康寧 (GLW) 2003 Q4 法說會逐字稿

Welcome to the Corning fourth quarter conference call. All lines will remain in listen only until the question and answer session. If you would like to ask a question, please press star 1. At the request of the company, this teleconference is being recorded. Now I will introduce Ken [Sofio], Director of Investor Relations. You may begin.

Thank you, Patrice. Good morning, everyone. Welcome to Corning's fourth quarter conference call. This call is also being audio cast on our audio site. Jim Flaws, Vice Chairman and Chief Financial Officer, will lead the discussion. Wendell Weeks, President and Chief Operating Officer will join for the Q&A.

Before I turn the call over to Jim, I should mention that except for the published results and historical comparisons, today's remarks constitute forward looking statements forward-looking statements and in the meaning of the private securities litigation reform act of 1995. These statements involve a number of risks and uncertainties in other matters that could cause actual results to differ materially. These risks are detailed in the company's SEC reports. Jim. Jim?

Thanks, good morning. Last night we released our results for the fourth quarter, and we were we were obviously pleased with the overall results. Sales for the fourth quarter were 820 million, an increase over the third quarter and higher than our expectations. As a result, we were able to achieve sequential revenue growth each quarter this past year. Earnings per share, excluding special items, were four cents, and at the top end of our guidance.

One quick comment on why our sales came in higher than we anticipated---- We did experience a sharp decline in the dollar in the quarter with an approximate overall impact of 25 million on revenue. The bad news is a good portion of this was from the Euro and across the corporation we don't make money in Euro so we translated more sales but but not more profit. We also had some unexpected telecom project sales in Europe that we do not make money on.

More importantly, we we also saw increased revenue performance in two of our businesses this quarter: display technologies and specialty materials, versus our expectations. While we were expecting strong volume growth in display technologies in the quarter, yen appreciation did help here. As you know all sales in this business are denominated yen which is then translated back to dollars for U.S. reporting purposes. As a result of 8% move in the yen this quarter, revenue in display businesses improved by $15 million.

Our specialty materials business, which is included within our other technologies business benefited from a sale of about six million of one time special orders. So, while we were very pleased by the revenue upside we were mildly disappointed by not getting as large of an incremental profit gain on the extra volume. In addition to the Euro telecom sales that I mentioned the explanations can be found within our gross margin and other expense line.

Let me start with gross margins. Gross margins in the quarter were 29.6%, compared to 29.2% in the third quarter. While this does represent a slight improvement sequentially, I had expected gross margins to be closer to 30.5% or higher in the quarter. However, gross margins in the fourth quarter were impacted primarily by additional diesel start-up costs and a manufacturing upset in our environmental business as well as some lower margin sales within hardware and equipment and inventory reserve within controls and connectors.

Environmental technologies gross margins were impacted driven by the accelerated ramp up of our diesel facility as we rushed to bring production on sooner to meet stronger than expected demand. The good news is that the facility began production early to meet demand. The bad news is it has accelerated the level of startup costs into quarter '04.

In addition we experienced a manufacturing upset within our automotive substrate business as we hit difficulty bringing a line up after routine repair. We have not had this severe of an upset in this established business for a long time. However, the good news is that these issues have been worked through and the production line is now running very smoothly. We are not expecting this to reoccur in the future.

Other expense for the fourth quarter was twelve million compared to other income in the third quarter of five million. The change was primarily due to a timing impact of foreign currency translation on intercompany accounts receivable between quarter three and quarter four with a strong change in the yen.

Now, moving through the rest of our income statement, SG&A was 152 million for the fourth quarter, up 5 million from the third quarter. The increase was primarily due to normal higher levels of year-end accruals. RD&E came in at 86 million in the fourth quarter, up 6 million from the third quarter. Increase here was primarily due to engineering support for the startup of the diesel facility and research on our next generation class for display business.

Our tax benefit rates, including special items, was 33%, consistent with the third quarter. Equity earnings for the fourth quarter were only 15 million, compared to 75 million in the third quarter. Equity earnings, however, included a 66 million impairment charge at Samsung Corning, our CRT class equity venture in Korea which I will discuss in a moment. Excluding this charge equity earnings would have been 81 million in the fourth quarter. The increase in equity earnings in the third quarter was due to stronger than expected same at Samsung Corning Precision, our LCD venture in Korea offset by slightly lowered earnings from Dow Corning.

Let me take a moment to walk through the special items in the fourth quarter. We recorded restructuring, impairment and other charges of 34 million pretax, 26 million after tax, primarily related to our decision to consolidate our semiconductor materials production from four points to two. One of the plants, in North Brookfield, Massachusetts was closed at the end of 2003. The other plant, located in Charleston, South Carolina is expected to be closed by the end of the fourth quarter.

The fourth quarter contained 27 million in pretax charges, related primarily to accelerated depreciation, asset impairment and exit costs. Because of the accounting in this situation, accelerated depreciation, exit costs, will be spread in the first quarter also, where you will you will see approximately 36 million pretax charges.

The total charge over two quarters will be 63, slightly less than the 70 million that we announced in December. As a reminder only 5% of this is in cash. Approximately 100 employees will be impacted as a result of the closures but we will add 70 new jobs at our two New York facilities.

This was not a decision that we took lightly, nor is it a change in our commitment to the business. Our decision was based on our need to have a more flexible cost structure, that could more closely align significant upward and downward cycles within the semiconductor industry.

Even during the peak cycle of 2000, we still had some unused capacity; by reducing our capacity, we will be able to handle the recovering industry with our two remaining plants, and this will allow us to save 12 million pretax on an annual basis.

During the fourth quarter we also made an adjustment to restructure reserves recorded in prior periods. The adjustment was a benefit of 13 million pretax and 28 million after tax. The adjustment was the result of two items. First we had severance and other exit costs that were lower than our original estimates. We continue to work hard on saving money, especially in our vacant facilities, either leasing or selling them for cash amount that are above our recorded salvage values.

