康寧 (GLW) 2006 Q3 法說會逐字稿

Good morning and welcome to the third quarter results conference call. [OPERATOR INSTRUCTIONS] I would now like to turn the call over to Mr. Ken Sofio, Director of Investor Relations.

Sir, you may begin.

Thank you, good morning, welcome to Corning's third quarter conference call.

This call is also being audiocast on our website.

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

Wendell Weeks, President, Chief Executive Officer will join for the Q&A.

Now, before I turn the call over to Jim, you should know today's remarks do contain forward-looking statements in the meaning of the Private Securities Litigation Reform Act of 1995.

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

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

Jim?

Thanks, Ken, good morning, everyone.

Last night we released our results for the third quarter which can be found on our investor relations website.

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

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

Overall regarding our third quarter results, we were very pleased with our excellent performance.

Our LCD volume exceeded the top end of our guidance range and our EPS was $0.02 above the top of our guidance range and $0.03 above consensus.

Perhaps most importantly, the LCD business rebounded from the supply chain pause in quarter two and gives us excellent momentum heading into quarter four.

Our third quarter sales were $1.28 billion and slightly higher than our second quarter sales.

In comparison to the third quarter of last year, sales were up 8%.

Without the impact of the weakening in the end ,year-over-year sales would have been up over 9%.

Our EPS before special items is $0.28 and exceeded the top end of our guidance range.

Net profit after tax excluding special items in the third quarter was $451 million, an increase of 7% over the second quarter.

In comparison to the third quarter of 2005, net profit after tax excluding special items was up $41 million or 10%.

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

A reconciliation of GAAP can be found on our website.

You should also note that third quarter sales of net income are slightly impacted by unfavorable changes in foreign exchange rates in comparison to the second quarter.

Our excellent third quarter results were driven primarily by strong volume and performance in the display segment.

You may recall from our last conference call, we entered the third quarter with quite a bit of uncertainty regarding the display supply chain.

Panel makers have been reducing their utilization rates quite severely.

At that time we sent an order for the supply chain to approve, three events needed to happen.

First there had to be normal seasonality in the end market, particularly for IT products.

Second, assuming the pull from end-market demand occurred, we should see a reduction in panel inventory levels.

And third, as inventory levels of panel makers fell, we should see an increase in their utilization rates and in turn an increase in glass orders.

Clearly, based on our results from our display segments, our hopes were rightly placed.

And by and large most of the other segments performed as expected.

I'll get into the details about each segment's performance in a few minutes.

Continuing down the income statement.

Gross margin in the third quarter was 44%, an increase over the of second quarter gross margin of 43% and higher than our expectations.

Higher gross margins were driven primarily by the strong volume of manufacturing performance in the display segment.

SG&A was $218 million in the third quarter and 17% of sales as expected.

RD&E was $127 million in the third quarter and fairly consistent with the second quarter also as expected.

Interest income was $32 million in the third quarter, up $6 million sequentially.

The increase is primarily a reflection of the higher cash balance we had during the quarter.

Equity earnings were $232 million in the third quarter compared to $256 million the second quarter.

As a reminder, second quarter equity earnings included a $33 million gain at Dow Corning.

Excluding that special item equity earnings were up $9 million quarter-to-quarter, driven primarily by Dow Corning.

Our tax rate in the third quarter was 13%.

Just slightly lower than our guidance range of 15-20%.

The lower tax rate was primarily the result of a reassessment of our annual corporate tax rate.

For your modeling purposes, you should use an estimate of 13-15% in the fourth quarter.

Our share count in the third quarter was 1.593 billion shares and consistent with the second quarter.

We had one special item in the third quarter.

We reported a pretax and after tax charge of $13 million, primarily reflecting the increase in the market value of Corning common stock to be contributed to settle the asbestos litigation related to Pittsburgh Corning.

Corning's share price increased during the quarter from $24.19 to $24.41.

Including this special item, our third quarter EPS was $0.27 per share.

Let me turn to the segments now.

Starting in display, sales were $506 million in the third quarter, a 10% increase over the second quarter sales of $461.

Sequential volume gains were 16% and slightly higher than the upper end of our guidance.

Price declines were similar to the second quarter as expected.

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

In comparison to the third quarter of last year, sales in the display segment grew 3% as volume gains of 31% were largely offset by price declines and foreign exchange rate changes.

Equity earnings from SCP were $135 million in the third quarter and slightly higher than the second quarter equity earnings of $133 million.

SCP's sequential volume growth in the third quarter was 11% and price was down slightly.

Third quarter price declines were consistent with the second quarter and not as significant as we had expected given the extent and timing contract negotiations with their Korean customers.

For your modeling purposes, SCP third quarter sales were $536 million compared to $513 million in the second quarter.

Year-over-year volume growth at SCP was 38%.

Sequentially, total LCD glass volume including our wholly-owned business plus Samsung Corning Precision was up 13% in the third quarter.

In comparison to a year ago, total LCD volume growth for the first three quarters was up more than 50%.

Net income in the display segment which includes equity earnings was $395 million in the third quarter up 15% compared to $344 in the second quarter.

The increase to net income was primarily the result of higher volume and strong manufacturing performance in our wholly owned business.

Our gross margin percent in the third quarter increased in comparison to the second quarter despite another quarter of price declines.

As a reminder, the second quarter had the impact of a lightning strike.

Let me now update you on the supply chain, specifically the panel inventory situation in more detail.

As I mentioned earlier, we believe there was an important improvement in panel inventory levels during the third quarter.

This improvement is the result of seasonal end market demand and strong panel shipments.

I'll table my comments on the end market for just a moment and start with panel shipments.

