康寧 (GLW) 2006 Q4 法說會逐字稿

Good morning, and welcome to the fourth quarter results conference call. [OPERATOR INSTRUCTIONS]

I would now like to turn the call over to Mr. Ken Sofio, Division Vice President, Investor Relations.

Sir, you may begin.

Thank you, Lisa.

Good morning, everyone.

Welcome to Corning's fourth quarter conference call.

This call is also being audio cast on our website.

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

Before I turn the call over to Jim, you should all note that today's remarks do contain forward-looking statements within 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.

This morning we released our results for the fourth quarter, which can be found on our Investor Relations Website.

In addition, for those of you with Web access, we have posted several slides 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, our fourth quarter results were excellent, led by strong volume and operating performance in our Display business, as well as higher equity earnings.

Our fourth quarter sales were $1.37 billion, an increase of 7% over the third quarter and a 14% increase over fourth quarter sales a year ago.

Our EPS before special items was $0.31, exceeding the top end of our guidance range by $0.02 and Street expectations by $0.03.

Our higher-than-expected EPS was driven by strong operating performance in Display, higher equity earnings from both SCP and Dow Corning.

Net profit after tax excluding special items in the fourth quarter was $488 million, an increase of 8% over the third quarter.

In comparison to the fourth quarter of 2005, net profit after tax excluding special items was up $144 million, or 42%.

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

A reconciliation to GAAP can be found on our website.

We had a few special items in the fourth quarter.

We recorded a pretax and after tax gain of $139 million, primarily reflecting the decrease in market value of Corning common stock to be contributed to settle the asbestos litigation related to Pittsburgh Corning.

Corning's share price decreased during the fourth quarter from $24.41 to $18.71.

While on the topic of Pittsburgh Corning, let me provide you an update.

On December 21, the judge handling the case denied the plan of reorganization that both sides have been working towards for the past few years.

We and others currently have motions for reconsideration, will be argued in the court on February 13.

Clearly our objective is to go forward with the current plan of reorganization.

We'll update you when there's further news, and I will discuss this at our annual investor conference on February 9th.

In the fourth quarter we also incurred a pretax and after tax charge of $44 million related to restructuring impairment at a European cabling entity in our telecom segment.

In addition, we also recorded an after-tax gain of $35 million to reflect the release of valuation allowance on certain deferred tax assets in Germany, as one of our entities there now has demonstrated sustained profitability.

Lastly, reported a net nonrecurring after-tax gain of $28 million, driven in part by the sale of land at our Samsung Corning CRT equity venture.

Including these special items, our fourth quarter EPS was $0.41 per share.

Now continuing down the income statement, gross margin in the fourth quarter was 44%, which was consistent with the third quarter, in line with our expectations.

It was also consistent with the fourth quarter of last year.

SG&A was $222 million in the fourth quarter, about 16% of sales.

RD&E was $138 million, about 10% of sales.

Interest income was $36 million in the fourth quarter, up $4 million sequentially.

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

Equity earnings were $272 million in the fourth quarter compared to $232 million in the third quarter.

Fourth quarter equity earnings included the $20 million -- $28 million non-recurring gain at Samsung Corning CRT that I mentioned a moment ago.

The remaining increase was due to strong performance at SCP and Dow Corning.

Our tax rate in the fourth quarter, excluding special items, was 13% and in line with our guidance.

Share count for the fourth quarter was 1.596 billion shares and consistent with the third quarter.

Now before I move into the segment results for the quarter, I'd like to recap our financial results for the full year of 2006. 2006 represented our fourth consecutive year of significant rebound from the telecom depression.

What makes this past year such a standout was that it broke many of our previous financial records, including those at the peak of the telecom boom in 2000.

Let me start with sales.

In 2006 our sales reached $5.17 billion, an increase over 13% over 2005.

This represents the fourth highest annual sales in our history.

Gross margin for the year was 44.1%, the highest percentage in our history, even compared to the late 1990s when our results were dominated by the fiber business.

SG&A for the year was 16.5% of sales, the same as in 2005, despite the addition of stock-option expensing.

Without that expense, SG&A would have been 15% of sales.

RD&E was 10% of sales for the year, consistent with last year.

Net profit after tax, excluding special items, was $1.78 billion, an increase of 35% over last year and, again, a Company record.

Earnings per share, excluding special items, were $1.12 in 2006, a 26% increase over last year, or about a 30% increase.

And for your modeling purposes, our full year results included about $81 million in stock compensation expense, or about $0.05 per share due to the new accounting rules.

As investors, I hope you were as pleased with our financial results in the full year of 2006 as we were.

Now, let me turn to the segment results.

Starting with Display, sales were $619 million in the fourth quarter, a 22% increase over the third quarter sales of $506 million.

Sequential volume gains were 28% and at the upper end of our guidance.

Price declines were about 5%, as expected.

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

In comparison to the fourth quarter of last year, sales in our Display segment grew 19%, as volume gains of 48% were largely offset by price declines of 21% and a slight unfavorable change in the foreign exchange rate.

Equity earnings from SCP were $147 million in the fourth quarter, and higher than third quarter equity earnings of $135 million.

SCP sequential volume growth in the fourth quarter was 14% and the price was down 4%.

For your modeling purposes, SCP fourth quarter sales were $571 million compared to $536 million in the third quarter.

Sequentially, total glass LCD glass volume, including our wholly-owned business plus Samsung Corning Precision, was up 21% in the fourth quarter.

Net income in the Display segment, which includes equity earnings, was $461 million in the fourth quarter, up 17% compared to $395 million in the third quarter.

This increase in net income was primarily the result of higher volume, strong manufacturing performance in our wholly-owned business.

Our gross margin percent in the fourth quarter increased slightly in comparison to the third quarter, as the strong volume and our cost reduction programs helped mitigate the impact of price declines.

Gross margin was also equal to the fourth quarter of 2005, despite the significant price declines year over year.

For the full year, Display revenues were $2.1 billion, an increase of 22% over last year's sales of $1.7 billion.

Volume in our base business grew 52%, and was partially offset by price declines of 16% and an unfavorable exchange rate.

