康寧 (GLW) 2004 Q1 法說會逐字稿

Hello, and welcome to the Corning, Incorporated first quarter conference call.

Following today's presentation, there will be a formal question-and-answer session.

If you wish to ask a question, simply press star one on your telephone touch pad.

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, Director of Investor Relations, Mr. Ken Sofio.

Sir, you may begin.

Thank you and good morning.

Welcome to Corning's first quarter conference call.

This call is also being audio cast 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 and uncertainties and other factors that could cause actual results to differ materially.

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

Jim?

Thanks, Ken, and good morning, everyone.

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

Sales for the first quarter were $844 million, an increase over the fourth quarter and higher than our expectations.

This is the fifth quarter in a row of sequential revenue growth for us.

First quarter revenues were driven primarily by strength in our display, environmental and life sciences segments.

Earnings per share, excluding special items, were 8 cents,and much higher than our expectations.

I would like to take a moment to provide more color on our strong earnings performance and why it exceeded our original guidance by so much.

As you know, our original EPS guidance was four to five cents per share.

That EPS level was based on a few critical assumptions, some of which we shared with you during our annual investor meeting in February.

In summary, our earnings this quarter benefited from a stronger gross margin, and higher equity earnings than we had originally anticipated.

In fact, each of those contributed a penny or so more to our earnings in the quarter which helped explain most of the difference between our upper end of our guidance and the 8 cents we reported.

However, we also benefited from a few one-time items that added close to another penny during the quarter and ultimately helped us reach 8 cents.

These one-time items included tax benefits within two of our equity companies totaling approximately 8 million and stronger-than-expected gross margin in our semiconductor business.

Now regarding semiconductor, as you know we are in process of consolidating those operations.

We actually benefited this quarter as the business built inventory at the plants being shut down in Charleston, South Carolina.

That won't repeat itself in the second quarter, since we will incur the cost of consolidating the operations into Canton, New York.

But we do expect semiconductor margins to bounce back to a similar level in the third quarter.

So in summary, we believe we had about a penny of earnings in the first quarter from these one-time events.

They are not expected to repeat in the second quarter.

Now, let's start with gross margin.

First, we had estimated the gross margin be about 31% for the first quarter.

And it came in at 35.5%.

The significant improvement in gross margin was led by strong operating performances across our operating business segments, in particular display, environmental and life sciences.

Equity earnings were $107 million in the first quarter compared to $81 million in the fourth quarter.

The increase was primarily due to strong performances at Samsung Corning Precision, and Dow Corning.

I will go into specifics on both of those in a few minutes.

You should also know that our sales did benefit from favorable foreign exchange rates by about $10 million.

However, the impact to our net income was negligible.

Before I walk through the rest of the income statement, I would like to take a moment to discuss our new segment reporting.

As you may remember from our annual investor meeting, I told you we would begin reporting our display business as a separate segment in the first quarter.

As have you hopefully noticed in our press release issued yesterday, we have implemented this change.

This change was prompted by Corning's management committee focus on the support and business as a segment and a response to the feedback we received from our shareholder base, who wanted greater insight into that key growth opportunity for Corning.

Along those lines, we decided this quarter to also begin reporting our environmental and life sciences businesses as separate segments.

We understand that we can be a difficult company to follow given our many different products and equity ventures.

Therefore, in our continued effort to increase transparency in our operations, we have taken this additional step to provide you with more insight into our other growth opportunities.

I will discuss the first quarter results for this new segment in greater detail in a few minutes.

We have included 2003 for these new segments in our release yesterday, and we will show 2001 and 2002 in our first quarter 10-Q.

You should also note that these internal segment presentations allocate all of our research and development expenses, corporate overhead, interest and taxes, to each operating segment.

There was nothing significant in our overall SG&A and R&D for the quarter.

Our tax benefit rate excluding special items was 33%.

Consistent with the fourth quarter.

Net profit after tax excluding special items, was $115 million in the first quarter., more than double the amount in the fourth quarter.

Now, let me take a moment to walk you through special items that we had in the first quarter.

These items have all been previously announced.

We recorded restructuring impairment and other charges of $40 million pretax and about $25 million after tax for accelerated depreciation and exit costs related to the consolidation of our semiconductor materials production from four plants to two.

This decision was made in the fourth quarter last year, and as we told you previously, the charges who be spread between the fourth quarter and first quarter.

For modeling purposes there will be no additional charges related to this decision going forward.

And as a reminder, only 5% of the charge this quarter was in cash.

During the first quarter, we also made an adjustment to restructuring reserves recorded in prior periods.

The adjustment was a benefit of $6 million pretax and $4 million after tax.

And related to cash proceeds we received from the sale of previously impaired assets that were above our recorded salvage value.

So net of the restructuring charge and the adjustment in the first quarter we had a charge of $34 million pretax, $20 million -- $21 million after tax.

Ken can walk you through the details which you will also find disclosed in our footnotes and our form 10-Q which will be filed at the end of the month.

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

Charge was $19 million pretax and $18 million after-tax and relates to the increase in Corning share price during the first quarter which rose from $10.43 to $11.18.

As you know, we've been making these similar adjustments over the last several quarters to reflect the continued increase in our share price.

We currently believe there is a good chance the legal process will run its course during the second and third quarter and the shares will be finally contributed to the trust, eliminating the need for future price adjustments after the third quarter.

