康寧 (GLW) 2004 Q4 法說會逐字稿

Good morning.

And welcome to the 4th quarter results conference call.

All parties will be in a listen-only mode until the question and answer portion of the conference.

This conference is being recorded.

If you have any objections, you may disconnect at this time.

I would like to turn the call over to Mr. Ken Sofio, Director of Investor Relations.

Mr. Sofio, you may begin, sir.

Thank you, Lisa.

Good morning.

Welcome to Corning's 4th quarter conference call.

This call is also being audiocast on our website.

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

Wendell Weeks, President, 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 historic comparisons, today's remarks constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

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

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

Jim?

Thanks, Ken.

Good morning, everyone.

Last night we released our results for the 4th quarter.

We were very pleased to be within the upper ranges of our guidance for sales and earning per share before special items.

Sales for the 4th quarter were slightly over $1 billion, 3 percent increase over the 3rd quarter and a 26 percent increase over the 4th quarter last year.

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

We believe this is fairly noteworthy achievement, given that the 4th quarter is usually our seasonally weakest quarter in most years.

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

We should also note the changes in foreign exchange rates were slightly beneficial to sales and NPAT during the 4th quarter.

Earnings per share excluding special items were $0.12 in the 4th quarter.

This is three times our EPS from the 4th quarter of 2003.

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

You can find a reconciliation to all non-GAAP financial measures to GAAP on our investor relations website.

Regarding our performance for the year, we are thrilled with what we are able to accomplish.

Sales were 3.8 billion, improvement of 25 percent over 2003.

In fact, three of our segments, display and environmental life sciences, had record sales this year.

I'll talk more on those segments in a minute.

Net profit before tax excluding special items was 674 million for the year compared to 128 million last year, an improvement of more than 500 million.

This is the second year in a row we have posted a half a billion dollar improvement in NPAT excluding specials.

Earnings per share before special items this year were $0.45 compared to $0.10 last year.

You should note here as well that these are non-GAAP measures.

Now, moving down into the 4th quarter income statement, gross margins were 35 percent compared to 40 percent in the 3rd quarter.

Clearly, this was lower than our expectations and our guidance.

The lower gross margins were primarily attributable to several small one-time items in our telecommunications segment and an approximately 20 million increase in lower margins submarine cable project sales.

In addition, we wrote off $12 million of assets within our semiconductor product line, which we did not count as a special item this quarter.

We do not expect these items to repeat in the 1st quarter.

Lastly, we experienced some weaker manufacturing performance in our environmental segment during the 4th quarter and that may continue, but hopefully to a lesser extent in the 1st quarter.

If you recall, our guidance for gross margins in the 4th quarter was a range of 37 to 38 percent.

You can categorize the miss as about 1 1/2 percent telecom, 1 percent due to the semiconductor writeoff and 1 percent due to the environmental manufacturing.

We do expect our gross margin to jump back up from these issues in the 1st quarter to 37 to 38 percent.

Regarding the 12 million writeoff of semiconductor assets, we made the decision to write off specific assets supporting our calcium fluoride product line.

As it became apparent that the market was not materializing as the industry had planned.

For modeling purposes, the writeoff was non-cash.

Continuing down the income statement, SG&A in the 4th quarter was 174 million, or about 17 percent of sales, which is well within our guidance for the quarter.

RD&E in the 4th quarter was 98 million, or about 10 percent of sales, which is also within our guidance for the quarter.

I'd like to make one comment on the level of operating expense over the past year.

We are quite pleased to have been able to keep the relative level of expenses down while increasing our sales base.

With this in perspective, while our 4th quarter sales increased by 213 million over last years, our operating expenses only increased 34 million.

For the year, operating expenses have grown only 65 million in comparison to a 764 million increase in sales.

Now, moving on to equity earnings, we recognized 133 million in the 4th quarter in comparison to 128 million in the 3rd quarter.

This increase was primarily a result of a one time gain of 11 million, as well as strong results from Samsung Corning Precision, which offset weaker results from Samsung Corning, our CRT class equity venture.

The one time gain was a result of royalty income related to our LCD technology that accumulated at a small equity company.

We're not expecting material earnings from this equity venture in 2005.

We did not report this gain as a special just as we did not account for the calcium fluoride asset charge as a special.

The items are close to offsetting in our overall results.

I'll provide more detail on our Samsung joint ventures during my discussion of the segment results for the quarter.

Now, turning to 4th quarter special actions, let me take a moment to walk you through them.

There were only two.

The first relates to the ongoing marked to market adjustment each quarter on the Corning shares we contributed to Pittsburgh Corning settlement.

The charge was 17 million and is the result of an increase in Corning share price during the quarter, which rose from $11.08 to $11.77.

In addition, we made a few adjustments to restructure reserves recorded in prior periods, resulting in a net benefit of $3 million.

The total impact of these special items was a penny.

Now I'd like to turn to the segment displays -- segment results for the quarter.

I'll start with display.

Sales were 311 million in the 4th quarter. 5 percent increase over the 3rd quarter sales of 295 million.

The increase reflects a favorable change in the end, sequential volume growth of 2 percent and stable pricing.

This represents the 13 consecutive quarter of volume growth.

Equity earnings from Samsung Corning Precision were 73 million compared to 68 million in the 3rd quarter.

The increase was due to sequential volume growth of 11 percent during the quarter.

You should note the SCP's equity earnings were impacted by the 5 million negative tax adjustment in the 3rd quarter and an unusually large compensation charge of 7 million in the 4th quarter.

