康寧 (GLW) 2006 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, Lisa.

Good morning and welcome to Corning's second quarter conference call.

This call is also being audiocast on our Web site.

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

Wendell Weeks, President and Chief Executive Officer 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 Securities Reform Act of 1995.

These statements involve a number of risks, uncertainties and 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 Investor Relations Web site.

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

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

Regarding our second quarter results, we were obviously very pleased with our earnings performance, although we fell short of our original sales expectations.

Our second quarter sales were 1.26 billion and consistent with the first quarter, but below the bottom of our guidance range by about 30 million, or 2%.

This was primarily due to weaker Display revenue.

In comparison to the second quarter of last year, sales were up 11%.

Our EPS before special items was $0.26 and at the top end of our guidance range.

Strong results were primarily due to strength in our Telecommunications segment and lower operating expenses which offset weaker Display results.

In comparison to a year ago, second quarter EPS excluding specials grew 30%.

This is probably a good time to update you on the power out age at the LCD plant located in Shizuoka, Japan.

We're pleased to report that all the tanks have been repaired and are fully operational.

The out of pocket expense as a result of the repair and shipping costs was only 6 million in the second quarter.

Since the volume in the second quarter was so much lower than we originally anticipated it's difficult to compare these costs and the impact of lost production with our original estimate.

I will get into more details about our Display results in a few minutes.

Net profit after-tax excluding special items in the second quarter was 421 million and basically flat with the first quarter.

In comparison to the second quarter of 2005, net profit after-tax excluding special items was up 109 million, or 35%.

You should note that EPS net profit after-tax excluding special items are non-GAAP measures.

A reconciliation to GAAP can be found on our Web site.

You should also note that second quarter sales and net income benefited slightly due to changes in foreign exchange rates in comparison to the first quarter.

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

We reported a pre and after-tax gain of 61 million primarily reflecting decrease in the market value of Corning stock to be contributed to settle the asbestos litigation related to Pittsburgh Corning.

Corning's share price decreased during the quarter from 26.92 to 24.19.

In addition, we also reported an after-tax gain of 10 million to reflect the release the of valuation allowance on certain deferred tax assets in Australia as our business there has now demonstrated sustained profitability.

We also recorded a loss of 11 million on retirement of debt.

Lastly, our equity earnings from Dow Corning included a gain of 33 million related to Dow Corning's settlement with the United States Internal Revenue Service regarding liabilities for tax years 1992-2003.

This settlement resolves all federal tax issues related to Dow Corning's implant settlement.

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

Including these special items our second quarter EPS was $0.32 per share.

Now continuing down the income statement, gross margins in the second quarter were 43% and right in the middle of our guidance range.

SG&A was 194 million in the second quarter, or 15.4% of sales compared to 223 million in the first quarter.

This increase was primarily due to lower compensation expense and accruals in the quarter, some of which are impacted by the change in our stock price.

RD&E was 128 million in the second quarter and fairly consistent with the first quarter.

Equity earnings were 256 million in the second quarter compared to 200 million in the first quarter.

As I mentioned a moment ago, second quarter equity earnings included the 33 million gain at Dow Corning.

And as a reminder, our first quarter equity earnings included a 21 million impairment charge at Samsung Corning CRT.

If you exclude both of these special items, equity and earnings were fairly consistent quarter-to-quarter.

Our tax rate in the second quarter was 15% and at the bottom of our guidance range of 15 to 20%.

Our share count for the second quarter was 1.597 billion shares and fairly consistent with the first quarter.

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

I'll start with Display.

Sales were 461 million in the second quarter, a 16% decrease from the first quarter sales of 547.

This decrease was primarily due to a 14% decline in volume and lower pricing.

Price declines in the second quarter were lower than the upper single- digit declines in the first quarter and this lower level was consistent with our guidance.

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

The impact of the yen to the U.S. dollar exchange rate was actually slightly positive.

In comparison to the second quarter of last year, sales in the Display segment grew 11% as volume gains of 38% were offset by foreign exchange rates and price declines.

Equity earnings from SCP were 133 million in the second quarter and lower than the first quarter equity earnings of 140 million.

You should note that the first quarter included a non- recurring gain of 7 million.

SCP sequential volume growth in the second quarter was 3% and price was down slightly.

Year-over-year volume growth at SCP was 52%.

Sequentially, total LCD glass volume, including our wholly owned business plus Samsung Corning Precision, was down 6% in the second quarter and consistent with our revised guidance from May 22.

In comparison to a year ago our total LCD volume growth was 45%.

Net income in Display segment which included the equity earnings was 344 million in the second quarter, down 18% when compared to 417 in the first quarter.

The decrease in net income is primarily a result of lower sales.

In comparison to the second quarter of last year, Display net income, including equity earnings, was up 20%.

The gross margin in our second quarter in our wholly owned business was lower than the first quarter.

The decline was primarily due to the out of pocket expenses from Shizuoka power outage, lower pricing, and reduced volume in comparison to the first quarter.

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

As always, I'd like to stress we don't have perfect information.

We use a variety of sources ranging from services that are available to you use such as Display Search, along with retail tracking vendors, our own discussion with customers, as well as our own models.

