康寧 (GLW) 2009 Q1 法說會逐字稿

Welcome to the Corning first quarter results conference call. All participant lines are in a listen-only mode. (Operator Instructions) Today's call is being recorded. I will now turn the call over to Division Vice President of Investor Relations Ken Sofio.

Thank you. Good morning, welcome to Corning's first quarter conference call. This call is also being audiocast on our website. Jim Flaws, Vice Chairman, Chief Financial Officer will lead the discussion; Wendell Weeks, Chairman, Chief Executive Officer will join for the Q&A. Before I turn it over to Jim, you should note today's remarks do contain forward-looking statements within 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 results to differ materially. These risks are detailed in the Company's SEC reports. Jim?

Thanks, Ken, good morning, everyone. This morning we released our results for the first quarter which can be found on our investor relations website. We've also posted accompanying slides on our website. Before I get in to the details I would like to make a few overall comments.

We were very pleased with our first quarter performance given the difficult global economy. Biggest questions we face coming into the first quarter were whether LCD television sales would show good year-over-year growth in this tough environment and when would the supply chain stop contracting. We were pleased to see the continued strength of LCD television sales at worldwide throughout the first quarter. We are also pleased to see demand for our glass pick up sooner than we anticipated. We believe this is one of the several indicators during the quarter that the supply chain contraction was ending. Stronger glass demand contributed to better than expected sales and earnings performance this quarter. Now let me turn to the details.

Our first quarter sales were about $1 billion, 9% decline from the fourth quarter. Quarter one sales benefited slightly from changes in exchange rates versus fourth quarter. Moving down the income statement gross margin was 27% in first quarter compared to 28%, fourth quarter. As a reminder fourth quarter gross margin included $33 million accelerated depreciation. SG&A was $207 million or 21% of sales compared to $179 million or 17% in fourth quarter. As a reminder in fourth quarter we reversed $30 million in variable compensation accruals, which lowered SG&A significantly. R&D was $151 million, in first quarter consistent with fourth quarter. Other income was $20 million in first quarter, versus other expense of $33 million in fourth quarter.

The swing from other expense to other income was primarily due to nonrepeat of balance sheet hedge losses and losses from unwinding of hedges during fourth quarter. Gross equity earns were $195 million in the first quarter compared to $288 million in the fourth quarter a sequential decrease of 32%. Decrease is primarily due to lower earnings at both Samsung Corning Precision and Dow Corning. first quarter includes the impact of $29 million restructuring charges at Dow Corning. Net income excluding special items was $150 million. A sequential decrease of 28%. EPS excluding special items was $0.10 compared to $0.13 in fourth quarter, you should note that EPS and net income excluding special items are non-GAAP measures. The reconciliation GAAP can be found on our website. Our share count for the first was 1.56 billion shares.

Our first quarter results also included restructuring charges for the Company of $165 million pretax, in line with our expectations. Restructuring actions that were implemented in fourth quarter and first quarter have been completed. We estimate annualized savings from these actions could be about $195 million, in second quarter we expect to see about $30 million in savings. As I mentioned a moment ago, there were additional restructuring charges at Dow Corning our share of these was $29 million pretax.

Let me now turn to our segment results for the first quarter starting with display. first quarter sales were $357 million, or 8% lower than fourth quarter. Volume at our wholly owned business down about 1% sequentially. As a reminder we had originally expected our total Q1 glass volume to be down 20 to 25%. In late February, we began seeing increase in glass demand, which led us to revise our volume expectations for the quarter. We believe the higher than expected glass demand was a result of strong end market demand and the supply chain contraction ending. Which I will discuss in more detail in a moment. We were able to meet this increased demand by selling glass out of inventory.

Price declines were higher than previous quarters, but in line with our expectations. Display sales benefited slightly from a positive exchange rate movement. Equity earnings from SCP, LCD glass business were $180 million in the first quarter, a decrease of 9% compared to $198 million in fourth quarter. Volume was up 7% sequentially, price declines at SCP were higher than our wholly owned business. Investors should note that price negotiations vary by customers so in any given quarter price declines may not be consistent between our wholly owned business and SCP. For modeling purposes, SEPs first quarter LCD sales $659 million. Compared to $703 million in the fourth quarter. A decrease of 6%. As a reminder this represents SCPs LCD sales only. Our public filings report SCPs total sales which include CRT glass and other product sales.

Net income in the display segment which includes equity earnings, was $218 million in the first quarter, slightly lower than the fourth quarter. Quarter one net income includes $34 million in restructuring charges. I would like to spend a few minutes discussing the supply chain and retail environment.

As I mentioned earlier, we entered the first with two key assumptions, first, LCD televisions would continue to exhibit good year-over-year growth at retail. And second, the supply chain would start contracting by the end of first quarter. We were correct on both. Let me start with retail.

