康寧 (GLW) 2007 Q1 法說會逐字稿

Good morning, and welcome to the first quarter results conference call.

All parties will be on a listen-only mode until the question-and-answer portion of the conference.

This conference is being recorded.

If you have any objections, you may disconnect at this time.

I would now like to turn the call over to Mr.

Ken Sofio, Division Vice President, Investor Relations.

Sir, you may begin.

Thank you, Lisa.

Good morning.

Welcome to Corning's first quarter conference call.

This call is also being audiocast on our website.

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

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

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

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

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

Jim?

Thanks, Ken.

Good morning, everyone.

This morning we released our results for the first 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 first quarter results were excellent, led by better than expected performance in Telecom and at Dow Corning.

Our first quarter sales were $1.31 billion, at the top end of our guidance range.

Compared to the fourth quarter, sales declined 5%, and compared to the first quarter of a year ago, sales were up 4%.

Our EPS before special items was $0.28 and exceeded the top end of our guidance range by $0.01 and Street expectations by $0.02.

Net profit after tax excluding special items in the first quarter was $452 million, a decrease of 7% versus the fourth quarter.

In comparison to the first quarter of 2006, net profit after tax excluding special items was up $27 million, or 6%.

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 two special items in the first quarter.

We recorded a pretax and after tax charge of $110 million, primarily reflecting the increase in market value of Corning common stock to be contributed to the asbestos litigation related to Pittsburgh Corning.

Corning share price increased during the quarter from $18.71 to $22.74.

In the first quarter we also incurred a pretax and after tax charge of $15 million related to retirement of debt.

Including these two items, our first quarter EPS was $0.20 per share.

Now, continuing down the income statement, gross margin in the first quarter was 45%, slightly higher than the fourth quarter and in line with our expectations.

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

SG&A was $214 million, about 16% of sales.

R&D was $130 million, about 10% of sales.

Equity earnings were $216 million in the first quarter compared to $272 million in the fourth quarter.

As a reminder, equity earnings in the fourth quarter had included a $28 million net nonrecurring gain.

The sequential decline in equity earnings was less than we had anticipated due to better than expected results at both Dow Corning and Samsung Corning Precision.

Our tax rate in the first quarter excluding the impact of special items was 19%, slightly higher than our guidance range of 15% to 18%.

Our share count for the first quarter was 1.6 billion shares.

Now, let me turn to our segment results.

Starting with Display, sales were $524 million in the first quarter, a 15% decline compared to the fourth quarter sales of $619 million.

First quarter glass volume declined 12% sequentially as expected.

Regarding glass pricing, our new strategy appears to be working, as we hoped.

Sequential pricing was lower by just 1% to 2% of base business.

Equally important, there appears to be no material change in our market share in the first quarter.

It should come as no surprise that we will continue this pricing strategy heading into the second quarter.

Regarding foreign exchange, the impact of the yen to the U.S.

dollar exchange rate was slightly negative during the first quarter compared to the fourth.

As a reminder, all of our glass is sold in yen.

Pricing guidance we provide is on a yen per square foot basis.

As a result, changes in the yen to dollar exchange rate do not impact the pricing.

Equity earnings from SCP were $113 million in the first quarter and lower than fourth quarter equity earnings of $147 million.

SCP's sequential volume declined only 5% in the first quarter, much better than we expected.

Sequential price declines were in the upper single-digits and in line with our expectations.

As a reminder, SCP's price declines in 2006 were not as significant as our wholly owned business.

This catch-up has now occurred in Quarter One.

We expect price declines at SCP to be much more moderate in Quarter Two and consistent with the wholly owned business.

For your modeling purposes, SCP first quarter sales were $484 million compared to $571 million in the fourth quarter.

Net income in the Display segment, which includes equity earnings, was $380 million in the first quarter, down 18% compared to $461 million in the fourth quarter.

Decrease in net income was primarily the result of lower volume in our wholly owned business and lower volume and pricing at SCP.

Our gross margin percent in the first quarter declined very slightly in comparison to the fourth quarter.

Now I would like to spend a few minutes updating you on our end market trends for the first quarter.

We also have some final end market data from the fourth quarter.

As always, I would like to stress that our first quarter market data information is only preliminary at this time.

This data represents our view and is based on a variety of sources.

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

In summary, the preliminary data indicates that the end market shipments for the first quarter were on track with our expectations for first quarter for notebooks and monitors.

For LCD televisions, the preliminary end market data suggests shipments were higher than we expected.

Starting with notebooks, about 22 million were shipped in the first quarter, in line with our expectations and slightly less than fourth quarter shipments.

