康寧 (GLW) 2009 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the Corning Incorporated second quarter results conference call.

For the conference today, all the participant lines are in a listen-only mode.

However, there will be an opportunity for your questions.

And instructions will be given at that time.

(Operator Instructions).

As a reminder, today's call is being recorded.

Now, with that being said, I'll turn the conference over to the Division Vice President of Investor Relations, Mr.

Ken Sofio.

Please go ahead, sir.

Thank you.

Good morning.

Welcome to our second quarter conference call.

Also being audiocasted on our website.

Jim Flaws, our Vice Chairman and CFO will lead the discussion.

Wendell Weeks, Chairman and CEO will join the Q&A.

Today's remarks 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 second quarter, which can be found on our investor relations website.

We have also posted the Company's slides on our website.

We were extremely pleased with our results and hope that you are as well.

Before I get into the details, I want to walk you through the key points we'll be covering this morning.

First, second quarter sales, gross margin and profitability grew significantly, driven primarily by strong display volume.

Two, we believe supply chain inventories at the end of the second quarter have rebuilt to levels similar to where we entered 2008, as the industry prepares for a stronger seasonal second half of the year.

We estimate that the current inventory supplies are 16% less than quarter two last year, compared to retail demand that's been actually running 15% ahead of a year ago.

Retail demand for LCD products is forecasted to continue growing at double-digit rates in the back half of the year.

This comparison gives us comfort about the current supply chain and the outlook for the remainder of the year.

Third, retail sales of LCD televisions remains strong worldwide throughout the second quarter.

This helped pull through a significant amount of product in the supply chain and kept inventory levels healthy.

Fourth, based on the robust retail data in the first half and our expectations for the second half, we've increased our forecast of the LCD market glass volume this year from roughly 2.2 billion square feet to 2.3 billion square feet.

Fifth, we met 40% of our wholly owned display shipments in quarter two by depleting our inventory.

We need to, and have, restarted tanks to replace this inventory drawdown to meet quarter three demand.

We have some decisions to make soon about whether or not to bring back capacity for quarter four.

But we are proceeding cautiously until we have more information from our customers on their quarter four plans and of course we'll continue to monitor end market demand.

Six, despite our efforts to bring required capacity online rapidly, we expect to be capacity constrained in Q3, and are prioritizing our glass allocation to customers with long-term supply agreements.

Seventh, we expect our Q3 display volumes to be flat to up slightly compared to the stronger than expected Q2 performance.

We also expect display gross margins to be consistent with Q2.

You should note that our display volume estimates for Q3 are much higher today than they were just a few months ago.

Eight, we expect our display glass prices to be flat in Q3 sequentially, at both our wholly owned business and SCP.

This dramatic improvement from the significant price declines we experienced in Q1.

Lastly we expect consistent to modest sequential growth in our other businesses for a second quarter in a row.

And this could be an indication that our businesses may have hit bottom in Q1.

So let me turn to the details.

Our second quarter sales were about $1.4 billion, a 41% increase versus the first quarter.

Q2 sales were negatively impacted by changes in exchange rate versus Q1.

Moving down the income statement, gross margin was 41% in Q2, compared to 27% in Q1.

This significant increase was primarily due to higher display volume.

SG&A was $211 million, or 15% of sales in Q2, compared to $207 million or 21% of sales in Q1.

We're very pleased to be able to maintain a consistent level of SG&A given the 40% increase in sales.

R&D was $136 million in Q2, or about 10% of sales, compared to $151 million or 15% of sales in Q1.

The cost savings from our restructuring actions were about $35 million in the second quarter.

That breaks down to 20 in cost of goods sold, 8 in SG&A, and 7 in R&D.

Other income was $41 million in Q2, versus other income of $20 million in Q1.

Increase was primarily due to higher royalty income from SCP driven by their higher Q2 sales.

Equity earnings were $361 million in the second quarter, compared to $195 million in the first quarter.

A sequential increase of 85%.

The significant increase was due to higher earnings at both Samsung Corning Precision and Dow Corning.

As a reminder, quarter one equity earnings had included $29 million of restructuring charges at Dow Corning.

Net income excluding special items was $614 million in Q2.

This is four times our Q1 net income, excluding special items of $150 million.

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

The reconciliation to GAAP can be found on our website.

Our share count for the second quarter was 1.57 billion shares, and consistent with the first quarter.

Now let me turn to our segment results, starting with display.

Second quarter sales were $673 million, an 89% increase over the first quarter sales of $357 million.

Volume in our wholly owned business was up 101% sequentially.

Sequential price declines were much more moderate than the first quarter, as expected.

Q2 sales were also negatively impacted by the change in the yen to US dollar exchange rate in Q2 versus quarter 1.

Equity earnings from SCP's LCD glass business were $284 million in the second quarter, an increase of 58% compared to $180 million in Q1.

Volume was up 50% sequentially.

Price declines at SCP were minor as expected and less than the wholly owned business.

Impact of exchange rates overall was a slight negative at SCP.

For your modeling purposes, SCP's second quarter LCD sales were $960 million, compared to $659 million in the first quarter, an increase of 46%.

As a reminder, this represents SCP LCD sales only.

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

Net income in the display segment, which includes equity earnings was $555 million in the second quarter versus $218 million in the first quarter.

As a reminder, Q1 net income had included $34 million in restructuring charges.