As a reminder, our working assumption was that a substantial portion of the panel inventory display chain was at Taiwanese panel makers, although clearly LPL had also been public about their own inventory levels.

The Taiwanese panel makers have reported monthly panel shipment data through the third quarter and the news has been very encouraging.

Many have reported record shipments in July, August, and September.

Inventory levels have fallen in the third quarter.

The number of days inventory on par with the first quarter.

Inventory reduction combined with seasonal demand improvement for the third quarter has resulted in substantial improvement of utilization rates.

We believe that the Taiwanese on average increased their[inaudible] utilization rates which were in the 55% range in June, 75% in July, 85% in August and 90% in September.

Although clearly not every company's operating at that level.

We believe that the average utilization rate for the Taiwanese panel makers is now equal to where it was in March.

Obviously the most encouraging sign has been the strong glass volume we experienced in the third quarter in our expectations for the fourth quarter based on customer orders, which I'll talk about in a few minutes.

Now let me walk you through the end market trends in the third 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 such as display search along with retail tracking vendors, our own discussions with customers, as well as our own models.

You should also note that the following data has been derived from the aggregate industry sources that are considered at this time to be preliminary estimates.

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

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

In summary, the preliminary data television indicates that the the end market shipments are in line with our expectations for the third quarter and on track for all three primary applications.

Notebooks, monitors, and televisions.

Starting with notebooks, about 19.6 million were shipped in the third quarter in line with our expectations, this was an 11% increase over the notebook shipments in the second quarter.

We believe the penetration of notebook computers, of all computers sold in the third quarter was 36% and consistent with the second quarter.

Moving to LCD monitors, about 32 million were shipped in the third quarter compared to 30 in the second quarter.

We believe the penetration of LCD monitors inched up from 79% in the second quarter to 82% in the third quarter.

LCD televisions about 10 million were shipped in the third quarter, also in line with our expectations.

This represented 11% increase over the second quarter shipments of 9 million.

More importantly is that the penetration of LCD television into the color television market was at an estimated at 21% in the third quarter.

As a reminder, these percentages are preliminary at this time.

You may recall during our last conference call, that we estimated LCD television penetration to be 19% in the second quarter.

After reviewing the final data, we concluded penetration was actually 21%.

Based on this trend and the expected strong seasonal demand, we believe LCD television penetration may be as high as 25% in the fourth quarter and average 22% for the year.

Now for your modeling purposes, I would like to provide an update on our glass mix.

Our glass mix of Gen5 and higher in the third quarter was 86%, up from 84% the second quarter.

Mix of Gen5.5, 6, 7 and 8 glass was 49% in the third quarter up from 48% in the second quarter.

You should note that our Gen8 capabilities continue to ramp as we prepare to begin shipping larger quantities to Sharp, they in turn begin to ramp their fab to full production starting in the fourth quarter.

As the contract majority glass supplier for Sharp's Gen8 fab, we're excited about this growing opportunity.

Eagle XG, our new extra green glass, continues to be a strong success.

The current requests from our customers to convert to the new glass outweigh our ability to supply at this time.

While this is a good problem to have, we're working diligently to convert more of our capacity over to produce Eagle XG.

To date, we're in the process of supplying four different panel makers of Eagle XG at various generation sizes.

Before I move on to the environmental segment, I'd like to address the new stories and analyst reports about a tank repair at one of our competitors.

First you should note there's been no official announcement directly from our competitor to date.

We have received inquiries from customers about the availability of more glass in fourth quarter.

We certainly have the inventory capacity to meet additional glass orders during the quarter.

We do not expect this event to have an impact on overall glass pricing as pricing for the fourth quarter previously negotiated.

Now moving to the environmental segment, sales in the third quarter were $153 million and consistent with the second quarter.

We were very pleased to announce our long-term supply agreement with Cummins Engine a few weeks ago.

These multi-year supply agreement for our DuraTrap filters and Celcor substrates help Cummings comply with US regulations for the medium and light duty engines beginning January 1.

I know many investors have been waiting for us to formally announce the names of our heavy duty customers.

Unfortunately, even though we have commitments in place with other engine manufacturers, we have to receive permission to use their names at a press release.

So far, only Cummings has agreed to this, but we're optimistic we'll be able to announce others in the future.

To date, we have commitments from engine makers to supply more than 50% of the U.S. heavy duty market.

I want to also update you on a very important milestone that occurred recently.

This month the EPA announced the implementation of ultralow sulfur diesel fuel at all retail terminals.

This is great news for our technology and great news for the environment.

Ultralow sulfur diesel fuel has 97% less sulfur than standard diesel fuel.

A difference of 500 parts per million verses 15 parts per million.

This is a major milestone and was always part of achieving the 2007 emission regulations.

In the life sciences segment sales in the third quarter were $68 million, compared to the second quarter sales of $75 million.

The segment incurred a loss of $8 million in the third quarter compared to a loss of $2 million in the second quarter due to lower sales in our continued investment research and development for new products in the second.

One of those new products is Epic.

I hope you saw our product launch announcement last month.

Epic is a high-throughput label-free screening platform based on our proprietary optical biosensor technology.

System performs both biochemical cell-based scrub discovery applications and offers drug developers the ability to evaluate promising new drugs.

So far we've received encouraging preliminary interest from potential customers.

You'll hear more about this exciting new technology during our annual investor meeting in February.

Now turning to the telecom segment, sales in the third quarter were $456 million, a 3% decrease from the second quarter in line with our guidance.

In comparison to a year ago, our third quarter sales were up 15%.

Sales of hardware and equipment products were $215 million in the third quarter compared to $238 in the second quarter.

