康寧 (GLW) 2007 Q3 法說會逐字稿

Good morning and welcome to the third quarter earnings conference call.

All participants will be in a listen-only mode.

Today's conference is being recorded.

If anyone has any objections, you may disconnect at this time.

I would now like to introduce your host for today's conference call, Mr.

Ken Sofio, Division Vice President of Investor Relations.

Sir, you may begin.

Thank you.

Good morning, everyone.

It's Corning's third quarter conference call.

The call is being audiocast on our website.

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

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

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

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

Jim?

Thanks, Ken.

Good morning, everyone.

This morning, we released our results for the third quarter, which can be found on our investor relations website.

In addition for those of you with web access, we have posted several slides 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 third quarter results were excellent.

Let me share with you some of the key data points and then we can get into the details.

We hit all-time records in the third quarter for gross margin percent, net income, earnings per share before special items.

Sequential volume growth and display was strong in both our wholly owned business and at SCP.

Panel inventory levels and display supply chain appear to be healthy heading into the fourth quarter.

Retail and market trends for LCD television look strong both worldwide and in the United States.

We currently see no evidence of credit concerns impacting consumers' decisions to purchase LCD televisions in the United States.

Our telecommunications business rebounded in the third quarter posting 10% growth excluding the divested of cabling business in quarter two.

Now let me go to the details starting with our income statement.

Our second quarter sales were $1.55 billion, an increase of 10% over the second quarter and an increase of 21% over the third quarter a year ago.

Our EPS, both GAAP and non-GAAP was $0.38 and exceeded the top end of our guidance range by $0.01.

Net income, excluding special items was $619 million, an increase of 13% versus the second quarter.

In comparison to the third quarter 2006, net income excluding special items was up $168 million or 37%.

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

The reconciliation to GAAP can be found on our website.

Our third quarter sales benefited from $12 million from the strengthening of the yen to U.S.

dollar exchange rate in comparison to the second quarter.

Continuing down the income statement, gross margin on the third quarter was 47.8% and an all-time record for Corning.

SG&A was only 14% of sales.

We are delivering on our commitment to gain operating leverage and keep our SG&A spending growth at less than half the rate of sales.

RD&E in the third quarter was $145 million or 9% of sales.

Equity earnings were $239 million in the third quarter compared to $220 million in the second quarter.

The increase was primarily due to higher than expected earnings for Samsung Corning Precision.

Third quarter equity earnings included an impairment in restructuring charge at Samsung Corning CRT of $18 million.

Due to the size of the charge it was treated as a special item this quarter.

Investors will recall that we had $10 million of charges in quarter two at Samsung Corning CRT which we did not take as a special.

Our tax rate in the third quart was 15% including a $15 million nonrecurring tax charge.

Wrapping up our income statement, our share count for the third quarter was 1.6 billion shares.

We had two special items in quarter three.

The first was the impairment charge at Samsung Corning CRT that I mentioned a moment ago.

Second was a pretax and after-tax gain of $16 million.

Primarily reflecting the decrease in market value of Corning common stock to be contributed to settle the asbestos litigation to Pittsburgh Corning.

The Corning share price decreased during the quarter from 25.55 to 24.65.

The gain and loss essentially offset each other.

Our GAAP EPS this quarter was also $0.38 per share.

Now let's turn to the segment results.

I'll start with display, which had an outstanding quarter.

Third quarter sales were $705 million and 16% higher than last quarter.

Volume was up 15% sequentially and at the upper end of our guidance range.

Price declines were in line with our strategy.

It should come as no surprise that we will continue this pricing approach in the fourth quarter.

Segment sales also benefited slightly from the strength in the end during the quarter.

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 our pricing.

Gross margin percent per display segment remain consistent with the previous quarter.

Equity earnings from SCP were $160 million in the third quarter, an increase of 21% versus the $132 million last quarter.

SCP's sequential volume increased 14% in the third quarter which is higher than we anticipated.

As expected, price declines at SCP in the third quarter were in line with our wholly owned business.

For modeling purposes, SCPs third quarter sales were $635 million compared to $574 million in the second quarter.

SCPs gross margin increased slightly on strong manufacturing performance.

Net income in the display segment which includes equity earnings was $540 million in the third quarter, an increase of 11% compared to the second quarter net income of $486 million.

This increase is primarily the result of volume growth.

As a reminder, Q2 had benefited from a one-time tax benefit of $17 million in the display segment.

In comparison to the third quarter of last year, sales on our display segment increased 39% as volume gains of 57% were partially offset by price declines and unfavorable foreign exchange rate movements year-over-year.

Segment net income grew 37% year-over-year.

For the three quarters to date this year, glass volume at our wholly owned business is up 42% compared to last year.

SCP's year-to-date volume is up 39%.

So our glass demand continues to be strong.

Moving to the supply chain, we believe panel inventories are in great shape heading into the fourth quarter.

Panelmakers experienced record shipments in September which has led to lower inventories at many of them.

On the retail side, our preliminary data suggests the end market demand remains strong.

In fact, our third quarter research indicates end market demand for IT and television was stronger than our previous forecast.

As always, I would like to stress that our third quarter market 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 television set makers to retailers.

Starting with notebooks, about 27 million were shipped in the third quarter, higher than our expectations and a 12% increase versus the second quarter.

As a percentage of computers sold, notebooks jumped from 43% to 46% in the third quarter.

For LCD monitors, about 43 million were shipped in the third quarter also higher than our expectations and the second quarter.

We believe the penetration of LCD monitors increased to 89%.

Moving to LCD television, about 19 million units were shipped compared to 16 million in the second quarter.

This was also higher than we expected.

Penetration of LCD television into the worldwide color television market grew from 36% in the second quarter to 38% in the third quarter.

We're obviously extremely pleased with the overall end market demand heading into the fourth quarter.

Regarding U.S.

consumers we continue to see no evidence that credit concerns are decreasing their appetite for LCD televisions.