LCD televisions continue to be a resilient consumer purchase in the first quarter, worldwide LCD television unit sales were up 54%, in January, and 32% in February. We do not have complete data from March to provide a worldwide growth figure for that month. In the United States LCD television unit sales were up 39%, both January and February. Both months came in much higher than we had forecasted. We believe the stronger sales may have been due in part to the digital conversion as some consumers replaced their analog CRTs in time for the original February conversion date. While the government ultimately pushed back the conversion date to June we believe up to 25% of US television stations decided to convert their signals anyway in February.

We also believe the closing of Circuit City may have accelerated LCD television demand. Some consumers who were planning on purchasing an LCD later in first quarter, may have been attract by the closeout pricing deals. As a result, we are not surprised that year-over-year growth rate in March was lower than the previous two months. NPDs preliminary estimate for March based on the weekly data is 9%. Which was still higher than our own expectations. The additional digital transition at Circuit City closeout there were indications that strong January and February sell through lowered March retail inventories in the US to about half the normal levels. This has led to stockouts of many popular LCD televisions across the country and likely dampen the year over year growth rate. In addition, we believe up to half of all Circuit City's demand went to companies that are outside NPDs coverage such as Wal-Mart. Circuit City had about 8 to 10% of the US market for LCD televisions. So our estimate, the actual growth rate for March could have been as high as 15 to 20%.

We've just received NPDs data for the first week of April and it indicates LCD television unit sales in the United States grew 17% year-over-year. In other regions LCD television unit sales in Japan were up 27% if in the first quarter, China were up 66%, in the first quarter. In Europe don't have March data yet but unit sales were up significantly in both January and February. As a result of the resilient first quarter demand we've increased our forecast for LCD TV sales from $111 million to $121 million this year. This would represent an 18% increase over last year.

Regarding screen size in unit terms we've seen all screen size categories show higher than expected year-over-year growth. In January and early February we saw particularly strong growth in the 10 to 29-inch size, temporarily reducing average screen size sold at retail. We believe this is largely attributable to the digital transition. Since mid February we've seen demand resume to very strong growth in the larger sizes, and total area growth exceeding unit growth.

Looking at the PC market, unit sales of both monitors and notebooks came in as expected in the first quarter. Consumer purchases in notebooks continue to be strong. However, we have data that suggests that corporate purchases of notebooks have slowed. As a result we have lowered our unit forecast for the remained of the year. We now expect about 126 million notebooks to be sold versus our original estimate of 137 million. This is versus 131 million sold last year. As a reminder we do not include net books in these numbers. Our forecast for monitors remains unchanged.

As a result of the changes made to our LCD television and notebook assumptions we've updated our forecast for the total LCD glass market this year. We now anticipate the glass market will grow 5 to 10% versus original expectation of flat. This put the glass market between 2.1 billion and 2.2 billion square feet this year versus two billion square feet last year. In summary LCD television sales at retail remain positive.

Let me provide an update on the display supply chain. There are several data points that suggest the supply chain contraction ended during the first quarter. First, we began to see increased glass orders starting in late February, and those orders grew through March. Second, panel maker utilization rates and shipments increased month to month and panel prices stabilized. There is even evidence that panel makers experienced some rush orders from set assemblers and as I mentioned there was evidence of stockouts of many LCD television sizes at retail.

Let me share some of the details starting with glass demand. As I mentioned a moment ago we began to see an increase in orders in late February. Slightly corresponds to the higher utilization rates of our customers. In Taiwan panel utilization rates from about 30% in January to almost 70% in March. In Korea utilization rates started about 60% in January, and rose to almost 90% in March. For those investors who are interested in this data, you should note many of the panel makers disclose their utilization rates each month. We believe Taiwan panel maker inventories in total contracted in the first quarter to around three to four weeks of supply. Korean panel makers are holding even less, typically about 4.5 weeks of inventory is considered normal. We believe total panel maker inventories at the end of first quarter as measured equivalent square feet of glass fell 10%.

We also saw a tightening of panel prices during the quarter, for all key panel sizes. For monitors panel prices have been increasing, we believe consistent and rising panel prices are a good indicator of the tightness between panel supply and demand. Moving to set assemblers based on our models we believe inventory there as measured in square feet of glass fell 15% in first quarter. This could be the reason behind the rush orders of panels. At retail we believe inventories fell 25%. This is a significant decline and gives credence to many reports of LCD television stockouts during the quarter.

In summary, we believe total inventory in supply chain as measured in square feet of glass, fell from around 630 million square feet at the end of fourth quarter to around 500 million square feet at the end of first quarter. Decline of 130 million square feet. Supply chain is not seen this level inventory since the second quarter of 2007. For reference the amount of inventory and supply chain at the end of the first quarter last year was 644 million square feet. I will cover our supply chain expectations for the second quarter and our decision to relight tanks in the outlook discussion.