Excluding these one time items, equity earnings at Samsung Corning Precision grew 11 percent sequentially.

You should also note that the $11 million one time royalty gain is reflected within the equity earnings in the display segment.

As a result, total equity earnings in the segment were 84 million in the 4th quarter.

Sequential volume growth for our family of LCD businesses, which includes our wholly owned business, plus Samsung Corning Precision was up 6 percent in the 4th quarter.

Net income in the display segment, including equity earnings grew 6 percent over the 3rd quarter from 142 to 151.

Sales growth in our consolidated business was offset by lower gross margins and higher operating expenses.

Gross margins were slightly less than 60 percent in the 4th quarter.

In comparison to the 4th quarter of last year, sales in our display segment grew 56 percent, primarily due to volume gains of 46 percent.

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

Net income including equity earnings has increased 86 percent in comparison to last year from 81 million in the 4th quarter of 2003 to 151 million in this quarter.

For the total year, display segment posted record sales of over 1.1 billion, an increase of 87 percent over the 2003 sales of 595 million.

The substantial increase was primarily due to volume gains of about 65 percent, as well as favorable pricing and exchange rates.

Sales at Samsung Corning Precision for the total year of 2004 were also 1.1 billion, up 89 percent over the 2003 sales of 590 million.

Equity earnings from SCP were 277 million for the year, almost double the amount of earnings last year, which were 144 million.

Net income for the year in the total display segment including equity earnings was 546 million, more than double last year's net income of 235.

I'd like to spend a few minutes updating you on the end market trends during the 4th quarter and the year.

Please keep in mind that the following data has been derived from an aggregate of industry sources that are considered this time to be preliminary estimates.

The final data for the 4th quarter will not be available for another month.

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

The market data suggests there was a very strong market demand for notebooks, monitors and LCD televisions in the 4th quarter.

Starting with notebooks, 12.7 million were shipped in the 4th quarter, about a million more than 3rd quarter, an increase of 9 percent.

For the full year, the preliminary estimate indicates that over 46 million notebooks were shipped compared to only 36 million in 2003, an increase of 27 percent.

More importantly, notebook sales as a percentage of total computer sales has also risen substantially to end the year at 30 percent.

Now, moving to monitors, over 21 million were shipped in the 4th quarter compared to 17 million in the 3rd quarter, an increase of almost 25 percent.

We think this is a reflection of lower pricing, which helped alleviate much of the inventory in the channel.

For the full year, 68 million LCD monitors were shipped, far surpassing last year's total of 48 million, an increase of over 40 percent.

No surprise, penetration of LCD monitors into the overall desktop monitor market grew as well this year from 42 percent in 2003 to 53 percent for the year.

The penetration rate in the 4th quarter was 56 percent.

Now, moving to LCD televisions, approximately 3.2 million were shipped in the 4th quarter compared to only 2.3 million in the 3rd quarter, an increase of 40 percent.

For the full year, 9.2 million LCD televisions were shipped, which is within our original estimates coming into the year.

This is more than double the 4.4 million shipped last year.

LCD television penetration ended the year at 5 percent compared to 3 percent last year.

I'd like to spend a few minutes updating you on the panel inventory situation at our customers.

Primary market data suggestions that excess inventory was by and large digested on an aggregate basis at the end of the year.

According to this data it appears excess inventory and supply chain from monitor panels has fallen below one week and there currently is no excess in notebook panels.

We believe the improvement in panel inventories can be attributable to aggressive price declines taken by the panel makers as well as retailers.

For example, market data indicates that after panel prices for 17-inch monitors fell by about $60 between August and October, similar price declines occurred at the retail level between October and December.

We believe this helped to spur consumer demand in the 4th quarter.

Now, regarding our own LCD glass product mix at the end of the year, Gen 5 and larger glass accounted for almost 65% of our total family volume, which, again, includes Samsung Corning Precision.

This is up significantly from the beginning of the year when it was just 40 percent.

A small portion of this volume was Gen 7 and I'm hopeful you all saw our announcement last week , we have begun shipping significant quantities of Gen 7 glass to Samsung through our equity venture, SCP.

We are very pleased our engineers and scientists at Corning working on location at SCP were able to meet our customer's needs and deliver product as advanced as Gen 7 in such a short timeframe.

Lastly, you should note that the one time on these customers who decided to take less than their allotted share of glass in November did come back in December and purchase their full allocation of glass.

Equalanocous [ph] will be providing a detailed overview of our display segment as well as some additional information about the LCD market and future trends during our upcoming investor meeting in New York City on February 4th.

Now, turning to the environmental segment, sales in the 4th quarter were 130 million, a sequential decrease of 4 percent, so it's in line with our guidance for the quarter as the industry typically has weaker auto production heading into the end of the calendar year.

However, we are unsure if this weakness was also part of a bigger trend tied to a well publicized decision by big three auto makers to lower production in 2005 due to higher inventory levels.

Although auto production was flat in the 3rd quarter, big three had 77 days of inventory, which is higher than their normal five-year average of 72 days.

I'll provide more color on the impact of this 1st quarter in our outlook segment.

Environmental segment had a loss of 6 million in the 4th quarter compared to breakeven results in the 3rd quarter.

The loss was primarily due to weaker manufacturing performance.

In comparison to a year ago, 4th quarter sales in the environmental segment increased 6 percent.

In the year, the segment posted record sales of 548 million, 15 percent increase over last year's sales of 476.

