康寧 (GLW) 2004 Q2 法說會逐字稿

Good morning and welcome to the second quarter conference call.

All lines will in a listen-only mode until the question-and-answer session.

At that time, you may press star, one if you have a question.

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

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

Sir, you may begin.

Thank you, Rosie.

Good morning.

Welcome to Corning's second quarter conference call.

This is call is also being audio cast on our website.

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

Wendel Weeks, President and Chief Operating Officer will join for the Q and A.

Before I turn the call over to Jim, I should mention that except for the published results, and [INAUDIBLE] comparison, today's remarks constitute forward-looking statements within the meeting of the Private Securities Litigation Reform Act of 1995.

These statements involve a number of risks, uncertainties and other facts 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 second quarter and we were obviously very pleased.

Sales for the second quarter were 971 million, an increase of 127 million, or 15% over the first quarter and higher than our expectations.

This is the sixth consecutive quarter of sequential revenue growth for us and the highest level of revenues since the fourth quarter of 2001.

Second quarter revenues were driven primarily by stronger than expected demand in our telecommunications segment, as well as continued growth in our display segment.

You should also know that the impact of foreign exchange rates in the second quarter on sales and MPAT was negligible.

Earnings per share, excluding special items were 11 cents and much higher than our expectations.

As a reminder, this is a non-GAAP measure.

You'll find a reconciliation to our GAAP EPS on our investor relations website.

The increase in earnings this quarter was a result of strong gross margins, lower operating expense and hire equity earnings than we anticipated.

Now, let me take a moment to speak about each of these, starting with gross margins.

Gross margins were 35.6% in the second quarter, consistent with the first quarter and slightly higher than our expectations.

In fact, it was our highest level of gross margins in three years.

SG&A in the second quarter was 166 million, slightly higher than the first quarter but lower than our expectations.

As a percentage of sales, SG&A fell from 19% in the first quarter to 17.1% in the second quarter.

RD&E in the second quarter was 85 million, consistent with the first quarter.

I'll provide more color on our expectations for operating expenses for the third quarter at the end of the call.

Equity earnings were 107 million in the second quarter and consistent with the first quarter.

You should note, however, that equity earnings in the second quarter included 21 million in restructuring and other charges at Dow Corning.

Excluding those charges, equity earnings in the second quarter were 128 million.

In addition, as I mentioned on our last call, equity earnings in the first quarter benefitted by about $8 million in one-time items.

If you exclude these items from both quarters, the sequential increase in equity earnings was very strong, particularly at Dow Corning and Samsung Corning Precision, and I'll go into more specifics about both companies in a few minutes.

We were also very pleased to achieve our first significant positive operating margin in many, many quarters.

Wrapping up the income statement, tax benefit rate for the second quarter excluding special items was 33% and consistent with the first quarter.

Net profit after tax, excluding special items was a 169 million in the second quarter, 47% improvement over the first quarter, which was 115 million.

You should note that since our negligence special items were about equal in both quarters, our net income all in doubled.

I'd like to take a moment to walk through the special items for the second quarter.

We again recorded a mark-to-market adjustment this quarter on the Corning shares to be contributed to Pittsburgh Corning's settlement.

The charge was 47 million pretax, 45 million after tax and related to the increase in Corning share price during the quarter, which rose from $11.18 to 13.06.

The pretax amount is recorded as a separate line item on our income statement.

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

The pace of Pittsburgh Corning's settlement case appears to have slowed as a result of the a longer than expected judicial briefing schedule which has been extended until November.

Therefore, the mark-to-market adjustments will likely continue through the fourth quarter.

As always, the transfer of Corning stock to the asbestos trust is predicated on the completion of this legal process, the length of which will depend on the ongoing rulings in the case, appeals and other factors.

We also recorded a gain of 25 million pretax, 8 million after tax and minority interest from the sale of manufacturing assets of cash.

As you may recall, in the third quarter of last year, we contracted to sell these assets to a conventional television manufacturer in China.

Due to contingencies, we have previously decided not to record the gain on these asset sales until the cash was received.

Have received the 25 million in quarter two.

We also made a minor adjustment to restructuring reserves recorded in prior periods.

Adjustment was a benefit of 9 million pretax, 6 million after tax and relates to severance and other exit costs that came in lower than our original estimates.

We recorded a charge of 9 million pretax and 9 after tax as a result of debt reduction program.

Lastly, as you remember from our last conference call, during the quarter Dow Corning implemented a cost reduction program which resulted in restructuring charges on their books.

In addition, they also recorded a charge to adjust the interest accruals for commercial creditors as a result of court rulings just prior to their emergence from bankruptcy on June 1st.

Earnings share of the charges was 21 million in the second quarter.

You can find a reconciliation of all the special charges our investor relations web page at corning.com.

Now let's move on to talking about the quarter.

Starting with the display, sales in this segment were 277 million in the second quarter, a 20% increase over the first quarter.

The increase reflects sequential volume gains of more than 20% in our wholly owned business, led by strong growth inTaiwan.

This represents the 11th consequtive quarter of volume growth for display.

As expected, pricing was stable and the impact changes in the end during the quarter were neglible.

Equity and earnings from Samsung Corning Precision increased 10% from 65 million in the first quarter to 71 million in the second quarter.

However, you must keep in mind in the Samsung Corning Precision's first quarter results they had a one-time $4 million tax benefit.

So the actual improvement in their operating results was closer to 16%.

This increase was driven by volume gains of more than 15% in the second quarter.

Net income in the display segment, which includes the equity earnings from Samsung Corning Precision grew 14% over the first quarter from 118 million to 135 million.