The large after tax benefit was primarily driven by an adjustment to increase the tax benefits associated with our 2002 restructuring charges. So the net of restructuring charges, adjustment of the fourth quarter, was a charge of 21 million pretax, a credit of 2 million after tax.

Ken can walk you through the details, which you'll also find disclosed on the footnotes, and on the form 10K filed at the end of the month of February. We also reported a mark to mark adjustment on the Corning shares to be contributed to the Pittsburgh Corning settlement.

As we previously disclosed part of our Corning 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 sometime later this year after the claimants have approved the plan and all appeals have been resolved. Until the stock has been contributed to the trust changes in market value will be recognized in our quarterly results.

I know this special item is frustrating as it continues to appear in our numbers, but we must move at the pace of the settlement, and, of course, the embedded good news is that our stock price has been climbing.

At the end of the fourth quarter we reported a charge of 25 million pretax, 17 million in after tax, to reflect the increase in Corning stock price over the fourth quarter from 9.42 to $10.43.

Lastly we recorded the 66 million impairment charge at Samsung Corning that I mentioned earlier. This charge relates to the decision made by that business to impair certain assets to reflect the continued weak outlook for CRT monitors and televisions. You can find a reconciliation of all of these special items on our investor relations website at corning.com.

Now let me move on to our business results for the quarter. Starting with our technology segment, sales were 457 million in the fourth quarter, a 15% increase over sales in the third quarter which were 396. This increase was primarily due to the strong growth in our display technologies business.

Net income, including equity earnings, was 72 million in the fourth quarter and 18% over the third quarter. The increase in net income was also led by strong volume at our display technologies business which includes our equity venture, Samsung Corning Precision.

In display technologies, sales for the fourth quarter were 199 million, up 39% over the third quarter. Volume, which is defined by us in square feet of glass, increased over 20% sequentially in the fourth quarter as we expected, led by strong growth in Taiwan. This represents the ninth consecutive quarter of volume growth for this business. The business benefited from very favorable exchange rates during the quarter as the yen strengthened by 8% versus the U.S. dollar.

As a reminder sales in this business are in yen which are then translated back to dollars for U.S. reporting purposes.

As expected, true pricing during the fourth quarter was stable. Samsung Corning Precision saw sequential volume increases of 18%, which was slightly higher than we expected. Equity earnings from Samsung Corning Precision were 50 million in the fourth quarter which included a 5 million beneficial tax adjustment that will not reocurr in the first quarter. However, even without this tax adjustment earnings at SCP were up 7 million from the third quarter or 18% sequentially.

Volume growth for the Corning family of businesses, which includes Samsung Corning Precision was up almost 20% over the third quarter. Net income, which includes equity earnings from Samsung Corning Precision grew 30% sequentially in the fourth quarter.

In comparison to the fourth quarter of last year, 2002, revenues in our display technologies business have grown over 90%, led by an over 60% increase in volume. Net income in the fourth quarter was more than two times higher than last year as equity earnings at SCP more than doubled.

For the years, revenues in our display technologies business were 595 million, an increase of almost 200 million over last year led by volume growth over 40% and stable pricing. Earnings family business, including Samsung Corning Precision volume growth was about 55% last year over the prior year.

The strong performance for the fourth quarter in the year was mainly driven by the continued penetration of the LCD monitors into the desktop monitor market and the industry's migration to larger generation glass. More than half of all LCD glass produced in the industry was consumed by the demand for monitors, which for the year reached 42% penetration worldwide compared to only 28% for 2002. This equates to almost 50 million LCD monitors sold for the year.

The average LCD monitor screen size also increased modestly during the year and is now over 16 inches. Consumers' increasing preferences for notebook computers also fueled the demand for LCD glass during the year. Notebook penetration of the PC market reached 25% at the end of 2003, or 36 million units sold.

Penetration of LCD televisions continued during the year, growing from about 1 million TVs to 4.5 million. Although this represents only a penetration rate of approximately 3%, we were pleased by the steady adoption of this new technology by the industry and the public.

This adoption is being led driven by early technology adopting countries, such as Japan, where 15% of all televisions sold this past year were LCD. It is this early acceptance of LCD TV that has pushed the LCD panel makers into high gear switching more of their capacity from notebooks and desktop production to TVs, and this is the main driver of our recent acceleration into GEN 5 and and GEN 6 class capacity.

One point I'd like to make here--there has been a lot of press recently about different LCD panel makers adding GEN 6 and 7 fast. While we are also seeing this trend it is important to remember it takes one to two-years for our customers to build a new fab.

So, while there has been a lot of talk about it lately, there is still only one panel maker in the industry with a GEN 6 Fab operating, and we supply the glass to them. And this fab has only just begun to ramp up. We expect that that to change over the course of 2004 and 2005 as LCD panel makers complete their GEN 6 fabs. In Samsung's case, they have decided to skip GEN6 and will open GEN7 fab towards the end of 2004.

That being said, over the course of 2004, we will continue to add capacity to meet the growing demand for these larger size substrates. In fact, for Corning's LCD family business, the percentage of our volume, GEN 5, 6 and 7 will grow from 40% at the end of 2003 to well over 50% at the end of '04.

Now we will have much more data on this growing market and our capacity and expansion plans during our annual investor meeting on February 6 in New York City.

Moving on to our environmental technologies business, revenues in the fourth quarter were 123 million, stronger than we expected and slightly higher than the third quarter. Slight increase in revenues was driven by the ramp up of our diesel products.

Regarding our automotive substrate product line---we were happy to see inventories at the U.S. auto manufacturers drop significantly at the end of last year to more normal levels. This gives us more confidence that the strength we experienced in the fourth quarter will continue in the first quarter of 2004.

Our emerging diesel products experienced another strong quarter as revenues increased 34% sequentially, albeit on a very small base. Demand was again driven by retro fitting diesel engines for the city of Tokyo. As I mentioned earlier, we accelerated the start up of our new diesel facility during the fourth quarter. In order to meet the demand that is expected as a result of the new upcoming emission regulations in the U.S, the new facility began production at the beginning of this year.