With that in mind, you should know the following date has been derived from an aggregate of industry sources that are considered to be preliminary at this stage.

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

Be clear the data we reference relates to shipments from PC manufacturers and TV set makers to retailers.

In summary, the preliminary data indicates that the end market shipments were in line with our expectations and on track for all three primary applications, notebooks, monitors and LCD televisions.

Starting with notebooks, about 18.3 million were shipped in the second quarter in line with our expectations.

This was a slight increase over notebook shipments in the first quarter.

We believe the penetration notebook computers reached 37% of all computers sold in the second quarter up from 35 in the first quarter.

Moving to LCD monitors, about 31 million were shipped in the second quarter compared to 29 million in the first quarter.

We believe the penetration of LCD monitors inched up from 79% in the first quarter to 80% in the second quarter.

For LCD televisions, almost 8.5 million were shipped in the second quarter, also in line with our expectations.

This represents a 10% increase over the first quarter shipments of 7.5 million.

More importantly, however, is the penetration [of] LCD television into the color TV market grew from 17% in the first quarter to an estimated 19% in the second quarter.

Based on the continued strong demand and further anticipated retail price reductions heading into the holiday seasons, we estimate LCD penetration this year to be approximately 20%.

As I have indicated, these sell into end market data seems on track versus our expectation.

As you know, we buy several retail tracking services to determine how the true retail end market is going.

The data here does lag and we cannot get complete worldwide coverage, however, this data also indicates the true end market retail sales are in line with our forecast.

I'd like to spend a few minutes updating you on the current supply chain inventory situation.

As a reminder, our visibility in the supply chain varies.

For obvious reasons, we have good insight into the glass market as well as our direct customers, the panel makers.

Admittedly, our insight beyond the panel makers, for example, into inventories at the set assembly and retail levels, is not as robust.

With that in mind, let me quickly walk you through what we believe has transpired over the last two quarters.

We believe the inventory build and the supply chain began in the first quarter particularly at the Taiwanese panel makers.

As we told you during the conference call in April, we [inaudible] some of our glass shipments in the first quarter, which as you recall, were much higher than we had anticipated ended up in panel inventory.

At that time we also warned that number of days of panel inventory increased during the first quarter.

We believe the increase in inventory was primarily related to monitor panels, although there clearly was some television panel inventory built as well.

As a result we announced our sequential Display segment volume would be flat to up 5% at best for the second quarter.

We promised investors we'd continue to monitor the panel inventory situation and provide updates accordingly.

During the second week in May we saw further evidence the panel inventory was building in the supply chain.

Again, particularly at the Taiwanese panel makers and particularly for monitors.

The first piece of evidence was the final April inventory data, which indicated the number of days panel inventory had increased yet again.

At the same time, two Taiwanese panel makers informed us they were reducing their utilization and as a result cutting back on glass orders.

We decided at that point there would most likely be other panel makers who would lower their utilization rates during the quarter further impacting our glass volume.

As a result on May 22, we announced we were lowering our sequential Display segment volume forecast from flat to up five to flat to down five.

This was total volume including Samsung Corning Precision.

It's evident the excess panel production in the first quarter contributed to inventory build and we've seen this happen in the industry previously.

To alleviate the inventory build, panel makers have historically relied on price reductions to move inventory further through the supply chain.

This has been particularly true for monitors over the past several years.

This approach has worked well in the past, especially when monitor penetration was still relatively low compared to today, but with monitors now at 80% penetration, the price reductions [inaudible] by the panel makers this time around may not have the same desired clearing effect, especially in regards to speed.

As inventory levels had continued to build and panel prices approach cash cost, many panel makers elected to reduce utilization [in] their fabs in late May and early June.

Clearly, the most significant reductions were at the Taiwanese panel makers, which was evident in second quarter volume declines at our wholly owned business compared to the higher volumes at SCP.

We believe on average the Taiwanese panel makers reduced their utilization to around 70% although there were two customers that were much lower.

On the other hand, the Korean and the Japanese panel makers continued to add substantially higher utilizations.

So what is the current status of the supply chain?

Our latest industry checks indicate that some of the Taiwan panel makers have been successful in reducing inventories through aggressive utilization cuts in June.

Obviously the amount of panel inventory still varies by customer, but in general the overall data of inventory have been reduced.

As a result, we began to see an improvement in the overall utilization rates of some panel makers in July, although they are currently not back to the levels we saw in quarter one.

We anticipate panel inventory levels will continue to decline and the panel makers utilization rates will rise as the third quarter progresses.

In fact, we believe there has already been a pull through of monitor panels downstream as a result of panel maker actions to reduce utilization.

Having said that, please remember what I said earlier about the lack of robustness of the data we receive from further down the supply chain.

It is no surprise that the strength of the end market will be a significant contributing factor in how quickly the supply chain rights itself.

The good news here is that the end market trends continue to be on track and we're heading into the traditionally stronger second half for monitor and television sales.

Now let me take a moment to share some seasonality data with you.

I'll first walk the data we have sales into retail.

This is the data you can obviously get from outside vendors such as Display Search.

I will also share with you some of the seasonality models we've been building for sales out of retail.

For those who are viewing the slides online what you'll see here is that for both LCD monitors and television, the sales into retail and out of retail are much higher than second half of the year compared to the first half.