Improved performance on our display segment was driven by both the higher sales volume and improved manufacturing performance.

The higher volume was fueled by the replenishment and slight expansion of supply chain during the quarter.

The stronger volume resulted in a significant increase in display gross margin, which accounted for most of the improvement in the total Company gross margin performance.

We were able to meet the stronger than expected demand through a combination of production from continuously operated capacity, glass shipments from inventory, and production from capacity restarted in the quarter.

As a reminder, our wholly owned business ran at less than 50% capacity for most of Q2.

It was not until the end of the second quarter that we began shipping glass from restarted production capacity.

Since glass demand was much stronger than we expected, we began restarting capacity earlier than planned.

However, there's a lag of several weeks between restarting a tank and producing good glass.

About 40% of our Q2 shipments in our wholly owned business came from inventory.

We made the decision to deplete most of our glass inventory in the quarter to meet the needs of our customers.

At the end of Q2, our utilization rate, based on all of our available capacity, was around 75%.

We'll continue to evaluate our production capabilities versus demand expectations.

Any decisions will be made a little later this year.

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

As I mentioned earlier, we entered the second quarter with two key assumptions.

First, LCD televisions would continue to exhibit good year-over-year growth at retail.

And second, the supply chain would replenish following a significant contraction in Q4 2008 and Q1 of 2009.

We were correct on both.

Let me start first with retail.

LCD televisions continue to be a resilient consumer purchase the second quarter.

Worldwide, LCD television unit sales at retail were up 27% in April and 33% in May.

We don't have complete data for June to provide a worldwide growth data for that month.

As a reminder, worldwide retail sell-through is the aggregate of the data provided by different data vendors in each of the primary TV sales regions, China, Europe, Japan and the United States.

Most significant growth regions were Japan and China.

In Japan, LCD television unit sales were up 18% in April, 48% in May and 42% in June.

In China, unit sales were up 77% in April, 80% in May, and 68% in June.

For the first six months, LCD television sales in China are up 71%.

We believe the strong growth in China so far has been more the result of the attractive retail pricing, rather than the stimulus program.

In Europe, LCD TV unit sales were also very strong.

In both April and May, unit sales were up 22% over last year.

We do not yet have June data for Europe.

In the US, LCD TV sales rebounded nicely after a slightly weaker April.

April was up 9%, May, 13%, and June, 29%.

All months came in higher than we had forecast.

We believe the slightly stronger June sales may have been due in part to the second round of digital conversion which took place on June 12th.

As a reminder, the US data provided by NPD and their data does not include Wal-Mart and Costco.

However, Costco recently reported that June LCD TV sales grew 50% over last year.

This higher growth rate supports our belief that discount retailers have continued to gain share.

As a result of the very strong demand for LCD TVs in the first half of the year, we've increased our forecast of LCD glass market volume for the year.

As you may recall, our original forecast called for a flat market versus 2008 of around 2 billion square feet.

This estimate revised upward in April to a range of 2.1 to 2.2 billion square feet.

We're now estimating the total market to be around 2.3 billion square feet or about 15% growth over last year.

The revision is largely the result of our revised forecast for LCD TV sales this year.

We now estimate 129 million units will be sold versus our previous estimate of 121 million.

This represents about a 25% increase over last year.

Much of the 8 million unit increase will be in China where we now estimate 22 million units to be sold versus our prior estimate of 18 million.

We have also slightly increased our estimates for notebooks and monitors.

Our estimates for notebook sales this year increased slightly from 126 million to 129 million, which is consistent with last year's total.

The estimate for monitors has moved from 143 to 154.

This is still lower than last year's total of 167 million monitors.

In summary, we're feeling very good about our LCD sales at retail.

I'd like to provide an update on the display supply chain.

During the second quarter, supply chain replenished following the significant contraction which began in Q4 of last year and continued into Q1.

We believe this rebuilding of inventory is appropriate, given the strength of retail demand during the first half and the need to service a larger end market than was forecasted entering the year.

We believe that total inventory in the supply chain, as measured in square feet of glass, increased from around 500 million square feet at the end of Q1, to around 650 million square feet at the end of Q2.

This level is consistent with the amount of supply chain inventory entering the year, which was around 630 million square feet.

The key question that remains is is the supply chain building too much inventory too fast again?

Difficult to answer as it ultimately depends on end market demand.

Perhaps the best way to think about it is this.

We estimate that the level of total supply chain inventories is 16% less than the second quarter a year ago.

This is compared to retail demand, both the total glass television IT that's been running 15% ahead of a year ago, and is forecasted to continue to grow at a double-digit rate in the back half of the year.

This comparison gives us some comfort about the outlook for the remainder of the year.

Looking ahead to Q3, we expect supply chain to expand further to meet seasonal demand in Q4.

The industry simply cannot make and ship enough televisions within the fourth quarter to meet that level of demand.

However, the supply chain expansion Q3 may be slightly constrained by the availability of glass.

Our models suggest inventory levels in Q3 could reach 800 million square feet.

That's about 9% less than Q3 of last year, which we all know now was higher than it needed to be.

Given that this year's end market in Q4 may be 10% higher than last year, this level of inventory may be appropriate.

Time will tell.

The key will be how strong Q4 retail demand is, and how much inventory is pulled out of the supply chain.

