康寧 (GLW) 2005 Q2 法說會逐字稿

Good morning and welcome to the second 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, Christie.

Good morning.

Welcome to Corning's second quarter conference call.

This call is also being audiocast on our website.

Jim Flaws, Vice Chairman and CFO, will lead the discussion.

Wendell Weeks, President and CEO, will join for the Q&A.

Before I turn the call over to Jim, you should note today's remarks 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 and 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 second quarter which can be found on our IR website.

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

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

Regarding our second quarter result we were obviously very pleased to be able to report sales and earnings per share that were higher than our expectations.

Let me share with you some of the details.

Sales for the second quarter were 1.14 billion, an increase of almost 9% over the first quarter sales of 1.05 billion.

This was the 10th consecutive quarter of sequential revenue growth for us.

Second quarter sales were driven primarily by higher than expected volume in our display segment, offset by lower telecommunication segment sales.

In comparison to the second quarter of last year, sales were up 18%.

Net profit after tax, excluding special items, was 307 million in the second quarter, an increase of 55 million, or 22% over the first quarter.

In comparison to the second quarter of last year, net profit after tax excluding special items was up over 80%.

Earnings per share, excluding special items, were $0.20 in the second quarter.

This was almost double our EPS ex-specials from a year ago.

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

Our strong earnings performance was primarily the result of higher volume and improved manufacturing performance in display.

You should note that second quarter sales in NPAT [ph] were negatively impacted by foreign exchange rates due to translation during the second the quarter versus the first quarter.

Now let me walk you through some special items for the quarter.

We had a pretax and after tax charge of 137 million in the second quarter related to the ongoing mark to market adjustment on the Corning shares to be contributed to Pittsburgh Corning settlement.

The charge was a result of the substantial increase in Corning share price during the quarter, from 11.13 to 16.62.

We also incurred a pretax and after-tax loss of 12 million on the early retirement of debt, and a 1 million pretax credit which was a 3 million after-tax minority interest loss due to adjustments to prior year restructuring reserves.

You'll see these three items recorded separately on our income statement.

Lastly, our equity earnings included an 11 million one-time gain from the issuance of subsidiary stock at Dow Corning.

You can find a reconciliation of all these special items on our IR website.

Moving down the income statement, gross margins were 42.3%, higher than the first quarter and higher than our own expectations.

The improvement was due primarily to a higher mix of larger size glass and strong manufacturing performance in our display segment offset somewhat by lower gross margins in our telecom segment.

SG&A was 191 million, or 16.7% of sales and within our guidance.

RD&E in the second quarter was 104 million. or 9.1% of sales and also within our guidance.

Interest expense in the second quarter was 28 million, and 9 million lower than the first quarter, primarily due to the redemption retirement of debt during the first half of the year.

Other income was 20 million in the second quarter in comparison to other expense of 9 million the first quarter.

The change was primarily due to the non-recurrence of the 26 million pretax foreign exchange loss in the first quarter.

As you may recall, that loss was related to the remeasurement of certain balance sheet items, in particular at our display business in Taiwan.

We told you on the last conference call we'd institute a comprehensive balance sheet hedging program in Taiwan and other foreign locations to help offset future remeasurement issues.

I'm happy to report the program was implemented in April, has worked as expected during the second quarter.

However you should note that hedging strategies are never perfect and we may experience future gains or losses.

Continuing down the income statement, the tax rate was 23% and within our guidance.

Equity earnings were 172 million in the second quarter compared to 166 in the first quarter.

As I mentioned earlier the second quarter equity earnings included a one-time gain of 11 million at Dow Corning.

I'll discuss Dow Corning's results in more detail in a moment.

Excluding the one-time gain, equity earnings in the second quarter were down 5 million sequentially, due to -- driven by lower earnings at Samsung Corning due to slower CRT sales.

Now let me turn to the segments for the quarter.

Starting with display, sales were 415 million in the second quarter, a 30% increase over the first quarter sales of 320 million.

The increase reflects sequential volume growth of 32%, flat pricing, and a slightly unfavorable change in the yen.

The second quarter sales are a record for the display segment and are greater than the entire sales of display in 2002.

Equity earnings from SCP were 85 million the second quarter compared to 80 million in the first quarter.

Sequential volume growth was 27% at SCP, and pricing was flat.

You should note than unfavorable exchange rates and several nonrecurring items at SCP in the second quarter impacted our equity earnings by about 15 million.

Sequential volume growth for our consolidated display segment which includes both our wholly owned business plus SCP, was up 30% in the second quarter and much higher than our expectations.

Net income in the display segment, which includes equity earnings, grew 51%, from 161 million to 243 million.

The significant growth in display segment net income was primarily the result of strong volume growth and higher gross margins.

Your modeling purposes, gross margins grew from 60% in the first quarter to 65% in the second.

The increase in gross margins was a result of higher mix of larger size glass and strong manufacturing performance.

You should note that the net income comparisons also benefit from the non-recurrence of the previously mentioned 20 million in after-tax foreign exchange loss in the first quarter.

The tax rate for display did increase slightly in the second quarter as expected.