In comparison to the second quarter of last year, revenues in the display segment have grown over 100 percent, primarily due to an 80% increase in volume year over year.

Pricing has also been favorable over that time frame due to mix, as has the change in the end.

Net income including equity earnings has more than doubled in comparison to last year from 53 million in the second quarter of 2003 to 135 million this quarter.

I'd like to spend a few minutes on the M market demand trends during the second quarter and then comment on recent investor questions about industry inventories and pricing.

First, as many of you know, the second quarter is typically the weakest for the consumer electronics industry.

Despite that, we again saw a strong demand over the past three months for our primary LCD and market products, notebook computers, LCD monitors and LCD televisions.

Now please keep in mind the following data is still preliminary as industry sources are working with estimates and will not have final data for the quarter for another month.

Be clear, the data we reference relates to shipments from PC manufacturers and television set makers to retailers, such as Best Buy.

Starting with notebook computers, almost 11 million were shipped in the second quarter, consistent with the number shipped in the first quarter.

The good news here is notebooks continue to penetrate deeper into the PC market, now 27% of all PC's shipped.

Moving to LCD monitors, penetration remained steady at approximately 50% in the second quarter, which is not unexpected given the shortage of 15-inch LCD monitors and raising pricing dynamics which I'll go into in a minute.

Approximately 15 million LCD monitors were shipped in the second quarter, slightly higher than numbers shipped in the first quarter.

LCD televisions also faired well in the second quarter as an additional 2 million units were shipped.

Penetration remained at around 5% of all color televisions shipped.

I'd like to take a moment to discuss questions from investors about the oversupply of LCD panels, monitors and televisions.

As we have said many times before, it would not surprise us if during any one quarter there was a build-up of certain panel types of products in the channel.

It has happened before and infact there's some evidence it's happened again recently.

But this does not changed our longer term view of the market.

Let me explain.

LCD monitor shipments were relatively flat from the fourth quarter of '03 through the second quarter this year.

Something we've not seen since 1999.

Certainly the second quarter's low seasonality did not help.

We believe however, there is more going on.

There currently is a shortage of 15-inch panels and monitors and resulting price increases have slowed growth.

Causes of shortage appears to be a shift made earlier this year by panel manufacturers of their capacity away from 15-inch, to higher [INAUDIBLE] to 17-inch and 19-inch monitors, as well as the 15-inch notebook panels.

The good news here is there are early indications of a market adjustment, which has historically been the response when these dynamics occur.

This is all part of an industry trying to find a natural balance between pricing demands [INAUDIBLE].

We are now seeing price declines in the 17-inch monitors, which will begin o to spur demand and help reduce inventory levels.

In addition, some panel makers are shifting production away from 17-inch monitors and back to 15-inch monitors.

This will obviously help balance the number of larger monitors and supply chain and increase the availability of 15 inch monitors, which in turn should help lower prices.

So in summary, we believe overall monitor prices are on their way down as we head into the traditionally stronger quarter for consumer electronics.

Moving to LCD television, from our conversations with industry participants, consumer demand to date for LCD televisions has not met somewhat hefty combined expectations of panel makers.

However, the demand is on track to meet the growth projections set by industry analysts, and in jt fact, our own forecasts.

As we are seeing today, increasing production of LCD-TV panels and sets, combined with retail price reductions, will help spur demand as we head into the seasonally strong quarter.

In summary, we've seen those inventory and pricing trends happen before in this industry.

First with notebook computers, then with LCD monitors and now with LCD televisions.

And it will likely occur again.

In the end, however, we're more focused on the longer trend of and the acceptance of LCD products in the marketplace.

And what we believe are temporary supply and balances that can occur within a quarter and sales channel.

Now, as I say all this, please keep in mind that we want you as our investors to continue to be diligent in our own research in keeping up with recent news in the LCD industry.

We'll do our best to update you on changes in our views and forecasts.

Moving to the environmental segment, sales in the second quarter were 141 million and consistent with record revenues achieved in the first quarter.

I'd like to take a moment to update you on the latest auto productions trends we're seeing in the industry.

On the last call, Wendell and I told you that the [INAUDIBLE] auto and inventories at the end of the first quarter were higher than their historical average and that we could keep an eye on this trend and update you accordingly.

Fortunately for investors, the industry publishes the number of autos produced and sold each quarter, so you can actually form your own opinions.

But for those of you who did not see the reports for April and May, auto sales were fairly strong.

However, in June, the industry experienced the weakest domestic auto sales month in years, which again pushed inventory levels higher than their historical averages.

Once again, the auto makers have said they'll use financial incentives to spur demand and lower inventory.

We'll have to wait and see.

The good news here is that NAFTA is on track to produce 16 million autos this year, which is slightly higher than last year.

In addition, worldwide auto production is on track to grow from 58 million autos to 60 million this year, due in part to continued growth in China and other developing countries.

As you know, our environmental business is a global one with manufacturing locations in the United States, Europe, China and South Africa.

As a result, we believe our business will continue to benefit from these positive growth trends in the worldwide auto industry.

Now turning to life sciences, revenues in the life science segment second quarter were 79 million, consistent with the first quarter, which like our environmental segment was also a record.

Demand was strong in the second quarter for both our laboratory and drug discovery product lines due to demand in the academic field as well as strong research spending in pharmaceutical and biotech markets.

Now moving to the telecommunications segment.

Sales in the second quarter were 392 million, a 26% improvement over the first quarter sales, which were 311 million.

Revenues from optical fiber and cable products were 192 million in the second quarter, an increase of 29% over the first quarter revenues, which were 149 million.