The increase was primarily the result of higher demand for our premium auto substraights and stronger diesel volume, led by specific retrofit projects.

In the life science segment, revenues in the 4th quarter were 71 million compared to 75 million in the 3rd quarter, decline of 5 percent in line with guidance.

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

The life sciences segment also posted record sales this year.

Sales were 304 million, an 8 percent increase over 2003 sales of 281.

In the telecommunications segment, sales in the 4th quarter were 423 million compared to 412 in the 3rd quarter, an increase of 3 percent.

However, excluding the impact of divestiture frequency control product line in the 3rd quarter, our 4th quarter sales here were up 6 percent sequentially.

Sales of fiber and cable products were 212 million for the 4th quarter compared to 202 in the 3rd.

The improvement is due primarily to stronger submarine cable project sales, which I mentioned earlier, have relatively low margins.

Fiber volumes were basically flat during the 4th quarter, much higher than we anticipated.

As you know, the 4th quarter is typically our weakest for fiber, so we were quite pleased by our performance.

Once again, demand was led by Verizon's purchases for their fiber to the premises buildout.

There was also specific fiber project in Asia that was completed during the quarter.

In addition, fiber imports to China were not as weak as expected, leading up to the final antidumping ruling.

For those of you who did not see our announcement a few weeks ago, the Chinese Ministry of Commerce, known as MOC, concluded that we did not dump fiber in the China market.

As a result, the preliminary dumping margin of 16 percent that was imposed on our fiber imports into China was eliminated.

Our customers have paid the dumping margins will be entitled to a full refund from the government.

We're obviously very pleased about the final ruling, as it alleviates some uncertainty about our ability to import fiber into this very important growing market.

For the year, fiber volume was up 18 percent, the first year-over-year growth since 2000.

Fiber pricing was nearly flat sequentially in the 4th quarter.

In fact, price declines for the year were less than 10 percent.

And the mix of premium fibers continued to be less than 10 percent for the quarter and the year.

Now, moving to our hardware and equipment business, sales were 210 million, consistent with the 3rd quarter, reflecting continued strong demand from Verizon's fiber to the premise buildout.

Excluding impact of the divestiture frequency controls, 4th quarter sales were up 6 percent sequentially.

Larry Illio, the President and CEO of Corning Cable Systems will be providing additional insight into our hardware and equipment business as well as our fiber to the premises opportunity during the annual investor meeting on February 4th.

Regarding our other reportable business, revenues in the 4th quarter were 98 million compared to 88 million in the 3rd quarter.

This increase was a result of stronger demand in our semiconductor product line.

Results from other reportable businesses also include equity earnings from Dow Corning and Samsung Corning.

Equity earnings from Dow Corning in the 4th quarter were 35 million, slightly lower than the 3rd quarter.

As a reminder, Dow Corning reported a one time tax gain in the 3rd quarter of 5 million.

Excluding that gain, equity earnings grew 9 percent sequentially.

For the year, equity earnings from Dow Corning were 134 million, compared to 89 million a year ago.

We're also pleased to report that Dow Corning had record sales in 2004 of 3.3 billion, which is up 22 percent over their 2003 sales of 2.7 billion.

Equity earnings for Samsung Corning in the 4th quarter declined about 12 million sequentially due to an unusually high compensation expense of 5 million and one time gain that occurred in the 3rd quarter of 6 million.

Now, moving to our balance sheet, we ended the 4th quarter with almost 1.9 billion in cash and short-term investments compared to 1.7 million in the 3rd quarter.

Our accounts receivable balance in the 4th quarter was 585 million, an increase of 50 million over the 3rd quarter.

About 30 million of this increase was due to foreign currency translations.

DSOs were up slightly as expected from 48 days to 51.

Our inventory balance was 535 in the 4th quarter, up from 498 in the 3rd quarter, about 20 million in this increase was foreign currency translation.

In addition, we did build some inventory and display, which I discussed earlier, as well as for certain fiber to the premise products.

Inventory turns did improve from 4.8 in the 3rd quarter to 5.2 in the 4th quarter.

Regarding our cash flow, we are obviously very pleased to be able to generate 366 million from operating activities and 74 million in free cash flow in the 4th quarter.

Major other cash inflows during the quarter included $100 million in customer deposits and improvement in working capital.

Most significant cash outflow during the quarter was 134 million in capital expenditures.

You should note that the total capital expenditures for the year were 856 million, approximately 100 million less than we had forecast.

The difference is primarily due to the timing of payments to vendors associated with some of our display expansions.

For the year, we generated over $1 billion in operating cash flow and 313 million in free cash flow.

You should note this is a non-GAAP measure.

We're very pleased to be able to generate as much cash from operations as we did during the year.

One more comment on the balance sheet.

You should note that during the 4th we reclassified approximately 270 million in debt from long-term to short-term.

This is done to properly reflect the remaining zero coupon diventures, which are redeemable in November 2005, and therefore now are considered short-term debt.

Lastly, we were very happy to see that Moody's upgraded the outlook on our debt from stable to positive.

They are the second rating agency to upgrade our outlook on our debt in the past two quarters.

I'd like to wrap up by providing you with some projections on our 1st quarter.

We're expecting revenues in the range of 980 million to 1 billion 30 million.

Expect our equity -- our earnings to be between $0.11 to $0.13 before special items.

In our display business, we are forecasting sequential volume growth for our family of LCD businesses, which, as I mentioned earlier, including our wholly owned business in Samsung Corning Precision to be up 5 to 10 percent for the 1st quarter.