As percentage of computers sold, notebooks grew slightly from 38% in the fourth quarter to an estimated 39% in the first quarter.

For LCD monitors, about 39 million were shipped in the first quarter, also in line with our expectations.

This was a slight increase versus the fourth quarter.

We believe the penetration of LCD monitors grew slightly from 85% in the fourth quarter to 86% in the first quarter.

Let me now move to LCD televisions and start with our view of the final end market data for the fourth quarter.

As a reminder, the market data we had provided on our January conference call and February investor meeting was preliminary at that time.

Our final data indicates 17 million LCD televisions were shipped in the fourth quarter, about 2 million more televisions than our original estimates.

For the year, approximately 44 million LCD televisions were shipped, about 23% of all color televisions.

This is higher than our previous estimate of 22% penetration.

The average size at retail in Quarter Four was 29.7 inches and was 28.6 inches for the year.

Moving to the first quarter, the preliminary data suggests about 14 million LCD televisions were shipped, which is also higher than our expectations.

More importantly, however, the penetration of LCD TV into the worldwide color television market was estimated to be 31% in the first quarter, up from 29% in the fourth quarter.

In light of the strong fourth quarter data and preliminary first quarter information, we've increased our LCD TV shipment estimates for 2007.

We now believe approximately 73 million LCD televisions will be shipped in 2007, up from our original estimate of 68 million.

As a result, our estimate for LCD television penetration for the year has increased from 33% to 36%.

We also believe the average screen size this year will be approximately 31 inches and larger than our previous estimate of 30.5 inches.

The increase in penetration and screen size has led to a revision of our market estimates for worldwide LCD glass volume.

We now believe the LCD glass market volume will grow between 35% and 40%, up from our original estimate of mid 30% growth.

You should note this growth rate may vary by geographic region.

We estimate that Taiwan and Japan will grow at the upper end of the range, while Korea will grow at the lower end of this range.

Historically, growth rates have varied by geographic region, and you should note that we have been much better at estimating the total market rather than individual geographies.

I would like to take a moment to discuss the estimated growth rate for glass versus some of our customer's estimates.

Based on our analysis, we believe panel area will grow approximately 45% this year, although two panel makers have published higher growth numbers.

However, when you look at the panel area growth in the entire industry, we believe the number is closer to 45%.

The difference between the panel area growth estimate and our estimated growth rate for the glass market of 35% to 40% is primarily the result of glass utilization improvements at our customers from process yield and panelization.

As we have told you previously, our estimated market growth for glass assumes our customers will be able to run their fabs more efficiently over time.

This would result in less glass being wasted by them, and more panels being produced and shipped from the same amount of glass inputted into their process.

We have always accounted for glass utilization improvements in our forecasts between finished goods viewing area shipment growth and the glass substrates area growth due to our customers' process improvements.

However, we believe it has been overlooked by investors due to the very high percentage growth for glass in recent years.

This improvement by customers is a good thing for the long-term health of the industry, despite them purchasing less glass for a given number of finished goods.

Our customers have low profitability and they need cost reduction to be able to reinvest for growth.

I think the customer yields from process selects are well understood.

Let me explain what we mean by panelization.

Panelization refers to how many panels can be made from a single piece of glass and what percentage the glass area is being effectively utilized by these panels.

We're now seeing panelization improvements as our customers move towards wide screen monitors.

For example, a Gen 5 panel maker can make six 20-inch panels in a standard four by three format on a Gen 5 piece of glass, which leads to panelization efficiency of about 60%.

However, on that same piece of glass, they are able to make eight 20-inch wide monitors, resulting in panelization efficiency of 70%.

The amount of glass going into the process is the same, but the output in terms of panel area has increased.

Please note that panel makers may decide to run these panel sizes more efficiently on either smaller or larger Gen sizes.

So for 2007 we have estimates for both yield improvements and panelization, and as a result, we believe our glass growth assumptions are reasonable compared to the panel industry's area growth expectations.

Some investors have asked us if the glass industry can add additional capacity beyond this range if needed.

We believe the overall glass industry will have enough glass capacity to meet a 40% growth rate, but not much more.

This assumption is based on our own capacity plans, plus other public announcements by our competitors.

For Corning, it takes us about six months to add melting and finishing capacity, assuming we have a building in place.

We believe it takes others in the industry a slightly longer time to bring on new capacity.

The take-away here is since it's the end of April, making a decision today to add capacity would not have a material impact on supply this year.

As a result, based on our market forecast and industry capacity estimates, we still believe supply and demand for glass will be tight in the second half.