However, further incomes are possible and we will have to see how and what the courts ultimately rule.

Lastly, we recorded charge $23 million pretax, $21 million after-tax, related to $213 million privately negotiated debt-for-equity exchanges related to our 3.5% convertible bonds due in 2008.

These were completed in February and previously disclosed on our 10-K.

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

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

Starting with display, sales in the segment were $230 million in the first quarter, a 15% increase over sales in the fourth quarter, which were about $200 million.

The increase reflects sequential volume gains of 14% over the fourth quarter, led by strong growth in Taiwan.

This represents the 10th consecutive quarter of volume are growth for display.

As expected, pricing was stable, and the impact of the yen during the quarter was negligible.

Equity earnings from Samsung Corning Precision increased 30% from $50 million in the fourth quarter to almost $65 million in the first quarter.

The increase in equity earnings was driven by volume gains during the quarter.

Specifically, SEP experienced volume gains of 9% related to shipments of glass to its Korean-based customers.

In addition, they also shipped us some glass to our wholly-owned business during the quarter to help with demand there, as planned.

Of course, we properly eliminate the inter-company profits from these types of transactions.

This helped explain the disconnect between SEP's 9% sequential volume growth in Korea and the 30% sequential growth in equity earnings.

Now, net income in the display segment, which includes the equity earnings from Samsung Corning Precision, grew 38% over the fourth quarter from $86 million to $118 million.

The increase in net income was primarily due to increased volume, strong manufacturing performance, and higher equity earnings.

In comparison to the first quarter of last year, revenues in the display segment have grown over 95% led by an over 70% increase in volume.

Pricing has been stable, slightly up over that time frame due to product mix.

And the change in yen has been favorable year over year.

Net income has tripled in comparison to last year from $38 million in the first quarter 2003, to $118 million this quarter.

As a point of reference, display made as much in the first quarter this year, as it did in all of 2002.

The strong performance in the first quarter was driven mainly by the industry's migration to larger generation glass, and the continued penetration of LCD monitors in the desk top monitor market.

More than half of the LCD glass produced in the industry is consumed by the demand for LCD monitors, which for the quarter reached a 49% penetration rate worldwide compared to 46% in the fourth quarter.

We also noted that LCD televisions continue to penetrate the market, as over 2 million LCD TVs were shipped in the first quarter alone.

This compares to 4.5 million LCD televisions shipped for all of last year.

To be clear, these represent shipments from an LCD panel maker like Samsung Electronics or Sharp, to a commercial distributor, like Best Buy or Dell.

We are also quite pleased to see a jump in the average screen size of LCD televisions from an average of 18.8 inches in 2003, to 21.6 inches in the first quarter.

Consumers increased preference for notebook computers also fueled demand for LCD glass in the first quarter.

Notebook penetration of PC market reached 27% in the first quarter compared to 25% in the fourth quarter.

During the first quarter, we continued to ramp up capacity of next generation glass to meet ongoing demand from our customers.

In the first quarter, 50% of Corning family volume was GEN 5 and GEN 6 glass and we now expect this percentage to be close to 60% by the end of the year.

We continue to lead the way with GEN 5 and GEN 6 glass and are in the process of preparing GEN 7 for sampling.

In fact, Samsung Corning precision recently became the first LCD glass manufacturer in the world to light a GEN 7 glass tank and expects to ship its first production samples of GEN 7 glass by the third quarter.

Now, let's turn to the environmental segment.

Sales in the first quarter were $141 million which was a record for one quarter, and 15% higher than the fourth quarter.

Sales were driven by a combination of strong worldwide automotive production and the continued shift in mix to our premium product.

We did note in the first quarter that inventory levels for some of the domestic auto manufacturers had risen in comparison to the fourth quarter.

But it is our belief that their second quarter production schedule will remain unchanged and the inventories will be corrected through incentives.

However, this is an important driver for our business, and it is something that we will keep an eye on.

Looking at the full year, we still anticipate worldwide auto production to grow around 3%, led by Japan, South Korea and China.

This is a region of the world that will make up almost 30% of all autos produced worldwide.

Now before I leave the discussion on environmental, you should also know we are pleased to note that the manufacturing upsets we experienced in this segment during the fourth quarter have been mostly resolved by our plant engineering personnel, and as a result, there was solid improvement in gross margin during the quarter.

Moving on to our life science segment, revenues in the first quarter were $79 million, a 20% sequential increase over the fourth quarter.

This substantial improvement was due to strong volume.

Although it is important to note we are comparing these are results to a historically seasonally weak fourth quarter.

Nevertheless, the $79 million in first quarter revenues was a record for life sciences.

Now before I move on to the results of the telecommunications, I would like to take a moment to close the loop on the matter we disclosed a few months regarding discussions with the SEC on the treatment of this segment.

As you may recall, we disclosed that the SEC and Corning were in discussions about the classification of our businesses for segment reporting.

One of the topics in those discussions was the treatment of telecommunications as one segment.

As I mentioned at the time, if the telecommunications segment were to be broken out further, there was a risk that a portion of our current goodwill balance would have to be written off.

I'm very pleased to report we've concluded our discussions with the SEC on the matter and will continue to report one telecommunications segment.

Therefore, we do not have to write off a portion of our goodwill, as a result of the change in operating segments.

That being said, the SEC has the right to revisit any issue at any time.

