康寧 (GLW) 2005 Q3 法說會逐字稿

Good morning.

Welcome to the third quarter results conference call. [OPERATOR INSTRUCTIONS] I would now like to turn the call over to Mr. Ken Sofio, Direct of Investor Relations.

Sir, you may begin.

Welcome to our third quarter conference call.

Also, welcome to the people on the Webcast.

Jim Flaws, Vice Chairman and Chief Financial Officer will lead the discussion this morning and Wendell Weeks, our President and Chief Executive Office will join for the Q&A.

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

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

These risks are detailed in our SEC reports.

Jim?

Thanks, Ken.

Good morning, everyone.

Last night we released our results for the third quarter, which can be found on our Investor Relations website.

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

The slides will be available on our Website after the call as well.

Regarding our third quarter results, we are obviously very pleased to report sales near the top end of our estimate and earnings per share that were significantly higher than our expectations.

Let me share with you some of the details.

Sales for the third quarter were 1.188 billion, an increase of 4% over the second quarter sales of 1.14 billion.

Third quarter sales driven primarily by higher volume in the display segment offset, by lower telecommunication segment sales.

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

Net profit after-tax excluding special items was 405 million in the third quarter, an increase of almost 100 million or 32% over the second quarter.

In comparison to the second quarter of last year, net profit after tax excluding special items was up about 90%.

A brief historical comment.

This very strong NPAT is much higher than any quarter in 2000 when leaf fiber was at its peak.

Earnings per share, excluding special items, were $0.26 in the third quarter and much higher than our expectations.

This was an increase of 86% in comparison to our EPS x-specials a year ago.

You should not, 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, improved manufacturing performance and display.

I really should note that our third quarter results did benefit from nonrecurring tax benefits, which contributed almost $0.02 per share.

Without this benefit, our EPS was still $0.02 above the top end of our guidance range.

Now first, we were profitable in the U.S. during the third quarter, which helped reduce our overall corporate tax rate to 16%.

Improved profitability was the result of higher royalty income and lower spending.

In addition, we reached a settlement with the IRS on the audit of our 2001 and 2002 tax returns, which allowed us to release reserves about 15 million during the third quarter.

This combination of these two items contributed about $0.02 to our third quarter results.

You should not anticipate the same $0.02 benefit in the fourth quarter.

You should also note that third quarter sales in NPAT were negatively impacted by foreign exchange used in translation during the third quarter versus the second quarter.

Sales in NPAT were impacted by approximately 23 million each.

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

We reported a pre and after-tax charge of 68 million, or $0.04 a share, related to the ongoing mark to market adjustment on Corning shares to be contributed to the Pittsburgh Corning settlement.

The charge was the result of substantial increase in Corning share price during the quarter 16.62 to 19.33.

In September we had announced restructuring charges of 28 million pre and after tax, or $0.02 a share, primarily related to cost reduction initiatives in our telecom segment.

We also announced in September, that Samsung Corning or equity invested that produces glass panels and funnels for CRT monitors and televisions would incur restructuring and impairment charges in the third quarter.

Our share of their charges was 106 million after tax or $0.07 per share and is reflected in our equity earnings.

This is the result of the rapid growth of LCD products, particularly LCD monitors, which has negatively impacted demand for conventional CRT products.

We expect Samsung Corning to record additional impairment charges as future decisions on assets and work force are made.

These decisions will likely not occur until 2006.

We expect our share of those additional charges to be approximately 30 million.

It is possible that the third quarter charges may be adjusted in future quarters as Samsung plans are finalized.

One final reminder, these charges are all noncash to Corning.

We also, have determined that a separate impairment of Samsung Corning investment asset held on our books was not required in the third quarter.

However, we will continue to monitor this closely as Samsung Corning completes its restructuring plans.

For your reference, the asset value at September 30 on our books was 233 million.

You should note that further deterioration of the CRT market could result in further restructuring charges at Samsung Corning and an impairment of the investment on our books.

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

Gross margins were 46% in the third quarter.

Much higher than the second quarter and our own expectations.

The substantial improvement was due to higher volume and strong manufacturing performance in our display segment.

Equity earnings were 74 million in the third quarter, including the 106 million charge related to Samsung Corning.

Excluding that charge, third quarter equity earnings were higher compared to the second quarter earnings of 172.

The higher equity earnings were primarily the result of strong volume performance at Samsung Corning Precision, offset slightly by lower equity earnings at Dow Corning, which had been expected.

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

So, let's move on to our segment results for the quarter.

Starting with display, sales were 489 million in the third quarter, an 18% increase over second quarter sales of 415 million.

The increase reflects sequential volume growth of 22%, flat pricing and an unfavorable change in the end.

As a reminder, when I refer to LCD glass pricing it is on a mix weighted basis.

Equity earnings from SCP were 114 million in the third quarter and much higher than their second quarter equity earnings of 85 million.

As a reminder, equity earnings in the second quarter for them included approximately 10 million of one time charges.

Sequential volume growth for SCP was up 22% and their pricing was flat also, As a result, Sequential volume growth for our consolidated display segment, including our wholly business plus SCP was up 22% in the third quarter.

Net income in display segment, which includes equity earnings, grew almost 50% from 243 million to 363 million.

The significant growth in display segment net income was primarily the result of the volume growth, strong manufacturing improvement and also our lower tax rate in the Corning - - in the quarter.

We recognize that the allocation taxes can be confusing and that is why we show it is a line item in our segment results.

Where it fundamentally displays incremental incremental sales translated into margin at a high rate.

Gross margin in the third quarter, our wholly owned business, approached levels closer to SCP's performance.

The increase in gross margin was the result of strong manufacturing performance.