Consumers continue to purchase LCD TVs and electronic retailers continue to offer financing incentives.

In fact, two of the big box electronic retailers publicly stated they do not plan on eliminating those incentives.

Moving on to an update on our total family glass mix, the mix of gen five and higher in the third quarter was 88% and consistent with the second quarter.

Mix of gen 5.5, 6, 7, and 8 glass was 55% in the third quarter and slightly higher than the second quarter.

I'll wrap-up display by commenting on EAGLE XG, our conversion to one glass composition is proceeding nicely.

At the end of the third quarter, EAGLE XG represented over 90% of our glass sales.

We are well on track to convert close to 100% of our glass to EAGLE XG by the end of the year.

SCP has begun ramping up EAGLE XG this year and is currently over 40% of their sales.

Now, moving to the environmental segment, sales in the third quarter were $198 million, an increase of 4% over second quarter sales of $191.

We were anticipating sales to sales to be flat sequentially.

We did not experience the typical August slowdown in auto as U.S.

manufacturers may have purchased additional product in anticipation of Union strikes.

Auto product sales were $126 million in the third quarter compared to $128 million in the second quarter.

Diesel product sales were $72 million in the third quarter, an increase of 14% over the second quarter sales of $63 million.

Segment net income was $14 million in the third quarter consistent with the second quarter.

In comparison to a year ago, environmental segment sales increased 29% driven by higher auto and diesel volume.

Auto sales were up 13% year-over-year while diesels was up 76%.

In the Life Sciences segment, sales in the third quarter was $78 million and consistent with the second quarter.

Segment net income was $1 million in the third quarter and consistent with the second quarter.

Moving to the telecommunications segment, sales in the third quarter were $472 million and 8% higher than second quarter sales of $438 million.

Excluding the $9 million in Q2 sales related to our divested submarine cable business, telecom sales increased 10% as we had expected.

Experience growth throughout the segment this quarter including increased demand for fiber to the premise products and private network projects.

Sales of hardware and equipment products were $235 million in the third quarter, an increase of 7% over second quarter sales of $219 million.

Sales in our fiber cable products in the third quarter were $237 million, an increase of 8% over the second quarter sales of $219 million.

Fiber to the premise sales which are primarily hardwood and equipment related were $83 million in the third quarter compared to $73 million in the second quarter.

Included in these sales were products shipped to our new fiber to the premise customer in Europe.

Net income in the telecom segment was $27 million in the third quarter compared to $40 million in the second quarter.

However, as a reminder, the second quarter included $19 million in one-time gain in our sale of the submarine cable business.

So excluding that gain, telecom net income increased nicely during the quarter on higher sales volume.

I hope investors were able to make it to the fiber to the home conference last month to see the demonstration of Clear Curve, our new ultrabendable fiber technology.

We're in the process of discussing the new technology with several potential customers and the feedback so far has been excellent.

In addition, Verizon is clearly -- is currently using Clear Curve in a broad test trial in New York City which has one of the nation's highest concentrations of MDUs.

We are very excited about working with Verizon on this trial and helping them connect with a significant customer base.

I know many investors are interested in understanding more of this technology and the market opportunity.

For those of you who missed the demonstration last month, a video of it will be found on our IR website in the near future.

Regarding the market opportunity, I'd like to ask for your patience as we finalize the pricing premium and other discussions with potential customers both within the telecom industry and outside the telecom industry.

Once we have a good handle on the market size, we will share that information with you.

I anticipate that we will provide a more comprehensive review of this market at our annual investor meeting in February.

Moving on to our other segment, sales in the quarter of $100 million were basically flat with the second quarter.

This was lower than we anticipated due primarily to weaker demand.

Turning to Dow Corning, equity earnings were $81 million compared to $88 million in the second quarter.

Third quarter results included a one time tax charge of $4 million related to revaluing UK deferred tax assets.

Moving to our balance sheet, we ended the third quarter with about $3.3 billion in cash and short-term investments up from $3.2 billion at the end of the second quarter.

Free cash flow was $272 million in the third quarter.

Year to date we generated $460 million in free cash flow.

As shareholders, I hope you all received the dividend check we mailed last month or noticed the electronic deposit.

In total we distributed about $80 million in dividends to our shareholders.

The Board recently approved another $0.05 per share dividend for the fourth quarter payable in December.

In addition, we repurchased approximately 5 million shares of stock for $125 million in cash in quarter three.

I'd like to wrap up by providing our guidance for the fourth quarter and some commentary about 2008 starting with display.

We expect the glass market to remain robust in the fourth quarter.

As panelmakers continue to run at peak utilizations, we think market demand will be consistent in comparison to the third quarter.

To meet market demand, volumes at our wholly owned business and SEP will be up 2 to 5% sequentially.

To meet this level of demand, we anticipate our operations will need to run at full capacity.

Our quarter four volume guidance is consistent with quarter four panel shipment guidance provided by some of the larger panel makers including LPL, Samsung, and AUO.

More importantly, the retail environment continues to look healthy, especially for a LCD televisions.

We're anticipating very robust sales of these television sales in the fourth quarter.

We believe LCD TV shipments will increase over 35% from 19 million units in the third quarter to 26 million units in the fourth quarter.

Fourth quarter shipments this year will be more than 50% higher than last year when just 17 million were shipped.

Regarding fourth quarter glass pricing, our approach will be consistent with previous quarters.

More importantly, glass prices in the fourth quarter this year compared to last year will be just 8% lower.

This is a significant change in comparison to last year when glass pricing fell 20% quarter four, 2005 to quarter our, 2006.

We're obviously very pleased with how our glass pricing approach worked this year.

Looking forward to 2008, we're anticipating another year's significant volume growth in the glass industry.

We believe the market will grow at least 400 million square feet to similar the amount of glass the industry added this year.

Regarding glass supply and demand our initial view is the glass market will again be relatively tight.

This is based on our view of the end market demand in glass supply.

