康寧 (GLW) 2008 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to Corning Incorporated fourth-quarter results conference call.

It's my pleasure to introduce to you Mr.

Ken Sofio, Division Vice President of Investor Relations.

Please go ahead, sir.

Thank you.

Good morning and welcome to Corning's fourth-quarter conference call.

This call is also being audio-cast on our website.

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

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

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

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

Jim?

Thanks, Ken, good morning, everyone.

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

We have also posted the accompanying slides on our website.

Before I begin covering the details I would like to make a few overall comments.

We're disappointed in our quarter four results.

I think the results are understandable in light of the difficult economic situation; however, we are disappointed.

We were on our way to an outstanding year, and quarter four wiped out a lot of strong performance earlier in the year and also value.

We've had some investors question whether we missed any turning points due to the worsening economy.

It's been my experience that turning points are very difficult to forecast.

Nevertheless, we've stepped back and looked to see if we missed any.

In the winter and early spring of last year, investors were worried that retail would turn down due to high energy and food prices.

Our response was, maybe, but we don't see it in our data on the retail sales of notebooks and televisions.

In retrospect, we did overestimate future IT level of sales at retail.

We had forecasted 15% and 14% growth in quarter three and quarter four, respectively.

Ultimately, IT square foot growth was ultimately only 2% in quarter three and a negative 6% in quarter four.

And, for those interested in the impact, that change was 84 million square feet of glass, about 4% of the full-year glass market, which was 2 billion square feet.

Also in retrospect, I do not think that we missed any signs on television growth.

TV growth at retail in square feet was up 55% in quarter two and up 41% in quarter three.

We had forecasted television growth to be up in the 40% range for quarter four and it turned out to be up only 20% in square feet in quarter four, an overestimate of 96 million square feet versus our July forecast.

I don't think we could have anticipated the September financial shocks and the subsequent traumatic impacts on consumer confidence in spending.

We did try to adjust our outlook down, but it clearly was dropping too fast and that led to multiple guidance revisions.

We had called out the supply chain risk in our July call.

We were worried that the supply chain might need to reduce 50 million more square feet.

The supply chain actually reacted faster and more severely than we anticipated in quarter four.

We had thought the supply chain would reduce 75 million square feet in Q4 with the risk of the additional 50.

The reality turned out to be far bigger.

Supply chain reduced 230 million square feet of glass in quarter for.

When you combine the retail weakness and supply chain contraction, you will understand why our glass volumes were down so much in Q4.

And by the way, these numbers I'm discussing here were for the entire industry.

So it was a difficult and disappointing quarter.

We are trying to learn from it for future forecasting.

More importantly, we are not in denial about the recession and started taking quick action in quarter four and are continuing to do so in quarter one to get our cost structure in line with the sales level.

So now, let me turn to the details.

Fourth quarter sales were $1.1 billion, about 30% lower than Q3 and Q4 a year ago.

We suffered declined in most of our businesses, reflecting lowering demand from the recession and supply chain contractions.

We're moving rapidly to reduce our cost structure to align our operations to a lower sales level.

We've moved quickly to slow production, most notably in Display.

We are also planning significant fixed cost reductions.

P&L benefit from these will show more significantly in the second quarter.

We are also planning to consolidate some manufacturing.

Those actions will take longer and the benefits will come later.

Q4 sales benefited slightly from changes in exchange rates versus Q3 as the benefit from a stronger yen was mostly offset from the impact of a weaker euro.

Moving down the income statement, gross margin was 28% in Q4 compared to 47% in Q3 and 48% a year ago.

The decline was primarily due to lower volumes in Display, Telecom, Environmental.

As a reminder, most of our businesses, especially Display and Environmental, have high variable gross margins and high fixed costs.

We see full gross margin potential in these businesses when they are running near capacity.

Unfortunately, the opposite is true when volumes are lower.

In addition, gross margin was impacted by accelerated depreciation stemming from capacity reductions taken in Display.

I'll discuss our capacity decisions in a moment; but, for your modeling purposes, there was approximately $32 million of accelerated depreciation charges to gross margin in Q4.

This impacted corporate gross margin by about 3 percentage points.

SG&A was $179 million or 17% of sales compared to $220 million or 14% of sales in Q3.

SG&A expense was lower primarily due to the reversal of variable compensation accrued earlier in the year due to a significant decline in Q4 results.

Fundamentally, Q4 was bad enough to drive any total year bonuses down to a very low level.

The accrual reduction represented a $37 million reduction versus Q3 expenses.

This accrual adjustment obviously will not repeat in Q1.

R&D was $153 million in Q4 versus $160 million in Q3.

R&D was also lower due to reversal of compensation accruals for R&D personnel.

Other expense in the fourth quarter was $33 million including an $11 million special loss on short-term investments I'll discuss in a minute.

The rest of the loss was primarily due to the impact of unwinding hedges for transaction levels that were down in Display and volatility in our balance sheet hedges.

Equity earnings were $282 million in the fourth quarter compared to $382 million at the third quarter, a sequential decline of 26%.

The increase is primarily due to lower earnings at both SCP and Dow Corning.

Net income excluding special items was $208 million, a decrease of about 70% sequentially and year over year.

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

Reconciliations to GAAP can be found on our website.

EPS excluding special items was $0.13, down about 70% sequentially and year over year.

Our share count for the fourth quarter was 1.56 billion shares.

Our fourth quarter results included net special gains of $41 million or $0.03 a share.

We released an additional $45 million of US deferred tax asset valuation allowances and reduced our asbestos liability by $28 million pre-tax and after-tax.

The asbestos liability was lower due to reduction in the valuation of Pittsburgh Corning Europe, which will be contributed to the settlement.

These gains were offset by a $22 million pre-tax, $21 million after-tax restructuring charge and an $11 million pre- and after-tax loss on cash and short-term investments.

Including the special items, our fourth quarter EPS was $0.16 per share.