You should note this will be our primary guidance for display volume going forward.

We believe that the total family volume to provide investors a more accurate view about how our business and to some extent, the LCD class market, is performing.

While we will still also provide volume growth for our wholly owned business it, will no longer be our primary guidance that will update during the quarter.

Volume growth at our wholly-owned business is expected to be flat to up 10 percent and Samsung Corning Precision is anticipating volume growth of 5 to 15 percent.

The rates of volume growth will be largely dependent upon the industry's ability to efficiently bring on new panel manufacturing capacity during the quarter, as well as the continued strong market demand for LCD products.

You should also keep in mind that the level of capacity expansion in the specific country can differ in any given quarter.

Now, pricing for LCD glass is expected to finally begin to decline after being stable to up slightly over the past two years.

We anticipate that the average pricing for LCD glass to be down approximately 5 percent in the 1st quarter.

We have always said in this technology business that prices will decline and it's the one reason why we are continuing to work on our costs.

We believe that we will be able to sustain the margins into quarter one despite these price declines due to our cost performance.

In our telecommunications segment, we expect volume for optical fiber products to be flat to down 10 percent sequentially in the 1st quarter.

While we typically experience a slight increase in fiber volume during the 1st quarter, it will be difficult this year to the stronger than expected demand we saw in the 4th quarter.

In addition, we'll not benefit from the Asian project completed in the 4th quarter that I mentioned earlier.

However, you should note in comparison to the 1st quarter of last year, fiber volumes are expected to be up almost 50 percent.

Pricing is expected to be down about 5 percent sequentially as we reset fiber prices for annual contracts at some of our bigger customers.

Fiber and cable sales in the 1st quarter will also not benefit from the approximately 20 million in submarine cable projects that were completed in the 4th quarter.

Sales in hardware and equipment are expected to be slightly less sequentially from the 4th quarter.

Sales within our environmental life science segments are expected to be up between 5 and 10 percent.

While expecting solid growth in environmental segment in the 1st quarter, demand could be impacted by a slowdown in production of the big three.

I have one additional comment to make on life sciences.

We are terminating one of our key distributors as a result of a strategic change on their part.

We believe that our end market customers will follow our products and will be adding additional distribution channels to replace this volume.

This may have a slight impact on segments 1st quarter sales.

For the year, depending on how long it takes to finalize the distribution channel, the impact could be as much as 10 to 20 percent of their annual revenues.

In our other reportable segment, we expect revenues to fall about 15 percent sequentially in the 1st quarter.

As we mentioned during the last conference call it, is evident that the next downturn in the semiconductor industry is now starting and it will impact our 1st quarter results.

This is unfortunate since we and the rest of the industry were able to enjoy this last recovery for only about 4 quarters.

Although this next downturn will have an impact on our semiconductor product sales during the 1st quarter due to our consolidation of manufacturing facilities last year, the impact to our bottom line will be negligible.

And for your modeling purposes, gross margins should be between 37 to 38 percent.

SG&A should be between 17 or 18 percent of sales and RDE around 10 percent.

We anticipate equity earnings for the 1st quarter will be slightly lower than the 4th quarter, as we will not benefit from the 11 million one time gain that occurred in the 4th quarter.

Regarding our capital expenditures, I'll be providing more of an update on our 2005 plans during the investor meeting in two weeks.

I'd like to spend a moment explaining our tax rates.

The 4th quarter rate was 43 percent and higher than previous quarters.

This higher tax rate was driven by a mix of domestic losses, where we now receive no tax benefit in international earnings, which are taxed at rates which can vary 20 percent in Taiwan to 40 percent higher in Japan and other countries.

Although we expect our 1st quarter tax rate to be relatively consistent with the 4th quarter rate, you should note it's difficult to forecast the rate and there is a risk it could be different.

You should also note that our effective tax rate will vary each quarter based on the mix of domestic and international earnings.

We do expect the rate to decline as profitability in the U.S. improves.

For your modeling purposes, you should note that the main drivers of profitability in the U.S. are telecom, environmental and life sciences, offset by corporate R&D and infrastructure costs.

Display and to a lesser extent, telecom and environmental drive our international results.

Lastly, you should use 1.5 billion shares in the 1st quarter when calculating our EPS excluding special items.

Lisa, we're ready to take some questions now.

Thank you.

At this time, if you would like to ask a question, simply press star, one on your telephone touch pad.

And to cancel your question, it's star, two.

Our first question comes from from CJ Muse with Lehman Brothers.

Good morning.

I was hoping to drill a little deeper on your ASP guidance for display.

Can you talk about what you're seeing across the various substraight sizes, I guess for the particular focus on below 5th Gen, 5th Gen and then above 6th Gen?

The guidance that we gave is on our average selling prices, which will reflect all those different Gen sizes.

We are experiencing a little more competition in the smaller sizes, the below Gen 5 and above Gen 5.

You should note, however, that at the beginning of the year at some of our big customers, we have an -- we have some long-term agreements that have an annual pricing adjustment that we begin to feel in the 1st quarter and that can impact across all the various generations that they buy.

Okay, and so what kind of price degradation are you seeing for Gen 6 and Gen 7 on a square meter basis?

We're not giving that level of specificity.

What I will say is that above Gen 5 is, is it doesn't have quite the level of competitive intensity.

However, we also have long-term agreements that end up with some annual pricing adjustments in both sides.

In the 1st quarter only on the annual ones.