Despite the significant price declines in the past -- the most significant price declines in the past decade of our Display glass business, we were able to maintain our gross margins for the full year.

This is a testament to our ongoing cost reduction programs.

We'll provide more details about these programs at our annual investor meeting on February 9th.

Equity earnings at SCP were $555 million for 2006, a 36% increase over 2005 equity earnings of $408 million.

SCP sales were $2.1 billion, up 27% versus the prior year.

Volume growth of 52% was primarily offset by price declines of 9% and an unfavorable exchange rate.

Net income for our total Display business was $1.6 billion, a 30% increase over last year's net income of $1.2 billion.

Now I'd like to spend a few minutes updating you on end market trends for the fourth quarter.

As always, I have to stress that 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.

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

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

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

In summary, the preliminary data indicates that the end market shipments were slightly higher than our expectations in the fourth quarter for all three primary applications; notebooks, monitors and televisions.

Starting with notebooks, about 22 million was shipped in the fourth quarter, slightly higher than our expectations.

This was a 7% increase over notebook shipments in the third quarter, which are 20.5 million.

For the full year, we estimate 78 million notebooks were shipped, a 30% increase over 2005.

For LCD monitors, about 36 million were shipped in the fourth quarter; again, slightly higher than our expectations.

This was a slight increase over the third quarter.

We believe that penetration of LCD monitors was consistent with the third quarter, around 82%.

For the full year we estimate 130 million monitors were shipped, a 33% increase over 2005.

For LCD televisions, about 16 million were shipped in the fourth quarter, higher than our expectations.

This represented a 50% increase over the third quarter shipments of 10.5 million.

More importantly, however, is that the penetration of LCD television in the worldwide color television market was estimated to be 26% in the fourth quarter.

For the year, we estimate 43 million LCD televisions were sold, compared to 21 million last year.

Penetration for the year should come in around 22%, double last year's penetration of 11%.

In the United States alone, approximately one out of every three televisions sold in 2006 was an LCD.

The average size of an LCD television increased from 24.7 inches in 2005 to 28.3 inches in 2006.

In the fourth quarter, we estimate the average size was around 29 inches.

Now, regarding inventory and the supply chain, we don't have complete information at this time.

I can offer some information and we may have more by February 9th.

At the panel makers, our data suggests panel inventory remains within what we deem acceptable levels, heading into the first quarter.

We have some retail data for the United States that suggests the inventories are better than last year exiting the holiday season.

We do not yet have worldwide retail data.

We have little information at the set maker level.

We are not hearing of big issues, but we clearly would like to see more data.

I'd like to spend a moment discussing utilization rate changes at panel makers.

I believe investors may have placed too much emphasis in the past months on slight utilization rate adjustments that happened at a few panel makers.

I know that this is an area we frequently tell investors they should watch, but let me be clear on what we mean.

Drastic utilization rate declines at multiple panel makers are something you should watch for.

That could be an indication of broader panel inventory build than supply chain.

We consider small utilization rate changes by a few panel makers in a given month or quarter to be fairly normal.

December was a good example of this.

Utilization rate at two panel makers went from around 90% to 85%.

We don't consider this to be a material event.

Looking forward to the first quarter, a few panel makers have announced they'll be moving their utilization rates slightly higher in January, slightly lower in February due to the Chinese New Year.

We would view these adjustments as positive, and believe it is an indication that panel makers are operating to avoid a repeat of last year's panel inventory build up.

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

Our glass mix of Gen 5 and higher in the fourth quarter was 87% and slightly higher in the third quarter.

The mix of Gen 5.5, 6, 7 and 8 glass was 52% in the fourth quarter and slightly higher than the third quarter.

Our Gen 8 glass capabilities continue the ramp.

In the fourth quarter we shipped several million square feet to Sharp's Gen 8 fab to meet their demand.

It's clear, based on the fourth quarter shipments and their expectations for us going forward, that we are the majority supplier for their Gen 8 glass needs.

The Eagle XG, our new extra green glass, continues to progress well.

Current requests from customers to convert to new glass far 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 own capacity over to produce Eagle XG.

Our goal is to have all of our glass capacity converted over to Eagle XG by the end of the year.

Moving to the Environmental segment, sales in the fourth quarter were $155 million, slightly higher than the third quarter.

The increase was due to higher diesel product sales, which offset lower auto product sales as expected.

The segment incurred a net loss of $8 million during the fourth quarter compared to a profit of $7 million in the third quarter.

The shift from a profit to a loss in the fourth quarter was primarily due to lower auto demand, which was expected given the industry shutdowns at year end, as well as our own inventory reductions.

In addition, while we like the strong diesel demand, these products currently have a lower gross margin than auto.

For the year, Environmental segment posted sales of $615 million, an increase of 6% over last year's sales of $580 million.

The increase was primarily due to higher diesel product sales, which grew from $98 million in 2005 to $164 million in 2006.

In Life Sciences segment, sales in the fourth quarter were $72 million compared to the third quarter sales of $68 million.

The segment incurred a loss of $2 million in the fourth quarter compared to a loss of $8 million in the third quarter.

Moving to the Telecommunications segment, sales in the fourth quarter were $404 million, an 11% decrease from the third quarter, but much better than we had expected.

We were pleased to have received additional orders from Europe late in the quarter.

Sales of our hardware and equipment products were $207 million in the fourth quarter compared to $215 million in the third quarter.

The decline was less than expected due to an increase in demand from European and North American customers.

Sales in fiber and cable products in the fourth quarter were $197 million and declined, as expected, in comparison to the third quarter sales of $241 million.

The decline was primarily the result of seasonality and lower private network-related demand.

Fiber to the premise sales were $51 million in the fourth quarter compared to $64 million in the third quarter.

The Telecommunication segment incurred a net loss of $54 million in the fourth quarter compared to a net income of $20 million in the third quarter.

The net loss in the fourth quarter included $44 million in restructuring impairment charges that I mentioned a moment ago.

