康寧 (GLW) 2010 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the Corning, Inc.

third quarter 2010 earnings results.

For the conference, all participants are in a listen-only mode.

There will be an opportunity for your questions.

Instructions will be given at that time.

(Operator Instructions) As a reminder, today's call is being recorded.

With that being said, I'll turn the conference now to the Vice President of Investor Relations, Mr.

Ken Sofio.

Please go ahead.

Thank you, good morning.

Welcome to Corning's third quarter conference call.

This morning we have Jim Flaws, Vice Chairman and Chief Financial Officer who will start the call with some fair remarks and then go to the Q&A.

These remarks do contain forward-looking statements and 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 third quarter, which can be found on our Investor Relations website.

We have posted accompanying slides online as well.

Here are the key messages you will hear today.

First, our third quarter segment results were in line or better than revised guidance we provided on September 14.

Telecom, environmental and specialty materials sales all exceeded our expectations for the quarter.

Telecom sales were up 5% sequentially driven by strong fiber-to-the-home and private network demand.

Environmental sales were up 13% sequentially, driven by stronger auto and diesel demand, and specialty materials sales were up 26%, driven by Gorilla glass and advanced optics.

Second, our Q3 results did benefit from a stronger yen to US dollar exchange rate in the quarter.

Our free cash flow was $208 million in quarter three.

For the first three quarters, our free cash flow now totals $1.2 billion.

Glass volume in total for our wholly owned business and SCP declined 8% sequentially, which was in line with the overall glass market.

Worldwide retail sales of LCD televisions, with the exception of the United States, continue to be strong in the third quarter.

Inventory levels at the panel makers and for the supply chain in total have improved.

For the entire supply chain, we believe there are about 17 weeks of inventory exiting the third quarter, down from 18.5 weeks entering the quarter.

We saw a modest increase in utilization rates at the Taiwanese panel makers in October, which in turn resulted in a modest increase in demand for our glass.

We believe this was in response to improved panel inventories and expectations for strong holiday retail demand.

We are forecasting panel maker utilization rates to remain modestly higher the remainder of Q4 in comparison to the low point last quarter, which was in September.

However, there is the possibility rates could be lower on average for Q4 versus Q3.

As a result, we expect worldwide glass market volume could be flat to down slightly in the fourth quarter.

We expect fourth quarter volume at both our wholly owned business and SCP to be in line with the overall glass market.

Worldwide glass demand remains on pace to hit 3.1 billion square feet this year.

Our glass price declines may be more pronounced in the fourth quarter versus prior quarters.

And lastly, as a reminder, the fourth quarter is typically a weaker seasonal quarter for several of our businesses, including telecom.

Now, let me go to the details.

Our third quarter sales were $1.6 billion, a 6% decrease from the second quarter and an 8% increase from a year ago.

Our Q3 sales benefited from changes in exchange rates by about $45 million versus Q2.

Moving down the income statement, gross margin was 45% in Q3 compared to 48% in Q2.

The decline was the result of the lower volumes in our display segment, which offset higher margin performance in telecom, environmental and specialty materials segments.

Gross margins included $20 million in Gorilla related startup costs at [Chisawoka].

Please note we did not record this as a special item.

And as a reminder, our Q2 results also included $25 million in start-up costs at Chisawoka.

Operating expenses on a dollar basis were basically flat quarter to quarter.

Other income declined from $65 million in Q2 to $2 million in Q3.

The decline was primarily due to a $30 million loss on the retirement of debt.

During the quarter, we issued long dated bonds at very attractive rates and we repurchased bonds with higher coupon debt.

The loss was incurred on the tender of that debt and was treated as a special item in Q3.

Our results were also negatively impacted by about $20 million in pretax foreign exchange loss in the quarter.

As a reminder, we hedge monetary assets and liabilities that are denominated in nonfunctional currencies.

Gains and losses from these activities show up in our P&L.

Exchange rates were very volatile in Q3, and our hedges cannot always be perfectly matched to the movement in the underlying exposure.

In any quarter, we can experience incremental gains or losses due to foreign currency movements.

This quarter, those losses totaled $10 million.

In addition, we incurred about $10 million of incremental one-time losses that are attributed to two large intercompany transactions related to our decision to repatriate $1 billion from our non-US locations in November.

The loss stems primarily from market rate movements between when the dividends were declared to when we could get the underlying notional amounts completely hedged.

While we understand placing a perfect hedge on these types of transactions is difficult, it could have been executed more effectively.

We do not anticipate this to repeat going forward.

Our equity earnings were $504 million in the third quarter, an increase of 6% over the second quarter.

Our tax rate was 3% in Q3.

Net income, excluding special items, was $808 million in Q3 compared to $916 million in Q2.

Net income benefited by about $0.01 from the change in exchange rates, including the impact of balance sheet non-hedge repatriation.

