康寧 (GLW) 2008 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the Corning second quarter results conference call.

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

Later we will conduct a question and answer session.

Instructions will be given at that time.

(OPERATOR INSTRUCTIONS) As a reminder this conference is being recorded.

I would now like to turn the conference over to our host, Ken Sofio, Vice President of Investor Relations.

Please go ahead, sir.

Thank you, Alex.

Good morning, everyone.

Welcome to Corning's second quarter conference call.

This call is also be audio cast on our website.

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

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

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

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

Jim.

Thanks, Ken.

Good morning, everyone.

This morning we released our results for the second quarter which can be found on our IR website.

In addition, for those of you with web access, we 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.

We are very pleased with our Q2 results, especially in these turbulent times, and we like our position heading into Q3.

We hope the information we present today will help all investors understand our point of view on the LCD market and the potential for the second half.

I would like to begin with some important points regarding our Q2 results, Q3 expectations and the LCD industry.

First in Q2 demand for LCD glass was strong throughout quarter 2.

Combined volume at our wholly-owned business and SCP was up 8% sequentially.

Our wholly owned business was up 1%, lower than our guidance due to an isolated manufacturing issue.

I will comment more on that in a minute.

SCP was up 15%, higher than we expected.

Second, panel makers ran at high utilizations in Q2, in the low to mid-90% range.

They also built some inventory in preparation for the seasonally stronger second half as we told you they would, but in general inventory levels at the panel makers were considered normal in ending Q2 at about five weeks.

This is roughly the same level of inventory at the end of Q2 last year.

We believe the inventory was weighted towards IT, but this is specific to each panel maker.

Those panel makers such as Samsung who have strong television brands reported no building of TV panel inventory.

Third, we believe set assemblers fearing a shortage of panels in the second half may have built more inventory than necessary during the quarter.

Fourth, retail was strong throughout Q2.

LCD televisions in the U.S.

were 35% higher year-over-year in the month of June.

In China they were up 62% year-over-year.

So in summary Q2 was a good quarter.

Let's turn to July.

First, reported panel pricing has come down significantly in July.

These drops are consistent with our analysis that the set assemblers may have slowed their purchase orders to try and reduce their own inventories.

Second, overall we could panel makers utilization rates remained high in July.

However, some panel makers have now announced lowering their utilization rates going forward to reduce their output and keep their own inventories in balance.

So what are our expectations for Q3?

We expect panel makers to maintain lower utilization rates until the set assemblers work off their inventory.

We believe utilization rates for the Taiwanese panel makers will be in the low to mid-80% rage.

Others may keep their utilization rates high throughout Q3.

Second, despite utilization rate reductions by the Taiwanese we expect total industry panel area shipments to be up Q3 over Q2.

This has been support by forecasts from several panel makers.

Third, we believe the utilization cutbacks reflect a normal supply chain correction.

This is especially true if the retail environment remains on track.

Fourth, regarding retail, we're now halfway through the year, and economic pressures have not caused LCD television to suffer at retail.

U.S.

LCD television sales have been up nearly 30% year-over-year each month.

So we believe all the recent noise in the market is a supply chain issue and not a change in the overall macro trend of LCD television penetration growth.

As a result we expect another quarter of strong glass demand, combined our wholly owned business and SEP volumes will be up 4 to 9% sequentially.

SEP's volumes will be up 8 to 13 while our wholly owned business will be up flat to up 5%.

The difference in growth rates may reflect the share gains of A brand televisions which have the competitive advantage of strong brand name recognition.

Based on the actual retail data for the first half and expectations for Q3 and Q4, we still expect at least 105 million LCD televisions to be shipped this year.

As a result, we still anticipate the overall glass market volume could be at the upper end of our 25 to 30% growth range.

Lastly, consistent with our strategy for cash usage that we have outlined for investors, we will continue to return excess cash to our shareholders if we feel our financial health is secure and if we have adequate funds for growth.

In light of our strong balance sheet and positive outlook about our future prospects, this morning we announced our Board has approved a new $1 billion share buyback program.

So now let me turn to the details, and I will start with our income statement.

Second quarter sales were $1.69 billion, 1% at the low end of our guidance range and 2% lower than Street expectations.

Two events contributed to lower than expected sales in Q2.

The first was the isolated manufacturing issue that impacted a small portion of of capacity at one of our plants.

Fortunately the problem was corrected and output has been improving steadily.

We did lose the opportunity to sell approximately $24 million in glass and it cost us $16 million in net income.

The second was foreign exchange rates.

The end averaged 104.6 during the quarter, and our guidance was based on 103.

This impact on sales was 14 million.

Without these two items sales in Q2 would have been well within our guidance and Street expectations.

Versus Q2 a year ago, sales increased 19%.

EPS excluding special items was $0.49, and within our guidance range and in line with Street expectations.

This represents a 44% increase over second quarter EPS specials of $0.34 a year ago.

Manufacturing issue and display impacted our quarter two EPS by about $0.01, the weakening yen in comparison to our guidance was not as material to EPS as it was to sales due to our hedging strategies.

Net income excluding special items was $782 million, an increase of 43% over last year's second quarter net income excluding special items of $546 million.

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.

Continuing down the income statement, gross margin in the second quarter was a little over 50% as expected.

The slight decline from Q1 gross margin which was 52% was primarily due to strong telecom sales and travel lower gross margin than our Corporate average as well as the manufacturing issue in display I mentioned a moment ago.

The manufacturing issue impacted our Corporate gross margin by approximately 50 basis points in the quarter.

SG&A was $260 million and 15% of sales as expected.

RD&E in the second quarter was $163 million, about 10% of sales.

Equity earnings were $360 million in the second quarter compared to $304 million in the first quarter, an increase of 18% and higher than expected.

Increase is due to strong earnings at both SCP and Dow Corning, compared to the second quarter last year equity earnings increased 64%.

Our tax rate in the second quarter was 13%.

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

We expensed three special items in Q2, the most significant related to the release of our U.S.

deferred tax asset valuation allowances which resulted in a noncash gain of $2.45 billion.

Timing of the release was driven by the substantial increase in U.S.

earnings over the past year as well as our belief that positive U.S.

earnings will continue.

Investors should note our book tax rate for 2008 will remain unchanged.

In 2009 it is estimated to increase about 10 percentage points.

We have previously communicated this potential increase in our tax rate and we believe most if not all of the analysts have reflected the higher tax rate in their 2009 estimates.

Investors should note that we currently have a $4.7 billion net operating loss, and we do not expect to pay cash taxes in the United States for four to five years.

The other two special items related to litigation settlement are display segment which resulted in a charge of $12 million as well as an asbestos liability charge of $9 million related to the Pittsburgh Corning reorganization proceedings.

Including these special items our second quarter EPS was $2.01 per share.

Let me turn to our segment results for the second quarter.

I will start with display.

Second quarter sales were $809 million or 2% lower than Q1.

The volume at our wholly owned business was up 1% and lower than expected due to the isolated manufacturing problem at one of our plants which impacted shipments to one customer during the quarter.

