康寧 (GLW) 2004 Q3 法說會逐字稿

Good morning and welcome to the third quarter conference call.

All lines will be in a listen-only mode until the question and answer session. (Operator Instructions).

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.

Sir, you may begin.

Thank you.

Good morning.

Welcome to Corning's third quarter conference call.

This call is also being audiocast on our website.

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

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

Before I turn the call over to Jim, I should mention except for the published results and through our comparisons, today's hallmarks constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

These statements involve a number of risks, uncertainties and other factors that could cause actual results to differ materially.

These risks are detailed in the Company's SEC report.

Jim?

Thanks, Ken, good morning everyone.

Last night, we released our results for the third quarter.

We were very pleased with our results, excluding the previously announced charges.

Sales for the third quarter were slightly over $1 billion, a 4 percent increase over the second quarter and a 30 percent increase over the third quarter last year.

This is the seventh consecutive quarter of sequential revenue growth for us.

The third 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 note that the impact to changes in foreign exchange rates in the third quarter on sales in NVAT (ph) were negligible compared to the second quarter.

Earnings per share, excluding special items, were 14 cents and higher than our expectations.

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

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

This NPAT without specials was four times our 2003 quarter three on the 30 percent year-over-year sales increase.

I'd like to take a moment to provide more color on our strong earnings performance and why it exceeded our original guidance.

As you know, our original guidance was 10 to 12 cents per share.

As always, that EPS level was based on several assumptions.

The primary difference in our results is a stronger gross margin level, which contributed approximately a penny in additional earnings.

This helps to explain most of the difference between the upper end of our guidance and the 14 cents we reported.

I will talk more on gross margins in a moment.

However, we also benefited from a few small onetime items that collectively added almost another penny during the quarter and ultimately helped reach to 14 cents.

The largest was a reversal accrued legal reserves of $10 million.

These reserves were originally established for a legal case that was resolved favorably during the quarter, and therefore, no longer needed.

In addition, Dow Corning recorded three items that netted to a onetime gain of 4 million for Corning.

So in summary, I believe we had almost another penny of earnings in the third quarter from onetime events that are not expected to repeat in the fourth quarter.

However, even when you exclude those gains, we were delighted with our performance and being up over a penny over guidance.

Now let me take a moment to discuss our strong gross margin performance in the third quarter.

Gross margins were 40 percent in the third quarter, a significant improvement over the second quarter and much higher than our expectations.

In fact, it was our highest level of gross margins since the first quarter of 2001.

For comparative purposes, gross margins in the third quarter last year were only 29 percent, so there has been a substantial improvement over last year.

The increase in gross margins were driven primarily by increased volume within our Telecommunications Segment, as well as the higher mix of larger size LCD glass and manufacturing efficiencies in our display segment.

Moving down the income statement, SG&A in the third quarter was 153 million, down from 166 million in the second quarter and only 15 percent of revenues.

Although we're quite pleased with the level of SG&A in the quarter, the largest portion of the reduction was due to compensation accrual changes which we do not expect to repeat.

Our ongoing SG&A dollars in the quarter were more similar to the second quarter and we would expect that level again in Q4.

Continuing down the income statement, RD&E in the third quarter was 88 million and up slightly from the second quarter.

One more note on the level of operating expense over the past year.

We're quite pleased we've been able to keep down the relative level of expenses while our revenues have grown.

To put it in perspective, in comparison to the third quarter of last year, our revenues have increased 234 million while our operating expenses have only increased 14 million.

Moving to equity earnings, they were 96 million in the third quarter, which is net of 35 million in equity investment write-offs.

The write-offs impacted certain cabling investments within our Telecommunications Segment and were part of the charges we announced last week.

Excluding these write-offs, equity earnings would've been consistent with the second quarter.

The tax expense of 985 million included 937 million of expense resulted from our decision to write off most of our deferred tax assets.

Net profit after tax, excluding special items, was 213 million in the third quarter, a 26 percent improvement over the second quarter of 169 and four times the 55 million in 2003.

Now let me take a moment to walk through the special items for the third quarter.

For your modeling purposes, I will let you know where each of these charges is reflected on our income statement.

I will start with the three items that made up the 2.8 billion charge we announced on October 6th.

I will not spend a lot of time on these since we covered them in detail on our conference call last week.

For those of you who missed that conference call, an archive of the audiocast can be found on our investor relations website at corning.com.

The 2.8 billion charge related to a 1.4 billion impairment of goodwill related to our Telecommunications Segment, a 374 million impairment of certain assets in our Telecommunications Segment and a 937 million valuation reserve against our deferred tax assets.

The impairment of goodwill and assets in our Telecommunications Segment and several other smaller charges and credits which are detailed in the footnotes to our press release totaled 1.794 billion.

It can be found on the restructuring, impairment and other charges line on our income statement.

The 937 million in valuation allowance for deferred taxes is included within our provision for income taxes line on our income statement.

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

The gain was 50 million and relates to the decrease in Corning's share price during the quarter, which fell from 13.06 to 11.08.

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

As you know, over the last several quarters, we've recorded a charge rather than a gain to reflect the increase of Corning's share price over that time.