Yes.

Okay, and in terms of, I guess looking beyond the 1st quarter, given that it's only an annual adjustment and that we're going see a major ramp in Gen 6 and Gen 7 capacity, really beginning 2nd quarter and moving forward throughout the year, what is your thought today on pricing for the rest of the year?

We'll provide at the annual analyst meeting in February a little more of our thoughts about pricing and volumes for the year.

That being said, note that the annual adjustments that I talked about that happened in the 1st quarter only impact a portion of our customer base.

There are other customers that we handle differently.

Gotcha.

And one housekeeping item.

Can you tell me what the share count was both basic and diluted, for the December quarter?

I'll have Ken get back to you on that.

I think it was a billion five.

Yeah, probably a billion three, basically -- it's right on the bottom of the income statement, CJ.

Okay.

I didn't see it on there.

All right.

Thanks.

Thank you.

Our next question comes from Stephen Sachs with Merrill Lynch.

Hi.

Good morning.

Just on the diesel business, can you give a quick update how that impacted environmental sales growth in the quarter?

Diesel was basically the same 3rd quarter to 4th quarter.

It was actually a little bit of a surprise to us because the retrofit business we thought was declining, but turned out to be a little bit stronger.

So basically diesel was flat 3rd to 4th quarter.

And just following up on the pricing question, Wendell, are you implying that this would be the worst of the pricing, given those price contracts and given some of the capacity coming online, or is it too early to tell that?

I think it's too early to tell that, Steven.

What I wouldn't necessarily do is assume that what happens in the 1st quarter is something that you say happens in the quarter after and the quarter after, so I think it's too early to say that our 1st quarter price down -- average price down will be the worst that we'll see.

That being said, note that last year our customers had average price declines on panels of about 35 percent and from what we have seen and heard from them, they are having -- they're guiding it to be down double digits in the 1st quarter again.

Against that type of environment, our glass pricing was stable last year and now what we're saying is in the 1st quarter we expect the average to go down only 5 percent.

So you can see that though we've always said that we would anticipate average price declines to begin again once we became more in balance, that the other element of our pricing strategy that we've always explained is that because of our relative competitive strength, we ought to be somewhat more insulated vis-a-vis the pricing experience of our customers.

Okay.

Thank you very much.

Thank you.

Our next question comes from Ping Sau with Credit Suisse.

Hi, how are you?

Good, thank you.

I have a few very quick questions.

The first one is what do you expect for the full year for that LCD volume growth?

We haven't given out specific guidance for ourselves yet.

All we've said is that the market, we think, can grow between 40 and 60 percent and we certainly don't intend to lose share for the year, but in 2004 we'll give you a little -- for 2005, we'll give you a little more guidance on February 4th.

Okay.

Second quick question, what's the gross margin for Samsung Corning Precision?

I don't have in a off the top of my head, but Ken can get back to you.

Is it still 71?

Actually I think it was 74.

74 percent.

Similar to the 3rd quarter.

Okay. the difference in the shipment growth rate between Samsung Corning Precision and Corning, is that purely because Gen 7?

No, it was not because of Gen 7.

Gen 7 was fairly small.

I think this is one of the important points to emphasize here.

One of the reasons why is we're moving to giving out family guidance.

Now that the industry has moved from being a sold out situation, in any given quarter what we can see is that some customers, because not only their ramps but also how successful they might be in the marketplace, they might be more successful in others.

So our base business, where, for example, we might be supplying to a Taiwanese supplier, they may lose out in the monitor market to a Korean one, and we'll still benefit because we get it in equity earnings.

And that's one of the reasons why we want to talk about family so now that the industry can't sell everything it can make, it's a little bit more difficult for us to forecast how successful a Korean customer will ge in a given quarter versus a Japanese or Taiwanese.

How much is the utilization you expect for the 1st quarter?

For ourselves?

Both.

Very high.

Very high.

We'll operate just a little under our capacity, which we're actually quite thrilled with because we are in the process of now converting pack from air freighting all of our pieces to shipping by ocean.

But we're operating very close to full still.

Final there, I didn't catch if you gave the guidance for the CapEx for the year.

No, I did not.

I said I will be holding that piece of data to announce as a surprise on February 4th.

Okay.

Thank you.

Thank you.

Our next question comes from Nikos Theodosopoulos with UBS.

Thank you.

I had a couple of questions.

First, with the price decline in the LCD business that you've talked about, where do you think you'll be for Gen 5 and below glass versus the competition?

Do you still think you would be at a premium in the 1st quarter or would these price declines do you think you'll be a parody?

We have always had a premium on our glass versus our competitors even below Gen 5.

We would expect that premium to continue.

We would view this as the situation as being much more in balance now between our capacity and market demand in the 1st quarter.

And therefore we would anticipate sort of returning to the situation that we've always described that we would anticipate with average price declines, but also as we've always anticipated, we will continue to be able to command a pricing premium versus our competition.

Has-- do you think the premium is the same as it was last year?

If it was like 10 percent last year, do you still think it's about the same or do you think the premium has narrowed?

I think it's still in the double digit range.

Okay.

Also on that, can you explain why the gross margin on LCD was down sequentially in the 4th quarter?

Yeah, Ken, it was only down slightly at our wholly own business and basically it was down for one simple reason.

You may recall that we didn't sell everything we could make, so we had brought on additional capacity for the 4th quarter.

Then as you recall in November, particularly because of one large Taiwanese customer, we couldn't ship that, so that was really the reason.