The problem was self inflicted and output is steadily improving.

Excluding the impact of manufacturing issue I mentioned earlier, our sequential volume would have been within our guidance range of 2 to 5%.

The remainder of our glass operations ran at full capacity for the quarter.

Normal price declines were in line with previous quarters.

Equity earnings from SCP, LCD glass business were $244 million in the second quarter, an increase of 20% versus $203 million at quarter one.

The increase was driven by strong volume gains at 15%.

Excellent manufacturing performance and favorable exchange rates.

Price declines were consistent with previous quarters.

For your modeling purposes SCP's second quarter LCD sales were $842 million compared to $737 million in the first quarter, an increase of 14%.

Net income in the display segment which includes these equity earnings was $685 million in the second quarter, slightly higher than the first quarter.

The segment net income includes the $12 million litigation settlement which was a special item.

In comparison to the second quarter of last year, sales in the display segment increased 33% led by volume gains at 26%.

Price declines were 8% year-over-year and the movement in the yen to U.S.

dollar exchange rate were very favorable.

Equity earnings from SCP's LCD glass business were up 85% over Q2 2007 led by volume gains of 40%.

Segment net income grew 39% versus last year.

Now, I would like to spend a few minutes discussing the current supply chain and retail environment.

It is clear that most of the news coming out of Asia over the past weeks has worried investors.

I would like to start by talking about what supply chain did in Q2 and then we can walk through our thoughts for Q3 and the second half.

Panel inventories in Taiwan grew in Q2.

On an average from four weeks entering the quarter to about five weeks by the end of the quarter.

This is a level we consider to be normal entering the third quarter.

In fact, this is about equal to the level of inventory heading into Q3 last year.

Regarded reported panel pricing, prices dropped significantly at the end of Q2 and these drops have continued in July.

Due to the severity of the price declines and the length of time over which they have occurred, it is now apparent there is a buildup of inventory in the supply chain.

Our hypothesis is that it is mostly at the set assembly level.

While we and you can track retail data and panel shipments there is no market data available for set a assembly inventories.

We expect some of the excess inventory has been built there in anticipation of tight panel supplies in the second half.

With more visibility and confidence in the second half panel supply we believe set assemblers are adjusting down that over build.

The good news is that retail remains on track.

If retail strength continues as expected, fueled by lower retail pricing, we expect that excess inventory in the supply chain can be worked off.

I would like to take a moment to comment on our supply chain model and give you some conclusions we've drawn from it.

We model the LCD industry at four supply stages.

The first is glass shipments to panel makers.

These are our shipments, and when we give you the glass market statistics, it is at this level.

With our market share and industry contacts, we have a high degree of confidence in these numbers.

The second stage is panel maker shipments to set assemblers.

We have pretty good confidence in these numbers triangulating from a variety of sources.

We also model inventory changes at the panel makers.

The third stage is shipments into retail.

We have good confidence in these numbers, they come from sources that you can purpose also.

The last stage is obviously from retail to consumers.

We buy our market research data around the world, and you can buy the same information.

We think our data represents about 50% coverage in television, but as you know some major U.S.

retailers and warehouse clubs do not provide data.

We supplement this data with regular conversations with major retailers and also branded manufacturers.

We model inventory changes and levels in them at set assembly and at retail, and we model the entire industry in glass volume obviously trying to build in expected efficiency improvements improvements.

We have two important observations and perhaps they should be characterized as beliefs.

First, the sequential growth percentages every quarter at each level are different.

We've often commented on this to investors when they ask why isn't our growth rate the same as panel makers in a given quarter?

The second belief is supply chain in the aggregate must build inventory to support the end market growth.

The supply chain cannot increase turns infinitely.

As an example, we think 500 million square feet increase of pull from the retail level probably requires approximately 150 million to 200 million square feet of new inventory in the supply chain to support that level of retail growth efficiently.

We've been modeling the industry stages this way for three years.

As we've commented many times, there is not a typical year for the display industry because it changes as television has a bigger impact due to seasonality, and as glass and panel capacity are tight or not.

We entered 2008 expecting the supply chain to be tight.

We expected this along with the Beijing Olympics timing would drive the supply chain to run stronger earlier in the year.

We forecasted the supply chain would build 140 million square feet of new inventory in the first half, and that's about 60 million more than it built in the first half of last year.

The main reason why this is important is that we believe the retail demand increase of about 500 million square feet is about the same in '07 and '08.

So the supply chain should not need to build more inventory than they did in 2007.

Remember my comment about our second belief on turns.

We compare our model today for the first half to our model at the beginning of the year.

We think that the 140 million square feet of inventory build that we've had projected is now 160 million, an increase of 20 million.

That's only 1% of the world's annual end market but is 4% of a quarter.

However, we think that this build at set assembly is now 100 out of 160 where as we originally had forecasted it would only be 60 of the 140 in our opening forecast.

It is this analysis that drives us to believe that the current panel pricing drops are being driven by the set assemblers.

They built enough inventory and have built significantly more in the first half of '08 than '07.

100 build this year versus 50 in '07 at set a assembly.

They are also sensing the panel capacity will not be as tight.

Another reason to slow purchases and expect lower prices.

The panel makers have not over built their inventory so far, but if they don't trim utilizations during this period of adjustment, they will.

So they will now trim and keep their inventories in balance.

This will let set assemblers work off inventory.

The recent panel price changes reflect this war of balance between the two supply chain stages.

Of course all of this is playing against a retail environment that feels uncertain although the first six months have been great, and the historically seasonally stronger demand of back-to-school and holidays is around the corner.

If these remain on track, then utilization cutbacks are exactly what we've described, a normal supply chain correction.

So what are we seeing for utilization changes?

We are now seeing Taiwanese panel makers lower utilization to low to mid-80% range for their large sized line says which are typically GEN 5 and higher.

We expect them to stay at this level before beginning to climb in September.

These utilization cuts are part of the balancing between set assembly inventories and panel price declines.

The ultimate good news is that year-to-date retail has been strong, and further price reductions that flow through to retail should help spur consumer demand.

We believe utilization rates will move higher once inventory at set assemblers has been adjusted to more appropriate levels.

Clearly some panel makers have stated their Q3 utilization rates will remain at 90% or higher.

Investors should noted that utilization rates vary by panel maker.

Investors have also reacted negatively to June and Q2 panel shipment announcements.

I believe it is important for investors to look at shipment data for all panel makers in their entirety and not just individual panel makers before drawing conclusions.

While some panel makers had lower than expected shipments in Q2, others had come in as expected.

Investors should note that individual panel maker shipments results can be influenced by their share gains or losses, their pricing decisions and their product mix.

In the long run we continue to believe the most important metric for investors to watch is retail sales results of LCD products.

It is the retail sell through that drives the ultimate demand for glass and will overcome and drive the supply chain.

So what are we seeing at retail?

All retail reports through June have been very positive.

June LCD TV sales in the United States were up 35% year-over-year according to NPD Group's retail tracking service.

This continues a trend we've seen throughout 2008, LCD television sales have been up 30% year-over-year each month 30% year-over-year.