I'll start with monitors.

Over the past three years about 43% of all LCD monitors sold into retail in a given year have been in the first half compared to 57% sold in the second half.

In the second half, LCD monitor sales into retail have been more weighted to the fourth quarter with 31% sold in the last three months compared to 26% sold in the third quarter.

As you can see on the chart for LCD monitors percentage sold out of retail in the second half and fourth quarter are fairly consistent with sales into retail.

Now let's talk about television.

For traditional color television sales the seasonality trends are similar to monitors.

Historically about 54% of all color televisions sold into retail in a given year have been sold in the second half.

Within the second half, about 25% sold in the third quarter, 29% in the fourth quarter.

For LCD televisions the impact of seasonality is greater, although we don't have as much history.

Since 2003 approximately 62% of all LCD televisions sold into retail in a given year have been sold in the second half.

Within the second half, 25% have been sold in the third quarter and 37% sold in the fourth quarter.

However, the impact of seasonality is even greater when looking at the number of LCD televisions sold out of retail in the fourth quarter.

Since 2003, approximately 44% of all LCD televisions have been sold out of retail in the fourth quarter when compared to 37 sold into.

Timing differences between sales into retail and sales out of retail pose an interesting forecasting challenge for us in the industry, particularly as television becomes a bigger driver of our LCD glass demand.

In addition, while there are clearly similarities between the LCD monitor and LCD television seasonality trends we do not believe the supply chain prepares for the surge in demand the same way for both products.

There are indications that the supply chain becomes severely contracted for LCD television sales given demand effectively doubles in a very short period of time.

It was evident last year when 32" televisions were sold out in the fourth quarter.

We believe it's very difficult for the supply chain to have enough products to satisfy the huge surge in the fourth quarter demand and maintain a healthy supply of inventory.

We believe this in turn can cause surges in demand for glass as the supply chain deals not only with the fourth quarter but also replenishes the supply of LCD televisions throughout the channel in preparation for first quarter demand.

We're continuing to work to enhance our understanding of the potential compression of the standard three months from glass into retail supply chain metric.

Of course, these are theoretical discussions.

We wanted to share them with you and underscore how difficult it is to accurately predict glass demand especially in an industry that's still in its infancy.

So to wrap up this part of the discussion, we're clearly expecting to see very strong seasonal demand for both monitors and TVs in the second half.

Obviously based on my comments above, estimating how much glass we pulled into the supply chain in the third quarter versus the fourth quarter is getting more complicated.

We continue to believe that the overall LCD glass market volume will grow between 40 and 50% this year.

I'll provide additional detail in our expectations for glass demand in the third quarter during the outlook discussion.

Before I move on to the Environmental business I'd like to provide an update on glass mix and EAGLE XG.

Our glass mix of Gen 5 and higher in the second quarter was 84%, fairly consistent with the first quarter.

The mix of Gen 5.5, 6, 7 glass was 48% in the second quarter, up from about 45% in the first quarter.

Regarding EAGLE XG, we continue to be very pleased by the acceptance rate from our customers for our new extra green glass.

As you all know, we recently signed an agreement with Sharp to be the majority supplier for their Gen 8 glass needs which will be entirely EAGLE XG glass.

In addition, two Taiwanese panel makers are in the process of securing glass supply for their new large-sized glass fabs and interest level in EAGLE XG is very high.

Regarding Sharp and their Gen 8 glass needs, we began shipping small quantities of production-ready glass in the second quarter.

We plan to continue to increase our shipments of Gen 8 glass to Sharp in the third and fourth quarters.

One reminder as with all new panel fab ramps, their pace and timing can be unpredictable as they bring scale up.

Now, moving to the Environmental segment, sales in the second quarter were 152 million and down slightly from the first quarter.

An increase in diesel retrofit sales volume was offset by lower automotive sales especially in North America.

For the second quarter in a row the segment posted significantly higher gross margins.

We're very pleased with the strong manufacturing performance of our light duty diesel filters.

Net income in the Environmental segment was 9 million in the second quarter versus breakeven in the first quarter.

In Life Sciences segment, sales in the second quarter were 75 million, that's slightly higher than the first quarter sales of 72 million.

The segment incurred a net loss of 2 million in the second quarter compared to a loss of 5 million in the first quarter as we continue to invest in research and development for new products.

Moving to Telecommunications.

Sales in the second quarter were 472 million, a 19% increase from the first quarter and in line with the guidance range we had revised upward in May.

Sales of our hardware and equipment products were 238 million in the second quarter, a 24% increase over the first quarter sales of 192.

This increase was primarily due to strong fiber-to-the-premise sales and strength in our base business.

Fiber-to-premise sales were about 80 million in the second quarter, an increase of 45% from the first quarter.

Sales in our fiber and cable products in the second quarter were 234 million, a 14% increase over the first quarter sales of 205.

The increase was due to strong fiber demand in North America , Europe and China.

Net income of Telecom segment was 40 million in the second quarter compared to breakeven in the first quarter.

We were obviously very pleased by the segment's significant contribution to the bottom line.

In our Other reportable business sales in the second quarter 101 million up from 91 million in the first quarter.

The increase was due primarily to higher demand for advanced optics and technical materials.