We believe this mark-to-market adjustments will likely to continue into next year.

The next Pittsburgh Corning bankruptcy court hearing is in mid-November and the timing of rulings and appeals remains uncertain.

We will update you as the legal process run its course.

In addition, we recorded a charge of 4 million pretax as a result of our continued debt reduction program.

This charge can also be found as a separate line item on our income statement.

We also recorded impairment charges of 35 million to write off certain equity investments within our Telecommunications Segment.

These charges reflect in our equity earnings line on our income statement and we're netted against the third quarter equity earnings.

Lastly, we reached a final settlement agreement with 3M on a disbursement of funds held in escrow as part of our December 2002 sale of our Precision Lens business.

This resulted in a gain of 20 million which is shown separately as income from discontinued operations on our income statement.

You can find a reconciliation of all of these special items on the investor relations web page at Corning.com.

So now, let's move onto the results for the quarter.

Starting with Display, sales in this segment were 295 million in the third quarter, an increase over the second quarter sales of 277 million.

This represents the twelfth consecutive quarter of volume growth for Display.

The increase reflects sequential volume growth of 4 percent, primarily in Taiwan.

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

We acknowledged that the 4 percent sequential growth is right under our volume growth guidance of 5 to 10 percent this past quarter.

You should note that this miss is less than one day shipments from one plant.

We continue to be sold out during the third quarter and are sold out as of this conference call.

Demand from our customers continues to exceed what we're able to supply.

Compared to the third quarter of last year, our volume grew more than 70 percent and our business is still on track to deliver 65 to 70 percent volume growth for the year.

Equity earnings from Samsung Corning Precision were 68 million, down slightly from the second quarter.

Although their revenues were up 4 percent due to increased volume, their net income was impacted by a 10 million tax adjustment.

Our share of that charge was 5 million.

Net income in the Display Segment, which included equity earnings for Samsung Corning Precision, grew 5 percent over the second quarter from 135 to 142 million.

Excluding equity earnings, sequential net income in our base grew 15 percent.

In comparison to the third quarter last year, revenues in the Display Segment grew over 100 percent, primarily due to the more than 70 percent volume increase I mentioned earlier.

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

As a reminder, the end was up in the fourth quarter of 2003 that the end made its significant change.

Net income including equity earnings has more than doubled in comparison to last year, from 64 million in the third quarter of 2003 to 142 million this quarter.

I would also like to note that gross margins in our Display Segment grew to almost 60 percent in the third quarter as a result of the higher mix of larger sized LCD glass and manufacturing efficiencies.

In fact, the mix of Gen 5 and higher glass for both Corning and SCP is now almost 60 percent of our total volume.

I would like to spend a few minutes updating you on the end market demand trends during the third quarter and then comment on the recent panel inventory situation.

In spite of the recent concerns regarding the LCD market, we again saw strong demand over the last three months for notebooks, LCD monitors and LCD television.

Please keep in mind that the following data is still preliminary as industry sources are working with estimates and we will not have final data on the quarter for another month or so.

To be clear, the data we reference here relates to shipments from PC manufactures and television set makers to retailers.

Starting with notebook computers, 11.5 million were shipped in the third quarter, about 700,000 more than second quarter, an increase of 6 percent.

LCD monitors, the penetration rose from 50 percent in the second quarter to approximately 55 percent in the third quarter.

Approximately 17 million monitors were shipped in the third quarter compared to less than 15 million in the second quarter, an increase of 15 percent.

LCD televisions also fared well in the third quarter as an additional 2.3 million units were, shipped an increase of 9 percent over the second quarter.

In fact, LCD television shipments continue to be on pace to hit our 2004 forecast of around 9 million.

Penetration for the third quarter remained about 5 percent of all color televisions shipped.

Now I would like to take a moment to discuss the recent panel inventory situation.

As we told you during our second quarter conference call, at that time, we were beginning to detect some evidence of a buildup of panel inventory, primarily in larger sized monitors.

We believe this was a result of both fab capacity expansions and slower demand growth due to higher panel prices, again, primarily for larger sized monitors.

Panel makers have responded now as we would expect them to do; they have lower prices.

We have seen aggressive panel price reductions of 20 to 30 percent on monitors over the last two months.

In fact, panel prices on a 17-inch monitor have fallen from around 300 a panel to around 200 a panel.

However, we believe it typically takes about one-quarter before the impact of panel price reductions reached the consumer.

As a result, we are only now beginning to see these panel price reductions reach the retail side.

In the last few weeks, we believe the average retell price of 15 and 17 inch monitors in the U.S. has begun to fall.

It is our belief over this next week month that retail prices will begin to fall much more dramatically.

Based on the past history of price elasticity impact on monitors, we believe that this in turn will spur demand as we head into a typically stronger quarter for consumer electronic purchases.

In fact, about 33 percent of all monitors sold last year were sold in the fourth quarter.

Based on our forecast, we are still anticipating monitor shipments to be around 69 million at the end of this year.

In addition, we have seen several panel makers recently announce that their panel shipments in September were higher than in August.

We are still waiting for panel shipment data from the other panel makers, but the early indications are that panel shipments are increasing.