If the rate had stayed the same in the first quarter display segment earnings would have been 12 million higher.

In comparison to the second quarter of last year, sales in display segment grew 50%, primarily due to the volume gains of 47% and favorable exchange rates.

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

Net income, including equity earnings, increased 80% in comparison to the second quarter of last year.

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

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

The final data for the second quarter will not be available for another month or so.

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

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

Starting with notebooks, about 13.4 million were shipped in the second quarter, slightly higher than our expectations.

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

Moving to LCD monitors, about 22 million were shipped in the second quarter which is also slightly higher than our expectations.

In the second quarter, we believe the penetration of LCD monitors to total monitors sold was around 67% compared to 60% in the first quarter and 56% in the fourth quarter of last year.

For LCD TVs, approximately 4 million were shipped in the second quarter, up 14% over the first quarter.

LCD television penetration was about 9% in the first -- second quarter compared to 8% in the first quarter.

We continue to believe that LCD TV penetration is on track to be 10% of the total televisions sold for the year.

A crucial factor that'll drive LCD TV demand will be pricing, and we are very encouraged by the pricing environment of the last 12 months.

During that time, both panel and retail prices for 26- and 32-inch televisions have fallen 40%.

You should note that our strong second quarter volume was a result of increased demand for Gen 5 and higher glass.

In the second quarter, Gen 5 and higher accounted for almost 75% of our total glass volume, including SCP's results.

This is up from 70% in the first quarter.

The mix of Gen 5.5, 6, and 7 glass was about 25% in the second quarter, driven by the continued ramping of Gen 7 shipments to Samsung Electronics.

One quick comment on Samsung-Sony venture, we believe the Canon stepper should have impacted their operations earlier this year.

It's by and large behind them.

We believe the strong pickup in Gen 7 demand at SCP towards the end of the second quarter was a good indicator of this.

Regarding our Taiwanese customers and their ongoing next gen fab ramps, in general they appear to be on track.

Regarding our customer deposits, we received 212 million in cash in the second quarter and an additional 87 million in July as expected.

Including the 20 million we received in the first quarter, our total cash from customer deposits this year is now 321 million.

One last comment on the display segment.

Our glass competitors have been thumping their chest lately about their large size glass investments.

In addition to our large quantities of Gen 7 glass shipments in the second quarter, we are very pleased to report that SCP has begun manufacturing and packing good Gen 7.5 glass in anticipation of LPL's new fab, which starts production later this year.

You should also note that we have started construction of Gen 8 glass capacity in Japan, and plan to be ready for Sharp's new fab.

Now turning to the environmental segment, sales in the second quarter were 146 million and as expected fairly consistent with sales in the first quarter.

In our automotive product line, sales were slightly lower due to weaker demand primarily in North America.

In diesel, second quarter sales were consistent with the first quarter.

The segment had a loss of 4 million in the second quarter in comparison to a loss of 2 million in the first quarter.

Its decline was primarily due to higher engineering expenses related to the accelerated commercial deployment of our new diesel filter called DuraTrap AT.

I have some additional comments regarding our diesel product line.

Last week, the Board of Directors approved additional capital expenditure of approximately 100 million for an expanded capability at our diesel manufacturing facility.

This investment is in addition to the 70 million expansion announced in February and will be used to meet anticipated market demand for our recently introduced DuraTrap AT filter for diesel passenger car use, as well as higher than expected 2007 demand for our heavy-duty diesel products.

These manufacturing enhancements are expected to be fully operational in late 2006.

In addition we continue to make significant progress in the long-term supply agreement negotiations with heavy-duty engine manufacturers.

We also continue to receive very encouraging feedback from our customers on the effectiveness on our diesel technology.

In the Life Sciences segment, sales in the second quarter were 75 million and as expected consistent with the first quarter.

I'd like to update you on the progress we've made in converting our customers to the distribution channel.

I'm happy report we've been very successful in converting our customers from BWR to either another distributor or to purchase directly from us.

However, the more important milestone for us will be whether customers actually purchase our products through the new channel.

It's only been two months since customers have been making the change, so it's too early to spike the ball yet.

We are, however, lowering the range of expected impact on Life Sciences' sales this year from 10 to 20% to just around 10% decline based on our early indications.

In telecommunications, sales in the second quarter were 415 million, a slight decrease from the first quarter.

Sales of hardware and equipment products were 202 million in the second quarter down from 215 million in the first quarter.

Decline was primarily due to lower sales of fiber to premise products as well as weaker demand in Europe.

During the quarter, sales for our FTTP products were about $50 million compared to about 80 million in the first quarter.

Decline can be contributed to lower demand and expected price declines.

Regarding the lowering demand, we believe it was a result of a rise in working through inventory during the quarter.

We continue to be pleased with our public commitment to passing two million homes this year and believe they are currently on track to do so.

I'll provide more comments on our FTTP sales going forward during my discussion of our third quarter guidance.

Sales of fiber and cable products in the second quarter were 213 million, flat with the first quarter.

Fiber volume in the second quarter was consistent with the first quarter at the lower end of our guidance.