So this could come up again in the future.

In addition, we will be performing our annual review of the goodwill balance in the fourth quarter.

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

Sales in telecommunications segment were $312 million in the first quarter.

Down from $357 million in the fourth quarter.

The decrease was due primarily to lower fiber volume and cable service revenues and the discontinuation of our photonic product sales which were $11 million in the fourth quarter.

Revenues from our optical fiber and cable products were $149 million in the first quarter, compared to $180 million in the fourth quarter.

Fiber volume did decline sequentially by 7%, which was slightly better than our revised guidance in early March, when we stated fiber volumes would be down 10-15% sequentially.

We're pleased to see some strength late in March as we received additional fiber orders, particularly in North America.

We did see some weakness in China in the quarter and are currently evaluating the causes.

Fiber pricing as expected was in the lower single digits.

The mix of premium fiber was consistent at less than 10%.

Now, closing out optical fiber and cable after experiencing strong cable project and service revenues in the fourth quarter, we did see them decline in the first quarter by about $10 million.

Sales of hardware and equipment products which now include the revenues of our controls and connector products, was $163 million in the first quarter, and basically flat with the fourth quarter.

Overall, the net loss to the telecommunications segment in the first quarter was $45 million, compared to a loss of $42 million in the fourth quarter.

As part of our new reporting, we're now combining other businesses, such as semiconductor and [INAUDIBLE] and report as other.

This group also includes the equity earnings from Samsung Corning Television and [INAUDIBLE].

From the first quarter, sales from these products rated $82 million compared to $75 million in the fourth quarter.

The increase was driven primarily by strong volume in semiconductor products.

Finally, equity earnings from Dow Corning were $24 million compared to $18 million in the fourth quarter, as they closed the year with a record month of revenues.

Now moving on to our balance sheet, we continue to be pleased with the progress we made reducing our overall debt levels.

For the quarter, we ended with about $2.8 billion in short and long-term debt, about the same amount we had at the beginning of the year.

However, you may recall during the quarter we repurchased 117 million of our zero coupon debentures, reducing the book value of the remaining ant amount to 168 million.

In addition, we swapped 22 million shares of common stock and $24 million in cash for exchange for 213 million and 3.5% convertible debentures due in 2008.

This reduced the outstanding book value of this issue from 665 to 452.

Lastly, we issued $400 million in 10 and 12-year bonds to raise cash and take advantage of a 50-year historical low interest rates.

This issuance allowed us to extend our maturities and access the debt market on our investment grade terms using our existing shelf registration.

Through these actions, we've improved our debt to capital ratio from 33.8% to 33.1%.

While ending the quarter with over $1.4 billion in cash and short-term investments.

We are delighted with our progress at reducing debt, yet also maintaining good cash balances.

You should expect some further debt reductions as the year progresses.

Moving to accounts receivable, DSOs for the quarter were 58 days and consistent with the fourth quarter.

You may have noticed our accounts receivable and inventory balances were up slightly in the first quarter, but given the 13% sequential increase in overall sales we view these movements as normal.

Also March was a much stronger month.

Regarding our cash flow for the first quarter, the major cash outflow was for capital expenditures in the amount of $134 million.

Our major cash inflow during the quarter was in the form of dividends from equity companies, in the amount of $78 million.

This amount was primarily from Samsung Corning Precision.

While we do anticipate dividends from a similar other equity companies, for your modeling purposes, we are not expecting this larger amount of dividends in the remaining quarters this year.

Now before I move on to guidance for the second quarter, I would like to spend a moment updating you on two of our legal issues.

We recently received good news on two of our ongoing legal matters.

Dow Corning and the consolidated federal securities case in the federal court in Rochester.

First regarding Dow Corning, we were quite pleased with the dismissal at the last significant appeal concerning Dow Corning's plan of reorganization.

This permitted the federal district court to establish June 1 as the effective date for the plan.

So if everything goes as expected, Dow Corning will emerge from Chapter 11 on June 1 and their claims facility will begin to pay settlement money to those with approved claims.

We were also very pleased by the April 9 ruling by the U.S. district court for the Western District of New York which dismissed the consolidated securities case against Corning arising from the telecom crash in 2001.

The court concluded the facts alleged did not make a valid claim of securities fraud and dismissed the complaint in its entirety.

It is possible to see an appeal, and if that is the case we will of course continue to vigorously defend our position.

You will find a much more updated -- detailed update of these two legal events in our upcoming 10-Q to be filed at the end of the month.

Now let's turn to the outlook.

I would like to wrap up providing you some information about the second quarter.

We're expecting revenues to be in the range of $900 to $950 million.

We expect our results to be between 7-9 cents per share before special items.

Two points I would like to make about our EPS guidance in comparison to revenue guidance.

Currently it takes about $65 million in additional revenue to move us one penny.

Of course we would love to be able to give guidance in half pennies, but I'm sure that would confuse some people.

Second we will not have the benefit of the $8 million or so one-time items equity earnings this quarter.

For modeling purposes, gross margin for the company in the second quarter should be between 34 and 35%.

SG&A should remain around 19% of sales, between $170 and $175 million.

Increases driven primarily by the impact of salary increases for employees, which went into effect in April.

As a reminder, these were the first salary increases for our employees in two years.

For you're modeling purposes, I would expect this level of SG&A to remain consistent during the remainder of the year.