Our glass supply assumptions are based on our capacity plans of 2008 since we and SCP represent over half the glass market, as well as the public announcements made by our major competitors.

We'll provide a more detailed update to our 2008 assumptions during our annual investor meeting which is scheduled for Friday, February 8.

Moving on to the telecommunications segment, we anticipate fourth quarter sales to be down about 10% sequentially.

Decline is a reflection of the typical seasonality that impacts the telecom industry in the fourth quarter.

We're extremely pleased with the performance of our telecom segment this year.

We are on track to grow sales by 10% excluding the impact of the divestitures of our Japanese business into a joint venture in early 2006 and the sale of our submarine cable business in quarter two 2007.

We are delighted with the 10% sales growth and the declining price industry.

Including our fourth quarter expectation, segment net income this year will be well over 70 million, excluding the 19 million in special gains in the second quarter.

This is an increase of more than 35% over last year's net income ex specials.

We anticipate our environmental segment sales will be down about 10% sequentially, reflecting the typical seasonal decline in auto sales towards the end of the year.

In addition, diesel sales will be lower, a result of lower engine production in the quarter.

Investors should note the environmental sales will be up over 20% this year driven primarily by diesel sales increasing 55%.

More importantly, segment net income will increase from just 7 million last year to over 40 million this year.

In our Life Sciences segment, we expect sales to decline slightly as market demand is seasonally weaker in quarter four.

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

This will all result in fourth quarter sales in the range of 1.5 billion to 1.55 billion.

Moving down the income statement for your modeling purposes, gross margin for the Company should be between 47 and 48% in the fourth quarter.

SG&A is expected to be approximately 15 to 16% of sales and RD&E is expected to be around 10% of sales in the fourth quarter.

As a reminder, SG&A for Corning is typically higher in the fourth quarter.

We anticipate equity earnings in the fourth quarter to be consistent with the third quarter excluding the $18 million impairment charges in Samsung Corning.

Equity earnings for both SCP and Dow Corning will be consistent in with quarter three.

Our tax rate for the fourth quarter is expected to be about 12%.

Our fourth quarter EPS before any special items is expected to be between $0.36 and $0.38 per share.

For the year, EPS before special items will be between $1.36 and $1.38 per share and more than 20% higher than last year.

Lastly, for your modeling purposes, you should again use 1.6 billion shares for the fourth quarter recalculating EPS before special items.

One note on the impact of foreign exchange rates on our guidance, our fourth quarter guidance is based on the yen to U.S.

dollar rate of 160.

If the yen to dollar rate were to average 2 points higher or lower in the fourth quarter, we estimate our overall sales in net income after tax would be impacted by about 10 million.

This includes the projected impact of our currency hedging program.

Investors should note that we translate our display results each day so the yen would have to make a drastic move beginning of the quarter and remain there for the remainder of the quarter to have a material impact on our results compared to our guidance.

Investors should also remember that the yen averaged 118 in quarter three.

So if the yen does average 116 in Q4, our display sales would benefit by about 15 million.

Before we go to questions and answers, I'd like to take a step back from the day to day volatility that we all feel in the display industry and adjust some macro issues.

Display is obviously very important to Corning.

Sales of our wholly owned business and SCP will approach $5 billion for the year.

So we get why investors are so sensitive to every story about the business.

It is important to pay attention to big trends.

First, the end market trends remain very favorable.

The IT applications of LCD remain robust as notebooks continue to grow significantly and wide screen monitors move into favor.

LCD is proving to be the technology of choice for entertainment television.

Sales of LCD television unit have gone from 10 million in 2004 to 75 million this year.

LCD televisions in units should outsell CRTs in 2008 and are overtaking plasma and large sizes.

In 2007 for the first time, more LCD television units will be sold than plasma in the 40 inch plus sizes.

In 2008, we expect LCD TVs will most likely sell double the number of plasma units in the 40 inches and above space.

Second, Corning has maintained its leadership versus competitors.

We continue to bring larger sizes and new compositions to the market that benefit our customers.

We continue to be a very reliable supplier, bringing quality products and meeting our commitments.

We have also reduced our prices on a consistent basis.

Third, our pricing approach has worked in 2007 and we feel it will work again in 2008.

We are already discussing pricing with our customers for 2008.

Fourth, we're maintaining our high margins through a combination of our pricing approach and our manufacturing strategy.

Fifth, this is a relatively young industry.

The supply chain is continuing to evolve.

This has led to ever changing patterns of utilization quarter to quarter as the industry deals with seasonality, inventory issues, technology substitutions, et cetera.

Pattern of glass shipments in the panelmakers has been different in 2005, 2006, and 2007.

The different cycle in 2007, by that, I mean the earlier ramp in Q2 and moving to expected Q4 levels in Q3 and now holding them is fine.

And healthy as long as no excess inventory appears.

We do not see any evidence of any inventory issues today.

We have seen a slightly different pattern of sequential percentages than we and you originally expected but the end result's turning out great.

We also expect a cycle in 2008 may be different as television moves to over 50% of the glass consumed.

So in summary, the end market is growing.

It's on track to our estimates.

Our pricing approach is working.

Our manufacturing strategy is helping our margins.

We are not losing ground to competitors.

And the total year-over-year numbers are strong even though the quarters did not always come out as we and you originally forecasted.

Ken?

Thank you, Jim.

We're ready to take some questions now.

Thank you.

(OPERATOR INSTRUCTIONS) Our fist question comes from Mark Sue from RBS (sic) Capital Markets.

Any thoughts on the customer feedback on your pricing strategy?

Are customers starting to look aggressively elsewhere because of what you did in '07 and does digging your heels in further potentially foretell a big downtime for revenues or do you think it's just a matter of grudging acceptance?

Actually, we have been positively surprised as the year has gone on with our customers' acceptance of our pricing strategy.

Actually, there was recently an article in Taiwan news from a top customer in Taiwan basically along those lines that pointed out that they viewed us as absolutely the leading supplier, most reliable, and that we have been behaving very responsibly over a long period of time.