Demand in North America was softer due to the reduction of fiber-to-the-premise sales mentioned earlier, offset by strength in Europe and a one-time up tick in demand in China.

In comparison to a year ago, fiber volumes were up 15%.

Fiber pricing in the second quarter was flat sequentially and better than anticipated as some expected price declines were pushed into the third quarter.

Despite lower sales for our fiber-to-the-premise products in the second quarter, the telecommunications segment did experience a seasonal increase in demand for the rest of its products.

Excluding fiber-to-the-premise product related demand, sales in the telecommunication segment increased 5% in the second quarter.

The telecom segment incurred a net loss of 13 million in the second quarter, including an 8 million after-tax charge to adjust prior year restructuring reserves.

In the other reportable businesses, sales in the second quarter were 90 million compared to 81 million in the first quarter.

The increase was primarily due to strong demand for our specialty materials products such as glass mirror used in digital light processors.

Equity earnings from Dow Corning were 77 million in the second quarter and included an 11 million one-time gain from the issuance of subsidiary stock.

More importantly, Dow Corning paid their first cash dividend to us in over 9 years.

While the dividend was only 15 million, it nonetheless represented a very important milestone.

We anticipate receiving dividend payments from Dow Corning on a semiannual basis going forward.

I know many of you would like more detail on Dow Corning.

In an effort to increase our transparency on this important equity venture, let me take a moment to talk more about Dow Corning.

Regarding Dow Corning's sales, they are split rather equally between the Americas, Asia, and Europe.

During the first half of sales this year, sales grew in all geographic regions, but the growth was strongest in Asia.

Sales in the second quarter for Dow Corning were up 18% versus last year with 9% of the increase coming from stronger volumes, 6% from higher pricing, 3% from favorable currency.

During the first half of the year volume was up for all industry groups except for one, and that one was flat.

Several investors have asked recently about Dow Corning's involvement with the polycrystalline silicon for solar power.

Dow Corning owns approximately two-thirds of Hemlock Semiconductor, so its results are consolidated within Dow Corning's results.

The solar industry is growing very rapidly, and Hemlock is adding capacity to keep up with this exciting industry.

Your modeling purposes, Hemlock was just under 10% of Dow Corning's first-half revenues.

I hope you find this information useful.

As a reminder, Dow Corning has a very extensive website where investors can learn more about the various industry the Company participates in, as well as the many product they have to offer.

Now moving to our balance sheet, we ended the second quarter with about 2.1 billion in cash and short-term equivalents, compared to about 1.5 billion at the end of the first quarter.

The most significant cash inflow for the quarter was 323 million from the new issuance of 20 million shares of common stock, which we will use to satisfy the zero coupon debentures that we expect to be put to us in November.

We also received 212 million in customer deposits during the second quarter.

Free cash flow in the second quarter was 193 million.

Most significant outflow in the second quarter was 375 million for CapEx, mostly for display expansions.

Regarding our debt reduction program, we made significant progress in the quarter.

In May, we converted the remaining 191 million in 3.5% convertible bonds into stock.

As a reminder, those debentures had a conversion price of 9.67, so they were in the money, and the shares that were issued were already included in our weighted average shares outstanding.

During the second quarter we redeemed for cash 100 million in notes with a coupon of 7%, but with the original issue discount the effect on our P&L, they were 15% maturity -- interest cost and matured in '07.

These notes were replaced with a new 100 million new issuance of the 6% coupon and a maturity date of 2015.

These transactions enable us to lower interest expense while extending the duration of our debt portfolio.

As I mentioned early, the cash received from the stock issuance in the second quarter will be used to satisfy the 275 million in zero coupon debentures that we expect to be put to us in November.

With the completion of that transaction, we will have met our goal of reducing debt this year to under 2 billion.

Looking ahead the next significant debt maturity consists of a 96 million convertible bond due in 2008, which has a conversion price of $15.62.

It's currently in the money.

And $150 million note due in 2009.

Our accounts receivable balance was 645 million the second quarter, 24 million increase over the first quarter.

We're not surprised by the slight increase in our receivables given the increase in our sales; however, our DSOs fell from 53 days in the first quarter to 51 in the second quarter.

Our inventory balance was 552 million in the second quarter down from 562 million in the first quarter.

Now turning to the outlook.

I'd like to wrap up by providing you some guidance for our third quarter.

We're expecting revenues in the range of 1.14 to 1.19 billion and EPS in the range of $0.20 to $0.22 per share before special items.

Your modeling purposes, gross margins for the Company should be between 41 and 42%.

SG&A should be around 17% of sales and RD&E around 10% of sales.

We anticipate equity earnings to be higher than the second quarter due to volume growth and the non-reoccurrence of the one-time adjustments at SCP this past quarter.

Regarding Dow Corning, the Company will be undergoing a planned shutdown at one of their larger chemical plants late in the third quarter.

In addition, you should note that Dow Corning has historically experienced seasonal slowdowns in the second half.

As a result, we still believe that the equity earnings for Dow Corning will be in the range of 50 to 60 million per quarter in the second half.