Right now, our model suggests about 100 million of square feet will get pulled out in Q4, leaving the total supply chain about 700 million square feet at year end.

We would view that level of inventory to be appropriate for a market of this size.

With that overview, let's start with the second quarter beginning with glass supply and demand.

Glass demand for the industry total was higher than in the industry's ability to ship in Q2.

The glass industry did restart capacity to meet demand.

But it generally takes more time to bring on glass capacity than it does the panel makers to ramp their utilization.

In addition, glass inventories are likely depleted faster than expected.

The amount of glass industry capacity currently being restarted appears to be following customer demand.

Now, turning to panel makers in Taiwan, utilization rates increased during the first two months of the second quarter.

However, glass shortages may have had an impact as those rates declined slightly in June.

In April, utilization rates at Taiwanese averaged nearly 80% compared to about 70% in March.

In May, rates increased to 85%, however, in June, the average declined to 75%.

Taiwanese panel inventories at the end of Q2 were about 4.5 weeks, a level we would consider normal.

In Korea, utilization rates remained fairly steady in Q2, averaging between 90 to 95% each month.

In terms of the total panel maker inventories measured in equivalent square feet, at the end of Q2, they were half of what they were in Q2 of last year.

Moving on to the set assembly level, inventory levels measured in square feet of glass have increased in comparison to the first quarter as expected.

The end of Q2, our models suggest they were slightly higher compared to inventory levels entering the year, 20% less than Q2 last year.

We would expect set assembly level inventories to increase again in Q3 in preparation for Q4 demand.

At retail, we believe inventories increased compared to Q1.

Inventory levels as measured in square feet of glass are about 12% higher in Q2 than a year ago, which is in line with end market demand that's forecasted to be 15% above.

We also saw a steady increase in panel prices during the quarter for all key panel sizes.

For monitors and notebooks, panel prices have had their most material increases over the last several weeks.

For TVs, panel price increases have been fairly steady over the last two months.

This is another indication of tightness in the supply chain.

My last comment about supply chain is regarding the concept of double booking or double ordering.

It's always difficult to tell if there's double ordering, either from your direct customers or customers further down the supply chain.

We assume there is some level of double ordering, but it's impossible to quantify.

If there were any double ordering within the display supply chain we believe it would most likely be at the set assembly level.

Rising panel prices, set assemblers may decide to purchase more panels in advance.

This could explain the increased inventory levels there.

We would be more concerned about this if retail demand were not as strong and pulling inventory out of the supply chain.

I'll cover our supply chain expectations for the third quarter and our capacity decisions in the outlook section.

My last topic is our Gen 10 plants.

We continue to ramp our production there in preparation for Sharp's startup later this year.

Investors should note the impact of fixed costs associated with our ramp is material to display's gross margin.

In Q2, the impact to display gross margin was about 400 basis points.

In Q3, it may be as high as 550 basis points.

There will continue to be a fixed cost overhang until production volumes at Gen 10 are high enough to offset t hem.

We expect this to happen sometime in 2010.

Exact time will be dependent on how quickly Sharp ramps its own production.

Now, turn to the environmental segment, where sales in the second quarter were $132 million, versus first quarter sales of $110 million.

The 20% increase was driven primarily demand for our automobile products.

Auto product sales were $85 million in Q2, compared to $64 million in Q1.

We experienced strong demand within Germany, China and the US.

US demand was likely the result of the replenishment of supply chain during the quarter, versus an increase in auto production.

We believe Germany and China demand was attributable to government incentives there.

Despite the recent spike in demand driven by incentives and refilled supply chain in Q2, longer term, we now believe the worldwide auto market will remain at fairly low levels.

Most industry forecasts predict auto production between 54 and 55 million cars this year, roughly 20% drop from last year.

These same industry sources estimate auto production will not return to pre-recession levels until the early part of the next decade.

As a result, we're now considering further restructuring actions to resize our auto business and align our capacity with a smaller market.

These actions may include further asset utilization and workforce reductions, and we expect to announce any decisions and actions later this quarter.

Diesel sales in the second quarter were $47 million and flat versus the first quarter.

The segment incurred a net loss of $9 million in the second quarter, versus a net loss of $44 million in Q1.

Q1 segment net income had had included $19 million in restructuring charges.

I'd like to make some additional comments on our diesel business.

We're halfway through the year and clearly the heavy duty engine market continues to suffer in this economic environment.

Light duty diesel is actually holding up well, but we're still disappointed with the relative amount of total diesel sales.

We still believe this business will reach $500 million in sales within the next few years.

Regulations also continue to tighten over the next decade, requiring even more advanced emission control products.

New standards for offroad engines will provide additional revenue opportunities.

So while it is taking longer than anticipated, this market is there, it's still large and it continues to be an attractive growth opportunity for us.

Turning to telecom, sales in the second quarter were $437 million, an increase of 14% versus Q1 and higher than our expectations.

China continues to have a strong demand for optical fiber and cable products.

In North America, we saw increased demand for fiber to the home, cable and hardware equipment products due to the release of carrier capital spending.

On the down side, North American private network demand was weaker.

Sales in our fiber cable products in the second quarter were $235 million, an increase of 20% sequentially.

China's 3G build-out was the primary driver again this quarter.

The China fiber market is now the largest in history.

No small feat, considering the size of the long haul build-out in North America in 2000.

We expect the China fiber market to grow 40% this year while the rest of the world declines 15%.

