feel confident in our ability to manage this against the end market demand.

Jim, another question with regard to OPEX.

Can you sort of go over your current level of OPEX, up to what level of quarterly revenues can you support, or does it need to continue to increase as your top line grow?

In terms of our operating expense, let's break them into two pieces, SG&A and R&D.

We do not feel the need to, within any reasonable revenue increases, to up our SG&A other than obviously the impact of some merit increases this upcoming year.

Where we might see selected increases are for, for example, the display business in Asia, where we are growing very rapidly, or in the diesel business, which will come into its own next year.

Other than that, the Company is committed to keeping our SG&A basically where it is now, and we have got a lot of capacity in effect to handle the business coming at us and quite a bit more.

On R&D, you will see a slight increase as we head into next year.

We think we got a lot of great opportunities there, but we are not talking anything like we had in the past.

These will just be very small increases.

So by and large for your modeling in the operating expense area, you should not see much of an increase as we go forward, other than a mild increase from inflation.

Thank you, sir.

Stephen Koffler with Wachovia Securities.

I'd like to explore the fiber demand in the U.S. a little better, notwithstanding the seasonal slowdown coming.

From the data that has come out over the last couple of months, especially from the equipment OEMs, it almost sounds like the old days.

I almost hate to say it, but Wendell, can you tell us a little bit more about what we are really selling into.

We're very much of the impression that long haul fiber has something close to zero demand -- please correct us if we're wrong.

Also the profile of the customer base, who was really buying this quarter?

It doesn't feel like the old days to me.

To get to your questions.

For long haul, I think you're assumption is very accurate.

There is very little long haul fiber being installed.

As far as where we see demand coming, it -- still for us Japan is very strong as well as China.

North America positively surprised us in this quarter, being higher than our expectations, and Europe was up as well.

For us, if we were to peel that apart and take a look at North America, we would say that ILEC demand was a greater proportion of our revenues than cable TV in this past quarter and little to no activity in long haul.

Note that we have also seen our customers continue to work down their inventories of fiber optic cable, and they have gone through a time period where they have done their best to consolidate their stores of fiber optic cable across the regions.

And as a result, they are able -- we are now at a level where we think that they have got the pipeline about where they want it.

Just to follow up, if I could.

So you're saying it's -- would you characterize this in North America as nothing more than inventory replenishment as opposed to application-driven buying?

No, I think really in a way the opposite is that they have successfully driven down their inventories, and we had some of that in this last quarter as well.

It is not so much inventory replacement.

It is being driven by specific applications.

However, what we would not say is that we are seeing sort of broad-based recovery in the telecommunications market.

We said historically we continue to believe that the earliest we would anticipate a very significant uptick in growth for us in this business to be at the earliest late quarter '04, and we are probably in 2005.

The recent announcements around fiber to the premise certainly lend credence to that scenario, but we don't anticipate a near-term surge in demand related to this.

It is a very significant turn of events if they indeed adopt a fiber to the premise buildout.

That is a very significant amount of demand for our products.

Our revenue opportunity, anywhere between 80 and $200 per (indiscernible) passed.

However, it is such a big deal that we think it is going to take some time to actually build up some steam and work its way up to significant demand, sir.

Thanks.

Aranda Massou (ph) with Morgan Stanley.

First question I have is, could you talk a little bit about the return to positive equity earnings in telecoms after multiple quarters of negative results?

Which joint venture would have contributed there?

There is almost no equity links (ph) in telecoms.

The equity earnings were coming really from our display business.

The only thing you might have seen is that we did have some restructuring in telecom in equity earnings that hadn't been there.

But other than that, there really will be nothing going forward in equity earnings of any significance in telecom.

So that was kind of confusing, because all of a sudden after several quarters of negatives that you had positive equity earnings in that line -- it was only because of restructuring?

Right.

It is only restructuring impact, so you shouldn't be seeing anything in that line of any significance going forward.

Okay.

Secondly, in terms of the product mix impacts in the telecom hardware results, last quarter you had a lot of private network sales to help numbers.

Do you think that continues?

We continue to experience relatively positive results in our premises businesses.

They were not hit as much by the downturn in overall telecom enterprise markets.

Though not growing significantly, we are not hurt as much as the public markets, and we would anticipate that trend to continue.

It is a more stable business for us, because you have a wide number of customers, and so therefore you tend to get that diversification effect, which leads to a little more steadiness.

Thanks, Wendell.

The last one quickly is, we are expecting margin expansion in the environmental business as the percentage of thin-wall products increases as a percentage of revenues.

Do you think that is going to be offset by the ramp of the Erwin facility in the fourth quarter again?

Jim, you briefly mentioned that a couple of questions ago in terms of the -- I think you were discussing the R&D side.

But do you have a more definitive view of what is going on with the Erwin facility specifically and what happened in the third quarter and how that is going to be different in the fourth quarter?

