康寧 (GLW) 2010 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the Corning Incorporated quarter one 2010 results.

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

Later we'll conduct a question-and-answer session and instructions will be given at that time.

(Operator Instructions).

As a reminder, this conference is being recorded.

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

Please go ahead.

Thank you, good morning.

Welcome to Corning's first quarter conference call.

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

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

Today's remarks do contain forward-looking statements under 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 have posted accompanying slides online as well.

In summary, we're very pleased with our first quarter results as they exceeded our most optimistic expectations.

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

Number one, our first quarter performance was outstanding.

Earnings per share were $0.52 cents, up $0.08 cents or 18% from Q4 earnings per share excluding special items of $0.44.

Q1 EPS was also up significantly from last year, which was just $0.10.

We're clearly pleased with the progress the Company has made since that time.

Second, we had significant improvement in our gross margin in the first quarter.

Quarter one gross margin was 47%, up from 42% in Q4 and 27% a year-ago.

The improvement was better than we expected and was driven by very strong manufacturing performance and higher volumes in our display segment.

I'll have more on gross margin and display performance in a few minutes.

Third, our first quarter earnings benefited from a much lower tax rate than we had previously forecast.

Our effective tax rate was 2% in Q1, versus our expectation of 10%.

We expect 2% to be the effective tax rate for the rest of 2010.

The benefit of the lower tax rate versus our original expectation was worth roughly $0.04 per share in Q1.

I'll talk more on the drivers behind the lower tax rate in a moment.

Fourth we had significant free cash flow in the first quarter, free cash flow was $472 million.

While we've been successful in generating substantial free cash flow on an annual basis, since 2004, our first quarter free cash flow is usually negative.

This quarter was the first time in the last ten years that we changed that pattern.

Fifth, retail sales of LCD televisions and IT products during the first quarter were stronger than our forecast.

As a result, we're raising our 2010 unit forecast for all LCD product lines.

We're also increasing our glass market forecast from the previous range of 2.8 billion square feet to 3 billion square feet, to 2.9 billion square feet to 3.1 billion square feet.

This represents glass volume growth of between 18% and 27% over last year versus our previous estimate of 14% to 22%.

Sixth, we expect LCD glass volumes at our wholly-owned business and SE P to be up in the mid single-digits, sequentially in the second quarter, separately and in the aggregate.

And glass prices, are expect ed to decline slightly.

Lastly, based on the strong retail data in Q1 and expectations for the remainder of the year, we believe inventories in the supply chain are at appropriate levels, heading into Q2.

And I will walk you through our model in our display discussion.

Now to the details.

Our first quarter sales were $1.55 billion, a 1% increase from the fourth quarter and a 57% increase from a year-ago.

Our Q1 sales were negatively impacted by changes in exchange rates by about $17 million versus Q4.

Moving down the income statement, gross margin was 47.1% in Q1, compared to 42.4% in Q4.

This improvement was the result of very strong manufacturing and higher volumes in our display business.

Gross margin also benefited from the non-repeat, the $10 million and one-time accelerated depreciation charges taken in the fourth quarter due to the Taiwan power outage.

Regarding operating expense, we were pleased with our level of spending this quarter.

SG&A was $235 million or 15% of sales.

R&D was $145 million or about 9% of sales.

Other income was $64 million in Q1 and consistent with Q4.

Equity earnings were $469 million in the first quarter, compared to $461 million in quarter four.

First quarter equity earnings included a special item totaling $21 million related to a manufacturing tax credit at Dow Corning.

As a reminder, Q4 earnings at Dow Corning also included a tax valuation gain of $29 million.

Now onto our tax rate.

During the first quarter, we made the decision to repatriate approximately $1 billion in cash from foreign subsidiaries.

We plan on repatriating this cash to the United States later this year.

As a result of this decision, we're able to use excess foreign tax credits, which have the impact of lowering our full year effective tax rate for 2010 from our previous estimate of around 10% to around 2%.

This was also on our tax rate for Q1 and the benefit to our Q1 EPS was about $0.04.

To be clear, this decision simply moves cash from overseas to the United States.

It doesn't change the total cash balance for the Company.

I'll have additional comments on our longer term tax rate in the outlook.

Net income, excluding special items, was $818 million in Q1, compared to $696 million in Q4.

The impact from exchange rates was immaterial and more than offset by a balance sheet hedge gain in the quarter.

We hedge our balance sheet against currency fluctuations.

This resulted in a gain of about $7 million in Q1 and don't expect this to repeat in Q2.

EPS, and EPS excluding special items were the same, $0.52 per share.

There were a few special items in the first quarter, but the net impact was only $2 million.

Included in the special items are the $21 million manufacturing tax credit at Dow Corning I mentioned earlier.

In addition, we took a charge of $56 million to reflect the increased future Medicare subsidy tax expense change.

This shows in our tax line.

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

Reconciliation to GAAP can be found on our website.

Our share count for the first quarter was 1.58 billion shares and consistent with the fourth quarter.

Now let me turn to the segment results for the first quarter and I'll start with display.

First quarter sales were $782 million or 9% higher than Q4.

Volume was up 12% and pricing was down slightly, as expected.

Sales were impacted by about $10 million from the change in the yen to US dollar exchange rate which averaged 91 in Q1, versus 90 in Q4.

Display gross margin expanded in the first quarter, as the higher volumes resulted in improved manufacturing performance.

In addition, there was the non-repeat of the $10 million accelerated depreciation charges I mentioned a moment ago.

The drag on margins from Gen-10 facility remain small.

Equity earnings from SCP's LCD glass business were $344 million in the first quarter, an increase of 7% from the fourth quarter.

Volume was basically flat and pricing was down slightly, as expected.

The increase in equity earnings was primarily due to strong performance and non-repeat of some year-end accruals.

For modeling purposes, first quarter LCD sales were $1.1 billion and consistent with the fourth quarter.

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

Our public filings will report SCP's total sales which includes CRT glass and other products.

Net income in display segment which included equity earnings was $703 million in the first quarter, and increase of 14% over the fourth quarter net income of $619 million.

As a reminder, displays fourth quarter results including the effect of the accelerated depreciation.