As I mentioned earlier, we're moving rapidly to reduce our cost structure in this difficult environment.

In the fourth quarter we implemented the first round of workforce reductions affecting 500 employees, primarily in Telecommunications segment.

In total, the Company is currently planning to reduce its workforce by about a net 3500 employees, or 13%.

In addition to the $22 million charge we took in Q4, we will take a first quarter charge in the range of $115 million to $165 million.

We expect to complete all planned actions by the end of 2009.

Several of our equity companies are evaluating restructuring actions that may result in additional charges in the first quarter.

Annualized savings from all our planned actions will be in the range of $150 million to $200 million in our consolidated businesses.

We have also decided to suspend all salaried merit increases in 2009.

We're in the process of communicating many of these decisions to our workforce.

As a result, we will not be discussing the detail of the plans today.

Peter Volanakis will discuss the actions taken to date on our annual investor meeting next week.

Now let me turn to the segment results for the fourth quarter, starting with Display.

Fourth quarter sales were $390 million, or about 44% lower than Q3.

Volume at our wholly-owned business was down about 50% sequentially.

Display sales benefited by about 5% from the yen, moving from an average 108 in Q3 to an average of 98 in Q4.

Price declines were slightly higher than previous quarters.

Equity earnings from SCP's LCD glass business were $194 million in the fourth quarter, [this] increase of 25% compared to $259 million in Q3.

Volume at SCP was down 25% sequentially.

Moderate price declines were offset by the favorable exchange rate.

For your modeling purposes, SCP fourth-quarter LCD sales were $703 million compared to $896 million in the third quarter, a decrease of 22%.

As a reminder, this represents SCP's LCD sales only.

Our public filings will report SCP's total sales, which include the CRT glass sales.

Net income in the Display segment, which includes equity earnings, was $222 million in the fourth quarter, significantly lower than the third quarter.

For the full year, segment sales were $2.7 billion, a 4% increase over the '07 sales of $2.6 million.

SCP sales were $3.2 billion, a 32% increase over their '07 sales of $2.4 billion.

Volume growth in total for our wholly-owned business and SCP was 14%.

However, volume growth was much higher at SCP for the year at 28% versus our wholly-owned business, was just 1%.

Price declines for the year at our wholly-owned business were down 7%.

SCP prices were down slightly more, and segment results benefited from favorable exchange rates.

The glass market in total finished the year at 2 billion square feet, up 250 million square feet or 14% from the 1.75 billion square feet last year.

So our total volume growth of 14% was in line with the overall market growth but also highlights the strength of the Korean market.

As you may recall, our original estimate for 2008 market growth was at least 25%.

The actual growth of 14% reflects the impact of slowing IT sales from Q2 on, a lower-than-expected growth of television sales in Q4 and the supply chain contraction.

I'd like to spend a few minutes discussing the current supply chain and retail environment.

We believe the Display supply chain contracted significantly in the fourth quarter, but further contraction is likely.

Let's start with the fourth quarter.

We believe inventories in the supply chain fell sharply in the fourth quarter due to panel makers continuing to run at lower utilization rates, coupled with strong pull from retail for televisions in December.

In Taiwan, Gen 5 and higher fabs, which is most of the panel capacity, ran at 27% utilization in November and 23% in December.

For the quarter, the average utilization rate was 35%.

Please note this is our calculation and may differ from public statements made by panel makers.

In Korea, Gen 5 and higher fabs ran at roughly 70% utilization rate in November and 45% in December.

For the quarter, the average utilization rate was 68%.

On the retail side we found that LCD televisions remained a very resilient consumer purchase, even in this difficult economic environment, with year-over-year growth continuing in the fourth quarter.

US sales of LCD televisions were strong in late December as consumers may have delayed their television purchases.

For the month, LCD TV sales in the US were up 37% year over year, which is higher than we had forecast.

In the last week alone LCD television sales were up 50% over the last year, and we have just received the first and second weeks of January sales in the United States which indicate a year-over-year growth of 36% and 18%, respectively.

All this data is provided by NPD and it reflects about 50% market coverage.

Missing from NPD most notably is Wal-Mart, which also reported strong holiday sales of electronics, which included LCD television.

In the US overall, LCD TV sales grew 30% year over year in 2008 despite the weak 11% and 12% growth rates in October and November, respectively.

In other regions where weekly data does not exist, December sales of LCD television in Japan were up 17% year over year.

In China, December sales were up 30% versus last year, which was lower than our expectations; and in Europe where we have retail data only through November, which showed sales up 27% versus last year.

As a reminder, all the sales data I am quoting here are in units.

As a result of the lower utilization rates and strong retail, panel inventories fell significantly in the fourth quarter.

In Taiwan the inventory was estimated to be in the three to four-week range at the end of December.

We view four weeks as healthy, so these levels are encouraging.

This compares to up to six weeks of panel inventory in prior months.

It should be noted, the average weeks calculation is using current panel demand as a denominator, so the absolute decline in inventory is actually much greater than the decline in weeks would imply.

In Korea, inventory levels of panel makers are much less than in Taiwan.

We've seen improving supply chains metrics resonate in recent panel price data.

Panel prices have stabilized in many key sizes.

For notebooks, monitors and LCD television, panel prices remained unchanged in recent weeks.

So why are we feeling better about panel inventory and consumer demand?

What about the inventory at set assembly and retailers?

For those, there is not as much data, so we need to rely on our models.

Let me share with you some of the data from our supply chain model.

There's a chart we've posted for those with Web access.

For those of you who are only listening on the phone, let me describe what it looks like.

We model the equivalent amount of glass in square feet at various stages in the supply chain for each quarter, both in inventory and shipments for the panel makers, set assembly and at retail, as well as the amount of glass shipped into panel makers and the equivalent amount of glass shipped out of the supply chain from retail to consumers.

I'd like you to focus on the first quarter 2008 to get a sense of how the model works.

Based on our estimates, in Q1, about 524 million square feet of glass was shipped to panel makers and 479 million square feet of glass in the form of finished products was shipped out to consumers.