Regarding Gen 10, may have seen Sharp's announcement to begin ramping their fab starting in October. We are already manufacturing production quality Gen 10 glass and sending it through the automated delivery system between our factory and theirs. We're very pleased with the quality of glass delivered. We planned on lighting additional capacity at our Gen 10 plant later this year to meet the increase in demand. This will result in additional fixed cost starting in second quarter.

Moving to the environmental segment sales in the first quarter were $110 million. 14% decrease versus fourth quarter sales of $128 million. Auto product sales were $64 million, first quarter compared to $77 million in fourth quarter. Our business continues to feel the impact of the worldwide slowdown in auto sales and production. Diesel product sales were $46 million in the first quarter compared to $51 million in fourth quarter. Segment net loss was $44 million in the first quarter versus a net loss of $23 million in fourth quarter. Quarter one segment net income includes $19 million in restructuring charges.

Restructuring charges have been taken in the auto business to align our capacity to what we see as lower worldwide level of auto production. We believe the annualized run rate of auto production in Q1 was 49 million units. This is compared to 67 million units last year. However, there are some sign that the auto industry may have hit bottom. Worldwide auto sales in March were up for the first time since October led by incentive programs in Europe, strong fleet sales in the United States and government stimulus in China. There still is uncertainty as what the new annual level auto production will ultimately be. As a result we are still considering further restructuring actions in our auto business.

Moving to the telecom segment, sales in the first quarter were $385 million. A decrease of 5% versus fourth quarter, and in line with our original expectations. Strong optical fiber demand in China was offset by weaker private network demand in North America, and also weaker cable and hardware equipment sales in Europe. Sales in our fiber and cable products in the first quarter were $192 million, a decrease of 4% sequentially. Lower sales on our base business offset stronger expected demand for optical fiber. In fact, fiber demand has been so strong we recalled the fiber employees who were laid off in Q4. Sales of our hardware and equipment products were $193 million first quarter a decrease of 6% sequentially, primarily due to lower demand in North America and Europe. Fiber to the home sales, which are primarily hardware and equipment related were $82 million the first quarter up 3% sequentially and 8% year-over-year. The segment incurred a net loss of $1 million in the first quarter compared to net loss of $14 million in the fourth quarter. Q1 segment net income includes $15 million restructuring charges. Q4 includes $22 million in restructuring charges.

Sales in our special material segments $60 million in Q1 down 29% versus Q4, decline in sales is primarily related to the semiconductor industry downturn. Segment posted $27 million loss in Q1 versus $6 million loss in Q4. First quarter segment net income includes $18 million restructuring charges. In life sciences segment sales in the first quarter were $76 million consistent with Q4 Segment net income was $8 million compared to $16 million in Q4, first quarter included $7 million in restructuring charges.

Turning to Dow Corning, equity earnings were $5 million in Q1 compared to $86 million in Q4. As a reminder Q1 included restructuring charges of $29 million. Dow Corning is clearly seeing the worldwide economic slow down impact demand in the silicon businesses. Hemlock continues to be sold out. Sales were lower due to a mix shift of semiconductor to solar and also lower prices in the spot market. For your modeling purposes Dow Corning sales were $1 billion in Q1 and $1.3 billion in Q4.

Turning to the balance sheet we ended the first quarter with about $2.6 billion in cash and short term investments, down from $2.8 billion last quarter. Free cash flow basically break even in Q1, we were expecting a significant outflow but net income was higher than anticipated and CapEx lower than planned. Although we continue to expect it to be around $1.1 billion for the year. We received all of Dow Corning's planned dividends for the total year in Q1. Free cash flow is a non-GAAP measure. With the improvements in financial markets, and with our improved performance we are considering raising a small amount of cash via our debt issuance. This cash could be used to prefund debt obligations in 2010, part of our clear runway strategy, make additional voluntary contributions to our pension plan, or to fund small to medium acquisitions. Inventory fell significantly, from $798 million, at the end of Q4 to $731 million at the end of Q1. Biggest decline in payment display as we sold glass out of inventory to meet demand. Inventory also benefited from -- positively from exchange rate changes.

Now on to our outlook, we will not be providing quarterly sales and earning guidance for Q2 at this time. However, some commentary to help you think about Q2 and the remainder of the year. We expect sales, gross margin and profitability to be significantly higher Q2 versus Q1. Increase will primarily be driven by volume growth in our display segment. For the second quarter results, also benefit from our recently completed fixed cost reduction programs. We expect total glass volume, which includes our wholly owned business and SCP to be up more than 40% sequentially. At our wholly owned business volume will be up more than 50% sequentially. Given the stronger than expected demand in Q1 and our expectations for Q2 we will be restarting some idle capacity sooner than we initially anticipated. At SCP volume will be up more than 25% sequentially.