I'd like to spend a few minutes discussing the current supply chain, starting with retail.

Retail demand in Q1 was strong across all major products.

Notebooks, monitors and LCD televisions.

Worldwide LCD TV unit sales at retail were up 17% in January and 40% in February.

We do not have complete data for March to provide a worldwide growth figure for that month.

But for those regions that we do have data, it continues to be very positive.

As a reminder, worldwide retail sell-through is the aggregate of data provided by different data vendors in each primary television sales regions.

China, Europe, Japan and the United States.

The most significant growth regions were Japan and China.

In Japan LCD TV unit sales were up 79% in January, 65% in February, and 167% in March.

These growth rates were higher than our internal expectations.

As a reminder, retail sales in Japan have been running in the high up double-digits since last May with the Echo Point program incentive was produced.

LCD TV sales in March have been even more robust due to the clearance sales of models that were not eligible for the new Echo Point specification starting in April.

However we recognize these higher growth rates, it may be be an indicator of faster replacement rates.

Another indicator that faster replacement cycle is underway in Japan is the significant number of larger sized televisions being sold there.

In March there were three times as many 40-inch and larger LCD televisions sold in comparison to March of the prior year.

The 40-inch and larger category has been consistently out performing total LCD television growth during this Echo Point program.

As a reminder, LCD TV penetration is already over 90% in Japan and consumers have been purchasing LCD televisions longer there than any other country.

That's why we're focusing on consumer-based studies there to understand if there's been an acceleration in LCD replacement rates versus traditional CRTs.

This is important to know as Japan could be a precursor to what occurs in other regions.

We plan on sharing the findings from the studies with investors in the future.

In China, unit sales were up 53% in January and 167% in February.

We do not have the March data yet.

As a reminder, the Chinese new year ran from February 1st to the 14th this year.

Last year the holiday began in January.

So you need to combine the first two months to have a more accurate picture of the growth rate.

In China, January and February combined, TV unit sales grew 85%.

Again was higher than our internal forecast.

Based on this retail data, we believe more than 8 million LCD television sets were sold in the first two months in the year in China, versus our expectation of 7 million.

It appears that retail sales were very strong during the holiday.

We are aware there were some in the industry who had higher expectations.

We've seen reports that state they were up to 1 million sets of excess inventory built.

We do not view this number as being significant, given that the industry expects at least 37 million televisions to be sold in China this year.

In addition, if there had been a significant amount of excess inventory, or at least enough to impact the supply chain, we'd have expected to see TV panel prices falling in March.

I'll cover panel pricing in a moment, but as many of you know, TV panel pricing was very stable in March.

So in summary, we don't believe there was an excessive amount of panels or set inventory build in China.

In Europe television unit sales were also strong.

In January and February, sales were up 12%.

We don't have the March data.

In the United States, TV sales were down 19% in January, up 19% in February and up 14% in March.

As a reminder, last January retail sales were influenced by the first round of digital conversion, which happened in February.

In addition Circuit City was liquidating their inventory last January and the Super Bowl occurred one week earlier.

So the down 19% was in line with our internal forecast.

If you combine January and February, sales were basically flat year-over-year in the United States.

We also have two weeks of April data in the United States television market.

They were up 12% versus last year.

As a reminder, a significant portion of the growth in LCD televisions this will be outside the United States and Europe.

We'll continue to monitor the week to week and month to month data from MPD but the region we're monitor most closely is China.

Sales of monitors and notebooks have also started the year strong.

For monitors, our data is based on shipments of the top nine monitor brands, which make up about 80% of the worldwide monitor market.

In January shipments from these brands were up 31% year-over-year.

In February, up 11%.

For a year-to-date growth rate of 21%.

These growth rates are much higher than our internal forecast.

We don't have March data yet.

For notebooks, our data is based on the top five ODMs, which make up between 75% and 80% of the worldwide notebook market.

In January, shipments were up 87% year-over-year and February up 46%.

Year-to-date, this growth rate for the first two months is 64%.

Again, much higher than our internal forecast.

It should be noted that monitor and notebook year-over-year growth rates are against a relatively weak environment in Q1 of 2009.

So in summary, on the retail side, sales of television, monitors and notebooks have been very strong.

As a result, we're increasing our 2010 glass market estimate from a range of 2.8 billion square feet to $3 billion square feet , to 2.9 billion square feet to 3.1 billion square feet.

For those who are modeling, here are the unit forecasts based on the lower half of this new glass volume range.

LCD television units sales are expected to be $177 million versus our original estimate of $171 million.

This is an increase of 22% over last year's $145 million.

Monitor sales are expected to be $184 million, up from our original estimate of $176 million.

Our notebook estimate also increased slightly from $207 million to $209 million, up 22% over last year.

I'd now like to update you on the supply chain inventory levels.

To measure the overrule health of the supply chain, we look at both total square feet of equivalent glass held at panel makers, set makers and at retail.

As well as the number of weeks of inventory.

We believe the number of weeks in inventory may be the better metric as the total end market increases over time.

The amount of inventory in supply chain required to meet the demand should grow also.

We believe that between 15 and 20 weeks of inventory in the supply chain is reasonable.

Let me give you some historical examples.

In the second quarter and third quarter 2008, the amount of square feet of glass in the supply chain was between 770 million and 807 million.

This represented 21 weeks of inventory.

This was too high and the supply chain subsequently corrected.

The correction was amplified by the financial crisis.

After the supply chain correction, contraction in late 2008, inventory levels fell to 630 million square feet in Q1, 2009.

This represented 12 weeks of inventory which was too low.

We saw stockouts at retail in Q1.

The supply chain needed to expand and did starting with Q2.

Exiting 2009, there was 756 million square feet of inventory.

This may appear to be reasonable, but it represented only 14 weeks of inventory.

We believe this may be one of the reasons, in addition to the strong retail environment, that glass demand was so robust in the first quarter.

Supply chain recognized inventory levels were lean and reacted accordingly.

At the end of Q1, we believe inventory levels were about 825 million square feet, about 17 weeks of inventory, which we believe is reasonable, heading into the second quarter.

