康寧 (GLW) 2008 Q1 法說會逐字稿

Welcome to the quarter one earnings conference call.

At this time all participants are in a listen-only mode.

(OPERATOR INSTRUCTIONS).

Today's conference is being recorded.

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

I will turn the meeting over to Mr.

Ken Sofio, Division Vice President of Investor Relations, sir you may begin.

Thank you, Jan and good morning.

Welcome to Corning's first quarter conference call.

This call is also being audio cast on the web site.

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

Before I turn it over to Jim.

Today's remarks do contain forward-looking statements under the meaning of the Private Securities Litigation Reform Act of 1995.

These statements do involve a number of risks, uncertainties and other factors that could cause the 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 the Investor Relations web site.

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

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

Overall, our first quarter results were excellent.

Let me share with you the key data and then we will get into details.

Demand for LCD glass was very strong throughout quarter one.

Both our wholly-owned business and Samsung Corning Precision ran at full capacity.

Panel makers ran at high utilization rates throughout Q1 and panel inventory levels were healthy coming into quarter two.

NPD data shows retail sales of LCD televisions in the United States continue to be very strong with year-over-year growth each month through March.

Although we do not claim to be recession proof we clearly have no evidence of an economic downturn impacting our display business.

Based on the current strength in the display market we now believe the LCD glass market volume will grow toward the upper end of our 25 to 30% estimate for the year.

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

Our first quarter sales were 1.62 billion or at the top-end of the guidance range.

More importantly first quarter sales were 24% higher than a year ago.

EPS excluding special items was $0.44, slightly over the top-end of our guidance range.

This represents a 57% increase over our first quarter EPS specials of $0.28 a year ago.

Net income excluding special items was 702 million an increase of 55% over last year's net income excluding special items of 452 million.

I should note that EPS and net income excluding special items are non-GAAP measures reconciliation to GAAP can be found on our web site.

Our first quarter benefited from strengthening the Yen to the U.S.

Dollar exchange rate.

The Yen averaged 1.05 in the quarter compared to our original quarter one guidance of 1.09 and 119 in quarter one of 2007.

This change benefited our EPS by about $0.0150, and our sales by about 25 million compared to our guidance versus last year our first quarter sales benefited by 120 million and EPS by about $0.04 due to FX changes.

Continuing down the income statement, gross margin the first quarter was 52%, a new record for Corning.

Improvement was primarily due to excellent manufacturing performance in our display segment.

SG&A was 242 million, and 15% of sales as expected.

RD&E in the first quarter was 151 million or 9% of sales.

Other income was 1 million in quarter one compared to 44 million in quarter four Each quarter the movement in certain balance sheet accounts with fluctuation exchange rates and the offsetting impact of the associated hedging programs are captured in other income.

Sequential decline and other expense reflects the significant volatility in exchange rates in Q1, especially the Yen to Dollar exchange rate.

And essentially offsets a portion of the positive effect of the exchange rate movement on our sales and margins.

Royalty income which is the most significant portion of other income was consistent quarter four to quarter one.

Equity earnings were 304 million in the first quarter compared to 267 million in the fourth quarter which is an increase of 14%.

As a reminder, fourth quarter equity earnings included net special charges at Samsung Corning CRT of 14 million.

Our tax rate in the first quarter was 14% as expected and wrapping up our income statement our share account for the first quarter was 1.6 billion shares.

We had one special item in quarter one related to Pittsburgh Corning bankruptcy.

We have made significant progress negotiating a revised plan regarding the Pittsburgh Corning bankruptcy proceedings.

This progress and proposed new structure have led us to record a gain of 327 million or $0.20 per share as we have reduced our estimated liability from about 1 billion to 675 million.

Although the revised settlement, if approved, will give us the option to use cash or shares of Corning common stock, the amount will be fixed in dollars and not by the number of shares.

As a result, you will no longer see us recording a mark-to-market impact every quarter as we await final Court approval.

I will also say it is our current intention to use cash to fund this liability.

All sides continue to work toward a new arrangement and we are hopeful a final arrangement will be reached soon.

We will keep you posted on our progress.

Including a special item our first quarter EPS was $0.64 per share.

Now let me turn to our segment results for the first quarter.

I will start with the display segment which had on outstanding quarter.

First quarter sales were 829 million, 7% higher than Q4.

Volume was up 2% sequentially and price declines were in line with previous quarters.

Given the continued strong demand throughout the quarter our operations ran at full capacity.

Segment sales also benefited significantly from the strengthening Yen 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 directly impact our pricing.

Business had excellent manufacturing margin performance in the quarter which resulted in higher gross margins.

Due to continued strong demand we were unable to build glass inventory in the quarter.

Equity earnings from SCP's LCD Glass business were 203 million in the first quarter an increase of 15% versus 177 million in quarter four, driven primarily by the favorable exchange rates, excellent manufacturing performance in a lower tax rate.

SCP's sequential volume was consistent with the first quarter and price declines were in line with the previous quarters.

Your modeling purposes, SCP first quarter LCD sales were 737 million compared to 708 million in the fourth quarter.

Net income in display segment which includes equity earnings were 679 million in the first quarter an increase of 16% compared to the fourth quarter.

In comparison to the first quarter of last year, sales in our display segment increased 58% led by volume gains of 50%.

Price declines were 8% and the movement in Yen to U.S.

Dollar exchange rate was favorable.

Equity earnings from SCP's LCD Glass business were up 81% over quarter one 2007, led by volume gains of 46%.

Segment net income grew 76% versus last year.

I would like to spend a few minutes discussing the supply chain starting with LCD panels.

In general panel makers ran a high utilization throughout the quarter.

