康寧 (GLW) 2005 Q1 法說會逐字稿

Good morning and welcome to the first quarter results conference call.

All parties will be on 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 now like to turn the call over to Mr. Ken Sofio, Director of Investor Relations.

Sir, you may begin.

Thank you.

Good morning.

Corning's first quarter conference call.

This call's also being audio cast on the Web site.

Jim Flaws, Vice Chairman, Chief Financial Officer leads the discussion.

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

And before I turn it over to Jim, you should note that today's comments do contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

These statements involve a number of risks, uncertainties of the facts that could cause actual results to differ materially and these risks are detailed in our SEC reports.

Jim.

Thanks, Ken, and good morning, everyone.

Last night we released our official results for the first quarter through our press release and through the filing of our 10-Q, both of which can be found on our Investor Relations Web site this morning.

In addition, for those of you with Web access you will notice that we've posted several slides this morning that will summarize some of the key data points from this morning's prepared remarks.

These slides will be available on our Web site after the call as well.

Regarding our first quarter results we were obviously very pleased with the higher than expected sales and earnings per share versus the guidance we provided at our annual investor meeting.

Let me share with you some of the details.

Sales for the first quarter were 1.05 billion, a slight increase over the fourth quarter and higher than our expectations.

This was the ninth consecutive quarter of sequential revenue growth for us.

The first quarter revenues were driven primarily by higher than expected demand in our Telecommunications segment as well as continued growth in our Display and Environmental segments.

Net profit after tax, excluding 3 million in special items this quarter, was 252 million, an increase of 42% over the fourth quarter NPAT of 177 million.

Our first quarter results represent the highest level of net income since the third quarter of 2000.

You should note that these are non-GAAP measures and a reconciliation to GAAP can be found on our Web site.

Earnings per share was $0.17 in the first quarter and much higher than our expectations.

While we did have two special items during the quarter, they netted to only 3 million and had no impact on EPS, therefore, our GAAP and non-GAAP EPS were the same this quarter.

Our strong earnings performance above guidance was the result of higher than expected equity earnings from Dow Corning, strong performance in our Telecommunications segment and lower corporate tax rate.

I'll provide you more details about the tax rate now and talk about Dow Corning and the Telecommunication segments during our discussion of our results.

Regarding our tax rate, it was much lower than we originally anticipated.

If you remember our discussion during the annual investor meeting, our tax rate post the deferred tax impairment, is driven by a mix of domestic losses, which received no tax benefit, and international earnings, which are taxed at rates that vary from about 20% in Taiwan to 40% and higher in Japan.

We told you then that our expected tax rate for the first quarter would be consistent with the fourth quarter of 43%, but that it was very difficult to forecast and there was a strong chance the rate could be different.

Our first quarter guidance was based on the belief that in the first quarter we would have higher U.S. losses and higher international earnings.

On the contrary U.S. losses in the first quarter were significantly lower than anticipated as was our international income.

U.S. losses were lower due to primarily the strength in our Telecommunications segment.

Our international income was slightly lower due to the impact of foreign exchange remeasurement in our Display segment, which is a topic I will cover in more detail in a moment.

In addition, our overall international tax rate was lower than we anticipated due to investment tax credits we received in Taiwan as a result of the significant capital spending there.

As a result, our overall tax rate for the first quarter was only 18%.

We estimate this lower tax rate was a benefit to our earnings performance of about a penny and a half.

I'll provide you additional guidance on the tax rate for the year in our outlook section.

Regarding two special items that netted to $3 million, first relates to the ongoing marked-to-market adjustment each quarter on the Corning shares to be contributed to the Pittsburgh Corning settlement.

First quarter we had a gain of 16 million due to the decrease in Corning share price during the quarter.

The second item relates to an impairment of our investment in Avanex.

As you may recall, we sold our photonics business to Avanex in 2003.

We received 21 million restricted shares of Avanex stock.

Our cost basis in these shares is around $2.50 each.

Today we currently own around 17 million shares.

With the significant decline in the Avanex share price in the quarter, we decided to impair a significant portion of that investment during the first quarter on the remaining shares we held.

Impairment charge was 19 million pretax.

Clearly, if the stock continues to slide, we may have to impair that investment further.

The net of Pittsburgh Corning gain on the Avanex loss was only $3 million, and therefore had no impact on our EPS for the quarter.

Now moving down the income statement, gross margins were 41% and much higher than the fourth quarter and our own expectations.

Fourth quarter gross margins were 35%, and as we mentioned during our last conference call, impacted by several non-recurring items, and weaker operating performance in the Environmental.

For your modeling purposes I'd say about half of the 6% sequential improvement in gross margins was attributable to the stronger manufacturing performance in all segments, particularly Display and Environmental.

The remainder was due to the non-reoccurrence of those fourth quarter items.

Now continuing down the income statement, SG&A in the first quarter was 184 million, 17.5% of sales, well within our guidance.

RD&E in the first quarter was 98 million, or 9.3% of sales, and also within our guidance.

The other income, other expense line item on our income statement moved from19 million in income in the fourth quarter to 9 million in expense in the first quarter.

The change was a result of a pretax loss of 26 million related to remeasurement of certain balance sheet items primarily at our Display business in Taiwan.