Our share count for the third quarter was 1.58 billion shares and consistent with the second quarter.

Now, I would like to turn to the segment results for the third quarter, and I'll start with display.

Third quarter sales were $645 million, 23% lower than Q2.

Volume at our wholly owned business was down about 25%.

Glass pricing was down in line with previous quarters.

Sales benefit from the change in the yen to US dollar exchange rate, which averaged JPY92 in quarter two and JPY86 in quarter three.

Display gross margins declined in the third quarter due to lower volumes.

Equity earnings from SCP's LCD glass business were $386 million in the third quarter, an increase of 9% from the second quarter.

Volume was up about 5%, and pricing was down in line with previous quarters.

SCP results also benefited from the change in the yen to US dollar exchange rate.

For your modeling purposes, LCDs -- SCP's third quarter LCD sales were $1.2 billion, an increase of 9% over the second quarter.

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

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

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

Retail demand in Q3 was good across all major products.

Notebooks, monitors and televisions.

I'll start with TV retail data.

Worldwide LCD television unit sales at retail were up 33% in July and 25% in August.

We don't have complete data to provide worldwide growth figure for September.

In China, LCD TV unit sales were up 23% in July, 8% in August, and September was up 23%.

A lower year-over-year growth rate in August was likely due to consumers waiting for September holiday promotions.

We believe the September growth rate was driven by strong holiday sales.

These holidays fell between September 20 and October 10.

Our data indicates 5.5 million LCD televisions were sold during the mid-autumn festival and national day holidays, which was in line with our expectations.

In Europe, LCD TV unit growth was strong post the World Cup, up 13% in July and 14% in August.

We do not have final data for September, but preliminary estimates indicate it was around 10% growth.

Japan continued to post significant year-over-year growth rates.

July was up 53%, August 69% and September was up 80%.

Again, for a market that was first to adopt LCD televisions and were more than 90% of all televisions sold each year are LCDs, these are very impressive growth rates.

We believe the Echo point program and a faster replacement rate is driving much of this growth.

Plan on sharing some of the data from our consumer study on this topic at our investor meeting in February.

In the United States, sales were down 3% in July, down 11% in August and down 8% in September.

We believe the lack of retail promotions during these months was a contributing factor.

LCD televisions are still a very price elastic product.

One needs to look no further than China for proof.

Consumers there waited for the holiday sales promotion to make their purchases.

Retailers here in the United States are planning significant holiday promotions later this quarter, so we expect to see some year-over-year unit growth in November and December.

In developing regions, emerging Asia sales were up 79% in July and 59% in August.

South America sales were up 82% in July and 80% in August.

We do not have September data yet for either.

In summary, we have no change to our forecast of approximately 185 million LCD TVs shipped this year, which would be an increase of 28% over last year.

Moving to monitors, sales continue to be on track with our forecast, although back-to-school demand was weaker than expected.

Our data is based on shipments at the top nine monitor brands, which make up 70% of the worldwide monitor market.

Year to date sales are up 5%.

For the notebook segment, which includes traditional notebooks, netbooks, slates and tablets, our data is based on the top five ODMs, which make up about 75% of the worldwide notebook market.

Year to date, shipments were up 29%, slightly higher than our forecast.

I would like to discuss the supply chain inventory levels, starting with the panel makers.

Utilization rates at the Taiwanese and Japanese panel makers hit a low point for the year during the month of September.

In July and the first half of August, utilization rates were above 80%.

In September, most of these large size fabs were running less than 50%.

This was not true for the Korean panel makers who ran at 90% or higher throughout Q3.

While production levels were down, panel shipments were up slightly, led by shipments of LCD television panels.

This led to panel inventories falling to what we consider to be a healthier level at the end of Q3.

The average inventory levels at the Taiwanese panel makers reached six weeks in July and August, but ended the quarter between four and five weeks.

As a reminder, this is the average of all the Taiwanese panel makers.

Some had more inventory and some had less.

Looking at the tired display supply chain, there were approximately 18.5 weeks of inventory heading into the third quarter.

We now believe that we're about 17 weeks of inventory at the end of the quarter.

I'll have some more on our fourth quarter expectations for panel maker utilization rates and supply chain inventory levels in our outlook section.

Now, moving to the environmental segment, sales in the third quarter were $208 million, an increase of 13% sequentially, which is much higher than our expectations.

We continued to see very strong demand for light duty filters, driven primarily by the Euro 5 regulations.

The good news is that we had more capacity to meet this demand this quarter.

As a reminder, Euro 5 was us a filter forcing regulation for all new model platforms this year.

As more new models come to the market, it has generated additional demand for our light duty filters.

Our total diesel sales were up $14 million this quarter.

Looking ahead to 2011, all models, new and existing, will be required to have a filter.

For the gasoline auto market, worldwide demand remains robust.