There's no-- no degradation in our performance during the 4th quarter and the differential between 3rd and 4th quarter in gross margin I think was just a little under 2 percent.

Okay, and the last question I have is on fiber, can you -- you gave the 1st quarter guidance for pricing down about 5 percent.

Similar to the LCD business, is that a one-time event and will we expect stability throughout the year?

Because it felt like pricing was stabilizing for the sector going into the end of the year and I'm wondering do you still think that is just an annual adjustment?

Yeah, I think that's the case if you go back and look at our 2004 experience, our quarter one is always the steepest price decline, so at least seasonally, that's what we would expect and if the business continues to do very well, so that's what our hope is, that it follows the normal pattern.

I think fiber is much more like that than LCDs.

Fiber, we tend to have a number of very large annual contracts.

Okay.

Thank you.

Thank you.

Our next question comes from Daryl Armstrong with Smith Barney.

Thank you very much.

I have two really quick fiber questions, then one on LCD.

You talked about some [inaudible] submarine fiber business this past quarter and some activity in China.

Could you give some color in terms of what you're seeing relevant to activity outside of fiber to the extype of deployments?

Then second of all on the fiber side, based on what you know right now, do you have any meaningful cost reduction initiatives that you plan to implement over the course of this year that would meaningfully change your incremental margins in that business and then I have one followup after you finish.

Let's start with the market question.

In terms of regions in quarter four for fiber volume, North America was the strongest and that versus our guidance and as Jim mentioned, we also had some strength in Asia due to a significant job that we had completed and shipped.

We would anticipate in quarter one that North America continues to be the largest market, but that we anticipate some continued growing strength in Europe as well as we look at some relative stability in Asia.

And the types of applications are still primarily more access-based, more fiber-based?

Yes.

As we predicted previously, significant proportions of our fiber volume are now moving into the access market.

We believe that long haul and submarine will continue to be very depressed as we move into this year.

We are seeing a little more strength in the regional, or feeder piece of the market, but many times that ends up being the same customers that are reinforcing their access network so they tend to be related.

Okay.

And then lastly, how much of a benefit do you get from shifting from air freighting to ocean shipping on the LCD side?

For a full year or if we can make it happen, about a percent.

Okay.

Thank you very much.

Our next question comes from John Anthony with SG Cowen.

Good morning, guys.

Questions over on the LCD side.

Beginning with the -- can you just give us a little more detail on the breakdown, the difference between the volume and revenue growth?

Jim, I think you said it had to do with both currency and pricing, but would you be willing to give more of a split there so we know which had the larger impact?

Well, volume, if you're talking about our wholly-owned, volume was 2 percent and currency was 3.

So we were up 5 percent sequentially for our wholly-owned business.

I guess if I'm looking at it on a full-year basis, maybe I misheard you.

I thought you said volumes were up 65 percent on a full year basis.

I'm sorry.

I thought you were just talking about for the quarter.

Yeah, I have that lying around here somewhere .

They were up 65 percent and pricing exchange rates were just about equal to the rest.

Okay.

And on the customer deposits, are those dollar denominated?

Yes, they are.

Okay, and then lastly, going over to the environmental side, have you guys gotten any indications on the, where you stand with some of the engine selection given that we're rapidly approaching the new builds in 2006 for the '07 deadlines?

We would anticipate in this year, we're going run an awful lot about where we stand in diesel.

First, as you note, on the heavy duty side, during 2005, we will have a very good idea of where we are on winning the customer platforms and did we reach our goal, which is to have majority share in that market.

So far we're actively involved with all the major players and we are feeling pretty good about where we are in their development cycle and our relative position.

In addition to heavy duty, note that in light duty diesel, we've also introduced a brand new material called aluminum titenate, that we are in the process of developing with a major European light duty customer and we should know whether or not we can successfully enter light duty diesel actually years ahead of when we originally planned by the end of 2005 as well.

Okay.

Thanks, guys.

John, it's Jim Flaws.

I want to come back on your comment on the deposits.

We do get -- with the amount agreed to in dollars, however the day it's due to us they pay in yen and therefore our obligation back to them is in yen, which is how we price.

So are they hedged out?

We don't hedge out the translation of our revenues.

Effectively they are prepaying their receivables which we bill to them in yen.

So we get the amount in yen at the time at the rate of that day and they can only earn back in yen, which is what we bill them, so we know they don't expect to have an exposure there.

Okay.

Okay.

Thanks.

Thank you.

Our next question comes from John Harmon with Needham and Company.

Hello, good morning.

Just a couple quick questions.

Without asking you to quantify it, could you discuss the pattern of Verizon's fiber purchases for fiber to the premises?

Were they ramping strongly in Q4 and in Q1, do you expect it to be flat or up or down and still ramping and then over what time period do you expect them to be buying?

Okay.

Well, there's two parts to a customer like Verizon's demand.

They buy a portion of their fiber demand or cable demand that doesn't go directly into the access piece of the network.

Now, we can tell that because it's some very high fiber count cables and so their volume of those products increased as well as the access products that they have done as part of the fiber to the premise ramp.

The two are somewhat related because as they look to their network and they look to what they believe ultimate demand will be, they are reinforcing some of their core rings.

Now, that being said, now let's turn to the next part and I think one of the real drivers here, which is fiber to the premise.

They publicly announced and disclosed that they are passing 30 to 35 homes per week.

That's about a rate of about 1.6 to 1.8 million homes per year.