In our display business, we anticipate remaining sold out in the second quarter despite adding additional capacity.

Sequential volume growth for our wholly-owned business is expected to be between 10-15% and pricing should remain stable.

Samsung Corning Precision should have sequential volume growth of between 5-10%.

For those of you wondering why the growth in our wholly-owned business would be higher than the Samsung Corning Precision in the second quarter, keep in mind that most of the growth in the LCD industry this year will take place in Taiwan.

As you may recall, the majority of the growth last year took place in Korea.

I have one more comment regarding our guidance for display.

At our annual investor meeting, we told you we expected LCD glass market volume to grow in the upper half of the forecast range, between 30-50% in 2004, and we would add capacity to maintain our share in this growing market.

Based on our second quarter guidelines and outlook for the remainder of the year, we believe our volume growth growth will now exceed 50% this year.

While we currently do not have an updated market growth data for this year, it is apparent with the industry's continued migration to larger-sized glass and our relative position in GEN 5 and GEN 6 market, there is the possibility we may grow at a faster pace than the market.

Sales for environmental life sciences in the second quarter should be consistent with the first quarter.

In optical fiber products, we expect volumes to be up, 10-15% sequentially in the second quarter, led by strong seasonal growth in North America, Europe and Japan.

We could also see some weakness in China.

We expect pricing to be down less than 5%.

For modeling purposes, we are expecting cable project service revenue to be consistent with the first quarter.

Regarding equity earnings, excluding the impact of the $8 million of one-time benefits we saw in the first quarter, we anticipate similar contributions in the second quarter from Samsung Corning Precision and Dow Corning.

And for Dow Corning, they're currently undergoing some cost reductions and will incur some restructuring charges on their books during the second quarter.

Corning's share of those charges would be approximately $10 million of flow through equity earnings.

These charges would be considered special item for our guidance purposes.

Lastly, regarding capital expenditures for 2004, at our annual investor meeting in New York, I told you we expected to spend between $600 and $650 million a this year in capital.

This amount is largely dependent on the timing and pace of the market growth and the LCD industry.

As we add capacity to meet our customers' demand and maintain our market position.

Clearly, if the market accelerates faster, which would be a good problem to have, and you will see us spend a little bit more than the $650 million this year.

With that, I'll turn it over to Ken.

Thanks, Jim.

And we're ready to take some questions now.

Thank you, sir.

We will now begin the question-and-answer session using our Q&A polling feature.

If you would like to ask a question at this time simply press star one on your telephone touch pad.

If you're operating speaker equipment, you may need to lift your handset prior to pressing star one or unmute your telephone.

To cancel your question simply press star two, and our first question comes from Daryl Armstrong with Smith Barney.

You may ask your question.

Thank you very much.

I understand that the margin, the gross margins in the semiconductor business will be down in 2Q but given the fact, that you will have fiber volumes which are moving up because of seasonality, and I would also assume that the margins within your LCD business should also improve with growth, and as you move down the manufacturing cost curve, why shouldn't gross margins actually be up on a quarter to quarter basis?

And then I have one follow-up.

Well, the primary reason, you mentioned the semiconductors, so if you take that out of the 35.5, we would have been lower.

Now the second reason, if you look at our volume growth, in the second quarter, compared to the first quarter, a significant chunk will come in telecommunications, where the margins are lower.

You're right in fiber that we do have higher incrementals, but in cabling and hardware and equipment, the incrementals are not as high but that's why we said there is a range.

It could be 35 again.

But we wanted to give you the 34 to 35.

That makes sense.

And then in terms of the fiber demand, you guys had an acceleration within March.

Could you provide some additional color there, was it coming from multiple service providers, or was it related to, you know, any particular type of application, like fiber to the home, any commentary there would be helpful?

What we experienced in March and really in the last three weeks, was the demand came primarily from North America and within North America it was primarily ILEC related, and then within the ILECs, it was primarily Verizon.

So that's about as specific as I can get on that.

As we now take a look at whether or not it is fiber to the premise or not, fiber to the premise bookings for total revenues for us in telecom is in the order of single digit millions, in the first quarter.

It is going to take a while for fiber to the premise to build up to be a significant driver of overall revenues as we work through the natural sort of start-up and penetration of a new technology, in the new segment.

Thanks.

And congratulations on the good work in the quarter.

Thank you.

Thank you, Daryl.

Thank you.

And our next question comes from John Anthony with Fulcrum Global Partners.

You may ask your with question.

Good morning, guys.

A couple of questions.

First, on the outlook for substrate growth and where you guys see yourselves. 50% volume growth would imply a pretty serious deceleration in the back half of the year given your guidance for the second quarter and the performance in the first quarter.

Is that just conservatism or is there something else underlying there?

So the reason that we're considering the market to decelerate in overall growth rate is remember that our substrates go into fabs from our customers, and for the overall demand to grow, either the amount of fab capacity has to grow, or the ramp-up has to increase within a given fab, so our guidance and thoughts about this have to do with what the overall start rate is we see on fabrication capability.

Okay.

But this is not an inventory issue.

This is, as you just said, it is more of a fabrication capability.

Yes, it is the relative capacity of our customers going in place, and also our ability to supply that relative capacity.

We don't foresee an inventory issue per se, but note in this market historically, we have periodically had what we call a crystal cycle where inventories will build up and it takes about a quarter to push those through the system.