Overall inventory levels at panel makers are currently at what we would consider to be healthy levels and well below quarter one of 2007.

On the retail side, U.S.

retail data for January, February and March indicate that LCD television sales were strong throughout the quarter and significantly higher than a year ago.

Data we have seen from Japan and Europe indicate that retail sales in those regions have also met our expectations.

Sales in China were affected by severe weather in February but the March retail data was much higher than our expectations.

In fact, March LCD television sales in China grew 87% over the same month last year.

I would like to take a moment to walk you through some of the end market data for Q1.

As always, I must stress that our first quarter market information is only preliminary at this time.

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

Clear, the data I'm referencing here relates to shipments from PC manufacturers, television and monitor set makers to retailers.

We estimate there were approximately 23 million LCD televisions shipped in quarter one compared to the first quarter of last year LCD television shipments were up 61%.

Penetration of LCD television and worldwide TV market moved from 45% in the fourth quarter to 48% in the first quarter.

Despite the continued news about the U.S.

economy, it appears that LCD television sales were strong.

We would like to remind investors that historically TV sales are not usually impacted by recessions.

For those who did not see the historical TV sales data presented on our Investor Meeting in February, we have included the slides here for your reference.

In short, over the last 30 years, there have been three U.S.

recessions and none have impacted television demand.

You have to go back to the recession of 1975 to find any meaningful impact and even then it is difficult too compare today's market with one 35 years ago.

First, there were only 30 million televisions sold versus over 200 million today, second, the TV purchase back then represented more than 10% of an average consumers disposable income versus less than 5% today.

Investors should also note the concerns about a potential recession have been around since last October, not just the last three months.

Q4 retail sales for LCD TV's were also very robust and they were strong again in Q1.

So in summary, we are not seeing the current U.S.

economic uncertainty impact LCD TV sales.

Retail data also suggest that the notebook sales were very robust in Q1.

Out of--- About 31 million were shipped in the first quarter which was higher than our expectations.

Notebooks are now 47% of all desk tops sold up from 39% a year ago.

Were starting to view notebooks as a disposable product given most consumers keep them for just a few years now, [suppose as well] for glass demand.

Moving to LCD monitors, about 41 million were shipped in first quarter, slightly lower than quarter four.

I would like to remind investors, that one of the key data points we look at to gauge the health of the supply chain channel is panel pricing.

We view sudden changes in panel prices as one potential indicator of a supply chain problem.

Investors can obtain biweekly pricing data from a variety of sources.

At Corning we look for significant panel price declines within a short period of time.

This could be an indication to panel makers and/or the set makers are building inventory, which could signal slower demand further down the supply chain.

Through April panel price declines have been very moderate especially on TV and note panels.

There's been some erosion in monitor panel prices in March, but that was expected.

You may recall the panel maker actually increased prices last year on wide screen monitor panels.

For the first half of April, monitor panel prices actually increased.

I would like to update you now on our Gen 10 facility.

We continue to make excellent progress and are on schedule to begin producing GEN 10 glass samples for Sharp later this year.

For those of you with web access this is a recent picture of our new plant under construction.

Investors have also asked us to comment on the recent equipment orders by several panel makers and their announcements to add panel capacity.

You may recall our comments from last year when we said, there was likely enough panel capacity for 2008 but 2009 looked light.

We said Investors should expect to see equipment orders and capacity expansion announcements from panel makers and Investors are seeing these now.

Investors should note that these announcements are for panel capacity additions in 2009 and 2010.

It takes almost two years to build a new fab so the generally long lead time for equipment orders.

And as a reminder, we base our decision to add class capacity on our view of the end-mark demand not panel capacity.

I will wrap up my comments on display with some thoughts on the Beijing Olympics.

This is a topic that resignates with Investors as either a potential positive event or a negative one.

We are more agnostic.

We do not believe sporting events significantly change world wide television demand but we are cognizant that these sporting events can influence behavior in the supply change.

In fact, we believe the Olympics could shift a small amount of TV sales from the second half into the second quarter, but not generate additional annual TV sales.

As a result, we believe panel makers could receive additional TV panel orders in quarter two for the Olympics if they have not already.

Panel makers are running at high utilization rates so these orders may help them maintain those rates.

More importantly, we don't believe the panel makers have forgotten what happened two years ago for the World Cup, but for those who don't remember we certainly remind them.

Investors should also note there's some important distinctions between the World Cup panel inventory build from two years ago and this year Olympic's related demand.

First, panel inventories were much higher on a weeks of inventory basis coming into 2006 than they were coming into 2008.

Second, in 2006, panel makers added these levels by building significant amount of inventory in January, February, March and April in anticipation of May World Cup demand.

At the beginning of 2008, panel inventories are very healthy and the panel makers have not added much inventory in Q1.

Another important distinction between 2006 and this year is the timing of events, 2006 the World Cup excess inventory had nowhere to go.

Industry was heading into a very slow retail months of June, July and August.

This year the Olympics are in August so if there's excess television inventory, the industry will be heading into the traditionally stronger TV retail season.

We are not suggesting that another overbuild can't happen, it certainly can.

Providing this commentary today so investors can understand the differences between the events and current market dynamics.

Now moving to the environmental segment, sales in the first quarter were 197 million, or 4% increase over fourth quarter sales of 189 million.

Auto product sales were 137 million in the first quarter versus 131 million in quarter four and an all-time record.

Auto sales were driven by strong seasonal volume in North America and Europe.

Diesel product sales were 60 million in the first quarter and slightly higher in Q4.

Heavy duty diesel sales were up 20% sequentially driven by higher U.S.

demand.

Light duty diesel sales were lower due primarily to an inventory correction at a customer.