So the supply chain in total built about 46 million square feet of glass.

In total at the end of Q1 there was about 639 million square feet of glass at the panel set and retail versus 445 a year before.

Now, while it's true the overall Display market was bigger and required more product in supply chain, as noted before, supply chain was beginning to build for much stronger demand in the back half of the year.

Looking at the details, you can see the biggest increase in comparison to the prior year was at the set assembly level, 250 million square feet of glass in comparison to just 83 million the year before.

This is where we believe inventory started to build in the supply chain.

In the second quarter of '08 another 563 million square feet of glass was shipped into the supply chain, but only about 431 million was shipped out to consumers.

So in Q2 there was another 132 million square feet of inventory added to the supply chain, on top of the 46 million built in the previous quarter.

At the end of Q2 we believe the set assemblers were sitting on the equivalent of 312 million square feet of glass, almost 2.5 times held the year before, in anticipation of the bigger market.

I'd like to pause here and remind investors that we discussed the supply chain model on our July call and we called attention to this build in inventory at the set assembly level.

At that point in the year, we were not anticipating any recession impact at retail, but we were worried the supply chain was on track to be carrying 50 million square feet too much by the end of the year.

Now let's step into the third quarter, where the trend continued and the supply chain built another 93 million square feet.

During this time retail had remained relatively strong.

Comparing the first three quarters of '08 to the first three quarters of '07 it was 30% more equivalent glass in the form of end products shipped to consumers.

But despite this, it was now clear that the supply chain still needed to contract.

We believe this is why set assemblers and started to reduce panel orders late in Q2 as they built too much inventory for second-half demand.

So panel shipments declined in inventory built there as well.

This is also likely why, when panel makers began cutting prices in late June through this summer, it did little to spur demand, because their customers had too much inventory.

The supply chain began contracting severely when the consumer crisis hit in October.

Subsequently, orders for glass fell significantly.

The amount of glass shipped into panel makers in Q4 was 30% lower than the year before.

Now, shipments to consumers were actually up 11% versus the year before, but clearly that was lower than previously anticipated.

At the end of '08 there was 634 million of square feet in the supply chain versus 594 million at the end of '07.

As you can see, panel making inventories fell substantially, about 60% versus the third quarter.

Panel making inventories ended the year at extremely low levels.

Panel makers have been clearing out inventory at low prices but not replenishing it because price points are at or below bill of material cost for some items.

This is likely why panel price declines are now moderating.

However, based on our modeling, there remains at least 100 million square feet of excess inventory at the set assembly and retail level.

This is why we believe the supply chain may contract further in Q1.

At panel makers we expect utilization rates to increase throughout quarter one from the December low, but the average utilization rate for Q1 compared to Q4 will still likely be lower.

This is why we are anticipating a smaller glass market in Q1.

I'll share our thoughts with you about glass demand for Q1 and the remainder of the year in the outlook section.

Before I leave Display, I want to provide an update on glass capacity.

For all the reasons I've just described, we decided to idle a significant amount of glass capacity last quarter.

To date we have idled more than half of our capacity at our wholly-owned business, and SCP has idled approximately 25% of their capacity as well.

We have significant flexibility to increase or decrease our capacity as needed, depending on demand levels.

This flexibility stems in part from our modular tanks as well as our decision to rebuild those tanks as soon as they were idled.

In addition, we believe other glass makers have also responded to market conditions by idling a significant amount of capacity in the fourth quarter.

Based on their public announcements and noticeable actions to date, we believe our competitors have idled up the half of their capacity.

As a result, we believe the spread between glass capacity in operation today and glass demand has narrowed.

However, there is still a significant amount of glass inventory still available at all glassmakers.

Before idle glass capacity is brought back on line, this inventory will need to be worked down.

Timing will depend on market conditions.

Now moving to the Environmental segment, sales in the fourth quarter are $128 million, a 28% decrease versus the third quarter of $177 million.

Auto product sales were $77 million in Q4 compared to $112 million in Q3.

This business is clearly seeing the impact of the worldwide slowdown in auto sales and auto production.

Diesel product sales were $51 million in the fourth quarter versus $65 million in Q3.

Segment net loss was $23 million in the fourth quarter decline versus the third quarter net income of $15 million.

Moving to the Telecom segment, sales in the fourth quarter were $405 million, a decrease of 18% versus Q3 and in line with our original expectations.

The sales decline was due to lower fiber volume and lower demand for private network and FTT products.

Sales in our fiber and cable products in the fourth quarter were $200 million, a decrease of 22% sequentially.

Sales of our hardware equipment were $205 million in Q4, a decrease of 14% sequentially.

Fiber to the home sales, which are primarily hardware and equipment related, were $80 million in the fourth quarter compared to $96 million in the third quarter.

Compared to a year ago, fiber to the home sales increased 15% and sales for the year were $350 million, an increase of 18% over '07.

This segment incurred a net loss of $14 million in the fourth quarter compared to $25 million in segment income in the third quarter.

However, as a reminder, fourth quarter segment results included $19 million in after-tax restructuring charges.

Sales on our Specialty Materials segment were $84 million in Q4, down 17% versus Q3.

The decline in sales is primarily related to the semiconductor industry downturn as well as lower Gorilla glass sales driven by the consumer recession.

This segment posted a $6 million loss in Q4 versus a $1 million loss in Q3.

In Life Sciences sales in the fourth quarter were $75 million, down 10% versus Q3.

This decline was due to normal seasonality.

Life Sciences was the only business that has not yet seen the impact of the economic downturn.

Segment net income was $16 million versus $11 million in Q3.

Turning to Dow Corning, equity earnings were $86 million in Q4 compared to $109 million in Q3, which included special charges of $18 million.

Dow Corning is clearly seen the worldwide economic slowdown in the silicon business.

Hemlock sales have not been affected.