Investors should not be surprised beside I the difference in growth rates at our wholly owned business and sep. Running at lower utilization rates and therefore have much more room to move higher versus Korean panel maker whose are already around 90%. Since the Koreans at 90% they are beginning to purchase panels again from the economies. Even with the significant increase in glass shipments, we do not believe panel makers will be building a material amount of inventory in the quarter. Expect panel maker shipments to set makers to be up significantly as well in Q2. Based on our modeling panel maker inventories measured in square feet of glass panel increased by 30 million square feet. We expect glass price declines at both our wholly owned business and SCP to be much more moderate in comparison to Q1. We told our investors our goal was to eventually return to the very moderate price declines we experienced in '07 and '08. We feel we're making good progress on reaching that goal, as evidenced by the lower price declines, expected this quarter.

As a result of the strong volumes, the restarting idling capacity, lower price declines display gross margins should be significantly higher this quarter. Looking ahead we also anticipate additional volume growth in Q3 as well, as supply chain prepares for the fourth quarter demand. It's too early to estimate Q4 volumes since we don't know if the supply chain will do, as of now assume demand might be slightly lower. In our other segments we expect modest sequential growth in Q2. At Dow Corning we've seen improving monthly sales which could lead to notably better results for its Q2 earnings.

Moving to the income statement SG&A and R&D will likely be consistent on a dollar basis despite the much higher sales level. Our tax rate based on the mix of income by geographic region we expect our tax rate to be zero in Q2. For the full year we are still estimating our tax rate to be between 0 and 8%. Lastly, investors should use 1.56 million shares in Q2 in their models. Regarding free cash flow we expect it to be slightly negative in Q2 due to the delayed cash impact of Gen 10 capital that we discussed in the past. We are optimistic we will have positive free cash flow for this year .

Before we go to Q&A I want to briefly discuss our sales goal for the year. One of our key assumptions that we gave investors in January was a goal to reach $5 billion in sales. We have been realigning our cost structure employment levels to operate profitability at this sales rate. Based on our Q1 results and expectations for Q2 we are feeling more comfortable today on being able to reach this goal. Given our nature we continue to be cautious. There's still a worldwide recession that is ongoing. Our businesses and equity ventures are still feeling the impact. Especially in the auto business and Dow Corning. If we do not see continued growth into the second half of this year, we will then consider taking further corporate wide restructuring actions to improve profitability.

Thank you, Jim. We are ready to take some questions.

Certainly. (Operator Instructions) First go to the line of Mark Sue with RBC Capital Markets.

Can you help us think about the seasonality now that glass volumes have normalized, maybe how we should think about that from a quarter to quarter basis? Separately, when you say gross margins should be up significantly. Can you put parameters on that considering that you are taking some (inaudible) off idle and should it go back to 40% for example, any help there would be great. Thank you, Jim.

So on seasonality, we did provide a slide showing what we view our forecast for total market demand at retail and glass in the slide deck we showed this morning. Seasonality around the world at retail, we are not seeing much significant change. Impact on the glass business becomes more driven by television every quarter. You have to look at the different regions, as you know China is much stronger in the early part of the year, US much stronger in the last four months of the year, weaker in the second quarter. Europe is similar to the US, but slightly more muted and then Japan relatively stable all year long.

As far as gross margin percent we are not giving any corporatewide forecast, but definitely the increased volume will be helping our gross margin a lot in display as well as obviously the corporation. And as we begin to fire up glass tanks in May and June they are basically, we have been absorbing the fixed cost of that with no production and now we will be able to generate additional gross margin from them. Lastly in second quarter we will be ending selling out of inventory and that will also help our results.

Jim, just on with better demand, and inventories pretty lean, ho do you think about pricing overall in terms of what the panel makers or customers are asking of Corning?

My only comment on our pricing with our panel makers is that we have told them that we will be lowering prices this quarter, but at a much more moderate rate of decline than what we had in Q1. And that's what we are expecting to achieve.

Thank you. Good luck, gentlemen.

Next question is from Brian White with Collins Stewart. Please go ahead.

Good morning, just on the pricing point here, have you sat down with the panel makers and negotiated for the June quarter, yet?

Yes, we are talking to panel makers about June and have been, starting in April

Then on the capacity coming back online, I think originally you had spoken about bringing the tanks back on late in the June quarter and now you are saying May, June, and you hadn't taken off about half the tanks in the wholly owned subsidiary and 25% at Samsung Corning, where can we think about that as we move into the September quarter.

Well, obviously it's going be higher, but I'd still count on us in the wholly owned being around half. Takes a while to get these up. That's where we stand right now, and we're going to have it climbing through the quarter.

Okay. Thank you.

Next question is from C.J. Muse with Barclays Capital.

Jim, I was hoping to revisit the display gross margin question from earlier. I guess in terms of the moving parts there, and considering your drop through was about 85%, in 2008, how should we think about the progression here in 2009, and you talked about firing up additional tanks, selling inventories through Q2, that should help, are there other moving parts we should be considering excluding I guess the slight increase for depreciation for the sharp Gen 10? If you could highlight all the moving parts it would be very helpful.