Regarding inventory in the supply chain, our data suggests panel inventories remain within what we think are acceptable levels heading into the second quarter.

Our glass mix of Gen 5 and higher in the first quarter was 88% and slightly higher than the fourth quarter.

The mix of Gen 5.5, 6, 7 and 8 glass was 52% in the first quarter and consistent with the fourth quarter.

Our Gen 8 glass capacity continues to ramp.

Consistent with our contract with Sharp, we're the majority supplier for their Gen 8 glass needs.

You should also note there have been rumors of a Gen 9 and Gen 10 fabs.

We've begun development of these generations to be ready, if the industry moves in this direction.

To put the size of a Gen 10 in perspective, it's almost 100 square feet of glass compared to 56 square feet of glass for a Gen 8.

While there have been no formal announcements from panel makers yet, we expect you will hear something later this year.

I'll wrap up Display by commenting on EAGLE XG.

Our conversion continues to go well.

We estimate that EAGLE XG represented about 40% of our glass production in the first quarter.

We're pleased to announce that SCP will soon begin producing EAGLE XG in response to customer demand in Korea.

Moving to the Environmental segment, sales in the first quarter were $179 million, an increase of 15% over the fourth quarter sales of $155 million.

The increase was due to substantially higher auto product sales versus traditionally lower fourth quarter.

Auto product sales were $123 million in the first quarter, up 17% over the fourth quarter sales of $105 million.

Diesel product sales were $56 million in the first quarter, an increase of 12% over the fourth quarter sales of $50 million.

Segment net income was a positive $9 million in the first quarter versus a loss of $8 million in the fourth quarter.

The significant improvement in the segment's bottom line was a result of higher volumes in auto, much stronger manufacturing performance.

Higher volumes in diesel also resulted in improved manufacturing performance.

Diesel sales increased 65% over last year's first quarter.

We believe diesel sales are on track to grow over 60% this year.

And while the majority of this growth will come in the heavy duty market in the second half, we are also quite pleased with how the light duty engine opportunity is progressing.

Hopefully investors saw the announcement last week regarding our supply agreement with Hyundai.

Hyundai will be purchasing our new DuraTrap AT filter for select European passenger car models.

We'll begin shipping small quantities of our filters at the end of 2006.

Investors should note that these sales to Hyundai will be driven purely by green marketing.

The regulations currently in place today in Europe, known as Euro 4, are not stringent enough to require these filters.

This will change towards the end of the decade when the new Euro 5 regulation goes into effect between 2009 and 2011 requiring filters on diesel autos.

For your modeling purposes, the filter sales to Hyundai this year were included in our market estimates and guidance that we had provided in February.

In the Life Sciences segment, sales in the first quarter were $76 million compared with fourth quarter sales of $72 million.

Segment was break-even in the first quarter, compared to a loss of $2 million in the fourth quarter.

Moving to the Telecommunications segment, sales in the first quarter were $439 million, a 9% increase over the fourth quarter and better than expected.

Compared to a year ago, Telecommunications sales were up 11%.

Sales of our hardware and equipment products were $228 million in the first quarter, up 10% compared to $207 million in the fourth quarter.

And compared to a year ago, hardware and equipment sales were up 19%.

Sales in fiber and cable products in the first quarter were $211 million, an increase of 7% over the fourth quarter sales of $197 million.

Compared to a year ago, fiber and cable sales were up 3%.

Fiber to the premise sales, which are primarily hardware and equipment-related, were $69 million in the first quarter, representing a 35% increase over the fourth quarter sales of $51 million.

Net income in the Telecommunications segment was $29 million in the quarter compared to a net loss of $54 million in the fourth quarter.

As a reminder, the fourth quarter had included a $44 million in restructuring and impairment charges.

The significant improvement in bottom line was due to the higher volume and strong operating performance.

Hopefully, most investors saw our other press release this morning.

Before the market opened, we announced the partial reopening of our Concord, North Carolina, optical fiber manufacturing facility.

We will begin a limited start-up of this facility in the second half.

As we stated previously, it will take approximately six to nine months to start this limited production.

I would like to be very clear here, at this time we are only planning on opening a portion of the facility.

In the future as demand warrants, we'll have the ability to restart additional capacity.

The decision to reopen a portion of Concord was due in part to the increased market demand for fiber we have seen over the past few years and our expectations for future growth.

Over the past two years, the fiber market volume has grown more than 15% per year.

The overwhelming majority of this demand has come from the access and metro segments, and we expect that trend to continue.

This partial start-up of the Concord facility will ensure we have adequate capacity to capture the expanding market opportunity.