Worldwide auto production this year is estimated to be about 70 million, which equates to a 19% growth rate versus last year.

We saw continued strong demand in Q3 to support this level of production.

Improved manufacturing in auto business this quarter allowed us to reduce the amount of product shipped by air, resulting in higher gross margins.

In the telecommunications segment, third quarter sales were $464 million, up 5% from Q2 and higher than our expectations.

Net income in the telecom segment was $41 million in Q3, up from $30 million in Q2.

We're very pleased with the segment's results compared to last year.

While sales were up 3%, net income almost doubled.

This is a testament to the segment's strong manufacturing performance and reduced cost structure.

Sales increased across most products and markets.

Demand increased for fiber-to-the-home products in North America and enterprise products globally throughout, during the quarter.

This more than offset the expected decline in fiber sales in China.

Regarding the higher enterprise sales, we're seeing both a stronger overall market and increased demand for our solutions.

Market growth is being driven by increased data traffic from smart devices, growth in cloud computing in companies investing in IT to increased productivity.

We have also seen significant customer interest in our Pretium EDGE solutions for the data center market.

The demand is so great that the conversion from our standard offering to Pretium EDGE is happening much faster than we planned.

Before I leave telecom, I'd like to add we're very encouraged by the results from the national election in Australia in September, where the labor party who supports the deployment of a national broadband network won the election.

The project goes forward, it could be a significant opportunity for Corning.

The network will reach 10 million homes, connecting 90% of the population with 100 megabits per second service.

Sales in our specialty materials segment were $159 million in Q3, an increase of $33 million, or 26% versus Q2.

The increase was primarily due to strong demand for Gorilla glass and advanced optics.

As you're looking at the profitability of special materials segment on this slide, I want to remind you that we are recording the start-up expense for TV cover glass manufacturing in this segment.

Q3, we incurred another $20 million in start-up and other construction-related charges at Chisawoka.

In Q2, the start-up costs were $25 million.

I'm very pleased to report that we are already producing Gorilla glass for television covers on the converted equipment.

Gorilla glass sales are currently on pace to be about $250 million of sales this year.

I have some updated figures for you this morning.

Gorilla glass now used by 23 major brands around the world as a cover material for handheld and lab top applications.

Our glass has been designed in more than 240 different models, more than 140 of these products are in the market today.

At least another 90 will be in retail in the next six months.

In terms of units, there are now more than 200 million with Gorilla glass in use worldwide.

Think about that.

200 million units.

There's a good chance you hopefully at least own one product that has Gorilla glass.

Lastly, we are also receiving very interesting requests for Gorilla outside of consumer electronics.

Requests are coming from auto, appliance and architectural industries and could provide even further revenue opportunities for us.

Needless to say, we remain very excited about the future for Gorilla glass.

In life science segment, the sales in the third quarter were $125 million and consistent with the second quarter.

Gross margin and net income were slightly lower, reflecting integration costs from the Axygen acquisition, as well as project costs associated with the new distribution center in China, which we announced in July.

Turning to Dow Corning, third quarter sales were $1.5 billion and relatively consistent with the record second quarter.

Silicon demand continued to be very strong, especially in developing regions in the world.

Sales at Hemlock Semiconductor were consistent quarter to quarter.

Dow Corning did true up their effective tax rate in the quarter from -- moving from 35% to 40%.

As a result, equity earnings declined 13% from $111 million in Q2 to $97 million in Q3.

Now, shifting to the balance sheet, we ended the second quarter with $5 billion in cash and short-term investments, up from $4.2 billion last quarter.

Of our total cash and short-term investments, slightly more than 50% is located internationally.

During the quarter, we issued $700 million of long dated bonds at very attractive all-in rates and repurchased $226 million of the higher coupon debt.

Free cash flow was $208 million.

Our free cash flow was about $1.2 billion for the first three quarters of the year.

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

Biggest outflow of cash during the quarter was for capital expenditures.

CapEx was $225 million in the third quarter and for the first nine months of the year, it is now $534 million.

Based on this level of spending and our expectations for Q4, it's unlikely our CapEx will hit our previous $1.2 billion guidance from a few months ago.

Our estimate for 2010 is now about $1 billion.

We have no change to our 2011 estimate of more than $2 billion.

I would like to discuss two housekeeping items that will take place this quarter relative to our balance sheet.

First, as I've mentioned, various investor conferences, we plan to repatriate slightly more than $1 billion of our non-US cash in quarter four.

In connection with this intercompany rebalancing transaction, we will borrow against our revolving credit facility in November and then repay the loan in early December.

SEC rules require us to issue an 8-K given the reborrowing, although for only a very short period under our credit facility.

I don't want anyone to be surprised or concerned when they see this filing.

Second, we also plan to call $100 million bond before year end.