In comparison to the third quarter of last year, sales in our display segment grew 65%, primarily due to volume gains of 73%, offset by price declines of 2% and unfavorable exchange rates.

Net income, including equity earnings, increased 155% in comparison to the third quarter of last year.

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

I would like to stress we do not have perfect information.

We use a variety of sources ranging from services that are available to you such as display search and retail tracking vendors; as well as our own discussions with customers and our own models.

We think this information is useful but it is not perfect.

With that in mind, you should know the following data has been derived from this aggregated industry.

Sources that are considered this time to be only preliminary estimates.

Final data for the third quarter will not be available for another month.

Be clear, the data I'm referencing here relates to shipments from PC manufacturers and television set makers to retailers.

The preliminary data end market shipments is tracking ahead of our forecast for all three end products, notebooks, monitors and televisions.

Starting with notebooks, about 15 million was shipped in the third quarter, which is higher than our expectations.

Increase of 13% over the 13 million shipped in the second quarter.

Overall, we believe notebooks were about 31% of all computers sold.

Turning to LCD monitors.

About 24.5 million were shipped in the third quarter.

Also higher than our expectations.

In third quarter, we believe penetration of LCD monitors to total monitors sold was 69%, compared to 67% in the second quarter.

For LCD televisions, approximately 5 million were shipped in the third quarter, a 16% increase over the second quarter.

LCD television penetration was about 10% in the third quarter and consistent with the second quarter.

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

As a result of the strong LCD television shipments to date, we now believe the market may do better than the 19 million shipped for year, which original -- which is higher than our original forecast at 18 million.

A crucial factor for what will drive LCD television demand will be pricing.

And we are encouraged by the pricing environment over the last 12 months.

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

You should note that our third quarter volume was the result of increased demand for Gen5 and higher glass.

In second quarter Gen5 and higher accounted - - third quarter 77%, which was up from 75% in the second quarter.

The mix of Gen5.5, 6 and 7 glass was about 33% in the third quarter, up from about 25% in the second quarter.

Regarding our Taiwanese customers and their ongoing mix fab ramps, they appear to be generally on track.

We're pleased to see that Taiwan panel shipments in September hit another all record high.

Regarding our customer deposits, we received 155 million in cash in the third quarter and additional 13 million in October as expected.

Including the 234 million received in the first half, our total cash from customer deposits this year was 402 million.

We're pleased that all the deposits this year have been received on time.

In the second quarter we also began issuing credits against these deposits as the customers began to purchase glass under the agreements.

Credits issued 11 million in the third quarter and are now 13 million year-to-date.

I would like to take a few minutes to address several market related topics that investors have asked us about over the past.

You should note, the following represents our opinions based on historical data, our models and discussions with customers.

Our objective here is to share that data with you so you can form your own opinion on these topics.

First topic pertains to inventory in the supply chain.

There were several reports during the quarter that there was excess inventory in the channel especially for televisions.

While we feel that there will always be a risk of excess inventory in the channel, we are not seeing it right now.

In fact, recent announcements by Sharp indicated shortage of 32 and 37-inch TV panels.

Our own analysis indicates LCD television inventories have increased marginally but within normal levels for this time of year.

The TV business is more seasonal and the level expected to be double last year.

So, we should be seeing more inventory to support the end market.

Please remember the LCD television level is doubling versus last year.

We have also called 14 set makers and their observations are that there is not excess inventory.

Back supplies of certain large sizes are tight.

We also believe there is not a significant amount of panel inventory at our customers' panel makers.

As a reminder, there are certain metrics that investors can look at to gauge the level of panel inventory.

One way is to monitor the monthly panel shipment data that is published each month by the Taiwanese panel makers.

Another way is to monitor panel pricing.

In times of rising panel inventory, panel makers will typically lower panel prices significantly to stimulate demand.

Current data indicates the panel pricing was fairly flat in September for both LCD monitors and LCD televisions across all sizes.

Nevertheless, we intend to watch inventories closely and sell through and be prepared to moderate production if we detect a backup.

There has also been concerns expressed about panel over supply in the first half of 2006.

While we cannot predict what the panel supply demand balance will be in future quarters, we can share with you how we view this balance and what we have seen historically.

First, you should note that the panel supply and demand is hardly ever in perfect balance.

In fact, since our record keeping began in 1998 the panel market has either been in a state of shortage or surplus.

For most of 1998 there was a surplus of panels in the range of 5% to 15%.

In '99 there was a shortage of between 10% to 15%.

In 2000 to 2001 there was a surplus between 10 and 15.

And from '02 to '04 the panel market fluctuated between surplus and shortage.

The takeaway here is panel supply and demand is always in flux.

For investors, the key question here should be what levels of shortage and surplus are acceptable?

What what decisions were made by the panel makers during previous over supply and shortages?

And what happened to glass demand during these previous cycles?

Regarding what is an acceptable level of panel shortage or surplus, there is no clear cut answer.

To gain an understanding of the current market, we review the number of weeks of panel inventory and panel makers, monitor set makers and TV set makers.

Our analysis - - today our analysis shows that inventory did grow during the third quarter but at expected levels given the seasonal nature of the consumer electronics industry.

We believe inventories should peak next month and then begin to decline as seasonal purchases accelerate in November and December.

Regarding an over supply next year, there was a research firm report in September that predicted a 10% panel over supply in the first half of '06.

It is too soon to comment on next year because we have not seen the fourth quarter sell-through.

But investors should know that the industry has experienced 10% or higher over supply several times over the past eight years, without an impact to glass demand.

While we cannot predict what will happen in those six, the determining factor for glass demand next year, will be the continued penetration rate of LCD monitors and LCD televisions.

It is important to note how panel makers have traditionally behaved during periods of panel shortage and panel surplus.