I don't think you will see overall margins really be hurt very much by the diesel ramp-up in the fourth quarter.

I think gross margins in the overall environmental business will be fine.

Any expansion that we might have gotten, though, will be tempered a little by diesel.

But overall, you shouldn't see a decline quarter-to-quarter in gross margins in that business.

Okay.

Thanks very much, gentlemen.

Max Schuetz with Credit Suisse First Boston.

Wendell, wanted to come back to something you said in answer to a previous question about the inventory workdowns on fiber, and was curious if you had a sense of how much that was understating the real fiber demand and if we have look for any uptick in 2004 based on the inventories now being depleted?

I don't think our ability to identify the pipeline and exactly track it is strong enough to be able to tell the effect in any great degree of detail.

I think that the main thrust of my comments was that historically -- I'm sorry, over the last year or so, where our surprises were that they were able to actually continue to find more and more inventory in various locations to service their network, and were able to drive that down further than they thought, frankly, and further than we thought as well.

So I wouldn't look at it so much as an opportunity for a pipeline refill as I would look at it as being the absence of a negative drawdown on their base installation demand.

How much of a negative drawdown was it?

Because I guess if you take the negative out, the result that we see in your business should be a positive, right?

I don't have the number off the top of my head as to what we estimate the overall drawdown in inventories are.

Could do a follow-up question to Ken, perhaps, after the call.

We will do our best to dig that out.

Super.

My other question, in the past couple years you've seen some positive seasonality in your environmental business in the March quarter.

Is that something that we should be looking for in 2004 or is this something that, as Jim talked about in LCD, is now more technology substitution driven by the move to thin-wall and maybe you will have more muted seasonality this year?

I think that seasonality is still alive and well in our environmental business, that it does follow -- because it is a well-penetrated technology for us --it does follow on the gasoline side what goes on in automotive production around the world.

There has been a trend for us for seasonality to become more muted, not so much because of technology to move to thin-wall, but rather the increase in globalization of environmental regulations.

So now rather than just focus on the sort of 16 million cars, let's say, in the U.S., instead now we step back and look to between 55 and 58 million cars around the world.

And that move to larger numbers and the continued adoption of new environmental regulations around the globe can help mute any given seasonality in a given market.

Thanks.

Good quarter, guys.

John Roberts with Buckingham Research.

Do the accounting rules let you carry Concord as idle indefinitely, or during 2004 are you going to have to make a further decision on either writing it down or making some other changes?

We're not expecting in 2004 to have to make any change for Concord.

I think our forecasting ability has proven itself this year in fiber with the stability.

We see the favorable benefit of fiber, the premises coming a little bit later, as Wendell indicated, late '04 heading to '05.

And from our reviews with our accounting internally and externally, there is no issue at all about the Concord asset.

Whenever you decide to restart that, because it is a continuing asset, you won't get to capitalize the start-up costs.

Are they going to be a material expense to get it back up when you make that decision?

So since we continue to depreciate the Concord facility, even though it is idle, the main expense would be to restaff.

We continue to keep a core of folks there so that we are able to ramp that up effectively, and we don't see that it would be a very material -- of course, there will be more cost as we ramp it up in the first few months -- but we don't see that as a very material affect.

Also note though, we don't anticipate having to ramp Concord up here probably within the relative planning horizon that you're working with.

Okay, thank you.

John Harmon with Needham & Company.

Apparently I just made it in under the wire.

I have two questions.

First of all, I was wondering if you could break down that 80 to $200 per home figure for fiber to the premises?

How much could be fiber, how much of that is optical in nature, and what the rest is, please?

It is all optical in nature, and it will be a combination of fiber, cable and our optical connectivity products.

What drives the range is the degree to which we are successful in our innovation ideas to drive down the overall installation costs for the ILECs.

We haven't yet provided a specific sort of pie chart breakdown of the different revenue opportunities.

What we are planning to do is, as we move to our annual investor review, is too provide a little bit more rigorous way for you to think about it, and what portion of it comes as a home is passed, what portion of it comes as a home is connected, and what type of products and the relative split-out of revenues they will be.

Thank you.

And secondly, just quickly, did you turn away any customers for flat-panel display glass?

Obviously, your contract customers, you took care of them.

But were you able to satisfy everyone that showed up and needed glass?

Certainly, the supply chain for glass right now is very tight and our customers would like more.

However, I don't have any specific examples, other than dissatisfaction with how much glass we are able to provide, with any specific turnaways of specific customers, sir.

Thank, Wendell.

John Anthony with Fulcrum Global Partners.

I'm hoping you can give us some characterization with respect to how Precision grew relative to display technology.

Did it grow faster and would you be any way you could give us some more detail about kind of the revenue growth and the profitability growth versus display?

So let me make sure I understand your question.