I have one more display market topic and that's panel pricing.

As you know, we view panel pricing as the canary in the coal mine, in relation to the overall health of the display and the supply chain.

When panel prices are heading up, stable or even down moderately, this is an indication that panel demand continues to be strong and stable, which suggests there is strength further down the supply chain.

We now have panel pricing data for the second half of April, and it was in line with our expectations.

We had expected price declines at this time of the year.

We see TV panel price declines in April and believe it's likely that overall panel prices will decline $3 to $5 per month throughout Q2, meaning panel prices will remain well above cash costs in Q2.

Monitor panel prices increased modestly in Q1 as demand remained strong.

In April, monitor prices were down $1 or $2.

Notebook panel prices were flat in Q1 and in April, but we believe we could see moderate monthly price declines here, also in the coming months.

Now I'll turn to the environmental segment.

Sales in the first quarter were $192 million, an increase of 6% over the fourth quarter.

As a reminder, we were guiding a sales decline of about 10%.

We were also surprised by the strength of auto demand in the quarter.

Auto product sales were $117 million, up $9 million versus Q4.

Demand continued to be strong throughout the quarter.

According to Global Insights, and industry source for auto data, worldwide auto production is now estimated to be $67 million in 2010.

This estimate is up from $64 million just a few months ago.

As a reminder, las year the auto market was $59 million.

Most of the year-over-year growth is expected to be in China.

But there's also growth expected in the United States and Europe.

We believe the stronger than expected auto production levels have placed further strain on the auto supply chain, which has been struggling to replenish inventory since last year.

As a result we've had to restart production that's been idle and call back workers.

In addition, demand has been so tight, inventory levels so low, for the first time in our history we had to air freight almost all of our production.

Lastly, we're in the process of transitioning our heavy duty production lines to manufacture the new products required under the US 2010 regulations.

The cost of all these actions weighed on the environmental segment margins during the quarter.

We expect the impact of the actions to continue into Q2.

In addition, it's important to note that the current auto industry run rate is about 72 million autos.

We don't believe this pace is sustainable so our forecast in demand for auto products to ease slightly in Q2.

I'll discuss Q2 auto expectation in our outlook section.

Diesel sales in the first quarter were $75 million and up slightly sequentially.

The increase was due primarily to engine manufacturers finishing engines from last year, ahead of the 2010 regulations.

Segment net income was $11 million in Q1, which was lower than Q4.

In telecom, first quarter sales were $364 million, down 10% from Q4 and in line with our expectations.

The decline was due primarily to lower fiber and cable sales in China.

Fiber to the premise demand was up 7% sequentially.

Sales in our fiber and cable products in the first quarter were $190 million, a decrease of 18% sequentially.

We believe the lower sequential demand in China in the first quarter was more seasonal in nature.

Fiber volume was also up 50% from a year-ago.

However, as we discussed at our annual investor meeting, we still expect the pace of demand to ease later this year with the China market ultimately being down between 3% to 14% versus last year.

Sales of our hardware and equipment products were $174 million in Q1, consistent with Q4.

Compared to the first quarter of last year, Q1 telecom sales were down 5%.

The year-over-year decline was primarily due to softer fiber to the home demand.

Sales of private networks were higher compared to last year as were fiber and cable sales in China.

As a reminder, the first quarter of last year included $9 million in sales from businesses that were later divested.

Segment net income was $8 million in Q1, versus a loss of $19 million in the fourth quarter.

You should note that Q4 results had included $21 million in after tax restructuring charges.

We're quite pleased with the operating performance of the telecom segment, given the increase in net income on lower sales.

We're now seeing the benefits from cost reduction actions taken last year.

Sales in our specialty materials segment were $96 million in Q1, down 13% versus Q4 and in line with our guidance.

The decline was due to lower advanced optic sales.

We're very pleased that the sales of Gorilla Glass were consistent between the fourth and first quarters.

We had expected Gorilla sales in Q1 to be slightly lower given the seasonal demand in Q4.

We exited Q1 with a sales rate for Gorilla of almost $170 million in the month of March.

We continue to receive requests from many consumer electronics companies, as well as others outside the industry about Gorilla.

Gorilla Glass is now in 80 different models, handheld and notebook products, and we're very confident we'll have a covered TV glass agreement soon.

We are taking steps this quarter to prepare for Gorilla Glass manufacturing at our Shizuoka facility.

Our Gorilla Glass operations in Harrisburg, Kentucky are currently running close to full capacity.

As we continue to receive requests for Gorilla Glass on new handset and IT models, as well as potential for TV cover glass, the need for additional operational flexibility is required.

There'll be some costs associated with the preparation of the facility in Q2, which will be reflected in the specialty materials segment.

In Life Sciences, sales in the first quarter were $118 million and consistent with the fourth quarter.

Turning to Dow Corning, equity earnings in Q1 were $112 million including the $21 million tax gain I mentioned earlier.

There was a tax gain of $29 million in Q4.

Excluding the tax gains in each quarter, Dow Corning equity earnings were down about 12% from Q4.

Silicon sales were running very close to previous peak levels in the first quarter, but Hemlock sales were about 30% lower sequentially.

The decline in Hemlock was primarily due to the non-repeat of the significant one-time sales of the fourth quarter.

As a reminder, last quarter Hemlock sold most of its lower grade poly that had been sitting in inventory.

Hemlock also experienced a manufacturing issue in March which affected sales.

This problem has been fixed and Hemlock's operations are running again at full capacity.

For modeling purposes Dow Corning sales were $1.35 billion in Q1 compared to $1.47 billion in Q4.

Moving to the balance sheet, we ended the first quarter with $3.9 billion in cash and short-term investments from $3.6 billion at the end of last year.

Free cash flow was $472 million and much higher than we expected.

Corning usually runs free cash flow negative in the first quarter, so we view this as a positive sign.

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

While on the subject of cash, we are updating our capital spending range for 2010.

Our original range was $600 million to $700 million.

As I mentioned at our investor meeting in February, there was a chance that Capex could be $300 million higher.

I have mentioned what we're already doing for Gorilla capacity.