For the year, Telecommunications segment sales were $1.73 billion, an increase of 10% over last year's sales, after adjusting for the Japan sales that we moved into an equity venture earlier this past year.

More importantly, the segment posted earnings of $51 million this year, excluding restructuring impairment charges in the fourth quarter.

This is a significant increase over last year's net income of $18 million.

These numbers are non-GAAP measures.

Our other segment sales increased 20% from $99 million in the third quarter to $119 million in the fourth quarter.

The increase was primarily due to strong demand for semiconductor materials.

Sales for the year increased substantially from $352 million in 2005 to $410 million in 2006.

The sales increase for the year was driven by demand for our [GLB] product, as well as semiconductor materials.

We are delighted with the performance of our specialty material product lines and feel strongly that the future is bright in this area, as some of our technology efforts pay off.

Moving to Dow Corning, the equity venture had another quarter of strong performance.

Equity earnings were $83 million compared to $78 million in the third quarter.

The increase was primarily due to a lower effective tax rate during the quarter.

For the year Dow Corning posted sales of $4.4 billion, an increase of 13% over the prior year.

Equity earnings increased over 20%.

We plan on providing more transparency into Dow Corning at our upcoming investor meeting in two weeks.

Now moving to the balance sheet, we ended the year with about $3.2 billion in cash and short-term investments, up from $2.8 billion in the third quarter.

Free cash flow was $339 million in the fourth quarter and $540 million to date.

Obviously we're very pleased with the significant amount of cash we were able to generate in 2006.

This represented our third year in a row of positive free cash flow.

As a reminder, free cash flow is a non-GAAP measure.

We have received some questions from investors about our future plans for this cash.

I can tell you that our board of directors has established a goal to maintain a cash balance in excess of debt as protection against volatility in our markets.

The board has also approved a priority use of cash beyond that level.

First, we will repay debt maturities within the upcoming three years.

Second, we'll earmark funds needed for potential major new developments coming out of our laboratories.

After these priorities are achieved, the board will consider share repurchases and the reinstatement of dividend payments.

And I'd like to wrap up by providing you guidance for our first quarter and some thoughts about the upcoming year.

We typically provide comments about the upcoming year at our annual investor meeting, but given the significance of Display glass on our results and the influence that seasonality may play in that market this year, we felt it was in our investors' best interest if we increased the amount of information on the call today.

With that, I'd like to start with comments about the Display market.

Clearly, due to the continued significant growth of LCD television penetration and screen size, we are expecting another year of substantial glass volume growth.

In fact, we believe the amount of LCD glass volume added by the market as a whole in 2007 will be equal to or greater than 2006.

In 2006, the Display market grew from about 400 million square feet -- about 400 million square feet from 800 million square feet in 2005, to 1.2 billion square feet.

We believe the Display market can grow at least 400 million square feet again this year.

This would equate to a growth rate in the mid 30% range.

We anticipate our glass volume to grow at the upper end of this range, while SCP's may be slightly lower than the range.

As a reminder, growth rates vary by geographic region and as a result, the growth rates for our wholly-owned business and SCP may be different.

However, we are better at predicting the total market than we are individual geographies.

LCD television demand will be the main driver for this growth.

We expect television penetration to reach 33% of all color televisions sold in 2007, a significant increase from the 22% penetration in 2006.

This would equate to approximately 68 million televisions sold in 2007 compared to 43 million in 2006.

And almost as important, the average size of each LCD television sold is expected to increase substantially from 28.3 inches in 2006 to over 30.5 inches in 2007.

This increase in screen size alone equates to about 10% more glass needed to produce LCD televisions this year.

As a result of the significant television growth compared to more moderate growth rates for monitors and notebooks, we expect, for the first time, more glass may be used to make LCD televisions than the total IT-related products.

And since television demand, especially LCD television, has been historically stronger in the second half than the first half, we expect our demand to be more concentrated in the second half, as well.

In fact, we believe almost 60% of our glass this year will be shipped in the third and fourth quarters.

This -- this will most likely influence glass pricing as well, as we believe the supply glass will become much tighter in the second half, resulting in a more favorable glass pricing environment.

With that insight to the year, let me talk about the first quarter for Display.

We anticipate sequential volume for our wholly-owned business and SCP to be 10% to 15% lower in the first quarter.

The sequential decline in demand is in contrast to the first quarter of last year.

If you recall, sequential volume growth in the first quarter last year was much higher than expected, about 15%.

Looking back, we believe a large portion of that growth ended up in an unhealthy build of supply chain inventories, which eventually led to drastic utilization cutbacks in May through July.

In addition, the amount of glass used in LCD televisions was significantly higher in the fourth quarter of 2006 compared to year ago, and is now a much more significant portion of total glass demand.

Lastly, in the first quarter of 2006, the impact of increased penetration helped offset the seasonal decline in demand.

This year, although television penetration should increase from 26% to 28%, it's not enough to offset the larger impact of TV seasonality.

We believe these are reasons for the overall market decline in glass volume for this quarter.

For comparison purposes, first quarter volume will still be about 10% higher than last year, despite the declines versus the fourth quarter.

As far as LCD television demand for the first quarter, we believe events such as Super Bowl and Chinese New Year will drive consumer demand.

This [inaudible] penetration increased from 26% in the fourth quarter to 28% in the first quarter.

However, keep in mind that the number of televisions sold in the first quarter retail will be lower than the fourth quarter.

Now, regarding LCD pricing, we expect the average price at our wholly-owned business to be down only 1% to 2% sequentially in the first quarter.

This is a much lower price decline than we've seen in the last several quarters.

This is a combination of -- due to the combination of tighter glass supply and our new pricing strategy.

As we've told investors previously, we made the decision to change our pricing strategy in 2007.

We are in a technology business that participates in the consumer electronics industry.

We do expect our prices to decline every year, as our costs also decline.

However, we are trying to achieve lower price declines in 2007 than we experienced in 2006.

We think our new strategy will help achieve this goal.

We believe the industry glass capacity growth will generally be in line with the market for the year and that glass will be tight in the back half of the year.

We think the amount of excess glass capacity in the earlier part of the year will be slight, despite the seasonal slowdown.