Another factor in the decision to partially reopen Concord is our recent innovation to make higher performance stepper glass for semiconductor materials products from the optical fiber process.

In addition to producing optical fiber at our Wilmington, North Carolina, facility, we now also manufacture high purity fused silica for semiconductor lithography applications.

Our semiconductor business is growing at double-digit rates, which has resulted in the need for increased specialty glass-making capacity in Wilmington.

This demand will displace some of Wilmington's fiber making capacity.

We are delighted to have found a second use for our fiber manufacturing assets.

For your modeling purposes, the cost to partially reopened Concord is not material to our overall results.

We estimate the incremental annual fixed cost is less than $5 million.

Moving to our Other segment, sales in the first quarter were $89 million, down from $119 million in the fourth quarter.

The decline was due to an expected drop-off in specialty material sales.

Turning to Dow Corning, equity earnings were $92 million compared to $84 million in the fourth quarter.

Both quarters had benefited from a lower than normal tax rate.

Sales for Dow Corning, which are not consolidated, were $1.2 billion.

Compared to a year ago, sales were up 15% and equity earnings were up 33%.

Now, moving to the balance sheet, we ended the first quarter with about $2.9 billion in cash and short-term investments, down from $3.2 billion at the end of the fourth quarter.

The decline was primarily due to our decision to use $246 million in cash to retire long-term debt during the quarter as part of our clearer runway strategy.

As a result, you will note that our cash and excessive debt remained about $1.4 million.

Free cash flow was a negative $69 million in the first quarter.

This is fairly typical given the first quarter usually includes higher working capital outflows.

In addition, we made a contribution to our pension plan of approximately $100 million in the quarter.

Based on our internal forecast, we remain on track for free cash flow this year in excess of $400 million.

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

We have continued to receive questions from investors about our future plans for our cash.

Our Board of Directors will be meeting later this year to consider uses for this cash, which could include share repurchases and/or the reinstatement of a cash dividend.

Moving down the balance sheet, accounts receivable were $781 million at the end of the first quarter, up from $746 million at the end of the fourth quarter.

The increase is primarily due to higher sales in the month of March compared to the month of December.

As expected, our inventory increased during the quarter from $639 million to $685 million in Quarter One.

The most significant increase was in Telecom, as we continue to gear up for the stronger seasonal pull, Quarter Two and Quarter Three, and partially due to foreign exchange.

Display inventory also increased in preparation for a seasonally strong second half.

I would like to wrap up by providing you our guidance for the second quarter.

We expect sales to be between $1.4 billion and $1.45 billion and EPS excluding specials to be between $0.30 and $0.33.

We expect LCD glass volume to be up 8% to 12% sequentially in the second quarter for both our wholly owned business and SCP.

We believe that we begin to see the pull from the supply chain as the industry gears up for the second half.

As I mentioned a few minutes ago, some panel makers area growth guidance is higher than our glass guidance for the quarter.

The difference is yields, panelization, and timing of shipments.

As a reminder, as we've discussed in the past, panel shipments and glass shipment data do not always correlate in any given quarter.

As I mentioned earlier, our pricing strategy in the second quarter will be consistent with the first quarter for our wholly owned business.

And for SCP, we expect sequential price declines to be consistent with the wholly owned business.

We still anticipate the majority of our glass shipments to occur in the second half of the year.

As a result, we believe market demand for glass will strengthen significantly as the year progresses and glass supply will be tight.

As a result, our pricing strategy should allow us to minimize price declines, as we head into the seasonally stronger second half.

Moving on to Telecommunications segment, we anticipate second quarter sales to be up between 10% to 15% sequentially.

We anticipate growth in the fiber and cable to be towards the upper end of the range, while hardware and equipment will grow towards the lower end.

We anticipate our Environmental segment will grow about 5% sequentially, led by strong demand for diesel products.

This growth is expected to offset weaker demand for auto.

In Life Sciences, we expect sales to increase 5% sequentially.

And our Other segment sales are expected to be up 10% to 15% sequentially in the second quarter.

Moving down the income statement for your modeling purposes, gross margin for the Company should be between 45% and 47%.

SG&A is expected to be approximately 16% of sales.

R&D is expected to be around 10% of sales.

We anticipate equity earnings in the second quarter to be up about 5% compared to the first quarter, higher equity earnings at SCP will be offset by slightly lower earnings at Dow Corning.

As I mentioned earlier, Dow Corning benefited from a lower tax rate in Quarter One, that's not expected to continue into Quarter Two.