Okay.

And then Jim, you had made a comment about inventories relative to the environmental business and the automakers taking on some volumes in anticipation of increased production.

Can you talk about that a little more and specifically are inventories at, you know, at a level that is higher than normal?

Or is it in line with seasonality?

My comment was relative to actually inventories of cars, days of cars outstanding at the car makers.

It is not an inventory backup in their production facilities of our products.

So we monitor that as -- to see whether there is any leading indicators that might be a slow down for us.

So we're not seeing any backup to us.

In fact, we remain very full in terms of demand for us for both automotive and diesel.

One other comment on inventory I would like to make just to follow-up what we're talking about with Wendell is in terms of inventories in the LCD channel, although a crystal cycle could occur at any time, we have no evidence of any inventory backup at any of the panel makers today.

Lastly on free cash flow, can you talk a little bit about your free cash flow expectations and outlook?

As I mentioned at our conference in New York, our personal goal for the year, for the management team is to get this to be positive for the year.

The biggest challenge for us is really the capital spending on LCDs.

And we obviously are going to keep up with the market growth and we're going to have to keep up with market share if we gain there, too.

So right now, I would say that the kind of range for the year looks like we could be maybe negative, 100ish, but our own goal is to see if we can claw that back to be slightly positive for the year.

Okay.

Thanks.

Thank you.

And our next question comes from Nikos Theodosopolous with UBS.

You may ask your question.

Yes, two questions.

On fiber, you mentioned in the commentary and press release that you think Japan will be up in the June quarter.

Why do you think that is going to happen?

Is it NTT, other customers, share gain, et cetera?

Because it seems to be inconsistent with historical norms.

And then the second question is on the LCD business, your core business, the profitability was improved dramatically sequentially.

However, part of that was due to lower R&D.

It looks like the gross margin had a material uptick and maybe even approaching the gross margin of the Samsung JV.

Can you talk about the sustainability of the gross margin uptick?

And can you -- can it reach the margin of the JV?

Thank you.

This is Jim.

I will take the latter question first.

On LCDs,, gross margins for our consolidated business did improve.

And we expect them to continue to improve as we go through the year.

Obviously, our goal would be to get them closer to Samsung Corning Precision.

As a reminder though that that is partially mixed influence because they are very much more oriented toward to the upper generations and remember we're still running all of our GEN 1 through GEN 4 lines but we expect to continue to mark that up as we go quarter by quarter.

But we still have a ways to go to match Samsung Corning Precision: Wendell, Japan?

On Japan, you're right to make the observation that this is -- would deviate from historical norm, which would tend to have quarter two not be significant growth from quarter one.

What's in our thinking here is really from our discussions with NTT, that quarter one was abnormally low.

I would say that Japan is not a market that we have a strong history of being able to forecast accurately quarter to quarter movements, and I know that's based on our dialogue with NTT he we will have to see as the quarter goes goes how the take-up moves, Nikos.

How did Japan do in your March quarter sequentially?

Obviously it fell.

Did it fall to levels that suggest that they bought it bare bones and that's part of your thought process there?

It fell very significantly Nickos, and that is what is at the core of the thoughts, is that they have -- it was so abnormally low, and that they've taken down their overall purchase levels so significantly in the quarter that as they begin a new year, that we will see some uptick and a change of behavior.

Once again, based on our discussions with NTT, and we'll see what happens as the quarter progresses.

Okay.

Thank you.

Thank you.

And our next question comes from Steven Fox with Merrill Lynch.

You may ask your question.

Hi, good morning.

Jim, I was wondering if we could revisit the display profits again just from the standpoint if I'm doing my math right it looks like sales like you said went up $31 million from the last quarter and EBIT went up about $42 million.

So that implies over 100% incremental margin.

Is there any way to break down that $42 million to understand how that change came about?

The $42 million in what, Steve?

In EBIT, it looks like you did $58 million in EBIT if I added back pretax plus interest and taxes, and then pretax of $90 million of EBIT in the Q1 number.

I would just characterize it as we had very strong volume growth, our gross margin moved up substantially.

We leveraged with not much growth to really change in SG&A, and R&D.

So all of that fell through to operating margin from the gross margin perspective.

So basically, you saw the volume, there was -- the price was fine and we continued to improve our performance.

Remember, the performance comes from improving our own yields and selections, as well as the fact that we do better on the larger generations that we're shipping more, so basically you saw all the gross margin fall through to EBIT.

Okay.

Great.

And is there any way to say how much the mix helped the profits, like in terms of dollars?

Is there any way to disaggregate that?

There is but we are not going to get to quite that level of detail to explain it.

Or quite that far in transparency.

Okay.

Fair enough.

Thanks.

Thank you.

And our next question comes from Steve Setis with Goldman Sachs.

May ask your question.

Thanks, good morning.

I guess two questions, one on the fiber side, I think in the not too distant past you had talked about fiber and your telecom expectations for the full year being kind of roughly flat with volume increases being roughly offset by price increases.

I was just wondering if you still view that for full year.

And then second, on equity holdings, I think if you exclude Samsung Corning Precision glass and Dow Corning Precision glass, the leftover portion of equity income was up north of 30%, if my numbers were correct, so I was wondering if is that CRTs, CORNITECH, or what is in there?

First, with telecom, yes, we still believe that we will experience relatively stable performance in telecom, with the primary amount of increase year over year arising from our exit of the photonics business.