Decline was primarily due to lower fiber to the premise sales in North America and fiber to the node sales in Europe.

Sales in our fiber and cable products in the third quarter were $241 million, slight increase over the second quarter sales of $234.

Increase is primarily due to strong cable project sales which were partially offset by lower fiber demand in North America and lower prices.

Fiber to the premise sales were $64 million in the third quarter, a decrease of about 25% verses a very strong second quarter.

In comparison to a year ago, fiber to the premise sales were up about 40%.

Net income in the telecom segment was $20 million in the third quarter compared to $40 million in the second quarter.

Decline was primarily a result of higher mix of lower-margin products and anticipated price declines.

I'm sure you all saw Verizon's announcement last month on their commitment to the fiber to premise project through 2010.

We were certainly pleased by the news.

While we never doubted Verizon's commitment to the project, they historically waited til the end of the year to announce their plans for the coming year.

We're also pleased by their connection rate projections over the next several years.

This is a key revenue opportunity that I think many investors do not understand.

As you know, there's a significant opportunity for revenue each time Verizon passes a home and we also get a second bite of the revenue apple, if you will, every time Verizon connects a home.

As a result, there's a second stream of revenue opportunity for us that we hope will build as Verizon passes more homes and markets their fiber service to communities.

Equity earnings from Dow Corning in the third quarter were $78 million compared to $104 in the second quarter.

As a reminder, second quarter equity earnings from Dow Corning included a $33 million one time tax gain.

Excluding this gain, equity earnings from Dow Corning were up 10%, primarily due to strong demand for [polysanto]

Now, turning to the balance sheet, we ended the third quarter with $2.8 billion in cash, and short-term investments up from $2.5 billion in the second quarter.

Most significant cash inflow was the proceeds from $250 million in long-term debt, to replace debt repurchased in the second quarter.

Most significant outflow in the third quarter was $338 million in capital expenditures.

Free cash flow was $76 million in the third quarter and almost $200 million to date.

We remain on track for a third year in a row of positive free cash flow, free cash flow is a non-GAAP measure.

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

We're expecting revenues in the range of $1.28 to $1.33 billion.

And EPS in the range of $0.26 to $0.29 per share before special items.

In our display segment, we're forecasting sequential volume growth for our wholly owned business to be up 20 -30% in the fourth quarter.

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

At SCP we're expecting sequential volume to be up 8-12% in the fourth quarter with consistent price declines to the third quarter.

Regarding the fourth quarter volume variance for a wholly owned business, I want to take a moment to explain the wider range.

As a reminder, it's our theory based on experience last year that the supply chain becomes severely contracted during the fourth quarter, given that the demand for LCD televisions essentially doubles in a short time frame.

This was evident last year when 32 inch televisions were sold out in the fourth quarter.

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

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

Given the inherent uncertainty of the extent of the contraction in the supply chain, we thought it was prudent to provide a wider volume range.

We still believe the overall glass market growth is on track for 40-50% this year, with both SCP and our wholly owned business volume up more than 50% for the first three quarters and our expectations for fourth quarter volume it's clear, both were on a pace to grow near the top end of that range.

I know many of you ask if we're gaining market share.

It's difficult to estimate market share in a given quarter.

I'll have a much clearer picture of the overall market growth sometime in January.

However, if the fourth quarter volume is as strong as we're expecting, we believe we'll have the potential to gain some share.

I'd like to make one point on our volume guidance for SC.

Although the range is lesser than our wholly owned business, please remember they've experienced growth every quarter this year, including second quarter when our wholly owned business volumes actually declined 14%.

Lastly, I'd like to return to my comments on the potential of Corning getting extra demand from competitors' possible manufacturing problems.

While we welcome the opportunity to help our customers, we are looking at a very strong fourth quarter to start with.

This potential extra demand is nice, but it is not the reason that we are planning on such a strong fourth quarter.

In our telecom segment, we expect fourth quarter sales could be down 20-25% in comparison to the third quarter.

Anticipated decline of sales will be a combination of normally softer seasonal demand and lower project related volume.

Our fourth quarter telecommunications results will also be impacted by a full quarter of lower prices, which were implemented as a result of contract negotiations with customers during the latter part of the third quarter.

We detected some disappointment last night in calls after our release regarding our telecom sales forecast.

So I'd like to comment on the decline in the fourth quarter.

First, our telecom sales for the full year will be up 10% verses 2005 if you adjust for the Japanese sales we moved into the joint venture.

We're delighted with the 10% increase in the declining price environment.

Second we are seeing very different order patterns this year in two of our major telecom projects.

Actually 2004 and 2005 were different also.

Different than 2006.

We don't think this reflects any change in the part of the customers' intent nor any competitive weakness.

And lastly as you know, there is seasonality in the telecom market in the fourth quarter.

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

This is a departure from normal fourth quarter declines you've previously seen in this segment.

While we expect auto sales to be seasonally lower, declines should be offset by higher diesel product sales.

U.S. heavy duty engine manufacturers are currently in the process of building inventory that will be compliant with the new emission regulations that begin on January 1st.

We begin to see the benefit from their ramp in the fourth quarter.

This ramp will be slightly slower than we originally expected due to truck makers buying engines in advance of the new emission regulations.

We expect fourth quarter sales in our life science segment to slightly on a sequential basis due to normal seasonality.

Sales and our other portable businesses are expected to be up 5-10%.

Now moving down the income statement for your modeling purposes.

Gross margins for the company should be between 44 and 46%.

Our ability to hit the upper end of the range will dependent on display volume and the extent of the decline in telecom.

SG&A is expected to be in between 17 -18% of sales.