In total, we now expect the worldwide fiber market to be flat to up 5% versus last year.

Sales of hardware and equipment products were $202 million in Q2, an increase of 5% sequentially.

Fiber to the home sales, which are primarily hardware and equipment related were $94 million in the second quarter, up 15% sequentially.

Segment net income was $18 million in the second quarter, compared to a net loss of $1 million in the first quarter.

Q1 had included $15 million in restructuring charges.

Sales in our Specialty Materials segment were $71 million in Q2, an increase of 18% versus Q1.

Which is more than we had anticipated.

The increase was driven primarily by higher demand for our Gorilla Glass.

This segment incurred a net loss of $10 million in Q2 versus a $27 million loss in Q1.

Q1 had included $18 million in restructuring charges.

The Life Sciences segment sales in the second quarter were $81 million, an increase of 7% versus Q1, in line with our expectations.

Segment net income was $9 million versus $8 million in Q1.

Turning to Dow Corning, equity earnings in Q2 were $58 million compared to $5 million in Q1.

As a reminder, Q1 had included restructuring charges of $29 million.

The sequential increase was driven by higher demand in both the silicone segment as well as Hemlock.

Silicone sales have grown each month over the past several months.

Hemlock benefited from capacity that came online during the quarter.

For your modeling purposes, Dow Corning sales were $1.2 billion in Q2, compared to $1 billion in Q1.

Moving to the balance sheet, we ended the second quarter with about $3.1 billion in cash and short-term investments, up from $2.6 billion last quarter.

Increase in cash was primarily due to the issuance of $350 million in senior unsecured notes during the quarter, and strong free cash flow.

Free cash flow was $156 million in Q2.

Free cash flow is a non-GAAP measure, and the GAAP reconciliation is on our website.

Inventory fell slightly from $731 million at the end of Q1 to 647 at the end of Q2.

The biggest decline came from display inventories but environmental, telecom declined also.

Now on to our outlook.

We expect glass volume at our wholly owned business and SCP both separately and in the aggregate to be flat to up slightly compared to the very strong second quarter.

As I mentioned earlier, about 40% of our Q2 shipments came from existing inventory.

As a result, we need to and have restarted tanks to replace this inventory drawdown to meet Q3 demand.

We are restarting tanks earlier than expected and we are getting them back online at a record pace.

We have some decisions to make about tanks that could deliver additional glass in Q4.

However, we need to know more about our customers' plans for Q4 and we also want to continue to monitor retail sales and inventory levels.

Our caution for Q4 comes from the uncertainty about the economy and the desire to avoid costs for starting and stopping tanks.

While we designed our LCD operations to be scalable, it's still a complex and costly process to take tanks on and offline.

As a result, we expect to be capacity constrained in Q3 and we are prioritizing glass allocation to customers with long-term supply agreements.

If end market demand continues to outpace our revised expectations, and we believe it will be robust, we have the flexibility to bring on additional capacity to meet that demand.

Regarding glass pricing, we expect pricing at both our wholly owned business and SCP to be sequentially flat in Q3.

With regard to display gross margins, we expect them to be consistent with Q2.

The benefit of running higher utilization rates will be offset by the higher Gen 10 fixed costs, depreciation from some of the restarted tanks.

Because of this, we would expect display gross margins will be similar to Q2 and the same is true for our corporate gross margin.

Looking ahead to Q4, we would typically expect glass shipments for the industry to be seasonally lower.

However, given the continued retail strength, we believe the declines could be more muted this year.

As a result -- as a reminder, supply chain inventories are usually depleted in Q4 to meet the surge in retail demand.

Panel makers typically continue to run at higher utilization rates for part of Q4 to replenish the inventory levels the supply chain requires for Q1 demand.

Once they reach those inventory levels, and demand subsides, they lower the utilization rates for the remainder of the year.

If retail demand in Q4 is stronger than expected, more inventory will be pulled out of the supply chain.

In that scenario, the panel makers may have to run higher utilization rates for a longer period of time.

This could result in stronger glass demand and Q4 being flat with Q3.

At our telecom and life science segment, we expect Q3 sales to be comparable to Q2.

Environmental sales are expected to be up modestly in Q3, while sales in Specialty Materials are expected to be up 10 to 20% on stronger Gorilla Glass sales.

At Dow Corning, we expect Q3 equity earnings to be up more than 25%.

Moving to the income statement, SG&A will be slightly higher in terms of dollars and R&D will be consistent in Q3.

For a tax rate based on the mix of income by geographic region, we expect our tax rate to be between 0 and 3% Q3 and Q4.

Now some comments about how investors should think about our tax rates going forward.

At our annual investor meeting in February, we told you to use a tax rate of 16 to 18% for 2010 and beyond when modeling Corning.

We now believe our 2010 tax rate could be much lower.

I'd like to walk you through the details.

Like most companies, our tax rate is influenced by where our income is generated.

And the tax rate in those regions.

As well as changes in tax code and tax holidays.

Looking forward, we're anticipating changes in each.

Let me start with income.

In Japan, where tax rates are high, our income this year has been offset by the startup costs of the Gen 10 factory.

As a result we've been incurring a tax benefit in that region and this has helped to offset tax expense elsewhere and lower our overall tax rate.

Starting in 2010, we expect those costs to by and large be offset by income to result in either a much smaller tax benefit or a small tax expense.