Equity earnings from Dow Corning in the second quarter were 104 million, including the tax gain I mentioned earlier.

Excluding this gain, equity earnings from Dow Corning were fairly consistent with our first quarter.

Now moving to our balance sheet.

We ended the second quarter with 2.48 billion in cash and short-term investments consistent with the first quarter.

Most significant cash in flows for the quarter were from operating activities, which also benefited from lower working capital needs and 82 million in net customer deposits.

Cash flow from operations totaled 589 million.

Most significant outflow in the second quarter was 274 million in capital expenditures.

Free cash flow was 299 million for the quarter and 123 million for the first half.

We remain on track for the third year in a row of positive free cash flow.

Free cash flow is a non-GAAP measure.

We were also delighted that Moody's recently raised it's credit rating on Corning to Baa2 from the previous grade of Baa3 during the quarter.

You should note that consistent with our continued focus on improving financial health you can expect us to opportunistically issue or refinance certain debt over the remainder of the year.

The only balance sheet item I'll mention is inventory which increased 48 million to 664 million in the second quarter versus 616 in the first quarter.

The increase was driven primarily by higher LCD glass and diesel inventories.

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

We're expecting revenues in the range of 1.26 billion to 1.33 billion, and EPS in the range of 22 to $0.26 per share before special items.

In our Display segment, we are forecasting sequential volume growth for our wholly owned business to be up 5 to 15% in the third quarter.

Regarding LCD glass pricing in the base business, we expect price declines to be consistent with the second quarter.

At SCP, we're also expecting sequential volume to be up 5 to 15% in the third quarter but with additional pricing pressure compared to the second quarter.

As a result, we're anticipating lower equity earnings from SCP in the third quarter.

Before turning to our Other segments I'd like to comment on the potential difference between our sequential growth estimates of 5 to 15% and some of the panel makers announcing growth percents above 20%.

We do expect them to lower inventories in quarter three, so glass into them will be less than panels out.

We have noted this disparity has occurred in past quarters.

In our Telecom segment, we expect third quarter sales to be flat to down slightly in comparison to a very strong second quarter.

Sales trend will be consistent for both hardware and equipment, fiber and cable.

Our third quarter Telecommunication results will also be impacted by anticipated price declines.

Regarding our Other segments, we expect sequential third quarter sales from Environmental Life segments to be consistent with the second quarter, and sales in our other reportable businesses are expected to be up 5 to 10%.

I know many of you were expecting to see more growth in the Environmental segment in the third quarter given the anticipated ramp in heavy-duty diesel filters to meet the regulations that go into effect here in the United States beginning in 2007.

Ramp is now expected to occur later in the year than our original expectations due to higher purchases of heavy-duty vehicles in advance of the regulations.

We now expect to see the ramp for heavy-duty diesel filters to start in the fourth quarter this year.

Moving down the income statement for your modeling purposes, gross margins for the Company should be between 41 and 43%.

SG&A is expected to return to normal levels, about 17% of sales.

RD&E should remain around 10% of sales.

We anticipate equity earnings in the third quarter be down 5 to 10% compared to the second quarter after adjusting out the 33 million tax gain at Dow Corning in second quarter.

Higher equity earnings from Dow Corning in the third quarter will be more than offset by lower earnings from SCP, and higher net charges at Samsung Corning CRT related to the dismantling of the CRT capacity included in the restructuring plan we had announced in the third quarter of last year.

We expect the higher net charges to impact our third quarter results compared to the second quarter by about a penny per share.

Regarding our tax rate for your modeling purposes you should continue to use a range of 15 to 20% for the third quarter.

Lastly, you should use 1.59 billion shares for the third quarter when calculating EPS before special items.

One other comment on share count as I've mentioned in previous calls, you should expect some executive selling after our quarterly announcements next week.

As always, executives who decide to sell stock, we encourage these in the period after our quarterly earnings announcement.

As of the restatement in the second quarter we did not allow any executive selling.

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

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

The guidance for the third quarter assumes a yen to dollar rate of approximately 1.15 per translation purposes.

If the yen to dollar rate averages 120 in the third quarter we would estimate our sales would be impacted by 20 million and MPAT by approximately 15 million.

This includes any benefit from our currency hedges.

I'd like to make one comment about our EPS guidance for the third quarter.

Clearly, the range is wider than we've been giving in the past and it may be disappointing to some investors given our strong first and second quarter results.

We believe the wider EPS range is justified given the inherent uncertainty surrounding the LCD supply chain, specifically the timing of improvement in both panel inventories and the utilization rate to panel makers.

While we have confidence the end market trends continue to be strong, it's difficult to determine if the supply chain will correct itself earlier in the third quarter or later.

We are also being exposed to the changing seasonality pattern with the impact of larger television market.

As I discussed earlier, the TV market is weighted more heavily in the fourth quarter.

We're also cautious about potential impact of general economic factors on consumer sentiment.

Now regarding the lower EPS guidance, let me walk you through our thinking on the range of 22 to $0.26.

Let me start with the $0.26 we earned in the second quarter.

As I mentioned, our third quarter results will be impacted by the charges at Samsung Corning CRT and lower pricing in Telecommunications.