For the year revenues in our environmental business hit an all time high of 476 million, which is a 20% increase over last year. The growth was driven by the impact of stronger foreign exchange rates, the continued shift in product mix from our standard ceramic substrates to our premium products, and the continued growth of our diesel business.

Profitability environmental was much lower in the fourth quarter due primarily to accelerated startup, diesel facility and manufacturing inefficiencies in the auto business. As I mentioned earlier in the fourth quarter we started to move production from our automotive facility where we had set aside equipment to produce diesel substrates for the last several years to our new facility.

This initial move added a level of cost to our production in the fourth quarter, but most of the move was completed by the end of the year so we don't expect to see the impact of these costs on our results going forward.

Moving on to our life science business, revenues for the fourth quarter were 66 million, down slightly from 70 million reported last quarter. The lower sales are attributed to normal seasonal declines in this industry.

As a reminder this business sells primarily to pharmaceutical and academic research departments which are typically closed during the latter part of December.

In our other technology business revenues for the fourth quarter were 67 million compared to 47 million in the third quarter. This increase was primarily due to demand in the semiconductor market and partially to impact of special one-time orders I mentioned earlier. We are very pleased by this increase, but it is too early to declare a definitive turn around here, especially after a long drought.

Before I leave the discussion on technology segment, I would like to make one comment about our CRT glass joint venture, Samsung Corning. Equity earnings at Samsung Corning excluding the restructuring were about 4 million in the fourth quarter, a 30% decline from the third quarter.

As I told you during last quarter's conference call the business was taking immediate action to address this current cost structuring in light of the declining CRT market. Clearly, the significant impairment charge taken in the fourth quarter was an important first step. We believe the business is taking the right actions to mitigate future deterioration results.

That being said we expect lower earnings going forward and could still see additional restructuring charges and impairments associated with this venture in the future. As you know, we have no plans to exit this venture. Samsung Corning continues to be profitable and generate cash. If at at some time in the future these factors change, we will reconsider our options.

Lastly equities from Dow Corning were 19 million down slightly from the 21 million reported in the third quarter.

Now I would like to move to our telecommunications segment. Revenues in the fourth quarter were 357 million, down from 370 in the third quarter. The decrease is primarily due to normal seasonal decline, fiber cable demand. Segment posted a loss of 41 million compared to 30 million in the third quarter.

Revenues in our optical fiber and capable products were 180 million in the quarter compared to 209 million in the third quarter. Fiber volume declined sequentially as expected by 15% reflecting normal seasonal slow downs that occurred in North America and also weakness in Japan.

Pricing for single mode was stable, ie. a very slight sequential decline during the quarter, reflecting the continued moderation of pricing we experienced in the second half of 2003.

We think that this has been driven by the price of fiber falling to levels equal to or below our competitor's cash cost of manufacturing fiber. In fact, during the second half of 2003, pricing pressure in this market was less than 5%. We believe this trend will continue next year. Mix of premium fiber was consistent to less than 10%.

I have one more comment regarding fiber volumes. During our investor meeting last February, we told you we expected fiber volumes to be stable for the full year knowing that there could be some fluctuations quarter to quarter.

As we exit 2003, this is exactly what happened in the fiber business as we experienced an overall 2% rate in volume year over year.

Sales of our hardware and equipment products in the fourth quarter were 143 million, actually up from third quarter sales of 134. This increase was due to stronger demand in Europe and the positive impact of the Euro exchange rate. Photonics our sales were 11 million in the fourth quarter that represented our last shipments of [Avanex]. We do not anticipate any additional sales of photonic products going forward.

Now, moving to our balance sheet. We continue to be very pleased with its improvement over the third quarter and obviously over the last 12 months. For the quarter we reduced debt by another 100 million; for the year we reduced our total debt balance by over 1.3 billion. As a result we have been able to improve our debt to capital ratio this year from 46.7% to 33.8%.

Included in the 100 million of of debt reduction in the quarter was another 87 million of 0 coupon purchases in the open market, reducing the book value, the remaining outstanding debentures here to 385 million. We will continue to look at opportunities to further reduce this debt and increase our average maturity.

Put value of zeros now under 400 million---our largest remaining maturity is 665 million convertible in 2008. This security is currently in the money for the conversion price of mid $9 range and we have the option to call the security as early as November of 2004.

Along the topic of debt, we were very pleased with a decision reached driven by S&P to upgrade their outlook on our long term debt from negative to stable. Now all three rating agencies have upgraded our outlook to stable. We believe our achievement of improving profitability cash flow, coupled with significantly reducing our debt levels over the past year were important elements in their decision.

Our ultimate goal is to return to investment grade. To get there, we will continue to drive for improved ratios of earnings and funds flow to debt. Until then we will maintain high cash balances.

We ended the year with approximately 1.3 billion in cash, a significant amount considering the substantial amount of debt we retired during the year.

On accounts receivable, PSOs for the quarter were 58 days consistent with the third quarter. Inventory fell nicely during the quarter, from 491 million in the third quarter to 467. This decline was primarily due to the reduction in inventory of display technologies, [indiscernible] and final sale of photonics inventory.

Inventory turns improved from 4.2 in the third quarter to 4.8 in the four. Over the year inventories declined by 92 million. Now, part of that is the exit of [indiscernible] and photonics, but we also had the impact of FX on inventories.

By my measure, our real inventories in our continuing businesses declined by 10% this last year. Solid progress in helping our cash flow. We are very pleased by this operational excellence and are encouraging our teams to do it again in 2004.

Moving to cash flows, our major cash flows during the fourth quarter were 162 million for capital, 60 million for additional voluntary pension contribution, and 33 million restructuring payments. I would like to talk about the first two in more detail.

With regards to capital spending, we ended the year with 366 million expenditures. Mostly on capacity expansions and display, and the construction of our new diesel facility. I know some of you may be surprised by the size of the amount in the fourth quarter, but keep in mind the total capital spending for the year was well within our guidance of 350 to 400.