For the first six months this year retail sales have been very strong with LCD television sales in the United States up 37% versus the first half of a year ago.

We know investors continue to worry about the impact of the U.S.

economy and LCD television sales.

As we've shown you several times in the past, TV sales have done well in past recessions.

We should also note that this worry has been with us all year and each month we still see consumers buying televisions.

We cannot guarantee they'll continue to do so, but we are encouraged by the resiliency of television purchases in the United States.

Lastly, investors should remember only 30% of TVs sold worldwide are in the United States.

We also just received June retail sales of LCD television units in China.

Despite the fears that the earthquake would have a lingering impact consumer behavior, LCD television unit sales bounced back up in June to be 62% ahead year-over-year.

We believe the continued strength of LCD television sales is due in part to the continued collapse of the CRT market.

On this slide you'll see June television sales in the United States broken out between LCD, plasma, rear projection, and CRT.

While LCD television sales were up 35% versus a year ago, CRT sales were down 71%.

Based on the first half data we believe the worldwide television market is still on track to reach at least 105 million units this year.

Our estimates are consistent with many of the A brand television manufacturers as well as electronic retailers.

Investors have also been concerned that the economy will influence consumers to purchase a smaller less expensive television.

On this slide we have worldwide LCD sell through by screen size for this year through May which is our most recent data.

As you can see since the beginning of this year the percentage of televisions 40" and higher have been consistent, around 24 to 25% of all televisions sold.

Compared to a year ago, the percentage of LCDs sold over 40" has actually grown significantly.

On this chart you can see the screen size breakout by month for the last year which is where I would like to draw your attention to June 2007.

A year ago televisions 40" or higher were only 16% of total compared to 26% today.

An interesting conclusion that can be drawn from this data is the shift from smaller to larger televisions.

In June of 2007 smaller televisions between 10" and 29" were 41% of the total.

Today they are only 33% and falling.

I would like to address one more topic that investors have asked about.

2009 panel capacity additions and their impact on glass demand and pricing.

To sum up investors concerns panel makers will put in too much capacity next year.

Glass makers will follow with too much capacity.

Then if the end market demand does not support all the panel and glass capacity there will be excess glass capacity which will lead to significant glass price declines.

Those are a lot of assumptions, but let's start with the panel capacity expectations.

Based on panel makers public announcements, they will be adding a total between 25 and 30% new capacity next year.

Some investors believe there will be far more new panel capacity added.

It is important to note not all capacity additions start on January 1.

Even more importantly, it typically takes months, sometimes more than a year for new fabs to ramp to full capacity.

Here is a listing of new fabs being added next year based on public announcements.

As you can see, many do not start until the second quarter and most will not reach full capacity until 2010.

So regardless of whether there will be excess panel capacity in 2009 or not, key question is what will the additional glass capacity be?

Based on our capacity plans and the public announcements by the glass makers, we believe glass capacity will grow between 20 and 25% next year which is in line with our expectations of end market demand, so even if glass makers put in excess capacity, we expect the glass market to remain tight and glass price decline to remain moderate.

Let me share with you some of the historical data to help put this in context.

Again, for those with web access, we have a chart comparing panel capacity addition to glass capacity additions.

In 2006 panel makers added 51% new capacity while glass makers added 48%, in line with the end market demand.

2007 panel makers added 42% new deposit while glass makers added 45%.

Again in line with end market demand.

This year panel makers are adding about 32% new capacity while glass makers have announced 30% increase, maybe slightly higher, but in line with end market demand.

We agree there is likely to be some excess panel capacity being added next year but as we are seeing today, panel makers either lower their utilization rates or slow their ramps as needed to adjust to market demand.

Based on our analysis of panel maker capacity additions, timing and market demand we believe panel makers may need to run at slightly lower utilization rates in comparison to the last two years.

Let me take a moment to walk you through some of the end market data for Q2.

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

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

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

We estimate there are approximately 23 million LCD televisions shipped in Q2 compared to the second quarter last year LCD television shipments were up 45%.

Penetration to LCD television worldwide TV market grew from 46% in the first quarter to 51% in the second quarter.

The data also suggests that notebook sales were very robust in Q2, about 32 million were shipped in the second quarter which was higher than our expectations.

Notebooks were about 46% of all PCs sold, up from 43% a year ago.

Moving into LCD monitors, about 43 million were shipped in the second quarter, slightly higher than the 42 shipped in Q1.

I would like to turn to the other segments.

I will start with environmental.

Where sales in the second quarter were 209 million, a 6% increase over the first quarter of 197 million.

Auto product sales were 132 million in the second quarter versus 137 million in Q1.

Strong demand internationally was more than offset by weak demand in North America.

Diesel product sales were 77 million in the second quarter, up 28% versus Q1 sales of $60 million.

Heavy duty diesel sales were up slightly due to retrofit demand in China, light duty diesel sales were up significantly due to strong demand in Europe.

Segment net income was $28 million in the second quarter, a significant increase over the first quarter net income of $13 million.

In comparison to a year ago, environmental segment sales increased 9% driven primarily by positive exchange rates and higher diesel sales.

Net income doubled.

Turning to telecom, sales in the second quarter were $477 million, an increase of 13% over Q1.

The increase was driven by fiber to the home demand as well as strong fiber volume.

Sales in our fiber and cable products in the second quarter were $248 million, an increase of 16% sequentially.

Sales of hardware and equipment products were $229 million, an increase of 11% sequentially.

Fiber to the home sales which are primarily hardware and equipment related were $99 million in the second quarter, 29% increase compared to Q1.

Second quarter fiber to the premise sales were driven primarily by strong demand in North America compared to a year ago fiber to the home sales increased 36%.

Net income in the telecom segment was $23 million in the second quarter compared to $11 million in the first quarter.

Compared to last year, sales increased 11% excluding the sales from the business we divested in April last year.

Net income was consistent excluding the $19 million gain we made from the sale of that business last year.

One additional note our Corning Cable Systems business has seen significant material cost increases and will be implementing price increases to offset these costs.

Sales in our specialty materials segment were $104 million in Q2, an increase of 25% over Q1 sales of $83 million.

The increase was due to strong demand for our advanced optics and technical materials products.

Compared to a year ago sales were up 9%.

In our life sciences segment sales in the second quarter were $87 million, a 7% increase over Q1 sales of $81 million compared to a year ago sales were up 12%.

Segment net income was $16 million, an increase of 60% versus the first quarter and 45% versus last year.

Our life sciences business also plans to increase prices to offset increases in material costs.

Now, turning to Dow Corning, equity earnings were $94 million, an increase of 18% over quarter one equity earnings of $80 million.

The higher earnings were primarily driven by strong worldwide demand and base silicone business across all segments.

We're pleased to note the general health of the silicon portion of Dow Corning's business has not been significantly impacted by the economy.

Outside of higher raw material prices.

Dow Corning has been able to partially offset these rising costs with higher pricing in the quarter.

For modeling purposes Dow Corning sales were $1.38 billion in Q2 compared to $1.28 billion in Q1.