Segment net income was 13 million in the first quarter compared to 23 million in the fourth quarter.

In comparison to a year ago, environmental segment sales increased 10% driven by a higher auto and diesel volume.

Auto sales were up 11% year-over-year while diesel was up 7%.

In the telecommunications segment sales in the first quarter were 421 million or 2% lower sequentially, which was lower than we expected.

Strong fiber volume and higher fiber to premise sales were offset primarily by a slow start on several customer projects.

Sales for our hardware and equipment products were 207 million in the first quarter a decrease of 5% sequentially.

Sales in fiber and cable products in the first quarter were 214 million and consistent with the fourth quarter.

Fiber to the home sales, which are primarily hardware and equipment related were 76 million in the first quarter an 8% increase compared to quarter four.

First quarter of fiber to the premise sales were driven primarily by the strong demand in North America.

We also recently began selling our fiber to premise products to a second customer in Europe.

Net income in the telecom segment was 11million the first quarter compared to 12 million in the fourth quarter.

Our new clear curve technology continues to gain market acceptance.

We expect several additional customers to begin product trials in Q2.

And regarding Concord, based on current order activity and forecasted demand we are considering bringing additional mothball capacity into production.

Investors hopefully noticed we began to separately report our Specialty Materials business as a separate segment.

We hope you will find the additional transparency to be helpful.

Sales in this segment were 83 million in quarter one compared to 105 million in quarter four.

The decline was primarily due to lower sales of our advanced optic products.

This segment generally has lower sales in quarter one.

In the Life Sciences segment, sales in the first quarter were 81 million an 11% increase over quarter four sales of 73 million and compared to a year ago, sales were up 7%.

Investors should also note our other segment now includes an development spending including spending on our development programs such as epic green laser and micro reactors.

About half of our increase in year-over-year R&D spending is on these new programs.

Turning to Dow Corning, equity earnings were 80 million slightly lower than the fourth quarter.

Silicon segment of the business performed as expected in Q1, good broad-based global revenue growth of 12%.

Margins were pressured earlier in the quarter by an upward surge in the price of key raw materials including methanol.

The Company was able to offset a portion of raw material increase during the quarter through higher prices.

Regarding hemlock it is in the process of bringing on new capacity, we expect new production shortly.

Investors should see some benefit in the increased capacity if Dow Corning's results in Q2.

Moving to cash, we ended the first quarter with about $3.3 billion in cash in short-term investments.

Free cash was a negative 172 million in the first quarter.

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

Free cash flow is a non-GAAP measure, regarding our stock repurchase program during quarter one, we purchased 3 million shares of stock for $62 million.

Moving to capital spending, we are increasing our capital spending plan for 2008.

We now expect to spend between 1.8 and 2 billion up from our original estimate of 1.5 to 1.7 billion.

The increase is primarily related to display and driven by capacity additions and precious metals price increases.

Our original estimate for display spending was 800 million to 1 billion.

It is now 1.2 to 1.4 billion.

Part of the increase is driven by the need to meet a larger 2009 market than we previously expected.

As a result, we are moving up some of our 2009 capacity additions up to earlier next year.

This takes us about six months to add a tank.

Some of this capital spending falls in 2008.

However, we're not prepared at this to provide a new forecast for 2009.

We are still in the process of updating it.

We do expect that the glass market this year will grow at the upper end of our previous 25 to 30% estimate.

We are also adding new tank capacity, because demand for our Gorilla glass is growing, Gorilla is a proprietary scratch-resistant for touch screens and other applications.

Currently our Gorilla glass is manufactured using existing LCD capacity in the United States.

While glass composition for Gorilla is very different than LCD, it is made using the same fusion process.

Since display is running at full capacity, we need to replace the capacity being used to produce Gorilla.

Investors should also note that the cost of precious metals has risen substantially in the last few months, precious metals, mainly platinum were used in the forming cost.

Since the precious metals are not consumed in manufacturing it is not depreciated.

Two years ago about 15% of the cost of a new glass facility was precious metals.

Today the cost is closer 25 to the 35%.

So it is a more material portion of our capital spending.

Now given our strong Q1 performance and even higher Q2 expectations, which I'll cover in a moment , we are still on track to meet our original goal of at least 500 million in free cash flow this year even with this higher capital spending.

This is probably a good time to update you on our tax rate.

Last summer we believe we began recognizing tax expense on U.S.

income no earlier than 2009.

At our Investor Meeting in February we told you that this could happen as early as this year.

We have now completed, updated analysis on the tax rate and investors should not expect any major change to our tax rate in 2008.

We think it is likely that the tax rate will increase in 2009 and we believe most sale-side analysts have been modeling this increase tax rate for 2009.

For modeling purposes, we suggest using a rate of 12 to 15% this year and 25% 2009.

As a remind, we will not be paying cash taxes in the United States for many years due to our NOLs.

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

We expect second quarter sales to be between 1.71 and 1.75 billion.

This would represent an increase of more than 20% over last year Q2 sales of 1.4 billion.

Our second quarter EPS before special items is expected to be between $0.47 and $0.50 per share.

This would represent a 38 to 47% increase over last year's quarter two EPS X-specials of $0.34.

Moving down the income statement, we believe gross margins will stay above 50%.

SG&A is expected to be approximately 14% of sales and [RD&E] around 10% of sales in the second quarter.

We expect equity earnings in the second quarter to be up 10 to 15% driven by SCP and Dow Corning.

Dow Corning equity earnings are expected to increase 15 to 20% driven by the growth in bay silicon business and hemlock semiconductor.

As I mentioned earlier, hemlock's results will begin to benefit from new capacity brought on line this month.