Increase in the quarter was driven by a drive to keep up with the LCD business in 2004. In addition capital spending by its nature is not perfectly smooth quarter to quarter.

Now regarding our additional payment for pensions. I know in the last conference call I told you we did not anticipate making any additional contributions to the plan in the fourth quarter. However, we decided during the quarter to make one more payment in order to improve the funding status of our U.S. plan.

So for the year we made 160 million in voluntary contributions to the pension plan. As a result, we have lowered our unfunded status to only 13 million compared to the 180 million at the end of the prior year.

In addition, moving that additional payment fourth quarter reduces our '04 plan contributions from 100 to 40 million. As an aside, returns in our primary use pension plans were 20.5% which will help our expense for the support and benefit. I will be discussing our pension plan expense in more detail on February 6.

As a result of the additional pension contribution, free cash flow, excluding restructuring, was an outflow of 67 million. For the year we were pleased to be able to reach our goal of positive free cash flow before restructuring to the tune of 38 million.

Now before I move on to our guidance for the first quarter I would like to spend a moment on goodwill and deferred taxes. We performed our required annual assessment of goodwill in the fourth quarter and determined with our external auditors that no additional writeoff was required.

As you know, the accounting rules are very complex and our impairment assessment was based on a number of assumptions underlying our long term view of the telecommunications market. Our assumption at the end of 2003 was that we do not anticipate any recovery of telecom market until late 2004 at the earliest. We saw flat volume in '03, so we're on track with that assumption and we have not changed it for '04. We are comfortable today with this review of goodwill, but as we note in our risk disclosures, accounting rules here are complex including the impacts of assumptions, definition of segments, etc. We could see a write off in the future.

The good news is any future impairment charges would be noncash and even if we had to write off all of our goodwill we could maintain access to our revolving credit.

We also performed a review of deferred tax asset balance in the fourth quarter. We determined, along with our external auditors that additional reserves were not required. Our net deferred tax asset balance at the end of 2003 was about 1.4 billion after 600 million valuation reserve.

The balance consists of a combination of domestic and foreign tax benefits for loss and tax credit carry forwards, carry backs and items that have been recognized for financial reporting purposes but which will be reported on tax returns in the future.

Now, the realization of the domestic portion of deferred tax asset, which makes up the majority of the balance, will be dependent on our abilities to generate sufficient future taxable income in the United States and the execution of some potential tax planning strategies. If in the future it is determined that the net deferred tax assets may not be fully realized, valuation allowance would be increased and this would result in a charge to tax expense and could potentially decrease our on going earnings as we would be unable to tax effect U.S. losses.

That being said, we have 20 years to utilize these deferred tax assets and we believe between the improvement in our U.S. profits led by telecom and semiconductor and our tax planning strategies, we will realize these cash benefits.

I would like to go to our outlook. A wrapup providing some information about the first quarter. We are expecting revenues to be in the range of 770 to 830. We anticipate our MPAT, excluding special items, to improve 10 to 20% sequentially and our results to be between 4 and 5 cents per share of income before special items.

Regarding the revenue guidance, I would like to make a few points, first keep in mind that our fourth quarter numbers included 11 million photonic sales that will not repeat in the first quarter, in addition we had one time sales of special materials of about 6 million in the fourth quarter.

Before I move on to guidance for some of of our businesses I want to provide you on some directional guidance of what potential impact and changes in foreign exchange rates could have on our performance this year.

Many of you have asked for more transparency on the impact of foreign exchange. So, for example, a plus or minus 5 point move in the yen and U.S. dollar exchange rate could result in a revenue change for us of approximately 50 million and a change of MPAT of approximately 30 million. While similar 5 point move in the Euro to U.S. dollar relationship, which changed sales driven by approximately 20 million, but result in negligible change to MPAT. Those are numbers for a full year.

Moving to specific items for the quarter, I expect gross margins should be about 31%, reflecting continued strength and display in environmental and elimination of manufacturing issues that occurred in the fourth quarter. In optical fiber products we expect volumes to be stable sequentially in the first quarter as growth in North America is offset by declines in China and Japan.

We expect prices to be down about 5% which is typical for first quarter as we initiate some annual contracts. Keep in mind that fiber pricing declined in the first quarter of 2003 by 13%. So we are viewing this as another indication of how fiber price pressure continues to moderate.

In addition, we also anticipated a decline of revenues in our cabling operations including project related sales of about 20 million in first quarter. In our consolidated display business, we anticipate remaining sold out during the first quarter, despited adding additional capacity. Sequential volume growth is expected to be between 5 and 10%. Pricing for the first quarter should remain stable.

As a reminder sequential volume growth rates in this industry are not smooth as they are dependent upon the timing of new capacity coming online, both at LCD glass and at LCD panel makers. That being said, we fully expect our volume growth for the year to be near the higher end of the estimates we provided previously on volume growth on the market.

We also expect continued strength in environmental, as both our automotive and diesel emission products will be sold out in the first quarter. This business continues to ramp up production and the diesel facility plans to have two manufacturing lines operating at the end of the first quarter. As I mentioned earlier, manufacturing in the business is improving after the upset in the fourth quarter.

Lastly, we do anticipate in our seasonal pickup of life sciences in the first quarter.

Before I end the outlook discussion, I would also like to take a moment to provide guidance into Dow Corning's contribution in 2004. Based on current assessment of their business we expect equity earnings from Dow Corning each quarter to be between 20 and 25 million.

I will be providing more specifics about our guidance including additional information regarding our equity ventures at our annual investor meeting on February 6.

One last comment for your modeling purposes on share count. Original guidance for the fourth quarter was 1.45 billion shares, but due to restructuring charges for semiconductor and the impairment charges at Samsung Corning, we had a GAAP loss for the quarter which precludes the inclusion of any diluted convertible securities.