During a shortage of panels, panel makers have typically increased prices, leading to higher profits and to capital spending for investment in new capacity.

This eventually has led to over capacity and excess panels.

During periods of this excess panels, panel makers reduced prices to stimulate demand, hurting their profits and reducing the amount of capital to invest.

These lower prices eventually fuel demand, which again tightens available capacity and starts the cycle again.

It is important to note these historical surpluses that drive panel prices down are necessary to drive the penetration to the overall industry growth.

The take away here is there is a long history of panel shortage and surplus and panel makers adjust both price and capacity accordingly.

The last question is; what has happened to glass demand since 1998 during these periods of panel shortage and surplus.

Despite these shortages and surpluses, LCD glass demand has grown each year since 1998.

In '99 during the 15% surplus of panels LCD glass demand grew 39%.

During the 10% to 15% panel shortage of '99, LCD glass grew 85%.

In 2001, LCD glass demand grew 40%, despite a surplus of panels by as much as 15%.

And for those investors who are worried about glass pricing in times of panel over supply, the average price decline since 1997 has been 5% per year.

Excluding '03 and '04 when glass pricing was relatively flat, pricing has fallen in the upper single digits on average since 1997.

The main point here is even in times of panel over supply there may not be a correlating impact to glass volume and price.

The key for us remains, to pace our glass demand with end markets not panel capacity.

which brings me to the next topic, seasonality.

We've received a lot of questions on seasonality and how it impacts glass demand.

Up till now glass demand has been driven by the penetration of LCD monitors and now starting LCD televisions.

Seasonality has actually been more of an undercurrent to our demand.

Something that we knew was there but did not impact us significantly.

That will not always be the case.

We clearly understand now that our glass business is strongest in the second and third quarters.

However, if LCD television penetration progresses the way we think it will next year, this may overshadow the impact of seasonality.

You should also note, it takes about three to four months for our glass to show up in a television monitor at retail level.

So by and large the glass we shipped in the fourth quarter will be for products sold at retail in the first quarter.

Glass shipments made in the first quarter show up, for the most part, in retail stores in the second quarter.

With that in mind let me spend a few minutes discussing seasonality trends.

First, for desktop monitors, sales have remained fairly evenly distributed by quarter for the last several years.

Even sales of LCD monitors are fairly consistent quarter to quarter with only a slight trend upward towards the end of the year.

Despite the fourth quarter uptick, you should note over the last five years, LCD monitor unit sales have been flat to up 15% sequentially in the first quarter due to penetration.

Color TV sales have historically been more weighted to the fourth quarter but not as much as what you may think.

You might be surprised to learn that the second biggest month of color television sales worldwide is January.

As consumers make decisions ahead of such events as the SuperBowl and Chinese New Year and every four years, the Olympics.

Over the last five years between 27% and 30% of all color TV sales in a given year occurred in the fourth quarter.

So, while there is some sequential decline in color TV sales in the first quarter, it does not tend to be significant.

For LCD television sales there obviously is less historical data.

The data does suggest an even heavier weighting towards the fourth quarter.

Over the last four years, between 37% and 41% of LCD televisions sold in a given year were sold in the fourth quarter.

As a result, there has also been a sequential decline in LCD television sales into the first quarter.

However, given the increased LCD television penetration, declines have been comparable to what we've seen historically in color television overall.

So, while we're not providing specific display volume guidance for the first quarter, I can offer a few thoughts.

Our glass demand will be driven by the continued penetration of LCD monitors and televisions.

We expect the penetration of monitors and televisions to grow sequentially in the first quarter.

We believe there will be a normal sequential decline in LCD TV unit sales in the first quarter.

Although, we do expect to see twice as many LCD televisions sold in comparison to the first quarter of '05.

Lastly, our first quarter glass shipments will most likely be used to fill the growing pipeline to meet second quarter end market demand.

The last topic I would like to address for the investors is the potential impact of higher energy costs on consumers decisions to purchase big ticket items such as an LCD television.

Why we cannot predict the future and the decisions consumers may make in light of higher living costs, we can share with you how color TV sales have fared during other historical recessionary periods.

This may provide some groundwork for your modeling regarding LCD television demand.

In summary, the datas indicate that during recessionary times consumers continue to purchase color TV's.

What we've found is the worldwide color television sales have increased almost every year since 1963 when they were first introduced en masse to the public.

Going back to '63 there have been a number of recessions in the U.S. and worldwide.

Specifically, in the United States we had recessions in '80, '82 and '90.

In each of those periods, color television increased on an annual basis of 4% to 8%, which is in line with color TV growth projections today.

We believe this was due to consumers need to save costs by traveling - - reducing travel and staying close to home and eliminating other entertainment choices.

The only period of time when color television sales fell in consecutive years was during the global recession of '73 to '75.

And during those two years color TV sales fell 13%.

The '73, '75 recession is now 30 years and ago and we need to be careful translating consumer behavior then to today.

It's important to point out, there are fundamental differences between that market and the one that exists today.

First in 1973 color TV represented 50% of all televisions sold.

In other words, in about ten years color TV had penetrated half the market dominated by black and white TV's.

Today, LCD television represents 10% of television sales and its footprint is much smaller.

In addition, there are numerous market factors that influence consumers decision to purchase a television today that did not exist in the '70s.

Back then your choice was either black and white or color.

Today consumers have a wide range of different TV choices.

From LCD to plasma to DLP and other projection technologies.

In addition, consumers are often driven to purchase these higher end televisions because of better content, technology such as the 16 by 9 format, high definition DVD and DVD players.

High definition television content and digital signals overall.

In summary, we do not believe that today's higher energy prices will materially impact consumer decisions to increase - - to purchase LCD televisions.

Historical data suggests consumers will continue to purchase these televisions.