Now let me go to the balance sheet.

Moving to cash we ended the quarter with about $3.5 billion in cash and short-term investments up from $3.3 billion last quarter.

Free cash flow was $295 million in the second quarter.

As always free cash flow is a non-GAAP measure.

As I mentioned earlier, this morning we announced a $1 billion share repurchase program effectively immediately.

This is in addition to our previous repurchase program of $500 million of which only $125 million remains.

This decision was based on the strength of our current balance sheet, which we believe contains more than enough cash and short-term investment to say protect the financial health of the Company and our confidence in our future cash flow projections that should allow us the flexibility to fund our significant R&D initiatives and other investments.

We have spoken to the rating agencies about the larger repurchase program, and they've confirmed our new program will not have an impact on our current debt rating level of BBB+ or BAA1.

Now we go to the outlook.

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

We expect third quarter sales to be between 1.65 billion and $1.72 billion.

This would represent an increase of 6 to 11% over last year's Q3 sales of 1.55 billion.

Our third quarter EPS before special items is expected to be between $0.48 and $0.51.

This would represent a 26 to 34% increase over last year's Q3 EPS ex specials of 38%.

Just as a reminder this is a non-GAAP measure.

Our Q3 guidance is based on a yen to dollar exchange rate of 108.

Exchange rate in quarter two was 104.6.

Investors should note that the sell side Q3 sales estimate of $1.79 billion and EPS estimate of $0.50 are based on exchange rates between 1.03 and 1.05.

For those analysts using 1.03, the impact to Q3 is approximately $45 million on sales, $0.03 on EPS.

For those analysts who are using 1.05, the impact is about $30 million on sales and $0.02 on EPS.

We would ask all analysts to use 1.08 in their estimates going forward for Q3 and Q4.

Moving down the income statement, we believe gross margins will remain at least 50%.

SG&A is expected to be approximately 15% of sales.

RD&E is expected to be about 10% of sales in the third quarter.

Dow Corning equity earnings are expected to increase 20 to 30% sequentially driven by the growth in the base silicone business and the benefit of new capacity in Hemlock Semiconductor.

The new capacity is online and ramping well.

Regarding our tax rate for the third quarter, it is expected to be between 12 and 15%.

Moving to our display outlook, we anticipate third quarter glass volume at our wholly owned business and SCP combined will grow 4 to 9% sequentially.

Glass volume at our wholly owned business expected to be flat to up 5% sequentially.

Normal price declines in the quarter are expected to be around 2%.

SCP's volume is expected to increase between 8 and 13% sequentially.

SCP price declines will be consistent with our pricing strategy.

As I mentioned earlier in the call, the difference in growth rates between SCP and our wholly owned business reflects the current strength of certain television brands, primarily Samsung.

Samsung recently announced they're reducing their panel inventories by cutting back on buying panels from the Taiwanese.

We think it is a reflection of the current panel capacity environment and recent strength by A brand televisions versus B brand.

It reinforces the Taiwanese utilization trimming I mentioned earlier.

SCP equity earnings will be impacted by about 15 million, and averages 1.08 in Q3 compared to Q2.

As a result, SCP equity earnings could be flat to up slightly.

Moving to the telecom segment, we anticipate third quarter sales to be flat to up 5% compared to our very strong second quarter.

We anticipate the environmental segment sales in Q3 will be flat sequentially.

Higher diesel sales will be offset by lower auto demand.

In our life science and specialty materials segment we expect Q3 sales to be consistent with Q2.

Ken.

Thank you, Jim.

I believe we're ready for questions now.

(OPERATOR INSTRUCTIONS) We'll go to our first question with Mark Sue with RBC Capital Markets.

Please go ahead.

Thank you.

Good morning.

Understanding your comments on supply, are there any July indications of macro impact on retail demand?

Do you think there was some prebuying related to the Olympics which caused set assembly makers to build inventories?

We believe that set assembly did build this year earlier than normal for two reasons.

One would have been the Chinese Olympics, and the other would have been that they expected tight supply capability in the back half of the year.

We have no change -- we have no hard data on macro change in retail environment for the month of July.

We generally get that about three weeks after the end of the month and point out it is only July 30, today.

Jim, considering the new utilization by panel makers during the current quarter and higher set assembly inventories what kind of glass seasonality should we assume in the holiday quarter?

It is hard to kind of look back at historics, but if you had to give us some qualitative measures?

We clearly have seen different seasonality every year, but as I indicated in my remarks earlier this year, we have never expected that the Q3 going to Q4 would be up very much because we thought the supply chain was building earlier.

We have no reason to change that expectation right now.

We're hopeful that these utilization cuts in Q3 will pull back some of the inventory that was there, but we're not expecting a robust quarter over quarter growth in Q4 for the glass market as a total.

Lastly, Jim, with everything going on, do you reassess your planned production increases or at least draw it back a little bit?

We're continuing to run full.

We have failed to build any inventory as what we talked about with our manufacturing upset.

That actually shorted customers, so we're continuing to run full.

We're not changing our plans for capacity additions for next year.

Clearly we have the ability on a given tank repair or given tank startup to moderate at its time, but given what we continue to see in the end market retail around the world, we don't see a reason to change our capacity additions at this point in time.

Okay.

Thank you and good luck, gentlemen.

Next question comes from the line of Brian White with Collins Stewart.

Please go ahead.

Good morning.

Just on the pricing environment, panel prices are going down fairly quickly.

Some of the panel makers are trying to get cost downs that higher than what they've had in the past.

Have you actually had panel makers ask for better pricing in the second half of the year?

Yes, we have, and we've had panel makers ask for lower prices even when they're raising their prices.

There has never been a meeting where they haven't asked for a price reduction, so this shouldn't come as a surprise as they're going down.

We'll tell you that we are holding firm on our prices.

Okay.

Great.

And just linearity of the June quarter, was there anything that is different or maybe you could talk about how the quarter typically trends in terms of linearity of the three months in a June quarter?

The June quarter was very consistent throughout the quarter.

We didn't see any real shifts in terms of capacity utilizations in the June quarter.

All the months were quite good.

The month of July was actually quite good and just at the end of July that we had some panel makers begin to either start to trim or announce their trims for August.

So June quarter was quite good.

I think as we deal with a series of questions that you've had on seasonality and on pricing, I think what's important to do is reiterate as we look at the total year, we still feel good about being at the high-end of our 25 to 30% growth in LCD glass for the year, so given we expect the total year to still come in where we thought it would, we continue to therefore see our guidance through quarter three, then tells you what we think about quarter four, and then all of that would therefore be consistent with the way we laid out our pricing strategy at the beginning of the year, so other than the, what we view as a supply chain correction that Jim went through I thought very effectively in the first part of this conference call, we see the year coming out largely the way in which we thought it would when we started the year, so we don't see any reason to change our strategies.

Okay.

Thank you.

Next question comes from the line of C.J.

Muse with Lehman Brothers.

Please go ahead.

Good morning.

Thank you for taking my question.