In display we've also restarted expansion at our Taichung facility that had been halted in late 2008 as a result of the supply chain contraction.

As a result of these actions, we now expect our 2010 Capex will be closer to $1 billion.

Now, I'd like to turn to our outlook and I'll start with display.

We expect glass volume at our wholly-owned business to be up in the mid single-digits sequentially in the second quarter.

This is on top of the 12% sequential increase we had in Q1.

We also expect SCP's volume to be up in the mid-single-digits sequentially also.

We anticipate glass pricing at our wholly-owned business and SCP to be down slightly sequentially.

We expect equity earnings at SCP to be about 5% lower sequentially.

The higher volumes will be more than offset by the expected impact of changes in exchange rates, as well as the fixed cost of new capacity coming online.

I'll comment more on exchange rates in a moment.

Gross margin in our display business is expected to expand slightly in the second quarter, primarily due to higher volume.

In general, we expect second quarter volumes in the glass industry to be fairly consistent to up slightly compared to the first quarter.

This forecast for the Q2 glass market is based on the lower end of our range.

We also have a forecast for Q2 showing the glass market growing more.

If this optimistic case occurs, we have the capacity to do greater than mid-single-digit forecast in both our wholly-owned business and at SCP.

We expect to regain share in Q2, at both the base forecast or in the optimistic case.

Panel makers are expected to continue to run at fairly high utilization rates.

In total, we expect inventories and supply chain to expand in Q2 as it prepares for the seasonally stronger second half.

As a reminder, the second quarter is typically the seasonal low point for retail sales of televisions.

Longer term some investors have asked about the likelihood panel makers will add too much capacity in 2011.

Investors should note that the panel industry has historically built more capacity than required to meet the true retail end market demand.

For example, last year, end market demand was 2.32 billion square feet.

The panel makers had capacity to ship 3.3 billion.

2008 the equivalent panel demand was 1.95 billion square feet, panel makers had 2.6 billion square feet capacity.

And the same was true in 2007, when panel capacity was 2 billion square feet, but the retail demand was only 1.6 billion square feet.

So in summary, we believe panel makers may build more panel capacity in 2011 than needed to meet end market demand.

The important question is whether the glass industry will follow.

And we can speak for ourselves.

Our strategy would be the same as it always has been.

We'll add capacity to meet our view of the end market demand.

As I mentioned earlier, we'll be adding some additional capacity at our Taichung facility to meet what is expected to be another year of glass volume growth in 2011.

In addition, we are likely to have a decision on the timing, location and cost of adding melting capacity on mainland China soon.

However, the China capacity will be to address our 2012 glass volume needs.

Capital spending for that project will not be significant until 2011.

In our telecom segment, we expect second quarter sales to be up between 10% to 15%, primarily by the higher seasonal fiber and cable demand in both North America and Europe.

We also anticipate sales of private networks, fiber-to-the-home and hardware and equipment products to trend slightly higher in Q2.

In China we expect Q2 fiber demand to remain consistent with the first quarter.

In our environmental segment, we expect Q2 sales to be consistent with Q1.

In Life Sciences we anticipate Q2 sales to be up 5% sequentially.

In Specialty Materials, we expect Q2 sales to be up between 15% to 25% sequentially, driven by growing Gorilla Glass sales.

At Dow Corning we expect Q2 equity earnings, excluding specials, to be consistent with Q1.

Silicon sales are expected to be consistent sequentially.

While sales at Hemlock are expected to increase 25%.

These sales gains would be offset by the impact of start-up costs of a significant expansion in China.

We're very excited by the start-up of the China facility.

This is a $1 billion Capex project, which has been under construction for four years.

As in many of Corning's businesses, the Silicon market in China will shortly be one of the world's largest and will continue to have strong growth.

This expansion positions us well to succeed in China.

I'd like to take a minute to say how delighted we are with Dow Corning.

The economic recovery is showing up strongly in the Silicon business.

Their new product portfolio is paying off, Hemlock's new capacity is on track, and the solar market is improving, both in volume and in stabilization of spot price.

And all of Hemlock's customers are current with their prepays.

Now turning back to the full income statement, we expect our corporate gross margin percentage in Q2 will be consistent with Q1.

While we expect gross margin expansion in display in telecom, it'll likely be offset by the one-time costs of preparing Shizuoka for Gorilla Glass.

SG&A and R&D as a percentage of sales will be consistent quarter-to-quarter.

Other income will be about $7 million lower due to the non-repeated Q1 balance sheet hedge gain.

Expecting equity earnings to be 3% to 5% lower, sequentially, excluding the quarter one tax gain at Dow Corning.

We are basing our Q2 guidance on a yen to dollar exchange rate about 94, which is roughly where it's trading today.

In Q1 the yen averaged 91.

For every one point move on the yen, our sales and net income moves by about $9 million.

So if the yen averages 94 in Q2, sales will be impacted by $27 million.

So would our net income .

The net income impact includes SCP where weaker yen also lowers their results.

In total, the impact of the weaker yen and the non-repeated balance sheet hedge gain would be about $34 million in Q2 or roughly $0.02.

Regarding our Q2 tax rate, we expect to be consistent with Q1, 2011.

We're still forecasting our tax rate to be about 20%, excluding the benefit of potential tax extender bill passing in Congress.

Extender bill passes, our 2011 effective tax rate would be reduced by about 2 percentage points.

As we outlined in February, we expect to grow earnings in higher tax jurisdictions such as the United States and Japan, which is pushing our effective

Thank you, Jim.

Julie, we're ready to take some questions.

(Operator Instructions).

We'll go to the line of CJ Muse with Barclays Capital.

Good morning.

Thank you for taking my question.

First question, Jim, in your prepared remarks you discussed the base case and a more optimistic case for Q2 glass volumes.

Considering how tight glass still is in your visibility today, plus some of the public comments we've heard from LPL, AUO, and your competitor, NEG, I'm curious why you're guiding to the less optimistic case.

Is this just a level of conservatism on your part or is there something else there?

As you know, CJ, we tend to be a little bit conservative on our guidance and we also are paying attention to the inventory and the supply chain.