Absent this, Dow Corning's second quarter equity earnings should be fairly consistent with a strong first quarter.

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

Lastly, you should again use 1.6 billion shares for the second quarter when calculating EPS before special items.

One other comment on shares, as I've mentioned in the last eight conference 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 immediately after our quarterly earnings announcement.

I would like to comment on executive selling in general, our senior executives can have as much as 75% of 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.

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

If the yen to dollar rate were to average 5 points higher or lower in the second quarter, we estimate that our overall sales would be impacted by approximately $20 million and our NPAT by approximately $15 million.

This includes the projected impact of our currency hedging program.

Ken?

Thank you, Jim.

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

(OPERATOR INSTRUCTIONS) C.J.

Muse, Lehman Brothers.

Couple quick questions here.

I guess first off, given how tight it looks glass will be, particularly in the second half, I was hoping you could comment on your pricing strategy.

Would you expect a scenario where you could see flat pricing?

Or have you contracted with your customers where you've guaranteed at least some price declines throughout the year?

So we're taking pricing quarter by quarter.

As we said at the beginning of the year, we are implementing our new pricing strategy, and the results in the first quarter were very encouraging.

And we've given you the guidance for the second quarter.

You're right, glass should be tighter in the back half, and therefore pressure should be somewhat less.

But we're not at this time giving any guidance for the back half of the year on pricing.

Okay, and then in terms of your glass capacity that's coming online, can you help us better understand the quarterly ramp?

We're not giving out our capacity by quarter, but basically we'll be bringing on additional capacity every quarter as we go through the course of the year.

And last question for me, can you talk about the impact of growing fiber and the higher margins associated with that within the telecom silo, on your overall gross margins, how we should think about that through the year?

Well, fiber, not cable, but fiber itself has extraordinarily high incremental margins.

So to the degree that we can fill up Wilmington this year, that rate -- those sales with that high variable rate actually help the Corporation, because that incremental rate is above the Corporate average of 45%.

When Concord begins production, we indicated there's a certain amount of incremental fixed costs.

But basically, the variable rate will also be very high there on the production, which isn't going to start for six to nine months.

Very helpful.

Thank you.

Nikos Theodosopoulos, UBS.

I had a couple questions on the LCD business.

Your comment in the release -- or in the discussion, was that you thought the market would now grow 35% to 40% this year, and in the first quarter you didn't believe that you would lose share.

So just wanted to -- it sounds to me like you think Corning, your plan is not to lose share this year and you should show growth in that 35% to 40% range.

Is that a reasonable assumption at this point?

We never intend to lose share.

So we don't give our guidance for the year, but we're not entering in this market to lose share.

The time when we felt we had the most opportunity to be affected by share loss would have been in Quarter One and maybe a little in Quarter Two.

We don't think we really saw any share loss in Quarter One, aside from the fact that some glass did shift back to [Asai] when their tank came back up.

But we never regarded that as a share shift in the fourth quarter.

So we don't intend to lose share this year.

Okay.

And on LCD gross margin, you mentioned that it was down slightly in the quarter and it looks like in SAP results that it was also down.

Given the increasing volume that you now are going to show throughout the year and those sequential increases should accelerate for you to get the 35%, 40% volume growth and the pricing strategy that you have of 1% to 2% a quarter, isn't it reasonable that the margins on LCD should start, the gross margins should expand throughout the year if all this holds true?

Or are there other factors that would cause it not to expand other than the accelerating sequential volume and 1% to 2% price decline?

I think you have to think -- and we've always said that our cost reduction programs don't happen smoothly quarter by quarter.

So we don't -- we tend to think about our cost reduction over the course of the entire year.

We think we'll have a very good, robust cost reduction program again this year if our glass volumes are accurate.

As we said, we can never guarantee that it will hit this 14% that we've had over the last few years, but we think it will be very robust.

And depending on the mix of that relative to the price declines, will influence where our margins end up.

We're frankly delighted to have gross margins as high as they are.

And what we would really like to do is be able to sustain these margins with this high rate of growth for a long period of time.

And that's what we're trying to achieve.

Okay, great.

Thank you.

John Harmon, Needham & Company.

Just a couple questions.

I was wondering first of all, I know it's a ways out, but when Verizon transitions to GPON in its access network, does that offer any additional revenue or margin opportunities for you?

And the second question is, you talked about allocating some of the space at Concord to advanced materials.

Does that mean that you're -- is that coming from your (inaudible).

Let me take the second question first.

So what I said is that we're allocating some of the capacity at Wilmington actually, to the semiconductor business, and we will be making Telecom products at Concord.