I guess first question on the appliance shutdown and where you talked about not having sufficient inventory to supply that particular customer, can you comment on their ability to out source from the two other guys and how much excess supply there is out there for the glass market currently?

The particular incident that you're talking about supply of that particular glass is very tight.

And regretfully we put our customer through some hard times during this quarter.

So that tightness of glass they felt and we felt right away with this regrettable manufacturing incident and we're working our way out of it, so we hope to be on track, and we've improved significantly with our delivery to that particular customer.

So you feel good that that will not have a material impact on your Q3 results?

Any time you have a manufacturing incident like this, it takes a little while to recover from it.

We believe that the worst of it is behind us, and that we're ramping steadily up.

We'll still feel a little bit of a drag, though, but we believe that the worst of it is behind us, and we're going to be okay.

Okay.

Was there an impact on pricing because of this to that particular customer?

It didn't impact our total pricing or our normal pricing.

However, the particular way in which this manufacturing event present itself is it also gave our customer some issues in their factory, and we helped them make that right in terms of that economic impact.

Price per se, but we tried to help make that right for their impact on their throughput.

Great.

And then I guess on the SG&A front, Jim, I think you guided to 14% and it came in at 15.4% or roughly 20 million higher than what you're looking for initially.

I guess can you comment on what happened there and how we should think about SG&A going forward?

I don't see -- I don't think there was anything material in SG&A during the month.

We are spending a little bit more, but there is nothing material, no material change.

Okay.

I guess last question for me.

I guess given some of the uncertainty with inventory at panel makers running at six to eight weeks and your comments about inventory at set assemblers, how do you think about managing your capacity additions?

I know you said in a prior question that you're sticking to your plans, but do you see yourself at the margin delaying by a quarter or so just to make sure that you keep glass supply tight?

First of all, we don't think panel makers are at 6 to 8.

The only place anybody is above -- there may be a couple people, particularly in China who are above 6, but the Taiwanese which is the most important to us are 5 and in Korea we're lower.

Second, to answer your question we don't intend to change our capacity plans.

As we said before, we would love to actually rebuild some inventory so we have the ability to do better as a customer supplier.

We're running very light, and so we're not planning to make any changes at all.

Basically we ran full in Q2.

And to build on what Jim is saying, taking a little step back to understand why we put in the capacity we do is we start with it all based on our view of the end market demand.

We do our best not to follow the panel makers through their cycles of either putting in too much capacity, too little, or we say what do we believe is going to happen in end market demand and we build to that, and as long as we do that, glass supply should remain relatively in balance with demand which should in turn support our pricing strategy, so we do our best not to over react to the supply chain protubations that we're experiencing right now because if we do, you can very easily end up in the wrong place from either a pricing strategy standpoint or on the other hand from a service and share standpoint, and I think that's why that, what we call the glass model that Jim just went through I think so very informative and helpful.

Very helpful.

Thank you.

Our next question comes from the line of Steven Fox with Merrill Lynch.

Please go ahead.

Hi.

Good morning.

Two questions.

First of all, is there any other specifics you can provide on the manufacturing issue in terms of what exactly happened?

Sure.

We had an employee who didn't operate to our SOP, it's very rare that something of that occurred, and we had to recover from it.

And in terms of what kind of generation glass this was, was this larger size glass, I assume?

So we don't want to really comment on it.

There has been plenty of speculation about this out in the noise level in Japan and I am sure if you were really curious you could find somebody with a theory, but I am not going to give any of those theories credence.

Fair enough, and then the last question would just be on in terms of what the customers and the retail checks are turning up, there is definitely a risk that the economy could get worse in the second half of the year.

Are your customers anticipating some of that in the orders they're talking about and what does that mean also for mix?

You addressed how the mix looked year-over-year, but do you expect a steady mix of TV sales in the second half?

Can you just talk about those impacts from changes in the economic environment?

Well, I think we've been dealing with this all year long, Steve, is the fear that the -- every time everybody asks us, it is the next quarter where they think the economy will reach up and grab us, so it is very possible, but we kind of were weathering our way through what are the weaker seasons at retail and which is late spring, early summer, and looks like it is going okay, and then we run into the holiday and back-to-school.

I think the only thing that we can say from our customer's point of view is they're expecting to have terrific prices at retail in the back half of the year.

We're hearing fabulous prices for 32" televisions, so that perhaps could influence size a little bit, but we're still having people plan on quite a strong retail -- a strong fourth quarter retail.

Great.

Thank you.

Steve, I want to build a little bit on what Jim said because I was having the conversation with our Chief Operating Officer this morning, Peter Volanakis, and he was commenting actually on a slide that Jim showed when he was doing the walk through this morning with you on the conference call which is when people get concerned about the economy, which is, granted not a great economy right now, they tend to compare that with, for instance, the sort of 25 to 30% growth that we're talking about, and it sounds like, wow, that much growth in a consumer product in this economic environment, does that make sense?

But what people miss is that, for instance, let's take a look at June.

I want to reiterate something that Jim went through is category growth.

If you add up all the different technology types for display, LCD, PDP, rear projection, and CRT, and say what was category growth year-over-year in June in the U.S.

sell through, it is only up 4%.

Right?

And so that actually ties very well with the data that Peter Volanakis presented earlier in the year that said we actually have gone back and analyzed past times of economic malaise and what you see is that television sales tend to hold up in that, so 4% growth in this type of environment doesn't sound that bad or doesn't sound like much, but then within that figure what you see is the old technologies really getting slaughtered, so you have got rear projection and CRT down 70%, and that makes room for the strong flat panel growth like LCD of up 35%, and I think people have a hard time keeping all of that in their mind, but if you take a look at it, 4% growth makes some sense in this economy, and then the power of penetration to the new technology is what's driving our growth rate so much higher.

I just think that's important to keep in mind.

Our next question comes from the line of Curt Woodworth with JPMorgan.

Please go ahead, sir.

Hi.

Good morning.

Good morning.

Jim, in your prepared remarks you talked about on a go-forward basis you feel the panel makers are going to run at relatively lower utilization rates than they have in the past, yet you still feel like you're going to run at basically capacity, so is that statement essentially saying that you think their view of the market is definitely higher, kind of relative to where you're at right now?

That our view of the market is higher than their view?

Is that what you said?

I am just trying to think why would they be running at lower utilization rates certainly in the back half of the year when you have strong seasonal demand relative to you guys running at 100% capacity?

Well, remember what we're talking about are shipments in our base business being at worst flat to Q2, so they could be up, and then SCP be quite strong.

We're going to -- we obviously could make a little more in Q3 than what that forecast implies, and we're going to rebuild some inventory, but not a whole lot.

We think their utilization trends are really reflecting their desire to try to help stabilize the panel pricing for themselves which will occur with set assembly, works off some of the inventory, but in talking to all of our customers, we're not getting a sense that people are having a different view of the end market than what we do.

What we have is that there is some correction in the supply chain which frankly you go back to the beginning of the year, we knew that people were building and the question was whether it was too much or not, and they're now the point of view is it probably did turn out to be a little too much, but we're not that different in terms of what we're running versus what we think the end market is.