You should note that we're also expecting slightly lower equity earnings from Samsung Corning, our CRT glass joint venture.

This should come as no surprise given the better than expected penetration of LCD monitors into the desktop monitor market.

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

For modelling purposes, you should use a range of 20 to 25% in the third quarter and 20 to 30% in the fourth quarter.

Lastly you should use 1.53 billion shares for the third quarter when calculating EPS before special items.

We're also updating our capital expenditure guidance for 2005.

We now believe spending will be about 1.5 billion for the year.

As you may recall, our original guidance was a range of 1.2 to 1.4 billion, although I have said at many conferences I thought it would be the upper end of that range.

The increase is primarily the result of additional capacity additions needed for display as well as more spending on diesel production; however, even with the increase in spending, we still believe we can be free cash flow positive for the year.

And as previously discussed at our annual investor meeting in February, you should note we expect to issue up to 10 million shares of stock during the second half of the year to fund our U.S. pension plan.

We will make this contribution in small tranches.

One note on the impact of foreign exchange on our guidance.

We ordinarily do not forecast any change in foreign exchange for translation purposes within our guidance.

Primarily because we're not that good at it.

However, our guidance for the third quarter does assume a yen to dollar rate of approximately 1.10 versus the 1.07 average for translation that occurred in the second quarter.

In our display segment, we're 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 third quarter.

The level of volume growth will be dependent on our ability to add larger size glass production during the quarter, as well as our customers' ability to continue to ramp their new fabs.

We're expecting sequential LCD glass pricing to be flat to down slightly in the third quarter.

In our telecommunications segment, we expect sales to be flat to down 5%.

Fiber volume is expected to be flat to down 5% sequentially.

We expect fiber demand in North America and Europe to be up slightly, offset by softness in China.

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

We expect our fiber-to-the-premise sales in the third quarter to be consistent with the second quarter.

Regarding other segments, we expect third quarter sales in environmental and life science segments to be consistent with the second quarter, and sales of our other reportable businesses are also expected to be stable with the second quarter.

Although we're not providing guidance for the fourth quarter, as a reminder I think it's important to remind you that several of our businesses, particularly telecom and Life Sciences, are impacted slightly by seasonality during the last quarter of the year.

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

I have a few more comments before the Q and A. We received a number of questions last quarter from investors on stock trading by senior management.

I expect some trading again this quarter, and I worry that investors look too hard for meaning in executive selling.

So first, you should continue to expect members of senior management to sell some shares of stock each quarter.

A significant portion of Corning's compensation for senior management is in stock options and restricted shares.

For top executives that portion is between 65 and 70% of our compensation.

So for them to realize value, they must sell.

Second, we encourage management to diversify over time especially as they get closer to retirement.

And third, you'll occasionally see someone sell larger amounts to buy a vacation home.

My recommendation to my colleagues is to sell a little each quarter, regardless is of the price, and to do so in the first two weeks after earnings release.

For those senior executives who are in the mid 50s, like myself, or Jamie, who's in his late 60s, you expect to see selling each quarter as we diversify our portfolios.

We do follow all the rules and have blackout periods, generally open windows from the earnings announcement for about five weeks.

As I said, I encourage sales in the first two weeks.

One last comment.

Despite these sales in recent quarters if you count the shares directly owned, restricted, and stock options under $20 stock price, the top five executives have actually increased their holdings.

The second topic I'd like to cover is stock options and the overall impact to our compensation expense next year.

As you know, we will be required to adopt the new accounting rules on stock-based compensation on January 1st of next year.

We wanted to provide our analysts and investors with some guidance now so you'll have enough time to adjust your models accordingly.

You should note we will not consider this expense to be a special item for our reporting purposes.

It will be included in our quarterly guidance.

So for those sell-side analysts who are on the call this morning, we ask you to include the impact of this expense in your estimates going forward.

You do not need to change your estimates immediately, but we'd like to have estimated -- estimates updated by the time you issue your new estimates after our third quarter close.

We know that some of the sell-side firms' front offices have already made the decision to do that just firm-wide, but there are a number of firms out there undecided.

We strongly encourage you to find out what your firm's policy will be going forward.

We expect our total stock-based compensation expense to increase by up to 90 million pretax and after-tax.

This amount is higher than our original guidance of 60 million.

This increase is primarily due to a recent interpretation of the new stock compensation rules regarding employees who are retirement-eligible, which for Corning means 55 years or older.

Under these new rules, stock options and restricted shares awarded to those employees 55 and over are expensed when issued, even if the employees are expected to work during the entire vesting period of several years.

I would also like to point out the values I'm giving you here are Black-Scholes based.

We are evaluating the binomial lattice model to see if it is -- gives us more appropriate values, and we will give you more precise numbers at the end of the third quarter.

The impact of higher expense will be reflected within gross margin, SG&A, and R&D expense, depending whether the employee who received the stock option is working in manufacturing plant, our at corporate in one of our research labs.

However, you expect the majority of the expense to fall within SG&A.

You should also note since our compensation program is predominantly for U.S. employees, there's no tax benefit on these expenses.