We are reducing prices in quarter one, but at a much reduced rate than last year, in line with our strategy.

As a result, any market seasonal declines may fall more heavily on us in the first quarter.

However, we believe market demand for glass will strengthen significantly with penetration seasonality as the year progresses, and the glass supply will be tight.

As a result, our pricing strategy should allow higher prices in the second half on very strong volume.

Regarding price declines at SCP, we expect them to be much higher than the wholly-owned business in the first quarter.

As you know, SCP's glass price declines were not as significant last year as the wholly-owned business.

This catch-up will happen in the first quarter, but we then expect price declines to be far more measured for the remainder of the year at SCP.

Many investors have asked about our competitor's tank issues and whether we expect that capacity to come back online in the first quarter and if this will lead to an oversupply of glass.

First we have no new information on the timing of their repair.

We take them at their word the tank will be ready this quarter.

Second, since the tank in question represented only 3% of the world's glass capacity, it's not enough to materially influence supply and demand.

Pete Volanakis will be presenting a lot more information about the Display market, including seasonality, our cost reduction trends and our longer-term growth outlook at our annual investor meeting.

Moving on to the Telecommunications segment, we're anticipating another year of growth, especially at the bottom line.

I'll save the details until our annual meeting, when Larry Aiello, CEO of Corning Cable Systems, will present.

In short, we're anticipating another year of sales growth, but more importantly, we expect to see earnings improvement again this year.

In the first quarter, we anticipate sales in our Telecommunications segment to be up slightly in comparison to the fourth quarter, and profitability should also improve due to the mix of products sold.

For our diesel products, we're anticipating a significant year of growth in 2007, driven primarily by demand in the United States from heavy-duty engine makers.

As many of you know, class 8 fleet truck manufacturers purchased engines last year ahead of the emission regulations that took effect on January 1st of this year, this commonly referred to as the pre-buy.

We believe that the pre-buy will impact up to 40% of demand in 2007.

That being said, since every engine manufacturer in the U.S. this year must be compliant under the new regulations, we are anticipating sales growth of at least 60% this year, with most of that growth occurring in the second half of the year.

For the first quarter, we anticipate our Environmental segment to grow about 5%, led by normal seasonal growth in auto.

Tom Henman, Senior Vice President of Diesel Technologies, providing a more in-depth look at our diesel opportunity in two weeks.

In our Life Sciences segment, we're expecting a year of modest growth for both the year and first quarter on a sequential basis.

Other segment sales will be about 15% to 20% lower in the first quarter due to lower demand for semiconductor and other material products.

Turning to Dow Corning, we anticipate another year of solid growth, expect sales to grow between 6% and 8% for the year, and for net income to grow at the upper end of this range in 2007.

Dow Corning does not have as much additional capacity coming online at Hemlock Semiconductor in 2007 as they did in 2006, or they will in 2008.

Also, Dow Corning will begin to experience higher project expenses for capacity additions in China.

For the first quarter we expect equity earnings from Dow Corning to be down slightly.

So based on this guidance, we are anticipating first quarter sales to be between $1.26 billion and $1.31 billion and EPS, excluding special items, to be between $0.24 and $0.27.

The majority of the sequential decline in sales and EPS is the result of a 10% to 15% lower volume in our wholly-owned Display business and SCP.

As I explained a moment ago, this is primarily due to seasonality.

Obviously based on our guidance, we expect glass volume to increase substantially this year.

The other contributor to lower EPS guidance in quarter one is the substantial price decline at SCP in the first quarter.

Again, we expect the sequential price declines to be much more moderate in the remaining quarters this year.

So while our first quarter guidance -- EPS guidance is lower than our fourth quarter results, we hope we've been transparent enough in the call this morning about our thoughts for the upcoming year to give you some indication about the amount of growth we're expecting in 2007.

Now, moving down the income statement for your modeling purposes, gross margins for the Company should be between 43% and 45%, SG&A between 17% and 18% of sales in the first quarter, R&D expected to be around 10% to 11% of sales in the first quarter.

Anticipate equity earnings in the first quarter to be down 25% to 30% compared to the fourth quarter.

The decline is primarily due to lower earnings at SCP and the absence of the non-recurring net gain at Samsung Corning CRT.

Regarding our tax rate for your modeling purposes, you should use a range of 15% to 18% in the first quarter.

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

One other comment on shares, as I've mentioned in previous calls, you should expect some executive selling over the next few weeks.

As always, for executives who decide to sell stock, we encourage the use of the period after our quarterly earnings announcements.

In the first quarter, the window will open after our annual investor meeting on February 9rh.

I'd like to comment on executive selling in general.

For our senior executives, they can have 75% or greater their compensation in Corning stock.

We expect them to monetize some of these earnings and, in fact, encourage them to sell small amounts of their holdings every quarter, regardless of price.

Now, one note on the impact of foreign exchange on our guidance.

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

The guidance for the first quarter has assumed a yen to dollar exchange rate of $1.19 for translation purposes.

If the yen to dollar rate were to average $1.24 in the first quarter, we estimate overall sales would be impacted by approximately $20 million and our NPAT by approximately $15 million.

This includes any projected benefit from our currency hedging program.

Ken?

Thank you, Jim.

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

Thank you. [OPERATOR INSTRUCTIONS] Our first question comes from Jeff Evenson with Sanford Bernstein.

First, in your release this morning you talked about potential growth opportunities in green lasers and micro reactors.

Could you go over the criteria you used to approve capital expenditures and other investments in those growth opportunities?

Well, as these move from development to where we're going to have revenue, we obviously have to have capacity.

We try to structure the capital to be careful when we first go in.

By and large as you know from our investments in businesses in the past, usually the first products we make, we don't make any money on, so you don't have a rate of return on the first piece of capital going in.

But we usually go into businesses expecting over a longer period of time to have a return on investment well above our cost of capital.

So we generally make the longer-term decisions about whether these are good businesses as they develop over a period of years.

As you know the gestation period for many of our new business is quite a while.