And the panel makers, remember also, they start out with more capacity in the ground relative to demand that than we do, right, so that because they have built into their own, their own views of share, et cetera, so that also makes it hard to relate directly their utilization to our utilization if that makes any sense to you.

Right.

Okay.

And, Wendell, on the penetration rate, can you guys give us an update on globally where you see penetration rates right now?

If you look at the NPD data, the U.S.

penetration rate for LCD is running about 82%.

I know starting the year you forecast North American penetration rate at 77.

So it seems like it is running considerably higher than you initially thought.

I wonder if you could just provide a little bit more insight into that globally.

I think the danger with the penetration rate, Curt, is always what's happening with CRTs, so clearly CRTs are falling more rapidly, not everybody who was going to purchase one of those is turning over to purchase an LCD.

Quite a few are.

That's what I think is making the penetration rate look higher than what we originally expected.

The absolute units of LCDs around the world appear to be basically on track with what we said originally.

Because there are fewer CRTs being sold, that is changing the penetration rate.

Got it.

Okay.

It is very well said.

Some of that, the economic impact that people are concerned about is being felt primarily by the old technology, right?

Right.

Okay.

Thank you.

Our next question comes from the line of Vijay Rakesh with [Think Premier].

Hi, guys, just trying to go about this whole retail and panel production turn once against.

You said Taiwan inventory was up from four to five weeks which is seasonal given that you're going into Q3.

Why then would they be cutting utilization back 10% for the quarter?

Just seems if Q3 is going to be strong, that things are, the build up is seasonal, they're continuing to go over this?

Their cutbacks are related to because even though they've seen panel prices fall very dramatically, we often warned this is a leading indicator, and they because of the panel price drops it is really an indication of the inventory not at their level but really what's happening at the set assembly level where we do think there has been a substantial build, so, yes, people are preparing for seasonally stronger back half of the year, but there clearly is more than is needed for that at this stage, and that's why that's showing up in panel prices and the panel makers are reacting very appropriately to trim back a little.

I'll just comment on the utilization comment a little bit again.

There is a danger in using percent here because the panel makers actually were adding capacity, so our actual shipments in our base business can turn out to be about the same as what we shipped in Q2 even though the overall utilization cut sounds like it is down quite a bit.

Remember, they were having capacity adds at this point in time so we could turn out to ship them about the same amount of glass in the quarter.

Obviously lower in the month of August than we were in June and July, but September could be greater than that, and end up with a flat quarter.

Okay.

So if their July/August is coming down and your glass shipment is going up quarter over quarter, what are we missing?

I mean, you heard AUO, CMO, LPL, all the panel guys cut back on utilization except for Samsung.

What is missing in that equation?

I don't think there is anything missing in the equation.

I mean, what -- you have to look at what their area shipments are, a number of people have talked about an increase in their area of shipments, what they're taking in at glass from us, their inventories, and in total, but I don't think you're seeing anything wrong with the math in the model.

I think the important thing always to do and we really worked hard at this starting in a number of years ago is you've got to figure out where you think the end market is.

Now, we still have half the year left.

We don't know exactly what's going to happen at retail on sell through in that back half of the year.

Maybe it will be an impact.

Maybe it won't be as good as it is that we've experienced in the first half.

All we have is sort of looking in the rearview mirror.

When you look at the rearview mirror and what's happened through June, you see very strong sell through performance, sell through performance that really supports what we've been saying which is we're going to grow LCD glass in the upper end of our 25 to 30% zone.

You got to spend your energy on what do you think is going to happen in that back half on sell through?

And do you buy what we currently believe, we think very plausibly what we see the total year working, and then to not get fooled by what happens between set makers, panel makers, what happens with a given utilization, what happens here on price or there on price, as long as you're trying to figure out how a longer time period is going to work, a year, something like that, then that sort of logic will carry you through any of the short of short-term protubations that you will experience trying to track a bubble through a supply chain.

Got it.

One last question on the gross margin side came down about 200 bips.

You mentioned 50 bips of that was a manufacturing issue.

The guidance is for 49 plus for September.

Is that kind of where -- first, what is impacting it and is that where margins will be going forward?

So for the Corporation we said guidance would be at least 50% in Q3.

What drove it down in Q2 was a combination of manufacturing problem and the rest was the mix of the business with telecom.

Got it.

Great.

Thanks a lot.

Next question is from the line of John Harmon with Needham and Company.

Please go ahead.

Good morning.

Good morning.

I guess just sort of thinking about this, you're making glass based on your view of the year, which you made perfectly clear, but it seems like in terms of the inventory that was dealt that maybe the industry ran a little hotter than it should have in the second quarter which would imply in the third quarter there could be some excess capacity around there with some of the panel makers cutting capacity.

Is that reasonable and could there be any effects on pricing?

Excess capacity on glass?

Yes, given that certainly some panel makers that had been running at full capacity are running at lower capacity.

That would imply there might be excess glass out there.

So we would say no.

We would say, there might be a small amount, but in an industry that takes 500 million square feet in a quarter, if there is an extra 20 million square feet that might be available, it is not going to influence pricing.

We're definitely not changing pricing.

What we tried to do in the analytics is integrate when you have seen those public announcements from the panel makers of what they're going to do with their utilization.

What we tried to do is integrated all that into the guidance that Jim just gave you of total family glass shipment volume being up 4 to 9% quarter three versus quarter two which will tell you we expect obviously to ship more glass in quarter three than we did in quarter two, so we tried to integrate all that utilization input and then that's what we based our guidance on.

Okay.

Thank you.

Just one more, please.

It seems -- I think panel makers got caught up short the last time we had a similar type of inventory behavior, but given if it takes three months to go from glass to finished television, given the strong fourth quarter seasonality, in other words if you want a TV on the shelves by the holidays, you probably got to make the glass this quarter.

Do you think the panel makers might be a little short sided again and not, I am thinking about the strong seasonality of the fourth quarter?

No.

We don't think the panel makers are shortsighted.

We think they're acting very appropriately.

We do think there is a large amount of inventory at set assembly level that can help the back half of the year, and so we don't think they're making a bad decision with what they're doing now.

We don't expect these lower utilization rates to stay there for a long period of time.

They clearly want to include the panel price environment, but we clearly expect them to begin ramping back up.

I think it it will vary a little differently for each panel maker, particularly relative to their strength in the end market, but we definitely expect them to ramp back up.

Okay.

Thank you.

Next question comes from the line of Carter Shoop with Deutsche Bank.

Please go ahead.

Good morning.

Good morning.

A couple quick questions here on the manufacturing problems.

Can you quantify the anticipated drag in 3Q?

I don't think -- I would be surprised if we would be even talking about it in terms of a drag.

Okay.

And in regards to the inventory level that the Taiwanese panel customers, you talked about how it went from four to five weeks from the beginning to the end of the quarter.

Do you have a sense, I am not sure if you have the information, but do you have a sense on where inventories were or are closing out this month?

No.

The month isn't even over yet, doesn't end until tomorrow.