For your modeling purposes, Dow Corning's sales were $1.3 billion in Q4 compared to $1.49 billion in Q3.

For the year, sales were $5.5 billion, an increase of 10% over last year.

Silicon sales grew 5% while Hemlock sales grew 30%.

Now turning to the balance sheet, we ended the quarter with about $2.8 billion in cash and short-term investments, down from $3.2 billion last quarter.

The most significant cash outflow was $766 million in capital expenditures.

We have negative free cash flow in the fourth quarter of $384 million.

For the year free cash flow was $211 million.

Free cash flow is a non-GAAP measure.

Now let me turn to our outlook.

We will not be providing quarterly sales and earnings guidance for Q1 at this time.

The current environment continues to make it difficult to forecast in the short-term.

However, I have some commentary to help you think about Q1 and the remainder of the year.

We expect our sales and profitability to be lower in Q1.

In fact, we expect our EPS before special items to be about breakeven in the first quarter.

This is a result of lower sales for Display, Telecom and Environmental as the economy continues to impact these businesses during their seasonally low quarter.

Gross margins in Q1 will trend lower again, due primarily to lower Display volumes and the higher price declines.

As I mentioned earlier, we expect the supply chain will contract further in the first quarter.

We believe first-quarter glass volumes for our wholly-owned business and SCP could be 20% to 25% lower sequentially.

We expect Display price declines to be higher in Q1 than previous quarters, as we had announced in December.

We expect the sequential price declines to be in the high-single digits for the quarter.

Looking ahead, we believe the supply chain contraction will end in Q1, and glass demand will climb substantially in Q2 as input to panel makers is at or above retail demand.

Regarding Display pricing, if we're right about the supply chain in glass demand to increase, our goal would be to return to more modest price declines in Q2.

As a result of the additional volume running through our factories and lower price declines, coupled with the elimination of any accelerated depreciation hits, we expect to see a significant improvement in our gross margin in Q2.

We would also expect to see seasonally strong demand in telecom, which should help margins.

Q2 gross margins should begin to benefit from the restructuring actions that are underway.

Moving down the income statement, SG&A and R&D will be higher on the dollar and the percentage sales in Q1.

The benefit we saw in Q4 from the reversal of comp accruals will not repeat.

Investors should begin to see cost savings from our restructuring programs in Q2.

Interest income will likely be lower in quarter one as we have less cash to invest and rates are lower.

Other expense should be materially lower, as we won't have the impact of unwinding hedging losses.

Dow Corning's equity earnings should also be lower sequentially in Q1, the result of continued softness in demand for silicones.

Turning to the tax rate, I will be discussing this in more detail at the investor meeting, but 2009 will likely see significantly lower tax rate than our previous 25% guidance.

Lastly, investors should use 1.56 million shares in Q1 for their models.

Regarding cash flow, we're optimistic we will have a positive free cash flow for this year, but our cash flow will be significantly negative in Q1 and Q2, due to the delayed cash impact of the Gen 10 capital that I've discussed in the past.

I know investors are used to receiving more quantitative guidance than we are able to provide at this time.

I hope some of the color on our Display business and supply chain were helpful.

As always, we're interested in your feedback.

The economic conditions are making it difficult for us and many other companies to forecast with any degree of certainty.

We are sizing the Company to run at an approximately $5 billion sales level.

$5 billion is above our Q4 run rate.

So why are we comfortable today with this estimate?

As I explained earlier, we do think the supply chain contraction will end.

We're also factoring in some modest growth in notebook and televisions.

However, we could be wrong.

As we enter the second quarter, we feel sales will be lower and we'll look at additional cost-cutting.

While all these actions are necessary to protect the Company, it does not make them any easier to make, especially a decision to reduce our workforce.

We don't take these decisions lightly, knowing how it has an impact on people's lives and the communities in which we all live and work.

We will continue to treat all our employees with dignity and respect as we work through these difficult times.

That being said, we feel good about our current financial health.

Although we will be free cash flow negative in the short-term, our balance sheet remains strong.

Over the last several years we have purposely maintained a significant amount of cash over debt to weather difficult times like the one we are experiencing now.

We've also purposely maintained a clear runaway of debt maturities, no material amount of debt coming due for several years, and we have complete access to our revolver.

The balance sheet is strong, which allows us to take the time to take the necessary steps to realign the Company while continuing to invest in innovation.

Innovation has always been the lifeblood of Corning, so having the ability to continue to invest in it is very important.

Regarding our businesses and the current state of the economy, we strongly believe the long-term growth trends of Display, Telecom and Environmental remain intact.

Why do we believe this?

Because we are experiencing an economic downturn, not an industry collapse.

The reasons we like these markets -- LCD replacing CRTs, fiber replacing copper, tighter emissions standards -- are still valid and will continue.

The reason we like our own businesses has not changed, either.

We remain the technology leader and have the financial flexibility to continue to invest and push that advantage further.

We continue to have strong market share.

We are the cost leader and have financial flexibility to look for ways to continue to reduce costs further.

So in the meantime, while the markets take time to recover, we will make ourselves leaner and more cost-effective while investing to expand our technology leadership and our current businesses as well as advanced new opportunities.

We are very much looking forward to the next decade of opportunities.

Ken?

Thank you, Jim.

We are ready to take some questions.

(Operator instructions) C.J.

Muse, Barclays Capital.

In terms of the restructuring, can you talk about timing of when we should see the full annualized savings of $150 million to $200 million?

And then, within that, can you give the mix between gross margin and OpEx?

The full savings won't be until the end of the year because some of the plant consolidations happen then.

However, the majority of the savings will be showing up to you really as the second quarter unfolds.

I won't give you the savings by line item today, but I will ask Ken to remind me to do that at the investor meeting and be able to show you how they flow.

Okay.

And then, in terms of when we get back to a more normalized glass demand environment, how should we think I guess gross margin for Display as volumes pick up?

Is there a stair-step approach as you un-idle capacity?

Any help there would be greatly appreciated.