There's one more point I would like to make regarding panel price reductions.

There appears to be a great deal of misunderstanding about the relationship between panel prices and LCD glass prices.

Let me make one point clear -- we have always felt panel prices needed to be on a steady, persistent decline to impact retail prices, which will help generate demand for notebooks, monitors and televisions and in turn, moves panels through the supply chain an in turn, generates more demand for our glass.

We have not decreased our glass prices as a result of the recent panel price declines, just as we did not raise them when they raised the panel prices last year.

This is not unusual, particularly during times of very tight glass supply.

You should also note that glass typically represents only 5 to 10 percent of the end product.

However, as we have indicated in the past, LCD glass is part of a tech industry and we ultimately expect our prices and our cost to decline over time.

Now one last point on display before I move to the environmental segment.

Last week, our Board approved the second phase of expansion of our new LCD plant in Tai Chung (ph), Taiwan.

Total expansion will be approximately 325 million, with the majority of those funds to be spent in 2005.

Initial manufacturing from this second expansion should begin in the fourth quarter of 2005 with production continuing to come online throughout 2006.

For your modeling purposes, this expansion, combined with our other projects, should provide us with enough capacity to meet the 16 percent penetration rate for LCD televisions.

As you know, our equipment is modular, which should make it easier for us to pace our investment with market growth.

We will also phase the timing of our production lines within the Tai Chung facility, in accordance with future customer supply agreements.

Now moving to the Environmental Segment.

Sales in the third quarter were 136 million, compared to 141 million in the second quarter.

The decline was due to lower retrofit demand for diesel filters.

Sales of auto substrates were fairly consistent with the second quarter.

Results for the environmental segment were about breakeven in the third quarter compared to net income of 4 million in the second quarter.

The decrease was a result of slower demand and higher research and development spending in diesel.

We continue to ramp up at our new diesel facility to meet anticipated demand that will be driven by regulations, not retrofits, in the upcoming year.

The cost associated with this new equipment, as well as the ongoing research and development, will continue to impact our margins and net income in the Environmental Segment.

In comparison to a year ago, sales in the Environmental Segment are up 12 percent, with autos up 9 and diesel up 40 percent.

Now I would like to take a moment to discuss auto inventories and production worldwide, starting in the United States.

We have seen inventories at the big three come down in recent months.

Big three recently reported about 69 days of inventory, which is only a few days higher than their seasonal average of 66 days, and comparable to last year.

For your information, this data is published monthly by the U.S. auto industry.

Worldwide auto production remains on track to hit approximately 61 million this year, which should be a 5 percent increase of last year.

As a reminder, the U.S. auto market is only about 16 million of the worldwide market.

In the Life Sciences Segment, revenues in the third quarter were 75 million compared to 79 million in the second quarter.

Now turning to the Telecommunications Segment.

Sales in the third quarter were 412 million, compared with 392 million in the second quarter.

Net income excluding special items was 15 million in the third quarter, compared to a loss of 20 million.

Revenues in our fiber and cable products were 202 million in the third quarter, compared to 192 million in the second quarter.

This improvement was due to higher than expected fiber (indiscernible), which increased more than 20 percent sequentially.

The increase in fiber demand was the result of continued strong seasonal orders in North America and Europe, as well as demand for Verizon's fiber to the premise buildout.

In addition, fiber imports to China were not as weak as we expected.

Regarding China, we're still waiting for the final determination from the Ministry of Commerce, which is expected to come at the end of the fourth quarter.

Fiber pricing was nearly flat sequentially in the third quarter.

In fact, price declines over the last four quarters were less than 10 percent.

The mix of premium fiber continued to be less than 10 percent.

I have one comment on the lower sequential revenue growth for fiber and cable products this quarter, in light of the much stronger fiber volumes.

Our sequential revenue was impacted in the change in mix as we experienced a significant drop-off in higher priced cable sales to Japan, as well as the additional lower -- increase in the additional lower price cable products sales in the U.S. during the quarter.

Now moving to our Hardware and Equipment business, sales were 210 million in the quarter, an increase of 5 percent over the second quarter's 200 million.

However, you should note that the third quarter revenues were impacted by the sale of our frequency controls business on September 1st.

Excluding the second quarter revenues from that business, Hardware and Equipment sales have grown 13 percent.

The increased sales this quarter was primarily due to continued strong demand in North America and Europe.

In North America, the growth was primarily due to demand from Verizon for their fiber to the premise buildout.

I would like to make one comment regarding the FCC's recent ruling on fiber to the home architectures and the subsequent announcements made by both SBC and BellSouth.

We stated before that we believe the RBOCs would only invest in an environment where they felt the regulations were favorable.

Up until now, the Verizon has been the only one to step up to invest significantly in upgrading their networks.

We're very pleased with the initial reactions from both SBC and BellSouth subsequent to the FCC ruling last week.

As a result of the FCC announcement, we're hopeful that both BellSouth and SBC will begin to bring broadband access closer to their customers.

For BellSouth, the FCC's announcement appears to be favorable since it requires fiber to be brought within 500 feet of the home, which more closely aligns with their fiber to curb architecture.