We'll provide more detail on this topic throughout the third and fourth quarter, and we'll be delighted to work with you to help ease the transition.

Ken.

Great, thank you, Jim, and, Christie, we're ready to take some questions now.

[OPERATOR INSTRUCTIONS].

Nikos Theodosopoulos, UBS.

Thank you.

I had a couple of quick questions.

First, on the SCP earnings, you mentioned that 15 million was due to impact of currency and nonrecurring one-time items.

I'm wondering if you can give us a sense of how large the nonrecurring one-time items were so we can kind of factor that into our modeling?

And the -- the second question I had was on the FTTP pricing that you said was anticipated, is most of that done now?

In other words, is the pricing changes that you give the FTTP customers done or are we going to see more of that, and is that why you're kind of guiding flat given that most of that pricing has taken place?

Thank you.

Nikos, on the SCP one-time items, about two-thirds of that 15 would be the one-time items, and it related mainly to some write-offs associated with the difficulty of making Gen 7 glass originally, which we're now doing quite well, but we had some equipment that we did write-off, so it was about two-thirds of the 15.

Wendell, do you want to comment on the FTTP pricing?

Well, with major telecom customers it never seems like pricing is done, Nikos.

But we would anticipate that the awards that we just received have incorporated the more significant price moves.

The primary factor that's leading to the flatness is that for us in quarter four and quarter one our FTTP customers bought a lot more than what they installed, and if they hit their original installation plans, then we would expect quarter two as we saw, and quarter three, to be below what we experienced previously.

The next big decision I think here, and the driver, will be what does Verizon or other FTTP customers decide to do for next year, and that will set the inventory levels that they choose to have.

Okay.

And just one last quick one.

The Gen 5 and above glass, I think you said on the call it was -- maybe I heard it wrong -- 70%, which seems flat from last quarter.

Did I hear right?

Did the percentage stay the same?

No, you heard wrong.

It was 75%, up from 70%.

Okay.

Thank you.

Steven Fox, Merrill Lynch.

Hi.

Good morning.

Two questions.

First of all, on currencies, can you quantify the impact on sales and earnings during the quarter?

So sales was around 19 million and earnings from just translation was about 10.

However, we were able to offset some of that by some hedging, but I'm not sure we'll always be able to do that on translation.

And then secondly, as you look out to LCD glass over the next couple of quarters, obviously as you stated, the TV sell-through is going to be important.

Is there anything else you would add in terms of color surrounding what your customers are saying about their inventory levels or retail levels that could support a good Christmas sell-through for TVs?

Well, Steven, I don't know that we have any particularly good inside information on the pipeline.

What industry data that we've looked at tells us is that we're not seeing any broad-based build in pipeline.

There are some sizes that have a little bit of thickness to it and some sizes that are extremely thin in terms of pipeline, but we haven't seen any broad-based build or anything to set off any warning sounds for us, based on the industry data.

Okay.

Thank you very much.

C.J.

Muse, Lehman Brothers.

Good morning.

You drove really strong margins here in display business in 2Q, and given your guidance for another strong quarter in volume growth, your gross margin guidance appears somewhat conservative.

Are you seeing increased depreciation costs on new factories coming on-line, or can you comment on I guess why that number to me appears conservative?

So it will be very dependent on -- we indicated that pricing in LCD could be flat or could it be down a little bit.

So if it's flat, and if the start-up of our Taichung factory goes well, you definitely could see good gross margins, but the conservatism for us comes about because we do have a range on pricing, and second of all, we have a lot of capacity being started up in quarter three and it is all at a brand-new factory.

So that does give us some pause.

I mean, we're getting pretty good at bringing up these tanks, but there is a lot that must start up in it as a new factory, so that's where the conservatism comes from.

There's no question about it.

If things go well, we could see very good gross margins.

Got you.

And historically as you've ramped up other facilities, how long does it take to get to sort of optimal gross margin?

I don't think we have any -- we have enough experience to give a consistent ramp up, but clearly when we start up a new tank, we've done pretty well.

By and large they come in pretty quickly, but a whole new factory we don't do very often, so I don't think we have enough experience to tell you.

That's correct.

Okay.

And if you look to your volume guidance of 10 to 20%, where do you see the biggest risk?

End market demand for glass or your ability to ramp capacity to meet that demand?

So in the very short term for that quarter 3 guidance, I think it's a combination of our ability to ramp and our customers' ability to ramp.

Longer term, as you take a look at the next quarter and then of course beyond, the key dynamic is going to be LCD TV penetration, and we're anticipating about 10% on average for the year, which would mean increases in penetration in quarter 3 and quarter 4 from the quarter 1 and quarter 2 levels.

Got you.

And two quick final questions for me.

Can you tell us what SCP revenues were, and then also, can you talk about whether the glass specs requirements for LTPS are any different and whether that's an emerging driver of your business?

Thank you.

You'll have to handle the last one.

I don't know what that is.

Could you please repeat part 2 of your question?

Sure.