Investors should model approximately 40 million if for other income expense.

Regarding our tax rate for the second quarter expected to be between 12 and 15%.

And lastly for your modeling purposes, you should again use 1.6 billion shares for the second quarter when calculating EPS before special items.

Now moving to display outlook we anticipate our wholly-owned business and SCP will continue to fun at full capacity in the second quarter.

Second quarter glass volume at our wholly-owned business is expected to be up 2 to 5% sequentially.

Compared to last year glass demand will be up 28% to 31%.

We know several analysts who had Q2 sequentially volume expectations of 6 to 7%.

These same analysts have modeled no growth for Q1 versus the 2% growth we achieved.

So when you add the quarters together the second quarter absolute glass volume is at the level they expected.

SCP is expected to grow between 8 and 13% sequentially up 32 to 38% compared to last year.

As a reminder, growth rates can differ by geographic region, since they're based on order rates and the timing of capacity additions at our customers.

When you combine Corning and SCP we expect Q2 volume to grow 6 to 9% sequentially.

It is important for investors to note that our growth estimates for Q2 are higher than the original expectations we had for this quarter earlier this year.

And regarding glass pricing we expect price declines to be consistent with revent quarters at both our wholly-owned business and SCP.

To wrap up my outlook comments on display, all lights are green.

We and SCP are running at full capacity.

Our customers continue to run at high utilization rates and inventory to panel makers is healthy in the aggregate.

Panel price declines have been very moderate to date suggesting good sale through panels to set assemblers.

The retail data was strong through March and we see no evidence of the U.S.

economy impacting LCD TV sales.

We anticipate the LCD glass market volume growing to the upper end of our original estimate at 25 to 30%.

Glass price declines are expected to be moderate for the remainder of the year and several panel makers have already asked us about supply agreements for 2009.

More importantly as evidence by manufacturing performance this quarter we continue to make excellent progress reducing our cost.

We remain confident our ability to continue to reduce cost further.

We are offer asked by investors if LCD glass volumes will have normal seasonality this year.

Our response is typically been this industry is so new and is growing and changing so rapidly that there really isn't a pattern established.

Now as you know, we give guidance one quarter at that time; however, last year, we experienced some volatile in the stock price as Investors are making seasonality assumptions for quarters beyond our guidance time.

So we would like to provide our current thinking, and I stress current, about how the remainder of the quarters will cycle.

When we entered the year saying that we felt glass market growth, and I want to stress glass not panels, would be up 25 to 30% for the year.

We are now saying that if we continue to see no impact if a U.S.

recession, glass market growth will be at the upper end of this range.

If we were to use 30% growth for the total year, we would expect 22% of the glass market volume this year to be in Q1, 24% in Q2, 27% in Q3 and 27% in Q4.

I want to stress this is the total market, not Corning and SCP, and obviously we have rounded to even percentages.

Lastly this is a forecast, we hope the information is helpful to investors.

For your benefit, last year's pattern, Q1 was 20%, 24%, 27%, and 29%.

I want to remind you that last year's market growth was a larger percent, but similar square feet to this year's estimated growth.

We are seeing a slightly different pattern in 2008 than 2007, the difference in the pattern this year is due to glass and panel demand being stronger earlier in the year to better utilize tight panel making capacity to address peak end market demand in the second half.

As you have seen in Q1, we did not see panel fab utilization fall from Q4 like we did in Q1 of 2007.

We use a very complex model to develop our cycle.

I want to remind investors that inventories can exist at many levels within the supply change that can influence the shipments of this industry.

Now turning to telecommunications, we anticipate second quarter sales to grow more than 10%.

Growth will be driven by significant fiber at a home demand from a number of customers as well as the start up for several private network projects.

Fiber to the home sales are expected to increase over 20%.

In comparison to Q2 of last year we expect telecom sales to grow at least 8% excluding the impact to divestitures.

We anticipate environmental segment sales in Q2 to be flat to up 5% sequentially.

Segment growth here will be driven by heavy duty diesel shipments to China as they retrofit anticipation of the Olympics as well as the modest improvement in the United States.

Despite this improvement, we expect Class A Truck engine production to come in at the lower end of our previous estimated range of 175,000 to 225,000 engines this is year.

As a result, we now expect diesel sales to grow 15 to 20% this year versus our original expectation of at least 25%.

In light duty diesel we expect shipments to several new European platforms.

Auto sales are expected to be lower in Q2.

In our Life Sciences segment, we expect sales to increase slightly, in specially materials segment, sales to be up 20% sequentially driven by increased demand for our advanced optical glass as well as our new Gorilla glass.

On note on the impact of foreign exchange rates on our guidance, our second quarter guidance is based on a Yen to U.S.

Dollar rate of 103.

The Yen to Dollar rate would average two points higher [lower] in the second quarter we estimate our overall sales in net income after tax would be impacted by about 15 million.

Investors should remember also that the Yen averaged 105 in Q1, so if it does average 103 in Q2 our display sales benefit by about 25

Thank you, Jim.

Jan, we are ready to take some questions now.

(OPERATOR INSTRUCTIONS).

One moment for the first question.

The first question comes from Mark Sue of RBC Capital Markets.

Your line is open.

Thank you.

It is RBC.

Just considering the positive glass date on the first half and some moving parts in the second half and your thoughts of adjusted seasonality, are you considering the additional capacity coming on from your competitors or are you just factoring in your productions so we don't potentially have an excess supply during the back half?

I'm not sure I totally follow your question, but we do look at our competitors their announcements and what we think their expectations of capacity coming on and we see no fundamental change in their plans versus our expectations.