In January we switched the functional currency of that business from the Taiwanese dollar to the Japanese yen.

FAS 52 requires companies to remeasure balance sheet accounts recorded in a non-functional currency back into the entity's functional currency.

In this instance the balance sheet accounts of the Taiwan Display business were remeasured from the NT dollar into the Japanese yen, its new functional currency before being translated into U.S. dollars for reporting purposes.

Loss was 5% appreciation was the result of 5% appreciation of the NT dollar versus the Japanese yen during the quarter.

We are instituting a more comprehensive balance sheet hedging program in the second quarter in Taiwan that should offset future remeasurement issues.

You should note that hedging strategies are never perfect and we could experience future gains or losses, however, given the hedging program we are now moving towards we do not expect those future gains or losses to be as significant as this quarter.

Moving to equity earnings we recognized 166 million in the first quarter, an increase of 25% over the fourth quarter equity earnings of 133 million.

This significant increase was primarily due to Dow Corning, which had a phenomenal quarter.

Equity earnings from Dow Corning were 68 million in the first quarter, almost double fourth quarter equity earnings of 35 million, which provided an additional two pennies of EPS for us in the first quarter versus our expectations.

Dow Corning's better than anticipated performance was a result of much stronger volume and favorable pricing exchange rates.

In fact their sales were up about 20% versus the first quarter a year ago.

Dow Corning did benefit from some currency and price gains where approximately two-thirds of the gain was from volume.

They are seeing good growth in many industry and geographies.

We are delighted with their performance.

For the remainder of the year, as long as commodity prices hold and world economies continue to be strong, we anticipate Dow Corning's equity earnings to be in the range of 50 to 60 million per quarter.

Even though this range is much higher than our original guidance of 30 to 35 million per quarter, it's slightly lower than Dow Corning's first quarter results.

You should note later this year they will be undergoing a normal shut down of one of the large manufacturing plants for maintenance which may impact volume.

Now let me move on to the segment's results for the first quarter, starting with Display.

Sales were 320 million in the first quarter, a 3% increase over the fourth quarter sales of 311 million.

This increase reflects sequential volume growth of 5%, a favorable change in the yen, and price declines of less than 4%.

Equity earnings from Samsung Corning Precision were 80 million, compared to the 73 million in the fourth quarter.

Sequential volume growth was 6%, offset somewhat by price declines of less than 4%.

You should note that SCP's fourth quarter equity earnings were impacted by an unusually large compensation charge of 7 million.

Sequential volume growth for our consolidated Display segment, which includes our wholly owned business plus Samsung Corning Precision, was up 6% for the quarter.

Net income in the Display segment, including equity earnings, grew 6% over the fourth quarter from 151 to 161 million.

You should note that the first quarter net income includes approximately 20 million in an after-tax loss related to balance sheet currency remeasurement that I mentioned earlier, which was completely offset by the impact of much lower corporate tax rate on segment's results.

For your modeling purposes, gross margins grew from 58% in the fourth quarter to 60%.

We are very pleased to have met our guidance on margins despite the price reductions.

In comparison to the first quarter last year sales in our Display segment grew almost 40%, primarily due to volume gains of 35%, and favorable exchange rates.

You should also note that LCD glass average pricing was flat with the year ago.

Net income, including equity earnings, increased 36% in comparison to last year.

I know some of you are curious why our glass shipments were up 5 to 6% in the first quarter, while reported panel shipments were up around 13%.

This is not a surprise to us.

In fact, looking at the last several quarters it's hard to find a quarter [where] panel shipments correlated exact with glass shipments.

Example in the second quarter last year panel shipments were up 8% while our glass shipments were up much higher, 20%.

Conversely in the fourth quarter last year panel shipments were up 23%, our glass shipments were up only 6%.

The take away here is quarterly panel shipments often do not provide the best metric in determining what our glass shipments will be in a particular quarter.

I'd like to spend a few minutes updating you on end market trends during the first quarter.

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

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

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

The preliminary data of end market shipments is tracking to our forecast.

Starting with notebooks.

About 13 million were shipped in the first quarter, slightly higher than our expectations.

We believe that notebooks remain close to 30% of all computers sold.

Moving to LCD monitors.

Over 21 million were shipped in the first quarter, on track with our expectations.

In the first quarter we believe the penetration of LCD monitors was around 60%, compared to the 53% average penetration last year.

For LCD televisions, approximately 3.3 million were shipped in the first quarter.

LCD TV penetration was about 8% in the first quarter, compared to 5% for all of last year.

We continue to believe LCD TV penetration is on track to be around 10% for the year.

Regarding our LCD flash product mix, in the first quarter Gen 5 and larger accounted for almost 70% of total volume including SCP.

This is up from 65% at the end of last year.

The mix of Gen 5.5, 6, and 7 glass was about 15% in the first quarter.

We believe these larger generations are aimed primarily at televisions.

You should also note that we signed four new long-term purchase and supply agreements with customer deposits since the February analyst meeting.

As part of these agreements, our Display business will supply large size glass substrates to customers over periods up to five years.

Also as part of the agreements the customers have agreed to make advanced cash deposits to Corning for a portion of the contracted glass to be purchased.

We now have five customer deposit agreements for a total of almost $1 billion in cash prepayments.