And with enhanced entertainment choices and content available today, the average consumer has more incentive to purchase.

Now, before I leave the display segment I would like to update now on the progress at our newest LCD manufacturing facility in Taichung, Taiwan.

We have already lit three tanks and are producing good glass.

The Taichung facility ultimately will manufactured generations 5.5, 6, 7.5 and larger substrates.

You may have seen our announcement earlier this month that our Board has approved a $425 million expansion of the plant.

This investment will be used to fund the third phase of the facility.

The majority of that expenditure will be incurred in '06 and '07.

This announcement does not change our capital spending estimate for this year.

And was already included in our planned spending for next year.

Initial manufacture from this most interesting this most recent phase will begin late '06.

With production continuing to come online into '07.

As with our other display expansions, this will occur in stages over a period of time and follow a modular construction plan that will be paced to meet end market demand.

If end market demand slows we have the ability to slow or even stop some of the expansion necessary.

We will also pace the construction to meet our long term supply agreements with customers.

I'm also happy to report that our Gen8 expansion at Shizuoka is well on track and will be complete next year.

Now, moving to the environmental segment.

Sales in the third quarter were 144 million.

And as expected fairly consistent with sales in the second quarter.

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

Diesel volume was slightly higher in the third quarter driven by retrofit sales to Korea.

A segmented loss of $5 million in the third quarter, in comparison to a loss of 4 million in the second quarter.

In the life sciences segment, sales in this third quarter were 70 million and lower than the second quarter sales of 75.

The sequential decline in sales primarily due to an inventory build in the channel during the second quarter, which did not repeat in the third quarter.

Third quarter sales were also negatively impacted by weaker Euro.

The segment incurred a net loss of 7 million in the third quarter, compared to a loss of 4 million in the second quarter.

The weaker performance is the result of higher development and engineering expenses as well as for lower volume.

We are happy to report the conversion of our customers to new channel continues to progress.

As a result, the impact to our life sciences revenues for this year will be between 5% and 10%.

Now, moving to telecommunications segment.

Sales in the third quarter were 398 million, a 4% decrease from the second quarter and in line with our expectations.

Sales in hardware and equipment products were 182 million in the third quarter, down from 202 in the second quarter.

Volume was primarily due to lower demand in North America and Europe.

In North America the weaker demand was primarily related to FTTP, as Verizon continued to work through their excess hardware and equipment inventory during the quarter.

Sales in our fiber and cable products in the third quarter were 216 million and slightly higher than second quarter.

Fiber volume in the third quarter was up in the mid teens sequentially.

Fiber pricing was flat.

As a reminder, our customers can purchase Corning fiber through an outside cabler or through our own cabling operations.

Some of the fiber that was shipped to our cabler, again, in the third quarter did not get sold until the fourth quarter.

Sales and profits for us, are only recognized when cable fiber is sold to an outside third party.

We have seen this occur throughout the industry as customers have shortened earlier lead times forcing cablers to keep more inventory on hand.

The telecom segment second incurred a net loss of 30 million in the third quarter but that includes the restructuring charge of 28 million after tax.

In our other reportable business, sales in the third quarter were 87 million.

Slightly lower than the second quarter.

Equity earnings for Dow Corning were 58 million in the third quarter and within our guidance range.

Now, moving to the balance sheet, we ended the third quarter with 2.4 billion in cash and short term equivalents.

And that compares to about 2.1 billion at the end the second quarter.

The most significant cash inflow during the quarter was the 141 million in customer deposits net of credits.

The most significant outflow in the second quarter was 378 million in capital expenditures mostly for display expansions.

Free cash flow during the third quarter was 219 million.

We continued to make progress on our debt reduction program during the quarter.

In September, substantially all of our holders of 96 million in convertible notes, elected to convert to common stock.

On the conversion, we issued 6 million shares of stock.

As a reminder, these shares were already included in our diluted weighted shares outstanding.

We're happy to report the Company reached a new financial milestone in the third quarter, as our cash and short term investments exceeded our debt by more than 300 million.

Also, during the quarter, Moody's upgraded our in debt rating to investment grade.

All three rating agencies currently have us at investment grade with stable outlook.

In the fourth quarter we you will see us a paying off the remainder amount of the 0 coupon debt for approximately 275 million, using cash.

Our cash and debt will fall.

We expect to end the year with debt of approximately 1.9 billion.

After this payment is concluded we will be finished with our balance sheet restructuring program.

Now, turning to the outlook.

I would like to wrap up by providing some guidance for the fourth quarter.

We are expecting revenues in the range of 1.18 billion to 1.24 billion and EPS in the range of $0.21 to $0.23 per share before special items.

Although, the revenue and EPS ranges, for the most part, are higher than current Street estimates;

I thought I would provide more color in the light of our strong thirds quarter results.

As a reminder, our telecom, environmental and life sciences segment has historically been weaker in the fourth quarter due to seasonality.

In addition, our third quarter EPS contained the $0.02 from tax adjustments that will not repeat in the fourth quarter.

Our selling and administrative spending will also likely return to normal levels in the fourth quarter.

Moving down the income statement for your modeling purposes.

Gross margins for the Company should be between 43% and 45%.

Our gross margin guidance reflects the potential impact of LCD class price declines, lower fiber volume and the continued complexity of adding new LCD glass capacity.

SG&A is expected to be between 16 and 17% of sales.

RD&E is expected to be around 10% of sales.

We anticipate equity earnings to be slightly lower than the third quarter.

That point in time will be impacted by normal seasonal fourth quarter declines.

As a result, we believe equity earnings for Dow Corning will be around 50 million in the fourth quarter.

Regarding our tax rate, it remains difficult to forecast given the change in mix over domestic and international earnings.