These are expected to impact us by roughly one penny per share each, or about $0.02 in total.

As a result, the starting point for the third quarter is $0.24.

If you use the midpoint of the Display volume it would be offset by pricing on the net income line, so we would still be at $0.24.

You model either the high or low end of the Display volume range, it would move EPS up or down $0.02.

This would bring you to either $0.22 or $0.26 per share of guidance for the third quarter.

Before we move into the Q&A session I'd like to take a moment to discuss the timing of stock option grants.

A topic that has been in the press lately.

Our stock options are granted the same time each year.

For executive stock options are approved at our December board meeting, half are granted the day of the board meeting, quarter granted the first business day of January and a quarter granted on the first business day of February.

For non-executives stock options are approved and granted on the day of our annual shareholder meeting, which is typically the last Thursday in April.

The only time stock options are granted outside of these two meetings is when an executive is promoted or for new hires.

Stock options are always priced at the average of high and low price at the date of the grant and usually vest over three years and have a ten-year life.

Ken?

Thank you, Jim.

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

Thank you. [OPERATOR INSTRUCTIONS] One moment while the questions register, please.

Thank you.

Our first question comes from Curt Woodworth with JP Morgan.

Hi, good morning.

Good morning.

Jim, can you provide more clarity on the degree of the gross margin decline this quarter?

How much decline did you see sequentially?

And then looking into the third quarter, do you expect further gross margin reductions in specifically the Display segment?

As it appears, price declines are going to offset any volume gains you have just at the midpoint of the range.

So the gross margin decline on a percentage basis was slight in terms of the percent, was not significant and I'm not expecting, based on our forecast for volumes and prices if those materialize, to see much change in gross margin percent Q2 to Q3.

And on the pricing front, can you comment on what is driving the price reductions?

It seems like the price competitiveness has gone up this year mainly in Gen 6 and you commented that SCP is going to see more price pressure sequentially in the third quarter.

Can you just give us your thoughts there?

Well, I think we've been pretty consistent that we expected this year to be a more price competitive year.

You may recall in February, we've shown you when the ranges of price declines in this business over the course of history and we said this is going to be a more price competitive year.

Particularly when you could see periods of time where there's been a backup in the supply chain, that's an opportunity for panel makers to be quite aggressive about pushing for price declines on generations of glass that have been around for quite a period of time, particularly 5 and 6, and be seeking more in the way of price reductions.

So as always, the focus for us is to continue to reduce our cost.

The challenge in the most recent quarter, aside from the Shizuoka lightning strike, is obviously we had prepared originally and had fixed cost in place to make far more than the amount of square footage that we prepared for.

Ultimately over time, if we don't grow as much we can grow into that fixed cost but that also influenced our gross margin percent.

Okay.

So this quarter the fact that the gross margin reduction was not that severe despite the lack of operating leverage and price pressure does that mean your costs down is also running around the 15% range in terms of holding that gross margin?

I'm not going to comment any further on our cost reductions per quarter.

Okay.

Thank you.

Thank you.

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

Yeah, good morning.

Good morning.

A couple of quick questions.

The first is just looking at the Cap Ex projection for the rest of the year given that you wouldn't need that much more capacity coming online in your consolidate business.

I think you guided to next quarter volume that's almost flat with the first quarter.

And then your cash conversion rate, do you expect that to accelerate from the current quarter or do you expect that to actually sort of slowdown in the second half of the year?

Well first relative to Cap Ex, we are not changing our Cap Ex materially for the remainder of this year.

We will probably slow a little bit from what we've previously said, but I think the impact of a slightly slower growth would be more likely to show up next year than this year.

In terms of capturing cash, the big swing item will really be working capital and if our revenues go up with the higher end of the range obviously some of that will go into receivables, so that's the primary swing item for the back half of the year.

And can you just remind us again since your business mix has changed, can you remind us again of the impact of currency going forward and EPS against the Japanese yen?

I think in our call, we said five points would be $$20 million and revenue [of] 15 on MPAT including the impact on the equity earnings.

Okay.

Thank you so much.

Thank you.

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

Good morning.

Good morning, John.

In my question, I just want to relate three things.

One is a statement that you made in Taiwan saying that the time from when you make the glass to when the TV shows up at the retailer is about three months.

That would imply that really in Q3 you're making glass for Q4 sales of televisions and how does that relate to that diagram you showed, showing the really strong seasonality in Q4?

In other words, are you making enough glass, could you have a shortage and how much are you counting on from inventory to get there?

So this is an area that we've had a belief statement about for three months but we're working very hard to understand the supply chain because the obvious question is, if television's going to be that high in fourth quarter shouldn't we begin to be seeing some more orders?

And one of the things that we do know is that in talking to retailers is that the retail chain can be compressed, first of all by air shipments and we know how much it costs to air ship a 32" television, and if someone feels they're going to miss a sale, that's something that could be a decision chosen by both the supplier and the retailer.

The other thing that we've seen is that there actually is a drawdown of inventory that occurs fairly dramatically.

In fact, we saw a little bit of this last year.

You may recall that our fourth quarter glass shipments were up higher than we expected and we think essentially we're partially refilling the supply chain which they compress during this dramatic retail season.

But clearly, we would expect to see our shipments climb month by month if this forecast is going to come true.