Can you talk about low-temp polysilicon and whether there are tighter glass spec requirements for that technology and whether or not that sort of emerging technology's driving glass demand for you guys?

So still for low temperature polysilicon that is still aimed at relatively small displays, so that is not driving our glass demand.

For those of you who don't know, it's main value proposition is an ability to have some higher electron mobility and therefore to be able to put more of the electronics on the -- on the display itself.

So like many new display technologies, it starts small.

The main spec difference is even though it is, quote unquote, low-temperature polysilicon it needs -- it's higher temperature processing than the amorphous silicon, so therefore, it's a higher temperature glass, and, therefore, in that way it's more difficult, but we feel pretty good that we're making good progress on that product as well.

And to answer your first question, SCP sales for quarter 2 were 383 million.

Great.

Thank you.

Daryl Armstrong, Smith Barney.

Thank you very much.

We've continued to see the LCD panel makers move up to larger generations of glass substrates, and clearly you guys have been the beneficiary there.

How close are we to reaching the upward boundary in terms of how large these sheets can get?

One, are we at the point where the manufacturers start to see some diminishing rates of return in terms of moving up?

And second of all, are there any logistical limits in terms of shipping the glass as it gets bigger in size?

And then after that, I have one more follow up.

So we continue to see our customers plan on larger generations.

There's a lot of discussion now in Taiwan for people aiming at Gen 7.5.

I think that they wouldn't be doing that if they weren't getting the returns that they expected.

I think since these are primarily driven around television it all comes down to whether they can -- what's the most efficient for the size that they think is going to be right in the market.

As you know, 32 inches is becoming very much the standard, and in certain sizes like that, they will design for whether they do a 10 up or 12 up at a time, but I don't think we would be seeing our customers plan Gen 7.5 if they didn't think they were getting the efficiency for the size of television market that they think's going to happen.

In general, one of the things that we're starting to feel is that sizes of televisions are climbing and people are getting more interested in larger ones.

We think that that's a phenomena that's occurring with the change in the format.

In terms of logistics, there's a lot of popular press speculation that there will be a point when you can't move these around.

My own personal opinion is if logistics ever become a problem, that the world will figure out how to solve it.

It's going to be more a question of whether the economics work for our customers.

Okay.

That's extremely helpful.

And then finally in terms of -- given the price reductions we've seen for LCD televisions, do you have a sense or at least a range in terms of your view in terms of what percentage of the cost that the actual glass represents in terms of the -- in terms of the wholesale pricing at this point for those televisions?

For a television set, selling price at retail, its glass will represent low single digits in terms of percent of that price.

Thank you very much.

And congratulations on the quarter.

Thanks, Daryl.

Robert Tango, Lazard.

Thank you.

Good morning.

Jim, just one question on -- in environmental with the expectations as you cited for the pretty robust 2007 period, as the regulatory environment in Europe requires higher diesel standards, in 2006, are you anticipating any R&D adjustments or costs, or are most of the substrate products that are being developed for the shipments in the second half of, say, '06 and maybe in '07 pretty much in place at this point?

The infrastructure is there for the diesel ramp?

So you -- we will continue to have high level of particularly development expenditures going into '06.

I don't think it will necessarily increase from '05, but you will not see a decline there in '06.

You will see from the heavy-duty side, which is a U.S.-driven market for '07, you will see revenue increases next year as first we do fleet tests and second in the back half of the year as they begin to ramp for the trucks that are sold in '07.

On the light-duty side, which is for European, for car manufacturers, where we have not yet won business but we're quite hopeful, that would be substantial volume in 2006 if we win it.

In both cases, the opening shipments will be -- will be challenged with our first run making it, but we will then begin improving our gross margin performance on those products as we head into '07.

If I could just add to that, that both in heavy-duty and in light-duty diesel, this is a very significant product in market development effort, and we have very significant obligations to our customers who are planning to use this technology.

As a result, being able to accurately predict exactly what the development spending will be is very difficult.

Okay.

But most of the -- it sounds as if, though, in general your arms are pretty much wrapped around in pretty good shape with respect to the R&D development.

And maybe -- there's always adjustments and adaptations next year, but it sounds like it's pretty much in place.

We'll feel better when we start shipping commercial quantities, sir.

And then just one quick follow-up.

On the equity earnings -- the SCP element, so you've already basically touched on this to some degree, but what would be the biggest swing factor in SCP over the next three quarters?

Would it be the production, the volume, the pricing, the margins?

What would be the biggest swing factor, positive or negative, for SCP?

Well, for SCP, their margins are very robust already.

Their pricing tends to move just like the rest -- our businesses, basically industry driven pricing.

So I think the biggest challenge for them, risk and also upside, is really because they're primarily shipping to two customers, which is Samsung and LPL, is do both of those customers do well in the marketplace and do they both ramp their fabs as expected.

And for the Samsung-Sony, they have huge quantities coming from the Gen 7 fab in the back half of the year.

We started to see significant quantities in the second quarter.

So that's both the risk and opportunity there.

In terms of LPL, they start their Gen 7.5 at the end -- towards the end of the year, so you're not going to see significant quantities from that.