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

Lastly, you should use 1.56 billion shares for the fourth quarter in calculating EPS before special items.

Now, 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.

However, our guidance for the fourth quarter does assume the end of dollar rate of approximately $1.15 versus the $1.11 average for translation occurred in the third quarter.

The end of dollar rate moves to $1.20.

We estimate the overall sales will be impacted by 22 million and our NPAT by approximately 11 million.

This includes the benefit from our hedge portfolio.

In the display segment, we are forecasting sequential volume growth for our wholly owned business to be up 5% to 15% in the fourth 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 are expecting sequential LCD glass pricing to be down slightly in the fourth quarter.

At SCP we are expecting sequential volume to be flat to up 5%.

Unlike the continued capacity ramps at our customers in Taiwan, the first phases of the Samsung 's Gen7 ramp and LPL's Gen6 ramp are basically completed.

As they discussed during their recent quarter three calls.

As a result, we are not expecting as much glass demand growth from the fourth quarter from SCP.

In total, display segment volume is expected up between 3% and 10% sequentially in the fourth quarter.

I know this growth rate is lower than the last two quarters, but as I mentioned a moment ago, there are fewer fabs in the process of ramping this quarter.

This is not the result of weaker demand in the industry.

If we are able to achieve our volume growth expectations in the fourth quarter, our growth for the year will be between 62% and 65%, which is higher than our original expectations.

We also believe that 2006 will be another strong year for LCD glass demand.

Driven principally by LCD television but LCD monitor penetration will also contribute significantly.

We're currently seeing some additional supply from competitors for Gen6 now.

Which is not a surprise to us.

We have been in the Gen6 market for over two years now.

And more competition was going to come eventually.

It just took longer than we thought.

This will cause more price competition than we had in the second and third quarter.

We have prepared for this competition and continue to have the lead in large sizes.

And expect to win in competition on Gen6, just as we do on Gen5.

As a reminder, LCD glass is a technology industry.

There will always be competition and there will always be price pressure.

We will need to continue to do what we said we would.

Drive down our costs equal to or greater than our price declines.

While our competition has been focusing their time and attention the last two years trying to develop these larger sized substrates; we have been using that time to work on our manufacturing process and reduce our costs substantially.

We believe our second and third quarter performance provides evidence of our progress.

In the telecom segment, we expect sales to be down 4% to 7% sequentially.

Fiber and cable sales are expected to be down 10% to 15% sequentially, reflecting lower seasonal fiber demand.

Hardware and equipment sales are expected to be consistent with the third quarter, as stronger FTTP sales will be offset by normal seasonal declines.

We are anticipating our FTTP sales in the fourth quarter to grow sequentially.

I know some investors will be disappointed we are not providing specific fiber volume or pricing guidance.

Our decision to drop this guidance was based on the immaterial impacts swings in the fiber volume and pricing had on the Corporation's overall results for the past year.

But if we anticipate changes in our fiber business with material impact to results we will communicate those facts accordingly.

We believe providing sales guidance for fiber and cable and the hardware and equipment businesses is more meaningful to our investors.

Regarding our other segments we expect fourth quarter sales for our environmental segment to be consistent with the third quarter.

We anticipate higher retrofit diesel volume to be offset by seasonally lower auto-related sales.

Sales at life sciences segment are expected to be slightly lower in the fourth quarter due to seasonality.

Sales at our other reportable businesses expected to be up 10% sequentially in the fourth quarter.

Driven by demand for our DLP and other semiconductor products.

For those who wondering about the influence of higher energy costs on our operation, we are currently evaluating its impact.

The impact of higher energy costs is embedded within our fourth quarter guidance.

As a reminder, the cost of energy is a fairly small component of our manufacturing cost compared to our history.

In addition, some of these energy costs are currently hedged into next year.

I will provide further insight during our fourth quarter conference call.

I would like to provide some additional information on the overall impact of stock options to our compensation expense next year.

As well as some insight in how we are accounting for it.

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

We are providing this information this morning with the strong recommendation that our sellside analysts update their 2006 models this quarter to properly reflect the impact of stock option expense.

I know that there are a few sellside firms that already require their analysts to reflect option expense in their estimates.

We are hopeful the majority of you will take this approach.

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 once we begin 2006.

So, for those sellside analysts on the call this morning, we ask you to include this expense in your '06 estimates going forward.

We expect our total stock based compensation to increase as a result of new accounting rules by between 60 to 70 million pretax and after-tax.

The amount is lower than our previous guidance of 90 million.

We have chosen the binomial model to calculate this expense.

The impact of higher expense will be reflected within gross margin, SG&A and R&D.

Depending on whether the employee received the options working manufacturing, corporate or in a research lab.

We expect about 75% of the expense to fall within SG&A. 20% in RD&E.

And 5% in cost of goods sold.

You should also note that our stock compensation rewards are heavily weighted to U.S. employees.

Therefore there is no tax benefit recorded on these expenses.

We also expect the expense to be spread relatively evenly over the year.

If you have any further questions to help in your models, do not hesitate to call Ken directly.

One last point I like to make before we go to Q&A.

Will all the great detail I went into on the last call about stock trading by senior management; as a reminder, you should continue to expect some members of senior management to sell stock each quarter.

This is not a reflection of their confidence in the Company.

Ken?

Great.

Thank you and we are ready to take questions now.

[OPERATOR INSTRUCTIONS] Our first question from Daryl Armstrong with Smith Barney.

I have two questions.

One on television and the other on margin.

In terms of the historical data on television volumes across recessions, was that consistent - - was that accurate from a high end as well as low end television sets?

And then I have a follow-up.

So actually, haven't looked at the television sales during these period of time by sales of television and that is relatively true that it was evenly placed.

Not perfectly across the different sizes.