If it doesn't, then either we've got the end market wrong or there may be something else going on in the supply chain that we don't understand.

But right now, given that we did see an increase in utilization in July as some of the people who have been working off inventory started to come back up, we think it's in line with our expectations.

The unknown for us always was when we saw this dip in Q2 was, would it be fixed by the beginning of Q3 or would it take, go month by month within Q3?

So it sounds like if the retailers used air shipment you could manufacture a little bit of glass in Q4 that would go into televisions and it would ship before the holidays.

We absolutely believe that would occur.

We don't think we can manufacture glass in December and get it to somebody's Christmas tree, but we certainly think that glass made in October could get to retail.

Remember, of course, that we tend to focus on the U.S. as being a major channel, but the LCD televisions are sold around the world, particularly in Asia, so the supply chain is not that long there.

Great.

Thank you very much.

Thank you.

Our next question comes from Daryl Armstrong with Citigroup.

Thank you very much.

Two questions.

One on LCD and one on fiber.

You talked about your expectation that utilization rates would increase this quarter as we move through the quarter.

Could you also talk about your expectations around the growth and overall productive capacity at your customers?

Are you expecting that to be flat on a quarter-to-quarter basis or if there's growth, how much?

And then I have a follow-up.

So I don't have the numbers for the overall capacity of our panel makers right handy on the call, so I can't really help you on that.

Clearly, there are not that many new fabs that I think are being ramped this quarter.

The Gen 8 at Sharp is relatively small so it really relates more to the utilization there, but I don't have the numbers handy for that.

And then in terms of the fiber business, you spoke of more momentum in Europe as well as in China.

Could you talk about in terms of the fiber sales that you're seeing there, is it primarily access or are you seeing some metro and long call deployments as well?

So in Europe, it's access and North America, we are seeing both access and metro.

And I don't have handy what the mix is in Asia.

Okay.

Thank you.

Thank you.

Our next question comes from John Roberts with Buckingham.

Good morning, guys, and congratulations at least on the quarter just passed.

Thank you, John.

Should we expect SCP's volume to track Samsung's glass demand or should we expect SCP to track the overall -- you had a pretty big divergence this quarter so I'm just trying to figure outgoing forward which is going to track the industry demand or Samsung?

So SCP will track both Samsung and LPL.

Obviously they have greater share in SCP than they do at LPL but we have very strong volume with both of those so you need to track both of them in thinking about their volume.

Okay.

And then secondly, the chart that you had on the seasonality of LCD TV versus all TV, I don't know if you have the data but maybe just qualitatively if you just looked at Japan where penetration is much higher --

Hello?

Can you hear me?

I can hear you.

If you looked at just Japan or even Europe where you have higher penetration already of LCD TV, is the seasonality even more pronounced the difference or is it less pronounced?

That is, LCD's got a divergence here.

I don't know if as the penetration gets higher is that divergence going to lessen, which is what you'd expect, or does it actually get higher for a period?

I don't have that handy.

I don't know, Wendell, if you've seen that but I don't think I've seen that but it's a good question.

So the logic, I think the logic that you're on is the same logic that we would have that part of the higher degree of seasonality in LCD is driven by the higher penetration rate as you go through the year.

That being said, I haven't seen the split out of the regional data.

Excellent question.

We'll follow-up, John.

Thank you.

Thank you.

Our next question comes from Tim Daubenspeck with Pacific Crest Securities.

Thank you very much.

My question is in regards to Teleco.

You mentioned kind of a pricing change in Q3.

Is this part of a plan, normal kind of seasonal thing or is it something that changed in terms of Q2 on the Teleco side?

And the second question is specific to the fiber part of the market.

Has there been any material change in the competitive environment over the last quarter or so?

So first to the price point, it is driven, our anticipated price declines are driven by big U.S. customers.

Now, it's not an everyday event, but that doesn't mean that it won't happen again.

So I wouldn't take it as meaning as a very long pause necessarily that happened post this quarter three move.

As far as the competitive environment, we're not seeing and significant shift in the competitive dynamics.

The market remains highly competitive.

And just, I'm sorry, just to go back to LCD, did you, based on your initial expectations, were there any material shifts in share within glass relative to [inaudible] in Q2?

I don't think there's anything really material.

I mean the only thing to remember when thinking about share within a given quarter is that if a panel maker that we have high share introduces the utilization that might impact it, but we have not seen anything meaningful in terms of a permanent share shift.

And if I could build on that, I do think that quarterly share dynamics, as Jim said, are difficult to track, really.

You have to take a look at share over a longer sweep of time, especially during supply chain corrections because what customers you have high share at, what do they do with their utilization can hit that dynamic.

Now that being said, as we have said earlier in the year, we anticipated that our competitors would be more viable in the Gen 6 area and therefore would begin to build their position at certain customers and we have seen that begin to happen.

Thank you.

Thank you.

Our next question comes from Steven Fox of Merrill Lynch.

Hi, good morning.

Jim, can you just go back over the gross margin guidance in a similar way that you went over the EPS guidance for Q3?

Off of the 43% gross margin in Q2, why would gross margins only be flat and possibly down 200 basis points?