We estimate this change could increase our overall tax rate by approximately 4 percentage points.

Regarding the tax code, there's one item that has the most material impact to Corning's tax rate.

It relates to foreign dividends.

Today, dividends declared by foreign subsidiaries are not taxed if the related income is not distributed back into the US.

This tax law has been in existence now for several years, but there's currently discussion on Capitol Hill to allow this exemption to expire.

If that happens, affiliates such as SCP will be taxable, even if the money stays abroad.

This could increase our 2010 tax rate by another 4 percentage points.

Congress still has until the end of the year to extend this law for another year.

Obviously, if that happens, this would not be a 2010 tax event for us.

We will also begin to see the phasing out of tax holidays in both Taiwan and Korea.

However, the impact to overall tax rate is not material from these changes until 2011.

So in summary, for 2010, assuming the US tax exemption of foreign dividends is allowed to expire, our tax rate could be around 10% next year.

However, given the uncertainty of other proposed changes by the Obama administration to current tax law, this estimated rate could be significantly different.

That wraps up my discussion on taxes and hopefully this data will help your modeling.

One other modeling point.

Investors should note that our results could be materially influenced by the yen to US dollar exchange rate.

For Q2 the yen averaged 97.

For every one point move in the yen, our net income moves by about $7 million.

So if the yen were to average 95 in Q3 our net income benefit would be around $14 million, or roughly $0.01 of EPS.

Before I head into Q&A, I would like to make some overall comments on how management views Corning, and why we believe in our long-term potential.

First, we remain the market leader in all of our major businesses in terms of share, technology and cost.

Even during this downturn, these strengths have not been eroded.

Second, the growth trends and profitability of our largest business, display, will remain robust.

Penetration of LCD televisions into the worldwide installed base remains very low.

Only 13% of all televisions worldwide entering the year were LCD.

In China, which is the world's largest and fastest growth market, less than 40 million have been sold there to date.

The penetration trends are good and so is our ability to have robust profitability from this business.

Third, we expect to be generating significant cash flow over the next several years.

We are not anticipating a significant spike in capital spending going forward.

In fact, we believe our CapEx next year will be about $600 million, down from $1.1 billion this year.

Fourth, as I mentioned earlier, our diesel business continues to have potential to be another significant business for Corning.

Lastly, we continue to innovate and have several promising technologies that have the potential of delivering significant revenues over the next decade, including solar, green laser, and Gorilla Glass.

I'm sure Wendell will be happy to take questions on these during the Q&A.

So in summary, I can tell you, senior management feels very good about long-term prospects for Corning.

Ken?

Thank you, Jim, and John, I believe we're ready to take some questions, now.

Certainly.

(Operator Instructions).

And first go to the line of Mark Sue with RBC Capital Markets.

Please go ahead.

Thank you and good morning gentlemen.

On display glass, if the inventory supplies are less than a year ago and demand is greater than a year ago, shouldn't we see magnified improvements as we move into 3Q and then an increase in 4Q since there is still some catchup going on.

Aside from the macro, is it set assembly data that's kind of giving you pause or any other thoughts aside from the macro picture for your conservatism?

Well, we feel comfortable about where inventories were at the end of Q2.

We expect them to build in Q3.

And to get up as I said to about 800 million square feet.

That's down from where it was at the end of Q3 last year, which we had thought was excessive.

But we think that's an appropriate level heading into what will be the Q4 demand.

I hesitate to imply to the word conservatism, in our models, our tracking of demand, we think the inventory level is appropriate, not being overbuilt, and not underbuilt, either.

I'd add to that that there's always room for some caution here, because though we feel really good about the end market, it's always possible for different players in the supply chain to make a judgment on how much inventory they want to carry and what their confidence is for the coming quarter.

So that's why before we make some decisions about restarting even more capacity, we want to get a little bit better insight into those plans and a little more data under our belt from the end market.

Thank you.

And Jim, just as a follow-up, can we assume a steady level of gross margin improvements as we see growth of display glass for the balance of the year?

I think at this revenue point and with stable pricing it was kind of near 48% in the past.

Is that kind of within the ballpark that we should think about.

I'm sorry.

You broke up so I couldn't hear the question.

Should we assume a steady level of gross margin improvements as we see growth of display glass for the balance of the year, around this revenue point, and with stable pricing, can we assume right around 48% gross margins?

Is that kind of reasonable?

We saw this in the past.

I'm not going to give you a forecast of corporate gross margins.

You heard my script that we're talking about gross margins for the corporation being flat Q3 versus Q2 and the same for display.

Okay.

Thank you and good luck, gentlemen.

Our next question from CJ Muse with Barclays Capital.

Please go ahead.

Thank you.

I guess first question, in terms of glass capacity constraints, can you comment on when you think that will ease up?

And then as part of your glass guidance now of up roughly 15% year on year, is that what you think all the glass makers can provide as of today, in plans today, or is that number higher?

It's what we believe that the glass market is going to be, based on what we are aware of, either our own plans or what we think the other glass makers are doing.

Clearly, we could turn on additional tanks and provide more in Q4 if we thought that was appropriate.

Both of our other large competitors have additional capacity that's not lit.

We're not capable of knowing how fast they can bring that on.

So glass is tight now, CJ, and we would anticipate it would remain relatively tight.