As we look ahead, as we said at the beginning of the year, we didn't anticipate a significant recovery in 2004.

That the earliest point, we could see a recovery, would be next year.

We would like to see, as the year proceeds, some clearer signs of that recovery coming in 2005.

So far, with the exception of the fiber to the premise work we see being done at Verizon, particularly, we haven't seen those signs.

But we will keep you posted as the year goes.

So on equity earnings, you know, the majority really was Samsung Corning Precision and Dow Corning.

In the rest of the items, there were two things to look at.

One was I mentioned that we had gotten a tax benefit.

Part of that tax benefit was in Samsung Corning Precision, but the other was in the photonics venture that won't continue.

So don't plan on that as being meaningful.

Samsung Corning Precision did increase a little bit in the first quarter versus the fourth quarter.

Thank you.

Excuse me, Samsung Corning Television.

Thank you.

Thank you.

And our next question comes from Raj Srikanth with Deutsche Bank.

You may ask your question.

Thank you.

Wendell, can you go over sort of the same fiber dynamics in terms of what is happening in China with regard to demand and pricing as well as what is happening there?

And then second question, for Jim, is what are the implications to Corning with Dow Corning emerging from bankruptcy and how does that sort of affect you in terms of overall?

Thank you.

With regards to China, in the first quarter, China was down sequentially for us, and we're looking into the reasons why.

And we will report back at the next conference call.

Pricing in the Chinese market is a little more vibrant competition, that pricing levels in China continued to fall as a total market, a little more than the relative amount of price moderation we saw in other regions.

On Dow Corning, so what will happen is the emergence will come hopefully as planned on June 1.

We are obviously already recording equity earnings and you should see that continuing as they have been.

There will probably be some one-time entries they will make that -- relative to the bankruptcy as they tune up the final numbers on what was accrued for the settlement, was accrued for paying commercial creditors, et cetera, that really won't flow through our ongoing equity earnings.

And then we will go forward and Dow Corning is having a very strong year, and we should plan to see good equity earnings this year.

We do not expect to see any dividends this year.

I think the first year, you know, they got to be sure that their settlement facility is working well, but we have hopes that they will be a dividend-paying company in the future.

So we're quite encouraged and we think it remains a great company and great asset for us.

Does this also mean that once they emerge out of bankruptcy, I think you have $150 million contingent liability, does that sort of go away?

No, the $150 million, we have one and Dow chemical has, that was part of the settlement, and really what that was put in place for, it really was like a backup line of credit, it stays in place in five years an then phases down over the next five, and what it is really based on is Dow Corning has to make payments from time to time into the settlement facility.

If for some reason they had a cash shortage in any given year, they would have the right to call on the two parents for that, but you know, based on the cash generating capability of this company, we don't see that as being likely.

But it does not go away as part of -- it is really part of the court bankruptcy settlement.

Thank you.

Thank you.

And our next question comes from John Roberts with Buckingham Research.

You may ask your question.

Good morning.

Thanks, Jim for the STUBIN breakout.

[ Laughter ] You're welcome, John and would you buy a few more pieces, please?

Since Dow Corning actually hasn't reported yet, is there anything beyond just the robust economy that is picking their numbers up so strongly?

They had a very strong March.

I think that they are seeing very good geographic improvement in Asia.

And beyond that, I think you have to wait for their call -- their release in a few days from now.

Secondly, since the hardware and equipment business is now larger than fiber and cable, every year at OFC, you give a break down of fiber and cable by region, by application.

My sense is the hardware equipment business wouldn't follow that same profile?

I don't know if you can give any color commentary on the mix of end markets and regions for hardware and equipment.

So for hardware and equipment, what we would anticipate is that business continues to grow larger, driven primarily by, as you move closer to customers, the need for connection and protection type equipment goes up, relative to the strands of fiber.

Because the more you leave the trunking systems, the fiber counts go down, while the need to connect goes up.

You're right in that the regional distribution of our hardware and equipment business is different than our fiber and cable business.

We are historically much stronger in North America due to certain differences in the architecture and also where our roots were in that business.

We are planning to grow in Europe, in this coming year, to bring -- to pick up the relative contribution of that, and we're still very small in Asia in that business.

So if you would like, we can provide a little more color on that going forward.

But the sort of short version is it is very North American-dominated for us.

Hopefully, we're going to grow more significantly in Europe.

And Asia we're still in the early stages.

And lastly, Jim, just back on disclosure again, I don't know that you've ever told us how much depreciation you're eating on the Concord plant that is idle right now.

As time goes on here, do you at some point, get a chance to at least extend the life of that plant since it has been idle for a while and lower the depreciation hit you're taking there?

We've never disclosed it.

We have never considered doing that.

I guess it could be an opportunity.

But generally, we have never done that within our accounting provisions.

Thank you.

Thank you.

And our next question comes from John Harmon with Needham & Company.

You may ask your question.

Hello, good morning.

At your investor meeting in February, you said one of your goals for the year was to stabilize the financial performance of the telecom business.

And you know, looking at this past quarter, it essentially neutralized half the profits from your stronger businesses.

I was wondering if the first quarter performance represents the stability you were seeking, and secondly, given the anticipated recovery in '05, does that start January 1 '05?

Has anything changed regarding the time line?