We received 200 million last year, 20 million in the first quarter, and another 88 million to date in April.

The remainder this year we expect to receive 374 million.

The total remaining amount of cash to be received over the next few years is approximately 300 million.

We are obviously quite pleased to have these additional customer deposit agreements.

It is a strong indication to us that Corning continues to be the most reliable supplier of large size glass in the market.

We are delighted to have signed these four customer agreements eight months after the first one.

In fact, these four customers recently signed up makes it clear that the technical advantages of our glass, and our ability to supply on a consistent basis, continue to set the standard in the industry.

In addition, the timing of these recent announcements helps solidify some of our own capacity plan.

I'd like to remind you of the accounting treatment of these deposits since we signed four of these agreements recently.

Deposits shows as a cash inflow on the cash flow statement.

We break this data out separately for you.

The deposit then becomes a long-term liability on the balance sheet.

We book no revenue or profit at the time of the deposit.

When the customer purchases glass under these agreements we book the sales and gross margin at that time in our normal manner.

The customer then receives a credit memorandum that reduces our receivable.

Effectively, the customer has prepaid a portion of the accounts receivable.

We have no restrictions on our use of the cash.

If the customer fails to buy the contracted glass for the terms over the life of the contract, we keep the cash.

We continue to believe this program is a classic win-win.

Customers have assurance that we, as the number one supplier of large gen LCD glass will build adequately capacity.

Corning gets cash up-front as we expand and higher assurance that we will sell the glass.

Now moving to the Environmental segment.

Sales in the first quarter were 148 million, a sequential increase of 14% over the fourth quarter sales of 130 million.

While first quarter sales are typically higher than fourth quarter due to seasonality, the sales performance was higher than our expectations.

The substantial increase was primarily due to strong volume in both auto and diesel.

Auto volume was up 10% sequentially while diesel volume was up 18% sequentially.

The increase in diesel demand was driven primarily by a national retrofit program in Korea.

The segment had a loss in the first quarter of 2 million comparison to a loss of 6 million in the fourth quarter.

The improvement was due primarily to better manufacturing performance strong volumes offset slightly by higher development in engineering spending on diesel.

We were also pleased to see that inventory levels declined as expected at the big three auto makers from 80 days in February to 73 days in March.

I have one update on diesel.

As you know, this will be an important year for our diesel business as we are working with various heavy-duty manufacturers with an objective of having our technology designed into their platforms.

As we told you at our February analyst meeting, we have several letters of intent and are working towards making them formal supply agreements.

I'm happy to report as of last week three of those prospective heavy-duty customers have notified us that they will be using our products and we're now in the process of negotiating final agreements with them.

While we're unable to name the customers, we wanted to update you on the progress we have made regarding this exciting growth opportunity for the Company.

In the Life Sciences segment, sales were 74 million, compared to 71 million in the fourth quarter.

As we told you during our fourth quarter conference call, we made the decision to not renew a key distributor contract as a result of strategic change on their part.

As expected, our first quarter sales were slightly impacted by this decision.

Even though the sales were higher in the first quarter this is in comparison to a typically weaker fourth quarter.

We have had good success so far in converting our customers to the new distribution channel although there are several who have yet to do so.

In addition, this upcoming quarter will be an important test as to whether these customers actually purchase our products through new channels.

Therefore, we still believe for the year our Life Science segment sales could be impacted by as much as 10 to 20%, although we are feeling much better about this transition.

Moving to the Telecommunications segment.

Sales in the first quarter were 427 million, a slight increase over the fourth quarter sales, and much higher than we expected at the time we gave you our guidance.

In comparison to a year ago, sales were up 115 million, or 37%.

The first quarter performance was driven by higher than expected sales in our hardware and equipment products, which grew from 211 million in the fourth quarter to 215 million in the first quarter.

In comparison to a year ago, hardware and equipment sales have increased 32%.

Primary drivers behind the sequential volume growth were continued demand from Verizon's fiber-to-the-premise buildout, as well as stronger demand in Europe.

Sales of fiber and cable products in the first quarter were212 million, and consistent with the fourth quarter.

As expected, fiber volumes were down 6% sequentially in the first quarter as growth in North America and Europe was offset by weaker demand in China.

The lower demand was the combination of overall weakness in the China market, as well as the non-reoccurrence of a specific fiber project we completed in the fourth quarter.

However, you should note the China market in general continues to be highly competitive with substantial overcapacity and continued price pressure.

In light of these current market conditions, it's been difficult to regain the share that was lost prior to the resolution of the antidumping matter.

While we will continue to work towards regaining our market share, we'll have to accomplish it in market conditions that do not appear to be improving anytime soon.

One last note on our worldwide fiber volumes and the progress we've made since last year.

Comparison to first quarter 2004 our fiber volumes were up 50%.

Fiber pricing was down sequentially about 2% in the first quarter.

Reduction was slightly lower than we anticipated as some of the expected price reductions were pushed into the second quarter.

For the quarter, fiber to the X sales were about 80 million and higher than we expected.

As a reminder, the majority of sales related to our hardware and equipment products.

Net income in the Telecommunication segment was 9 million positive in the first quarter, in comparison to a loss of 9 million in the fourth quarter.