Our balance sheet is in great shape and we are well positioned to support our aspirations to grow to be a $10 billion Company in the next several years.

Moving further down the balance sheet, inventories increased from $607 million at the end of Q2 to about $712 million at the end of Q3.

About half this increase relates to display inventory, but there was also the impact of foreign exchange.

As we mentioned previously, inventory levels in display have been very low for the past year.

While excess inventory can be problematic, there is a certain level inventory desired to operate the business at maximum efficiency.

At an optimum level, inventory could help us minimize manufacturing costs and cover most unexpected disruptions.

So we exited the third quarter close to the minimum level of glass inventory we would like to have.

Given our expectations for Q4, which I'll cover in a moment, we will likely build some more glass inventory this quarter.

This is probably a good time also to discuss our R&D portfolio.

I have two updates.

First, as we have decided to discontinue our synthetic green laser program.

This was a difficult decision for us to make, but one that we felt was necessary.

We belive the the market opportunity for synthetic green lasers is closing.

There has been accelerated advancement in what is known as native green lasers over the past year.

While synthetic green lasers may be a viable industry choice over the short-term, we believe its life span will be limited by native green.

As a result, we felt it was not prudent for us to put more R&D dollars into our synthetic green laser program.

There will be a charge equal to about $0.01 of EPS in the fourth quarter, half of which will impact R&D and the other half gross margin.

I have some good news to report also.

About a month ago, Corning and Oerlikon, the world leading manufacturer of end to end thin film PV solutions, announced a world record 11.9% conversion efficiency in the laboratory using Corning's glass on a research size silicon tandem cell.

We're very pleased about this milestone.

We continue to feel very good about our chances of making photovoltaic glass a viable new business for Corning.

Now, onto our outlook.

We expect our sales in EPS to be lower in Q4 compared to Q3, due primarily to normal seasonality in telecom and lower glass pricing in display.

Let me start with display.

We saw a modest increase in utilization rates at the Taiwanese panel makers in October.

We believe this is in response to improving panel inventory levels and expectations for a stronger holiday retail demand.

Our glass demand forecast is based on an assumption panel maker utilization rates, remain modestly higher for the remainder of Q4 in comparison to the low point last quarter, which was September.

While we're expecting utilization rates to rebound in Q4, we are unsure at this time whether they will reach the level they were prior to the inventory correction.

Admittedly, the fourth quarter is usually the most difficult for us to forecast, given the specific market dynamics that take place this time of year.

Regarding the overall glass market, expect market volume to be flat to down slightly quarter to quarter.

For Corning, we expect our combined glass volume for our wholly owned business in SCP to be in line with the overall market.

We plan to continue to run all our glass operations at full capacity to build some additional inventory.

Regarding retail, we expect demand to remain strong in the fourth quarter, driven by heavy holiday promotions on LCD televisions, especially in the United States.

We are modeling a significant amount of inventory to be pulled out of the supply chain during the quarter from retail to consumers.

As a result, we anticipate the supply chain inventory could fall to 16 to 16.5 weeks exiting the year.

Glass price declines at our wholly owned business and SCP are expected to be in the mid single digits in the fourth quarter.

This is more than previous quarters and reflects the current imbalance of glass supply and demand, which is causing pricing pressure from our customers.

The fact the panel prices on certain panels have approached cash costs at some panel makers is also creating additional pressure.

At our telecom segment, we expect fourth quarter sales to be down about 10% in comparison to the very strong third quarter.

This decline is consistent with the seasonal decline we have seen in previous years.

We expect sales in the environmental segment to be consistent quarter to quarter.

We expect light duty diesel demand to offset normal seasonal declines in auto.

In life sciences, we expect sales to be up 5% sequentially as normal seasonal declines will be offset by a full quarter of sales from the newly acquired Plaslab.

In specialty materials, sales are expected to grow 10% to 20% sequentially, driven by Gorilla glass.

We anticipate Gorilla glass sales to exit the year on a run rate of about $450 million, driven entirely by handhelds and IT products.

At Dow Corning, we expect quarter four equity earnings to be down about 5%, due primarily to the fixed cost drag from their new China facility.

Moving to the income statement, we expect our Q4 corporate gross margin percentage will be lower than Q3, driven by the higher price declines in display and the lower telecom volumes.

SG&A and R&D as a percentage of sales will be higher due to the lower sales.

SG&A will be around 17% and R&D around 10%.

Investors should note that movements in the yen to US dollar exchange rate influence our results.

For your modeling purposes, for every one point move in the yen, our sales and net income moved by about $10 million.

The net income impact includes SCP, where a stronger yen could also improve their results.

And finally, regarding our Q4 tax rate, we expect it to be between 2% and 3%.

Ken?

Great, thank you, Jim.

John, we're ready to take some calls.

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

Please go ahead.

Thank you.