What we've done is we've got our capacity basically shut down now.

Part of our capital is actually rebuilding the tanks and getting them ready to go.

We can turn them on relatively quickly.

We will -- as we turn them on and begin to fill up, we have extremely high variable margins that will start showing up.

So the downside that we experienced in Q4 of the high variable margins hurting us will help us as that goes along.

So the real question is -- will be the pace at which that flows in.

As you know, our variable margins are extremely high, so any additional sales volume will flow to the bottom line very quickly.

I'm not prepared to give you a cycle of quarterly volume growth at this point in time, frankly.

Our ability to forecast that is not that great.

But as soon as the volume picks up, it will flow very quickly to gross margin and net profits.

On the Other income line, typically you see nice profitability there from the royalties from SCP; this quarter, in the red.

Were there one-time charges in there?

Yes.

We had several charges that related to a couple of things.

First of all, we have some operational hedges on as we move things around between Harrisburg and Japan.

And also, we hedge royalty income coming in.

And because the quantity of both of those were lower, we had to unwind the hedges and took losses on them.

Also, we don't normally see this, but we did have some balance sheet hedge losses there because we just had very extreme volatility, even within the quarter.

Both of those should go away, and you should see a big improvement in other income/other expense from not having those.

Royalty income obviously is going to remain lower until SCP sales begin to pick up.

Mark Sue, RBC Capital Markets.

Jim, recognizing the situation is still fluid, any thoughts on total glass volume for the year versus compared to last year?

Can it be flat, or can be down minus 10% or even minus 20%?

And considering the dynamics in the supply chain, why will pricing not worsen the changes in pricing to indicate it's still give and take with the panel makers?

So I'll start with the overall glass market.

We are currently thinking that the $2 billion glass market that we had last year, we'll probably see about the same this upcoming year if we are right on the supply chain and right on end market.

We are not planning on being down, we are not looking for much increase.

Obviously embedded in that assumption at the glass level are a lot of assumptions about the supply chain levels of inventory as well as what is happening at retail.

Wendell, would you like to comment on pricing?

Sure.

So the corrections that we have taken in quarter one to close the gap between ourselves and our competitors, we think, have adjusted well to the current status in the market.

What we plan to do, what we are going to try to make happen, is, as we look forward to quarter two and quarter three and quarter four, is to return to price moves much more like our normal novel, in the very low single-digit range.

It remains to be seen if we can make that happen.

On one side, you have the fact that there is a lot of idle capacity for the glassmakers at this point in time.

On the other side, what you have is that we do expect that the supply chain will stop contracting and that market shares are relatively sticky.

So, we have to see how it all plays out.

Do you think the Company can be profitable at a $4 billion market in terms of annual revenues?

Why is $5 billion the right number?

And maybe just your thoughts on how quickly you can tune to cost structure, aside from the once mentioned today.

Well, the first case, the Company is pretty close to a $4 billion revenue rate in Q4, despite a series of things like we were just talking about and accelerated depreciation and hedge unwinds.

So the answer to your first question is, yes, it could.

And clearly, we're going to be taking out more cost that was still there in Q4.

So the answer is yes on that.

I think more importantly is -- why do we think the $5 billion is correct?

And it comes down to our belief about the supply chain.

As we tried to show you in the detailed charts, and obviously, you can do your own math on what you think our share of that supply chain contraction was.

But in Q4, what we are talking about is huge amounts of volume that didn't exist for us simply because the supply chains was reducing inventory.

If we had just shipped what was happening at retail and the same in Q1, we would be much closer to the $5 billion already.

So that's why we think it's appropriate.

Obviously, we could be wrong.

Maybe our supply chain model won't work.

But that's the primary reason why we think we'll get close to the $5 billion level.

We don't need a giant recovery in end markets.

Brian White, Collins Stewart.

Of the 3500 in workforce reduction, what percent of that is going to be related to Display?

We are not giving out that level of detail at this stage.

On the pricing, when is it that December quarter pricing was maybe a little worse than you anticipated?

We've got the high single-digit decline expected in the March quarter, which is no surprise.

When did pricing start to degrade a bit in the December quarter?

We really made decisions as we announced that, I think, the conference in the second week of December that we made, started to make some price reductions then.

But we say it was a little worse in quarter four.

I mean, we're talking about a percent difference.

Really, the decision we made in quarter four was for quarter one, when we talked to our customers about narrowing the gap that Wendell talked about.

So really, it was very tiny in Q4.

It was really the decisions we made at the beginning of December for Q1.

Just on the LCD TV demand you said in December was a little better than you anticipated.

What did you see in terms of LCD TV screen sizes, versus expectations?

They came in pretty close to what our expectations were.

We didn't -- our revised expectations.

Originally, if you go back to the middle of the year, we would have expected probably to get an inch greater than what we saw.

But we didn't see this.

What I think everybody feared was average sizes actually declining.

That didn't take place, although the number-one selling unit was the 26-inch.

But we did not see a big decline in the number, in the size.

We saw it hold stable as we finished out the year.

Steven Fox, Merrill Lynch.

Can you just talk about the set assemblers a little bit more in detail?

Obviously, that has been the toughest part of the market to call.

Have you gotten any more refined analysis there that gives you some confidence that there's not another large amount of hit in inventories, or how do you feel about that going into the quarter, specifically?

We don't get reporting of inventory there.

So the way we build this model, the facts we have is we know glass going into panel makers, we know panel maker inventories, we know glass coming out of panel makers.

We know glass going into retail, we know retail inventories and we know glass going to consumers, although we only have half market coverage there, but we think it's a pretty good approximation.

So the thing that we don't have is absolute inventories reported by set assembly, but we feel that our model is pretty good.

And what we have seen, as we showed you on the chart, is that's where we think the biggest issue has been on inventory.

That's why we think that panel prices started falling in the second quarter of last year, and that's where we've seen the least amount of correction, if you will, on inventory relative to the panel makers.