They announced that they would accelerate their fiber to the curb deployment of 40 percent in 2005.

Regarding SBC's recent announcement, they've announced they would accelerate their fiber to node deployment to 18 million homes by 2007.

While both BellSouth and SBC's architecture may not bring fiber as close to home as Verizon's, we view their announcements as a very positive first step towards upgrading their network and increasing bandwidth for their customers.

We're in the process of working through specific revenue opportunities for Corning.

We will update you once we've finalized our estimates.

Regarding our other reportable businesses, revenues in the third quart were 88 million, an increase over the second quarter of 82.

The increase is primarily the result of stronger demand at our semiconductor and ophthalmic businesses.

In addition, results from our other reportable business include equity earnings from Dow Corning and Samsung Corning.

Equity earnings from Dow Corning in the third quarter were 40 million, consistent with the second quarter but include a onetime gain of 4 million that I've mentioned earlier.

Equity earnings from Samsung Corning, which makes CRT glass, increased due to a onetime subsidy payment of 5 million from the China government for their recent expansions there.

Now moving to our balance sheet, we ended the second quarter with over 1.7 billion in cash and short-term investments.

Our accounts receivable balance in the third quart or was 538 million, down slightly from the 566 in the second quarter.

In addition to lower accounts receivable balance, we were pleased to see our DSOs drop five days from 53 to 48 in the third quarter.

We're expecting our year end DSOs to be approximately 50 days.

Our inventory balance was 498 million in the third quarter and consistent with the second quarter.

Inventory turns were also fairly consistent at 4.8 in the third quarter.

The other significant changes to our balance sheet relate to the write-off of goodwill and the valuation allowance taken under deferred taxes.

Regarding our cash flow, we were obviously very pleased to be able to generate 386 million from operating activities and 193 million of free cash flow.

The major cash inflows in the quarter included 100 million in customer deposits, proceeds from the sale of Frequency Control business of 80 million and the 20 million settlement of the escrow with 3M that I mentioned earlier.

The most significant cash outflow during the quarter was 254 million in capital expenditures, which relates primarily to our display expansion.

I would like to wrap up providing some projections for our fourth quarter.

We're expecting revenues in the range of 950 to 1 billion.

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

Two comments regarding our fourth quarter guidance.

I know you may be hoping for higher revenue and earnings guidance.

However, regarding revenue and earnings, you should keep in mind that our Telecommunications, Environmental and Life Sciences segments typically experience weaker demand in the fourth quarter due to normal seasonality.

This quarter should be no different and I will provide more details on all three in a moment.

As I mentioned earlier, our third quarter results benefited almost a penny from several onetime items that will not occur again in the fourth quarter.

In our Display business, based on current customer requirements and our capacity plans, we anticipate remaining sold out during the fourth quarter.

We're anticipating additional capacity being available through new tanks beginning to ramp up and the ongoing netting of tank repair cycles.

Obviously in manufacturing, there's some variability possible and we have the unknown of the pace of clearing the monitor inventories with the lower pricing.

In addition, we had the risk that if any panel maker reduces orders, we may not be able to completely reallocate that demand to other customers.

Therefore, our forecast of sequential volume growth may be up 3 to 10 percent.

Pricing for LCD glass is expected to remain stable again in the fourth quarter.

For the year, volume in our display business is still on track to be up between 65 and 70 percent over last year.

At Samsung Corning Precision, volume will be up sequentially similar to our base business as they start to ship additional quantities of the Gen 6 and begin to ship Gen 7 glass.

In our Telecommunications Segment, we expect volume declines for optical fiber products to be between 10 and 20 percent sequentially in the fourth quarter.

The softness in demand is primarily due to normal seasonal declines in North America and Europe.

The extent of the decline in fiber volumes will be very dependent on the continuing strength of shipments to Verizon for their fiber to premises program.

The question here is -- how much will Verizon continue to purchase in the last few weeks of the year?

Despite the expected decline in fiber volume in the fourth order, we are pleased to note that our fiber volumes for the year are on track to grow 10 percent over last year.

This is the first year-over-year volume growth since 2000.

We expect fiber pricing to be down less than 5 percent in the fourth quarter.

Our Hardware and Equipment sales in the fourth quarter will also be impacted by normal seasonal declines in North America and Europe and the level of demand from Verizon.

Revenues in Environmental Segment will be down sequentially approximately 5 percent, due to normal seasonal weakness in auto production.

Demand for our diesel products is expected to remain consistent with the third quarter.

In Life Sciences, fourth quarter revenues will also be impacted by seasonal declines in the industry.

As a reminder, this segment sells primarily into the pharmaceutical and academic research markets which are typically closed during the latter part of December.

In our other reportable businesses, we expect fourth quarter revenues to be consistent with the third quarter.

However, we may be beginning to see some evidence of a market slowdown in semiconductor, although it's truly too early to tell.

It is also difficult to predict whether this potential slowdown may be just a short-term pause for inventory correction in the industry or the beginning of the next downturn.

It would be troubling to us if this is another downturn after such a short-lived recovery period.

This industry is continuing to evolve with different technology choices than we envisioned several years ago.

We will keep you posted on our evaluation of any potential impacts on the need for asset write-offs, etc.