And we don't have price data back to the '70's but we looked at the various sizes of televisions.

Back then a 27 was a big one.

It was relatively evenly spread versus small ones.

That is helpful.

And then in terms of margin, the way I look as it that there are three drivers of margin expansion.

One, LCD becoming a larger part of the overall corporate mix.

And then second of all the uptick - - or the increased sales of Gen6 and Gen7 your the overall LCD volumes.

And then third the improvement in the individual generations, let's say for instance Gen6 due to the improvements of yields net of pricing competition.

As you think about your business over the course of the next few quarters, how do you rank order the importance of each of those three factors in terms of driving up margins?

Well, I think that the most important thing for us would be the additional volume of Gen6 and ultimately Gen7, which shows up in our base business.

As you know, right now our base business is really only Gen6.

Our Gen7 is at S&P.

We expect to have Gen7 on '5 and Gen8 in next year for our business.

I think that the things you're missing in the margin would be the impact of price as a negative.

And then the other impact will be our own ability to continue to improve our cost structure.

And as you know, most of our additional capacity we are ramping in Taiwan where our cost structure is very, very low.

So, I think those things are the other things you ought to be putting in your model.

That's helpful.

Thank you.

Thank you.

Our next question comes from Nikos Theodosopoulos with UBS.

Thank you, I had a couple of questions.

First of all, you gave us a sense that the LCD gross margin was up sequentially.

Can you just give some color on the other businesses, whether - - was the gross margin trend up or down and what was the gross margin in SCP in the quarter?

And the second question I have is, you mentioned royalty income.

Can you elaborate on what business that was reported in and what was the amount?

Thank you?

The royalty income is all within one business.

It is basically a royalty that comes out of our overseas operations in display paid to the U.S. where we developed the technology.

But because of our tax treatment in the United States it absolutely helps our overall tax rate.

In terms of the gross margins and the other businesses, environmental was basically flat.

Life sciences was down a little and the other materials were down a little bit, too.

But nothing material there.

Well, what about telecom?

I don't remember what telecom was in the third quarter.

Hang on a second.

Telecom was down just slightly.

And the significance of the royalty income how large is that?

Sorry, we don't break that out.

You don't break that out.

It's masked because it is an expense and an income when you look at the total Corporation.

Right.

I'm trying to get a sense of the profitability - - the core profitability of the LCD business.

As you look at it second quarter versus third quarter it seemed to have improve dramatically.

And I'm trying to get a sense - - was that mostly the gross margin improvement or was it kind of split evenly?

Did the royalty income change dramatically sequentially?

The royalty income wouldn't affect the display as you've seen it - - in the segments you see it.

Because it is both an expense over in Taiwan and then an income in the United States and then consolidated, so you don't see it.

What's driving the margin improvement in the display business is our gross margin percent increasing, the overall growth of the business, leveraging our SG&A and R&D.

And then lastly as I indicated that - - because of the way we allocate taxes, sequentially compared to quarter two, the tax benefit was great because we had this overall lower tax rate.

Okay.

And finally, the SCP gross margin, do you have that?

It was consistent with quarter two.

Thank you.

Thank you.

Our next question comes from C.J.

Muse with Lehman Brothers.

Good morning.

A couple of questions here.

I guess first off, for your gross margin for your core display business you alluded to it getting closer to SCP.

Can you give us I guess a tighter range in terms of what that number was like?

No.

Sorry, I won't do that.

Okay.

I guess looking forward to Q4, you gave up guidance for glass volumes.

Yet your gross margin guidance is considerably low are than what you achieved in the third quarter.

Can you comment on why that is?

So, overall for the Company, what you are going to see is the telecom business going down.

And remember we have basically when you - - we lose the telecom revenues they fall at a very high incremental rate.

And that is providing most of the down, if you will.

If you all the way to the 43% versus the 46, the telecom dropoff is about 2/3 of that.

The other potential pressure we see will be the question of what is the ultimate pace of price declines in the LCD business?

As we indicated, we expect them to be only slightly down.

Slightly is what we would think about similar to what we had in quarter one.

So, that will be the potential, and I stress potential, downers within it.

The up will be - - depends on how well we do in manufacturing in Taiwan where we are bringing on a number of new tanks.

Okay.

And final question from me.

I know glass and panel shipments don't necessarily correlate one to one but you're flat to up 5% guide for SCP seems rather conservative relative to Samsung's guide of up 8% and LPL's guide of mid teens growth in the fourth quarter.

Can you help me understand the disconnect there?

Well, really - - remember what we've shipped to them in quarter three is showing up in their outtick in quarter four.

And I think they indicated that their actual - - that their ramps were done.

So, they are not adding manufacturing capacity really in this quarter.

What you are seeing in their sales going out is what's coming out of what they've already manufactured and the inventory they have.

But I think both of them indicated that they had achieved their ramped capacity on those two fabs.

Got you.

So, your guide of flat to up 5% would suggest panel shipments out of Korea will be up sequentially in the first quarter?

We would hope so.

Got you.

Thank you.

Thank you.

Our next question comes from Steven Fox at Merrill Lynch.

Hi, good morning.

Jim, first of all going back to some of the comments you made about the excess inventory potentials.

Is there any chance the panel makers would try to hold price and slow production as opposed to first trying to drop price and net pricing on say panels may not be a good leading indicator for monitors?

This is Wendell.

So, yes, there is always that chance but past behavior has not - - if past behavior is any predictor of the future then they wouldn't do that.

And if there was to be some kind of inventory correction that had to go on what do you think the lead time would look like in terms of them slowing production?

It depends on the segment.

As Jim pointed out, the pipeline tends to be shorter and under tighter control in monitors.

Right?

As opposed to LCD TV.

Right now we don't see much concern in LCD TV, as Jim has said.