This improvement in second quarter revenues was primarily due to higher than expected fiber volume, which increased over a 30% sequentialy.

The increase in fiber demand was a result of stronger than expected seasonal orders in North America and Europe.

Sequential demand from Japan and China was also higher than the second quarter.

Now one note regarding our fiber sales to customers in Japan and China.

Wendell and I told you on the last conference call we'd update you on the conditions of these two markets on our next call.

In Japan, we believe the increased demand we saw in the second quarter was a result of the market strengthening.

Although at a much smaller base from the levels of last year.

With regards to China, let me update you on the ongoing fiber import issue with the Ministry of Commerce, which is also known as the MOC.

Over the past week, a verification team from MOC has visited with us in the United States and in Hong Kong to continue discussions on the 16% preliminary dumping margin they recently imposed on certain fiber imports into China.

Our position on this matter has not changed despite the preliminary determination.

We do not believe that we dumped optical fiber or caused injury to Chinese fiber producers.

We'll continue to cooperate and work with the MOC toward a resolution.

For now, certain fiber imports from Corning will be subject to this duty, which our customers must pay upfront.

As a reminder, the duty does not apply to the fiber that is manufactured by Corning at our Shanghai China plant.

We began to see the effects of this ruling in our second quarter results.

We noticed slowdown in demand in late June from our Chinese customers subsequent to the MOC's ruling.

And while we did experience an overall increase in fiber volume in China during the second quarter, this increase was more the result of higher shipments from our Shanghai plant than an increase in imported fiber from the United States.

I'll talk more about our outlook for both Japan and China towards the end of the call.

Fiber prices declined as expected, in the lower single digits.

In fact, the cumulative price decline over the last four quarters is now less than 10%, a mix of premium fiber remained less than 10%.

Now, turning it our hardware and equipment products, sales were 200 million in the second quarter, an increase of 23% over the first quarter sales of 162 million.

The increase was primarily due to strong demand in North America and Europe.

In North America, the growth was due in part to demand from Verizon for their fiber the premises build-out.

This was not surprising and is consistent with the guidance we previously provided about our fiber to the premise revenue opportunity.

Specifically, a much larger portion of our overall revenue opportunity will be in our hardware and equipment product line due to the high connectivity required in the fiber to the premises architecture.

Growth in the second quarter is evidence of that belief.

I'd like to make one other comment regarding SBC's recent broadband access plans.

We are clearly pleased with their decision to bring fiber closer to their customers.

Of course, we're hopeful that some day in the future fiber will reach all the way to their subscribers.

This announcement was not a surprise.

SBC had stated many times they would invest if here was a beneficial change in the new deregulations governing our box .

SBC stated in their announcement that we would use fiber in all green field and select aerial builds.

For overbuilds, they will bring fiber much, much closer to the home than they have in their current architecture.

Specifically, they will bring fiber in from a distance of 12,000 feet to only 5,000 feet.

While this is not as deep as Verizon's fiber to premise build-out, it is nonetheless a significant step by another one of the R box to bring fiber closer to their customers.

We're still working through the specific revenue opportunity for Corning and will update you as soon as we have some data.

Now moving on to our recent announcement regarding the sale of frequency control business, the sales should be completed in the third quarter result of a one-time charge of 25 million, which includes an amount related to goodwill write off.

The remodeling purposes, the business is generating about 20 million in sales per quarter and operating at a slight profit.

You should adjust your hardware and equipment sales estimates for the third quarter appropriately.

Regarding the sale itself, while we're clearly pleased with the performance of this buisness, it was simply not a strategic fit.

Overall, the net loss from the telecommunications segment in the second quarter was 21 million.

Less than half the loss incurred in the first quarter.

Regarding our other reportable businesses, which includes semiconductor and [INAUDIBLE] revenues in the second quarter were 82 million, consistent with the first quarter.

Finally, equity earnings from Dow Corning were 37 million in the second quarter, compared to 24 million in the first quarter.

As I mentioned earlier, these equity earnings in the second quarter exclude approximately 21 million in restructuring and other charges.

Now let me turn to our balance sheet.

We ended the second quarter with approximately 1.6 billion in cash and short term investments.

Our accounts receivable balance grew slightly from 544 million in the first quarter to 566 million in the second.

It was not unexpected given the sequential increase in revenues.

We were pleased to see our DSO's actually drop five days from 58 days in the first quarter to 53 in the second quarter.

Inventory was even in the second quarter, 504 million compared to 501 million.

Inventory returns improved from 4.5 in the first quarter to 5 in the second quarter.

In addition, our average days in inventory in stock fell by 10%.

Regarding our cash flow, we are obviously very pleased to be able to generate approximately 120 million in cash this quarter.

This is primarily the result of strong cash generated from operating activities, including dividends from our equity companies in the amount of 44 million.

We continue to execute our plan to lower debt levels.

During the quarter reduced debt by approximately 100 million.

We expect debt to fall by another 100 million in the third quarter as investors are holding a portable bond due in 2024 have now elected to redeem the security in the third quarter.

Given the rise in interest rates, we had anticipated this action and it was included in our forecast.

Lastly, you should also note we made a $20 million voluntary payment to our pension plan in the second quarter.

Now, I'd like to turn to the outlook and wrap up by providing information about the third quarter.

Expecting revenues in the range of 950 to $1 billion.

Expect our results to be between 10 and 12 cents per share before special items.

In the display business, we anticipate remaining sold out during the third quarter, despite adding some additional capacity.

Sequential volume growth for our wholly owned business should be around 10% and pricing remain stable.

Unfortunately, our growth will be constrained in the quarter by the amount of capacity we'll be able to ramp up.