But when we get to the point where we've got -- hit our cost targets, our return on capital and the internal rate of return, or our return on invested capital is well above our cost of capital and that's the metric we use.

Couple financial questions on the Display segment.

Looks like your tax rate in the Display Technologies business was up relative to the middle of the year, but pretty consistent with late 2005.

How should we think about that going forward?

And also, in the Display Technology business, any unusual increases in SG&A relative to Q3, like added head count or payout of bonuses?

For the corporation, we did accrue a little bit more for bonuses in the fourth quarter than we had in the third quarter result -- as a result of our record performance.

I don't think it would have been terribly meaningful within the Display business by itself.

Relative to the tax rate, I -- it's difficult to predict exactly the tax rate for the Display business, but I think you should expect to see it up a few percent for the full year of 2007 versus 2006.

Thanks.

Thank you.

Our next question comes from Michael Walker with Credit Suisse.

Thanks.

My question is on the Display business relative to the margins.

I know you'll go into some more details probably at your analyst day, but you're giving us some pretty positive indications on pricing here and some pretty good numbers on volume, as well.

I'm wondering if that translates into relatively stable margins in the glass business.

Is there any possibility that margins could actually go up?

Just given that you had price declines a lot worse in '06 than you will in '07, is there a reason to believe that cost downs in the glass business will be anything different than what they were in '06?

And if that's the case is there a possibility that margins could be stable or even higher in the glass business in '07?

Well, we'll touch on this more significantly on February 9th, but a little bit of a preview would be that we anticipate that we should be able to continue our strong cost performance, and then if our pricing strategy works, we'd expect price declines to be less severe this year than they were last.

Now, that being said, understand that our gross margins in this business are already very, very high, and with gross margins at this level, it would be very good to maintain them and I wouldn't necessarily model our gross margin expansion, even though certainly the math may work that way.

And just on a similar note, you had a competitor that was pretty aggressive in Gen 5 and Gen 6 in '06.

You talked about the glass supply environment being not, not as bad, a lot tighter by the second half of '07.

Are you assuming that that competitor is as aggressive again in pricing this year, or do you have reason to believe that you won't see the same level of pricing aggression that you did last year?

Well, as Jim explained in the first part of the conference call, what our strategy is is to lay forth the prices that -- that he covered.

And then what we expect as a result of our large market share, together with our pricing strategy, that the bulk of the seasonality impact will fall on us in the first half, and that competitors will run relatively close to full.

And that we would expect that by the end of the year, as demand and the seasonal terms goes up significantly, that we would pick up more volume as the year went on and that overall we'd end the year growing with the market.

Okay, and just one last question on the fiber business.

A little surprised to see, it looks like the FTTP business was cut in half in the fourth quarter, and I know you did guide to that and that was down roughly in line with your guidance.

But even if you add back the $44 million one-time hit to the earnings number, you still would have had a loss in the fiber business.

I'm wondering in '07, would we look for FTTP to kind of resume its historical growth rate?

Do you see that bouncing right back?

And do you see the profitability of that business recovering to a level above where it was for the full year of '06?

Well, FTTP has its own seasonality pattern, driven by the way in which some of our key customers run their projects.

So, yes, indeed, fiber to the prem was down some in quarter four.

Not as significantly as you just laid out, probably more in the tens of millions range rather than more significant than that.

Our positive uptake in quarter four really didn't come out of the fiber to the premise area, but rather in a broader recovery in our base and in Europe than we originally had thought.

So as we look to this year, what we expect is Verizon to continue with their fiber to the premise effort.

We see strong interest now at a number of other major customers beginning to get started on fiber to the premise.

But also, I think it's important for folks to remember that fiber to the premise, although a significant play for us, is only a part of a broader telecommunications business and we're feeling better about a broader recovery and we're seeing that in our base numbers.

We're seeing that in private networks, as well.

Great.

Thanks a lot.

Thank you.

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

Hi, good morning.

Good morning, John.

So based on the last question, what was the fiber to the premise sales figure for the whole year?

I don't know it off the top of my head.

We'll get it.

You got any other questions?

Sure.

One other one.

In your press release you hinted at the possibility of a dividend.

And I think it was at last year's analyst meeting that you said basically it wasn't going to happen during your term as CFO.

Have you -- have you changed your thinking on that?

[multiple speakers] because over the course of this past year, we've had more investors talk to us about considering dividends, as well as stock buy backs.

So it just shows that I'm willing to change, but the board of directors will consider both, I think, as the year unfolds.

And back to fiber to the premises, when -- in what month of the quarter do you get an indication of what Verizon's intentions are for the year?

When do they come back seasonally in their purchases?

Well, first, the answer to your first question, which is our fiber to the premise sales for last year were over $0.25 billion.

As far as the guidance for the year for what Verizon's going to do, they've been very public to the entire market about what their plans are to do similarly another three million homes passed in the coming year.

A hunk of the variability now will come as they connect those homes.

As you may recall, what we've said is our revenue opportunity for home connected is in the range of a couple hundred dollars per home connected.

Half of that happens when they pass the home and half when they connect.

So part of it of our demand will depend on how successful they are at selling the service.

They seem to be feeling pretty good about where they are in the markets that they offer video as well right now.

Where we'll get -- we will have our models updated on that cyclicality of the demand of their projects in the relatively near future, and we hope that Larry Aiello will share some of that with you on February 9th.

Thank you.

Thank you.

Our next question comes from Ajit Pai with Thomas Weisel Partners

Yes, good morning and congratulations on a very, very solid 2006.

Thank you very much.

Some questions on your cash flow and liquidity, back to the commentary provided slightly earlier, you talk about the earlier priorities, which is retiring some of your debt and then sort of having some cash earmarked for investing in opportunities.

Could you give us some idea, quantify how much that is and what kind of time line that you think your free cash flows would be able to cover that and you could consider the share buybacks or dividends?

The board has not yet finalized the amount that they're going to have in excess of debt.

When they do, I think we'll disclose that to investors.

The amount of debt that I think we're likely to buy back this year is probably in the $300 million kind of zone, because we really don't have too much in the next few years and that's what they have asked us to concentrate on.