Looking ahead to the first quarter, even with remaining charge to our semiconductor business, we expect to have GAAP income. Therefore, the impact of potential diluted convertible securities such as option, series C, 7% mandatory should be added to our weighted average shares outstanding. For your modeling purposes you should use 1.45 billion shares for the first quarter. For a listing of all the potential diluted securities see the footnotes to our third quarter 10Q. Back to you, Ken.

Thanks, Jim. Patrice, we're ready to take some questions now. Question & Answer.

[Caller Instructions] Our first question comes from Darryl Armstrong with Smith Barney.

Thanks very much. You guys talked about your intention to continue to increase capacity based upon your expectation of fairly strong end markets in the LCD business. But could you give us a little bit more color in terms of how you think about your capacity decisions? For instance, what would be an acceptable rate of pricing decline on the glass side, or a level that would be sufficient to cause you to ramp back on some of your capacity plan?

Good morning, Darrell, this is Jim. I'll answer part of that, and I will let Wendell chime in also. First of all on capacity expansions, we clearly intend to keep up with market demand; we expect it to be strong, and what our customers are asking of us particularly in large sizes.

We have mentioned several times that this is a technology business, and over time, prices do come down. Obviously with new generations of glass as we said before, we get price increases. But over time, we expect to see price declines and have seen that in this business over a longer period of time. Those price declines have generally been moderate towards the upper end of single digits. Wendell, any comments on our decisions to add capacity?

Jim, I think you hit it. The primary driver of our decisions to add capacity will be our view of the end market demand for LCD monitors, notebooks, as well as well as entertainment TV.

Okay. Thanks. One last question. What are your assumptions, the embedded assumptions, for fiber growth in both China and Japan for Q1 ?

So in quarter 1, we anticipate a decline in demand for Japan and China. China decline is very typical, seasonal decline there tied to the new year's timing in China.

For Japan, in quarter 4, our shipments to Japan declined, and NTT has told all of its suppliers that its purchases will be down in 2004 versus 2003. Now we have built this into our quarter 1 guidance of stable volume for our total fiber business with the strength in North America offsetting weakness in Japan and China.

A couple of notes on Japan. First our share position in Japan is not as high in other regions. We are not the market leader in Japan as we are everywhere else in the world. So the impact of the change in the Japan market is somewhat mitigated on us. The other note I would make is that NTT has not historically been a pretty good forecaster of its fiber demand. So as the year progresses, we should know more.

Thanks for answering my questions.

Sure.

Thank you. Our next question will come from Nikos Theodosopolous with UBS.

Thank you. A couple of questions. On the operating expenses, you mentioned you know, some accruals and so forth, but on R&D, it went up sequentially and the reasons you gave there, investments in diesel, etc, I am just looking at the first quarter, what kind of guidance do you think the trend will be for R&D and SG&A?

Back on the fiber side, the pickup in the U.S, do you see that as having yet nothing to do with the FTT buildout, you know, it's just normal seasonal pickup and and the impact of the fiber to the prem is going to be more towards the end of '04? Thank you.

Good morning Nikos, this is Jim. So I will deal with SG&A and let Wendell take fiber. My expectations for quarter 1 on SG&A and R&D, are basically for them to be flat for the fourth quarter. So the one one-time accruals, you know, we will get a little bit of gain there but we do have some increased costs as we begin restoring some of our items such as the matching the 401 K and some increased pension expense, but you can count on those two being basically flat fourth quarter to first quarter.

Wendell, fiber?

Hi, Nikos. We do not anticipate a significant impact from fiber to the premise in the first quarter. Although we were very pleased with our win at Verizon to supply fibers to the premise, we think that it's going to take a bit into the the year before we will start to see any significant shipments for the fiber to premise deployment.

Okay. So if you look at the U.S. market, business in the fiber business, through the course of the year should see a continuing strengthening trend, is that reasonable?

We would anticipate the total market to be pretty stable with 2003. With North America improving, in that, so I think your assumption's right.

One thing to be careful of, for fiber to the premise, its near term impact on fiber demand per se is not significant. What we look at this year as being is Verizon really paving the way here for the fiber to premise deployment, proving out the technology, and also continuing to develop their business models to support the investment.

But we would expect fiber to the premise if it is successful this year, to begin to build steam as we go into the year after and beyond. But in this year, don't look at it as being a dramatic driver in fiber volume, Nikos.

Okay. Thank you.

Thank you, and our next question will come from Steven Fox with Merrill Lynch.

Hi, good morning. First another fiber question. Wendell, how much globalize has occurred in the fiber market such that if Japan does fall off that it could increase price pressures in other parts of the world or is it still pretty regional?

Steve, I think that's an excellent question. It is still pretty regional. For instance, it is not easy to quickly translate for a Japanese fiber producer into the share into a U.S. RBOT, for instance. But at the same time, there are regions of the world that are already qualified on Japanese fiber. So, for instance, there is the potential for seeing pressure in China, which has been a very stable pricing performance throughout this last year; there is potential for that.

Right now, our outlook is in the first quarter, that pricing overall for us around the world will be pretty stable for us in the first quarter down about 5%. It remains to be seen if we effectively factored in any impact of NTT's changes. You wouldn't feel it right away. It would tend to be a little more subtle and play itself out throughout the remainder of the year, if indeed that does create pressure in China.

Okay, thank you, and then just two quick financial questions, Jim, working capital requirements or benefits to cash in 2004, rough idea if it's going to be positive or negative and if you have a year-end head count number available, that would be great.

So head count for the total corporation last year was about 20,000 -- 20.5 thousand, I think, and that was down from about 23 at the end of the prior year, but most of that down occurred with the exit of [indiscernible] full timers.

So working capital this upcoming year is going to be very dependent on a couple of things. Obviously, accounts receivable will grow depending on what happens to our ultimate revenue. We are not expecting any deterioration in DSOs.

I think the question for us, if we see good growth there, can we mitigate that by continuing to cut into inventory as we go along? But I don't expect it to be a big draw on us for cash. If it is, it's going to be because we have good news on the revenue.