So, generally we think that the glass industry is by and large growing capacity about the rate of what we think the end market is.

Got it.

To be sure we are not expecting a down sequential September-quarter, it is more moderate sequential growth.

Is that how we should kind of look at it for Corning?

That's correct.

Okay.

And lastly just on gross margins, a lot of improvements there.

Any thoughts on the rate of gross margin improvements that seems to that you are recognizing a lot of efficiencies.

We are delighted with gross margins being where they are and frankly I would love to keep them at this level for quite a long time.

Okay.

Thank you, gentlemen.

Good luck.

C.J.

Muse of Lehman Brothers you line is open.

Yes, good morning, thank you for taking my question.

I want to go a little deeper on the gross margin side.

It looks like the net margins were up about 500 bips on display suggesting maybe 200, 300 improvement on the display side.

Is that in the right ball park.

Our gross margins did improve in display.

We are not given the absolute number.

Okay.

I guess in terms of the overall strength, Jim was telecom in there as well or was it just display that drove the uplift?

It is primarily display, telecom was actually a slight detractor for us in Q1.

Okay.

And I guess, lastly on the line of gross margins, do you they that level or close to that level is sustainable throughout the year given your visibility on going cost reductions?

I think we will be able to maintain the high corporate margins and display margins during the course of the year, of course in any given quarter we can have changes as we cycle through various maintenance and other things, but if pricing remains moderate, glass demand as we expected, we expect to have a very strong year for display gross margins.

I guess moving on to you are raising the volume to the high-end of the range, three months ago you gave us a at that 25 to 30.

What has happened in the last few months to give you confidence it will be the high-end?

Is it your view that panel shortages, is it that you have contracted glass through the second half of the year, can you provide a little more color considering the macro backdrop that we are seeing?

It really is what we are seeing at retail that we continue to see very strong demand obviously when we gave you at that 25 to 35 we had some assumptions based on what we thought would flow through, it isn't all just supply chain but it is the end market demand and now three months into the year, what is obviously what appears to be a challenging economy for people, yet demand remains very strong.

So that is what is leading us to be at-- moving it up to a 30% level.

It is really our view of end market demand.

Got you.

Last question for me.

On the other income line that came in a little light you talked about royalty revenues being sustainable.

What drove that to being flat I guess in Q1.

It is, I mean it really is based on the primary thing there in royalty is really from SCP and they didn't have real volume growth there.

So as they see volume growth you see royalty income will grow more in tune to what their revenues are.

Right.

But I thought you guys reported 1 million of other income.

Yes, but and that's a whole bunch of things in there.

So that's a net of other income, other expense and we had some other items in there.

Particularly we had some losses on FX hedges related to the balance sheet hedges that we put in place.

We had extreme volatility in the month of March and also, that our balance sheet itself turned out to be a little different than what we originally expected, with hedging, we had FX losses of about $0.01 in there.

Sop there was that and just miscellaneous noise and some minor expense but there is nothing significant on an ongoing basis.

Great, very helpful.

Thank you.

Nikos Theodosopoulos of UBS, your line is open.

Yes.

Thank you.

I had a couple of questions.

On the gross margin for LCD, you gave Jim, the impact on net income on the exchange rate both sequentially and year-over-year which is quite helpful.

Does that also flow through gross margin?

In other words, is that where you see it on the income statement and if so, or if only part of it is there, what is happening to gross margin and LCD sequential and year-over-year if you strip out the currency movement?

You have two currency impacts on the gross margin, one is obviously overall translation of the absolute number which is a benefit therefore some of the impact that I talked about is at gross margin.

That's where we make our money.

Also, we got a little bit of improvement in the margin percent by how it fell between the combination of the various currencies that we-- our costs are based in and they're not all identical.

So probably approaching one percentage point of our corporate gross margin came from FX improvement.

Okay.

All right.

That's 1% the sequential change you are referring to the sequential change?

That's correct.

Okay.

So if you look at the operational aspects of the LCD business, it sounds like it is still improved sequential just maybe a part of it was currency but you still had some operational improvement.

Is that fair?

That's correct.

We had outstanding manufacturing performance in display.

Obviously the reaping the benefit of running full which we told you many times is key to us, for our success.

We continue to reap benefits from Eagle XG.

You may recall that even though we were fully converted in our wholly-owned business, we are still exploiting the benefit of this glass gives to us.

So we were delighted by our manufacturing quarter one.

Okay.

And just a quick question on telecom, your commentary about projects being slower in the first quarter, can you elaborate on that?

Was that a global phenomena?

Was it one or two customers?

Just trying to understand what happened there and why do you think it comes back in the second quarter.

Thank you.

Well, it is Nikos, it is in two segment, both public network and private, let's deal with public first.

The good news is that we are developing new fiber-to-the-premise customers.

And especially in Europe.

But there's some regulatory uncertainty that the EU has entered into the next year.

The EU has come and said they're not going to have their final decision until October.

And this has caused some of the new fiber-to-the-premise customers that we get to announce; right, to delay a little bit on their start up.

We would expect that to stay relatively delayed here through the first half.

On the premises side, it is just major data center projects here and there and those are, are timing related.

I think the fiber to the home ones are also timing related but I think we will get the up tick in quarter two from the premises as well as the strengthen we are anticipating and fiber to the home and other regions.

So, overall, we feel our operations guys feel really good about the fundamental strength here and they view the quarter one moves more as noise than any sort of fundamental signal.

The delay in the premises going into 2Q is not tied to any potential new products you might be coming out with and the customers are pausing.

It is not tied to that just to their own.

Yes, I think it is just tied to big complex projects when you ship them et cetera.

We don't see anything really significant driving their behavior.