So in general, I would characterize our customer relations at this time as being very positive, more positive than they were earlier in the year and probably more positive than they were at the end of last year.

Separately I think that you're painting a very positive picture of demand and market share and inventories.

I think people were expecting a little bit more for the December quarter guidance.

If you could explain to us the delta, that would be helpful.

I'll be happy to discuss that.

I just want to amplify Wendell's comment on the pricing with our customers.

I think the acceptance of our pricing strategy and how it's working for our customers with the consistent down pricing and small levels can be reflected also in the fact that we've moved far earlier to be discussing pricing for 2008 with many customers than we had before.

Those discussions are going quite well.

Relative to the quarter four sequential guidance, I think that many investors were overlooking the fact that the industry had ramped up earlier in quarter two than what we had and they had expected.

And that in quarter three had moved to near peak utilizations.

Frankly, there isn't that much room to go in terms of panelmakers in quarter four.

Many cases panelmakers are running over 95% utilization.

There's not a lot of room to grow and we think maybe some analyst expectations for additional glass growth in quarter four were not reflecting appropriately the fact how much the industry had moved up starting quarter two.

As I said in my commentary, frankly in quarter three, we got to where I think many people thought that we would be in quarter four, and there isn't much room to move up.

So I think that's the primary difference rather than the fact that the industry should be looking for more.

That's helpful.

Thank you.

Good luck, gentlemen.

Thank you.

Our next question comes from Nikos Theodosopoulos.

Can you hear me?

Yes, we can.

I had a couple questions on the LCD.

Can you elaborate a little bit.

In this quarter the SCP gross margin went up, the consolidated one did not.

They both grew trouble digits sequentially.

Can you explain why the consolidated gross margin also wouldn't have benefited?

And as you look out to next quarter given that you'll be running at full capacity in the fourth quarter and with a modest sequential uptick in volumes, wouldn't we expect to see gross margin in the LCD business improve for both consolidated and SCP given you're running at full capacity?

Thank you.

I think at SCP, you may recall that we had slipped done a little bit and they had an excellent manufacturing quarter.

So I think that's the primary reason they improved.

I think that, we've often told investors that our cost reduction are not perfectly smooth quarter to quarter.

So when we look at the total years we'll talk about in February, I think you'll see a very robust cost reduction program again for a wholly owned business and the fact that it will be greater than our pricing and margins will be up slightly for the year.

Relative to quarter four, I'm not looking for anything substantially different in gross margins.

We think we'll be able to maintain our very robust levels.

Just one other.

Give that in the fourth quarter you'll be running at full capacity and you've given some initial forecast next year for about 25% industry growth, the panelmakers keep talking about continued shortage of next year.

What's your strategy going into next year in terms of adding additional volume?

Are you going to add based on the market growth of 25% or would you add different numbers based on perhaps a desire to gain some share next year or not?

Could you talk about how you approach the capacity additions for next year?

So over the long term, what we continue to do is follow our strategy of adding capacity based upon our view of the end market growth.

And we've done that consistently and we will continue to do that consistently.

Right now, in our dialog with our customers it once again looks pretty tight for 2008, and we'll do our best to fulfill our customers' requirements of us, but our capacity planning is always based on our view of the end market.

Okay.

Thank.

Thank you.

Our next question comes from Steven Fox from Merrill Lynch.

Good morning.

Just going back over the margins for a second on the display business or just as a whole, it seems like as you add capacity during the course of the next several quarters you'll be running fairly tight.

Would those additional unit volumes result in any incremental margin or should we be thinking about margins from display and the SCP as sort of maintaining at thee very good levels for the next year or so?

The incremental units that we add, because they're so modular really don't have the same leveraging effect that you normally think about in the way of fixed cost because they are relatively small increments to add to fixed costs and the volume at the same time.

So you don't see that effect.

Really, you do see some improvement when we get incremental capacity from running our existing units better.

That's what's led to our cost reduction to offset price reductions.

Frankly, as we have talked about in the past, our goal is to maintain these very high gross margin percents.

We have, year in, year out and that's what we're hoping to do again as we head into next year.

Great.

Then just one question moving on generation 10 technology.

Do you guys anticipate that you'll maintain the typical one-year lead over your competition as you move to the next generation?

It's hard to comment on exactly where our competition is.

I think the most important news on gen 10 is that we were invited by Sharp to co-locate with their new and what will be the first manufacturing of gen 10 panels in the world.

So I think that action by Sharp speaks for itself, and I really can't add much to it.

Thanks.

Thank you.

Our next question comes from C.J.

Muse from Lehman Brothers.

Good morning.

Thank you for taking my call.

A couple quick questions on my end.

I guess first off, now that you have visibility to your glass volumes through year end and considering the new pricing strategy that you adopted at the beginning of the year, can you comment on what impact you see that having on your market share?

So we don't see any real, in the quarter any sort of significant movement in market share one way or the other.

Our current view of the end market, as you heard from Jim is that it's relatively flattish quarter three to quarter four.

We see our volume guidance up 2 to 5%.

Numerically, you could calculate, yes, it looks look a share gain but frankly you're going against 400 million square feet of a glass market in quarter four and single digit millions moving one way or the other is just sort of lost in the noise.

I think you have to step back overall and say what are we trying to accomplish this year in display.

What we tried to do is do a new pricing strategy that would significantly moderate the decline of prices while overall maintaining our position in the market.

As we said at the beginning of the year, the place that we anticipated to lose a little share would be in Korea with LPL mainly because of LG's long-term concerns with dealing with a Samsung affiliate.

So other than that, our pricing strategy and market share strategy has really stayed very consistent.

Then I guess secondly, given the time lag in terms of dividends off of past earnings from your equity affiliate, Jim, can you comment on your thoughts around free cash flow for 2008 and what your plans are on that front?

Well, we'll be reviewing the ability of our equity companies to pay dividends as we get towards the end of the year.