I think you probably got most of them. But when we sell out of inventory, we sell at a gross margin that isn't as great as when the incremental gross margin when we are just making it on tanks. So the good news Q2 versus Q1 is that we will be ending the sellout of inventory probably a little bit earlier than what we expected. The incremental we will get some tanks back in production for June. Making glass and selling it. So that will come at a very high ratable gross margin rates as you know. And then Gen 10, probably trims our gross margins by 2.5 points in Q2.

The other point I would add to the comments, Jim, is making our gross margin, is also remember in terms of absolute levels, that our operations folks are very concentrated on bringing our inventory levels down, what tanks we want up relative to anticipated demand, responding to the shifting regional demand patterns and as a result, we have not been able to spend as much time as we normally do pushing down our cost curves. So rate of improvement is going to relate primarily to how much our volume increases during the current year rather than as you've grown used to, us pushing down the cost curve to offset pricing moves in the near term. We will get back on track going forward. But it's going to take a while to get realigned.

That's helpful. Final question on a cost cutting side you talked about $30 million in savings in Q2, can you walk us through what your business should look like overall exiting calendar '09? So Q2 would OpEx be incremental benefit to gross margin?

I'll just say about in Q2, about two-thirds of the benefit is coming to gross margin from that restructuring. We talked about achieving an annualized rate of $195 million, and obviously the $30 million in Q2 is about $120 million rate. So but I think the savings will be proportionately to gross margin and operating expense at the end of the year.

Very good, thank you.

Our next question is from the line of Jim Suva with Citi.

Seems like the big topic that emerged over the weekend was the swine flu, can you maybe let us know a little bit a history of what happened when SARS came out about your Company, hopefully this doesn't equate to any of that, but were there any type of logistical custom issues or something like that that we should just be aware of?

Thanks for the question, Jim. The biggest area that we are watching right at the moment, of course, is our Mexican operations, we have some significant operations in the Reynosa area, aimed primarily at supporting our telecommunications and life science businesses. First, we have seen no outbreaks in Reynosa or reports of outbreaks in Reynosa which is good news. Over the weekend we activated our flu response team at the corporate level, once again this was a response level that we developed during the time of SARS. And what we will do is monitor the situation and move to our level protocols accordingly. I would note that in dealing with the SARS issue, we were able to do that without negatively impacting our operations in any significant way.

Wonderful. As a quick follow-up, I found your comment about issuance on debt or potential kind of interesting, can you give us a little more color on that, like you mentioned for pensions, looks like your cash position was pretty strong, is it just that cash is in locations you can't reach or how much cash do you need to run the business, and what's your pension and outflow that we should keep in mind?

We have enough cash to run the business, and in the absence of any unexpected worldwide worsening, we feel fine in terms of our cash flow this year. We obviously have used up some cash from beginning of the recession to when we got our cost normalized but we feel pretty good. That being said, we do have a balance sheet that we intend to run with, always having some debt, but with a clear runway strategy, meaning we try to not have debt coming due short term, so we over time opportunistically will fund -- will issue some debt, and get ready for prefunding it. In terms of pensions, the -- not wedded to having to put more money in, but we might put an extra 50 million to $100 million in, if the markets don't improve, we are obviously under funded as you see in our 10-K as a result of equity markets down. Lastly, probably the stronger driver for why we might want to have more cash is we are seeing valuations come down from potential acquisition targets I will stress so small to medium size.

Thank you very much. Congratulations.

Thank you.

Next Steven Fox with Calyon Securities.

Good morning. Two questions, first of all, at telecom, at the analyst meeting you talked about it being down 10 to 15% for the year, can you just confirm whether that's still in your head as proper outlook? And within that, what have you seen? You mentioned the private networks but what have you seen from the service providers in terms of their projects either pushes or pulls?

Hi, Steven.

Hi. First, on the 10% down for the year. So you are right to raise the question, because we are doing better in telecom in the first quarter than what we would have anticipated. We would like to get a little deeper in to the year, Steven, to figure out where we are. I note that if you were to take a look at our current plans through quarter two that compared to last year, we would be down about double digit in revenue. So I think that we would like a little more time to think about whether or not we want to upgrade that or not. Our dynamic is that China is super hot. We've seen some slowdown in North America and in Europe. We have seen less of that slowdown in fiber to the home which is up in quarter one, some 8% year over year. So we are seeing carriers prioritize their fiber to the home investments, even as they're a little more cautious. We are beginning to see some evidence that some of the carriers around the world are beginning to release more of their capital plans. So you put that all in the mix and basically we end up saying give us a little more time and we will talk to you in quarter two.

Lastly on the LCD glass tanks are you saying that you're comfortable even with the surprising resurgence in demand in terms of where you are in rebuilding the tanks and getting glass to customers or are they asking for more than you can deliver in the near term.

We say glass supply is tight right now. But we certainly have the ability to respond and respond we will.

Okay. Thank you.