So my guess is that the board will turn to this issue the middle of the year, after they feel comfortable the year is unfolding as we expected and start to have the debate on what we should do with the cash, because we clearly are not going to pile it up unless we feel we have a major new product that's going to break early and needs a lot of capital spending.

Other than that, we intend to do the right thing.

And the free cash flows that you had of $540 million in 2006, do you expect that to increase in 2007?

I'll be giving you an update on that on February 9th.

We have to save a few things for that day.

Okay.

And then in terms of the deposit that you have -- that you'd received from some of your customers for glass supply, how depleted are those deposits?

What's the net position on that?

Then also, the sort of reserve you're taking against some your deferred tax assets, now that you've been profitable for such a long period, what does GAAP provide for in terms of reversing some of those and could you quantify those, as well?

Yes, I think-- I don't have the number right here, but you can get it off of our financial statements on the net amount of what -- it was a slight decline in the year 2006 that was used down, but we were still getting some money in.

But it will be a negative to the cash flow in the sense of 2007, because there'll be a little money coming in that mostly effect the credits being -- the customers using part of their money to pay the receivables that we have issued to them.

On the deferred tax, there's nothing new.

We'll comment a little more on that on February 9th in terms of when we think that the United -- in the United States we might have to return to accruing taxes.

We'll also talk a little bit more about our cash tax position, but it's definitely not 2007.

Okay.

Thank you so much, and congratulations, again, on a really, really incredible year.

Thank you very much.

Thank you.

Our next question comes from Curt Woodworth with JPMorgan.

Yes, hi, good morning.

Good morning.

Jim, can you help me understand a little bit more of the gross margin dynamics?

Looking at the first quarter, just in the context if the Display business is going to be down 10% to 15% in volume and a couple points on price, how is it that you could potentially achieve a 45% gross margin, or be up sequentially on gross margins?

Is it simply cost down, or is it incremental to telecom that could be that powerful?

Well, telecom is powerful, and we also intend to improve in our Environmental business.

You know, one of the things that you'll be seeing as the Environmental business goes along over the course of the year with the growth in diesel, that you'll be seeing improvement there.

Remember in the fourth quarter, we had a very low level of gross margin, as we had low auto and we also took shutdowns to reduce our own inventory.

So I think the combination of the inventory, as Environmental, telecom being up, as well as our own continued efforts to try and reduce costs in Display, despite the volume down, will allow us to do well in gross margin.

Okay, great.

Then just on the pricing in the wholly-owned business going from down 5% this quarter to down 1% to 2%, a pretty big step function change.

Is it -- is it simply a matter of the new price strategy you're implementing, or are there other dynamics involved, either incremental mix benefits of Gen 8, just a little bit more clarity around that change?

No, it's strictly a result of our pricing strategy.

Okay.

Then last question, on the tax rate for 2007, do you think the 15% to 18% guidance you gave for the first quarter would be appropriate for the remainder of the year?

At this stage that would be the best guidance I could give you.

We'll try to give you more of an update on February 9th about the dynamics in different countries.

The thing that's a little difficult for us to sometimes predict is -- is you're basically seeing the tax rate of our foreign entities right now is that we have different rates in Japan versus Taiwan, as an example.

So, if we end up making a little bit more in one country or the other, that influences it.

But the best number I can give you right now would be the 15% to 18%.

Great.

Thank you.

Thank you.

Our next question comes from John Roberts with Buckingham.

Good morning, guys.

Morning, John.

The pricing at SCP, it sounds like it's maybe lagging the trends in the wholly-owned by about a quarter, and structurally, it won't get to the same pattern as the wholly-owned.

The mix differences are enough that it won't get down to the 1% to 2%, will it?

I think I wouldn't characterize it as just lagging the trend.

I mean, we clearly were lower there and now are catching up, but we intend to employ the same pricing strategy past this catch-up there as what we're doing here.

So on a sequential basis, we hope to be achieving the same thing at SCP that we're achieving in the wholly-owned business.

Great.

Thank you.

Thank you.

Our next question comes from Steve Fox with Merrill Lynch.

Good morning.

Could you talk a little bit about the risk to the new pricing strategy, especially on the market share side, what's the chances that you lose more market share than you're anticipating?

Hi, Steve.

It's Wendell.

Hi.

So I think it's all the obvious ones you would come up with, Steve, which is that what our strategy is is to not chase the seasonality in the market with price.

And that instead to evaluate the market on, really, an annual basis on where we think supply and demand of glass will play, while at the same time still being responsive to our customers' needs for price declines to some extent.

And so the obvious ones are, do we have the market right and do we have where the glass supply in terms of overall capacity for the industry right?

If we do, then any -- then the move for more seasonality in the first half ought to be offset by moves upward in the back half and it'll all work out.

But you have both of those sets of uncertainty.

You have both the market and what we think the overall industry supply is.

But we wouldn't be implementing the pricing strategy if we didn't feel pretty good about those others.

Thanks.

Then Jim, on the gross margins for the year, you were very successful holding gross margins in Display this year.

Despite pricing pressures, you're adjusting your pricing strategy now.

So I would think that you can hold Display gross margins.

If that was the case, that helps your mix and you're seeing better improvement in Environmental.

Is it safe to assume that you have gross margin upside as the year goes on, or are there certain headwinds we should consider?

If your assumptions were correct, that would be true.

Okay.

Thanks.

Thank you.

Our next question from -- comes from Nikos Theodosopoulos with UBS.

Yes, thank you.

I had a couple questions.

First, on the full year LCD volume forecast that you gave for the industry of mid-30%, that number seems low relative to at least what we were looking at, and if you listen to some of the earnings calls from some of the panel makers, like Samsung and LPL, it seems like their expectations are more like in the 40% to 50% range.

So I'm trying to understand why do you think the market is going to decelerate so much, or is this just an early year initial forecast and is -- you're trying to be conservative?

Or is this really the forecast you think the market's going to grow and that's how you're going to base your capacity additions for the year?

So first of all, I think you covered a bunch of different areas of possible explanation there.