They have also said that they have a desire to double that rate by the year end 2005, which would take them to a rate of 3.2 or 3.6 million homes passed per year.

Now note at the same time for this year, their target is to do somewhere in the 2 to 2 1/2 million homes passed.

Now, how to relate that directly to fiber demand gets a little more esoteric.

We've given you revenue guidance.

Let me try to give you a little insight on fiber demand.

From a theoretical standpoint, we would conclude from our architectural models that they should be taking a little bit less than two kilometers per home of fiber for each home passed.

Now, what we've actually experienced in real life with them is they are taking a little more than 2 kilometers per home.

We're not quite sure we understand exactly why, it could just have to do with something as simple as while they are actually have the construction crews out there in their provisioning, that they are just putting in a little bit higher fiber count so that they don't ever have to ever dig it all back up again, but we're not quite sure why.

So that's one of the areas of positive surprise during the revenue in this last year is they have taken a little more of our product per home past than what we originally estimated.

Good answer, thank you.

But -- and secondly, you said LCD television penetration was 5 percent last year and I think along the curve you were looking for something like 7 percent.

Is that due to any particular factors?

Does that endanger the 16 percent penetration you're looking for in '06?

We were always anticipating 5 percent TV penetration in 2004.

To be on that ramp for the 16 percent for 2006.

Note that 2005 is going to be real important year for us in LCD TV because we would expect that penetration to almost double by the end of the year and that means we'll have a significant ramp throughout the year.

LCD TV should be around 40 percent of our anticipated growth in volume in this, in 2005, so it's a critical year and we should get an answer to the question of how quickly LCD TV will penetrate.

Just to follow up, what do you think dollars per linear inch need go to and/or end up at by the end of this calendar year?

We'll talk some more about that at our February 4th.

Okay.

Thank you.

Thank you.

Our next question comes are Ed Show with QCI.

Good morning.

Two quick questions.

LCD, any conversations on further prepayment contract, conversations and two, maybe just a quick update on depreciation in Concord, will we see that, or even contemplating opening that back up in the forecastable future?

On Concord, we're still depreciating.

As we've said before, we think it would be '06 that we make the decision if the market strength continued, so you really should expect no change from that in the upcoming year.

On customer deposits, we remain very close on negotiations with two additional players, but again, as we've said, this is a tough thing to do, but we are still in negotiations.

I assume that -- the probability of that improves as the inventory gets cleaned up here as you've talked about and digested?

Well, clearly one of the things that is elongated the dialogue with our customers has been some of their challenges financially and to the extent that their financial performance improves, that would make us more optimistic about being able to close those agreements quickly.

Great.

Thanks.

Thank you.

Our next question comes from Matthew Smith with IBC World.

Yes, good morning, gentlemen.

I was hoping you could give me a little more color on the LCD gross margin.

You commented that despite the price declines for 1, 2005, you still expect to hold the gross margin steady and it sounds like the move from air freighting to boat shipping will account for some of that margin benefit, but what other things are at play there that give you confidence that you can hold your margins steady in 1, 2005?

Thanks.

That really is coming to fruition, a number of the things we've been working on which is continuing to improve both our melting and finishing yields, our capital efficiency on some of the new tanks that we'll be operating, and so it is really that is driving it much more than any ocean freight improvement.

We have always been expecting this level of price declines to come at some point and we've been working very hard to improve our cost performance.

Okay.

When you, some of the recent comments from the likes of LG Phillips and Samsung are sort of pointing towards a tighter supply demand equilibrium for the flat panel industry in the 2nd half of 05 as TV's ramp up, that would imply a rising level of capacity utilization for the industry as a whole.

In that sort of a situation, do you expect that the -- glass situation to tighten as we go through into the 2nd half of the year and would that imply that you would have -- would that make a dent to some extent, you think the price declines that you're beginning to see in 1Q '05?

We're anticipating that this year's a year that if LCD TV penetration goes as planned and the monitor market goes as planned, that we'll be relatively in balance, which would mean that we would have an environment that Jim has described many times of being able to support sort of a double-digit price decline and still drop our costs enough to be able hold our margins.

If indeed LCD TV comes on stronger than what we are anticipating, and our customers financial results improve and glass becomes tight again, we will go back to the mode that we were over the last two years, but I think it's too early to tell how LCD TV penetration will do and what it's subsequent impact will be on panel capacity and therefore to what extent we're in balance on glass.

Great.

Thank you very much.

Thank you.

Our next question comes from RE Bessinger with Standard and Poors.

Thank you.

It is evident there has been some nice nice momentum in FTTP related fiber sales and I'm just wondering what the correlation would be to hardware and equipment.

Should that be a leading indicator that hardware and equipment segment sales should start to see some momentum during the 2005?

We clearly feel our hardware and equipment is -- we've said it represents about 70 percent of our fiber to the premise opportunity.

So we clearly feel that for the year if Verizon continues to accelerate, as Wendell just indicated, that would be very good for us.

We're also delighted with our margin performance in this business.

We've often commented that this end of the business remained profitable all the way through the telecom slump, but we really have improved margins this is year this that business, so this will also beneficial to our bottom line.

Thank you.

And one last question, in the life sciences segment, the 10 to 20 percent revenue impact that you mentioned in terms of termination of a major distributor, is that something that we should see in the 1st half of the year until it's replaced, or is that sort of throughout the year or should it rebound in the 2nd half?

I would like to emphasize I think that number is what we think appears as the worst case.