We are shipping a lot of Gen 6 glass to them.

Okay.

Great.

Thank you very much.

Jeff Stevenson [ph], Sanford Bernstein.

Hi.

At you analyst day, Joe Miller discussed the Epic product that allows label independent detection and high throughput screening for drug discovery.

Could you give us some color on early customer feedback and commercialization efforts for that product?

Yes, Jeff.

We will go to six beta sites within the next nine months or.

So we have in this quarter we'll deliver some of the very first beta units.

Alpha feedback was good, but as you know, that the beta process is very important for us to be able to discover how strong a value proposition we have with this unique way to aid drug discovery and development by using light.

Thanks.

What factors drive the traditional seasonal weakness of Dow Corning during the second half of the year that Jim mentioned during the discussion?

In some of their construction-based businesses, you will see a fall-off, and also there just seems to be some customers in some parts of their -- that traditionally reduce inventories towards the back part of the year.

I mean, don't take this as a big seasonality thing, but it just is as we looked at that the Company year after year, the second half is usually a little weaker than the first half.

Thank you.

Ajit Pai, Thomas Weisel Partners.

Good morning, gentlemen, and congratulations on a very solid quarter.

Thank you.

Just one quick question which would be about the three other businesses outside of display.

When you're looking at telecommunications, environmental, then at Life Sciences, sequentially operating margins over there declined in all three of those businesses and they're pretty close to 0 if not negative for those three businesses.

So I suspect you're staying in those businesses for diversity in the long run.

Could you give us some indication about two-and-a-half years out, or three years out, sort of what your target operating margins for those three businesses that comprise close to 60% of your overall sales are?

In the case of environmental, our margins have been depressed for two reasons.

First of all, we did have some weaker manufacturing, much to our regret, in the back part of last year.

We are making progress on that as we go forward this year, and we expect to see the automotive side gross margins continue to move up as we go through the course of this year.

The other thing you're seeing in the environmental segment that weakens the margins is that first of all the opening of the new diesel factory with very low volumes in it right now at this stage, and then also the very large R&D expenses that are going against -- we're effectively doing two developments at one time.

I don't think it's well understood.

We're doing both heavy-duty and light duty, which was never our original plan.

And as we move towards '07, I hate to predict things two to three years out, but our intent is to get the diesel gross margins, once we get significant volumes and get some maturity in the manufacturing, to be equivalent to the auto margins which gross margins for auto when we're running well have clearly been well into the 40% range, and that's our hope for our diesel business, when we get to maturity.

And you will eventually see the R&D ramp down, unless there are new requirements from customers.

So we expect that environmental will be a very strong profit contributor and cash flow contributor as we get into maturity on diesel.

And remember, the first big sales don't really happen until '07.

But we have -- I mean, we've got a big lot to do in diesel, but we're very confident that you will see good profit margins in that business going forward.

Life Sciences has traditionally been a very strong profitability and good cash generating business.

We are struggling a little this year because of this distribution change, and as a reminder, even if we end up with only 10% of sales having been lost versus prior year, that adds up and depresses margins, but we will -- we do expect to succeed there and get back and also we are spending quite a bit on the previously mentioned Epic project, which we hope to have some results on and find out whether we can go forward with that.

But we are -- we remain confident in our Life Sciences business there will be good margin there.

We're quite hopeful about the Epic product because it's been a long time since we actually had something new in this business, and that might create stronger growth for us.

The Life Sciences business profitability we like a lot, but as you know, the growth has been quite low over time so we hope to get back to better margins and also get some growth here.

So those are the ones we would focus on the most.

The other reportable segments of telecom and semiconductor, telecom, until there's more of a robust recovery among more than just a couple of customers, I don't think you're going to see much change in the profitability.

However, we -- I remind you that that business does throw off quite a bit of cash for us, which is important as we're doing the investments.

Thank you so much.

George Nissan [ph], Merrill Lynch.

Yes.

Thank you very much, guys.

Congratulations on a pretty good quarter.

Thank you.

Couple of questions.

Over the past year a lot of your competitors have recently been implementing some new strategic initiatives to reduce their raw material commodity costs by establishing a better line of communication with their supplier base.

I mean, just if you could provide some color to us on the call today as in what you guys are planning on doing to reduce your raw material and commodity costs by opening up a better line of communication with your suppliers.

So we have -- commodity costs are not that important for our Company.

We're a value add company.

Tends to be more driven by our capital and depreciation in our people so commodity and energies are not that important to us.

Okay.

Thank you very much.

John Roberts, Buckingham Research.

Should we be preparing ourselves for seasonality to start entering into the LCD business as the TV component becomes a larger piece?

So seasonality will be an impact for us from televisions.

It is -- tends to be more of a back-half-loaded business than the IT portion, but I don't think you need to worry about it anywhere in the next couple of years because the substitution factor overwhelms the seasonality, and also with the increasing average size in television, so I doubt you will see much impact from seasonality early on, if the substitution ramp goes as we expected.

Remember, Wendell talked about the 10% average for the year, but that -- the way that works, it goes 8, 9, 10, 12 in the fourth quarter.