The good news here is the consolidation of our semiconductor manufacturing plants has been completed, so our business should be better suited to handle these potential market fluctuations.

From your modeling purposes, gross margin for the Company should be between 37 and 38 percent for the fourth quarter.

Although our gross margins will benefit from the increased mix, larger size LCD glass will ultimately be impacted by the fall-off in demand in our telecommunications segment.

SG&A will be higher in the fourth quarter and return to normal ongoing level spending that I mentioned earlier, including typical fourth quarter expenses.

For modeling purposes, I expect SG&A to be between 17 and 18 percent of revenues in the fourth quarter.

R&D will also be slightly higher in the fourth quarter, approaching 10 percent revenues, driven by display and diesel spending.

We anticipate equity earnings in the fourth quarter will be lower than the third quarter.

The decrease is primarily due to these onetime gains in the third quarter of both Dow Corning and Samsung Corning that I mentioned earlier.

Regarding our capital expenditures, we've spent approximately 560 million to date and are still on track to spend between 900 and 1 billion for the year.

For modeling purposes, you should use 1.5 billion shares for the quarter end when calculating our EPS, excluding specials.

Lastly, I want to make one comment on the tax rate for the fourth quarter.

For the time being, you should use a 33 percent tax rate for your fourth quarter models with the understanding that we will now have more variability than where our income is generated.

Clearly, a change in mix between income in the United States compared to internationally caused this rate to change.

We will update you going forward as necessary and also try to provide an outlook for 2005 as we go through the fourth quarter.

Ken, we're ready for questions.

I will pass over to Rosie (ph) to grab some.

(Operator Instructions) Stephen Sachs (ph), Merrill Lynch.

A couple of things.

First of all, I wanted to congratulate your IR manager in coming in this morning after such a devastating evening.

With regard to the fiber business, there has been some talk about how Verizon is beating up the suppliers.

Wendell, I was wondering if you could talk about, in terms of cabling and hardware, are the margins living up to what you would expect going into some of the ramp that Verizon is saying?

That's my first question.

Actually, fiber to the premise has exceeded our expectations of our.

The strength of our innovations for this application have carried us through the early stages of this deployment.

However, there is no question that Verizon is a very powerful buyer and will continue to see pressure.

And are they asking you to do increasing services?

One of the things I was wondering about specifically was, they seem to be looking for specific cuts of cable and connector eyes.

Are you doing that in your facilities right now for them, or is that potentially something that could happen down the road?

Good intelligence, Stephen.

Actually, we were the ones that proposed a sort of next phase of our innovations that would reduce installation cost even higher that actually puts together a combination of our fiber cable and connectivity products than using some factory-based value-added, doing things in our factory that could potentially save their installers time.

Early returns are positive on this, though remember, this is going to tend to be region by region because local installation practices are made at a very local basis.

Okay, great.

And just one question, Jim, on depreciation expense, should it start to creep up as you go through into next year, given the capital (ph)?

Yes, Stephen.

Depreciation will begin to grow as our cap spending increases with display, and we'll give you a more precise number on that when we finish up the fourth quarter.

Thank you so much.

Daryl Armstrong, Smith Barney.

Two questions.

The first question, you talked about a number of factors that are causing the wide margin of guidance for LCD in the December quarter, one of which was your maintenance activities.

Could you give me a sense in terms of how big of a factor that could be for the December quarter?

Is it the largest factor, or if you have some numbers behind that, that would be helpful.

We don't think the range is that wide, the 3 to 10.

We actually -- when you think about that amount of glass, it really isn't that big of a number.

In terms of maintenance, the tank repairs in Q3 and Q4 are about equal.

And really, the real opportunity for us is with the new tanks that we have coming on in the quarter, if they all come on as we expect.

And if our customers continue to take all of the glass they told us, that would lead us to the top part of the range.

However, we do want to be conservative to reflect that that's possible that they won't all come up at the time we expected.

If I could have something to that, Daryl.

In our continued drive to be transparent, I think last quarter, we got overly precise with point estimates.

I think Jim's comments at the very beginning of the call that sort of put in perspective that one percentage point of sequential growth between one quarter and another is less than a day's shipments for us.

So, given that we are -- continue to be supplied constrained, we think it is wiser to look at this on a range basis, because execution at that level of precision is sort of hard to predict three months out, Daryl.

That makes sense.

And then one quick follow-up.

You gave the mix of glass shipments, or (indiscernible) the third quarter.

Any color, in terms of whether that mix is going to move up meaningfully in the fourth quarter or be roughly around the same level?

We anticipate continued positive momentum in our mix as more and more of our customers production is Gen 5 and above.

Thank you.

Stephen Savas, Goldman, Sachs & Co.

Jim, I just wanted to follow-up on equity earnings, if you could help me reconcile.

I think you had said that, excluding some of the onetime items, it was relatively flat sequentially.

You reported 96 million;

I think there was 35 million in charge from the telecom side, 5 million in benefit from the CRT side.

What was the amount that was a benefit for you onetime from the Dow?

About 4 million.

And are there any other adjustments?

Because, then I would get about a little over 120 in equity earnings, versus 107 last quarter?