Jim, your thoughts on why the worst may be over as it relates to production cuts, panel maker utilization rate adjustments and also the price cuts to clear the inventories?

Do you think the cuts and adjustments were quick and deep enough?

Is the initial retail data showing firming trends pointing to strong holiday demand, or is it more extrapolation of historical trends?

In essence, do you feel it might be a little early for utilizations to be increasing from the Taiwanese panel makers, or can we trend line higher utilization rates for the rest of the year and into 2011?

Mark, it's always difficult for us to forecast Q4 utilization rates.

I think the month of December is the most difficult month for us to predict.

I can tell you that October utilization rates were improved in Taiwan, and the order rate for November reflects that continuing.

I would not say that we would characterize it as too early, because we did see panel maker inventories decline.

What we do need to see worldwide, is good retail demand, and lowering the inventory that exists at the set assembly level in our model.

But I will stress that the increase in October was a lot versus the low point of September, but remember, it is not back to where it was in July and August.

Historically, Jim, can you remind us when things probably bottom in terms of inventory weeks?

Is it 16, 15 weeks, is that when things really bottom?

Our model, actually, we have seen as low as 13 at that level, which was coming out of the pulldowns last year.

We think that results in a lot of out of stocks.

We think a more normal operating range is 15 to 20.

As it approaches 20, that's too much inventory, as it gets to 15, you approach out of stocks.

I think we would be delighted if the supply chain exited this year at around 16 weeks, and our model shows between 16 and 16.5.

Got it.

Thank you, Jim.

And lastly, just on the repatriation of the $1.1 billion, are there any tax implications for that?

The tax implication is actually positive, and that is why, you may recall, we announced in April that our tax rate was going from 10%, down to 2% to 3% for the year.

We are required to, even though the repatriation was occuring in November, once we decided that, we basically had to accrue at that rate for most of the year.

So it was actually a very positive event for us.

Okay.

Thank you, gentlemen, and good luck.

Your next question is from Rod Hall with JPMorgan.

Please go ahead.

Yes, hi, guys.

I just wanted to follow up on the repatriation question and ask, there's a -- there are people, notable business leaders like John Chambers, talking about changes to the repatriation laws that they expect to happen after the election.

Now, whether that's true or not, I don't know.

But I just wonder, from a timing point of view, are you guys saying that you don't believe that that is worth waiting for, and you're going to go ahead now?

Can you kind of help us understand why you went ahead with it now, and didn't wait to see what came through on the legislation?

And then I have a follow-up to that.

Well, we made the decision in April on this repatriation.

It's actually more favorable to us than anything's being proposed in Congress, so there would have been no point on waiting.

So, this one is something we've been planning for a number of years, and we've structured it such that it related to a very positive benefit to our accrued tax rate.

So, there was no reason for us to wait.

I won't candy cap what's going to happen in Congress.

We'll obviously -- we generate cash overseas, and we'll work to take advantage of whatever legal structure exists in 2011 and beyond.

Okay, and then I also wonder if you could help us understand, it sounds like there's pricing pressure from the suppliers, or from the people actually buying the glass, the panel manufacturers.

And I wonder if you could help us understand the linkage between that and demand.

So, if demand did weaken further in Q4, would you expect further pricing pressure to be that much more exacerbated, or do you think pricing is kind of as bad as it can get at this point?

We don't anticipate much difference from what I outlined with our price declines in the mid single digits.

We're one month into the quarter.

We've met with a lot of our customers and walked through all the pricing.

So clearly, that's a change statement from what we experienced in prior quarters.

I don't think we expect to see much difference.

We have not done anything on pricing for next year.

I think it's premature for us to do that until we all see how demand exits the year, and what the supply chain looks like.

I was just trying to get a feel for the linkage between demand and the pricing.

So if demand did worsen, I know you don't expect it to at this point, but if it did, do you think the guys would come back to you for even greater price breaks, or do you think that pricing would remain relatively stable, even in a worse demand environment?

Our expectation is it remains similar.

The biggest price pressure really is what's happening at panel prices, because that's what drives a lot of the pressure on us and our competitors.

In some cases, panel prices have gotten to cash costs, and we have seen some panel makers refuse to take orders at that level.

So, we're not anticipating any significant change from the pricing guidance we've just given, even if demand turns out to be a little bit weaker.

Okay.

That's great.

Thanks a lot, guys.

And next we'll go to Brian White with Ticonderoga .

Please

Okay, good.

When we look at the TV market in the US, Jim, we've had five months of year-over-year declines, pretty easy comps for at least two or three of those months due to the digital upgrade last year.

What does that tell us maybe about the penetration rate in the US?

I think it's difficult to judge on the penetration rate.

Penetration rate in terms of annual sales.

I mean LCDs remain still about 90% of all televisions being sold.

In terms of the effect on the install base, I think it's a little hard to make a judgment on that based on just five months worth of television sales.