When Jim ran through sort of the dynamics on quarter 3, what he pointed out was that in our consolidated business, we grew at around 7 percent, and at Samsung Corning Precision, we grew at around 16 percent in the quarter, leading to overall sort of family growth rate of around 12 percent.

As we look ahead to quarter 4, we anticipate volume to be up between 15 and 20 percent, with our consolidated business being up a little more than Samsung Corning Precision.

Does that get to your question?

Yes.

No, that does.

And also, would you be willing to comment on where you think your market share relative to display substrate is at the end of the third quarter?

Do you think it expanded?

So, no, we would not be willing to comment on what our market share is in the third quarter.

What we would be willing to comment on is that our relative competitive strength increases as the new generation of LCD fabs adopt new generations of glass substrates.

For example, the predominant size today is for Gen 3 and Gen 4 fabs, which is 3.8 square feet and 6.4 square feet glass substrates, respectively.

The new Gen 5 and Gen 6 fabs require glass substrates that are about 14.8 square feet for Gen 5, 29 square feet for Gen 6, so it is a very significant increase in size, and also increases the difficulty of manufacturing that substrate.

And this increases our relative competitive strength.

We are starting to see that dynamic -- to sort of get directly at your question -- right now.

In quarter 3, we significantly increased production of Gen 5 and began to ramp up our production of Gen 6.

As we look forward to quarter 4, we would expect that trend to not only continue but to accelerate, that we would almost double our Gen 5 production as we go into quarter 4.

So the more that the market moves to the new large sizes, the more that it moves to Gen 5, Gen 6 and Gen 7, we would expect our competitive strength to increase.

I know this is somewhat probably of a premature question, but if the trends continue that we're seeing now into 2004 and you get the changes from the rating agencies that we're all looking for, could you give us an outline of what kind of expectations for changes to the balance sheet we can look forward to and what kind of impact that could have?

We're hopeful that the rating agencies will regard the performance this quarter favorably.

We have driven down the debt to a little below $3 billion.

We talked just earlier today about driving it down by another 7 to $800 million over the next year and a half, through the end of '05.

Beyond that, what happens to our balance sheet, you may recall that we do have about 700 million of a convertible security that has a conversion price of 9.65.

So when that hopefully will convert at some point, then our debt should be down in the 1.5 billion level.

We hope that will convince the rating agencies as we drive ahead to move us back to investment grade.

And then the other positive you will see from us is we will have the ability to no longer carry the large cash balances we do today, and go back to running the Company with a small amount of cash and free that cash up for obviously better purposes.

Okay, thanks.

Steven Fox with Merrill Lynch.

It's actually Eric Weinstein.

Just wanted to go back to the LCD business for a second.

It sounds like you're saying that pricing stays relatively stable, and that is a function partly of mix.

But given the trends that you're seeing in that business, is there a possibility that you might find yourself in a position to perhaps raise prices in your noncontract business?

We treat our customers as long-term customers, and as a result, what we don't do with our long-term customers is exploit sort of short-term supply chain perturbations with significantly higher prices.

Rather, what tends to happen is if supply is tight, the normal product line price declines that you expect in any high-tech business -- think of it as high single digits per year -- that tends to moderate.

For us, the real dynamic to watch on price is that as we introduce and significantly increase the proportion of our product, that is Gen 5, Gen 6, and moving towards Gen 7, that average price is higher, which once again moves to offset product line price decreases and leads to the relative stability that Jim described.

Okay, thanks.

Steve Koosa (ph) with J.P. Morgan.

Great quarter.

Just wanted to get a little bit of color on the Submarine project revenues, geographic nature, if you could?

Thank you for your compliment.

So this is a project business, and projects tends to end, and we had a number of them that have finished in the third quarter, which gave us about 15 million more than what we would have had in the second quarter, and that won't repeat in the third.

The other thing to remember about this, this is a very low margin business.

So it really doesn't have much impact on our profitability, so the gain of that 15 million in the third quarter and the loss of it in the fourth quarter really doesn't influence our results very much.

Great.

Thanks guys.

Jim, you have some closing comments?

I'd just like to make a few comments.

First, we were very pleased with our results for the quarter.

You may recall we had set a goal of returning to profitability, excluding Dow Corning, by the third quarter, and we were able to meet that.

Along the way, we had to make some tough decisions, including the closure of CAV and photonics.

Looking forward, we are equally excited about our ability to maintain a consistent level of profitability in the fourth quarter, even though it has been the weakest for us in terms of sales historically.

I think this is a reflection of our continued commitment to meet our profitability goals, as well as the very strong opportunities we are seeing in businesses like LCD.

Before I go, I do have one public service announcement.

Ken and I are going to be meeting an investor lunch on October 30 the in San Francisco and Novembers 7th in Portland.

You are all more than welcome to join us if you're in that area.

If you're interested in attending, you can register online on our Investor Relations page on the Website or contact Ken directly.

With that, we look forward to speaking with you again in the near future.

Thank you all for joining us this morning.

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