We're expecting very strong dividends from both SCP and Dow Corning again next year.

We haven't set them at this point in time.

SCP is going to be expanding next year significantly, but we believe they will be able to pay a substantial dividend and will be evaluating at Dow Corning.

I think for the Corporation's free cash flow, I think most important dynamic going into that will be of the pace of the gen 10 investment in Japan should we reach final agreement with Sharp.

That will have a pretty big influence on our capital.

We'll give you some guidance on that as we get to the end of the year.

I guess a follow-up there, Jim.

On the OpEx side, great cost control there in Q3 down to 23%, well below what you had guided.

But then you are guiding up again in Q4.

I guess there's some end of year expenses there.

When you look to 2008 do you see kind of a shift here where 23, 24% is kind of the right range for OpEx?

Well, we do have some more year end expenses.

There are some things that occur naturally in quarter four for us.

We've always gone up a little.

Relative to 2008, we're not changing from our strategy -- I'd like to separate OpEx into two components, but in terms of SG&A, the kind of goal that we've been talking about the last few years which is have our SG&A increases be less than half our rate of sales is something that the management team is committed to do again in 2008 so that should help.

The RD&E number I think will be very dependant on the success of our development with a number of things and whether we can move some of our big projects to the next stage.

If they do that might increase spending a little bit more, but I think that would be good news overall.

We'll try to give you more guidance on then.

Leverage-wise, you should see some plus.

The only thing that could move it up would be if RD&E moves up and that's going to be a long term good thing.

Last two quick questions from me.

First, do you expect another charge for Samsung Corning Company Ltd.

in Q.4?

And then secondly, for the other revenues that you guided up 10 to 15%, is that principally on the semiconductor optical lenses seeing some strength?

Latter question is yes.

On the semiconductor area.

And on Samsung Corning CRT, we could have a charge in quarter four and possibly quarter one but we are coming to the end of our sequences of charges with that.

Very helpful.

Thank you.

Thank you.

Your next question comes from Brant Thompson from Goldman Sachs.

I've got two question.

The first just going back to the margins in the glass business.

So if you're able to hold utilization rates extremely high and pricing relatively stable, are you hitting the point where the ability just to bring cost out of the business as changed?

So therefore you're maintaining margins as opposed to seeing greater margin expansion in the total consolidated business?

Is it more of a cost issue?

Thanks.

Our goal has been to have our cost reduction program match or exceed if we can, price reductions and we didn't have a goal of trying to move our margins up.

Our goal is long term to have a robust rate of cost reduction and have it at least offset our pricing.

It's possible in a given year that it might be a little bit more and therefore allow margins to move up.

You should not focus too much on any one quarter because cost reductions in a given quarter and also when we bring on new capacity the onslaught of depreciation as an example, can influence a given quarter.

But we have not seen a lessening in our list of projects to continue to reduce cost.

Then any comments with regard to an outlook for Dow Corning as we look into 2008?

How should we be thinking about how that might trend?

I don't have any comments today on it.

We're actually about to review their plan for next year in the next few days.

They clearly are influenced by the global economy.

Silicone, aside from polysilicone do tend to move with the economy so we'll have to see how that's going around the world.

And polysilicone there will be some additional capacity next year.

As we get to our January announcement we'll tell you when that's likely to show up within the cycle next year.

Thank you.

Thank you.

Your next question comes from Jeff Evanson from Sanford Bernstein.

In previous calls you had mentioned some changes in utilization of class both because of tiling yield and because of just better manufacturing techniques.

I'm wondering if you could give us an update on how those are progressing?

The gap between the area that the panel manufacturers ship to customers and the glass that you need to ship to them to make that happen and how we might think about that gap changing next year?

So we don't have any really new update on panelization or yields.

Everything that we're seeing was consistent with our last update to you, Jeff.

What we see from panelmakers is, if you take a look at the quarter four sequential guidance from let's say LPL, SCC, and AUO is area growth sort of in the mid-single digits from LPL, SCC said shipment unit growth of a couple of percent.

AUO., large panel shipment's flat.

TV shipment's up low teens.

So it's pretty consistent with what we're talking about with overall glass market, and you know, I don't think there's much to be mined in the near term around the panelization and yield factor.

We will do our natural update of those and get back to you as soon as we know something new.

I'd just like to comment one other thing about looking at the shipments from panelmakers.

Just that assembly and versus our own numbers.

People have to remember that there are inventories that exist at our panelmakers both inventories of glass and inventories of their own finished panels.

So particularly when there's a quarter where there's a relatively low percent for us and for them, that can have a bigger impact than it has in some quarters and when the growth rate is in their teens.

Thanks.

Thank you.

Our next question comes from John Roberts from Buckingham Research Group.

Good morning, guys.

Given that the increase in size is a strong driver of square inch growth, could you update us on where you think the average size LCD is now or will be a year from now relative to a year ago some.

I think we're looking at televisions to end the year a little over 31.

There were 28 last year.

I don't have a new number for next year, but we do expect to grow again next year.

Unless we're very surprised on large size, the rate of growth of inches per year will be less next year than it was this year.

28 to 31 is about a 25% increase in surface area?

I don't have the numbers on the top of my head like that, but we'll let you figure that out.

We are looking forward to grow next year.

I think one of the things we're very interested to see, we do learn things what's happening in retail is to see what's happening with 40 inch and 50 inch LCD televisions this holiday period.

For the first time, we'll expect to see 50 inch LCDs with full 1080 go head to head with plasma having full 1080 and the price points for LCD will be very competitive.

If that does well, that will have a big influence on the average side.

Then secondly, I thought the 10% earnings growth at Dow Corning was relatively modest given high oil prices I think sometimes drive substitutions toward silicones and adhesives and fluids.

I think semiconductor and solar were pretty robust during the quarter.

So could you comment, I know 10% is pretty good growth but I thought it might have been higher.

If you're looking at year-over-year?

That's right.

Third quarter versus third quarter a year ago.