Let me emphasize the ones that I think are on point.

But first, start with what Jim said, which is we expect actually in terms of square feet more growth in 2007 than we had in 2006, but since it's on a larger base, that's going to take you to a lower percentage.

We showed that to you on the Web on that slide 13, which said 2006 square footage growth was around 400 million.

And 2007, we're expecting on -- to be greater than, or equal to amount, but that same amount's going to yield about mid-30s in terms of growth rather than 50% last year.

So now let's deal with the 400 million.

Yes, there is potential for upside variance to that number.

However, we do think it's in the mid-30s at this time.

We won't be able to have all the data it takes to fully analyze what happened in quarter four until the end of February.

You might remember that last year, after we fully analyzed that data, we did indeed upgrade our forecast because there was more strength than what the preliminary data had indicated to us.

That could happen again.

But, it's not a deliberate attempt on our part to be conservative.

It's dealing with the data that's in front of us and we should have more by the end of February, Nikos.

Okay, and just a follow-up.

Let's just assume that the market grows what you're thinking or more, and you go with this pricing strategy.

Did you suggest -- I'm just trying to make sure I understand this -- that in the second half of this year that pricing could actually start going up sequentially as the market gets tighter?

Because if your pricing's going to decline 1% to 2% in the first quarter and you think the second half is tighter than the first half, does that imply that pricing actually can be flat or go up?

Is that kind of like what you said, or am I misreading that?

So what I said specifically was what we are attempting to do by having the lowering declines at the beginning of the year than what we did, for example, last year, that in the back half of the year on that huge volume that we expect to see, we'll be able to have a much higher price than what we would have if we had let prices go down to where we've been kind of trapped for the last two quarters of being down 4% to 5% each quarter.

I would be surprised if pricing went up, but obviously, it would be our goal to have -- we'd love to have pricing be flat in the back half of the year compared to the first part of the year.

We'd make a ton of money.

Okay.

Thank you.

Thank you.

Our next question comes from Jeff Osborne with CIBC.

Great.

Thanks a lot.

I just wanted to drill down on the XG opportunity.

I was just wondering if you could share with us what percentage of your output is capable of XG now, and then just go through the process and operational challenges, or the methodology of shifting the entire production output to XG in 2007, like you indicated?

Well, at this time we're -- under half of our volume is Eagle XG.

We anticipate to take it over to be 100% by the end of the year and that's our plan.

And of course there are complications to being able to get there, but we have great confidence in our operations and technical folks in Display and we think they are up to it.

Great.

And then just a last quick one is can you update us, Wendell, on the submarine telecom market?

Are you seeing any rebound in that market?

Thanks for the question on submarine.

It's been a lot of years since I've talked about the submarine optical cable market.

Brings back old memories.

So, yes, we are seeing a rebound, but it's on a very small number.

I think the most exciting thing is that we're finally getting to use some of the very, very advanced technologies that we developed a number of years ago to make submarine cable transmission much lower cost and much more effective.

But regretfully it's on a small number.

Okay.

Thanks a lot.

Thank you.

Our next question comes from Brandt Thompson with Goldman Sachs.

Hi.

Just wanted to clarify a few things around some of your assumptions related to your pricing strategy.

First, in the second half of the year, you had responded to one of the prior questions that you should see some -- could see some more stable pricing, as capacity would be tight then.

If that's the case, in years past, we've ended up in some tight supply situations in the past.

Would that be typical of the type of leverage you were able to see at that point, is the first question?

And the second question gets back to any loss of market share.

Are you assuming that your competitors, who have so far acted pretty aggressively with price over the last, say, 18 months, are going to not increase capacity and try to really gun for share on the back of this strategy, or what are your assumptions about their behavior?

Thanks.

Well, it's our belief that the glass industry is not putting in place enough capacity such that someone could have enough to actually try to steal a huge amount.

If you look at all the announcements that have been made in the industry -- and that's at the core of our pricing strategy -- is we believe that the glass supply demand will be tight in the back half of the year.

Therefore it's relatively hard for someone to come in with a very aggressive price and say, well, we're going to take away a large portion from Corning.

So that is at the core of our pricing strategy that we're utilizing all year long.

Relative to the leverage, if our prices are not declining in the back half of the year, and we continue to do well on cost reduction and do what is probably the most important thing for our cost structure, which is to run relatively full, we expect to see quite a bit of leverage from that.

And let me just build some on Jim's comments.

Because we're not counting on one behavior or another from our competitors.

It comes back to our answer to Steve Fox's question, which is, where the potential for variability here and the effectiveness of our pricing strategy will depend on sort of how right we are on the market and how right we are on how much capacity is out there.

To the extent that glass is tight, then our actions will stand on their own.

And what we're not trying to do is chase this sort of point or two of market share with price.

What we believe is we have an understanding of where the market will be and the performance versus glass supply.

There is variability potential there and the future's a hard thing to predict, but that's what we're basing our strategy on.

Thank you.

Our next question comes from Daryl Armstrong with Citigroup.

Hey, how's it going, guys?

To tag on to the back of the previous question, in terms of market share variation, given the fact that you do expect that the conditions will be tight in the second half of the year, then would it be correct to assume that you are tolerant of more than a point or two of market share variability in the first half, figuring you'd just recoup it at the back end?

No, I think our statements sort of stand on their own.

What we expect is as the market leader and with our pricing strategy, the bulk of the seasonality in this market will fall on our shoulders.

I think it's important to remember, you can't measure market share quarter to quarter.

You can remember last year we had market share really shot up --

Right.

-- in quarter 1 and what we told everyone was, gosh, don't feel too good about that because we think a lot of that's sitting in panel inventory.

And then it adjusted in quarter two and all up and down all year long, where basically, we grew at, or slightly above the market.

So I think you can bring over precision to analysis on a quarter-to-quarter basis.

It is a business that we think has very long legs and a long lifetime.

We'be got a set strategies in place that don't just account for quarter-to-quarter variation, but rather put us on a long-term trajectory that has strong profitability, while at the same time being responsive to our customers.

We don't expect this to be a market where prices are going to go up.