Next question is from the line of Jeff Evanson with Sanford Bernstein.

I'm wondering if you could give us some commentary on Hemlock, specifically wondering if any of the restructuring charges at Dow Corning this quarter apply to Hemlock and what's the outlook for maintaining your utilization around 100%?

I don't think there was any restructuring at Hemlock, and I was just there actually on Friday and their demand is very strong. And what they have begun to see turn back, semiconductor from solar, you may recall we talked earlier about some of the semiconductor people have taken their contracts of solar and dumped it lowering the spot price. We have seen an increase in semiconductor demand as we are Marching in to April and they are still making everything they can and basically selling up all they can. They have had no changes to their contracts with their customers. They have had nobody -- nobody failed to make a prepayment on the various contracts. So things are going quite well there.

Thanks. Wondering, given that glass supply is tight what you're anticipating your competitors in the LCD glass space to do in terms of their capacity additions and capacity changes. How that impacts when you guys decide to light tanks?

So we believe that both of our large competitors have at the end of the quarter begun lighting tanks again, we would expect that to be in line with them drawing down their own inventories as we have and with the increased market demand. Our observation of that is it's in line with what we would have expected for the marketplace growth. We are not seeing any unusual behavior.

John Harmon with Needham & Company.

I'd just like to probe into one of your previous answers, I believe previously you said your capacity utilization is below 50%. With the 50% sequential increase in volume you are expecting at your wholly owned business, I think you said your capacity utilization would still be about a 50*%. Does that mean it was about 30% and it's going up to 50% or does it really take you practically a whole quarter to get the new tanks online so capacity frozen for a quarter?

So we said our glass utilization in the wholly owned business was less than 50%. As of the end of April we haven't relit another tank yet. So we are just now making decisions to start relighting tanks, it takes us about a month to relight a tank, so if we press the button today, basically the earliest we get glass is June. We are still running the exact same number of tanks as what we had had at the end of last year. That's why Wendell made that comment. We are drawing down on inventories at a much more rapid rate now that demand is going up. And obviously are making decision now to start multiple tanks as soon as possible to be ready for this increased demand.

Okay. Thank you. Secondly, based upon your improved view of what the glass market is this year, do you have to add any new tanks or had you built enough last year to tide you through this growth?

We are not planning on starting footprint construction of any new tanks in Taiwan. We had some new tanks that never ran last year, and may run this year, then obviously in Japan as you know, we will have multiple tanks for Gen 10.

Thank you.

Our next question is from Vijay Rakesh with ThinkEquity.

Just from the gross margin line, as you look at the second quarter your volumes going up 40%, Q3 expecting better volumes, and the pricing on the glass side seems to be benign here going to second quarter, would you expect your gross margins in that scenario to get at least the low 40s, including calendar 09?

I'm sorry we are just not giving gross margin guidance going out.

But on your comment of significantly improved margins in to second quarter, -- your furnaces on but your volumes are going up 40%, how do you see that improvement on the margin line?

We expect gross margins to be substantially higher in Q2 and for them to grow again in Q3, but we are not going to give specific numbers or even bracket it.

Last question, on the market share side, wondering how you see that trending through calendar '09, versus the other two guys in the space.

Well, let's start with the past quarter, if you've been following us for a while you'd know that as we implement our pricing strategy, what we try to make sure we do is we don't overreact to any near term moves in share and instead try to make sure that we have the sort of stickiness required to get what we want to get over the sweep of time, in quarter one, implementing that pricing strategy meant we probably lost share, although it's very hard to measure on a quarter to quarter basis. As this year's now seems to be evolving, barring any additional economic change with consumer preferences, what we would expect is to regain some of that share as we go in to here quarter two, and that's about as far as I would like to run through it as far as seasonality. Overall our expectations is share will end up for the year, about where it went in.

Thanks a lot. Guys.

Next to the line of Carter Shoop with Deutsche Bank.

Good morning. I had a question with regards to the glass business. Can you talk a little bit about the costs associated with relighting the tanks, I'm trying to better understand the incremental benefit of bringing this capacity on line in Q2 relative to 3Q.

The incremental cost to light a tank is relatively small. We have do have capital cost to rebuild the tank. Actually we rebuilt a lot of these tanks earlier in quarter one and then there will be some depreciation when they start up. It's not a big number. Then relative to the incremental cost of energy, sand and people, it's relatively minor, that's why this is such a high variable gross margin business. I don't think you really will see much impact of that.

When we think about depreciation in the second quarter, you think where we are in 1Q is a decent number here or is it going to be increasing from 1Q levels?

It will increase a small amount due to the lighting up of tanks and then also some from Gen 10.

Okay. Regards to Gen 10, will we see that drag in Q2 reverse in 3Q or do you think that Gen 10 will continue to be a drag in the third quarter also?

It will continue to be a drag in third quarter because we will begin bringing up more capacity and we expect Sharp's demand to be relatively small in the beginning of the year and then the question mark will be how rapidly they are ramping in Q4.