Okay.

Thank you.

Steven Fox of Merrill Lynch.

Your line is open.

Hi, good morning.

Two questions, please.

First of all on Dow Corning, could you talk a little bit about the sequential change in the coming quarter, how much is exactly due to hemlock and opposed to the core silicon business and is our outlook on the core part of Corning changed at all with the economy and then I have a follow up.

The majority of the increase in quarter two is coming from the silicon part.

Hemlock will go up but the ramp is just started.

Actually as we speak right now.

So, there isn't that much that is coming on.

We will see greater benefit from hemlock in Q3 and Q4.

But really is in the silicon business.

We have not seen really an economic impact on Dow Corning silicon other than the obvious.

Certain industries that they sale into, for example like construction which you have to remember their business is very much a worldwide business.

I mean we think about it not perfect percents but basically 1/3 Asia, 1/3 North America, 1/3 Europe, and so in some places, they have seen some slow down, but overall the volume is looking fairly good as we actually now know where we stand pretty much at the end of the month of April.

Great.

And then just one more question on the gross margins, when you, Jim with our outlook of greater than 50%, what are the risks to gross margins not being flat in this quarter given that you have higher unit volumes in the LCD glass business?

Well, it really is the mix of telecom which is obviously a lower gross margin.

It would be maintenance on, on tanks.

Those would be the potential down sides to it.

Obviously the upside is, continued very strong volume and good running in the LCD business.

Diesel is perhaps a slight drag because we just don't, aren't seeing any, any pick up at all really in the heavy duty truck business and obviously, anticipated having more demand there.

Great.

Thank you very much.

Curt Woodworth of JPMorgan, your line is open.

Hi.

Good morning.

In terms of hemlock, can you comment on what capacity you expect to bring on line, is it still the 3,000-tons and is it right to think most of that comes on line in the first quarter?

I think officially we stated going to a run rate of 14.5 so I think it is possible they can do a little bit better than that.

You start to really see, I mean it is all on by the end of the year.

You really start to see substantial impact in Q3.

And what would you capacity plans be for '09 for hemlock?

I think they go up to 17.5 as a stated number, they're obviously trying very hard to bring it up earlier if they can.

And but that's the stated growth that they have given out publicly.

And I think you have commented that a lot of your capacity has already been presold at set prices so in terms of thinking about an ASP for that volume should it be relatively kind of flat looking out this year and next year or should you see some price benefit?

Really don't get much price benefit.

Actually we had a negative price in quarter one because some of the capacity we brought on earlier we now had to switch over to contracted pricing and that actually was a margin to pressure, pressure on hemlock in quarter one versus quarter four.

We have always known that would be coming.

By and large you won't see much change of pricing going forward now.

Almost everything that comes on is under, under contract.

The only time we get the advantage of spot prices is when it comes up earlier and obviously to recognize that.

When they can, they will try to bring it up earlier but generally we are now, our future is kind of known in terms of pricing along that hemlock.

By the way it remains a very good business at these contract prices.

Yes, for sure, and in terms of the global market, is it still, you know, extremely tight and do you have any opinion on other players who made announcements and players that are going to bring on sizable amounts of global capacity.

Just curious how you think the supply demand balance is going to play out in the near-term and maybe two years from now.

Our point of view is that demand for poly remains very tight and will remain so for several years.

I think you have seen a series of announcements bringing up new capacity.

This is really hard to do.

In terms of the people who have never brought up capacity, they remain a lot more announcements than reality there.

Some have started up production but demand continues to be very, very strong.

Unless you see some change statement in either tax subsidies and various places around the world, oil drops down below substantially and no one being worried about carbon footprint, I don't think you have to worry about poly over supply until toward the end of this decade and at that point in time you could come into a point where there is a more capacity than demand.

I hesitate to call that to accurately given this is a market growing at over 30% per year but that will be the concern.

That's a one of the reasons why we structure our contracts the way we did.

To build on that as I think you know, it is one of the reasons that we ask our customers the most established in the business to literally give us the billions of dollars that it takes to do this capacity and in return, we give them long-term supply contracts that establish prices so we feel pretty good at this time.

One last question on SG&A, it is down 140 basis point this is quarter in 1Q and almost 300 over a two-year period and your second quarter guidance at 14% is almost at 200 basis point year on year benefit.

Do you think you can continue to see that type of SG&A leverage in the business, I guess as you just get scale in display.

Are there any FX considerations there just your kind of thoughts going forward.

So I just would point out I think you are on to one element.

Clearly FX is a little bit of a benefit.

The yen was 119 a year ago and 105.

Most SG&A are in Dollars not in Yen so we get some benefit of that on a percentage basis.

That being said we are continuing to maintain our fundamental approach to this which is excluding FX changes is that it is our goal to let SG&A grow more than half the rate of our real sales increase.

And that's the goal and the commitment that , we have made and think we can continue to do that and certainly for

Great.

Thank you.

Jeff Evenson of Sanford Bernstein your line is open.

Thank you.

What is currently the EAGLE XG mix at SCP?

Currently more than half of the volume.

Great.

Thanks.

Unrelated question you mentioned that you had won some new light diesel platforms in Europe.

Wondering if these are at the same manufacturers you currently sale to or new manufacturers,.

Both, but also some new light duty diesel customers.

Great.

And in Europe, diesel enjoys on orders 50% of passenger car and overall light duty sales.

Some argue that the big discrepancy between Europe and the U.S.

is due to the high gas price that is have been in Europe for a long time and we are now seeing here.

Does what we are seeing in gas prices in the U.S.

make you more optimistic about the opportunity for light duty in the U.S.?

So, yes, though it is a complicated question.