The Samsung Corning television, you have Dow Corning and then you have the equity write-offs.

Those are the only adjustments that we had in equity earnings.

So, if I did the 96 plus 35, minus 5 from the CRT, minus 4 from Dow, I get about 120?

Yes.

And then just very quickly on the Environmental business, you typically see a bump up in the new year of first quarter from repricing of your filters.

Is that something that you would probably expect for this year, or is some of the transition to the newer technology done?

We're not going to give any comments on pricing for next year at this time, Steve.

All right, thank you very much.

Nikos Theodosopoulos, UBS Warburg.

Thank you.

I had a couple questions.

On LCD gross margin, if you assume stable pricing, given the mix shift that you expect to continue, would we see LCD gross margin continue to increase under that scenario?

What would make it go down?

Is it just the pricing, because the mix shift seems like it is going to continue to work in your favor?

The only thing that would work against us would be when we start up the new tanks, how fast that they come in.

And it's not always perfectly smooth when we start up a new tank.

But by and large, we're feeling very good about the margins we achieved in the quarter and our ability to have them go from here.

Okay.

And my second question on telecom, can you give us an update for the most recent quarter, what the shift of your fiber business is between the major regions of the world?

And in doing that, if you look at the entire telecom segment, how large our RBOCs in the (technical difficulty) segment?

Thank you.

And you're looking for quarter three, Nikos?

Yes, I mean using this as a benchmark, given that China has been soft, Verizon has been strong -- I'm trying to get an update from quarter three as kind of a benchmark of your geographical mix.

And if you can given the color, just how large U.S.

RBOCs total are of telecom right now?

So, let's start with the regional mix, Nikos.

In quarter three versus quarter two, the strongest growth region by a significant amount was North America, followed by Europe was also up, but once again, not as strong as North America.

Really, all of the regions were positive, except for -- all significant regions were -- except for Japan, which are trended down again sequentially.

In Japan, NTT continues to be very dedicated to fiber to the premise but is pursuing it a little bit more anemic level.

And they're also thinking, Nikos, about adopting a more U.S. style, Verizon style, architecture, which could potentially be good for us if we could actually seed some of our innovations that we had done with Verizon and NTT.

But, that is not an inconsequential task.

So we continue to see the mix of our business shift towards North America, driven by the improvements in the access market that you heard Jim Flaws talk about earlier in the call.

The RBOCs, I don't have the percentage right at the top of my fingertips, Nikos.

What about just U.S. in total?

How big is U.S. and total right now of telecom?

It is over 40 percent right now North America in total, and I don't want to get much more precise than that.

I would say for us, that the RBOCs are larger than cable TV base shipments at this time.

Alright, thank you.

John Harmon, Needham & Co.

First of all, I was wondering if you could discuss the mechanics of adding capacity.

In other words, how quickly could you add capacity?

Your press release said that you expected to be sold out in the fourth quarter.

It's a good problem to have, but what would take to meet all of the demand that is out there for LCD glass?

So, when you're operating in a shortage environment, it's very difficult to tell how short you are.

We're going at a rigorous pace to add capacity.

Our ability to add capacity has been captured in the range guidance that we've given, and also within the announcements you heard us make.

But I really don't want to speculate as to how much demand we are missing, so to speak, or how short the industry is for our glass.

Part of the dynamic is our relative competitive strength has been building, and so customers have been turning to us in increasing numbers and it's hard to extrapolate that to an overall industry balance question.

Let me clarify my question then.

Certainly, it is prudent to you to add less capacity then you need, but how are you adding capacity as rapidly as you possibly can?

Of course, it gets to be a steeper slope as capacity grows?

I'd say that we're adding capacity at a relatively assertive manner.

Of course, we could always go a little bit faster, but we are comfortable with the pace.

Thank you.

My second question is about the fiber business.

If you look at the SBC announcement, they have the shovels to the ground ready to deploy about 38,000 miles of fiber.

It looks like that could be a couple tens of millions dollars of revenue opportunity.

How many strands of fiber does the typical fiber to the premises deployment use?

Can you quantified the revenue opportunity for me, please?

In terms of volume, that is potentially a lot of like volume or as your said, shovel to the ground.

That's a lot of shovels.

So, it has the potential, depending on which fiber count they choose in this fiber to the node architecture to certainly be millions of kilometers.

But, we don't know yet what that fiber count will be.

We're working very closely with SBC on the architecture design and also on different product innovations that can help them both in their fiber to the premise architecture, which they're doing for greenfields.

But, we also want to apply our innovative skills to fiber to the node.

So we're still a bit away from having the exact fiber count and what products exactly they will use.

Okay, thank you very much.

Stephen Koffler, Wachovia.

Good morning.

Jim, question for you, also on the FCC ruling and the goodwill impairment charge.

The charge came right before the ruling, which seemed like it was obviously a positive piece of information in the industry.

If you had known about that, is there a chance the goodwill impairment in telecom would've been smaller?

And as the news unfolds and if it is positive over the next year or so, is there a potential for a write back up?

First of all, the accounting rules don't let you write back up goodwill at fixed asset impairments.

So that would not be the case.