Panel makers actually surprised us how far down they dropped their inventory.

We think that there's about another $100 million that should come out, optimally, in set assembly level, given what is happening at retail.

Just looking at the pricing quarterly a little bit more, do you guys need panel prices to rise much above cash costs in order for you to return to your previous pricing policy?

What should we be looking for on panel prices in Q1 to understand how safe your own pricing is?

Well, I think that the panel pricing -- what we look for on panel pricing is -- has more to do with a signal on when the supply chain stops contracting.

I think the situation that we see right now is, with the won where it's at, the Korean panel makers have a cost advantage.

And, as a result, we are seeing the Taiwanese panel makers at a spot where you've got pricing below their bill of materials on certain key product lines.

When they have it in inventory to raise cash, that's an okay decision.

But to make new panels, it doesn't make a lot of sense to make and sell new panels below the bill of materials cost.

That, of course, as you point out, leads to a lot of pressure on the materials makers, but I also think, more importantly, gets to what their utilizations will be.

So we take a look at panel prices as being a good potential indicator as to what's actually happening with that supply chain and whether or not we will be able to see it stop contracting in quarter two.

The tensions on price have both to do with panel makers as well as the amount of idle capacity at the glassmaker structure.

As I've said before, I think the biggest pressure, the biggest negative pressures, are the poor profitability of our customers as well as this idle capacity.

The biggest positive pressure that may allow us to be able to return to our pricing strategy is the relative stickiness of the market shares and the strong position that we have with all of the major brand leaders.

And that's how we hope to see that play out and return back to that very low single-digit price declines in quarter two, three and four.

This, of course, is resting on the assumption of the glass market coming back.

Jim Suva, Citigroup.

Can you help us connect the dots?

Obviously, it's very easy to understand why free cash flow will be negative in Q1.

But with your comment of a significant increase in glass demand in Q2, which in essence says you're calling for a bottom in Q1, why wouldn't free cash flow for the first half of the year be breakeven or positive, yet you are saying it's negative for the first half of the year?

The primary reason is that we have a very heavy capital spending for the first half of the year.

Of our $1.1 billion, we are talking about $800 million of it falling in the first two quarters.

A big chunk of that is this carryover that we have on Gen 10.

It seems funny now, but we thought we had brilliant terms by paying our Japanese contractors six months in arrears.

You always like to pay your bills slowly, but that is coming due now.

So that's the biggest reason.

The other reason, on Q1 versus Q2, is the cycling of the dividends we get from our equity companies really don't get much in Q2.

And so we expect free cash flow to be better in Q2 than in Q1, but it still will be negative.

As a quick follow-up or housekeeping item, you mentioned tax rate would be significantly lower in 2009.

I don't believe you said the level of what it would be.

Would it be down to like 15% of like what it was for 2008?

I didn't give you a number specifically because I'm going to walk through than in great detail at the February 6 investor meeting.

But it will be a very low tax rate.

Can you give us any magnitude of below 10% or above 10%, or just any reasonable range?

No, you will just have to wait and see.

Okay, we'll see you there, then.

Carter Shoop, Deutsche Bank.

I was hoping to get a quick update on Hemlock.

Given the fact that the market for polysilicon has significantly deteriorated over the past three months, are your entering or entertaining any pricing concessions for your business under contract?

As a follow-up that, what percentage of your solar and semi production is currently under longer-term contracts as of the end of the year?

So Hemlock is doing very well.

We are not entertaining any price concessions at all.

People who are under contract are taking their contracted volume.

We have had a little -- some of the people who had semi contracts have the right to take some of that as solar, which they have done.

Obviously, the semi industry is a little depressed right now.

But the contracts are fine, the pricing on that is fine.

Remember, we set the pricing on those contracts to be well below spot simply because we anticipated eventually there would be -- spot prices would come back to [earth].

So no pressure at all on the contracts.

Hemlock is operating full, shipping everything that they can do.

And a very high percentage of their business is under contract, and that's the way it's cycled throughout the year.

The last comment on Hemlock I'll make is really that you saw an announcement in December that our customers have actually asked us to plan for more capacity after our third expansion is completed in 2011.

So we are going to construct additional capacity in Michigan and Tennessee.

And, once again, that will be done with our customers giving us customer deposits.

So the business feels very good.

Obviously, to the degree we had excess capacity goes out on spot, the pricing on that is quite a bit lower than what it was last year.

But the fundamentals with Hemlock are, are we going to make money at the contract prices?

And we will, and that's all going as per plan.

What kind of a rebound in the second quarter do we need to see to make you feel comfortable that the current round of restructuring is sufficient?

Do we need to approach that $5 billion annualized run rate as early as the second quarter?

No, we don't.

But if you go back to that supply chain chart that I showed you, if you look at the Q1 numbers that we are talking about, you see that at retail level 450 million square feet of glass are going out.

Admittedly, Q2 is slightly down from that normally because of seasonality.

What we need to see is the glass going into the supply chain being approximately what's going on at retail.

If that's what is happening, then we are going to feel pretty good.

We don't need the Company to be at $5 billion at that time.

It sounds like the CapEx in the second half of the year will be approximately at a $600 million annualized run rate.

Is that a good figure to think about going into 2010?

Or, is there any large capital expenditure projects, be it either a follow-up payment for Gen 10 or anything else that would be expecting?

We are not planning on any large capital for 2010, right now.

So you should expect to see a very low level of capital continuing into 2010 at this stage.

John Harmon, Needham & Company.

Regarding the performance of your Telecom division in the quarter, I was wondering if you could break it out.

You talked about the soft economy, but how much of it might just be due to lower capital spending?

And how much of it is directly economically sensitive?

You did say that fiber to the home was up in the year.

So I think embedded in your question is a little bit of an answer, which is -- how much of it is true economically driven, and how much of it is capital project denominated?

I think the key thing to understand about Telecom is that it tends to lag going in and lag coming out.