Increased SG&A in the fourth quarter will be the result of normal seasonality.

RD&E is expected to be around 10-11% of sales in the fourth quarter.

We anticipate equity earnings in the fourth quarter to be flat to down 5% compared to the third quarter.

Dow Corning equity earnings are expected to be down 5-10% due to normal seasonality in the silicone industry.

As I mentioned before regarding our tax rate for your modeling purposes, use a range of 13-15%.

Lastly, you should again use 1.59 billion shares for the fourth quarter when calculating EPS 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 for executives who decide to sell stock ,we encourage the use of the period immediately after our quarterly earnings announcement.

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

Ordinarily we do not forecast any change in foreign exchange guidance for translation purposes within our guidance.

Our guidance for the fourth quarter assumes a yen/dollar rate of approximately 1.18 for translation purposes.

If the yen to dollar rate averages $1.23 in the fourth quarter, we estimate overall sales will be impacted by $25 million and by NPAT by $20.

This range includes projected benefits from any amount from our currency protection program.

Our capital spending for the year looks like it'll be around $1.3 billion or the lower end of our previous guidance range.

I'd like to address a story that circulated yesterday that we had frozen our display capacity additions in Taiwan.

This is not true.

As investors know, we pace our capacity additions by the use of modular or smaller tanks to try and match our view of the end market demand we'll see.

Continuing to bring up tanks in Taichung this year, and we'll do so again next year.

We're also continuing our expansions in Japan and Korea.

We will be prudent and try not to get ahead of the market, but we expect to continue to be the market leader and supply our customers' needs in Gen5, Gen6, Gen7.5 and Gen8.

Ken?

Great, thank you Jim.

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

[OPERATOR INSTRUCTIONS] Thank you.

Our first question comes from Ajit Pai with Thomas Weisel.

Good morning, congratulations on a very solid quarter.

Thank you.

Couple of quick questions.

The first one would be just about the glass pricing environment.

You did mention that you're not going to see the benefits of any sort of shortages of glass in the fourth quarter.

But give us some color whether the supply demand situation makes things look better for 2007 and at what point would the contracts for 2007 pricing be decided?

Well, thanks for your comment, Ajit.

First, it's just too early to offer much guidance on what's going to happen in 2007 with pricing and glass demand supply balance.

With that said, I'd offer a few things that are worth thinking about.

I'm going to do it from order of easiest to understand to those that it's going to take more time for us to understand and to get better insight on.

The first is the impact of mix.

Historically mix or a greater percent of our sales being greater than Gen5 that previous years would offer a positive impact on average pricing even though at the product line level you continue to have price decline.

Given that such a large percent of our volume is already greater than Gen5, we would anticipate that we wouldn't be getting that sort of mathematical upward pressure in the average.

So that's one thing to think about with your models.

Second is the point that you're getting at which is glass supply demand balance.

We would like to wait until we see how the end market behaves in quarter four to be able to give us some insight as to what the glass demand and supply balance will look like going into next year, especially noting what does the strength of LCD penetration look like in the 40-50 inch range, very large size TVs, because that has a very significant impact both of our customers' outlooks, their capacity and of course it consumes a lot of glass.

Finally, I think the thing that's going to really take some time for us in the industry to understand is what's the impact of the seasonality pattern of LCD demand.

You heard Jim just speak about it in the opening comments.

With such a large percent of LCD TVs being bought in the fourth quarter, the industry behaves seasonally.

I think what's going to be key is how do our customers adjust and not overreact to the seasonality as well as the glass industry.

So sorry we can't be a little more clear at this time, but we'd still like to see a little more data.

But in terms of your level of confidence of the generational shift in glass, you do have Gen8 that is ramping, that historically you have had a high price premium on higher generation glasses.

Are you still seeing and do you still see maybe two or three years out a path to higher generations than Gen8?

We're still getting a premium on the new larger sizes.

But remember that just one Gen8 against all this embedded base now against all these Gen6s, we don't get the same mix benefit we did before.

Actually the year that mix benefit helped us most on pricing was actually 2004, it was much less in '05 and nothing this year.

So unless everybody started a Gen8 fab, which is not going to happen, we're not looking at much impact from the mix benefit.

Just a comment relative to our competitors, people have asked, well, competitors don't look like they're lowering prices as much as you are.

They are actually finally getting a mix benefit because they're shipping more at the larger sizes whereas we are not.

to your question on Gen sizes beyond Gen8, we're working on that now, and we would think that we will have customers who will go larger than Gen8 and seek to get even higher productivity on those very large size TVs, but it's too early to call timing.

Okay.

And the last question is about telecom segment, just looking at the kind of visibility you have especially after listening to the Verizon call and getting some visibility there.

When do you expect your capacity in Concord to start ramping? and what's the capacity broadly in the industry right now for fiber?

So there's still more capacity than there is demand in fiber and we don't see that situation changing any time soon.

We've been able to productivity gain to continue to get more and more out of our Wilmington facility so at this time we don't have plans to ramp up Concord.

Congratulations again on a very solid quarter.

Thank you.

Thank you our next question comes from John Anthony with Cowen Company.

Morning, guys.

A couple of things, I just want to clarify on the comments with the competitor and possibly picking up additional orders.

So to state the obvious, the guidance that you gave was for your business on a run rate basis.

If customers were to come back to you, it would be additive if they needed additional capacity.

I just wanted to make sure that's not reflected in the glass guidance.

No, it is reflected in the glass guidance.

It is?

Okay.

People are putting too much emphasis on the size of this from this potential of the customer at our one competitor's tank.

It's embedded in that.