I would also caution you, sometimes people focus only on AUO or LG and you really have to add up all the panel makers to get a forecast for the market.

But clearly, we could meet the optimistic case and if that's true, the market needs that much, we'll ship more.

Okay, great.

And as a follow-up question, can you talk a little about your gross margin outlook overall for the Company heading into Q2 in the second half of 2010?

I know you don't like to guide forward, but is there any reason, in terms of Q2, why the corporate gross margins shouldn't increase given your guide for display gross margins to tick higher?

Any other moving parts we should be thinking about?

Yes, as I just mentioned, we'll have some costs at Shizuoka to get ready for Gorilla so that will probably hold our corporate gross margin to be roughly similar Q1 to Q2.

Without that it would have gone up.

We expect display margins, assuming we're right on volume and pricing, to get better.

We expect telecom to improve as we get more volume.

We're quite hopeful that environmental will improve as the year progresses, particularly as we stop air freighting and we run manufacturing better.

In general, our gross margin outlook is optimistic for the Company.

Of course at any given time we can have events like the Shizuoka cost but we feel quite good about our gross margin and manufacturing performance.

Very helpful, thank you.

We'll go to the line of Nikos Theodoropoulos of UBS.

Two quick questions.

On Gorilla, can you just clarify what you said about the run rate exiting March?

Just, just trying to understand that better.

And the second question is, given this analysis that you showed in terms of the inventory in the channel, 15 to 20 weeks, what do you do, if anything, if you see it exceeding the 20-week level sometime before the second half begins?

Do you do anything or do you just watch it?

What would be your course of action in that kind of situation?

So your first question on Gorilla, in March, pretty strong demand.

And we're expecting in Q2, Gorilla on an annualized rate could exceed $200 million.

So we're feeling quite good about that.

On inventory, there's not too much we can do.

If our customers keep buying, we'll keep shipping.

We clearly will alert you guys if we think inventory has gotten too high as we did in 2008, but we can't stop our customers from running.

But we obviously have very modular capacity and we'd be prepared to correct if we had to, frankly if it dipped a little.

We'd just put something in inventory because we have almost no inventory right now.

But right now inventory is at 17 weeks.

If you take the more optimistic case in our forecast, it doesn't get to 20.

It also informs us.

One of the reasons we look at it is it informs us in how we play out our particular customer strategies around how do we want to handle our share and when do we want to make what moves when?

So it's very helpful information both for you and also helps inform us as far as when we want to make what type of moves.

Okay, thank you

The next question comes from Simona Jankowski with goldman Sachs.

Thank you.

Couple questions.

First I just was hoping you can clarify your expectation of gaining share in the second quarter.

I think NEG guided up 10% for their owned shipments in the second quarter.

Are you just assuming that in the best case scenario, you can do better than that?

And then second question if you could just give us an update on the Sharp Gen-10 facility.

There had been some trend reports on that, accelerating production as well.

If you can just give us some sense of the gross margin impact there, both in the second quarter and potentially for the back half of the year.

I'll take the latter question first.

Gen-10 is a slight drag on our gross margin in the display business, and we expect if Sharp ramps, as they're telling us they're going to, that that goes away over the back half of the year.

Relative to gaining share, I would remind you, we talk about share for the total market.

And when you compare to NEG they're primarily focused on a couple of customers.

We do expect to gain a little share back in Q2 compared to where we were in Q1 and Q4 in both the base and optimistic case.

Thank you.

Thank you, next question is from George Notter with Jefferies.

Please go ahead.

Thanks very much, guys.

I was trying to understand how you might address the Chinese opportunity with the government there helping to facilitate the development of new panel facilities in China.

Would you address that business through the wholly-owned business?

Or would you address that business through SCP?

I'm thinking about the case where the Korean panel makers get into the Chinese market.

How would you address them?

Thanks.

We're very closely engaged with the appropriate folks in China.

We already have finishing operations in China, we have said we're going to put melting in China, as well.

And now it's just simply a question of where and when.

We would expect to make that decision this year.

As pertains to how we would address that market, we would primarily address that through our base operations.

We are open to, depending on what happens with Samsung's particular play in China, considering a potential role for SCP.

But any such consideration would look primarily to our interest first but at the same time, some consideration for what best serves our customer base.

Great, thanks.

Thank you, we'll move on to the line of Jim Suva with Citi.

Please go ahead.

Great, thanks very much.

This is Kevin Dineen standing in for Jim.

Just first quick housekeeping question.

Jim, could you recap what you said about tax rate for 2011?

We said that we haven't changed our forecast that the tax rate could move up to 20% if we make the money we expect to make in Japan, which has a much higher overall tax rate.

And then I also said that if Congress should move to pass the tax extender bill, that that could fall by a couple percent.

So that's the outlook right now.

Okay, terrific, thanks.

And then my question is, on the $1 billion that you're repatriating, can you talk about any plans of what you'll do with that cash?

I'm assuming that some of the Capex, the increased Capex can be funded with probably balances that are domiciled overseas, given the display operations are overseas.

We have no immediate plans for the cash.

We have talked about this year the Company would think about our growing cash balance and whether we should be doing something more than just keeping it and when the board makes that decision, we'll update you.

But you shouldn't take this planning move back, by the way it occurs in the later part of the year, as a signal we're about to do anything.

We thought this was a very prudent move from a tax point of view and that's why we made the decision at the end of Q1 to adopt this as a decision and it affects our tax rate from a book basis for the full year.

Terrific, thank you very much

Thank you, the next question is from Steven Fox with CLSA.

Please go ahead.

Hi, good morning.

Just a couple questions on Gorilla Glass.

First of all, excluding the start-up costs in Japan for Gorilla, can you give us an update on how the manufacturing efficiencies are moving?

How you see the margin profile going forward?

And secondly, if you could talk a little bit more about what a large TV customer could mean for your growth expectations, say as you get out over next few quarters?

Thank you.

I'll handle the latter one and let Wendell talk about the manufacturing of Gorilla.

Our expectation is that we will have a large customer who will be committing to take cover glass manufacturing, could start at the end of Q3 and could have minor amount of shipments in Q4.