I am sorry.

We don't know.

Two more quick ones.

For SCP you talked about a $15 million I think charge.

Is that in in 3Q?

That you anticipated and had can you elaborate on that?

It is an FX movement.

15 million.

The comparison Q3 versus Q2 there is a $15 million FX downward Q3 versus Q2 if you use 1.08.

Okay.

I am trying to better understand the comments about SCP earnings contribution only being flat to up slightly, if you take the midpoint of volume, you take 3% FX drag, and a 2% drag to pricing, it seems like it should be up at least 5%.

We're bringing on new capacity in Korea to get prepared and that will bring additional cost in, but it won't be any output this quarter.

The other thing is the tax rate will go up just slightly in Q3 versus Q2, so those two things are unfortunately combined with the FX kind of dampening the fabulous volume we're getting.

That's helpful.

Last question.

Can you discuss your level of confidence about maintaining your pricing strategy into 2009 as it sounds like you're anticipating a moderate over supply situation at your customer?

We're very confident about maintaining our pricing strategy.

We've said and we demonstrated in 2007 that we're willing to stick with this and as long as we're reasonably correct on the end market and how it flows through the supply chain, we think our strategy is very good and we'll stick to it.

That's helpful.

Thank you very much.

The next question comes from the line of John Roberts with Buckingham Research.

Please go ahead.

Good morning, guys.

Good morning.

Could you give us an update on your strategy for requiring deposits in advance of glass expansions?

We're working that down.

I don't know how that trends over the next several quarters to the next couple of years.

Well, we're not getting any new deposits for glass.

So it just is working its way out in terms of on our cash flow statement we break it out for you separately, but we began this in 2005 and it is basically winding its way off and we'll all be gone pretty soon in terms of impact on the cash flow statement.

Have there been any recent changes to payment terms?

I know you give us average selling pricing, but has the duration or terms of the contracts changed at all?

There has been no change in terms of our day sales outstanding, what we ask our customers to pay on recently.

Remember the way that deposits work, want to make sure we get these two things separate.

When somebody gets an invoice from us and then goes to pay it, they're allowed to use a certain amount of their deposit as effect I am going to send you ex amount of dollars, please take some out of the deposit I gave you and it is all regulated, but we have not changed our terms to customers saying, hey, you're going to get more days to pay.

Thank you.

Next question comes from the line of Jeff Evenson with Sanford Bernstein.

Please go ahead.

Good morning.

Wondering as you look at the strength of the A brands as you call them that's promoting much more rapid growth in SCP than in Taiwan, say, how the tier B brands might respond and what that would mean for you all?

It's a great question.

I would say also one of the hardest things for us to predict is what we call regional mix that usually plays out around the A brand versus B brand dialog.

What we believe is that the A brands will continue to be strong this year.

And the B brands will have a follow and therefore you'll get some recovery there as well, but I would say it is always hard to forecast what's going to happen in the end market that starts right and then we try to pick which of the brands are going to have the most share or propensity towards error goes up so I would hate to say anything too predictively about it.

Second is as you think about the mix between SCP and a wholly owned business, clearly from a revenue perspective it is better off if the sale happens at the Wholly owned business, so Taiwan or Japan.

What about from an earnings perspective?

Is there a preference for you all where the glass goes?

We still prefer that it shows up in our wholly owned business even though SCP is very profitable, but clearly getting 100% of that revenue even though SCP is very efficient, I'd rather have it, but we're delighted to have our share position with the two large players in Korea and so we have no regrets.

Counting the royalty that you get on SCP, how long does that royalty stay in place?

A long time.

Great.

Thanks, guys.

Thanks.

Next question comes from the line of Ajit Pai with Thomas Weisel Partners.

Please go ahead.

Good morning.

Good morning.

Two quick questions.

One is about your second largest consolidated business that's your telecom business.

If I look at the revenues while it is growing nicely, it seems to have sort of negative operating leverage, your earnings actually operating income is down, net earnings are down while revenues are up.

Can you give us some color as to whether it is just the factor that you mentioned about the cable side of things, inflation pressures there, there's something else that's impacting those earnings and when that can change or when will that change?

And then the second is on your life sciences segment you had some pretty incredible profitability this quarter, almost 20% operating margins or close over there.

Can you give us some color as to whether there is a one-time issue or on an ongoing basis actually expect profitability where it is now?

I will comment on cable and let Wendell will take life sciences.

We definitely in telecom did not have profitability leverage we would have liked with the volume.

There are a couple of things going on.

We clearly have some material price cost increases I talked about and we're moving to recover that.

We did have some additional costs that we had to put in ourselves to help us, we implemented a new supply chain system which we have been planning for quite a while, but in order to bridge as we went through it and not harm customer shipments we did add some cost, and lastly within the mix of products within telecom, we do have one richer product that has been on decline.

We've known it was on a decline, and the decline has accelerated a little bit, so that's what's going on in telecom, but we obviously are not happy with the margin weakness that we've seen in telecom and are working very quickly to try to get that back so that we get the volume that falls to the bottom line.

Wendell, do you want to comment on the great performance we're having in life sciences?

Well, first of all, thank you for noticing life sciences.

That profitability is exactly what our strategies and efforts have been about, and we planned for that to be the way our life science business looks going forward.

Okay.

Then on the telecom side is there any change in the pricing environment?

Is it a pricing issue, not in terms of the cost of goods sold for you but more in terms of what you can charge for your products that is impairing your ability to expand those margins or is everything on track with the second plan you brought in line or are there any unexpected expenses that you faced over there?

There's no issue with Concord on fiber.

Fiber is going terrifically.

The margin issues are really occurring in our cable systems business, and we are going to move to raise prices and are notifying our customers there, but it is really more of a cost base issue and a mix issue within cable systems, but in terms of our manufacturing particularly in fiber we're doing fabulous.

That leverage should start showing up over the next couple of quarter from the fiber side?

You definitely have been seeing fiber leverage already.

The only problem is fiber is just too small within the overall mix.

We're definitely getting it.

Okay.

Thank you so much.

Thank you.

Our next question comes from the line of Brendan Furlong with Miller Tabak.

Please go ahead.

Thanks for taking my call.

Touching back on the gross margin issue, the 50 basis points hit that you took on the manufacturing problem, is a good assumption that you get to 50 basis points back this quarter?

And then I have got other questions.

We certainly hope to get a lot of it back.

Okay.

The other question I have, the last time the industry went through a panel build inventory driven down cycle if you will because the demand obviously is there on the long-term basis, do you think the broadest back out of the cycle was the panel makers cut their CapEx with them bringing down utilization are you hearing anything from the panel makers that possibly they might reign in their CapEx a little bit in '09?

We have not heard any change in capital spending, but I do think it may be a little premature to hear about that.

I think that more likely what you will see is a delay in start up of some of these new facilities rather than an absolute cancelation of one of them.

That's good news.

My last question is you talked about the build up in your A-list and set assembly guys.

Obviously Sony had a big inventory build yesterday had they reported.

Why wouldn't that feed into SCP and your outlook for SCP next quarter?