As you heard me say a number of times, the period of time, May through August is a normally not a television season.

You can always tell this by looking at advertising.

People don't promote a lot of televisions during this period of time.

And frankly, consumers are not as interested in televisions in the US market.

This has been historically true for a long time.

But we do find that there was clearly a change statement that occurred this past summer in the United States.

We saw the effect of the higher panel prices earlier this year.

We saw very little promotions during this period of time, and in general, I think there's a sense that the US economy was weaker during this period of time.

But I think it's premature to draw a perspective on what the impact is on the ultimate penetration on the install base.

Okay, and when we look at China up 8% in August, up 23% in September, if we look back a year ago, we saw rates of up 64%, up 75%.

I know China has a big subsidy program.

It's obviously pulled in some orders.

What are your general views on kind of the trends we should think about in China over the next 12 months?

Well, I think one of the things that you have to keep remending when you compare this year versus last year, is even in China, penetration rate in terms of the number of televisions being sold for LCDs, is approaching mid-80s this year.

So, the fueling of the growth rate from the penetration change is ending.

So, we will fall to a more normal year-over-year kind of growth rate, and that's driven by what the pricing is, and what kind of promotions that exist, and obviously the economic environment the Chinese government represents.

But we were not expecting growth rates to stay at those astronomical levels in China forever.

We are expecting to see excellent growth in China again next year.

Great, thank you.

Our next question is from C.J.

Muse with Barclays Capital.

Please go ahead.

Yes, good morning.

Thank you for taking my question.

First question on pricing, I guess can you share a little bit in terms of what the mid single digits mean?

Is that down 4 to 6, 5 to 7?

And I guess also importantly there, are you starting to see having to give a little bit of the benefit to your customers in terms of migrating more to thinner glass?

The movement to thin glass has not been a significant portion of our glass yet.

Clearly, we will give some of the benefit to them in terms of that move, and they are aware of that.

But that's not a significant part of the demand.

Mid single digits means that, and I won't give you more detail on it, but it definitely is the mid single digits, and we are expecting that to happen both at our base business and at SCP.

Okay, and in terms of the price negotiations, has that been fully set across all gen lines, or is that to be continued in terms of negotiating?

I believe we're pretty much done with all our customers and on all the generations.

Okay, great.

And then as a follow-up, on the gross margin side, can you talk a little bit about what transpired for the display side?

Clearly with the benefit of FX helping, and then what kind of trajectory we should see there for Q4, and whether there's anything we should be thinking about in terms of the build of inventory, and the implications to display gross margins going forward.

Okay.

So as a reminder on FX.

FX doesn't change the margin percent, because we're translating both the sales and the cost of sales.

Now, the display gross margins were down in Q3 versus Q2, even though we continued to run all our facilities.

And the primary reason is because we sold 25% less glass.

And at the very, very high margins we have, even though we were putting glass in inventory, we didn't get the benefit of the sales against the very low cost of making a product.

So, that is the biggest driver in the down Q3 versus Q2.

We will be down in the Q in display business in Q4, versus Q3.

In that case, the down is only really driven by the price, because we're saying we expect our volume to be either flat or maybe down just slightly.

We're not expecting another steep downdraft like we occurred in Q3 versus Q2.

But we feel fine about our display gross margins.

Obviously a little disappointed that the supply chain gyrations caused us to have slightly higher price decline in this upcoming quarter.

You may recall me saying earlier in the year, we certainly had hopes, as people build inventory that this wouldn't lead to a quarter where we had to have more pricing pressure, but our hopes were displaced.

But in terms of how we're running and our costs, and as soon as demand picks up, the margins will go up.

In terms of the inventory we're building, we feel very comfortable with the level we're building.

To the degree we feel it gets too much, then we can just switch a tactic to Gorilla faster than we would otherwise.

And that's, again, very good for us because frankly, we've been shorting the Gorilla market.

Great.

One last question.

What tax rate should we assume for 2011?

Any change there?

The tax guidance, no change.

We're still expecting it to move up close to 20%.

Obviously, we're very focused on what's happening in Washington.

There are a number of things that could have an impact us on.

We would love to see the tax extender bill that's been put forth a couple times go through.

That could lower our tax rate by over 3%, and obviously, we continue to work on other programs that maybe could lower.

But for your guidance right now, I would use the upper teens.

Great, thank you.

And next, we'll go to Nikos Theodosopoulos with UBS.

Please go ahead.

Yes, thank you.

It looked like specialty materials, the gross margin was up sequentially.

Can you comment on how the Gorilla gross margin did sequentially?

Did it also increase by a similar amount?

And would we expect that to also continue in the fourth quarter, since you expect Gorilla glass to be up sequentially?

I'll speak about Gorilla glass, excluding the Gorilla TV cover charge that occurred in both quarters.