So that the -- building on Jim's answer for the high purity fused silica, the newest generation of stepper systems use very high quality fused silica lensing systems.

And what we've done is we've introduced a product that builds on the incredible purity that we're capable of manufacturing of optical fiber to introduce an advantage product for that market, and it's growing well and we're very pleased with our progress on that product.

To GPON, we think that it will not have a positive impact for us.

Although it is primarily a change in the active system, it will significantly advantage fiber optic systems versus all other alternatives.

And we believe it offers opportunities for further cost reduction for our customers.

So overall, this is something we are very excited about and look forward to being introduced.

Thank you.

Curt Woodworth, JPMorgan.

If you look at the performance of SCP, you were down about 23% sequentially on income, yet volume was better than expected.

Can you just comment on gross margin performance out of that segment, maybe now how it compares to the wholly owned business?

So gross margins did decline at SCP sequentially versus Quarter Four.

That was driven primarily by the big pricedown within the quarter.

I mentioned that prices were down in the upper single-digits.

So you combine that with the price -- with the volume being down, that's what led to the gross margin being down a little bit.

It's still slightly higher than our wholly owned business.

Great.

And in terms of the inventories in the market being at pretty reasonable levels and your comments that the industry cannot support growth over 40%, and that's the high end of your guidance, what is the strategy you think you're going to employ, maybe the industry's going employ to handle that volume?

Do you plan on building safety stocks and are you hearing from your panel customers that maybe they are going to buy in more in 2Q as a hedge on that?

Well, just to clarify, the 40% I talked about was glass.

Right.

We believe the area shipments from panel makers would be greater than that.

Right.

But we are expecting that we would see our customers begin raising their utilizations in the second quarter.

We're very delighted that they didn't do what they did last year, which remember, they built inventory in the first quarter and then ended up having to take it out.

We think they are approaching the market on a very rational basis.

From our point of view, we did build some inventory in Quarter One and we will build some inventory in Quarter Two because we believe this satisfied demand in the back half of the year will have to sell some out of inventory, just as we did last year in the fourth quarter.

And one small add I would make to that, I think you're right to take a look at the dynamic for our customers and their customers, the set manufacturers, that there is always the potential when people get concerned about panel supply getting tight, that they could move around the timing of their purchases, and then you can get an outsize impact in any given quarter.

But so far we haven't seen that.

Great.

And one final question.

Last year around the August timeframe, you locked into pricing for the majority of the back half of the year.

Given the expectation for the market to tighten pretty dramatically in the back half of the year, are you trying to maybe lower the pricing timetable?

I know some guys like to go a quarter or more than that out.

I'm just curious what your thoughts are on that.

Remember, at the beginning of the year what we said at our investors meeting is that we're going do this new pricing strategy based on our deeper understanding of the seasonality of the market.

And that what we were going to try to do is chart our course and not over-react to seasonality and changes in the pipeline.

That's exactly what we're doing, and we're off to a good start.

And we would expect to continue that pricing strategy as we work our way through the year.

Great.

Thank you.

Steven Fox, Merrill Lynch.

Two questions.

First of all, on fiber, the restart of the Concord facility, what is the implications for pricing?

Do you anticipate a more benign pricing environment now for fiber?

Well, what we believe is that pricing pressure did moderate some last year.

However, we continue to face a downward movement in pricing in this business on a pretty continual basis.

So we would hope that everyone would recall the lessons of a few years ago.

But I think it's too early to tell whether or not there's any significant change in the pricing environment one way or the other.

We don't expect the addition of the Concord capacity to have any material impact on the relative pricing behavior in the marketplace.

Wendell, are you seeing any other competitors bring -- restart fiber capacity?

We haven't seen any significant moves above and beyond the utilization of the facilities that they had started.

Note that our view, though, inside what our competitors' utilization is and their capacity plans isn't incredibly accurate.

Okay.

And then lastly, on the LCD glass business, on Gen 8 glass, are you guys expecting one of your competitors to become an important second supplier during the course of the year?

And given your comments on tightness in glass in the second half, what does that mean for the ability -- the risk to Gen 8 supply of glass later on in the year, if they don't do that?

So we do believe that already there is another supplier of Gen 8 glass, and we would expect that to continue.

But we believe that we will be able to supply our customers' needs for Gen 8, although it is part of the overall larger situation of some relative tightness in glass supply in the back half.

Thank you.

Tim Daubenspeck, Pacific Crest Securities.

Just in terms of starting up the new fiber fab, you guys -- you've been fairly cautious in terms of approaching increasing volume.