The improvement in our results was primarily driven by stronger operating performance and the non-reoccurrence of lower margin sales that occurred in the fourth quarter.

In our other reportable businesses, sales in the first quarter were 81 million, compared to 98 million in the fourth quarter.

The decline was primarily due to weakness in our semiconductor products as a result of the recent downturn in the industry.

Now moving to our balance sheet.

We ended the first quarter with about 1.5 billion in cash and short-term equivalents, compared to about 1.9 million at the end of the fourth quarter.

The decline was due to the capital expenditures in excess of our operating cash flow and net debt repayments of 146 million.

Our cash flow from operations was 142 million in the first quarter, compared to 366 million in the fourth quarter.

Free cash flow was negative 179 million in the first quarter, compared to 74 million positive in the fourth quarter.

You should note that free cash flow is a non-GAAP measure.

The most significant cash outflow during the quarter was 323 million in capital expenditures, mostly in Display.

In addition, working capital was a cash user of 260 million.

As a reminder, quarter one is usually Corning's weakest cash flow quarter.

Major cash inflow during the quarter was dividend from our equity companies of 143 million.

This amount was primarily from Samsung Corning Precision and Samsung Corning.

While we do anticipate future dividends this year from our equity companies including Dow Corning, we will not be expecting this large of an amount in the remaining quarters this year.

Regarding our debt reduction program, during the first quarter we redeemed 100 million of our outstanding 3.5% convertible debentures.

As expected, the majority of bondholders affected by this redemption elected to convert their debentures to stock.

At the end of the first quarter 191 million of the debentures remained outstanding.

We expect to redeem those debentures depending on market conditions before the end of the year.

During the first quarter we also completed negotiations with banks on a new revolving credit facility which will provide the Company with 975 million unsecured revolving credit line.

This new facility expires in March 2010 and has two covenants: Total debt to capital account exceed 50%, and EBIT DAD must be at least 3.5 times interest expense.

This new credit facility replaces the previous $2 billion revolver from 2000 that was set to expire in August.

We're very comfortable with the new credit line as it's more than adequate for the Company of our size.

Our accounts receivable balance in the first quarter was 621 million, an increase of 36 million over the fourth quarter.

We were not surprised with the slight increase in our receivables given the increase in our sales, especially in March.

Our DSOs for the quarter were up slightly, as expected, from 52 to 53 days.

Inventory balance was 562 million in the first quarter, up from 535 million in the fourth quarter.

As expected, we built some inventory in Life Sciences to support our new sales channel strategy.

In addition, we did build some inventory in Display as planned, as well as for certain fiber-to-the-premise space products.

Turning to the outlook, I'd like to provide you guidance for our second quarter.

We are expecting revenues in the range of 1.08 to 1.13 billion, and EPS in the range of 17 to $0.19 per share before special items.

For your modeling purposes gross margin for the Company should be about 40%.

One comment on our second quarter gross margins.

We believe we have the opportunity to maintain the current margin of 40.8.

However, with the expected increase in telecom revenues which have a lower gross margin, and potential slight decline in gross margin in Life Science, there's some chance that gross margins in the second quarter could be lower sequentially.

SG&A is expected to be between 17 and 18% of sales, RD&E is expected to be between 9 and 10% of sales.

We anticipate that equity earnings will be slightly higher compared to the first quarter.

Regarding our tax rate, it remains difficult to forecast going forward given the changing mix of our domestic and international earnings.

For your modeling purposes you should use a range of 20 to 25% in the second quarter.

For second half you should use a range of 20 to 30%.

Lastly, you should use 1.5 billion shares for the second quarter when calculating our EPS excluding special items.

In our Display segment we are forecasting sequential volume growth for our wholly owned business and Samsung Corning Precision, both individually and in the aggregate to be up 10 to 20% in the second quarter.

To the extent there is any pricing pressure in the second quarter, we expect it to be at a level that is less than the first quarter.

In our Telecommunications segment we expect revenues to be up about 5% sequentially.

Hardware and equipment revenues are expected to be up about 5% sequentially also.

Fiber volume is expected to be flat up to 10% sequentially in the second quarter.

Fiber pricing is expected to be down less than 5% sequentially.

Regarding fiber-to-the-premise program, we expect second quarter volume to be similar to the very strong first quarter, but revenue will decline with the onset of expected price declines as this program enters the second year.

I have some additional comments regarding Verizon.

While we typically do not discuss the activity of specific customers, they are obviously very important to our fiber-to-the-premise program so we're inclined to provide you some additional insight into our view of their recent ordering and whether this is a sustainable trend.

We believe they're still on pace to pass 2 million homes this year.

However, it's important to note we have seen a higher level of purchasing since the start of this program than we would have expected.

Clearly, some portion of this was likely to fill their supply chain and build some inventory.

As a result, pace of demand for our products throughout the second half of this year will be largely dependent on Verizon's 2006 deployment plans.

This is consistent with what we told investors at our annual investor meeting in February.

If Verizon announces their FTTP deployment plans in 2006 will be flat with this year, then we expect the demand to fall in the second half as they utilize some of their inventory.

Now moving to our other segments, we expect second quarter sales in Environmental and Life Science segments to be consistent with the first quarter.