And what steps could you take to improve its profitability if this recovery doesn't materialize?

Thank you.

I would say that we're not looking for any material shifts quarter by quarter within telecom as the year unfolds.

Clearly, the second and third quarter have -- are usually slightly higher revenues because there is seasonality in here, and that should affect the profitability a little.

But I don't think it would be, you know, material to the overall corporation.

In terms of improvement in '05, we haven't gotten to the stage of doing '05 by quarter, but we've hopeful as we exit this year that we will be seeing some momentum on the various things that we think that would begin to lead us to a sustained growth every quarter.

Remember, we're not looking for sudden pop-ups in '05.

But what we're looking for, sustained growth in '05.

But we haven't gotten to the stage of picking quarters at this point in time.

Okay.

One follow-up if I may.

I mean I would assume that the hardware and equipment business is profitable.

So that '05 recovery would be dependent upon a recovery in the fiber and fiber demand, is that correct?

Well, yes and no.

So clearly, hardware and equipment is profitable.

We are looking for a rebound in fiber and cable.

But we are also looking for hardware and equipment to grow more, particularly as fiber to the premise gains momentum as Wendell was talking about earlier, because remember, that is a large component of the fiber to the premise build.

So the advantage for us there is that business is already profitable.

Okay.

Would you take additional steps if this recovery does not emerge.

Is it conceivable to reduce fiber capacity even more?

Well, I don't really want to speculate about why what we would do additionally because we really believe it is going to happen.

We are only operating one plant as an earlier questioner asked, we still are depreciating Concord, so I guess that is the only, you know, item that I would say would even be on the table.

But frankly, we believe that we will see the recovery, and we have been seeing exactly as we predicted, stability in '03 and '04, we draw straight lines through the volumes, although there is a little soft quarter to quarter, the back half of '02, '03, and heading into '04 look flat to us, and that's what we expected.

So we believe we are on track with what we've been forecasting, and are still very hopeful of a recovery beginning in '05.

All right.

Thank you very much.

Thank you.

And our next question comes from Arenda Munsen with Morgan Stanley.

You may ask your question.

Hi, ask you hear me?

Just barely.

Can you speak up a little?

Yes.

Jim, you spoke about volumes in environmental, but from the margin perspective, now that the Corwin facility is up and running and startup costs have already been incurred, do you think margin expansion is going to continue in spite of the continuing high auto inventories?

I don't think that you will see significant change in margins as we go through the year.

But it should gradually improve.

But, you know, you shouldn't be looking for a sudden kind of changing in our gross margin there, but we did have a very nice rebound from the fourth quarter to first quarter and we should see gradual improvements as we go through the course of the year.

As a reminder, we haven't brought on all the depreciation at the diesel factory because there is still capital spending this year, as we add some more, and we are basically full in our environmental business, which is growing, so we do have capital spending to come.

But margins are -- gross margins are back in the 40s, and you should see a little bit of lift as we go through the year.

And then on the telecom equipment business, can you talk a little bit about product mix, I was trying to get a sense of the private network contribution, versus other types of customers, relative to last quarter's trends.

We tend not to break out for you.

But we don't break out for you the various segments within hardware and equipment.

The insight that I would give you is that in terms of revenue, the larger revenue is in the public markets.

However, in terms of profitability, we experience higher profitability in the private or enterprise market.

Thank you.

Thank you.

And our next question comes from Steve Koffler with Wachovia.

You may ask your question.

Hi there.

A couple of questions on fiber, then a quick currency question for Jim.

Wendell, who is your main competitor in China for fiber?

And for -- exploring the seasonality and also the applications a little more, since you've called out Verizon, you're stating pretty clearly that this is not fiber to the premise driven.

The growth we're going to see in Q2 and the strength you saw at the end of Q1.

So what is your sense as you look -- even just that the one important customer?

What do they really buy it for, what's the applications, you see going on?

And then on the currency -- the dollar yen relationship, Jim, can you please just go through the major -- the revenue items denominated in yen, and what they're -- confirm that most of their costs are denominated in dollars, and how are you hedged if at all?

Starting with the telecom questions, in China, almost every one of our competitors in the world participates in China.

We would have the number one position right now.

Probably in the number two position would be YOSC.

But all the Japanese eight players are there as well, as are some of the second tier players from Korea and the like.

So it is a pretty full set of players that we compete against in China.

With regards to the -- where is the volume going, in the ILECs, I can't speak to particular customer, where it is going in their architecture, so let me just step back to the segment of the ILECs, we're seeing the demand be primarily driven by what we would call metro edge, and improving penetration in the access network.

And we see that sort of across the base.

And as -- as fiber to the premise begins to build, if indeed it becomes successful and a wide scale program, then that will become a very significant revenue driver for us.

As we said at the beginning of the year, at our analyst conference, that the revenue opportunity per home pass for us is somewhere in the area of 80 to $200 per home pass.

So depending on whether they're connected or not, and depending on the relative mix of our products and the quality of our innovations.

So it will be a significant revenue driver, if indeed it happens, it is just that in the very beginning of these things, those numbers tend to be small.

And as the number of homes pass grow, so will our revenue.

So on currency, I will point you back to what we said in the analyst conference.

Every five points in yen tend to move the sales about $30 million and the profits in the 20-ish.

The euro, five points tend to move us I think about $15 million sales and really don't change our profitability very much because most of our European business is telecom which isn't profitable.