So if you start with the 43% that we had in Q2, first of all, Wendell just mentioned the Telecom price.

That comes into effect and that gets partially offset on a percentage basis because of how the math works by them not having out of pocket cost to Shizuoka so we're essentially still running in motion then.

Then with Display, it obviously depends on where you pick within the volume range.

I just happened to pick the middle.

If you pick the middle, essentially even though we are having volume up, the price down really doesn't, it still holds you relatively even at 43% at the middle of the range.

One of the things that most people forget among how the percent works even though we have high variable margins, percent actually hurts the gross margin, price declines hurt the percent gross margin greatly.

So at the midpoint we're still basically even.

Where we're losing ground potentially is two areas: one, as I mentioned in the opening of the call, we built inventory in Display in quarter two.

Obviously we shipped a lot less than what we originally intended despite the lightning strike, and we are going to work off some of that inventory ourselves and that has an impact.

And second, we are seeing a mix weakness in our Telecom forecast for the third quarter relative to second.

Basically those two things cost us about a point.

So the mix doesn't change and business is stronger, then we'll be at the upper end of that gross margin range.

That's very helpful.

And then a couple quick follow-ups.

The 5 million charge that you're including in your non-GAAP results, what is that and why is it being included?

The charge for Samsung Corning Precision or CRT?

Is that it?

Yes.

There's a $5 million charge that's been line itemed out, "Restructuring Impairment and Other."

So at Samsung Corning CRT we are bringing down some production capacity and then we don't think that that amount is consistent with us taking it out as a special.

We get the number and we'll certainly call it out to you if you want to take it out.

It's obviously more one-time in nature but we don't think it qualifies under how the rules we normally treat our special accounting versus not.

Okay, fair enough.

And then last question, just specifically on the SCP pricing being down stronger than the wholly owned, can you just explain again why that's the case?

Well, I would say in quarter two is the flip.

Pricing there was less than what we saw in our wholly owned business so in any given quarter the competitive dynamics of rebidding and the supply vendor to supply a relationship sometimes it's stronger in one quarter versus another.

I don't think you should take it as an indication of a fundamental shift in the business.

As I said in quarter two it was the flip.

Thank you.

Thank you.

Our next question comes from C.J.

Muse with Lehman Brothers.

Yeah, good morning.

A couple questions here.

I guess first off, Jim, you talked about I guess potential hundred bip hit from the buildup in LCD glass inventory.

Is that something you expect to work off of here in Q3 and something that will not impact gross margin in Q4?

So that 100 bips was both that and Telecom mix it wasn't just Display so just correct that.

And second, we will work off some of it in quarter three.

I don't know what our operating plan in quarter four will be.

It will be very dependent on whether the forecast that we hold internally for quarter four is coming true or not so it's a little premature.

Okay.

And I guess in terms of new tanks coming online, startup cost yield, is that something we should be considering as we forecast gross margin for the Display business going forward?

Yes.

I think that it's something that we've kind of overlooked as we discussed this and generally it doesn't make that big of a difference because by and large as the capacity we've brought up every quarter with the growth that we've had, it's been pretty much absorbed, but when you run into a quarter like we most recently had where we, obviously, when you go back to being in the quarter could have made at least a 5% growth over our quarter one and ended up being down 14% in our base business.

Obviously, we had quite a bit of excess fixed costs and so our goal, clearly, is to try to not have quarters like that occur when we have a lot more fixed costs than we have in our capacity than what we're utilizing and if this, if the rate of growth were to be slower over a number of quarters we'd clearly be phasing our tanks a little bit less but clearly that is a factor in what happens to our gross margin quarter-over-quarter.

Can you give a sense of the magnitude in Q2?

I prefer not to, C.J.

Okay.

I guess a couple quick follow-ups.

For Sharp, you said that they were entirely going with EAGLE XG.

Are you saying that you get 100% share there or are you saying that for what you supply it's just the XG?

So what we said was for Gen 8, that they are using EAGLE XG from us and therefore 100% of our glass to them is on EAGLE XG and they are planning to take the majority share from us.

I can't speak to what they're going to be doing with the competitors.

They also are converting over to Gen 6 to the EAGLE XG.

So we're seeing EAGLE XG be taken up not only at Sharp but also at our leading players in a number of our markets, takeup and reaction to EAGLE XG has been very positive.

That being said, note that a strong takeup of EAGLE XG does not necessarily lock out a competitor from continuing to sell glass to a particular customer.

Okay.

And on ASPs it looks like the yen appreciated by about 2.5% in the quarter suggesting ASPs fell somewhere between 4 and 5%.

Is that the right math?

I think your math is fairly good.

Okay.

And is that something you expect ongoing?

Well, I can't predict what the yen's going to do but we did say our price declines in our wholly owned business would be consistent probably with what happened in Q2.

Okay.

And last two questions.

Could you give us the SCP revenues?

And then also, for SCP pricing pressure, is that driven more by Gen 6 LPL or by Samsung Gen 7?

SCP revenues were 513 in the second quarter.

I won't comment on the pricing by customers.

We have price declines at both customers.

Thank you.

Thank you.

Our next question comes from Nikos Theodosopoulos with UBS.

Yeah, thanks.

I had two questions.