It would probably be significant volume next year obviously if consumers buy these televisions.

Relative to Gorilla manufacturing, from my own perspective, we are improving as we go along.

But we clearly are growing so rapidly that we have some start-up expenses as we try to keep expanding capacity, keep up with the growing demand.

Maybe Wendell, I'll ask if you have any comments about manufacturing Gorilla.

We're happy with the progress.

I think that as this business grows in importance to us with Jim and Ken, we'll give some thought to the best way to help you all think about the profitability on Gorilla.

At the glass level, its profitability is quite enjoyable.

But we add a lot of value to it with things like coatings, finishing, special surface morphologies, and all that added value is great from a revenue perspective and also very good for making more money at the bottom line.

However, in terms of margin percent richness is going to be significantly less than that of the glass.

So, as we work our way through that, we'll think of the best way to help you, Steve, to be able to build that into your models in the appropriate way.

Just adding to that, on the margins, finishing is not as acid intensive as glass so we don't need to have the very high margins we have on the glass portion.

And lastly, some of the added value that we're putting on the glass is very important to our customers as they take this product and do various things with it.

And it helps us to retain customers by some of the stuff we do with it.

That's very helpful, thank you very much

Next question is from Mark Sue with RBC Capital Markets.

Please go ahead.

Jim, does it feel like the early stages of an upgrade cycle?

Should we extrapolate the trends in Japan to other developed markets such as US and Europe?

And how should we think about replacement cycles overall?

I'd say we're hopeful that Japan may be a predictor of other developed economies but until we get the complete results back of our consumer study I can't declare that definitively.

It's very clear from some data we have that there are various things happening in televisions.

I'll stress in particular right now, the impact of LEDs with the thinness of product, appears to be driving the cycle.

We've noticed in Japan that the mix has shot up on LEDs.

They were introduced later there than they were introduced in this country.

And of course, we are interested to see how 3D plays out particularly as more content becomes available.

So we're hopeful but I just can't prove it statistically yet.

But clearly I think there's some good news in Japan, the question is statistically how much.

With a lot of the new things, form factor and LEDs, directionally should we plan for sequential volumes to increase in September and December, or should we think about seasonality in the business?

Are you talking about the overall glass market or are you talking about it retail?

Overall glass.

So for glass in our base case, our lower case, Q3 is higher than Q2.

In our optimistic case, both Q3 and Q4 are higher than Q2.

As always, we have to have a range because we don't know exactly what the supply chain will do.

So when you pull it back from retail, there's always some variability from inventory.

For those worrying about Q2 being the peak quarter for us this year, we don't have that in any of our forecasts.

Okay.

Thank you gentlemen.

And I just want to cycle back to the first part of the question, because I do think it's worth really giving some thought to what's going on in Japan.

We're doing that.

But I also think it's worthy for those on the call who are engaged with our customer base for you guys to actually engage in some of those conversations with them.

Because, some of our customers in terms of long outlook, this year, this very long-term outlook, has an extremely robust view of what they think is going to happen in terms of replacement cycle and in terms of television demand.

We don't share those views yet, but it's very interesting to note just the tone of the dialogue around these factors and how actually the whole energy level around what is the right replacement cycle and what is going to happen on this new product cycle is going to play out.

So it's quite intriguing and it's dominating a lot of conservation in the industry right now

Thank you, we'll go to the line of John Roberts with Buckingham Research.

Good morning, guys.

Just a housekeeping question and if you could give us an update on solar.

The housekeeping question, you had a $0.04 tax benefit in the quarter, which it looks like first call is going to include that in the $0.52 Would it be about $0.04 in each of the next three quarters, assuming that underlying earnings remained roughly in this range?

Obviously I'm not going to give you guidance for the remaining quarters, but I will tell you, the way accounting works for tax rates, total year rates, obviously we would have had 10% throughout each quarter of the year, we're now thinking 2% every quarter.

And you can apply it to your forecast for the quarters.

Okay, good, thank you because I think that's the basis first call is going to go with.

Could you give us an update on solar development activity?

I think you're a little bit behind where you thought you'd originally be with that.

I'll let Wendell take that.

I'd say that solar when we were altogether in February, what our comments were was that we weren't moving forward quite as aggressively as we would have liked.

I'd say that over the last few months we're feeling much better again.

A lot of where we felt the progress was slowing some had more to do with our own internal set of priorities and where it was, and how much work we are having to put in getting touch technology right among a lot of other things.

I feel really good right now that we're back on track and making nice progress and that we're continuing to see nice experimental data.

We still got a lot of work ahead of us to finalize our product, the manufacturing process and to close on a major customer.

But I do feel like we're on the right track.

Thank you.

Thank you, the next question comes from the line of Yair Reiner with Oppenheimer & Co.

Please go ahead.

Thank you.

First of all congrats on very strong operating results.

In terms of seasonality, it looks like at your base case for the market, you're looking at first half seasonality of about 48%.

Is that roughly the math that you're using?

I don't think about it that way, so I'll have to actually look and calculate, but keep going on your questions and I'll get the math out.

Okay, very good.

And second question is the raised guidance for LCD TV sell-through.

Where is incremental units coming from?

Is it Japan and China or is it more widespread than that?

It's across the board, but obviously we're thinking Asia is running well ahead.

But we've actually raised our numbers for United States and Europe also slightly.

Okay and then last question for me is on inventory.

It looks like most of the upside in the first quarter in terms of panel shipments came from monitors.

I think if you annualize the rate of the first quarter, you'd have year-on-year growth in monitors of well over 20%.

Does that really reflect the demand coming from the refresh cycle in enterprises or is that really where the inventory is starting to get sized up?

It's hard for us to determine exactly what drives the demand.

Obviously when you look at the year ago overall demand was very weak, but we can't know for sure what's refresh cycle.

It's difficult for us to tell.

I'd say in our conversations with the major computer makers, and I'm sure you're hearing it as well from them, they seem to be feeling very strongly about the refresh cycle and demand in enterprise as well as consumer.

But most of the conversations that I'm participating in, sound very bullish on their side.

I'm sure that's what you're hearing too.

Great and maybe just one quick one.