I don't think you'll see much in the 1st quarter and you'll begin to see some impact if we're going have it in the 2nd quarter.

Obviously we hope in the back half of the year that we've gotten our end customers to move over to our alternative channels, but it was important to inform you about this major shift.

Thank you.

Thank you.

Our next question comes from Ajit Pai with Thomas Weisel Partners.

Good morning, gentlemen.

And congratulations on a great year.

Thank you very much.

Couple of quick questions.

The first one is about cash flows.

About over a third of your cash flows from operations were from accounts payable.

Just trying get some color on that.

I don't think there was anything very unusual going on in accounts payable.

We did try to, as always, work, extend out our days payables outstanding to help out just as our customers are always trying to stretch us outgoing the other way.

And of course we did have accruals at the end of the year for some bonus payouts, and then we lastly we have accruals on capital spending.

Okay.

The second question is about the gross margins in your LCD business, the consolidated substraight business.

You mentioned that it was higher than 60 percent, but could you give us some indication of the cash gross margin if you take the depreciation out, whether that's closer to the 75 percent that Samsung Corning Precision has right now?

I'll have to answer the question a different way.

First of all in the 3rd quarter, our wholly-owned business was 60 and dipped only slightly in the 4th quarter, but I don't think cash gross margins are a useful metric here because we keep adding incremental fixed costs because our tanks are so modular, so we don't tend to think about it like we do in fiber where there is huge capital that's underutilized.

The primary difference between us and Samsung Corning Precision is, first of all, they have always had a higher mix of the larger sizes.

Second of all, they manufacture in Korea and remember, we still manufacture a portion of our glass in the U.S. and Japan where we have higher labor costs.

However, lastly they are also very good at what they do, but those are the primary differences between us and them.

Could you give us some indication of the depreciation in that business for the consolidated business, though?

No, not of off the top of my head.

We could maybe talk more about that on February 4th.

It will also be disclosed in the 10-K for display segment, which will be out in a couple weeks.

Okay.

And then the last question would be about the fiber business.

In terms of the industry consolidation, you just watched [inaudible] merge together and the three Japanese players have all been in a cost-cutting mode.

At one point I think maybe three quarters ago, you talked about your cost of production of fiber being substantially lower than your competitors.

Has that changed with their cost cutting right now and what would be the approximate cash operating margin for that business for you today?

We haven't seen any significant change in our competitive position at least in terms of weakening.

Actually telecom was our top free cash flow contributor for the company last year, so we continue to have a strong cost advantage.

Regretfully, more consolidation hasn't happened and so we're not seeing our competition get tremendous leverage out of out of being able to consolidate factories.

Note that our fundamental manufacturing process is different and is advantaged on many dimensions.

That being said, I don't believe we disclose our cash flow gross margins in that business.

However, when we do at the analyst meeting upcoming here in February, we'll give a little more insight into both the pricing situation and relative competitive position.

Okay.

Thank you so much.

And congratulations, again on a great year.

Thank you.

Lisa, we have time for one more quick question.

Thank you.

Our next question comes from Kurt Woolworth with J.P. Morgan.

Hi, good morning.

Good morning.

Quick question on the glass ASP.

Can you provide a little bit more detail on the dynamics behind how you price glass, how much of the glass is sold under long-term contract, how often the contract is repriced.

Also just highlight on how the pricing works at Samsung Corning Precision if that's all annual contract.

Thank you.

So it will be -- it's different by region and different by customer.

We have some very long-standing customers that we have had some preset pricing steps.

However, what is more common is that as, as they take a look at their glass needs upcoming for the year in the coming quarters, you certainly have a lot more activity in the early part of the year, but that doesn't necessarily exclude activity later on in the year.

With Samsung Corning Precision, we participate fully in setting that pricing and that is an ongoing dialogue with Samsung and Samsung Corning Precision and their direct display customers.

I'd say probably the pricing dialogue with most of our customers, I can't remember the last meeting I was with one that didn't -- we didn't talk about price, so it's pretty ongoing.

Okay.

Thanks.

Thanks very much.

I only have a couple closing comments.

First of all, we were extremely pleased with our performance over this past year.

We were able to increase revenues significantly, triple the amount of EPS before specials, generate a tremendous amount of cash despite our growing needs, continue to fund R&D efforts and improve our balance sheets.

We're very excited to have the company going the right direction and we feel very good about our opportunities to growth in the upcoming year.

I'd like to reemphasize one point on the pricing in LCDs, since it tended to dominate the questions here.

This is a price decline that we've always expected, we been preparing for and we're driving down our costs.

Reemphasize, we expect to be able to hold our gross margins as we go into the 1st quarter compared to the 4th quarter.

As I mentioned earlier, I invite each of you are attend our annual investor meeting on February 4th at the Mandarin Oriental Hotel in New York City.

At that meeting, providing additional information about display, fiber to the premise, diesel, as well as giving you a look in some of our new R&D projects.

To register and obtain more details about the even, visit our investor relations website at Corning.com.

We hope you can all make it.

Ken?

Thank you, Jim.

And thank you all for joining us this morning.

A playback of the call is available beginning at 10:30 a.m. eastern time today.

It's going to run until 5:00 eastern time Wednesday February 9.

To listen, dial 203-369-0275.

No password is required.

And the audio cast will be available also on our website.

Lisa, that concludes this morning's call.

Please disconnect all lines.

Thank you.

This conclude's today's teleconference.

Thank you for your participation.

Have a great day.

You may disconnect at this time, please.