Can you talk about the discussions you've had with some customers, whether there's any guarantees and the type of visibility you have around demand the next couple of years?

We don't have any guarantees.

I mean, we approach this with caution, as you indicated, because we wanted to start this when we had a higher degree of confidence that this would be consistently needed.

The breadth of demand that we see from our customers has led us to that, but there's no guarantee from our customers that this will -- that they will continue buying at this level.

Okay, and then we're not going to get capacity from the partial opening in the fab until '08, but can you comment at all about terms of trends in terms of cash margins within telecom, X-depreciation in maybe '07 versus '06?

The cash margins have been improving in this business.

So it's very good, but they have been improving.

Okay, thank you.

Daryl Armstrong, Citigroup.

A couple of questions.

First, on the LCD side, I think earlier in the year you said that you had about 50% of your annual glass capacity tied up.

Could you provide an update in terms of what that percentage is today?

And then second of all, on the fiber front, with the partial opening of the Corning facility, you said that the lead time would be six to nine months.

If you found that you needed incremental capacity from that facility, would the lead time still be that same interval, or would it be shorter?

Let me take the second question.

I'll let Jim handle the first one.

In terms of incremental capacity, we have the ability to respond to upticks in the market demand this year with Wilmington and some passing gear that we have there.

We're really bringing this on in anticipation of continued growth.

So I think we're going to be okay to be able to fulfill our customers' requirements from our total system of production.

Daryl, I don't have a current number on the amount of glass that's under contract.

I would be surprised if it had changed materially, though.

And then one last question.

In terms of your pricing strategy and the success that you seem to be seeing there, do you think it's a function of competitors also understanding the same type of supply/demand situation in the industry and not trying to undercut you?

Or are you finding that customers are just so concerned about tightness in supply, that they are just simply trying to lock up glass anywhere they can?

I can't really comment on the mindset of our competitors.

I don't know why they are choosing to do what they are choosing to do.

What I would comment on is that as we laid out this new pricing strategy and how seasonality would impact it and how we would chart our course through the year, that we're very encouraged by the start, and that reality is playing out as we had hoped that it would.

Thank you very much.

Andrew Abrams, Avian Securities.

I wonder if we could just talk for a minute about the pricing strategy.

Maybe you could comment a little bit on the total number of customers that are really working off this strategy, and is SCP part of that program, number one?

And maybe a comment on what this does to correlation between panel pricing and glass pricing, or your pricing, given the new circumstances that we're working under right now.

So in our wholly owned business, every customer is under the new strategy, with the exception of we have a few customers that had contracts that had a price built into them.

But essentially, we're approaching this with all of our customers this way in the wholly owned business.

And SCP going forward will be operating to the same strategy.

And do you think it's going to change the correlation at all between panel pricing and glass pricing?

We've never really seen any real correlation between the two.

Panel prices have come down far greater than glass prices over a period of time.

That's partially because glass has been the enabler in a lot of cases for the cost reduction that our customers have had, which has allowed them to reduce their prices.

So I mean obviously, glass is a significant cost component to our customers' bill of materials.

In many cases it would be 15% for a large television.

But our customers know that we are going to reduce our prices over time, and that's a commitment.

It's just at a lower rate than it was last year.

Just lastly, on the swing factor for you guys with the new policy, we -- if you guys are in a 1% or 2% change position for a given quarter, would you come out slightly ahead of where you would normally be, given last year's policy versus this year's policy?

Or is there no appreciable change in a small glass price change environment like that?

I'm sorry.

I don't follow your question.

A change in what?

If there's only a small change in glass pricing over a period of time, meaning a quarter, how would it affect you differently this year than it would have affected you last year?

Well, last year prices were coming down in Qs 2, 3 and 4 about between 4% and 5% every quarter.

So clearly, that's a benefit to us.

And then the other question will be how are our costs doing relative to that.

If we're running full, we should be doing quite well.

Thank you.

Jeff Evanson, Sanford Bernstein.

Couple questions on equity earnings.

First, I was wondering if you could give us an update on polysilicon and in particular, what that's contributing to the 15% year-over-year Dow Corning growth rate?

And second, a question on Samsung Corning, that this quarter looks like it contributed about $28 million to your equity earnings, which you identified as nonrecurring.

As I looked through their products, they are doing a number of new things, including back lights for LCDs.

And I'm just wondering what your thinking is on making all of this nonrecurring?

No, that's not -- a $28 million nonrecurring was last quarter, not this quarter.

Ah, okay.

Thanks, Jim.

-- Samsung Corning.

And back lights are not helping at all.