Third quarter, we really haven't brought much capacity on Hemlock year-over-year.

You may recall last year we had growth in Hemlock but mostly , it occurred last year but since the second half last year we haven't added very much so you're not seeing the same impact there.

They also had some expenses relative to two expansions.

They're obviously expanding Hemlock dramatically.

That capacity hasn't come online and there is some expense there.

We're beginning to see some expense affecting their P&L from the large methyl expansion that's underway in China.

But you really didn't see -- you haven't seen much additional metric tons coming on in Hemlock this year and year-over-year.

In the first half of this year, you did see it gaining numbers the first half of 2006 there, but not in the

I know you don't provide specific guidance but it sounds like acceleration then at Dow Corning?

I'm not giving any guidance on Dow Corning yet.

Thank you.

Your next question comes from John Harmon from Needham and Company.

Good morning.

Just one question, one clarification.

You said in the fourth quarter you plan on running capacity at your LCD glass factories.

Is that the level you want to run at?

Clearly it's good for margins but do you typically plan on keeping a bit of extra capacity around?

Does that mean you came up a little bit short in terms of your forecasting for the year?

The second question is, when you start filling Clear Curve, are you going to count that as a premium fiber or just lump it together with (inaudible)?

Thank you.

Just a comment.

We were running very full also on quarter three and shipping out of inventory.

Remember one of our goals at the beginning of this year was to try and deal with the cycle by building some inventory in the first part of the year and being able to ship it in the back part of the year.

So we ran very full in quarter three, took a large amount of inventory.

We'll take some out of inventory again in quarter four.

Our own inventories will be quite low so we've been running very full.

We certainly don't have a goal of being absolutely full, but frankly, we'll take it.

Demand from our customers is quite robust, and their inventories are very low which is boding very well as we head into 2008.

I'd add to that and so nothing negative happening on the operations side really all our operations are doing very well in terms of productivity and it's just we have really good demand.

We'd like to have a little more leeway than what we have right now and we'll work hard to get it.

We'll keep at our productivity.

As to Clear Curve, yes, we do anticipate that the whole Clear Curve product family will be a premium set of products.

Mainly because it adds so much value, especially in MDU applications as much of a doubling of productivity for our customers.

That being said, it's going to be a little different than other premium fiber products you may remember from the past.

Because only around 30% of our overall revenue is in the fiber optic cable per se for a connected apartment unit.

Another 70% is in hardware and equipment.

I think all of the products would be premium products within our overall family, they'll be split up a little differently than maybe you think about normally.

The fiber part in and of itself is not as large as being able to capture the premium revenue opportunity across the whole product set if that makes any sense to you you.

It does.

Thank you.

Thank you.

Our next question comes from Curt Woodworth from JPMorgan.

Hi, good morning.

Good morning.

Jim, you commented on the variance in the patterns in terms of the sequential volume growth this year in the display business.

I guess I'm wondering what the right way to think about this dynamic is because you have the seasonality issue where usually in the fourth quarter you get maybe more robust TV sales.

Then you also have the dynamic that maybe the panel manufacturers are getting belter at managing the seasonality.

So, do you think this year was perhaps better for the supply chain in terms of how the year unfolded in the sense that you had more consistent production and the panel guys leveled it production and maybe not have to ramp up so quickly in the back half of the year?

To me it seems like this actually could be a positive development for the industry even though it's outside the norm and obviously the Street is negative on 4Q but I guess I'm just wondering how you think about it and maybe going forward do you think that kind of the seasonality concern in the industry is actually less of a risk here and that the whole supply chain is getting better at flexing up and down for this?

Curt, I totally endorse that opinion.

We were -- we think it's actually been very positive.

You may recall back in February we were concerned that the supply chain waited too late to ramp.

They could actually just not have enough to just satisfy end market demand and with that was one of our fears.

We frankly were delighted in quarter two when we began moving up to beat our own estimates.

Because we hadn't seen it at the beginning of the quarter.

But as the quarter unfolded, we did.

Basically they moved up to what we would have -- what we were afraid they would have only in quarter three and late quarter two and that in quarter three they moved up to the original forecast to be quarter four levels and maintain them.

I think what we're seeing is, as they've used the word maybe some maturity in how the supply chain thinks.

Particularly there isn't as much surplus in panelmaking capacity as there used to be.

As the IT business has achieved essentially maturity with penetration rates of monitors being almost at 90% and television now, moving well up.

We may be seeing more of an even utilization going forward.

It raises the question of whether we should be thinking more of year-over-year comparisons as being the primary metric that we talk about here, but we're delighted, think it's been very positive.

Frankly, it's been very positive for our customers.

Notice the recent announcements from the Taiwanese in terms of their NPAT as a percentage of sales, there's some stunning numbers being put on the board by our customers now.

In terms of the market is going to be clearly very tight in the fourth quarter and then maybe the supply eases up in 1Q.

I mean, in terms of your price discussions, I know there is probably not a lot you can say but on the margin, do you feel like the panelmakers are more willing to commit to maybe longer term price agreements relative to the past?

Given concerns for shortages?

What I would say is that we are feeling relatively confident that we could continue our pricing strategy that we started this year and continue to execute that into next year.

And our dialogue so far with our customers have been positive.

That being said, we've still got a lot of work ahead of us.

Okay.

And last question.

In terms of the product mix and display, looking out in 2008 obviously TV is going to become a much larger part of the overall mix.

So the question is, I'm not sure if you can answer it, if you look at '08 relative to where your mix changed this year would you expect a more sizable mix shift next year to larger generation size substrates to meet that demand?

The base is so large now it's hard for any individual new fab to make a big change statement.

So we clearly will, we have in Korea, we just have Samsung having started their gen 8 basically in the May time frame.

That will be a plus for us.

Hopefully Sharp's gen 8 continues to ramp up and we've got the big 7.5s in Taiwan that are not yet at full ramp.

That should be a help to us, but we also have people who have talked about putting additional gen 5 capacity in and so it's hard to say that you're going to see something real material.