Based on your studies, what has historically been the replacement rate for TVs?

The only studies we have were on the CRT market which were eight to 10 years.

And LCDs haven't been around long enough for us really to have any kind of accuracy.

That's what we're striving to get because that's where, in Japan, they've been around the longest.

Actually I think two investor conferences ago Peter Volanakis presented a bunch of different data on some of the main factors that helped drive overall television growth.

And included in that presentation, the historical ranges on replacement cycles and then what different replacement cycles would mean for overall demand in terms of glass.

I'm sure Ken would be willing to make that available to you.

It's very helpful to think about what range you really believe and what the impact would be on glass demand if you're interested.

I'd be more than happy to.

We'll go to the line of Carter Shoop with Deutsche Bank.

Please go ahead.

Good morning and congratulations on a good quarter.

I wanted to touch base on cover glass again.

Based on your preliminary discussions with this one OEM, could we see adoption rates in 2011 be as high as 30% if the market is receptive to these types of products?

I know it's very early on.

But based on your conversations with the OEM, is this something that could flip very quickly like we're seeing in LEDs?

I'm not sure I understand the question.

The answer is no.

We're not expecting a 30% adoption rate in the total television market.

I was thinking with that one OEM you're in discussions with.

We're in discussion with a number of the OEMs, so it's not one OEM.

It's a number of the OEMs.

I still think that would be a high number though.

Okay, that's helpful.

And then in regards to Dow Corning, can you talk about the outlook for the second half of the year in regards to the drag from the expansion in China?

Is that something that's going to continue to the second half of the year or is that going to largely be behind us after 2Q?

It will still be a little bit of a drag in Q3 on the Silicon business, but Hemlock should have a very strong Q3.

So I don't think it's going to be a large number, but we'll update you when we get later on in the quarter.

Wendell, can you elaborate a little bit on the progress you've made in the past couple months on the solar side.

I think as you may recall, there's three different major thin film types -- cad-tel, cigs, micromorph tandem structures on silicon.

I'd say that we're very pleased with our progress in cad-tel and the continued positive lab level results we're getting, and we're getting closer and closer to nailing down exactly what type of product would best serve that market.

Similarly in cigs, we're getting closer and closer at nailing down what the product requirements would be and seeing some nice uptick in terms of conversion efficiency as we're doing these relatively massive DOEs to actually nail down can we improve conversion efficiency.

And finally on the tandem structures, I think we're about halfway there in terms of being able to show a conversion efficiency gain that we would need to be able to justify specialty glass.

So I think overall, the good news is we continue to believe that we can generate significant increases in conversion efficiency using a specialty glass.

There was widespread disbelief of that in the industry, now I'd say there's widespread belief of that in the industry.

Now we have to turn to the next challenge to actually turn it into revenue, turn this idea into revenue.

We need to have exactly the right product for each of these areas, exactly right manufacturing process to deliver on the appropriate economics.

And then we need to catch customer build cycle exactly right.

So all that's ahead of us, but I think the good news is there's nothing about our product, our original product concept of thin specialty glass, that is proving to be not a good idea.

Great, that's helpful, thank you.

Thank you.

Next question is from Ajit Pai with Thomas Weisel Partners Please go ahead.

Good morning and congratulations on a very solid quarter.

Two quick questions.

I think the first one is just looking at Corsam, can you give color as to what the agenda for Corsam would be, and also whether the markets they would be addressing, is it related to some of the China opportunities for Samsung Corning Precision Glass where they can operate with you.

Is it all in the LCD area or outside of the LCD area as well?

The second question would be on your equity earnings, I'm just running through the numbers, and it's far more than being impacted just by Dow Corning and Samsung Corning Precision Glass.

Can you give us some color as to whether there are any other ventures that are becoming material as a percentage of that that we should start thinking about at this stage?

On equity earnings, I don't think there's anything else that's really material.

We look at equity earnings, you had the impact of the other part of SCP.

We do have Eurokera in there.

But I'm not aware of anything material happening.

On Corsam the focus is beyond LCD.

That's what we put in place for.

It is focused on use of flat glass.

Beyond that, we're not disclosing where it's going.

What about the financial?

It's quite a significant amount of investment from both companies right now.

I'm running the numbers, it's almost like $50 million in a quarter, I think last quarter.

In terms of overall investment, over the next year or two, is there some sort of broad number you can share with us?

Directionally you ought to think about it as about $40 million a year.

I'm not quite sure how you got to the $50 million but I'm happy to deal with it offline.

Thank you so much

Thank you, our next question is from Jeff Evenson with Sanford Bernstein.

Please go head.

Couple questions.

One, as you look at the Shizuoka capacity that you're moving over to cover slip production, what is that being used for now?

Shizuoka capacity is the older capacity that has actually been shut down since 2008.

Are you carrying depreciation for that on your books?

Yes we are.

Okay and then if you move it to cover slip, is that depreciation going to move over to the specialty glass business?

Yes it will.

Okay.

In the cover slip business, Wendell, you mentioned that currently with Gorilla Glass, you're putting on coatings and adding value in other ways.

As you think about the TV opportunity, there are a lot of films and coatings going into making a high quality television panel.

To what extent is capturing that revenue an opportunity for you guys?

Similar to when we do highly finished IT parts in Gorilla, we'll see that same type of investment and that same type of product attributes for cover TV if we're able to actually close that business.

All sorts of different ways to deal with light, and I splinter.

I think the main difference between that and what we do for IT would be we probably wouldn't have to put on our anti-smudge type materials.

So, it does add a lot of revenue, all of these various steps, it's quite true.

And given that you're actually reducing some cost that the panel manufacturer would have in other areas, how would there bill of material change by adopting your TV cover slip technology?

This is actually the same question that our Vice Chairman, Mr.

Flaws, has for us.

I'd say the level of our understanding isn't yet deep enough to actually understand, to give you an accurate answer to that question.

In many ways it looks to us like it adds cost, I think it clearly is a cost add overall.

How much they reduce their cost in other space, we just aren't expert enough yet on the overall manufacturer of the television set to be able to answer that question accurately, I don't think, Jeff.