I mean you have both the infrastructure, you have different tax policies play out, Europe to get the higher fuel economy tilted, the balance to be a little more in favor of diesel and then you actually have sort of reputation of the technology, the U.S.

players have some, we had a bad diesel experience way back when they first introduced it here not at all similar to what they are in Europe where real think true high performance cars are all diesel.

We are optimistic longer-term, that diesel is going to play an increasing role in the engine plants here in the U.S.

but it is going to take time, Jeff.

And last question, is you mentioned that you are now seeing some evidence that 2009 LCD glass demand may be higher than you expected a few months ago there and therefore you are accelerating CapEx into 2008 so you will be ready in 2009.

What are some of the factors that go into that?

Primarily driven by television.

We are seeing television ahead of what our expectation were and that's the primary thing.

We haven't yet determined some of the long-term factors that people went through very eloquently at the Investor Day on the demise of CRT's, the rise in emerging markets televisions for home et cetera.

We are starting to go get a sense some of that may be coming true and it is just a little hard to pick up on a quarter-by-quarter basis but clearly the demise of CRTs is happening very rapidly.

We will be back with a more full dialogue on this later in the year.

Jeff.

Great.

One quick question on it though, to the extent there is a demise in CRT, if we guess that the diagonal size of the CRTs are roughly related to what they might buy in LCD, that would suggest that there's potentially a new demand peak coming in the smaller sizes, do you think that would be satisfied with GEN 6 and 7 capacity or people will use higher generations and make more cuts .

To the degree it will be below 32 I think you would be right there.

The real question, we would obviously saw in the faring quarter more small size televisions sold than what we originally forecasted.

The real question is because of the 4 by 3, 16 by 9 change with the height thing, do people actually move up.

If you previously had a 27, you put a 32 in based upon just the height.

But we definitely saw more 26-inch LCD sold in quarter four.

So the one of the things that has been an interesting trend to build on Jim's point is we are seeing the use of even larger GEN sizes for smaller TV sizes than we would have thought once upon a time.

And they're driving very nice glass utilization here and very nice efficiency and good cost performance.

So they're getting more and more flexible on how they use it and I think it is overall a very positive trend for us pushing the industry in the direction of our strength which is very large size, very high performance glasses.

Great.

Thanks, guys.

John Harmon of Needham Company.

Your line is open.

Hi, good morning.

Morning.

Just a couple of questions, please.

This reflects on an earlier question.

Given that you have been sold out, you are sold out in Q1 and sold out in present and not able to build inventory, is it that fact that would cause you to add capacity or to increase your plan or is it driven by your end market analysis that causes you to bring some of the '09 capacity into '08.

For us it is always our view of the end market, John.

Right.

We try not to let the short-term supply chain and what our customers do directly to impact what we choose to do with capacity, we base it on our version of what we believe the end mark to be.

Okay.

Thank you.

What percentage of your fiber volume was classified premium and if certain access programs really do take off in and you get the customers you think you will get, could this number really exceed the 5 to 10% range again?

We don't have think forecasts that say that premium fiber movers out of that kind of range at this point in time.

Clearly submarine has been more robust over the last 18 months than it was before but remains a tiny amount of glass in the under sea cables.

We would love to see more multimode into the future but we are not looking for a sudden up tick in the amount of premium fiber.

Okay.

My thinking on the question was a Clear Curve is counted as premium fiber what are you expecting?

Clear Curve is one of course we have high hopes for.

And it is just early, okay.

It is just early.

It is going to take a while for this business, for this product line to begin to matter to our overall financials.

It is a radically different product and it is going into a new application.

So that tends to mean for relatively slow adopt rate and then hopefully it builds into a very strong business for us, but it is going to take a little bit of time.

Got it.

Thank you.

Ajit Pai from Thomas Weisel Partners, Your line is open.

Yes, good morning.

Morning.

Two quick questions.

The first one is about the free cash flows, I think you have talked about despite the higher CapEx you are projecting you still expect free cash flows in excess of half billion dollars.

Can you give us some color as to which areas you actually expect the extra cash to come from, which businesses?

Primarily display.

So it would be primarily display.

And then the second question would be about the, when you are looking at your telecom business right know, both in the fiber and then also in the hardware and equipment side, can you giver us some color as to the pricing pressure and competitor dynamics are, especially on the hardware and equipment side?

So, always, telecom has a challenging pricing environment, primarily because you have very few, very large powerful customers.

So buyer power is quite high.

What we have seen though is that sort of our new product sets, whether it be our flex product sets, our series of fiber-to-the-premise products now with Clear Curve and a number of our, our new introductions that significantly improve productivity for our customers, that has been able to help moderate that to some extent.

After that, the fact that fiber capacity at least its in operation at this time is relatively tight.

There's, there's other capacity that can be brought on, mean that is you, it helps offset some of that typical aggression from the buyers side.

So, I would say the situation is relatively consistent with where it was last year and we have hopes for it to moderate over time.

And in the mix in that business on the telecom side, fiber and cable and hardware and equipment would you expect the fiber and cable business from this point on to be much faster than the hardware and equipment side?

No, I wouldn't say so because if we continue to be successful with fiber-to-the-premise, that is going to have a richer revenue, more significant part of the revenue would be hardware and equipment than it would have fiber and cable.

Got it, so then the margin assumptions we would be looking at for that business on a go-forward basis is that we would be expecting all of the incremental gross margins to get reflected in about the same expansion and operating margins.

Is that a fair assumption?

What we should probably do, I haven't seen this update recently what our mix of split is for fiber-to-the-premise between hardware and equipment, fiber.

We will update that here and make that public information so that you guys can have a better idea for your modeling purposes.