Actually if you look at our percentages, we give out every quarter, it's not like they've moved that dramatically at this time.

Great, thank you.

Thank you.

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

The first question, I apologize if you stated this, but can you tell me what the quarter over quarter price declines was backing out the exchange impact?

Quarter over quarter, for quarter three?

Yes, Q2 to Q3.

Q3 to Q3 a year ago?

No, no, sequential, I apologize.

Oh, it was in line with our guidance very well.

So 1 to 2% sequential?

Yes.

Then there's been some discussion of LPL potentially selling the business.

Do you see that having any -- could that potentially have an impact in terms of the share within the panel market as some of those inherent-Korean conflicts could potentially be removed?

I think we're on a pretty level course right now with LPL.

We always look at any sort of changes that are happening with our customers with great interest but so far I would comment that things are sort of progressing exactly as we would have thought and in line with our strategies.

Then finally, in terms of 2008 telecom with a bendable fiber, are you building in expectations of share gains either within cable or hardware in 2008?

It's still a little early.

Remember, we're just completed our field trials with the first of our product family and we're going to just be starting to commercialize in quarter four with the first of the product family.

Then we have a number of other field trials in quarter four of other pieces of that family for MDUs.

So it's a little early for us to be able to give any degree of accuracy on what exactly the revenue impact's going to be.

This is a significant new product and as such, there's a lot of excitement.

But also, as such, it's going to take us a little time to find out exactly how big an opportunity it is, sir.

Thank you very much.

Thank you.

Our next question comes from Carter Shoop from Deutsche Bank Securities.

Good morning.

I wanted to talk a little bit about the glass business in 3Q when you look at the stand alone business excluding SCP.

I was a little bit surprised we didn't see more upside there.

I realize it was at the high end of expectations.

But when you look at a lot of your panel customers, particularly in Taiwan, we saw those customers actually deliver substantially above their guided range.

Just to throw a few numbers at you, if you look at your customers which I estimate represent roughly 50% of your business in the stand alone glass business, your customers did about 32% in regards to a sequential gain in 3Q versus your 15.

That compares to about 24% growth in 2Q for your customers while you guys did 12%.

While I understand inventory can sometimes have an impact there, it appears that you guys meaningfully underperformed those customers over the last two quarters and now you're looking for just in-line expectations.

So can you help me understand why there's a little bit of a disconnect there?

We don't think we meaningfully underperformed what they did.

So I mean, we saw sequential growth of 15%.

If you add up all of our customers, they were perhaps a little bit greater than that.

But we don't think there was a meaningful difference.

We don't think we were losing share at our panelmaking customers.

I think what you all have to do is you have to step back and take a look at the total macro.

Because we're so large in the market.

You have got to step back and take a look at the total.

If you just take a few customers and what happens with their particular shipments in any given quarter that is only one piece of it and then you put that together with the overall supply chain movements and it's really hard to conclude much.

In total, we're real comfortable with where we are and where we're going to end up the year and that we're in line with market growth.

So we feel pretty good.

Fair enough.

We looked at the trend over the past three years and actually there's been a very tight correlation and it's really started to disconnect here a little bit over the past two quarters.

I want sure if hat was anything to worry about but I guess we'll wait and see what happens in 4Q.

In regards to 4Q growth and expectations, are you guys limited at all?

I know you mentioned that you guys are at full capacity if capacity was a nonissue, would we be seeing a higher sequential number for guidance here?

So you're saying theoretically if we could make more, could we sell more?

Correct.

So theoretically, I guess yes, but it's a hypothetical.

I think the right way to think about it is full capacity, it's tight and we're scrambling, we're trying to make as much as we can for our customers, and we will do our best.

A couple more quick ones here.

On competitive pricing, have you seen an environment change at all with your two largest competitors in this quarter or last quarter?

Jim, why don't you -- you wanted to go back to something he had asked earlier and then--.

Carter, when we add up all the panelmakers that exist and I'll include both base in Korea, we don't see area shipments from panelmakers to set makers, by our math being materially different from our 14 to 15%.

I mean, I think sometimes people focus on just a few people who give the numbers.

Actually not everybody does give area numbers.

Right.

But in our best estimate, and we generally know since we supply everybody what they are running their fabs at.

We're not seeing a number of their shipment's out.

We know what they tell us what their inventories are.

We're not seeing a number where that area number's substantially different from what we saw sequentially.

Wendell, you want to--?

That's including Korea?

Yes.

Other excluding Korea.

The SCP business looked like it trended in line with expectations.

It was the non-SCP business that we really saw a divergence and based on our checks, you guys are at least maintaining share with Sharp.

With these customers from Taiwan, we get to about 70% of your overall business.

Those vendors are the ones who meaningfully outperformed you on a sequential basis in 2Q and 3Q.

I think we disagree with that.

Fair enough.

The last question on the tax rate, a little bit below expectations in the quarter and then for guidance, where do you see that shaking out for 2008 if you can comment on that?

I haven't given guidance yet for 2008 so we'll give comment later on.

Did you want to answer the pricing question?

So not much to add beyond that our pricing strategy looks like it's working.

We don't have any deep insight into exactly what's happening with our competitors' pricing but ours is going exactly as we laid out.

Great, thank you.

Our next question comes from Daniel Gelbtuch from CIBC.

Just as a follow-up to that.

With regard to the very tight environment it's pretty clear I don't know if you had any representatives at the Display Search Conference, but it sounds like for the next two maybe even three years it's going to be a tight environment.

Are you gaining any pushback from your pricing, pricing strategy?

We always, in my experience, customers always would like lower prices, so there's always pushback, but I think the good news here is if we just step back to the beginning of the year when we laid out we were going to pursue this new pricing strategy that at the same time we were going to convert all of our customers over to a new super green glass as well as pursue gen 10 and we wanted to do all this while maintaining our position in the market.

I think the good news is we are into quarter four is all of that has occurred.