We're looking to 15 -- for 16% for next year.

So that will -- the square footage from that would overwhelm the slight seasonality impact.

If we don't get the ramp in substitution, yes, then you'll have to begin to worry about that.

Great.

Thank you.

John Anthony, SG Cowen.

Good morning, guys.

Congratulations.

Couple questions.

I don't know if you've already discussed this, but would you be willing to give us an outlook for CapEx next year?

Not at this stage.

The one comment I've made before is it will be very dependent on the success of LCD television.

If it's ramping quickly, then we will again have a strong capital spending program next year.

If it ramps on a more moderate basis, then we'd have to spend less capital and we really will have to make some decisions upon that as we -- probably at the end of the third quarter we'll be able to give you an idea because right now it feels like the television penetration is going very well, but we have not given out specific guidance yet.

Directionally, would it be safe to assume anything at this point in time or is it really -- is it in the direction from the 1.5 level of this year going to be dictated by what happens with LCD?

I don't think you'll see an overall increase for the Company on CapEx.

The question I think is whether it's the same or whether it could go down a little.

Regardless of either, we -- Wendell has challenged us to have aspirations to be cash -- free cash flow positive again next year.

Okay.

And if I'm doing my math correctly on a historical basis it looks like you guys are quickly bumping up against record operating margins for the past decade on a normalized basis.

I guess at this point, I know you're not going to give long-term guidance, but could you give us a sense with -- how much you think the current operating model has to grow in its current footprint?

Well, the difficulty with these historical comparisons is the Company you're comparing to today is very different than the Company we had back then.

So it really will be very dependent on how large -- does display continue to have very strong first growth in margins and therefore how big it is relative to the rest of our businesses.

And if telecom remains pretty much a flattish business and then you have display continuing to see very large growth every year, the mix impact will drive our operating model as a corporation to be greater than what you might have seen in the past history, so it's tough to compare historical -- make historical comparisons.

I'd add to that, that -- so the core for us is our growth through innovation over time, and so how our footprint looks going forward will depend on the success of LCD TV, on the success of fiber-to-the-premise, and on the success of our diesel innovations in both heavy-duty and light duty, and I think we'll gain more insight by the end of the year on how we're doing on all those innovations and I think that'll be a primary driver for us in our financials going forward, sir.

Well, if I could just ask another way, how much more growth do you think you could accommodate without adding meaningful headcount?

We're trying to control our spending in SG&A and R&D.

R&D will probably grow closer to a rate of sales, and therefore that's driven mostly by headcount.

SG&A we clearly don't -- we are trying to hold it below half the rate of sales growth.

So we're trying to continue to not get ahead of ourselves and build up our infrastructure too much.

Great.

Thank you, guys.

Christie, we have time for one more quick question.

Matthew Smith, CIBC.

Good morning, gentlemen.

I was wondering if could I get some comments on the volume growth that you saw in 2Q, up 32% was significantly better than even the high end of your guidance.

Obviously demand for monitors and TVs was very robust, but I wondered how your market share fared through the quarter?

Did you get some extra benefit there that perhaps you hadn't bargained for, maybe at Gen 6 and 7 with your customers -- your competitors perhaps still lagging there?

And also, was there any benefit from perhaps smoother than expected ramps of, say, some of the Gen 6 fabs out there?

Thanks a lot.

Well, I think that there's no question that our volume ramps with how our customers' volume ramps, and most customers are bringing up the larger generations, and that's clearly where we have larger shares.

So there's some benefit of that.

On the other hand, we know some customers do intend to bring up some more Gen 5 capacity going forward, and there there's a much more competitive environment, but clearly with Gen 6 for our wholly owned business the ramps appear to be by and large going as we expected and we have very large share there, so that helps us overall.

Great.

And one more question if I may.

Your guidance for volume growth of 50% or more year-on-year in '05, is that looking conservative now?

Could it be something closer to 60% or 65% for the year?

Thanks.

Well, what we said is the market could grow -- would grow above 50, and there's no question about it.

If the back half of the year goes well, the market could grow at 60%, particularly after this very strong quarter two.

Okay.

Thanks a lot, guys.

Jim, you have some closing comments?

I do have a couple.

Clearly we were very pleased with our performance in the second quarter, and we are equally excited about our prospects for the third quarter.

We think we've got great momentum as we start the third quarter, particularly with LCD glass.

And while the months are never perfectly smooth, we're encouraged that in our base business, April was higher than March, May was higher than April, and June was higher than May.

I have some IR announcements also.

On August 1st Wendell and I will be meeting with investors in Boston.

We've set aside time for a lunch hour to meet with investors who are interested in meeting with us and asking questions.

And then on September 7th, Wendell will be presenting at the Citigroup Solomon technology conference in New York City, and on September 21st, I will be presenting at the Bank of America annual investor conference in San Francisco.

For more details regarding these upcoming events, you can give Ken a call or go to our IR website, and we hope you'll come out and see us.

Ken?

Thanks, Jim.

Thank you all for joining us.

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Thank you, sir.

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