Just to clarify that would that be an incremental drag versus 2Q, 3Q over 2Q?

A slight incremental. Last question for you here, payables, there is a pretty significant drop there in the quarter, anything going on there that we should be aware of? It really is the reflection of the capital spending that occurred prior to that we are paying some bills on. Remember, what I said earlier this year is we will be eventually exiting this year, running at a very low level of capital spending than we had been running at a rate approaching $2 billion and we'll be exiting this year at a rate between $500 million and $600 million. That's where the big change stayed.

We'll go to the line of Yair Reiner with Oppenheimer.

Another question on the gross margin maybe from a different angle. Obviously some puts and takes next quarter. On an absolute dollar basis, do you expect COGS to inch up or do you think you can keep them flat with the Q1 levels?

That's a clever way of getting me to give gross margin forecast and I won't answer the question.

Okay. It isn't because you are not giving a top line guidance. The other question is on sell through, obviously some indicators from China showing very stong demand there, it seems like a lot of incremental demand for the panel makers have come from the subsidies and rural areas. Do you have any data about the sell through there?

The only data we have in China is with the panel we buy overall where demand has been quite strong. We have no parsing of the demand by rural area versus major cities on the Coast so I can't help you there. It's been very strong demand this year in China throughout the quarters.

Then just one final question on the restructuring. Were there any restructuring savings already visible on the P&L in Q1 or is the $30 million saving in Q2 going to be all incremental?

The $30 million is incremental to Q1 but Q1 did have some savings versus Q4 because we had reduced people in telecom area in November, that we saw savings so you would have gotten some savings from that Q1 versus Q4. So this $30 million is all incremental.

Thank you very much.

Next we will go to Andrew Abrams with Avian Securities.

Just back to pricing for one minute. I know you've kind of talked a little bit in the past about that your pricing in first quarter was going to probably be unusually depressed. And your comments this morning about things getting better in terms of pricing, and also your comments in terms of the glass market being relatively tight indicate that it looks like it's going to be considerably better than what it was in first quarter, is there a way that you can quantify a little bit in terms of what first quarter actually looked like in terms of your pricing?

Pricing guidance we gave in quarter one was that it was at the upper end of single digits, and that's what it turned out to be. We expect it to be significantly lower in Q2. But not back to the level of 2% that we experienced back in '07 early '08.

Great, thank you.

We will go to the line of John Roberts with Buckingham Research.

Good morning.

Morning.

Do you expect that Gen 10 will have a material mix affect on pricing at some point in the next say 12 months, next four quarters?

No, we didn't expect it to have any material impact from a mix point of view. As big as it is the business is so large now that the introduction of any new fab doesn't make a big -- doesn't change the overall mix very much.

Are there any discussions underway -- there were several other sort of tentative announcements on other gem 10 by other potential customers in that marketplace, they all got put on hold, when the industry turned down but now that things are picking up, have any of those discussions restored?

We have no new confirmations of a construction start up of gem 10 or Gen 11 at this stage.

Thank you.

Next to the line of Ajit Pai with Thomas Weisel.

The first question is on cash flows. You've shown some pretty impressive cash flows in this quarter and you've also talked about your CapEx falling and your demand side actually rising. Can you give us some indication for this year what you'd expect your cash flow generation to be? Maybe if you don't want to give specific guidance if you do make a $5 billion top line number what it could look like?

If we make the $5 billion top line number we expect to see good free cash flow generation, I won't dollarrise it at this stage. We will give you more help on that in our July call. If we get to that level and things are playing out the way we expect them to display we should be in good shape to have strong positive free cash flow this year. Certainly will not be as great as it was two years ago but it will be definitely very good.

Second question would be looking at the telecom business you talked about shedding some workers in the fourth quarter and then bringing them back in the first quarter, from an overall perspective, particularly on the fiber side of things, can you give some color as to what capacity utilization at your [at your two fiber units are]?

It's tight.

At both or at one it's close to 100%, at the other it's about half the time to less than half, higher than half?

Not going to disclose that for the glass we got running it's very tight, demand is very strong relative to our ability to supply. As you may note that we were just over in China, doing a ribbon cutting on a very significant expansion of our Shanghai fiber plant. That is timed very well to help meet this acceleration in China market demand.

The margin structure in china is it comparable to what you get from the fiber plant in the US and also the profitability as related to, the pricing environment for fiber, or just given how tight your capacity is I'm not sure what the competitive dynamics have been capacity utilization of the competitors, but is that environment where pricing is fairly benign?

Pricing being fairly benign in telecom is a strange concept. You have, just overall industry structure you have relatively few, very powerful buyers relative to the supply base right now. With pricing strategies that played out in fiber, like we wanted them to, and certainly pricing has become more moderate though I would not ever call the telecom pricing environment benign.

In terms of mix like China versus North America, is there a major difference in margin structure?