Sales at our other reportable business are also expected to be stable with the first quarter.

The one additional comment I'd like to make regarding stock option expensing.

As you know last year FASB issued a much talked about ruling that required public companies to expense stock options effective July 1st of this year.

However, on April 14th, the SEC issued a statement allowing public companies to wait until the first quarter of 2006 before expensing options.

Assuming FASB or SEC does not decide to delay it further, we will begin expensing options in January.

As we told you at our investor meeting, we expect the impact to Corning to be around 60 million annually.

You should note we've taken steps to lessen the impact of option expensing by lowering the amount of stock options used each year.

Our total compensation equity programs represent about 1.5% of shares outstanding each year.

Regardless of when we decide to expense options, you should note they will not be considered a special item for our reporting purposes.

The impact of option expense will be included in our gross margins, SG&A and R&D expense, depending on when the employee received the stock options working at manufacturing plant, at corporate, or in our research labs.

However, we'll disclose in a footnote the amount of expense each quarter to help you with your modeling.

Ken?

Thanks, Jim.

Lisa, we are ready for some questions now.

Thank you. [Operator instructions] Our first question comes from C. J. Muse with Lehman Brothers.

Good morning.

Two quick questions for you.

First, you saw a pretty substantial improvement in your display business, met margin, upwards of 25%.

Do you see any ability to grow that in the quarters ahead?

Let me deal with our overall margins there.

We intend to be able to hold gross margin in our wholly owned business and Samsung Corning continued to have their very strong gross margins.

As the business grows what would grow our operating margin percent would be continuing to try and hold SG&A and R&D down so that the margin increased there.

We are not committing to anything more than holding gross margin in the second quarter at this time.

Okay.

But you do see potential growth there to get you closer to where SCP reports net margins?

Well, over time we clearly intend to improve.

Whether we get exactly to SCP or not will be very mix dependent.

As a reminder we still have all of our Gen 2, 3, and 4 lines running and we don't have the same economic mix with plants in Harrisburg, Kentucky, and Japan.

There's no question about in Taiwan that we expect to be equal over time with Korea on a cost basis.

Okay.

So I guess if you take the negative impact of U.S. factories and the fact that you have below Gen 4 glass in the mix, what kind of improvement?

Can you quantify the potential there?

I can but I'm not going to give it to you, C. J.

Okay.

And second question, you mentioned it briefly on the call that glass and panel shipments don't correlate well, but we did see glass only up 6%, panel shipments up 11, 13%.

Would you characterize the delta there due to built up inventory particularly in TVs, or build up in glass inventory, or market share loss?

Can you help us quantify that?

C. J., over time, of course, the amount of glass that was shipped is going to tie very closely with the amount of panels that get shipped.

It just hasn't been true on a quarterly basis, as Jim explained, even last year there were significant differences and this has always been true for us.

The reason why is that one day of shipments for us is about a point of sequential growth so as the pipeline in our industry normally expands and contracts, you can get differential movements in these two numbers.

I wouldn't put much portent into that movement or that we're seeing a particular buildup of a particular type of panel or particular market segment.

And you don't think it's due to market share loss?

We don't believe so.

Okay.

And just one last housekeeping.

You said the 2005 remainder deposits from the supply agreement.

Was that 304 million or 384 million?

374 million the remainder of this year.

Thank you.

Thank you.

Our next question comes from Steven Fox with Merrill Lynch.

Good morning.

A couple of questions.

First of all, Jim, if I look at the Display Technologies EBIT margins using the segment data, is it fair to say that the EBIT margins might have went down a little bit sequentially or am I doing my math wrong?

You've got embedded in there that exchange rate loss so that's what you're seeing.

And we don't expect that to repeat so you've got to take that out it.

Got it.

And then, when you look at the Environmental business and the three new wins, is that something that could meaningfully impact 2006 revenues?

Any chance to qualify those wins for us?

I think it's still too early for us to be projecting what the impact is in 2006, Steve, but obviously as I said at the beginning of the year, that one of the big questions and big challenges for us this year is can we successfully win in the heavy-duty market.

Certainly having three major customers committing to our technology, assuming that we complete these agreements, is good news and would say it would be on track to those longer term forecasts that we talked about at that time.

Great.

And then last quick question would be Wendell, I assume based on what you're seeing in the TV market you guys are still sticking to the unit outlook that you gave at the analyst meeting which was about 17 million units of TVs this year?

Yes, sir.

We're sticking to our end market forecast of what we saw in quarter one seems to be very consistent with our forecast.

Thank you very much.

Thank you.

Our next question comes from Daryl Armstrong with Smith Barney.

Thank you very much.

Congratulations on really good execution this quarter.

I have a couple of really quick questions.

First of all, you did say that you guys were focused on reducing options to minimize option expense going forward.

Do you expect to have a counter-balancing increase in cash comp or will overall compensation expenses just trend down modestly because of your change?

First of all, thank you for your note of congratulations and obviously we'd love to have more comp but we don't expect to see a big shift in our cash compensation as a result of this change.

We have been bringing down the usage of options and we at one time were about 3% annually and now we're about 1.5% for all our equity programs.

Thank you.

And then second of all, within the LCD business you did say that you expected to see less pricing pressure.