But we do have to take a close look at what happens - - what our customers believe will happen in quarter one for monitors.

Because we are counting on increased penetration in that.

And it is once again, as Jim just said, we will sell glass in in quarter four for what ultimately our customers sell out in quarter one.

And then just a quick question rate Jim.

Is 25% a good number - - 20% to 25% a good number to flow through into an '06 model at this point?

Yes, I think that is a reasonable estimate right now.

We will try to give you a lot more help on that.

Obviously, we are having a little trouble doing the forecasting tax rates.

But I would say for right now that is a good rate to use.

Thanks so much.

Thank you.

Our next question comes from John Harmon with Needham Company.

Hello, good morning.

Good morning.

I guess two quick questions.

One, I noticed a change in the language in your press release.

I'm talking about that LCD television penetration could be between 20% and 25% in '07 versus I think 21% is your latest forecast.

Has the market researchers, have they changed their view or are you more optimistic about LCD TV?

I won't speak for all the market researchers but we clearly have moved up our own expectations of what we think LCD television penetration is going to be next year.

Thank you.

And secondly given that fiber volume turned out much better than expected in Q3, could that accelerate the reopening of Concord or does that increase the probability of it opening next year?

At this time one quarter does not change our position one way or another on Concord, sir.

But at present you still believe if current trends continue you can reopen it in '06?

No, I would say that we - - unless there was a more significant rebound in China it is not likely to be in '06.

All right.

Thank you very much.

Thank you.

Our next question comes from Brant Thompson with Goldman Sachs.

Hi, you gave us a lot of information about how consumers might behave relative to the TV market.

And obviously we've talked about how that market can quickly result in corrections.

But can give us your view on the monitor and notebook side, how higher energy prices and these types of things may impact that?

And you had mentioned that you can see quicker corrections in inventory in the monitor market.

But just kind of talk about how a glut at the panel makers may impact you on the monitor side since that's really the bulk of the volume still still.

We don't have the same kind of history on the IT usage of this during a long number of recessions in particular.

Remember about the IT market, it is driven not only by the consumer behavior but also by the corporate IT budgets.

So, we don't have the same ability to say what's happened.

What we have focused a little bit on, is done informal surveys of other CFO's about what their IT budgets are for the upcoming year on the corporate side and basically we're not - - I'm not sensing declines.

If anything, in fact, they're up.

But it is hard to judge and it is very possible that a consumer who might have been thinking about a flat panel display might put off that purchase but we just don't have enough history about it.

As you've indicated the bad news about the monitor market is it is probably flows quicker to us than the television does.

But we just don't have any kind of history to judge that.

I would say if the thing that we focus most on right now, is what is happening in the monitor market rather than the television market in terms of potential impact on us from December and January.

And then if I could have a quick follow-up on the pricing changes in the pricing environment.

Over the last couple of quarters we saw some pricing I guess down in the first quarter, flat in the second and third quarter and then you are expecting to be down a little bit into this next quarter.

As we look out into 2006, given that you are seeing pricing competition really for the first time in Gen6 now, should we expect the price declines to be steady sequentially throughout the year or would it follow a similar trend?

Well, what we have said consistently a what we anticipate is price declines on an annual basis in the high single digit range.

And we've provided information in the past that shows that - - though you can have given years where it is a little more shallow or a little more steeper; that the important point is when we show how we have done on cost that we have been able to over that period of time decrease our costs by at least the rate of price decline.

Thank you.

Thank you.

Our next question comes from Jeff Evenson with Sanford Bernstein.

Jeff, are you there?

Yes.

Investors probably appropriately focus on the size mix of LCD glass substrate.

Can you comment on the nonsize parameters like surface properties, expansion coefficients and perhaps in the future polysilicon and its impact on purchase decisions?

Jeff, do you mean specifically on TV or across the whole sweep of the product line?

On TV.

On TV.

So I think that the three main areas to focus on from the technical standpoint is; that as you go bigger the challenge gets harder.

From both the stress standpoint and on overall glass requirements.

And that tends to play to our strength.

So, we continue to have product entries that will I think match up nicely with those tightening specifications.

To polysi we don't think that is going to be a force in TV.

However, that we will see it in smaller displays.

And once again, the technical challenges of the glass increase in polysi especially around processing temperature.

And, once again, we have got some new technology that we feel really good about that will position us very nicely in that market.

Thanks.

Thank you.

Our next question comes from Matthew Smith with CIBC.

Good morning, gentlemen.

Two questions, if I may.

Firstly, on the ASP's I think in the past you've said that historically you have commanded a double digit premium in terms of your glass ASP's relative to the competition.

I'm wondering if that is still the case?

And whether or not you are seeing any pressure to bring down that premium as the - - as Asahi and so on get better at supplying Gen6 glass?

And then secondly on the diesel business, if we can switch gears a bit.

Can you give us an update on where you are with your letters of intent with North American and European customers?

And when might we see some of those LOI's converted to formal deals?

Thanks a lot.

First a general comment on the competition and your particular focus on Gen6.

I think it is important to remember that we started commercial production in Gen6 sort of mid 2003.

And really the first competition showed up selling in Korea to a customer who isn't that close to Samsung Corning precision and therefore, had a lot of motivation to buy it from someone else in the fall of 2004.

And we are still the majority supplier there.

Now, 2.5 years later we have another competitor finally showing up with commercial quantities in Taiwan and Japan.

We anticipated competitive entry long before this and are more than ready for that.

Remember, we only had about a one year lead in Gen5 and we have continued to expand our profitability in that product line.

A part of that relates to the premium that you spoke to but more importantly is continued improvements in productivity.

We would expect to continue to have some degree of premium.

Mainly because of the better glass quality and our strong reputation for being able to reliably produce it.