It's nice to have a little bit extra, but we're going to have a very strong quarter even with without that.

On the environmental business, could you give us a sense of when you expect any sort of inflexion to come into that business? and how much of the current demand is being masked by some weaknesses and the traditional environmental businesses?

Well, we passed the low point on diesel earlier this year.

And in the fourth quarter we'll see nice increase in revenues and our gross margins will continue to climb.

It's our expectation that we'll pretty much see this build every quarter next year.

We clearly are going through a slower ramp than what we originally hoped because of the big prebuy and a lot of the model changeover in the sense that engine manufacturers incurring more than one.

But we -- we've hit the inflexion point has happened with the rollout of the regulations and now we start climbing and our gross margins will be improving every quarter also.

So we're feeling quite good about that.

Okay.

And lastly, I know you're not giving guidance for 2007, but could you give us a sense for the direction of capital spending?

Capital spending would probably be slightly down next year for the corporation.

Great, thank you, guys.

Thank you, our next question comes from Michael Walker with Credit Suisse.

Thanks, good morning.

A question on kind of the broad '07 outlook.

I think back in the spring when you'd had your analyst day you kind of threw a couple numbers out there for the '07 time frame.

For instance, I think in the vicinity of 29% penetration for LCD TVs which sounds like it's going to end up being low.

That worked out to about 60 million TVs.

Display Search is out saying they think it could be 66 million, Sharp has raised the numbers.

Just wondering if -- I don't want to preempt your '07 analyst day, but wondering if your expectations in terms of glass volume demand for '07 are starting to look low?

There's no question about it.

We'll officially revise for our February day.

But we -- our current thinking right now could be 33% penetration.

Clearly we're delighted with Sharp's recent announcement about their very bullish view of the demand for 2010.

So will update it, but there's no question about it, we are seeing a stronger television division.

The other thing that's equally exciting is the average size of televisions is creeping up.

You remember that was one of the surprises to us at the end of the fourth quarter last year how large it had gotten and we're delighted by the retail pricing that we're seeing on 40-42 inch televisions.

Wendell and I were comparing the circular this morning, he's about to buy a new television and it's almost hitting the price point.

Okay.

And then I just have a quick follow-up on the telecom side.

Just if we could get a little more color on that being down 20-25% sequentially.

Obviously that's quite a bit more than the normal seasonality.

Is this entirely on the long haul metro side of the business?

Is there an FTT impact?

I think Telex [[?]] was complaining about some inventory builds in their O & T business for Q4 as reducing their outlook.

Is there a connection to that at all?

Let me start and I'll let Wendell jump in.

I think it's important to remember that our year-over-year telecom revenues were up actually 15% in quarter 3.

If you looked at quarter three of '05 versus '04 they're actually down 3%.

So we're coming off a very strong quarter.

And part of this is we're not seeing a consistent pattern in the ordering of fiber to the premise equipment.

Some of which can be inventory related and some of it can just be the buying habits of our customers.

Wendell, do you want to add on to that?

I think Jim's got it very accurately.

As those of you who have been following us a while will know, you heard us say consistently that though we're delighted with our fiber to the premise product offerings and our product offerings for fiber in the access, that the customer demand, a number of customers doing major projects just isn't enough yet to get more consistency.

So we're very reactive to a major customer in the U.S. and a major customer in Europe.

And what's happening in their project and their project buying patterns.

So as a result, you can't get much insight from mining the seasonality data here.

You have to step back and look at it the way Jim just did in his comments.

Okay, thanks.

Thank you.

Our next question comes from CJ Muse with Lehman Brothers.

Yeah, good morning, a couple questions.

I guess if you follow up on that question on telecom.

You've cited a weakness in fiber to the premise and downtick in ASPs for the week and guide for 4Q.

You know, I guess you're talking about roughly $100 million revenue downtick in the telecom, fiber to the premise is running $60-70 million.

There's got to be something else in there.

Can you sort of help me understand that?

So we're seeing a down tick in fiber to the premise, which is partially unit driven and also the price reductions.

As Wendell mentioned, we're seeing a drop off in Europe.

Where a similar large customer is backing off in the amount they were putting in.

We are seeing private networks be down a little.

I don't think we can determine any rhyme or reason to private networks, because it's a very important part of our business and very profitable part but never has a consistent ordering period.

And we are seeing a little bit of weakness across the base.

So you're talking about, you know, an $80 million down tick.

But remember it's coming off of a very good quarter three compared to a year ago.

We don't think any of these customers with the possible exception of Europe where there may be a change in the regulations, that any customer is changing their intent here.

So in terms of the earnings contribution from telecom dropping from 3 cents to 1 cent to I don't know what for 4Q in the last three quarters.

Does it change your thinking about how you manage this business?

Whether you try to change the cost structure at all?

Well, we're, we've been trying to reduce our cost in this business on a consistent basis and actually ramped it up more in terms of trying to reduce our fiber cost as we go forward.

But, you know, we're not changing the fundamentals of our view of the telecom market just based on this one quarter.

You know, as I've mentioned before, the total year revenue for this business is going to be up 10% year-over-year if you take out the sales that we put through the joint venture now in Japan and that's 10% after the price declines.

That's the biggest increase we've had in telecom in a long time.

We're delighted that the business has been profitable the last two quarters.

We think that there will be a return to ordering from the customers as they move into '07 as they work on these projects.

So we like where we stand in telecom.

But we're also working to reduce cost.

Sounds good.

I guess moving over to displays, Jim.

You talked about LCD gross margins directionally higher.

Can you give some sort of sense to magnitude?

If I flat line your gross margins for nondisplay businesses, that would suggest display was up about 100 bips?