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

Now in our telecommunications segment, we expect volume declines for optical fiber products between 10 and 15% sequentially.

This weakness in the quarter will most likely result from China where we're anticipating a drop in volume, resulting from the preliminary China Anti-Dumping Ruling.

As a reminder from our press release in June, if we lost all the imported fiber volume to China in the back half of 2004, the impact would only be one cent per share.

We anticipate that demand will continue to be seasonly strong for fiber in North America and Europe.

We're also expecting stable demand from Japan in the third quarter.

We expect fiber pricing to be down less than 5% in quarter three.

In hardware and equipment, we're again expecting consistent sales in line with the second quarter, driven by the strong demand in North America.

As a result of Verizon's fiber to the premise build-out as well as continued demand in Europe.

For your modeling purposes, gross margin for the company should be between 36 and 37% in the third quarter.

SG&A may rise slightly in the third quarter due to growth in our display business and related head count.

For modeling purposes, I'd assume SG&A between 17 and 18% of the sales in the third quarter.

We anticipate equity earnings in the third quarter to be consist ten with the second quarter.

Biggest driver here will be Dow Corning which may decide to perform some annual manufacturing maintenance on a major facility during the third quarter, which of course could impact our results.

Forecasting Dow Corning equity earnings to be in the range of 25 to 30 million in the third quarter.

Due to the increase in earned net income, it's impact on our rated share calculation, you should use 1.5 billion shares in you models.

Now, regarding capital expenditures for 2004, as we announced in our press release yesterday afternoon, we are updating our capital expenditure forecast for the year to a range of 950 to 1billion.

This is an increase over our previous guidance of 650 to 700 million, relates solely to our spending in the display business.

The increase in our range is a result of expected acceleration in the timing of expansions in Taiwan and faster than expected timing of payments to contractors and vendors in Taiwan.

Clearly we're experiencing much higher demand than we expected at the beginning of the year.

Our volume was 75% higher in the first half of this year in comparison to the first half of last year.

Now, although this is a significant increase in capital spending in the second half of this year, we're still trying to hit our stretch goal of being breakeven on a free cash flow basis.

Obviously the sale of frequency controls will help cover a part of the capital increase.

We've made significant progress on this front during the second quarter and hopeful from the momentum we're seeing as we enter the third quarter will help.

I know some of you remain concerned about future capital transactions.

Although I can never say never, I will tell you that with 1.6 billion with cash on hand, we have no plans at this time to access the capital markets for these additional capital expenditures.

I'd also like to update you on the impact of foreign exchange rates on our results going forward.

As you know, a significant portion of our revenues are generated outside the United States, particularly Asia and Europe.

Our results are impacted when we translate the local foreign currency to dollars for U.S. reporting purposes.

The large portion of our current future growth coming from display, the impact of potential changes in the end is also increasing.

During our investor meeting in February, provided some transparancy into the impact of foreign exchange on revenues and earnings.

Now, we're through the first half of the year I thought it would be a good time to update those numbers.

Based on current exchange rates and the forecast to growth and display, plus or minus a 10 point move in the end, U.S. dollar exchange rate could result in a revenue change of approximately 120 million on an annual basis.

A similar move in the Yen would change our net income after tax by approximately 70 million.

We also have some exposure to changes in the Euro although not as much as the Yen.

A plus or minus 10 point move in the Euro to the US dollar results in a revenue change of 20 million but the impact to MPAT would be negligible.

Now, before I send it back over to Ken to begin the Q and A session, I would like to provide you with one reminder about our fourth quarter.

As you know, we provide guidance just one quarter at a time but I thought it was important to remind you that several of Corning's businesses, particularly telecommunications and life sciences, are impacted by seasonality during the last quarter of year.

You should consider these factors as you model the rest of the year.

Back to you, Ken.

Thanks Jim and Rosie and we're ready to take some questions now.

Thank you.

At this time, we are ready to begin the Q and A session.

If you would like to ask a question, please press star, one.

Once again that is star, one to ask a question.

Our first comes from Nikos Theodosopoulos of UBS.

Yes, thank you.

Hello.

NIikos?

One moment, please.

You may go ahead, sir.

Can you hear me?

Yeah, we hear you now.

I had a question on the capital spending.

Given the significant increase, can you give us an update on your market growth for LCD this year, next year in terms of the glass growth rate?

And as part of that, can you clarify if all of the increase in CapEx is going to the Taiwan plants or are there any other new plants being made and finally, on that, is there any view you can give on 2005 on capital spending?

Thank you.

There was a lot of questions there.

So first of all, on the market growth, we've said before that we expect the market to grow at least 50% this year and obviously we expect to be well north of that, as you've seen with our 75% growth through the first half of the year.

We're not prepared to give market growth numbers for next year, but we are working very closely with customers, particularly in Taiwan, about what they will need so the new fabs come on next year.

As a reminder we did say that we expected to grow faster in our wholly owned buisness this year than we did in Korea because of the new fab capacity was coming on in Taiwan or Japan for this year.

The increased capital spending this year is primarily happening in Taiwan, but there is some of it happening in Japan where we're trying to go faster at our Sizvoka factory to keep up with customer demand there also .

In Taiwan, we're trying to finish our expansion of our first factory there faster than we originally anticipated and as you know, we announced in April the location of our second factory and these numbers include the beginning equipment spending as a forecast in the back half of this year.

I'm not prepared to give capital spending for next year but it clearly will be some increase over this year.

Some increase other the '04 level?

Yes.

Okay.

All right.

Thank you.

Thank you.

Your next question comes from Stephen Fox of Merrill Lynch.

Allright, good morning.