And that is all the way through year end or I guess could you -- ?

I think as Jim comments, a lot depends on how the seasonality works its way through this quarter.

And you heard in his opening remarks that we have scenarios that have a quarter four that is relatively flat demand and then scenarios that have a quarter four that drops off a little, like more the normal seasonality.

And so we're not really ready to make any definitive comments about Q4 at this time, CJ.

Okay.

And I guess moving on to OpEx and unallocated expenses, R&D showed a 10% sequential drop.

I guess was that part of the initial plan or is that timing related?

I guess how should we think about OpEx going forward?

As part of the same question, unallocated expenses came down pretty dramatically as well.

Is that something that we should change in our models as well?

R&D benefit in Q2 from restructuring and also we had some programs that didn't repeat themselves, but R&D is always somewhat subject to just program expense and we have some -- our new businesses move ahead successfully so we think it's flat for Q3 but could go up a little as we evaluate those programs.

And I think unallocated I'll leave to more detailed call with you and Ken.

And then final question, on the display gross margin side you provided some good color there.

I was wondering if you could dig a little bit deeper, though.

I would have thought that you would have seen a slight uptick at least in Q3, given not selling from inventory and.

Why just flat?

Is that a level of conservatism on your part or are there other issues going on?

The reason it's flat is that we are -- have a Gen 10 drag increasing.

We are also making some other changes to our capacity that will hurt a little in Q3 as well as some of the depreciation from the restarted tanks.

Thank you.

Next question's from Jeff Evanson from Sanford Bernstein.

Please go ahead.

Hi.

First, just a clarification.

You're guiding for your Q3 shipments in the wholly owned business to be up slightly.

Do you define up slightly as low single digits?

We are guided it to be flat to up slightly so that could be zero to five.

And when we look at the panel manufacturers, although we certainly haven't seen all of them, I'd say in aggregate they're guiding for up 10 to 15% in their shipments.

How does the math on that work out?

We don't believe that an aggregate, the entire industry when you count all the panel makers could achieve that.

Okay.

Great.

And when you talk about extra capacity that you could light, where is that capacity and what generation is it?

It's mostly in Taiwan.

We do have capacity in Japan, that would be Gen 6 capacity, but we're not planning right now to light that, and then we have capacity in Taiwan that would be Gen 5 and Gen 6 that we could light.

And lastly, sounded like Wendell wanted to say something about solar from your last comment in your prepared remarks, Jim, and I'd love to hear it.

He does.

He's been very excited about solar recently.

I don't know that I actually wanted to make a comment on it in the conference call, however.

I would characterize our progress on solar as very encouraging right now.

Tests are showing that very thin glasses we can make are damage resistant enough to be able to sustain the same or even better performance as the relatively thick glasses of today and we continue to generate some very encouraging data on improvement in conversion efficiency related to some of our exciting new composition work.

So so far, so good on solar, Jeff.

Thanks very much.

Next question's from Jim Suva with Citi.

Please go ahead.

Great.

Thanks.

Can you just help me better understand a little bit of connecting the dots where inventory went down 11% in Q2, which I would have actually thought it would have come down a little bit more, but more importantly, your comment about Q3 about your shipments to be flat to up 5%, rebuilding some inventory, but is there some shortages?

It sounds like you're making some priority allocations as far as who gets supply.

I would have thought a sell today versus putting something in inventory and limiting the sales is quite an interesting discussion.

Why would you build inventory if you're allocating supply in Q3?

We didn't say we're building our own inventories.

Okay.

So you're not building inventory in Q3?

Okay.

Okay.

That's very interesting to know.

Okay.

And then can you also talk about the expansion of Taichung?

I believe the phase 4 expansion was shifted a little bit or delayed until 2010.

Is that one of the areas of production that you could actually bring back online, potentially, and what's the status of that?

Taichung phase 4 was never brought online so it's not bringing it back.

We do have some of that capacity that is a potential decision but most of the decisions are in Taichung and Tainan.

Taichung early in phase 3 and then in Tainan.

But the expansion is continuing to plan for 2010?

I'll just say we could bring capacity online for phase 4 in 2010 from phase 4.

Okay.

Great.

Thank you very much.

And next go to the line of Steven Fox with CLSA.

Please go ahead.

Good morning.

Two questions, real quick.

First of all, Jim, is the peak drag from the Gen 10 ramp, is it the 550 basis point drag or could it get worse from there?

And then secondly, given how you describe potential seasonality in the fourth quarter, when would you get back to sort of a comfortable level of inventories for LCD glass on your own balance sheet?

On the latter point, we're comfortable with the inventories on our balance sheet.

We don't actually like to have inventory so we're kind of back to where we would have said, where we kind of would like to run, maybe just a hair under.

So we feel comfortable running with very low inventories.

I don't actually know exactly the quarter by quarter on Gen 10.

We have lit our second tank now.

We have plans to light additional tanks there.

But I don't have a quarter by quarter ramp from Sharp so I don't know exactly what the drag is.

I have a hard time imagining it being much worse than the number I gave you, though.

Thank you.

Next go to the line of John Roberts with Buckingham Research.

Please go ahead.

Good morning, guys.

Good morning.

Do you think the loss of the dividend tax holiday is an eventuality.

If it doesn't happen this year it's most likely going to happen next year or soon after.

It's very hard for us to judge.