But our gross margins on the glass we're selling to IT and Handheld improved in Q3.

We're starting to reach the point where [I'd] say we're delighted, and there's a lot of smiles on this very new product that we're getting very high gross margins on the glass alone.

We hope to have that continue, maybe edge up a little in Q4.

And we're frankly just delighted by the IT and Handheld glass portion of the business, and gross margins on it.

It's going very well for us.

And we're expecting strong demand against year.

And we'll be making some of this on larger tanks, which should hopefully drive our costs down even more.

And what happens -- I belive the revenues so far do not include any TV sales.

What -- when do you -- can you update us on where that stands?

And does the margin then take a hit back down, when you start selling it into the TV application?

And maybe if you could just revisit the outlook next year.

I think earlier, couple months ago, you mentioned that the business could be up to $1 billion next year.

Given some time's gone by, can you give us an update on that?

That's a lot of questions all in one.

Sorry.

So, we will ship small amount of TV cover glass in quarter four, but it would be very tiny.

The margin on TV cover will be lower, and therefore to the degree that that's a large sales next year.

It will harm specialty materials, compared to specialty materials on a margin percent basis with just IT and Handheld alone.

How big the cover glass number is very dependent on, frankly, the strength of the television market and particularly upper end TVs.

We've said we believe that could be a several hundred million dollar business.

I think compared to our earlier expectations of getting to $1 billion dollars, I think it's still possible.

It requires cover glass to be a success.

Frankly, compared to our original expectations, I think we now think Handheld and IT will actually be stronger than what we originally expected.

So, I still think we have a shot at making the $1 billion, even if cover glass doesn't do as well on televisions.

But we're delighted by the margins on IT and Handheld.

Cover glass will be difficult for us in the beginning.

It's very hard to do these very large pieces.

But, again, we expect it to be positive and hopefully as this business matures, we'll move up in gross margin.

Okay, thanks.

And we'll go to Jim Suva with Citi.

Please go ahead.

Thanks very much.

On the pricing environment, Corning has long stated about their disciplined pricing environment of kind of down 2% to 3%.

And one would think with only three to four industry suppliers and Corning's leading market share, you could maintain keeping discipline down 2% to 3%.

So, the question is around -- one has to wonder if down mid single digits, is that actually starting to become the new norm, especially since we haven't seen any additional capacity come on from the China expansion yet?

Or do we think the more disciplined pricing could come back into the equation in the future beyond Q4?

I think it's a little premature to decide this is a new normal based on one quarter.

What drives the pricing pressure for us, is when there is a gap between us and our competitors, they cannot get too large.

And at the level of glass demand that's occurring right now, there is excess glass capacity.

So there -- as much as we'd love to be able to stick to our strategy of the rates you were talking about, we can't do that in an environment where there's excess glass capacity.

And there clearly is now, against what the industry had in place, relative to what the possibilities had been earlier this year on that market growth.

I don't think this has to become the new normal.

I'm not going to give price guidance for next year, at this point in time.

But clearly, it's our desire to try and have the glass industry have lower price decreases than what we're experiencing this quarter.

But I think it's premature to declare that this is the new normal.

Thanks, and a quick follow-up.

If demand exiting Q4 in sell-through wasn't what you expected, would you look at lowering utilization or actually lowering price again?

I think what we would do, is switch more of our capacity to Gorilla.

And then it's premature for me to say what the pricing environment is going to be under that scenario.

A lot depends on what our competitors do at that point in time.

But I think if demand is lower, what we'll do is switch some things to Gorilla earlier than we had planned.

Great.

Thank you very much.

And we'll go to Steven Fox with CLSA.

Please go ahead.

Hi, good morning.

Two questions.

First of all, on your unit outlook.

Can you talk about any influence, positive or negative, that the Chinese New Year next year, is having on unit production at your customers?

And then secondly, you highlighted on the fiber side the data demand is strong, and your competitive advantages.

I was wondering if you could just go into some more details on why you think you're picking up share in the data center.

On the latter, it's really our Pretium Edge solution for data centers, in terms of the space and the ease of labor installation, is really the advantage that we think we need have there.

On unit demand for the Chinese New Year, we've not heard a lot.

We've had some commentary from a few of the Chinese television manufacturers, beginning to talk about their expectations for that, and making sure they had inventory for that.

That may be playing in somewhat to the Taiwanese panel makers' thinking.

Because as you know, a large portion of the television panels going to China have come from Taiwan.

But I don't have much market input right now about the New Year in terms of plans.

Great, thank you.

And we'll go to Simona Jankowski with Goldman Sachs.

Please go ahead.

Hi, thank you so much.

Just wanted to ask one more follow-up question on your capacity utilization plans into the first quarter.

Clearly, you have built inventory here in Q3, even as panel inventories have come down.