Great. Thank you, very much.

Thank you, Wendell. Our next question will come from Steve Savas with Goldman Sachs.

Thanks, good morning. I am not sure if this was mentioned Jim or not. Did you kind of mention outlook for '04 on Cap Ex?

I didn't mention it. I was going to save it for February 6, but Ken told me someone would ask the question anyway. So, we originally expected Cap Ex for '04 to be around 500 million, but as I said at a couple of conferences in the fourth quarter, I think that the number will climb now closer to 600, driven strictly by the LCD business, where we are seeing this red hot demand, particularly in Taiwan, and we are going to keep up with it. So it could edge up from 500 to 600, but it's all good news in that regard. On that front, people [indiscernible] will be talking on February 6 conference about our capital efficiency on LCD where we made great progress over the past year on new tag support for finishing lines we're putting in.

Okay. Just as a followup to that, is it correct that Cap Ex spent on JVs, either existing ones or new ones are not under that same, kind of, roughly 600 million that you are talking about?

That's correct. Our equity ventures are responsible for their own capital spending unless they are very tiny and startup mode, which we don't have any right now. For example, Samsung Corning Precision funds---all of their own capital spending themselves and by the way also sends us a very nice dividend at the end of each year so we don't have to put any money into our equity ventures.

Great, thank you.

Thank you, Wendell. Our next question will come from John Roberts of Buckingham Research.

Good morning, hi, guys.

Hi, John.

Guidance on Dow Corning--20-25--I mean during '03 it was 18 to 25 every quarter, so there's no real upside there although it has had good economic leverage in the past. Could you give us an update on when the final bankruptcy emergence is expected?

Well, John, I would point out for Dow Corning for the year of 2003, the contribution to us was about 83 million. I expect for the year for it to be above that, and so I expect good contribution this year.

We give the range of 20-25 within a quarter, because, in fact, we do see some variability there. And, frankly, we are not that good at forecasting it yet.

We are expecting emergence to come in the first half of the year. Our general counsel always reminds me that it always seems to take a little longer with courts than what I would hope, but we really are feeling very confident by the middle of the year we will be emerging from bankruptcy.

Thank you.

Thank you, Wendell. Our next question will come from max with Credit Suisse First Boston.

Thanks, guys. I was wondering if you could give us a sense of where the demand for diesel products was coming from by geography, and also comment if you were seeing any advantage from foreign exchange in terms of your cost on fiber. If we continued to see deterioration in the dollar is that likely to keep fiber pricing more stable or is that not really a relevant factor there? Thanks.

Let's take your diesel question first. Right now our current demand is being driven both driven by Tokyo retrofit, as well as heavy duty diesel in the U.S. That is our primary near term drivers. We would expect that to continue with increasing demand for the U.S, heavy duty especially, related to diesel manufacturers getting ready for the U.S. 2007 regulations around reducing NOX in particular.

With regard to foreign currency and fiber, to the extent that the dollar weakens, it increases our cost advantage versus our competitors, in, for instance, Japan and Europe. So, therefore, theoretically, it ought to contribute to reducing price pressure on fiber.

I think it's important, though, to note that there still is substantial overcapacity in fiber and that what we have been experiencing in terms of the lessening price pressure is really driven by our competitors, fiber prices reaching the cash cost levels of our competitors. But periodically, a competitor will do something that is economically irrational, so that's one of the reasons we only give fiber pricing guidance a quarter at a time.

Thank you, Wendell. Our next question will come from Jim Youngjohann with CIBC.

Thanks, this is Chris for Jim. Wendell, if I could ask you some more questions on fiber, I don't mean to beat a dead horse, but in the North American market, can you give us a little color, is pricing better or are competitors just falling out or maybe an area that you are better positioned in? Just a little flavor on why North America is a little stronger?

First of all, it depends on which quarter we had. In quarter 4, North America was down, which is very typical of seasonality, and then in quarter 1, it's very typical from the seasonality standpoint for North America to be up so I am not sure of the direction of your question that you are talking about, a given quarter, or you are talking broader than that?

Yes, I just meant if there is anything besides seasonal that you could give us some color on for Q1?

No, I don't think so. I think this is primarily seasonality is what we would anticipate. Normally, in North America, I don't think it is a signal, sort of broad base recovery yet in the North America wire line market.

Are you seeing any strength in cable that is a little ahead of telecom, by chance?

No, not really. Cable TV was strong relative to RBOT demand last year, as one of the major players attempted to complete some significant parts of its buildout, but we don't see any increasing strength of cable TV relative to RBOTs as we go into this current year.

Thank you.

Thank you, Wendell. Our next question will come from Raj Srinkanth with Deutsche Banc.

Good morning, thank you, gentlemen. Jim, a question for you, in terms of revenue guidance you were saying 770 to 830 for Q1. Do you have any sort of built in assumptions in that as far as how foreign currency will affect that?

And then the second question, the cost margin of 31%, is there any sort of major projects that are going to be underway in first quarter so that there is a chance, of anything else happening on the first quarter as it happened in the December quarter? Thank you.

Good morning. So, there are no major projects really underway in that regard. I mean, actually we were very disappointed, when I say major project, we took -- a line down, normal maintenance line down, we had run it for many years, and we brought it back up and it didn't work. We wouldn't even have regarded it as a major project ordinarily, but it was disappointing. No, we don't have that.

Really, the only potential projects you could point to are diesel overall, which is a new factory, bringing up, so there is always a little variability there. And obviously, we are bringing on more capacity in LCD, which we have done very well, but we have to bring on a lot of different tanks. But I am feeling more optimistic about our gross margin as we had in in quarter 1. A comment on FX, my assumption on that is things are flat as we exited the quarter. So that is what is embedded in there. If the Euro and yen continue to strengthen then we could see some upside on revenue.

Thank you.

Thank you, Wendell. And now our next question will come from [Indiscernible] with Morgan Stanley.

Hi, good morning, gentlemen.