Does that sound right?

No it was up much more than that.

Remember in quarter two, we took a whack from the lightning strikes.

Our gross margins were excellent in the third quarter as we got good rebound not only with the volume, but also manufacturing and the absence of a lightning strike.

So we had excellent gross margin and we hope to again in the fourth quarter.

Would you expect to see an increase in 4Q?

No I'm not going to make any forecasts on it.

But we think -- we hope we'd be able to do well either holding or being down slightly on gross margin We're delighted to be back where we are after the low level in quarter two.

Got ya.

And I guess final question for me.

For pricing for glass, I'm calculating core glass pricing down around 3.7% and for SCP around 3.5% assuming roughly down 2% for effects.

Are those numbers sort of in the ballpark?

We were a little bit higher on the core and I don't remember the SCP number, about 3, about 3, I guess.

Great, thank you.

Thank you, our next question comes from with Nikos Theodosopoulos of UBS.

Yes, I have a couple of quick questions.

I guess the first one is given the volatility in the quarterly unit growth in the LCD business.

You know we've tended to see inventory corrections occur more frequently given the significant changes in quarterly unit shipment.

Are you concerned with this 20-30% sequential guidance verses what the panel makers are talking about their fourth quarter shipment levels that there could be an inventory building going into the first quarter next year?

So I think it varies customer by customer what the expectation is.

So I think that some of the Koreans have been more public on lower number and you notice our guidance in the Korean part of our company SCP is more in line with what they're talking about.

We're seeing very strong demand in Japan and Taiwan and we're not sensing that there's any inventory building, but that's one of the reasons why we gave the wider guidance of 20-30 because it's possible that people get to the middle of December and say well, maybe we've put a little too much.

But we're not sensing that people are building inventory at any rapid rate.

I think one of the things that's most important for us, as Wendell alluded to earlier, is how is the entire supply chain going to be dealing with the impact of seasonality that television is such an important part of it.

Of the glass this year, we're in the mid 30% of the use of the glass but obviously higher in the fourth quarter going to television.

So first of all, what are retailers going to do?

Because a huge part of their revenues are now these televisions.

Are they going to try to do something in the first half of the year or are they always going to be dependent on the November-December period?

Second, how do our customers, the panel makers, react to it.

There was a big learning a year ago, remember they built inventory in quarter one and had to take it out in quarter two.

Will they be operating differently?

And then how do the glass makers operate?

Because we ourselves are thinking about how we operate and not go through this cycle correction we just did.

I'm not sure I would say they're happening more frequently, I think the last inventory correction was in '04 of any significance here, but we clearly need to deal with the seasonality.

Okay and just two quick other ones.

On the gross margin in telecom with the new pricing that's taking effect in the fourth quarter, as you look out to '07, assuming you have growth in the business, you know 5-10%, something in the range you did this year, it just seems like your gross margins will not be up next year for telecom.

Can you -- can you expand the margins at the telecom business with the new pricing given you know similar type of revenue growth next year?

Well, I think the right time for us to talk about telecom for next year will be when we do our annual session.

That being said, Nikos, I wouldn't overestimate the impact of this, you know, of the latest pricing negotiations.

We've been doing this a long time.

It hadn't --what we always seek to do is continue to improve our productivity as well as new product offerings that help us lever our innovation base.

One of those, for instance, in the fiber to the prem area is what we call Flexmap, where basically we do everything -- we preengineer and preconnect all the product in our factories and then just drop ship it right at the given neighborhood and at the exact spot where they need it and then all our customer has to do is plug and play.

And when it's buried they've got to dig a ditch and plug and play.

So that type of dynamic is actually kind of more important to our revenue picture as well as what do our customers actually do on volume? and I think as I step back from telecom, we're -- no matter who you talk to in our customer base, what you're talking about is how deep do they have to take fiber as opposed to what the conversation just was a mere 24 months ago, which is will we ever need fiber again? and that fundamental shift, I think is encouraging, how the microeconomics are going to work of our product sets, demand, cost et cetera.

Let's get into that when we get together in February.

Okay.

And just lastly, Jim, when's the first year you think Corning will go back to a full effective tax rate?

I don't think it's happening '07, I think '08 would be the first year it could happen and a lot will be dependent on how we're doing on North American income.

Definitely not next year, but it could be '08.

And what we will begin doing for you, Nikos, is pro-forming is what '06 and '07 would have looked like if that'd been the case.

Cash tax is obviously still quite a ways away.

Thank you.

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

Thank you.

Just taking a look at the price declines this year in terms of glass.

Looking like an excess of 20%.

Is that the new kind of expectation for this market especially with your commentary about the shift to higher gen sizes.

I know you're not giving '07 guidance but should we assume that type of price decline as we move into next year, as well?

Well, I wouldn't necessarily do that.

You do have the mix effect that Jim has already talked about and I talked about which really isn't telling you much about the dynamics.

It's just math, right?

And you've already seen that reflected in this year.

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

The factors are going to be glass supply, demand and balance effects and we just need to see how that fourth quarter looks to get a better feel for that and be able to offer better guidance on that.

And then the point that Jim just made of seasonality and how does that impact?

We want to make sure we do and our customers want to make sure they do is not overreact to that seasonality, but instead steer our way through it in a more reasonable way.

So I wouldn't conclude from this year any fundamental shift other than the removal of the mix effect.

And then let's see what the end market looks like in quarter four and how everybody reacts.

Just a quick follow-up.

Looking out a couple of years, do you see any change in terms of, you know, you've got three big players in the glass market.

In three or four years, you're going to just have three big players, as well?

As we analyze this, we don't see a lot of major moves going on in terms of market shares.