The first one, you didn't change the annual LCD guidance for the market of 40 to 50% growth.

Do you still think that you will gain share this year or do you think you'll be flat versus last year or do you think you'll lose share?

There wasn't an update on your share expectations for the full-year.

So, the question will be at the end of the year whether we'll gain share.

It will be very dependent on the mix by customer, it's obviously will be closer than what we previously had expected.

I think it's pretty clear that in quarter two, where we had some customers where we had very, very large shares who brought down their fab utilizations and that potentially could have an impact, but depending on the mix of who wins in the end market, we think we'll either hold our share or gain slightly.

Okay.

And back to the LCD gross margin, I'm still missing something here.

This quarter, the margin only fell slightly yet volumes were down in your consolidated business pretty meaningfully and you had the one-time cost in the shutting down of the Japanese facility.

So why wouldn't the gross margin in the third quarter in the consolidated business improve?

You don't have the cost in Japan.

Volumes, let's say, in the middle of the range will be up 10% and it looks like pricing was only down 2, 3% in the second quarter and if the pricing is down in the same level, wouldn't the increase in volumes and the lack of the cost in Japan lead to an improvement in the gross margin?

I don't understand why it wouldn't go up again this quarter.

So it went down in the past quarter, so what I talked about is it being held even so you do have more volume.

You have similar price declines and I think we had talked about a different number than what you had just said on the earlier question.

And the other thing I raised is that we are going to take inventory out whereas in Q2 we actually built inventory and we want to work off some of that so we'll be selling more than what we're making in Q3.

Okay.

Just to clarify in this quarter, if the volumes were down 16 % and, I'm sorry, if the volumes were down 14% and the volumes and the revenues were down 16%, pricing seems to have fallen on the order of 2 to 3%.

You're missing foreign exchange, Nikos.

So what was the foreign exchange?

Well we just, the earlier question we just said pricing down 4 to 5%.

Okay.

Thank you.

We have time for one more question.

Yes, thank you, sir.

Our last question comes from Brant Thompson with Goldman Sachs.

Hi, thanks very much.

With regards to sticking to the full-year glass growth, you all had talked about how, I guess, [inaudible] that it needs to be a very robust holiday selling season in order to achieve that.

Can you give a little bit more color on what determines where your, what your thinking is around it?

Does it required very robust to achieve that at the low end or would very robust achieve it at the high end?

And you had talked about the October, the month of October being pretty important and that and the potential for people even air shipping to meet demand.

Can you just talk about kind of where we are with that and why you'd have confidence that you would actually have customers willing to pay air shipment and kind of go that distance for demand given kind of the inventory levels now and just give us a little bit more color on why there's not some more risk to the fourth quarter?

Thanks.

Well, what our analytics are showing, let me start and then Jim can build on this.

Are very similar to what, or exactly what Jim showed you, is all of our models, as well as a lot of anecdotal evidence directly from retail, as well as the logic of the shift more to TV, really support a late quarter three and quarter four surge, especially related to TV.

It's leading for us to the wider range and to your point is that that being said, although the current glass shipments are up in our factories, it's not yet brisk enough for us to narrow the range on our forecast, and that's what we want to see the combination of.

We want to see that reinforcement of what our models are saying and what our customers are saying and what retail is saying with very brisk order rates in our factories and if that happens, we'll be able to narrow our ranges going forward.

Jim, would you want to add to that?

So I'd echo that and the other thing I'd just remind you is that one of our focuses is the sell out of the inventory at the panel makers.

So there's one very large panel maker who actually went through the math for people about what they were going to do on their area of shipments, and then their reduction of their inventory and then we can clearly see if that type of exercise is repeated to other people, that explains how a lot is going to be leaving within the third quarter to go to retail.

And the question comes is did they buy from us as they refill themselves?

And that's the thing that we've got to see.

So we have a belief this is going to happen but as Wendell indicated, the orders have to start increasing as we go into August and September and October to make this happen.

In terms of the robustness on holiday sales, I mean the thing we have to all remember is that we're talking about an LCD television selling in the 42 million compared to about 21 million a year ago.

If it fell short by 2 million televisions, it still would be a very big year-over-year increase and I think an important reminder of how this technology is penetrating the TV industry.

Thank you.

Jim?

I have just a couple of closing comments including some Investor Relations announcements.

First of all, Wendell and I will be meeting with investors in Boston and it will be a lunch session.

If you're interested in attending, please contact Ken and his team.

Wendell will also be presenting at the Citigroup Technology Conference in New York City on September 6th and we would welcome the chance to see you at one of these events.

Relative to the second quarter, I'd like to remind investors that we were out very early on May 22 with our announcement about supply chain implications for LCD.

And it is our goal to get meaningful information out promptly and we will continue to do that.

Second, we were pleased that our revised guidance on the LCD volume was accurate.

We met our forecast on making guidance on EPS.

Third, we remain very positive about LCD penetration rate in the TV market and we must remember that TV is very seasonal.

The fourth quarter season is an opportunity but also a forecasting supply chain challenge.

We're constantly trying to upgrade our analysis and are committing to sharing our learnings with you as we go along.

Thank you very much and have a good summer.

Ken?

Thank you, Jim, thank you, Wendell.

Thank you all for joining us this morning.

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