First on the fiber, is there any chance to negate some the pressures from the dumping legislation by shifting more production to Shanghai?

Has that been considered or is that not really on the table?

Yes, there is that opportunity for us and in the in the last quarter we did see increase in demand on our Shanghai facility and our Shanghai brand that more than offset a slight decline o our exports to China.

However, for us we have the Corning brand, the Corning export brand is a very powerful brand in China and around the world and we don't want to sort of mitigate the power of that brand by replacing it with the more regional nature of our Shanghai faciltiy brand.

So over the longterm, if the preliminary dumping margins were to hold, which we would hope they don't, we would consider that but in the near term, we would stay with our current brand strategy and trust that ultimately the truth will out here and Chinese will conclude that we have not dumped nor harmed the Chinese fiber industry.

Thank you.

And then , just on the cash cycle, it ooks like it's the lowest it's probably been since I guess December 2000.

My calculations is it's 71 days.

Is there opportunities to take that number lower or is that about where it should be, you know, in the coming quarters?

Well, what we're focused on is driving the our receivables lower.

We've made a lot of progress there, particularly in the display business, the strength with our customers is allowing to get better terms and as CFO, I always think there's opportunity in our inventory area.

And I think this actually would be the highest inventory during the year in terms of the second quarter, so there's opportunity there also.

Okay.

Thank you and one last question, just to clarify, your '05 outlook for LCD volume growth, I think you've said 30 to 50%.

Is that still sort of the the formal number you're using?

Well, what we've said, Stephen is that in any given year with the LCD numbers 30 to 50%, we actually haven't given any specific guidance yet for 2005.

Obviously the trends that we're seeing and hearing about from our customers and focus on the end market, you know, we're quite hopeful for next year as we're seeing great volume this year.

Great.

Thank you very much.

Thank you.

Your next question comes from Stephen Savas with Goldman Sachs.

Thanks very much.

I just wanted to I guess t first follow up on CapEx, and your plans there for the LCD side.

I guess over the last 6, 12 months or so, it has not been unusual for you to be sold out and in fact be even perhaps a bit presold on capacity that you haven't built yet.

Do you consider that kind of the case for the plans that you have for the second half of this year for this time?

Yeah, I think that we would consider the customer commitments we have for the capacity that's going to be coming up in the back half of this year to be very well spoken for.

Again, a reminder that the capital spending in the back half of this year is probably entered for the demand for next year and we would certainly regard that based on the strength of the customer commitments that we have seen.

As I think you know we have longterm supply agreements with most of our commerce and we're working to strengthen those even more as we continue to make these capital commitments.

Okay.

And then just a quick question on pension contributions or assumptions.

Any changes there or still too early to see, are you going to do an end of year assessment?

We had said that we would put 40 million in this year, so we put 20 in the second quarter and there's another 20 that we'll either do in the third or the fourth quarter.

Beyond that, we don't plan on making any further contributions to the pension plan this year.

Okay.

Thank you.

Thank you.

Your next question comes from John Harmon of Needham & Company.

Hello, good morning.

Just a couple of quick number questions.

You said LCD-TV penetration was 5%.

Is your forecast still 16% in 2006?

We have not changed our forecast of the longterm penetration in '06.

We continue to believe that , that will come true, particularly because we think what's going to happen now is our retail prices are starting to fall on televisions, which is what must happen.

So we continue to believe in that penetration rate.

Okay.

Thank you.

Sorry if I missed this, but with Dow Corning emerging from bankruptcy, you said you could start receiving cash dividends.

Did you receive cash dividends in the second quarter?

No.

What we have said is that once it's emerged from bankruptcy, the company would be able to pay dividends.

I would not anticipate any before' 05.

And again, that will ramp up slowly at first.

We are really pleased with our emergence from bankruptcy.

The management has done a great job in maintaining a market leading position over this nine year period of time and is very profitable but, you know we're not looking to suddenly declare dividends immediately, but I'm hopeful for 2005 to begin to see something.

Thanks and really quick now that you're profitable and GAAP profitable, what tax rate should we be using for the rest of this year and next year?

33% is a good estimate for the remainder of this year and I I don't know of anything that would change it materially at this stage for next year.

Okay.

Thank you very much.

Our next question comes from Erin Nambasu of Morgan Stanley.

Hi, good morning.

Last year you had a sequentially strong September in the fiber optic business.

And this year you're saying you have North American, European strength but you're calling for a 10 to 15% volume decline.

So is China the only offset or should we assume some other issues like fallouts in Japan as well?

No, it's really China.

We're very comfortable with the rest of the world.

Okay.

And last quarter you also gave some same commentary in terms of how much fiber to the premise are revenue you garnered?

Could you give that a sense of however the premise for revenue in the second quarter, whether it's from fiber optic and/or telecom hardware and what do you any is going to be the outlook for the latter half of the year, particularly given Verizon's announcement of fiber to the premise rollouts inTexas, California and Florida?

We continue to be on track to meet or exceed the revenue opportunity that we layed fort in the beginning of the year.

Okay.

Thank you.

Thank you.

Our next question comes from Penny Vale of Credit France.

High, how are you?

I have a very quick question.

What was the volume and the revenue increase at Samsung Corning Precision?

They had a 15%, you want to go quarter one versus quarter two?

Yeah.

Their volume growth was around 15 to 18% and the revenue growth was very similar.

Thank you.

Thank you.

Our next question comes from John Roberts of Buckingham.

Thanks.

I guess had you to look quick last quarter to get Steuben, as they're easy come, easy go.

We failed to break that out for you, John?

Yeah, that's okay.

I can model you with without that.