There's an awful lot of dynamic that goes on, but in total, the market is large and the folks who are in it have done a good job of lowering costs and so we still think that the industry structure we don't see any major shifts coming in the near term.

Great, thank you very much.

Thank you.

Our next question comes from Jeff Evenson with Sanford C. Bernstein.

Hi, I got a demo of Sysco's new telepresence product last week and the project leader told me they tried to get the display size below 65 inches but found it impossible because the smaller sizes couldn't provide a realistic experience.

Ignoring Wendell's budget constraints, what's your perspective on optimal display size at typical viewing distances?

You're beyond the CFO's capability to estimate that, but we clearly -- we're doing a lot of work on whether people, you know, people are just moving up.

And our, you know, we are seeing our customers talk about where they thought LCDs would be in the 40s now moving up into the 50s.

There is a 65-inch out there.

I noticed in a circular last Sunday, nice price on a 52.

We'll have to see.

Wendell, you have anything to add?

Still recovering from the joke at my expense on my budget cap.

and Jim, was that comment about your ability to compute referring to Wendell's budget or the display size?

I think that we just haven't done enough work on this.

I think you make a great point.

And frankly, I'm sure you remember, I was saying previous to really this year that I didn't see LCD TV really breaking big into the above 40 inch market.

And I thought that our customers were being overly aggressive in it.

I've ended up being very wrong.

I think LCD is doing very well in the 40-50.

And now our customers are saying something very similar to what you and Sysco were saying, which is, hey, I think we can go bigger economically.

And I think the customer will want it.

Once again, our inherent conservatism finds that a little hard to believe.

But we'll be doing more work on it.

Very good question.

Great.

One other quick thing As Jim pointed out in the prepared remarks, the relationship between sequential growth rates in SCP and the wholly owned displays business varies widely quarter to quarter.

Could you share your thoughts on the likely revenue split between the two businesses for 2007?

Well, we're notoriously wrong getting this balance between Korea and our wholly owned business.

Seems we always have to adjust part way through the year.

I think, clearly, you know, our alliance with Samsung has been very beneficial to us and they're doing very well in the end market along with their connection with Sony.

LPL, we continue to have a very large share there too and they're very successful in the end market.

So, you know, not clear to me that you would see any big fundamental shift between Korea and our wholly owned business.

Obviously, either one could be up or down a few points during the course of the year.

Difference from what the prior year is.

I don't think we see a reason for there to be a fundamental shift.

Thanks.

Thank you, our next question comes from Steven Fox with Merrill Lynch.

Hi, good morning.

Jim, just going back to the gross margins if you look at the roughly 160 basis point improvement.

Can you talk about the pushes and pulls?

How much of that improvement was due directly to LCD glass and what were the other drags accounting for that?

for the corporation, Steve?

Yeah just looking at the corporate gross margin and how it got to where it did.

Display was really the fundamental driver of that where, first of all we had to come back from the absence of the lightning strike.

So that was the biggest biggest change and the negative against that was, you know, our telecom revenues and I'm now talking sequentially for telecom, we're down and that was a drag combined with, you know, some lower prices and weaker mix.

Can you put numbers around it?

How much of the basis point improvement was due to LCD.

Really was driven by LCD, LCD overwhelmed everything else.

Okay, and then just looking out to next year's CapEx, you mentioned it would only be down slightly.

Given that your customers have pulled in some capital spending and I think the amount of capacity coming on at the customer level is roughly 35% or so next year.

How does that factor into your thinking for CapEx for next year?

Well, you recall the question, Steve, someone asking for a general indication, all I said was it's going to be down, I'm not giving guidance for next year.

Clearly we pace and have for a while paced our display capital spending against what we think we need to have capacity.

We did add quite a bit.

So display capital will definitely be down year-over-year.

You'll have to wait until February for me to give you final numbers.

Okay.

Great.

Thank you.

Thank you.

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

Hi.

Good morning.

Morning, John.

I know you said it was difficult to predict how they're going to act, but I -- it seems kind of logical that now that Verizon is no longer ramping in terms of the number of houses it's passing per year, it's going to stick with three.

Could that mean that they could smooth out their buying patterns at all? and are you a big enough supplier that you have enough pull with them that you could get them to even it out a bit?

So to Verizon staying at 3 million passed, would that even it out?

Remember what Jim said in the opening, about half our revenue opportunity happens during the pass, but the other half, what Jim calls the second bite of the revenue apple happens when they connect. i.e., when customers call them and say listen I want to sign up to file service.

And then they go out and they install that connection between the home and the access point.

So I don't think that connectivity is going to be more predictable than the past.

If anything, it could be a little bit less.

That being said, the way in which the cycles worked on the buying cycle verses the actual project installation rate.

It's been more cyclical than it would need to be from sort of theory of constraints pull approach.

And there's always the opportunity that Verizon will get better and better at managing the project and find a way to smooth out.

As to are we a big enough supplier to have any clout with them on this, so yeah we're a big supplier, but there's just no question that Verizon is the customer here and we don't have clout, we react to their request.

Okay, thank you.

Thank you, our next question comes from Jeff Osborne with CIBC World Markets.

Thank you, great quarter, guys.

Just two quick questions.

I was wondering on the implied guidance of 20-30% growth in LCD, if you could just comment on the impact there of Asahi, I think someone had asked about that before and you said it was fairly negligible, but just trying to get a sense of magnitude there.

I didn't mean to use the word negligible.

It's certainly a smaller part of this.

We're looking for a very strong quarter.

It's embedded in there.

But remember you're talking about what we think might be their tank going out is less than 3% of the world's markets.