Regarding Hemlock, on a year-over-year basis they were quite strong because of the comparison of both pricing and volume when compared Quarter One a year ago.

and Hemlock was about 18% of revenue of the Company in the first quarter.

But there really, unfortunately, isn't a lot more capacity coming on at Hemlock right now.

There is year-over-year because they brought on some in the middle of last year, but right now there's not much more coming on.

A lot of it comes on next year.

But Hemlock was a big contributor to year-over-year improvement.

I will say though, that the other part of the business, what we call the silicons part of the business, had very strong year-over-year performance also.

So Dow Corning had a great quarter in both poly and regular silicon.

Thanks.

Lisa, we have time for one more question.

Ajit Pai, Thomas Weisel Partners.

Good morning, and congratulations on a very solid quarter.

Thank you.

Just regarding your fiber business right now, I know that you are planning to bring Concord on, and you've talked about some of the growth rates there.

But in terms of industry structure right now and the pricing environment over there, can you give us some color as what you currently expect the industry capacity -- utilization to be, and whether your competitors I think had a significant cost advantage over there, whether their costs have come closer to yours, and what you'd expect with pricing going forward?

So as far as the overall industry demand and supply balance, if you were to count in that portion of the capacity that is moth balled, we still think there is significantly more capacity, or potential capacity in the industry than demand for fiber.

We have said before we think it's approximately twice as much, and we think that that ratio has not been changing significantly.

We continue to feel very good about our cost position.

But this is going to be an industry that will always be highly competitive and that we need to continually drop our costs to meet our customers' pricing requirements.

Right, and what do you think the impact from the pricing point of view will be?

I think about three years ago when you talked about your costs relative to their costs, you had mentioned that if they were at their marginal cost, you would still have sort of a 200 points advantage.

Where do you see that right now?

I would have to refresh my knowledge on that item.

It's coming up for me in the middle of the year.

We're going to take another look at that in depth.

And if you ask us that a little bit later, we should be able to answer that question for you with greater accuracy, sir.

Okay.

Thank you so much.

Couple of closing comments, including some Investor Relations announcements.

Tomorrow is our annual shareholder meeting in Corning, New York.

If you're in the area and plan on attending, we look forward to seeing you here.

Corning executives will be appearing at many investment events over the next few weeks.

On May 1st, Pete Volanakis and I will be attending the Merrill Lynch Technology Conference in New York City.

On May 16th, Wendell Weeks and I will be at the Deutsche Bank Technology Conference in San Francisco.

Wendell will also be speaking on May 21st at the JPMorgan Technology Conference in Boston, and at the Bernstein Strategy Decision Conference in New York City on May 31st.

Lastly, Kate Asbeck, Senior VP of Finance, will speak at the Lehman Wireless, Wire Line and Media Conference in New York City on June 1st.

We hope to see you at one of these conferences.

Regarding the first quarter, we hope you were as pleased with our performance as we were.

We believe our Quarter One results were an excellent start to the year.

And based on our second quarter guidance, we see this growth trend continuing.

We expect the display industry to begin preparing for the seasonally strong second half, driving our volume up.

Pricing strategy implemented in the first quarter worked exactly as we had planned and we will continue the strategy in the second quarter.

The long awaited industry demand for heavy duty diesel products is finally here.

We're looking forward to revenue growth and margin improvements in this business, and we're anticipating our heavy duty diesel business to reach profitability by the end of the year.

In Telecom we experienced strong growth in the first quarter and we anticipate this trend to continue into the second quarter.

We're quite pleased with the increased level of telecom activity around the world.

Obviously, we need to see this order trend continue into the second half.

Switching gears, we would like to end this conference call by saying thanks to Jamie Houghton.

As many of you know, Jamie will be stepping down as Chairman at our annual shareholder meeting tomorrow in Corning, New York.

Jamie will remain on the Board for one more year.

Jamie's been involved with Corning for over 40 years and helped guide the -- Corning out of its most difficult time back in 2002.

I know many of you had a chance to meet Jamie during his first time as Chairman from '83 to '96, or during his second run starting in 2002.

On behalf of the employees of Corning, we want to thank him for his leadership and wish him continued health and success in his second retirement from Corning.

Ken?

Thank you, Jim.

Thank you, Wendell.

Thank you all for joining us today.

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

Eastern time this morning, will run until 5:00 p.m.

Eastern time on May 9th.

To listen, dial 402-998-1237.

No password is required.

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

Lisa, that concludes our call.

Please disconnect all lines.

Thank you.

This concludes today's teleconference.

Thank you for your participation.

Have a great day.