And then Jim can you talk about what kind of productivity you're seeing in the installed basis capacity for the AMA ?

Are we talking about just new capacity for growth or are you able to go back and re-tool to increase the capacity in the installed base?

We are able to increase the productivity of our assets that have been installed through improvements that we make in yields, etc., however, the biggest pickup we get in productivity is as we adopt newer generations of manufacturing technology and that's really what's been the combination of the two what's been behind sort of two-thirds increase in our asset productivity over the last year or two.

Okay.

And Jim, are you still on track for a decision at year-end on whether to write down Concord?

We're on track for the fourth quarter to do our assessment of impairment on both Goodwill and assets, which we're required to do under GAAP and so that would apply to all the assets in the telecom business, including Concord as well as the Goodwill.

As you know, we have to do that formally once a year unless there's an event of impairment and we do that in the fourth quarter of the year and we'll give you an update at that point of time.

We'll definately have to review it.

The China situation enough to be sort of a tipping event for that?

Do we need that by year-end, maybe have some resolution with them on the Chinese issue?

The loss of China volume if that were to occur, is not by itself big enough to be an event of impairment.

It obviously would play into our longer-term outlook, but by itself it doesn't require us to suddenly deal with impairment now.

Thank you.

And I'd just like to comment, sales have been over 5 million so obviously we'd like a little more purchases from you.

Thanks.

Thank you.

Our next question comes from Agin Tay of Thomas Weisele Partners.

Good morning, gentlemen.

Good morning.

A couple of quick questions.

The first is about your deferred income tax assets.

On the balance sheet it continues to rise rather than go down.

I'm wondering at what point will you actually start seeing that to start to decline and you know, generate some cash flows from that?

So the deferred tax asset , you should see some benefit from that as the company overall becomes more profitable, particularly in the U.S.

Most of our deferred tax asset in the U.S.

There is some in Germany that we have and we make most of our money offshore right now, but as the telecom business continues to recover as we receive more royalty income in the United States from the LCD business, we should see a swing there and begin to get some cash benefit from that going forward.

So you think you would be able to use those tax deficit tax assets that have you in your balance sheet within the next four years for modeling purposes, cash flow?

I would say that if LCD business and our telecom business do what we expect to do, we would see some benefit from that over this period of time.

I would urge you to walk through our disclosure, particularly the one in the 10-K, where we outline very specifically, you know, our support of the DTA and why we feel it's a good asset and how we feel we utilize it.

Okay, and the second question is about the previous assesment of technologies that you reported as other advancement materials and the consolidation of [INAUDIBLE] and you're seeing a strong rebound like the end markets and the cap equipment industry?

I'm sorry, could you repeat the question?

Sure, could you provide color on that earlier sub-segment?

I think you're consolidating your facilities over there, whether that's complete, how profitable it is right now and whether it's seeing similary cyclicality as the [INAUDIBLE] equipment industry right now.

Yes, we are seeing an upswing in demand for n our product in semiconductor and we will gain benefit as we complete the year from our manufacturing consolidation.

Okay.

Thank you so much.

Thank you.

Our next question questions from Dennis Gallagher of Schwab.

Thank you.

Your hardware and equipment segment in telecom had a great uptick this quarter.

Is the seasonality going to be the same or similar to the fiber or is that what you'd expect obviously if you're expecting the fiber perhaps to be down this next quarter?

But I would expect we're in the meat of the rollouts in terms of fiber to the home and so can we expect continued improvement?

So you're correct in identifying that the primary mover in hardware and equipment is the fiber to the premise activity and the sequential down guidance we've provided for fiber, remember as said, has to do with China and specifically the preliminary determination of dumping margins by China.

So we would expect North American activity and European activity, which are the two bigger markets for hardware and equipment to continue to be strong as it was in quarter two.

Thank you.

Thank you.

Our next question comes from Darryl Armstrong of Salomon Smith Barney.

Thank you very much.

Two quick questions.

The first one, has the inter-dumping action in China caused any collateral impact on unpricing in some of the Asian markets, meaning you have people try to redirect them, the volumes they were trying to import into China into other areas and then second of all, on the LCD television side, I agree that pricing needs no come down to drive volumes there.

How much can pricing come down, however, before you see any impact if any on substrate pricing?

Thanks.

So to the first part of your question regarding fiber and thenI'll turn to the second.

It's really too early to tell whether or not there'll be any collateral impact from let's say the Japanese or Korean producers who have much higher dumping margins placed on them, trying to place their fiber in other markets.

Note, however, that competition in the fiber optic market has been very intense for quite a while here.

So t's hard to point to just the China change alone significantly increasing that rate of competitiveness, but it is still too early to tell.

With regards to entertainment TV and display, we would anticipate that the entertainment TV market prices would have to fall in excess of 20% a year to continue to drive that penetration up.

Note that that doesn't equate directly to price pressure on us in the substrate.

The key thing for us from a mix standpoint is, is it t to do entertainment TV, you need much larger glass, Gen-6 glass, Gen-55, Gen-7 and now we're working on Gen-7.5 and Gen-8.

Historically, we've been able to get a premium on that because it enables dramatic cost reduction by our customers.Though as we've always said, this is a hightech market.

We anticipate that our prices will continue to reduce on a product line basis sort of in the upper single digits to able to support the continued adoption of the technology.

Great.

Thanks.

And another good quarter.

Thank you.

Thank you.

Thank you.

Our next question comes from Matthew Smith of CIBC World Markets.

Good morning.

I was just curious about your gross margin guidance for 3 Q, particularly with fiber volumes being guided down 10 to 15%.