This has been in a tax extender bill last year, just like the R&D credit, which gets renewed on an annualized basis so I think it's difficult for us to predict.

Obviously, there's a desire for more revenue in Washington, so that might go against this but we're not the best predictors of tax policy in Washington.

If you lose that tax holiday, is there no tax on dividends you would bring back, then?

I'm not sure I follow your question.

So if you're going to get taxed on the earnings generated abroad if you wanted to bring that cash back as a dividend to the US, would there not be a double tax on that, then?

That's correct.

Then you're underlevered I think or potentially significant underlevered in some of the foreign operations and the JVs.

Could you lever up and bring back a fair amount of cash then tax free because it's not generating earnings if you're just leveraging up to pay the dividend back to the parent.

We're not intended to lever up Samsung Corning precision.

We could bring extra dividend back.

I think what we're -- those extra dividends would have a tax on them.

Okay.

If you levered up and paid dividend back there would be a tax on that.

Not intending to lever up, John.

Okay.

Thank you.

And next go to the line of Carter Shoop with Deutsche Bank.

Please go ahead.

Good morning.

Couple of questions on the Chinese market, two on the TV side and one on the telecom side.

Given the limited visibility into the Chinese TV market, particularly the opaque and distributed retail channel.

How confident are you that there isn't a inventory build in China and what extra precautions are you taking if any?

We do believe there has been some inventory build in China.

We have gone around and had some people over there meeting with all the Chinese set manufacturers.

Inventory is done a little differently there, it's more of a consignment basis and the brands actually, the television that's out at retail is on consignment to the brands.

We do think there's been some increase but it doesn't appear to us to be inappropriate at this level.

We have met with basically all the Chinese television set assembly television manufacturers over the past two months.

Chinese government I think actually this morning announced how many televisions have been sold under the stimulus package, which looked about in line with our expectations.

So we feel pretty good about China and not worried.

I think if panel prices for small televisions climbed a lot more from where they are now, that might be a negative for the Chinese television market.

Great.

And then same question on the TV side, can you give us an update on what types of investments you made in China on the glass side, since your initial fray into market about a year ago in Beijing and any kind of future plans there would be helpful.

We've had no further investments on the mainland since that initial investment in Beijing.

We continue to be engaged with the appropriate folks in China.

And I think a lot of where our decisions will go will depend on ultimately what happens with the panel capacity there.

So that is how we're continuing to steer our way through the development of the LCD manufacturing base in China.

Last question on the 3G build-out in China as relates to telecom segment.

We've heard a couple of equipment manufacturers sites slowing demand there as a result of that build-out decelerating a little bit.

What's your view on the current pace of the fiber build-out in China right now?

Are these levels sustainable?

Well, they're very strong.

We're not seeing signs of a slowdown at the glass level.

We continue to be able to sell everything we can make there and we timed our capacity expansion in China, looks like perfectly.

So that's all going very well.

That being said, any time you do a build along this type of scale, you're going to have a complicated set of projects that's going to have some ebbs and flows to it.

So I find it very believable that we'll see some movement one direction or another as the 3G build-out continues, but overall we remain very bullish on the size and scale of the China fiber market.

Great.

Thank you.

Our next question's from Yair Reiner from Oppenheimer.

Please go ahead.

Thank you very much.

First question on SCP, it looks like gross margins in the quarter were exceptionally high.

I wondered if you could tell us if you think that's sustainable, at least for the near term or whether we should expect that to ease a bit?

The gross margins at SCP were fabulous.

We expect that their level of volume utilization, low price declines, for them to remain strong.

But I will point out a lot of that is benefited with where the Korean yuan is.

If there was significant change in that that could drive those margins differently.

Second question, also related to the Korean market.

It appears as though capacity there for glass is particularly constrained, well beyond the issue of how many tanks are lit or not relit.

Is there any opportunity for the wholly owned business to take advantage of excess capacity in other regions of the world and actually ship into Korea?

We can manage the worldwide capacity footprint in such a way to do our best to get glass to our customers that need it and we're always working our way through that and trying to find the best possible way to serve our customers in both directions.

Okay.

Final question, it appears that the bottleneck right now for the LCD industry is clearly glass.

That's causing ultimately upward pressure on LCD panels and perhaps down the line is going to limit the ability of the retailers to discount in the holiday season.

Do you have any concern that the artificial -- or the glass constraint is going to ultimately impact sell-through and then come back and have an adverse effect on the whole industry?

Well, I don't think we have any deep concerns about that.

I think the issue has been the way the supply chain has interacted with the end market demand and what's happened is that the supply chain over-reacted, due to concerns about the economy and that in turn pushed back to the least flexible component.

So glass, if you're going from 1600-degrees C down to room temperature, that is not the component you want to try to build your supply chain flexibility into.

Takes a while to recover to that, from that, because you've got to get it from room temperature back to 1600 degrees C.

So we would say most of our concern has been around, as Jim was I think one of the very first people in the world to point out, has been around the way in which the supply chain is understood and thought through the levers in the end market, rather than any real concerns on the end market.

But Jim, you've had the most insight on this.

Do you want to add anything?

No, I think that we -- we're actually pleased that panel prices came back up because if you look at the panel makers' financials, they were losing money and you can't have that go on for a long period of time.

So obviously we don't want the 32-inch panel price to go back to where it was at the beginning of 2008, $300.