I wouldn't want to start to talk about by region margin structure. Mix overall what I would say is that high data rate type projects as well as private network type projects have been ones that have been impacted more than some of our base business projects so therefore the relative rate of standard single mode is higher, than sort of high data rate fibers or private networks, and that will tend to be a little bit negative on mix for us.

Thank you.

Next go to the line of Nikos Theodosopoulos with UBS.

Two quick questions, on the $195 million cost reduction, just a couple of clarifications on that. In the second quarter, you said you would get an additional $30 million in savings, but most of that will be in cost if I heard that right, what was the actual savings you guys had in the first quarter, I'm trying to get a sense by the end of 2Q where you will be versus the full targets?

I just don't have that handy Nikos. I have to help get something to Ken and we will get you back.

Okay, even though most of the savings in 2Q will be in COGS, ultimately half the savings will be in OpEx and half in COGS is that the way to look at it?

No. I think we will still be slightly weighted towards cost of good sales on the savings.

Okay. All right. On LCD gross margins, given the volume ramp in the next couple of quarters, and more stable pricing, if this continues, is there a scenario where you can get back to the gross margins you had in the LCD business in the first let's say nine months of 2008, sometime in the next year or so? Or are those margins not going to be achievable based on the resetting of the bar here in the first quarter?

Let me start out by saying our gross margin in March was very nice for us in the display business, it moved up each month. In terms of an exit rate for the year, the way we think about it is that we will probably end up with a 12 month period of time of a bit of price declines mostly driven by the quarter one being down. And unfortunately we won't have had the same opportunity to work on what we call our normalized cost reductions over the course of the year. Driven principally by the fact we spent a lot of time shutting down tanks and bringing them back up. I'm not expecting that our gross margin gets back to the level it was. And by the end of the year. I do expect it to be quite high and be an extremely profitable business. Whether it gets better over time, I think it would be very dependant on the ratio of price declines in 2010, relative to our ability to work on cost reductions. As you know, there have been years in the past where we had cost reductions exceeding our price declines, and we get one of those again that will help inch our way back. As of right now I'm not expecting to get back to quite the level that we had in the first half of last year in our wholly owned business, but I do expect the margins to be very, very high.

Okay, real quickly on acquisitions at the analysts day, maybe it was just me overanalyzing this, I got a sense at the analyst day the Company was aggressively looking at acquisitions and today on this call, it was kind of like well, we might do a small to medium one, we might not, did something change over the last couple of months, or is it pretty much the same approach you had at the analyst day.

I would say it's pretty much the same approach we had at analyst day. Remember for us we'll have two things that are going to tend to balance out. We will see how the opportunities lag. One way or the other on that. On one side valuations are down and we're very strong financially, so that raises the probability of us doing some smart external development. On the other hand, we are never going to do anything that challenges the fundamental stability of Corning. And we always aim at being here for another 150 years, of independence and innovation that tends to make us be conservative and not overreach. So no change in approach, and we will just seek and we get an opportunity that manages to fit through that cycle being something that we would be outstanding at, the valuation being right and at the same time being totally consistent with our strategic frame work.

Thanks a lot.

We got time for one more question.

That will be from the line of Brandon Furlong with Miller Tabak.

Three quick questions. On the telecom side you mentioned that the datacom/enterprise part of the telecom was weak in Q1 any further color on that into Q2?

Well, as we take a look going in to quarter two, we expect overall telecom sales to be modestly higher. And that being driven really around the same dynamics we expect relative flatness in some of the areas that were down and continued strength in those areas that were up.

Understood. Second question, on in the firing up on the tanks, you're firing them up in May and June it would be -- the way to characterize the impact of gross margin in Q3 as significant again?

Yes. Basically you are going to get the glass coming off those tanks assuming the volume remains as we think it is, to come in extremely high variable gross margins.

Great. Last question on the pricing front, I have you roughly down 8%, quarter on quarter on pricing. Normally 2%, you were more moderate in Q2, do you think you can get halfway back to the more normalized level?

I'm sorry I'm not going to confirm that.

Okay. Thanks a lot.

Thank you. Jim, just a couple of quick investor related announcements, first, Ken and I will be in London on Tuesday May 5, meeting investors, we will have a open luncheon that day and if there's anybody interested in attending you should call Ken. Second, I will be presenting at the JPMorgan technology conference in Boston on Monday on May 18. Lastly, Wendell will be presented at the Sanford Bernstein strategic decisions conference on May 28. We hope to see you at one of these events. Ken?

Thank you Jim and thank you Wendell and thank you all for listening today. A playback of the call will available starting at 10:30 a.m. Eastern time today. Run till 5:00 Eastern time on Monday May 11, to listen dial 800-475-6701. The access pass code will be 994513. The audiocast also available on our website during that time, that concludes our call, please disconnect all lines.

Certainly. Ladies and gentlemen, you may now disconnect.