We expect prices to go down, but you're dealing with the rate of down relative to our cost performance.

Makes sense.

And then in terms of the growth assumption that have you for the overall market in the mid-30s range, what's the implied assumption that you have for some of the IP-related end markets, like, for instance, PC growth?

We're talking about I think 10% on notebooks and 6% on monitors.

Okay.

All right.

And then one last thing, in terms of the better-than-anticipated cost reduction in the -- in the fourth quarter on the LCD side, did you guys start a new initiative?

Any additional color that you can give us before the analyst day meeting in terms of what you guys were able to do over the course of the last three months?

There's nothing dramatic within the three months, but Pete Volanakis is going to talk to you about the very extensive plan we have on driving down costs over a five-year period of time, of which 2006 was just one example.

Excellent.

Thank you, again.

Lisa, we're running kind of long.

We've got time for one more call.

Thank you.

Our final question comes from C.J.

Muse with Lehman Brothers.

Yes, good morning.

I guess a couple questions here.

First off on your pricing strategy, is the goal to get down 1% to 2% on a blended basis, or is that across all generations?

That's a blended basis, but I will point out to you, C.J, that, with the business now so big, mix really isn't that much of an impact.

It really had no impact on this past year, so you're really not seeing very much from mix anymore.

Even one big new fab coming in just can't move it that much, so it's really the blended overall.

Got you.

All right.

In terms of the volume guidance for SCP for 1Q, given what we've heard from Samsung and LPL, that seems very conservative.

Would you characterize that as being conservative on your part, or are you anticipating share loss?

Can you help me understand that?

So as Jim has said, and I have, that what's important to remember is what our view is of seasonality and where the impact hits, right?

So we do view this market as going to be much more strongly seasonal.

You may remember that last year what we said as the whole industry was dealing with this switch over to TV being the really big driver, that the whole industry would have to figure out how to operate in a market that was going to be so seasonal.

We've now laid forth how we are going to operate.

So that's why -- that together -- our large market share together with our pricing strategy will mean that the seasonality has the potential to hit us a little more strongly than other players in the market, and that's what we're planning on.

Just one other comment on that, C.J., I'd just point out once again that panel shipments and glass don't perfectly correlate in every -- any given quarter.

As you just saw, our glass panel shipments in quarter four were greater -- much greater than panel shipments, so you've got to look at it over a greater period of time.

Okay, so you would characterize it as timing differential in the food chain, not share loss at either Samsung or LPL?

I think our comments stand on their own.

Okay.

And in terms of your gross margin, given LCD approaching 50% of the mix in the second half of the year, are you comfortable that we're going to hit roughly 47%, 49%-type gross margin in the second half?

I'm not giving gross margin guidance for the full year.

I indicated before to a caller who said that if our pricing strategy worked, volume's good, Display is impro -- diesel is improving, we have room for it to improve, but we're not going to give guidance right now for the back half.

It was worth a try. [LAUGHTER]

We'll give you an [at-a-boy].

And then in the other business -- other technologies, how much of the revenue there are leveraged to semi cycle?

I think semi is about half of those, of the other segment.

We got -- and there's a couple drivers.

One is semi with the very strong performance now out of our people doing the semi optics.

And the other, of course, has been a strong success story for them, which is the DLP play, where we make the packaging for TI's DLP solution, which has been a great success story of innovation for those guys.

Got you.

And last question for me.

For Dow Corning, I'm not sure if I missed it, but, Jim, did you give guidance for the full year for the equity contribution?

I basically said that their revenue would grow 6% to 8% for the year and that the NPAT would be at the upper end of that for the full year, held down a little because we don't have as much Hemlock capacity coming on, and also they will have some project spending in China.

Perfect.

Thank you.

Jim, do you have some closing comments?

Yes, I do.

I would like to make just a couple of comments.

First of all, from an Investor Relations announcement point of view, as we've noted we will have our annual investor meeting on Friday, February 9th at the Mandarin Oriental Hotel in New York City.

We plan on providing a lot more transparency into our Company, our strategy and our views of long-term market trends.

We're going to have a number of our key business leaders on hand to speak to investors and showcase products and answer your questions.

You will see a piece of Gen 8 glass on our new diesel filter, our new Epic well plates, and a complete fiber to the home setup, showcasing our innovative product offerings.

In addition, several members of our R&D group will be there showcasing a few of the exciting projects they're currently working on labs, and these will include the green laser, micro reactors, silicone glass and mercury abatement.

You're going to hear formal presentations from senior executives and obviously have the opportunity to ask questions.

Presentations made by Wendell, Pete Volanakis, Joe Miller, our Chief Technology Officer, and myself.

In addition, Tom Henman from diesel and Larry Aiello from Corning Cable Systems will be present.

We believe it'll be very informative event.

We hope you'll be able to join us.

If you're interested, please register on our website.

Now, regarding 2006, we could not have been more pleased with our financial performance.

I know many investors were disappointed with the stock movement towards the end of the year, but I hope you'll agree that the actual results for the year for the Company were terrific.

Our sales were up 13% for the year.

Our NPAT without special items was up 35%.

And without the impact of stock-option expensing, that NPAT was actually up 42%.

We faced a most turbulent year in Display, which led to our highest price declines in history, and we were still able to hold our gross margin percent.

So obviously we would have liked to see a higher stock price, but our main responsibility is to continue to grow the Company and meet our financial goals, and we accomplished both of these objectives in 2006.

In fact, we think we did them exceedingly well, and we hope investors will agree.

Looking forward, we believe we have another -- a number of opportunities to provide further growth in 2007 and we look forward to seeing you in two weeks.

Thank you, Jim.

Thank you, Wendell.

Thank you, all, for joining us this morning.

A play back of the call will be available beginning at 10:30 AM eastern time today, run through 5:00 PM. eastern time February 7th.

To listen, dial 210-369-3852, no password is required.

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

Lisa, that concludes our call this morning.

Please disconnect all lines.

Thank you.

This concludes today's teleconference.

Thank you for your participation.

You may disconnect at this time.

Thank you.