In terms of how we hedge, let me deal most importantly with display.

Most of our manufacturing is being based overseas.

We have a large capacity in Japan, obviously Korea, with the Korean customers, and then in Taiwan.

What we by and large see is that business is yen dominated in revenue.

Obviously, recent tally has about been some push from customers to switch to dollars.

We have not done that.

But we pretty much have if you will a natural hedge on manufacturing there.

There can be momentary dislocations between the Taiwanese dollar and the yen, and momentarily with the yuan.

But by and large those currencies stay pretty well connected.

We do have some U.S. manufacturing in LCD, and we do hedge the transaction of shipping that glass to be finished in Japan.

But that's increasingly becoming a smaller amount.

We don't really do any hedging in environmental, we have factories in South Africa, Germany, China and the U.S., we don't do that much shipping of environmental products around the world.

Thank you.

Thank you.

And our next question comes from Mark Billy with Banc of America.

You ma I ask your question.

Good morning, guys.

One question on LCD.

Talking about the fact that your sampling GEN 7 glass to customers, are they actually using that glass and fabricating, you know, panels?

Or when will their, full scale GEN 7 plants come on stream.

We expect to go into commercial production of GEN 7 towards the end of this year.

Secondly, I was a little surprised to see now for the first time you disclosed margins in environmental, less than 10%, and [INAUDIBLE] -- their numbers run around 16%.

I know it is not directly comparable, but I expected to see higher margins in that business given your asset market share position, excellent mix, and excellent technology.

So what you got to look at there is we have a very high allocation of development expenses right now in diesel, and we've got the start-up to all the new factory there, and but I think as we move through this period of time, you will get back to seeing margins in this business that are much more typical or greater than what you're talking about.

And as a reminder what you see there is also allocations of some corporate expenses that we have against that business.

So would mid teen margins at the op income level Jim, be appropriate there?

I think that you can think about our gross margins being in the 40s today.

And you can look at what the allocations would be.

But we don't give out operating margin for that business specifically.

Okay.

And then lastly, talking about the financial structure of the company, as those converts come in, are they -- are you purchasing those and retiring them?

Are you converting to equity?

Help us with the share count going forward.

On the guidance we gave on share count on average for the year, was 1.45 billion.

The 2008, you know, you should be counting on we will get converted I believe, unless there is a very sudden change in our share price, which we certainly don't expect, no later than I think the end of the year.

But we said right now to use the 1.45.

As a reminder, what drives the share count, there are some converts that move at different price points and depending, it is that GAAP earnings that drive which ones of the converts get put in, but you should use 1.45 for now for the year on average.

But we will keep you updated as we go through the year.

It was less than that in the first quarter, so to average 1.45, does that mean it will be higher than that toward the end of the year?

It could be.

We could see some more conversions.

And as a reminder, we do have employees exercising some options.

Thanks, Jim.

Dalan, this is Ken.

We have time for one more question.

Thank you, sir.

And our last question women come from Agin Tay with Thomas Weisel Partners.

You may ask your question.

Yes, good morning.

I was wondering if you could talk about the news article that went out in the Asian media about two weeks ago about a disruption in your LCD glass facility?

I wanted to check, in Asia, wanted to check what the costs associated with something like that are and whether indeed that might impact your earnings this quarter in the display business?

There was a -- some power issues in Taiwan that did slightly impact our capacity, though it is a -- it was a relatively trivial effect.

Okay.

And the second question is in the fiber business, you know, globally, between the second quarter and the third quarter, would you expect, you know, the overall revenues to be stable?

Or would you expect them to be able to tick up?

We would expect the third quarter, because it is seasonally the strongest quarter generally for telecom, to drive revenue improvement.

Okay.

Thank you so much.

Jim, have you some closing comments?

I do, Ken.

Thank you.

First, we are obviously very pleased with the results for the first quarter.

And we hope you were as well.

We are equally excited about our revenue growth opportunities in the second quarter.

And the chance to continue the momentum that we built over the last several quarters.

Now, before I go, I have a few other announcements.

Our annual shareholder meeting is next Thursday at 11:00 a.m. here in Corning.

All investors are welcome.

I know we're not the easiest location to get to, but those of you who cannot make it are interested in listening to the meeting, you can visit our Web site for an audio cast.

In addition, we continue to have a very proactive program in place to meet with our investors.

So I would like to fill you in on some upcoming events we will be attending.

On May 4, Wendell and I will be presenting at the J.P.

Morgan technology conference in San Francisco.

The following week on May 11, Pete and I will be meeting with investors at the Merrill Lynch technology conference outside Atlanta.

And lastly, during the week of May 17, Wendell and I will be meeting with investors in Denver and Minneapolis.

You can find the specifics behind each of these events on our Investor Relations website at Corning.

We hope you have a chance to meet with as many of you as possible at these events so we can answer your questions and hear your concerns firsthand.

Thank you very much.

Ken?

Thanks, Jim and thank you, everyone, for joining us this morning.

Play back of the call will be available begin at 10:30 a.m. eastern time today and run to 5:00 p.m. eastern time on Friday, May 7.

To listen dial 402-998-0521.

No pass word is required.

The audio cast is also available on our website during that time period.

That concludes our call.

Please disconnect all lines.

Thank you, sir.

We would like to thank everyone for joining today's conference call and please have a wonderful day.