Got it.

Thank you.

Carter Shoop from Deutsche Bank, your line is open.

Good morning.

Wanted to ask a couple of quick questions on the LCD supply chain.

If you look at your customers balance sheets and inventory levels there, they're clearly very low for historic relative to historical levels in the first quarter.

I was hoping that you guys could provide a little extra color in regards to how you see glass inventory at your customers.

Is there any, do you have any color there you can can provide in regards to how that is to historical perspectives?

Yes, I would say that inventories at our customers compared to the histories along time, but certainly at this point in time compared to '07 and '06 it is substantially lower.

So that has been reflected in quarter one we were basically, we were actually air shipped a little.

We were really desperate to get it.

So we don't see any glass building up panel makers.

Cumulative in including all inventories I think they added about a week from the beginning of the year to the end of the first quarter which they still remain below where they were a year ago.

Do you have a sense on how much it was increased in '07 or '06 from the beginning of the quarter to the end of the quarter?

In '07, it was a similar amount but they come in higher.

If '06 it was two weeks.

Great.

Thanks, in regards to SEC, you mentioned that a lower tax rate helped there, can you quantify what that change was?

I think they were about 10% in Q1 but we are really expect to go be between 14 and 15 for the full year: it was an adjustment of some accurrals we had made last year where we had finalized their numbers.

So for the full year it shall be between 14 and 15%.

Great.

Ask with the FX hedges that was about $0.01 head wind.

Was that more the volatility or the decline ask what does that mean on a go forward basis, continue to see losses there if the Yen continues to decline?

No you shall not see those same losses in the other income other expense.

It was extraordinary volatility in one month and also we had hedged against the balance sheet and we had big changes in the balance sheet within the quarter and so you shall not see those repeat every quarter going forward.

Last question, the specialty material division, a new division this quarter.

Anyway to give us a little color with regard to expectations there for the full year in regards to both revenue growth and margins?

So, in the we are not going to give you a view on the full year.

What I will say is on quarter 2, we do expect that segment sales to be up about 20% sequentially which should be driven by increased demand for the advanced optical glasses as well as in new Gorilla glass which is doing very well.

It is doing very well.

Is there any seasonality in that business.

We are actually adding some capacity related to Gorilla so we are very happy with its progress.

We do expect year-over-year growth for this segment in total The quarters are much more volatile than some other businesses.

But we are looking for year-over-year growth driven by Gorilla glass.

Great.

Thank you.

Thanks.

We will squeeze in one more call.

John Roberts of Buckingham Research, your line is open.

Is John there?

Check your mute button.

Mr.

Roberts, check your mute button.

Well, I will tell you what.

We are running late anyway.

I will pass it over to Jim for final comments

I have a few IR related announcements and also a couple closing comments.

Ken and I will be in Dallas on May 1, to meet with Investors and answer their questions at an Open Investor Luncheon.

If you are interested in attending , please call Ken.

People (inaudible) Our President and Chief Operating Officer will be presenting at the JPMorgan in Boston on May 19.

Wendell will be presenting at the Bernstein Strategic Growth Conference on May 29, and on June 16 and 17, Ken and I will be hosting Open Investor Luncheons in Denver and in Minneapolis and, again if you are interested please call Ken.

We hope investors were pleased with our start for 2008.

Our first quarter results were strong.

Our second quarter expectations have exceeded the estimates on Wall Street, base on second quarter guidance our first half sales would be over 20% growth over the first half of last year and EPS to be up over 50% of last year without special items.

Most of this growth is driven by our display business, a business that we strongly feel will continue to grow well into the next decade.

We know there continues to be short-term concerns about LCD television demand in this economy but a said earlier, we have been living in this economic slow down for more than six months and have not seen any impact to LCD television sales.

Longer term there are some investors who believe this business only has a year or two of growth remaining.

This is obviously not our view.

Some view display as a young business but one that will be old with no growth by 2010.

We question this thinking.

Welcome televisions today represent only 8% of the 1.9 billion televisions in homes world wide.

We believe this percent will continue to rise substantially over the next number of years.

A number of televisions per household especially in developing country is also low.

Welcome televisions being placed in rooms where they have not been traditionally like kitchens, bath rooms and guest bedroom this is is increasing the number of televisions per home around the world.

China, a country of 400 million home, there are only 1.1 TVs on average per home.

We believe substantial growth in China and other developing countries.

One more interesting fact Chine has larger average televisions than any place else in the world.

In summary we believe the number of TVs per home will increase around the world and most will be LCD televisions.

Especially as the CRT market continues to collapse.

Last year about 40% of the world's CRT glass maker capacity was taken out by CRT makers.

This trend will continue.

In the U.S.

it is becoming difficult to even find a CRT.

If you haven't tried next time you are in electronics or discount wholesaler ,try to find one.

It isn't easy.

We believe this same trend is taking place around the world.

LCD is clearly the technology of choice to replace these CRTs and we think it will fuel more glass demand.

So for investors to spend at that time to look at the market trends and do the math calculate in the glass opportunity they will understand the potential size of the glass market is substantialy but also these trends will take years to play out.

The outlined of this information at our Investor Day in February and urge investors to revisit that presentation.

In closing, we remain optimistic about our prospects both short-term and long-term and hope investors will share that

Thank you, Jim and thank you, Wendell.

Thank you all for joining us.

A play back will be available starting at 10:30 a.m.

Eastern Time today or one at 5:00 p.m.

Eastern Time on Tuesday May 13.

To listen dial 203-369-3844, no pass word is required.

The audio cast is also available on our web site during that time.

Jan, that concludes our call today please disconnect all lines.

Thank you.