At this time we have seen really very few of the major carriers announcing that they are going to do significantly less in fiber capital.

So right now that's holding up well, and in many countries around the world they are choosing to have fiber builds be their infrastructure.

So that's a positive for us.

On a more negative for us is that it does tend to be lagging, a lag in and lag out.

So if the economy is down, ultimately carriers lacking a public prompting for infrastructure will tend to slow with the economy.

And the other piece is our premises business, which is a very profitable business for us.

That's going more with data centers and IT spending, and we are planning on seeing that come down.

I think you said, in response to a prior question, that you could make money on $4 billion of revenue.

So with $5 billion as your target, are there any specific profitability targets attached to that?

Or how did you arrive at that?

What goals do you want to accomplish with that number?

We're not setting out a net profit goal at this stage and time, John, we just clearly do intend to make money.

At $5 billion -- obviously, $5 billion is a lot less than where we were running just a few short quarters ago.

But we clearly intend to make quite a bit of money at $5 billion.

Okay.

And finally, what were SCP's gross margins in the quarter?

And were your -- the margins for your wholly-owned businesses comparable?

SCP's gross margins were lower also.

We are not giving out the number.

You'll see it in our 10-K when it comes out shortly.

They were lower, but not as bad as what our wholly-owned business was.

Vijay Rakesh, ThinkEquity.

Just looking at the gross margins, you said you see a significant improvement into the second quarter.

I was wondering if you could give a little bit more color?

When do you expect margins, given fab utilization and pricing into the second, when do you see margins get back to the low 40s?

We are not giving out that level of guidance at this point in time.

We believe that, if we are right on quarter two, that the supply chain contraction ends.

There will be a lot more sales available in our Display business, which we'll get both in Display-based business as well as SCP, and that falls at a very high variable margin rate.

But we are not giving gross margin guidance by quarter at this stage.

Okay.

And, as you look at 2009, what do you think glass pricing looks like for the year?

And how was glass pricing as you exited 2008?

Where do you think it ended up?

So glass pricing for the year last year ended up down 7% in our wholly-owned business, year over year.

And we've talked about in quarter one it being down sequentially in the upper-single digits and we hope to return to more moderate price declines for the remainder of the quarters.

I'm not prepared to give an absolute number, but clearly we hope it to return closer to the kind of declines that we had been seeing before.

Amitabh Passi, UBS.

Regarding your first-quarter 2009 LCD volume guidance, can you give us any sense of how you expect volumes to trend between your wholly-owned business and SCP?

We expect them to be very similar in terms of sequential declines.

And then, Jim, I think you said you expect a significant rebound in LCD glass volumes in the second quarter, assuming I'm doing my math right here.

However, it seems like, to get to your flat LCD volume growth for the full year you'd have to see something like 30%, 35% sequential growth 2Q through 4Q.

Is that the kind of sequential growth you implied in your full-year guidance of sort of flattish LCD volumes?

I'm not going to comment on the specific numbers for the remainder of the quarters.

We think that, if you look at the overall glass for the market of about $2 billion and then we've got a plan for what's happening in retail and we do think there will be some inventory rebuilt in the supply chain, in the back half of the year, that's how we get to it.

But I'm not going to give you the various specifics quarter by quarter at this stage.

And then just my final question, perhaps for Wendell.

Any incremental color on your Telecom business in terms of how the private networks side of the business fared versus public networks?

So private networks have had more of a slowdown for us than public.

If we were to take a look at the segments of it, we would say that, in terms of year over year for '08, that sales were down some, primarily due to a drop in private networks with private networks down around 19% while fiber to the home sales were up about 15%.

So it's natural that we would see the private networks business adjust to corporate IT spending and that type of movement.

As we look ahead, we would, once again, see that continue; the private networks would be a little weaker for us than our public networks business.

I think one of the wild cards here for our public networks business, especially for fiber to the home, is to what extent does this become a strong stimulus package component around the world.

And then just one final related to that.

In the fiber to the prem revenue you disclosed for 4Q, did you start recognizing revenue from the second European customer you recently announced?

We did start recognizing revenue from a relatively new European customer.

I have a hard time keeping count on which number it is, so (multiple speakers) [Ken].

But yes, we did bring on a new customer and with very robust demand.

Jeff Evenson, Sanford Bernstein.

Beyond the macroeconomic conditions, I'm wondering how you're incorporating the ruling yesterday that Sharp may be disallowed from selling LCD TVs in the US, and also discontinuity from customers substituting netbooks with much smaller screens for traditional laptops.

So, you have caught us by surprise.

We obviously didn't see that ruling, so I can't comment on that.

Sharp in the US is relatively smaller market share.

Their strength is primarily in Japan at the end market.

But we haven't seen the ruling, so I can't really comment on that.

Two other quick questions -- oh, sorry.

Netbooks first?

So, netbooks, in our conversations with the PC and notebook makers, it's interesting on how much of it is cannibalization and how much of it is true category expansion.

Without doubt, their mix is shifting more towards netbooks; it's a hot item.

I have yet to get a good, clear answer from these guys as to that delta of cannibalization versus category expansion.

And of course, this is obvious to you, Jeff; to the extent that it's cannibalization, right?

It's smaller screen sizes.

To the extent that it is category expansion, it's net more demand for that glass.

One other thing I will say about notebooks, an exciting opportunity, I think, for us, is now we are starting to see the first uses of Gorilla glass being applied to the notebook area.

And that's really exciting for us because now it's taking glass out of just the liquid crystal itself and using it on the outer surfaces of the notebooks.

This is potentially a very exciting market for us and offers a much higher revenue per notebook than we get in pure LCD.

So that's one bit of good news for us in notebook.

On other potential good news, what is your current market share of multimode fiber?

And also, what is the timing of the availability of your new ClearCurve multimode?

So I don't think we talk specifically about our market shares in multimode.

It's very high, of course, because we are the leader in all things fiber.

We just announced, as you point out, the new ClearCurve multimode.