Good morning.

Jim, first, a quick house keeping question. What pension return assumption are you using right now?

Return is 8.5% on our U.S. plan.

Thanks. And when you comment on the fiber outlook year over year, going forward, the under sea cable pop d ad in third quarter, is that going to be included more in the special projects commentary or is that going to be included in your year over year fiber outlook?

We would grab that as more projects because there is not a tremendous amount of fiber embedded in it. It is really driven around the other under sea items that we have in our NSW subsidiary in Germany there. You should not think of this as a big submarine cable job like we used to have back in year 2000.

Got you. And then last question, I know you went into some of the commentary about the competitors not doing GEN 6 and going into GEN 7---could you reiterate that a bit and give me a sense of the LCD glass competitive environment and what you think your lead time is going to be on 7G?

Let me comment on that, what I was referring to was our customers, So for example, Sharp are major customers; Japan is running GEN 6, Samsung Electronics runs a lot of GEN 5--- they chose to skip 6 and go to 7. I was not referring to our glass competitors. We continue, as far as our glass competitors, to be the first with every generation, as we were with GEN 4, 5 and 6 and we expect to be there when GEN 7 also when Samsung and Sony bring up their new fab later this year.

And the competitive entree? You think for GEN 7, any sense of that?

I won't comment on our competitors. We are very confident that our fusion process continues to scale up as it has so far.

Okay, thanks a lot.

Thank you, Wendell. Our next question will come from Dennis Gallagher with Schwab SoundView.

Thank you. I wonder if you could characterize where that 7% growth in hardware and equipment came from in the telecom sector?

It came in Europe, mostly, and some demand here, but it came mostly in Europe, and that's again one of the reasons why it didn't help our incremental margins as much as we would have liked.

Is that apt to continue?

So we are very deliberately increasing our geographic penetration of our hardware equipment product line, both in Europe as well as we also had good success in Japan in this last quarter. So we would hope that it continues; for us our hardware and equipment market business has historically been much more North America centric and we would like to introduce some of our more innovative products around the world.

Going forward, will there be no residual photonics revenue at all?

That's right. The residual revenues we saw in the fourth quarter, really we were continuing to supply pump lasers to them, prior to them starting up their pump laser facility fully with--that they got from Alcatel. So we're not expecting anything based on the technologies we had at the time of then transfer.

Okay, one last question, relatively speaking, I know you won't go into specifics, but how important important is cable for the MSO, cable operators, as a percentage of business?

So, first, let me continue to make the question more finite. Cable TV is primarily a U.S. phenomena, although cable TV has a presence around the world, it is less significant than in, for instance, Europe or China than it is in the U.S.

So the question on split between where is it, where is cable consumed, cable TV versus wire line telecom, it really has the most relevance when you address North America.

In North America, it tends to be about a 50/50 split between the two in terms of overall market demand. We at Corning tend to have a little bit higher position in RBOT relative to cable TV, so we will be a little more weighted to telecom than we are to cable TV, but not by a dramatic amount.

Thank you very much.

Thank you, Wendell. And now our next question will come from Stephen Koffler with Wachovia.

Hi, there. Wendell, what is your view these days on what industry fiber capacity is relative to demand?

I would say we still are in a position where capacity exceeds demand pretty significantly -- as much as as two times.

Still two times. Okay, thanks a lot.

Thank you, Wendell, and now our next question will come from John Anthony with Fulcrum.

Good morning. Couple of questions, first on the fiber side, without really, you know, going into too much detail, relative to your comments earlier, there's been some speculation that we are seeing some of the IXCs replace routes within the United States. I mean, is that part of the maintenance comment that you made, Wendell, earlier or is that over and above some of the capacity things that you have said?

I wouldn't look to the long distance providers or IXC providers as being any sort of significant near- term driver of fiber volume. What you say is true, that there are---there is some demand related to upgrading certain of their routes, but it is not a dramatic sort of increase and very much business on a very incremental basis, sir.

I know you don't like to talk about your competition on the glass substrate side, but without referring to them, from a competitive positioning standpoint, are you doing anything differently, either specifically with the substrate---- I know you are working on some things with packaging for the later generations, GEN 6, 7, etc, that you feel is just going to further your advantage, and should we see any benefit of that in '04 or '05?

We continue to believe that we have advantages as our customers move to larger size glass substrates that have to do with the degree of difficulty of producing, for instance, something that is flat within 2 mills across 45 square feet for GEN 7. This takes precision control of both stress and dimensions as well as pristine services.

Where our advantage fundamentally lies is you don't have to finish our glass; grind and polish our glass to get those surfaces. And, so, therefore, it is relatively easier, though it is hard for everybody, to be able to meet the specifications of these very large sizes for us, to sort of do it right the first time, as opposed to having to finish to a precision surface.

Jim, very quickly, you know, not to beat the gross margin issue dead, but can you explain a little bit why gross margins wouldn't be higher in Q1 given the mix of revenues, more display technologies, more environmental? Does it just have to do with the amortization of costs from the new fab on environmental?

Well, the environmental factory is a big item level of a complete quarter of depreciation there. It could be higher, but that's the biggest drain, if you will, on it, in the first quarter.

Okay, and then lastly, can you talk a little bit about where you -- I guess relative to a question that was asked earlier on R&D and SG&A going forward, how much leverage do you think you will be able to get out of those two lines throughout 2004? Would you be willing to speculate if you remember -- you feel you are at kind of a fixed cost volume there and the volumes, environmental, and display technologies will continue to benefit from that, or do you see those continuing to ramp?

Well, we don't give guidance for the full year, so I will repeat some things I have said in the past, is that we do expect that the display business, with the dramatic growth it is having, is going to have to add some SG&A. Beyond that, we are not really looking for any material changes for the corporation, other than the fact that we are reintroducing merit increases to our people this year.

In R&D, we have moved up a little bit on diesel, but I am not looking for any material increases other than that R&D for the corporation this year.

Okay, thanks.