I wondered you know, if you were seeing a benefit from gross margin expansion in other parts of your business which was driving that, and mainly I suppose from glass displays, if you could give some color on that, that would be great.

Thanks.

We're looking for expansion of gross margin driven by our LCD business.

Not only do we see a growth effect there, mixing against the whole company, but also we expect to see gross margin expansion.

We actually had a little weaker gross margin in our wholly owned business in the second quarter in LCDs because we had some glass yields in only one factory in the month of April, recovered from that in May and June.

So you actuallily will see LCD margins improve from the second quarter and the third quarter so that will help us overall for the company.

And we're obviously trying to do better in the environmental business too.

Great.

And I one follow-up question, if I may, could you comment on what the mix of glass was in the core business for 2 Q with the yield problems on Gen-5 or the other sizes.

Thanks.

The yield problems don't really relate to a particular generation and wouldn't impact those percentages much one way or the other.

As we've told you, he we expect a sort of continued change in our mix as we go through the end of the year to be over half of our base business, glass being in Gen-5 and above by quarter four.

We're not seeing anything that's taking us off of that path and that by the way, is one of the contributions to margin expansion that Jim just talked about is that improved mix as we do slightly larger percent of our broad load in Gen-5 and above.

Great.

Thank you very much.

Our next question comes from Stephen Koffler of Wachovia.

Good morning.

Again related to the CapEx increase, you have been alone in Gen-6 largely all this year.

I would think you had some assumption about when you would start to get more competition from other people you know, getting that getting that capability.

What is that assumption?

Well, what our assumption has been really throughout this year is that our competition was going to be able it solve their issues and show up and be able to support Gen-6 and we have been wrong now a couple of quarters.

We've been predicting that they would be here already.

Well, what our assumption has been really throughout this year is that our competition was going to be able it solve their issues and show up and be able to support Gen-6 and we've been wrong now a couple of quarters.

We've been predicting that they'd be here already.

Historically, he had a one year lead.We introducedGen-6 about a year ago.

So once again, we'll make a prediction that our competition will show up sometime here in the third quarter, but I would put upon that the qualifier that I said that in previous quarters and they haven't been there yet.

Thank you.

Our next question comes from Michael Lee of Bank of America.

Yes, guys.

I'm kind of concerned about this CapEx.

We've kind of seen this movie before and it didn't have a happy ending in terms of overexpanding.

So one question is you talk about growth in the market.

How do you assess growth?

Are you listening just to your customers or to what extent are you really measuring on your own final end use demand in the LCD area?

Mark this is Jim we remember well remember the lessons of telecom, and so we have focused on a couple, so end market, we clearly pay attention to our customers but we also know our customers individually all think they're going to win in the marketplace So we're building and have built our own end market models, obviously we use industry statistics, trying to avoid everybody all using the same statistics, but we are researching very heavily to track through what's happening in the end market.

We then build that that back into a total square footage that would be required.

We have some knowledge about the yield of various customers and therefore how much glass is going on.

And obviously, between our own shipments and Samsung Corning Precision's, we're well over half the market so that gives us a good handle on that.

So we're constantly focused on you know, what is that end market.

The second thing we're doing to avoid a repeated telecom is on the pace of capital expansions, obviously when you have a business that's this large to us and growing at the rates we have seen, it's big dollars going in.

But we make these announcements butI remind you that the actual spending is phased and its a series of moderate modular tanks in finishing lines an when for example, when we announced our expansion in our Taiwan plant in February, it wasa series of tanks in finishing lines and they don't all come up at one point in time.

We obviously build the building but we're phasing the equipment and the bring up of the tanks and if we saw a slow down in the marketplace, we would slow the rate of capital expenditure.

You may recall we didn't have the luxury of doing that in a fiber business where in fiber it required us to be, it was a three-year build to bring up a new fiber factory.

So the pace is different here.

The last thing we're doing again, coming back to the end market, is we are very focused on the television business because that will increasingly be an important part of what justifies our demand and so we are working so we have the advantage of knowing something about this business having been in it for many years in conventional television, but we are working very hard on understanding the consumer's acceptance of LCD televisions in the United States, but equally important outside the United States.

A reminder, 80% of the televisions sold in the world are outside the NAFTAt market.

And then lastly, although we do listen to our customers, they're important to us, as they continue to ask us to supply larger and larger shares of their new Fabs, for example, a customer would come to us or a new Gen-6 Fab and perhaps ask us to commit to supplying 85% of the demand for that, we have always traditionally had a contract with them.

We are putting much stronger terms in our customer's contracts for the new Fabs that will be primarily justified by television.

So we clearly are working very hard to avoid any kind of repeat of the telecom capacity experience and we will keep you up-to-date as we work through this during the course of this upcoming quarter.

Yeah, that's very helpful Jim but as a kind of crosscheck, a reality check, Corning has about 25% of the market roughly, assuming [INAUDIBLE] comes back on in Samsung Corning a similar percentage.

If you and Samsung Corning each spend a billion dollars this year and next year, that would be a cumulative of $4 billion just for two players in the industry.

I realize that could be a worse case but nonetheless, it represent as very large commitment to a single business by you and your joint venture.

Let me comment on Samsung Corning Precision.

We mentioned this is at the beginning of the year.

If Samsung Corning Precision is expanding not as quickly as we are this year because most of the industry capacity is coming on really in Taiwan, not in Korea.

The Fabs that are beginning to ramp in Korea that are new in year are the Gen-6 line at LG Phillips and then Samsung Sony, Gen-7 which really didn't start taking significant class until, you know, really the end of his year.

So you will not be seeing that same rate there.