To answer your former question, no, we would not have changed had we known that the FCC ruling would have been this favorable to the rest of the RBOCs.

The primary element of this write-down is really related to the level of prices and the level of premium products.

And the big change that has really occurred over the last two years, once we retrieved some stability in this business, was our understanding of what would ultimately happen on prices in premium jobs.

And in the case of this recent ruling, that does nothing for our premium products.

And in terms of pricing, much to our regret, we have not seen economic behavior by any of our competitors, in terms of taking capacity off-line or continuing to price below cash costs, in some cases, below even their variable cost.

And that's what really drove the valuation change, rather than just the pure volume of single-mode fiber.

Obviously, we're delighted by the FCC ruling and by the announcements that were made by BellSouth and SBC.

But that would not change the impairment.

Thanks.

John Roberts, Buckingham Research.

Good quarter, guys.

I think you said the fourth quarter might be impacted by up to a penny from the tax changes when you had the conference call a week ago.

So, the guidance that you have now for the fourth quarter, is that one cent lower than what it might have been, or is that tax effect maybe over estimated when you had the call before?

Tax effect was overestimated before.

Really, its is not showing up this quarter.

Secondly, there's no sign yet that Asahi is making any progress in restoring their position.

You have been of the opinion that eventually, they're going to come back.

Are you starting to maybe think you can sustain your position at a higher level now for a little bit longer period in the LCD business?

I think you're correct in saying that we have pretty consistently overestimated Asahi's ability to begin to close the gap with us and large sizes.

And we're not seeing the progress there that we were counting on.

So that is good news from the competitive standpoint; it's not new good news from our customers' standpoint.

Note, however, that NEG (ph) does continue to make progress and it seems to be capable of supplying some small amounts of Gen 6.

So we are seeing an increase in competitive capability.

But you are right, John, it is not as strong as we have been predicting.

Lastly as the fiber prices finally stabilize, it seems like the volume is becoming harder to predict.

The third quarter was better than he expected it.

It seems like a wide range for the seasonal decline in the fourth quarter.

So as the premises business becomes more significant to you, should we expect less predictability, that this is just going to become a more volatile volume-based business for you?

There is no question, John, that in the third quarter, since we did not even get the sign right originally, we were anticipating a decline sequentially and we got a very robust increase, that that doesn't speak well to our ability to predict telecom.

I don't think it has so much to do with that it's accessed per se, as I think that it has to do with how thin the improvement is.

In other words, that this is not a big broad base movement that is driving the unpredictability in our numbers, but a relatively narrow movement by just a couple of our customers.

If that were to spread; for instance, if the announcements that SBC has made, for instance, or BellSouth were to come to reality, it ought to actually improve our predictability some.

But gosh, that's highly speculative on my part, sir.

But it's not related to just shorter lead time on the access business, and therefore, you just have no visibility beyond the next few weeks?

No, I wouldn't say so much that as it has been that when we looked and did the work on the fiber to the premise architectures, we did not expect quite as much fiber to get pulled a is getting pulled with this architecture.

And we also counted on that some of our innovations would not be as successful, frankly, and get as much take-up from our customers as they have.

So so far, the surprises have been positive.

But in general, volatility isn't a good thing.

Thank you.

Mark Gulley, Banc of America Securities.

Good morning, guys.

My question has to do with LCD glass, particularly for next year.

You've enjoyed a positive mix shift and you've enjoyed some pretty terrific prices, in terms of being stable.

At what point do you see the mix shift kind of topping out, and therefore, when prices might begin their normal decline from within generations?

Actually, we don't feel the mix shift topping out because you have yet to see the Taiwanese producers really bring on much Gen 6 capacity.

So in fact, that will be a very strong effect for us in 2005.

And as you know, with each new generation, we get a price increase.

So we think the generation impact will be favorable in '05, and we also have the beginnings of Gen 7 really happening then.

So, we don't see the mix effect slowing down next year.

A financial question, Jim.

Did the write-downs have any effect on your credit ratings or are the credit ratings simply driven by free cash flow?

And given your good free cash flow, what indications do you have for a rating upgrade next year?

So the write-offs had no impact on our ratings.

I think at least one of the agencies actually had a press release and affirmed that.

They are far more focused on what we're doing with our debt reduction program and also how we're doing on cash generation.

Of course, we have hopes of a rating upgrade for next year.

I think it will be very dependent on the agencies seeing how well we do on generation of cash and than the rate of spending.

The challenge for us really is we see this tremendous opportunity right now in LCDs and we are reluctant to achieve free cash flow positive at the risk of giving up market share, and we think we're making the right economic choice.

But we have hopes that the rating agencies will see that as the year unfolds.

Wendell, can you comment on your progress to cutting more deals with customers like CMO (ph)?

You talked about that in the last call, saying that some customers were insulted, some were happy.

Can you update us there?

So, we continue to make progress on that dimension as well.

As Jim touched on briefly at the beginning of the call, one of the things we're going to use to phase our Tai Chung II (ph) investment is the level of success we have had with customer supply agreements, and we continue to make progress.

It is always challenging to get up-front cash from customers.