We will start to have that available to certain customers in quarter two, and we would expect to have a fuller rollout in the back half.

And so far, response has been a combination of relative shock from some people and real excitement from our customer base.

It's all aimed at about a $600 million market at the very high-performance end for our datacom business.

And now we have to see how much of that can be brought into our shop because of market share gain or potentially even market expansion.

So we are excited by this, and it's a heck of a technical accomplishment.

Now we've got to go to work on the marketing.

Andrew Abrams, Avian Securities.

Just a couple of questions on the capacity issue.

How much of your shuttered capacity has been refitted?

And what is the final intent there?

Is this all going to be refitted, or is there a portion of that that you're not looking to rebuild at some point?

And can you give us a little more color on what you know about Asahi and NEG in terms of their capacity changes and how closely aligned that is to the numbers that you have?

So we have begun reconstruction of tanks, but we haven't given out the absolute number of how much we have got completed.

We will be continuing to repair some of the tanks as we move through quarter one and quarter two.

There are several of our tanks that we are considering whether we will ever rebuild, some of the older, smaller ones.

We just haven't made that decision at this point in time.

Relative to our competitors' capacity, I can only say what I said earlier in the script, is that we believe in total that they have about 50% of their capacity off-line at this stage.

And I'd have no more specifics then that.

Just one other question on pricing.

If your scenario holds true for second quarter, the price declines that you have had, I guess, in the last year or year and a half, maybe 2%, 2.5%, would that become normal again?

Or, are we looking at slightly higher, like 3%, 3.5%, more normalized price declines for 2009?

So I think it's too early to get that specific.

What we would like to do is return that to that low single-digit, more normal price decline rate.

And that's where we are going to place our efforts, as opposed to the high single-digit move that we are seeing in quarter one.

I think, once, if we can get that accomplished, then we will feel a little bit better about providing a little bit more specific as to whether -- more fine-tuning in that zone of a point one way or the other.

Ajit Pai, Thomas Weisel.

Just looking at that CapEx in the quarter, the $766 million, I think it's probably the highest CapEx you have had so far, at least in recent years, perhaps even close to a record.

Could you give us some color as to how much of that is linked to commitments that you had made earlier?

I think you mentioned something about the even additional CapEx that you have got in '08 that is going to be paid next year, the $525 million of the $1.1 billion.

So how much of the $766 million was construction completed earlier that were just the terms of payment, and what was it spent on?

Well, the majority of the capital was obviously commitments that we had done earlier.

It was capital for Taichung, the expansions that we had been doing in spring and summer into the early fall.

It was precious metals that we had contracted to buy for Gen 10.

Precious metals don't have any delay terms on it.

It's some diesel construction that we've done for 2010 capacity when new regulations come in because we'd want substantial business for that.

So it's a series of things and I'll try to remember, February 6, maybe to give you more specific color by category.

Got it.

And the $525 million that you mentioned out of next year's budget that was construction completed in '08 -- is all of that or the vast majority of that just the Gen 10?

Or, were there other components to that as well?

The vast majority is Gen 10.

Scott Coleman, Morgan Stanley.

Forgive me if you've answered this already, but I'm just curious if you can tell us the amount of capacity in terms of volume that you've taken out of Display in Q4 and what the expectations are in Q1.

And again, may apologies if you covered this earlier in the call.

In our base business, we've got about 50% of our capacity out in Q4, and that will be similar in Q1.

In SCP, we're exiting the year with about a quarter of the capacity down.

And, Jim, just so I understand it, should I think of idle capacity, which is what I think you're referring to, as being different than actually taking a tank entirely off-line?

No, you should think of it as being taken off-line.

At one point we used to leave the tanks hot, and maybe just drop sheet for a brief period of time.

And, therefore, there was a high degree of cost left in them.

But now basically we don't need it; we are shutting it down cold.

And so the 50% number suggests that there is nothing incremental coming out in Q1.

Is that right, if it was 50% in Q4 and 50% in Q1?

Directionally, yes.

So then, from a gross margin perspective, is there -- there shouldn't be any additional accelerated depreciation, at least a material amount, in Q1 related to Display.

Is that correct?

That's correct, in our wholly-owned business.

Thank you very much, guys.

Can I just come back and touch on one other item on the question that we had heard earlier from Jeff on Sharp?

What we have tracked down is that this has to do with a patent dispute between Sharp and Samsung; it's a preliminary ruling at the administrative level, the Administrative Law Judge at the US ITC.

And Sharp plans to appeal.

So, given that sort of context, we haven't had a chance to talk to Sharp or Samsung yet, but I would imagine this would continue the sort of typical wrestling that you see around IP disputes.

Jim?

Just a quick couple of IR comments -- we will be holding our annual investor meeting in New York City on February 6.

It is at a new location, the Times Center.

At the meeting we'll be showing our latest products as well as demonstrating some of the innovations that we have and some that are in development.

And, you'll see formal presentations by a lot of Corning's senior management.

If you are interested in attending, you can register on our website or contact Ken.

Second, we will also be attending the Thomas Weisel Telecom and Technology Conference on February 10 in San Francisco.

You can attend either.

Of course, our presentations will be on a webcast, and slides will be on the website.

And one last IR-related announcement.

Ken has finally decided to get some assistance.

We are delighted to say [Ann Nicholson] has formally joined the IR department last quarter.

Some of you have met her.

We are very pleased to have her on board and expect you'll all have a chance to meet or speak with her over the phone at some point in the future.

Ken?

Thank you, Jim; thank you, Wendell and thank you all for joining us today.

A playback of the call will be available beginning at 10:30 AM Eastern time today and will run until 5:00 PM Eastern time on Tuesday, February 10.

To listen, dial 800-475-6701.

No password is required.

I will also be posting all the slides that Jim went through today on our website immediately after the call.

And operator, John, that concludes our call.

Please disconnect all lines.

Thank you.

Ladies and gentlemen, that does conclude your conference.

You may now disconnect.