Last one, as we look at Japan rates year-over-year, what is the implied replacement rate you think exists in the high growth that you've seen in the first part of the year?

We don't have a calculation yet Jeff.

Thanks guys.

We'll go to the line of Paul Bonenfant with morgan Keegan,please go ahead.

Regarding the expansion in Taichung, the retrofit in Shizuoka, when is that capacity coming online and what impact, if any, does it have on your expectations?

I think in the past you've talked about LCD glass industry capacity at maximum utilization being around 3.2 billion square feet.

I'm not sure I got your questions totally.

But Shizuoka coming up is not going to be in the display business, so it will be for gorilla, so we're not going to count it in that.

Taichung, the additional capacity we're bringing on would be at the very end of the year.

On a theoretical basis, if everybody was running everything perfectly, if you annualized all tanks, it could get up to 3, 4 for the industry.

Thank you.

Just a quick housekeeping question.

I'im wondering if you could give us the dollar amount of FTTP sales in hardware and equipment.

I think you talked about how that moved directionally on a percentage basis.

I don't recall seeing the dollar amount for a few quarters.

I couldn't understand your question.

I can give you that offline.

Thank you

Thank you.

We'll go to the line of Andrew Abrams with Avian Securities.

Please go ahead.

Two China questions and I know these are still on the speculative side.

One, can you talk about the Chinese supply chain, where you guys are feeding into the supply chain right now and how that's expanded over the last six months or 12 months.

Meaning what's going into the supply chain glass-wise relative to where it was a year ago.

Also, if we're talking about that, can you talk about how you're going to approach the fact that there could be a number of LCD fabs in different locations in China spread out as opposed to maybe in the science parks in Taiwan where it's a little easier?

How do you deal with that?

Are they duplicate construction sites for you guys or what's the concept there?

On the first one, there really hasn't been much change on the China display right now because there hasn't been a change in the people running the panel fabs.

The next new fab I don't think really has cranked up very much.

There hasn't been much any change to date.

What we're evaluating is the fact that when the Chinese government gives the final agreements to panel fabs, they may be in multiple locations.

As we said in February, we're considering whether we end up having two factories and what the best place to put them is.

But that obviously would be dependent on where the fabs get finally approved.

Do you have a thought process on the number of final licenses that are going to wind up being issued or is this just guess work on everybody's part?

I think it's guess work on everybody's part.

Guessing how China will actually choose to behave and what they'll approve in any industry is quite challenging.

So the good news is, we can actually wait until that process is done and then make our decisions and we'll work with all the right folks to be able to make the right decisions.

Great.

Just one other thing.

Do you guys supply a substantial amount to BOE in China now or is it done a different way outside of China?

BOE is one of our most valued customers and has been one of our early customers in China.

And so we think quite highly of them.

A reminder, we already have a glass finishing operation in Beijing.

That's what I needed.

We're running long, we'll take one more call

Thank you.

That'll come from the line of Wamsi Mohan with BofA Merrill Lynch.

Thanks for taking my question.

In your exploratory talks with TV lenders and Gorilla Glass, what sort of models from a screen size and thickness are the ones driving adoption of (inaudible) glass in your opinion?

Different OEMs have very different ideas.

Some don't think that the borderless design is a good idea, some think that the borderless design is the best idea since sliced bread.

And depending on where you stand as an OEM on that continuum depends on how far across your product line you want to take it.

I think if you do like borderless, there's relatively widespread agreement in the camp of people who like borderless that it's best on their highest end models, the largest pieces, because those tend to be the customers that will highly value design.

As far as footprint and thickness, the short answer is thinner is always better than thicker.

And one of the keys for our ideas is that you could potentially go thinner with our product than you can with competitive products.

Thank you and a follow-up on gross margins.

Of the 470 basis points of sequential improvement in gross margins, how much of that improvement would you attribute to expansion of gross margins in the display segment?

Would you attribute greater than 100% to display?

I won't do that for you because we're not giving out specifics on display margins, but display had a big role in it.

Okay, and last one from me is can you update us on any potential progress on discussions with SCP for one-time cash dividend?

Yes, we're having very favorable discussions with them.

As I indicated in February, we have high expectations that by the end of the year we'll get increased dividends.

Can you talk about the magnitude of that?

No.

Thank you very much.

Just a couple quick closing comments to leave you with.

Regarding the first quarter, we couldn't be more pleased with our results and hope you are also.

This was an excellent start to 2010 and we hope to build upon the performance.

We believe there is potential for further sales growth in gross margin expansion this year.

In telecom we expect to continue to benefit from the cost reduction actions we took last year.

Environmental, there's a significant opportunity to bring gross margin up to its historical levels.

And in Specialty Materials, Gorilla Glass continues to find its way into more products and hopefully a few more soon with much larger screen sizes.

Investors often ask us what the most significant next business opportunity is for Corning and we think it's Gorilla.

So we remain very optimistic about our potentials to further grow sales longer term, as well as the potential to further expand gross margin in our bottom line.

Lastly, a couple investor related announcements.

Our annual shareholder meeting is tomorrow at 11 AM right here in Corning, New York.

If you're unable to attend in person, the meeting will be webcast.

We'll also be speaking at the JPMorgan technology conference in Boston on May 17th.

We'll be on the road meeting investors in London early in the week of May 24th.

If you'd like to attend an investor luncheon there, please call Ken.

And in June we'll be attending the B of A large cap conference on June 3rd and the UBS technology conference on June 8th.

Both of those conferences are in New York City.

And finally on June 15th, we'll be in Minneapolis meeting investors and will likely have an open luncheon.

If you're interested in attending that lunch, call Ken.

Great, thank you Jim, thank you Wendell, thank you all for joining us today.

A playback of the call will be available beginning 10:30 AM Eastern Time today in about 45 minutes.

Will run until 5 PM Eastern Time Monday May 12th.

To listen, dial 800-475-6701.

The access code is 152579.

Audio cast also available on our website during that time.

Julie, that concludes our call.

Please disconnect all lines.

Ladies and gentlemen, as mentioned, that concludes the conference for today.

Thank you for your participation.

You may now disconnect.