So from an operations standpoint, or from on execution standpoint, we really are delighted with where we are right now in display.

As we look forward, right now it's a very positive environment for us to continue to execute our strategies.

Okay.

As far as where do you -- just on a macro long-term view, where do you think the market can be growing over the next two, three years on an annual basis.

What do you think would be a fair supply estimate?

We will update that when we get together with you all in February, give another multiyear outlook.

One thing that we had said previously, and I think Jim just covered at the beginning of the call.

Is we have said that we anticipate next year to be up at least 400 million square feet as a market.

So, but we haven't gone out further than that.

We would like a chance to update you on that when we all get together in New York.

Then just to switch gears to telecom, any update on what you see in the macro environment for '08 and '09 and I guess for '08 and '09 for Corning.

Are there any other operating leverage levers that you look to for '08 and '09?

So I think the big, let me start with overall market trend and then let Jim comment on any levers.

So what we see there is really continued maturation of the fiber and the access markets.

The beginning of the year, we said what we wanted to see happen was continued growth in fiber to the prem not only at Verizon but having some others also adopt that technology and we have seen that happen.

Then we wanted to see the fiber to the x and fiber to the node type architectures also gain momentum.

We've seen that as well.

So as we look forward, we'd say that's going to continue to be a source of growth for us is customers around the world pushing fiber deeper and deeper into the network.

As far as operating levers for Corning per se, in any of your segments beyond LCD obviously.

I think the biggest lever will be the impact of diesel as we go through the next couple of years.

We believe that our heavy duty truck manufacturers are basically reaching the end of their, if you will, engines from last year trucks from last year and so we'll see good diesel rough again in 2008 and 2009.

That will have substantial operating leverage for us as volume flows into our factory and as we continue to get better at manufacturing.

So I would say that's the biggest lever that we have outside of LCD within our wholly owned.

Thank you very much.

Thank you.

Our next question comes from John Anthony from Cowen and Company.

Good morning.

Couple quick questions on environmental.

Can you give us a sense for how much of an impact, if any, the heavy duty versus light duty had on the overall sales mix?

In other words, is light duty big enough that it's meaningfully contributing to diesel yet?

Yes.

Light duty's definitely meaningful to us in terms of volume.

And is moving up in terms of profitability.

So it definitely is becoming meaningful to us.

Heavy duty is still the most important to us right now.

Can you give us a sense for the rough split within the diesel line how much is heavy and medium and how much is light?

No.

Not prepared to give that level of detail today.

Can you also give us a sense quickly for where the margins are in the environmental business, specifically how diesel's been trending?

I know the volumes aren't quite what you expected given the inventory levels that were built last year.

Can you give us a sense for when we might see a sizable improvement on the margins?

Well, you've seen it on improvement this year already and you will see another substantial improvement next year driven primarily by diesel for the segment.

So you're seeing it.

We didn't get quite the volume we originally hoped this year.

But we expect to get more volume next year and you'll see a substantial move up in margins.

Jim, is that margin improvement going to be based more on the volume increase or are there going to be adjustments to the cost structure and the production structure that will contribute there as well?

Well, you are going to get utilization effects.

You get the volume effect of selling more and then the fact that we already have fixed cost by and large in place for, that's in effect too for us and we're improving our manufacturing is going along.

So you're going to see substantial operating leverage from diesel next year.

Terrific.

Thanks, guys.

We have time for just one more call.

Thank you.

Our last question today comes from Ajit Pai from Thomas Weisel Partners.

Good morning.

Good morning.

Two quick questions.

The first one is regarding your quarterly cash flows.

Typically the fourth quarter has the strongest cash flows of the year.

Do you expect that trend to continue?

Then the second question would be about your telecom business, which is on the metro side on the long haul side can you just broadly geographically describe the trend you're seeing there like in terms of North America, in terms of Europe and then in terms of Asia?

Were there many trends that you can spot particularly?

We expect a very strong free cash flow performance in quarter four.

You are correct.

That is very often our best quarter during the course of the year.

And in telecom, we've seen a lot of strong growth in North America as well as in China and in Europe.

When you want to divide it by network type, though, the bulk of the growth, you're seeing in the more developed markets is in the access piece of the market, it's doing fiber to the node, it's doing fiber to the prem, similar type architectures in Europe as well where you're still seeing some good, strong metro buildouts in the less developed countries.

Right.

Can you give us the second plant that you brought online this year.

Could you give some color as to what kind of progress has been made over there?

Was it progressing on track?

Were you ramping it faster than you expected or at the same pace and where capacity utilization over there is right now?

So we did two announcements this year.

We did the Shanghai expansion of our facility in China as well as the restart of our Concord facility here in the U.S.

Both are progressing very well.

Of course we've got a lot of room for future growth in Concord but so far so good from an execution standpoint.

Okay.

Thank you.

I'd like to wrap up with a few comments.

First of all, for those of you who didn't notice, we had a new format on our press release this quarter in response to comments of having some simpler headlines.

If you have any feedback on it, please give it to Ken.

Second, a few other investor related announcements, Pete Volanakis, our President and Chief Operating Officer will be presenting at the UPS technology conference in New York City on November 13.

On November 28, I'll be presenting at the Credit Suisse technology conference in Scottsdale.

Finally, on December 6, Kate Asbeck, our Senior VP of Finance will be presenting at the Lehman Brothers technology conference in San Francisco.

We certainly hope to see you at one of these events.

Regarding our results for the third quarter, we couldn't have been more pleased.

The Company hit all time records, as I said, for gross margin, net profit after tax, and EPS before special items.

As I mentioned the last call, we view these records as major milestones given our long history.

We intend to deliver on our quarter four results.

If we do, the Company will have total new sales up approximately 12% and EPS specials up well over 20%.

So we're delighted with our performance.

Thanks for joining us this morning.

We look forward to seeing you in the near future.

Ken?

Thank you, Jim, thank you, Wendell.

Thank you all for joining us this morning.

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