And I think those last quarter with some of the concerns that they have had about the market and some of their own financial performances made progress perhaps not as quick as we would've liked.

But that being said, we continue to feel good that we're going to be able to drive additional customers to agreement.

Okay, thanks.

Ajit Pai, Thomas Weisel Partners.

Good morning, gentlemen and congratulations on a great quarter.

A couple of quick questions.

The first is about your fiber business.

Yesterday, SBC selected Alcatel as its primary supplier for Project Light Speed.

Does that mean that they would have a preference to use Alcatel draft card (ph), rather than Corning's fiber as a primary resource for fiber?

No.

Light Speed -- that particular selection had to do with the active electronics and we are working very closely with SBC on the passive transmission system design.

Okay.

And then the second question would be, on your Samsung Corning prescription glass, the tax rate -- you know, you seem to have made an adjustment right now.

And I remember they had a tax break from the Korean government.

What is the step function over there, and how will that tax rate change over the next couple of years?

And then second question in the same area, when does the Sony Samsung plant come online, and when will it start drawing glass?

So on the latter on the Gen 7 and Sony Samsung, we expect to begin shipping some production quantities this quarter.

It really won't be significant this quarter, but it will at least start.

On the tax rate there, the adjustment they had this quarter was really a correction on some deferred tax assets that they had incorrectly built-up over a period of time.

They have been enjoying a tax holiday there and gradually over the next couple of years, the tax rate will go up a little bit.

And we will maybe give you a little more update on that when we get to the fourth quarter call.

Okay, thank you so much.

Dennis Gallagher, Schwab Soundview.

Given how important fiber to the home has become progress in hardware and equipment, can you give us some sense of how much FTTP is in the hardware and equipment segment these days?

No, we're not breaking that out separately, Dennis.

I'm sorry.

You can get a sense of estimating by looking at our guidance on amount per home passed.

There really haven't been that many homes connected.

I think we said $78 per home passed, and I think we said 75 percent of that is hardware and equipment.

I don't think Verizon has yet released the amount of homes passed, so all we can tell you is that they are on track to what they said.

But is it safe to say it has been the primary driver of improvement in the last couple quarters?

Within hardware and equipment, that is certainly true.

The other improver there has been in Europe on some DSL spending, has also been helped.

But clearly, the fiber to the premise program from Verizon has been the big driver in hardware and equipment.

Operator, we have time for one more call.

Matthew Smith, CIBC World Markets.

Good morning, gentlemen.

I was wondering please if you could characterize for me the levels of the capacity utilization at the Generation 5 fabs that you supplied to during the third quarter, and how is that reflected in your guidance for 3 to 10 percent quarter on quarter volume growth?

And secondly, I was interested to just hear from you what sort of inventory levels of glass substrates do your customers typically keep on hand in their fabs?

And did that change for better or for worse through the third quarter?

Thank you.

As far as glass inventories, they keep a very, very small amount.

If anything, they have running hand to mouth.

Frankly, we don't have enough inventory and we've been air shipping a lot of glass consistently this year.

It actually is a drag on our margins.

And if we ever had a breather and could build a little inventory and get out of that, we would love to, because it would help our gross margins nicely.

But we have detected no built-up or real change in glass inventories anywhere, either in our system or theirs.

And in terms of capacity utilizations at Gen 5 fabs, would you it's still well north of 90 percent?

And did it slow down noticeably during the third quarter?

I don't think we can give you precise information on the for quarter three.

And note that our guidance for next quarter, as you look forward, is primarily based around our ability to supply.

We continue to believe that demand for our glass will be higher than our ability to supply.

So what is driving that range is not capacity utilization in our customers' fabs, but rather our own ability to execute.

Thank you very much.

Let me close up.

First of all, we were delighted with our billion-dollar revenue and the 40 percent gross margin.

Second, it's exceptionally great to see the strong results in our wholly-owned businesses to go along with our robust equity earnings.

Third, we're delighted with the 30 percent sales and four times MPAT year-over-year without specials.

Fourth, the LCD business clearly weathered the Q3 nervousness that existed in the industry.

We're making progress on margins there and our Gen sizes.

Frankly, we love to see the retail price declines because we think it's good long-term for this industry.

And fifth, we're very pleased by the favorable rulings in telecom and the momentum we started to get there.

My last comment is we want to continue with our very proactive program to meet with investors, so I'd like to fill you in on some upcoming events we will be attending.

November 16th, we will be presenting at the UBS Warburg conference in New York City; on November 18th, we will be at the Western New York Investors Conference in Rochester, New York and on December 2nd, we'll be at the CS First Boston Technology Conference in Phoenix.

You can find specifics behind each of these events on the investor relations website at corning.com.

We hope to have a chance to meet with as many as possible at these events to answer your questions firsthand.

Thank you very much.

Ken?

Thank you, Jim and Wendell.

Thanks to you all for joining us today.

Playback of the call available beginning at 10:30 AM Eastern time today until 5 o'clock on November 4th.

To listen, dial 203-369-1765, no password is required.

The audiocast is also available on our website during that time.

And Rose, that concludes our call for today.

Please disconnect all lines.

Thank you for attending today's conference call and have a nice day.