Is that solely a function of the shifting mix toward larger substrates or have you noticed any change in the competitive behavior of some of the other vendors within that space?

We certainly have some mix effect that goes into that, but as you, we've noted before, what really drives the pricing for us is primarily the glass competitors and what the supply and demand dynamics are with them.

So I would say that's an important impact in this slightly lower guidance that we're giving also.

And then lastly, really quickly.

When would you expect to have clarity on Verizon's fiber-to-the-home volumes for '06?

Do you guys get three months or six months rolling forecasts, or do you, is it just pretty much on, you only get orders one month ahead?

Well, we get plenty of opinions from inside Verizon on what's going to happen in the next few months.

However, we've been unable to correlate those opinions with what actually happens.

So I would say that we won't have a really good idea on what Verizon's plans are in 2006 until they actually go public with those towards the end of this year.

Okay.

Thank you again.

Thank you.

Our next question comes from John Anthony with SG Cowen.

Good morning, guys, and congratulations.

Would you be willing to quantify how much the customer deposits on the LCD side are as a percent of total contract value, just kind of ballpark it for us?

No, we have not given out that number.

I would say they're significant but, and help offset a large degree of our capital risk, but that's all we'll say.

But is it safe to say that the value of the deposits is, I don't want to say insignificant, but, you know, is not, I guess insignificant on the total face value of the overall contracts.

In other words, is there a lot, should we expect that there will be a lot to follow on based on those, the agreements?

I mean, you will see a lot of revenue from these when we ship the glass against that.

A big amount.

Okay.

And then a clarification on the Verizon statement.

I just want to make sure I understand.

Are you stating that if Verizon stays flat and adds another 2 million on 2006 that your revenue opportunity will decline relative to Verizon and does that include the expected ASP reductions?

Yes, that's what we're saying.

Based on what they bought so far, if they're only going to do two next year then we think the second half revenue will be lower than what we've been experiencing.

Okay.

And last question.

I apologize if you've already addressed this, but the change on payables, was that just due to compensation, end of the year type bonuses paid out in the March quarter?

So that was clearly an element and that is always an element in our first quarter cash outflow and we did have a larger payables exiting last year that we paid off around our capital program, but if you look over time usually that's our weakest cash flow quarter and it comes primarily from those events.

I appreciate it, guys.

Thank you.

Our next question comes from Ed Shul with QCIS Management.

Good morning, Jim.

Two questions real quick.

Update on Concord, please?

And the second question, does the supplier prepayments alter your Cap Ex plans at all for LCD?

No, we're sticking to our range of 1.2 to 1.4 billion this year.

The ones we've gotten were the ones we hoped to get.

As we told you we're working all the way along so there could be minor shifts in our capital spending but I think that range accompanies it.

This shouldn't drive us over and above.

On Concord, there's really nothing new.

We're still running when we [inaudible] and have capacity there.

And as we see how this business looks like it's going to unfold in '06 that might become a decision that we have to make but right now we've got room to handle the business.

Super.

Thanks.

To add one quick thing to the observation on the customer deposits and their relationship to our capacity.

We continue to operate under the principle of building our capacity to meet our view of the end market and we view the customer deposits primarily as a way to reduce our risk.

Great.

Thank you, Wendell.

Thank you.

Our next question comes from Ajit Pai with Thomas Weisel.

Good morning, gentlemen, and congratulations on a great quarter.

A couple of quick questions.

The first would be about your Cap Ex in terms of the [inaudible] over there.

How due expect the Cap Ex to trend for the year, when do you expect it to peak?

And then the second question would be in terms of cash flows on your balance sheet.

At what point during the year if you do think, if you do think you are going to turn free cash flow positive at what point do you think it's going to happen?

On capital spending, the second quarter could be a little bit higher, but I mean the range within our forecasting is pretty even quarter-to-quarter as we go along over the course of the year.

And in terms of getting to free cash flow positive, we have hopes if everything goes as planned, that we will edge into that in the second quarter and stay there.

And just one follow-up on the, in terms of free cash flow.

The equity earnings that you got this quarter, I might have gotten the dividend, the actual cash dividends.

Could you give us what that number is again and how you expect that to trend to the rest of the year?

I think it was 143 in the first quarter and it goes down substantially because we get the biggest ones from Samsung Corning and Samsung Corning Precision in the first quarter.

We do expect to get some dividends from Dow Corning as the year goes along but it's a much lower amount in the second, third, and fourth quarters.

Thank you so much and congratulations again.

Thank you.

Thank you, Our next question comes from Amithad Hassi with UBS.

This is actually Long at UBS.

I have a question related to the mix of your LCD shipments.

You mentioned 60% plus, 70% plus for Gen 5 and above.

Do you have expectation about Gen 6 and above in the mix by the end of this year?

And I have a follow-up question.

Well we gave you the mix in the first quarter for what we call the very large sizes which we include Chi-mai Gen 5.5 in that, and we expect that number to grow but we're not forecasting what it's going to be for the year but that clearly will grow as we see Chi-mai continue to ramp.

We'll see Samsung Corning, Samsung with their Gen 7 and AUO's Gen 6 ramping so that will grow as a percent.

We're not giving out the exact number but we will update you every quarter as we go along what that number is now.