Thank you, Wendell. And our next question will come from Ajith Pie with Thomas Weisel Partners.

Thank you. Good morning.

Good morning.

A couple of questions, first on the display technologies business--- [indiscernible] looking at the numbers, that they have posted recently seems to be growing in volume terms at a slightly faster rate than Corning. Is that accurate and do you expect that trend to continue?

No. It is accurate, but it did grow faster in the year 2003, but in 2004, we expect it to be the opposite. So, and even if you look within 2003, in the individual quarters, that was not consistent every quarter. So, for example, quarter four we grew much stronger in our base business than we did at Samsung Precision. I think if you look overall where additional fab capacity is going around the world, there is more going into Q4 that will come from our base of consolidated business than in Korea.

Okay. And just a follow-on on that. In the technologies business, can you give us some indication of what the margin is for glass substrate demand? How much actually flows through to the bottom line?

As I have said before, the gross margins in this business are very high, and getting higher as our productivity goes forward.

On the diesel side, the two new plants that are coming online, you know, not asking for guidance for the year, but these two plants, with the amount of capacity that you are putting in. If they are running at peak capacity, what would the revenue run rate be, not talking about 2004, 2005, 2006, particulars.

Well, we are not bringing on two plants. We are having within the one plant, we're bringing on

Lines, I'm sorry.

two lines. I am not prepared to give you that peak capacity. The only thing I will comment on, we had said over the back half of this decade we expect diesel opportunity potentially for us to be $400 million.

Okay. And on the fiber side, like you are seeing, some, you know, you talked about a price in decline that is customary in the first quarter. Do you expect things to stabilize after that, for that, you know, to sort of flow through the rest of the year?

We are not giving guidance beyond the first quarter. The only thing I will point to in 2003, after a steep decline in quarter one, it was very moderate for the rest of the year. And our quarter 1 guidance for this year is much less than the decline you saw a year ago.

Fiber premise, I know it is a 2005 opportunity but in early indications that we are having do you look at the fiber developing for that more as a premium fiber, more as a commodity fiber, because in access, the volumes, you know, are probably going to be quite substantial.

So we are working on innovations on fiber that we are in discussions with our customers on. I would anticipate pricing on those products, though, to be more in the range of standing single mode, for instance, than, leaf fiber was for long haul.

Okay, thank

Okay, thank you very much. This is Ken, I know we are running a little long. Let's get one more question in here.

Thank you. We have one more question that will come from John Harmon with Needham & Company.

Last but not least, thank you. Hello, can you hear me?

Yes, we are waiting.

You didn't talk about this, how big do you think the LCD glass market grew in 2003, which leaves the question, you know, of how much share do you think you might have picked up ?

I don't have an overall number for the market growth this year. We would say our share probably edged up slightly, but clearly, we were looking at a year where, including the entire families, we are 60% growth in volume. And so the market may have been slightly less than that. But we are just at the end of January. We don't have the final statistics on the true market at this stage.

Okay, thank you, and then just one quick second one. You are obviously done with the big restructuring moves. Are you done with restructuring charges now or can we expect maybe some little optimizations like you are combining your fusilica plants?

Well, we still have the carryover of what we announced there. But, beyond that, we are really not anticipating further restructuring charges. Obviously, if we see a softness somewhere that we have got to take cost out, we will do it, but we are really not anticipating anything at this stage. We think we have the right momentum and capacity in most of our businesses. We will be subject to the fluctuation in the asbestos settlement as a special charge, but there is really not anything we can do about that until the court takes its shares.

Okay. Great, thank you very much.

Jim, do you have any closing comments?

I have a couple of , I know we are we are running over. I hope the comment about fiber being a dead horse was not a comment on fiber because fiber is performing exactly the way we expected it to. Volumes were stable, price moderated, if you take out the concord depreciation, the fiber business was profitable.

We are very happy with where fiber is positioned. We are very happy having won the Verizon fiber to premise contract.

Another couple of closing comments. We were very pleased with the fourth quarter. We were even more pleased with our results of the past year, and I hope you are also. We had three goals at the beginning of the year: strength and balance sheet, return to profitability, invest in the future. I know you are probably tired of Wendell, [indiscernible], and myself talking about these goals over and over again but we made a commitment to our investors, not only of reaching our goals but keeping updated all along the way.

I believe we have done a very good job maintaining progress up to speed as we made progress through the year. We have done exactly what we said we were going to do: work down the debt substantially, maintain cash and liquidity, return to profitability before special items, and maintain our commitment to technology and innovation. You should expect the same commitment dedication from all of us in the management committee as we enter the new year.

I have two public service announcements. First of all I highly encourage all of you to attend our annual investor meeting February 6 at the Pierre Hotel in New York City. There will be presentations given by Wendell, Jamie, people in office, and Dr. Joe Miller, our CTO, as well as myself.

One theme this year will be an increased transparency and as a result we will be providing greater insight into many of our businesses and product lines, LCD, diesel and Dow Corning. These presentations will be followed by a Q&A session. In addition we will have product managers in the lobby prior to the meeting to answer specific questions you have about many of the products.

We really hope you can attend. Presentations and Q&A sessions will also be broadcast through a conference call on the web and materials will be available online. Please register through our website, corning.com.

One last comment. A year ago announced that the head of investor relations, Kathy [Indiscernible] decided to stay home with her new daughter. I am pleased to report to you that knew her, that Kathy is doing very well. I am even more pleased to announce we had asked Ken Sofio back then to handle the IR job on an interim basis. I wanted to let you know that we, through your feedback,have been delighted with Ken's performance and named him permanent director of IR group late in 2003. Ken.

Thank you, Jim. Thank you for joining today for the call. The call will be available -- I am stunned by that last comment, Jim, thank you. The call is going to be available to access at 10:30 A.M. eastern time today until 5:00 eastern time February 6. Dial 402-998-0771 - no pass code is required. To listen on the audio cast, please go to our website at corning.com. That concludes call for today. Please disconnect all lines