SCP supplies Samsung who obviously supplies Sony, but what part of Sony's product.

Sony also buys from a number of players, as I think you know, they don't manufacture anywhere really, they also use themselves.

But in terms of what Samsung has done, particularly with their own trimbacks and what they buy from the Taiwanese they're showing no change in their production rates and that's what they've demonstrate -- that's what they've called out publicly.

Our next question is from Nikos Theodosopoulos with UBS.

Please go ahead.

Three very quick questions.

On the production revenues of $24 million or the impact I should say, is that something you think is pushed out or was it lost revenue, in other words did competitors make up the difference in the quarter?

I mean, it is hard to tell.

It is hard to tell.

Okay.

There is a famous saying we have around here which is you can't make glass in the past.

Okay?

Fair enough.

Okay.

On gross margin can you give us the SCP gross margin in the quarter and looked like LCD wholly owned was down sequentially I guess the production in FX led to that, but can you give some color on that?

Nikos, it's Ken, I'll take the first part SCP gross margins in the quarter were 78%.

Okay.

Why was that?

What led to that strength?

They're running very well.

They had great volume growth as you saw, and great -- we're starting to see the second GEN 8 ramp at Samsung, so SCP has rebounded from some manufacturing issues.

They're beginning to get the benefit of Eagle XG, so we're delighted by that.

Do you think that's kind of a new level for the Company going forward or were there some one-time things that helped or what's your sense on that?

As I mentioned earlier in response to one of the questions, we will have a little bit of a drag this upcoming quarter because we have some new capacity that's coming on that will lower it a little bit, but definitely we expect SCP to have gross margins in the 70s.

My last question on environmental it looked like the EBIT margins went double-digit this quarter which was I think obviously positive.

Is that something that's also sustainable going forward or was there something one-time that helped there?

I wouldn't call it one time.

I think what you're seeing is what we've been talking about which is that diesel's profitability is going to continue to improve.

However, it has still got some lumpiness to it.

For instance, in quarter two one of the reasons our diesel sales were up was what you hopefully will see on TV pretty shortly which is we sold an awful lot of diesel particularly filtered to Beijing to help clean up the air before all the athletes arrive, so it has still got some lumpiness to it.

We don't yet have the diesel business exactly the way we want it in terms of revenue production, and we still have some of the issues with the U.S.

coking industry, so it has got -- still a little too lumpy, but in general the trend that you're noting is the trend we want it on.

It is the trend we're planning on, and hopefully environmental is only going to continue to get better over time.

Okay.

Thanks for answering the questions.

Our next question comes from the line of [Jim Silva] with Citigroup.

Please go ahead.

Thanks.

Could you give a little bit of color on you had planned in Q2 to rebuild a little bit of your internal glass inventory and with the production issue that you had you worked some down.

Can you give some color on how much you worked down versus what your plan was and what you need to restock or has that been fully done?

It sounds like you actually need to restock a little bit of Corning internal glass?

I don't have a specific number, but we would love to build some inventory and we're now anniversarying twelve months in a row where we've been unable to build any inventory, so we would be happy to build some, but I am not going to dollarize it.

We would like to get out of air shipping and we'd like to get out of a lot of different things.

It is just too tight right now.

Could you give us any type of without a dollar amount like a percent or even like that, less than 5%, less than 10%, or any parameters there?

I will not comment.

Last question, the production issue, is it fully resolved?

As we said in the comments, it is -- we're steadily improving.

I wouldn't call it fully resolved.

It takes awhile to get it behind us entirely, so we're very -- we feel very good about the improvement path we're on.

We're confident that we're going to get this behind us, but it is not totally behind us yet.

And the time line totally behind you, would that be exiting Q3.

Well, if I was able to tell that then it would never happen to begin with right?

So what our current plan is the impact this quarter will not be material, and that's our current plan, but you never know until you're out of it.

Okay.

Thank you.

Our next question comes from the line of [William Vogel] with Omega Advisors.

Please go ahead.

Mr.

Vogel, your line is open.

Let's go to the next question.

Make this the last one.

Our next question is from Andrew Abrams with Avian Securities.

Please go ahead.

Two questions.

First, have you guys seen any change in your cost structure?

I mean your manufacturing cost structure.

I know the panel guys have seen some cost increases on the material side.

How much if any have you seen?

And second, if we could talk just a little bit more about the size issue.

Let's make the assumption in the discussion that smaller panels are being sold at least in North America relative to what was expected earlier in the year or maybe late last year .

If we see increases in the number of those units where do we start to get parity with what might have been larger units sold in assumptions made

I will answer on the second question first.

In the U.S.

we originally talked about the growth going from 22 million televisions to about 28 million or 29 million.

If you were to assume that maybe -- I will just make up numbers.

Let's say 2 million of those were supposed to be -- that growth was supposed to be 40s and turned out to be 32" televisions.

You get about half the amount of glass in the 32 versus 40.

So you would have to set aside -- if you sell 2 million of 32s instead of 2 million of 40s, you got to sell 2 million extra 32s to make up that glass difference.

As our data showed we're not yet seeing that, but that's how you would estimate the impact.

On costs, I won't dollarize for the Corporation, but we are seeing costs increases in materials principally resins and life sciences, and the products that go into cable systems and either hardware or armoring the cable.

They're not material enough that it is changing our results for the Corporation, but obviously on top of it and want to raise prices there.

Energy is important to us overall, but energy tends to be as a percentage of our costs to be below 10%, so it has not been a significant item for us yet, but we're obviously paying attention to it.

We have not seen it show up in our primary raw material which is sand and clay although certainly transportation costs have factored in that.

Great.

Thank you.

I am going to turn it over to Jim for some brief closing comments.

I have a couple investor related announcements and also some closing comments.

First of all, Ken will be hosting an investor luncheon in Toronto on August 6.

If you would like to attend, give him a call.

Wendell will be presenting at the Citigroup technology conference in New York City on September 3.

Regarding our results over the first six months of the year, we could not have been more pleased, especially in light of economic environment we've been in.

Our first half sales were up 21% versus a year ago and our EPS excluding special items is up 50%.

Looking ahead we remain delighted about our current business opportunities and opportunities for the future.

There has been some negative reaction to the news coming out of the display supply chain.

We believe end market trends of LCD growth continue to remain robust.

We often remind investors in any given quarter there can be adjustments in the supply chain.

Obviously the panel makers and set assemblers are doing that right now.

Key for us will always be the underlying growth rates of end markets that LCD participates in and especially the penetration of LCD television in the TV market.

We have no change to our longer term views of this growth.

We also hope investors are pleased with our decision to return additional cash back to shareholders.

This is consistent with our strategic framework, in addition for those investors who usually worry over executive selling immediately following a quarter, you'll be happy to note that all 16B executives will refrain from doing so this quarter.

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

Thank you, Jim, and thank you, Wendell and thank you all for joining us this morning.

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That concludes our call this morning.

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Ladies and gentlemen, that does conclude the Corning second quarter results conference call.

Thank you for your participation.

You may now disconnect.