So it can't have that big of an impact on us.

But it is embedded in there to the degree that our customers have called and asked us for more, and it was due to that by itself.

Okay.

And then the quick response that you would be having there would be at predetermined contract pricing?

It wouldn't be at higher rates?

It will go out at the rates we've already agreed with them.

I see.

And the last question there on the Dow Corning side, can you talk about how impactful Hemlock is to that total number?

It's very important to them.

You know, Hemlock has grown to be from about 10% of their overall revenues to, I think this year maybe 17%.

It's obviously very profitable.

But we'll point out that their silicone business is also improved profitability in the third quarter.

There's no question about it that Hemlock has been very important to them this last year, this year, and we think we'll continue to be so in the next couple of years.

Great, thank you very much.

Thank you.

Our next question comes from Daryl Armstrong with CitiGroup.

Thank you very much, a couple items, as you mentioned on the previous question.

The potential supply disruption from your competitors is not impacting pricing.

As you think about 2007, given the fact that short-term supply demand activity doesn't really see the impact of contract pricing.

Once your do your negotiations at the beginning of the year given the fact that you don't expect that mix is going to impact your average pricing, you guys should have pretty good visibility in terms of what the pricing pressure is going to be through the course of '07?

Is that correct?

So I think you may be overestimating our visibility.

What -- in the fourth quarter the reason Jim is saying we're not anticipating any shortfall, any potential shortfall in the part of our competitors' impact on quarter four pricing is that we had already reached agreements with most of our customers on what we were going to supply at what price.

And if they come in with additional demand, we just view that as part of us being a good supplier to respond to that.

But pricing has proven to be really anything but predictable this past year other than directionally.

We said at the beginning of the year we expect it the price point to be under pressure.

This year more so than in past years.

And as we come into February, we'll -- we will give you what our feel is for next year.

But I would not portray it that we have really strong visibility, Daryl, at this point in time.

We'll do our best to analyze it, get a good feel of that demand/supply balance for next year.

And what sort of the impact of seasonality will be.

We'll do our best to provide you what visibility we have.

and then one last question, you talked about the potential to pick up some market share in the in the LCD business at the end of this year.

Could you talk a little bit about your underlying market assumptions in terms of glass substrates just so that we have a better idea in terms of how much share potential that you're looking for.

And given the fact that it seems that most of this is not coming from the competitors production issues, would you anticipate that the share that you pick up toward the end of the year that you'll continue to and hold on to that share in 2007?

I think that share is very hard to reach any conclusions on a quarter to quarter basis.

And we're not setting out to gain a significant amount of share one way or the other here.

So I think share is best viewed on sort of an annual basis and over the sweep of time and we'll provide some insight about that as well as we go forward.

But I don't think this is a --you should overemphasize the share gain in quarter four due to this production shortfall.

It's hard for us to tell how big this production shortfall is by our competitor and how long it will last and what its nature is.

And how quickly they'll recover.

So I just wouldn't conclude too much from this yet, Daryl.

Okay, thanks.

We have time for one more question.

Thank you.

Our final question comes from Brant Thompson of Goldman Sachs.

Great, thanks so much.

I was wondering if you could just comment on two questions.

One, is I don't think I heard in some of the answers to the prior questions exactly when you start to renegotiate the glass pricing for next year, number one.

And number two if you could talk about how you expect the profitability and the diesel business to develop as we, you know, think about achieving some of those long-term targets.

If you could just refresh our memories on that, thanks.

Well, last couple of years we've done quarter one pricing in November, beginning of December period of time.

And I don't -- I can't imagine why that would be any different this year for display.

On diesel, we expect gross margin to improve every quarter going forward.

Quarter four will be ahead of quarter three.

And I would expect that if the market behaves as we anticipate as the volume increases every quarter next year that the gross margin and that's the primary thing that we've been waiting for is to get some real volume.

We're talking about, you know, our diesel revenues this year being, when we're all said and done, probably $180 million.

That should be moving up substantially next year.

And we're looking for to contribute gross margin each quarter as we go through.

We think we'll be past the impact of the prebuy as we get to the back half of next year and you'll start to get a better idea what run rates look like in this business.

And we've got the factory, we'll be improving our manufacturing as we finally get to make quantities.

You'll see some contribution on the bottom line.

Great.

Thank you.

Thank you.

I just have a couple of closing comments including some investor relations announcements.

Kay Asbeck, our Senior Vice President of Finance, will be presenting at the Western New York Investor Conference in Buffalo on October 31st.

Pete Volanakis will be presenting at the UBS Global Communications and Technology Conference in New York City on November 14th.

And I'll be presenting at the Credit Suisse Annual Technology Conference in Arizona on November 28th and also at the Lehman Global Technology Conference in San Francisco on September 7th.

We'd be delighted to see you at one or more of these events.

Regarding our third quarter results and fourth quarter guidance, we're certainly on track for another very strong year for both revenue and earnings growth.

Revenues are on pace to grow more than 10%, earnings per share excluding special items on pace to grow more than 25%.

Gross margins will average between 44 and 45%, which will be the highest in our recorded history including the peak sales year of 2000.

We hope investors are as pleased as we are with the performance of the company to date and our momentum heading into the fourth quarter.

Ken?

Thank you Jim, thank you Wendell, thank you all for joining us today.

A play back of this call will be available beginning at 10:30 a.m.

Eastern time today, will run till 5 p.m.

Eastern time on November 8th.

To listen dial 203-369-0648.

No password is required.

The audio cast will also be available on our website during that time.

Lisa, that concludes our call, please disconnect all lines.

Thank you for your participation. [OPERATOR INSTRUCTIONS]