Fair enough.

Now on Environmental side obviously we are expecting the diesel-related business to ramp.

How do you view your performance in diesel business related to gasoline-related business and how do you expect the gross margin for the emerging diesel business on an incremental basis?

I'm talking about cash gross margin.

Thanks.

So first what I count on in the near-term is actually the more that we win customer placements in the near-term in heavy-duty and light-duty actually it will mean we'll have to spend more in the development and the ramp-up of those items.

So in the near-term we don't see diesel being a very strong contributor to our net income.

We're doing this primarily for longer term opportunity.

Thanks for that.

Thank you.

Our next question comes from Matthew Smith with CIBC.

Good morning, gentlemen.

I was hoping you could give me some color on the glass ASP movements through the first quarter, specifically I guess, by generation where did you see the most aggressive price movements and were Generation 6 and Generation 7 sizes relatively stable and firm in terms of the ASP relative to say Gen 5 and below?

Thank you.

So the most price competitive size was Gen 5 which is what we would have expected and really, there wasn't that much competition in Gen 6 place except for what was already mandated customer declines built into original contracts.

But the real price competition in the lowering was really in Gen 5.

Okay.

One note that I would make though, in addition as you look forward is that note for some of these new products that we're introducing in Gen 6 and Gen 7 that we would anticipate sort of higher percentage price decreases in those as we follow the ramp and our customer commitments as those become main line products.

Of course.

Right.

But our cost performance on those will continue to improve.

We always start out with a tough position.

That's why the price is so high initially because it's very tough to make some of these things.

Could you give us update on where Nippon Electric is with Generation 7 and is it possible that they could also be supplying to Samsung in the current quarter?

Thank you.

We can, so first of all, we don't know exactly what NEG is doing so what this is based upon is what our information is to date.

So far we have not seen anybody be able to step up to commercial quantities of Gen 7 glass.

What we've seen NEG do is focus primarily on LG in Korea and their Gen 6.

Right.

Great.

And one final question if I may.

You mentioned that the European demand had been quite strong in telco.

Could you comment on what's driving that and how do you see the sustainability of that through Q2 and beyond?

It's a little similar to North America in that we have one major customer who is involved in a significant DSL buildout that uses a very innovative product of ours.

So like the U.S., it's still thin in terms of overall customers driving us which is why we're not more bullish overall on telecom, is in both our major markets, it's still thin.

Okay.

Thank you very much.

Thank you.

Our next question comes from Robert Tango with Lazard.

Thank you.

Good morning.

Wendell, one specific question on your two competitors in Display.

You touched on it briefly.

Have you seen either Asahi or NEG altar their approach in style in dealing with [PO] manufacturers or are they sort of still taking the same approach in recent months?

And what I mean by that is with Corning's approach in the last nine months to restructure or to change the contract structure, are they adapting to that in any way in terms of their dealings with customers?

Not that we can tell but we're probably the wrong ones to ask.

But you haven't seen any reaction out of them in the way that they've dealt with and handled their customers?

No, I think Jim said it best during the opening when he talked about the customer deposits.

I think perhaps the most encouraging thing for us from a competitive basis is that introducing this very different type of approach to supply agreements for us that our customers had a lot of time to go to our competition and see if they were able to step up in a reliable way.

I think if they were our customers would have chosen a different path than the one that we presented them with.

So I think that's encouraging.

That being said, both NEG and Asahi are very good technically and we would anticipate that they will build their strength over time.

And as you mentioned, too, the natural cycle as Gen 6 and Gen 7 start to have more of an impact in our larger portion of panel manufacturers the price decreases even though will accelerate that's somewhat of a natural initial cycle as the stuff going out in larger volumes and you're not anticipating any sort of unnatural pricing situation and obviously that would be impacted potentially by any movements by the other two players?

So in the time period which we are forecasting, which is next quarter, no, we don't see anything, quote unquote, unusual.

As Jim pointed out, yes, we would anticipate that following a normal curve on an introduction of a product that it starts out more expensive because our costs are more expensive and we would plan on being able to lower our costs at the same rate that we're lowering our price in the near-term.

And natural cycle's basically Gen 5.

Okay.

Thank you very much.

Thank you.

Our next question comes from Curt Woodworth with JP Morgan.

Good morning.

A quick question on the supply contracts.

Can you talk a little bit about the pricing dynamics for those contracts and also give us a sense of when you do the negotiations with the panel makers how do you gauge the level of capacity that you're going to supply to them?

And I'm curious just to know as for some of the panel manufacturers do they come to you and need 80% of their fab needs?

Is it more like 50% of their fab needs?

Just to get a sense for how important these supply agreements are to them.

Thank you.

So all the contracts are different but what a panel maker will do is come to us and say, as an example, we're going to begin ramping a Gen 6 line in the second quarter, we want this many piece of glass per month and they will generally be bringing that up as they ramp, go through the course of the year, generally takes people nine months to a year to get up to full capacity.

In terms of the contracts, we see a wide variety of percents.

It can be someone coming to us and asking for exceptionally high amount of what they're amounts they want or they could come and take a lower amount and essential run more naked and gamble that they can buy some in the marketplace.

Generally we receive pretty high percentages from people but it varies by each contract is slightly different.