Remember, we've already turned in a commercial producing Gen7 and have already begun sampling larger sizes and are in the midst of building our Gen8 plant.

Thank you very much.

Diesel, you asked about where we are on the supply agreements.

We are continuing to negotiate.

These are difficult contracts.

Not so much for price but more to make sure we understand the warranty and performance requirements in the contract.

But we continue to make very good progress on that with our customers and are hopeful of reaching conclusion in the fourth quarter.

Our next question comes from John Roberts with Buckingham.

I'm not sure any one said nice quarter yet, guys but maybe that is becoming a little bit routine to you.

No.

And we always appreciate hearing it.

Thank you very much.

The questions first on Dow Corning, which is also nonpetroleum based but they sell into markets with a lot of petroleum based alternatives.

So, in a high energy environment, should we be expecting their earnings to accelerate here?

I would not be expecting acceleration right now.

They're - - they have some energy components sales.

Although, obviously smaller than most of the commodity players.

But they are also running very close to near capacity at there basic plants.

So, I don't see a lot of room for big acceleration.

But we do have a seasonality method.

As you know, the first half for Dow Corning is usually much stronger than the second half.

And then when we talk about the LCD share of the TV market, it is sort of with the assumption that the total TV market is not growing.

But as we get a ramp in digital broadcasting over the next couple of years, the installed base of TV's still have very little digital penetration, I think.

So, should we be thinking about the total TV market maybe accelerating a little bit and then LCD picking up a good part of that incremental growth?

I think that is a good point.

The overall category growth that we would say for TV have increased in the low single digits.

And that with the advent of a strong digital broadcasting and the move towards digital, it could have a prompting to give people a reason to have to buy a TV.

Especially, if the digital broadcasting bill that is work its way through Congress right now goes through.

Because people's analog sets will be obviously challenged.

Remember, that digital goes very well with LCD TV since it is naturally digital.

So, perhaps there's is a an opportunity here with digital signalling becoming predominant providing some upside to overall category growth.

Remember, the key thing we want is people to have a good reason to buy TV's.

Once they have that we feel really good about the competitive nature of the LCD TV technology.

Thank you.

We have time for one more question.

Thank you.

The final question comes from Ajit Pai with Thomas Weisel.

Good morning and congratulations on a really solid improvement in your balance sheet over the past couple of years.

Thank you very much.

We appreciate that.

A couple of quick questions about that.

Now, that you are in sort of a net cash situation I think for the first time in almost 20 years; what do you intend to do with that cash in 2006 and beyond?

Do you want to continue to have learn on the balance sheet or what will you use that for?

So actually, we were kind of researching to figure out the last time we had the situation.

I appreciate you pointing that out to us.

We are going to keep a large amount of cash going forward simply as part of our stability metric.

Because we know we are in tech businesses, we will have some debt.

We don't expect it to get greatly above the amount of debt we have.

What we're really going to do with that cash is reinvest it in the business and there is two places.

One is obviously our capital expending for near term business, such as either display or diesel.

More importantly, I think for investors, is that reinvesting in our research and development for hopefully businesses that will be appearing at the end of this decade.

So, that is why we are maintaining the cash for both stability purposes and the ability to reinvest in R&D.

And when you look at your planned extension of Gen8 capacity that's being over there, Gen8 and higher, when do you expect that to come online?

I think you mentioned 2006 but you didn't indicate whether it is the middle of the year or end of the year.

It will be in the first part of the year.

In the first part.

So, is it safe to assume that the second quarter would be seeing a ramp over there?

We clearly expect it to start in the second quarter.

But ramps of new big fabs don't happen really fast.

So - - but we clearly intend to be prepared to ship Gen8 glass in the second.

Okay.

Just moving on to the operating margins in the environmental business.

Those margins have been hovering in the close to 0 for awhile now.

I think largely driven by your sort of large investments in the diesel opportunity.

Are you seeing any deteriorating trends right now in the regular auto business?

And then in the diesel opportunity, when do you expect like the sort of margins over there to move up into double digits?

How many quarters or years would it take?

So, we are not seeing a deterioration in auto.

We would like to see a little by the more improvement in auto but we are not seeing a deterioration.

Diesel, I don't think you should look for much improvement before the beginning of '07, when we begin shipping quite a bit of volume.

Thank you so much and congratulations again on a very solid quarter.

Jim, do you have some closing comments?

I do.

Just a few closing comments.

Clearly we are very pleased with our outstanding performance in the third quarter and are excited about our prospects for the fourth quarter.

We've got excellent momentum as we start the fourth quarter especially in LCD glass.

And with regards to display, we are looking forward to seeing how successful LCD television continues to be in this very important holiday season.

Our belief is retail prices will generate substantial sell through and that '06 will turn out to be the inflection point in LCD television.

One late breaking piece of new.

I'm aware that Verizon announced this morning their 2006 plans for homes past.

And they announced the 3 million homes and also the details on their connect rate where they have been marketing the service and that looks favorable to us.

So, we are pleased by that news now also.

Two final notes.

On investor relations announcements; on November 2, I will be presenting at the Morgan Stanley conference in Phoenix.

And then November 15, Pete Volanakis, our Chief Operating Officer, will be presenting at the UBS Global Communications Conference in New York City.

Ken?

Thank you Jim.

Thanks Wendell.

Thank you all for joining us this morning.

A playback of the call will be available beginning at 10:30 Eastern Time today.

Will run to 5:00 pm Eastern Time on November 10.

To listen dial 402-220-9717.

No password is required.

The audiocast is also available on our Website during that time and that concludes our call.

Please disconnect all lines.

Thank you, this concludes today's teleconference.

Thank you for your participation.

Have a great day and you may disconnect at this time.