We think that would be negative.

But we're not sure that there's going to be a significant amount more increase from where we are right now.

So we still think there will be a very healthy retail pricing environment for the fall.

Very good.

Just a parting question.

I know that it's very early to look into 2011.

If you had to look at the market and glass demand, do you think we should get ready to expect a similar year to 2010 or little bit below?

Little bit above?

We expect overall glass demand to grow in 2010 and 2011.

Great.

Thank you very much.

Our next question's from Brendan Furlong with Miller Tabak.

Please go ahead.

Good morning.

Thank you.

Quick question.

Earlier on in the year, you said that Corning standalone versus the industry will kind of lose some market share if you will because of the Taiwanese and the impact of the Koreans with major shift in dynamics in the last six months.

Where do you see Corning standalone versus the industry now in terms of share for the year?

I think we've regained the share that we lost when the industry was barely operating at all in the January, February period of time, so we think shares are by and large back to where they have been for quite a while.

Do you expect the full year share to be the same as 2008?

In general, yes.

Okay.

And just a clarification on the R&D.

Flattish in the September quarter.

Does it stay at these low levels or does it spike up again for some reason or should we just model incremental gain from $136 million in the next few quarters?

I don't think you should expect any unusual spike up or spike down.

We're looking for our overall level of corporate R&D next year to be slightly down from this year, but you should not expect any unusual movements.

Okay.

And then my last question, you exited the Q2 with 75% utilization.

Just as a matter of interest, what's the trigger point on utilization levels where you get worried and you have to add more capacity?

Is it 85% or what's the number?

We don't think about it that way.

We have tanks that are cold today, they're rebuilt, ready to restart.

Takes us about a month to bring a tank up once we make a decision.

We have to make some decisions soon in order to bring up more capacity relative to quarter four and get ready for Q1 next year and we'll be making those decisions over the next month.

Excellent.

Thank you very much.

Next question's from Paul Bonenfant with Morgan Keegan.

Please go ahead.

Yes, hi.

Thanks.

Like to start with a housekeeping question.

I apologize if I missed it.

Did you have any 10% customers in the quarter?

Yeah, I think our same LCD customers were 10% customers.

That's correct.

That would be AUO and Chimei.

Okay.

One of your larger customers last week suggested that a new government stimulus plan in China, this one aimed at urban areas versus the existing stimulus plan for rural areas, to subsidize I guess TV upgrade and replacement from older CRTs to more energy efficient LCDs was expected to go into effect sometime over the summer.

Do you have a sense for or have you built into that your expectations for demand in China.

That's not the news.

That's been known now for almost a quarter.

Okay.

And final question.

Do you have a sense for what the maximum theoretical glass industry output is for 2009 and 2010, with all capacity lit?

It would seem that we're bumping up pretty close up against those maximum limits.

No, I wouldn't say that.

You have to remember, just pick for ourselves as an example.

When you think about 2010, we operated most of the first half of the year in our wholly owned business with only 50% of our capacity running.

So if we run that all year long next year, there's quite a bit of capacity available.

I think we said that the industry had footprint under way, either lit or under construction, that they could get to 2.6, 2.7 billion square feet.

So there clearly is, if everybody likes and runs everything, there's enough glass capacity around.

Thanks for taking my questions.

John, we have time for one more question.

That will be from the line of Ajit Pai with Thomas Weisel Partners.

Please go ahead.

Good morning.

Good morning.

A quick question about your cash flows.

I think you guided to next year your CapEx falling by about $500 million from 1.1 to $600 million.

So this year, you've already said that the CapEx should be falling through the end of the year.

Could you give us some color as to what kind of cash flow can we expect this year and next year and then also use of cash, you talked about I think on your last conference call that the priority for acquisitions was getting a little higher.

Could you give us some color as to what you've been seeing over there, experiencing there, as you look at potential business development activity?

So I won't give a free cash flow forecast for next year but it should be substantial and we are looking at acquisitions with more urgency than we were before.

And are actually expanding our corporate development group.

So we definitely -- that would be potential use of cash.

But our free cash flow should be excellent next year, assuming that the economy doesn't do something strange.

And any color for the free cash flow for this year?

No.

We're delighted that it's positive in the first half of the year.

We expect it to be nicely positive for the whole year.

Some of our CapEx got delayed a little on finishing Gen 10 but to quarter three but we're feeling very good about free cash flow for this year.

Got it.

Thank you so much.

Jim?

Just wrap up with a couple investor related announcements.

Wendell and I will be in Boston meeting investors on Tuesday, August 4th.

There will be a luncheon, if you're interested in attending please contact Ken or Ann.

Wendell will be one of the keynote speakers at the Citi Technology Conference in New York City on Thursday, September 10th.

And lastly, Jim Clappin, President of Display Technologies, will be presenting at the Deutsche Bank Technology Conference in San Francisco on Tuesday, September 15th.

We look forward to seeing you at one of these events and hope you all have a very nice finish to the summer.

Ken.

Thank you, Jim, thank you Wendell.

Thank you all for joining us today.

A playback of this call will be available beginning at 1030 Eastern time today, will run until 5 Eastern time Monday, August 10th.

To listen in dial 800-475-6701.

The access code for that call is 106323.

Audio cast will also be available on our website during that time as will the slides from today's call.

Operator, that does conclude our call this morning.

Please disconnect all lines.