But there's no question about it, we're very focused on that and one of the things we're trying to do, Mark, is we have been driving our capital efficiency up so that we get at faster cash payback on these things compared to what we have in the past, just built around this risk mitigation as this business gets bigger.

Thanks, Jim

Thank you.

Our next question comes from Chris [INAUDIBLE] with Lehman brothers.

Good morning.

I came on late, so I apologise if you already covered this.

But for June quarters LCD glass growth, how much was driven by migration to larger size panels and how much was driven by higher unit volumes?

Well, the new capacity that we're putting on is in Gen-5 and above, so in that sense, the growth is primarily in those pieces.

Because what happens is our customers build a generation FAB and we have glass factories that are a little more flexible.

But we've been running at close to full utilization for a while now.

So the growth tends to be in those newer generations to go with those newer generations of customer Fab, sir.

Right, I was hoping to drill down to the actual panel size, not the mother glass size.

Do you have any sense from your customers, you know, as to where they're seeing demand, 15, 17, 19 inch or the small size TVs?

And how that --

I understand question.

You're asking about the channel flow through.

Yeah, I'm just trying to understand the 22% volume growth, was that driven by units or you know, larger size panels really?

So what Jim did in the opening of the call is he went through the end market or the sales from the customers into the channels, like people like Best Buy and layed out what went to notebooks, what went to monitors and what went to LCD-TV.

Also, we do have data on what size monitors and the like.

What we saw between quarter two and quarter one was Jim went through in some degree of detail.

[INAUDIBLE] this is Ken.

Give me a shout after the call and I'm walk you through it.

Okay.

Let me just ask one quick follow up.

With June monthly unit sales down, month-over-month for the panel industry, and concerns regarding panel inventory build and retail sell through, how concerned are you about meeting your glass volume projection of 10% in the third quarter?

Well, I mean, it's a projection but Jim and I just recently came back from meeting with our major customers in display and Asia.

And as Jim mentioned, although you get some short-term quarterly dynamics around different size monitors and seasonality, the strength of the polls from our customers is extreme.

And we believe we will continue to be capacity constrained through this coming quarter, sir.

Any chance of giving what growth could be if you filled that unlimited capacity in the third quarter?

There's no chance of that.

Okay, great.

Thank you very much.

Rosie, we have time for one more call.

Thank you.

Your final question comes from John Anthony of Ffulcrum.

Good morning, guys.

A couple of quick questions.

On the environmental side, what kind of ramp do we have see in volumes before we'd see a meaningful increase in the profitability there?

So for the overall environmental segment, one of the primary drivers on profitability has been our significant investment to develop a new technology for the diesel market.

It's our top deveolpment priority and probably our top technology spend.

The base environmental automotive business continues to perform well but we're re-investing those profits back in to create another automotive size business in heavy duty diesel.

So I think that the biggest leverage going forward will be our success in that market.

We believe this is an opportunity out in the 2008 time frame of a total market opportunity, somewhere in the range of 800 to $1 billion dollars of which we should get a significant share.

Okay.

And then not to beat this CapEx thing to death, but looking at a different way and given that you've spent, if I'm correct, about 300 million year to date, so there's obviously a pretty significant spending ramp in the back half.

Can you give us a rough projection of what the productionof your LCD substrates are going to look like on a mix basis by the end of the year in terms of Gen-6 versus Gen-5.5, etc.?

So what we have said is that we expect by quarter four, to be in our base business running at over half of our production in Gen-5 and above, and on a family basis, higher than that since a significant amount of SCP's production is already in Gen-5

Okay.

And then I guess lastly, the only other question I would have is, you know, looking at the CapEx plans as they've been revised, it seems somewhat puzzling to me that you're increasing spending at a time when, you know, going through the prior questions, demand seems to be abaiting to some extent.

So I'm just curious what it is you guys are seeing that potentially we're not seeing or is this a case that you're to some extent you're trying to drive the LCD-TV market?

We're definitely not trying to drive the LCD-TV market.

What our CapEx is about, though is entertainment TV.

Our customers will be starting up their Gen-5.5, Gen-6 and Gen-7 fabs, the bulk of them will be starting up late next year.

And our capacity spending is aimed at that.

One thing that we've tried to do in addition to the answer that Jim give earlier, is provide to you exactly what sort of square footage of glass is driven by what entertainment TV, notebook and monitor penetration, so what we've done is basically provided you the math.

As with any new technology, there's a chance that we'll be wrong on how quickly entertainment TV is penetrated.

What we're seeking to do with our customers is find the right way to share that risk of overcapacity and as we make progress on that, we'll share that more openly.

Okay.

Thanks.

Jim, you have some closing comments?

Just a couple, Ken.

First, we're obviously very pleased with our results in the second quarter and hope you were as well.

We're also equally excited about our revenue growth opportunities in the third quarter and the chance to continue this momentum we've built over the last few quarters.

Just commenting, the LCD business is very strong for us right now.

The market has been good but I also want to emphasize we've been very strong competitvly in winning share.

Telecom results are encouraging despite the China upset and we are very comfortable with the handling the CapEx and cash requirements and are conscious of what we need to do to keep from getting ahead of ourselves here.

One other comment as a public service announcement, we'll be presenting two analysts' conferences later this quarter.

On September 9th, Wendell and I we will be speaking at the Citigroup Salomon Technology Conference in New York city and also that week, Don McNaughton, Senior VP of display will be presenting at the the CS First Boston Technology Connference in Taipei in Taiwan.

This will be Corning's first analyst presentation Asia and we're excited about the opportunity to meet with our investors there.

We hope you will be able to attend or listen to the presentationings online.

Further version about the conferences will be posted on our IR website shortly.

Ken

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

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