They do have the right to buy some more glass from us above the contract.

And so you maybe some people are hoping to get some of that, but we don't have a commitment to do that.

And that's the key thing here, is that we are sizing our overall business to make sure with reasonable estimate of market share that what we're going to get in the end market, nevertheless, when we sign one of these contracts we are absolutely committed to be there for that customer.

Okay.

And how fungible is the glass source for the panel maker in the sense that if, say, their contracted for 50% of their fab needs from you, do they have the ability to go to alternative sources or once they start using your glass are they pretty much embedded with your product?

Certainly their preference is to develop in a fab, and if you're the ones that start up that fab and that they tune their process for you have somewhat of an advantage.

However, note that our customers would prefer to not be dependent on one supplier so they will make sure that they build enough flex into their manufacturing process to be able to use alternative glass suppliers.

Okay.

Great.

Just one quick question on Verizon.

Can you just give us a sense of the degree of the price reduction in the second year of the contract, and if you could provide any guidance on if you would expect a similar price reduction in year three?

Thanks.

So we don't want to give exactly what's happened on pricing or we anticipate to happen on pricing in quarter two for obvious competitive reasons.

I would say two things.

First, yes, we would anticipate normally a price reduction in the second year of a program like this.

On top of that, though, note that because we have such innovative products so early, our share is very significant with Verizon.

That will tend to make purchasing people uncomfortable, and they'll seek to bring on alternative suppliers.

In that attempt, pricing competition becomes a little more intense.

So we would categorize the pricing as we look forward to quarter two to be significant and that is why it made it in Jim's opening comments.

Great.

Thank you.

Thank you.

Our next question comes from James Parchment with Banca Intesa.

Good morning.

Good quarter, gentlemen.

I have two points actually.

The first point focuses on capital expenditures and I was wondering if you could give us a little bit more granularity on the components of the 323 million in the first quarter?

The second item I'm looking at is, if you can give us any kind of expectation for your debt repurchases or retirement for the remainder of 2005?

So in the first quarter of the 323, approximately 270 was Display and then that falls very rapidly to the second spender being diesel, quite a bit lower.

So obviously Display is the majority of the amount of money we're spending.

In terms of our debt reduction plans, we do plan to, assuming the stock price remains high, to force redemption of the remaining '08s and get that accomplished, and then we are obviously well aware of the zero coupons that comes at the end of the year but we haven't announced our strategy on that yet.

We have time for one more call, Lisa.

Yes, thank you.

Our final question comes from James Croom with Morgan Stanley.

Mr. Croom.

Are you there?

Hi, this is James Croom.

Hello?

Yeah, we're here.

I guess I wanted to talk a little bit about more plans to develop these contracts.

I know you can't give out details of these customer deposits but are you guys in active discussions, and should we expect or does your guidance include additional contracts going forward?

We've achieved contracts we expected when we set out, but obviously as customers begin thinking about future expansions we'll have to think about contracts with them.

But in terms of the ones with customer deposits we have achieved the primary ones we set out to do.

And that's all that's in our guidance at this stage.

And then I guess lastly, you've talked a lot about rating agencies.

I'm assuming you've had the conversation with them based on your earnings and discussed the outlook, and in your press release you expect to get investment grade rating.

What is, I guess, the feedback, what are the things at this point given your performance that are left for them to kind of make the ratings change?

We have an annual review in-depth with them in the spring that took place in March and April and they wanted to see our first quarter results and we'll look forward to seeing what they have to say after they internalize these results.

I would say the fundamentals have been they would look for stability and profitability in telecom, they're looking for free cash flow on a consistent basis going forward, and a little bit of worry about the concentration on Display, but the customer deposits, I think, have done a lot to help them out with that.

But I anticipate we'll be hearing from the rating agencies as the second quarter unfolds now that they've seen first quarter results.

Thank you.

Thank you.

That's our final question.

I'd like to turn the call back over to Mr. Jim Flaws for any closing remarks.

I have only a few closing comments.

Clearly, we are extremely pleased with our performance of the first quarter and equally excited about our prospects for the second quarter.

We believe we have excellent momentum as we start the second quarter, especially in LCD glass.

Although months are never perfectly smooth, we were encouraged in that our base business, February glass shipments were higher than January, March was higher than February and so as far it looks like April will be higher than March.

I also have some Investor Relations announcements.

Our annual shareholders meeting will be held tomorrow in Corning, New York at 11:00 a.m.

You're all welcome to attend the event or listen to the Web cast on line at corning.com.

In addition, members of senior management will be attending the upcoming conferences.

On May 3rd, I'll be at the Merrill Lynch technology gathering in New York City.

On May 10th Pete Volanakis will be presenting at the CIBC Technology Communications Conference in New York City.

On May 17th, Wendell will be presenting at the JP Morgan Technology and Telecom conference in San Francisco.

On June 2nd, I'll be at the SG Cowen conference in New York City, and on June 13th I'll be at the Thomas Weisel growth forum in San Francisco.

For more details regarding these upcoming events, you can give Ken a call or go to our Investor Relations Web site.

We hope that you all come out and visit us.

Ken.

Great.

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

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Lisa, that concludes our call.

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Thank you.

This concludes today's teleconference.

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