And then you're expecting the same in Q4, as far as increasing glass inventory, even as panel inventories come down.

Do you see any scenario, if demand is disappointing in the fourth quarter, where you might actually have to take tanks offline in the seasonally slower first quarter?

Or do you think that that's an area with pretty much off the table at this point, given that you can repurpose some of that capacity for Gorilla?

I think it's unlikely that we would take anything offline.

I think most likely is that we will convert more tanks to Gorilla.

I mean, we are planning in quarter one, to begin converting some of the large capacity to Gorilla.

And I think the only thing that would be a change statement, would be maybe advancing some of that a little bit.

Okay, and then when I look at your $2 billion CapEx guidance for next year, can you give us a sense of how much of that is going into Gorilla, versus display or other?

And then also, by how much do you think you'll increase your glass capacity next year based off of that CapEx, also taking into account the transition to thinner glass?

I'm sorry.

We are not giving out that level of detail on either capacity or CapEx yet.

Okay, thank you.

And next we go to Carter Shoop with Deutsche Bank.

Please go ahead

Good morning.

First question, can you give us a little bit of a preview of how you expect to grow the company to $10 billion over the next several years?

I imagine we'll hear a lot about this at the February Analysts Day, but just any kind of color would be appreciated.

Well, the things that have to occur for us to get to $10 billion is in the display business, as we know it today.

We need to have television demand worldwide continue to grow.

In the areas of the world that are not fully penetrated, we define full penetration on an annual basis to be around 90% for LCD.

So, in what we call emerging areas, it's not there yet.

We need to have that occur.

Then we need to have television demand reflect a stronger replacement rate in what existed under the CRT era.

And then we need to continue to see good IT, and demand as we go forward.

But we need to see display continue to grow, driven by those things.

Second, in sticking to our existing businesses, we need environmental to have the diesel business fulfill its fruition.

We think we're beginning to see some of that take place, as the number of truck builds has started to increase.

And we're confident that we can manufacture the product better.

And we would like to have a big diesel business.

We're still trying to get it to be a $500 million business in 2012.

And so that's got to happen.

In life sciences, we have a goal to make it be $1 billion business.

Most of that growth will come from acquisition.

You've seen us do two deals in the last two years.

And we expect to continue it to continue to grow by acquisition there.

We need to have Gorilla be a home run, which we think it's on its way to become, driven by, clearly by IT and Handheld.

And we think we would like to see a cover glass business develop, but it looks like Gorilla is turning out to be a home run.

And if that continues to play out, that's very important.

And lastly, we need to get something out of our new business efforts.

And although Green Laser is now turning out to be a disappointment, we continue to have good hopes for Photovoltaics and a closely related to Gorilla.

But probably likely be slightly different, is to get some growth out of architectural or automotive strength in glass.

If you put those things together, and they come together and FX behaves, we believe we have prospects to get to $10 billion.

That's helpful.

One housekeeping question, and then one follow-up.

Other income, would you expect that to rebound to more traditional levels of about $60 million per quarter in the fourth quarter?

It will definitely rebound up.

Whether it gets exactly to $60 million, I'm not sure, but we definitely don't have the debt tender.

The call we're doing in the fourth quarter has no charge.

And I'm hopeful that we have no FX issues.

And then lastly, why aren't we seeing, or why aren't you anticipating to see a little bit more of a rebound in the wholly owned business in display, given the relative under performance in the third quarter?

I would expect to have seen a little bit more of a snap back in the fourth quarter there, relative to the overall industry.

Well, remember, our wholly owned business service is primarily the Taiwanese, Chinese and the Japanese panel makers.

And until they raise utilization rates that would deliver that, it's not going to have a big snap back.

And there's been nothing about their utilization rates and order rates, that they've communicated to us that they would do that.

I think some people focus on their area shipment numbers.

And again, a reminder, because of the fact that they can reduce inventories, they could be shipping more than what they're taking from us.

I can tell you, is if it turns out they are going to run higher, we'll be happy to supply them the glass, because we'll have it.

Great, thank you.

And next, we'll go to Yair Reiner with Oppenheimer.

Please go ahead.

Yes, my first question is on utilization rates in Taiwan and Korea.

It seems as though those are beginning to converge a bit.

Can we read through that that in the fourth quarter, incrementally, display volumes of your wholly owned business can actually be up a bit, and the SCP down a bit?

It's possible that that could occur.

Clearly, there has been a slight pullback in Korea, which we didn't experience before.

So it's possible that we might do a little bit better in the base business, than what we're seeing in SCP.

Our guidance for both of them is similar, but frankly, that could easily occur.

And then, could you give us some insight into the gross margins in your environmental business?

You said in the past that there's a lot of leverage there.

Directionally, I know you don't like to give too many details, but directionally, give us a sense of how much gross margin improved there in the third quarter.

And how much room is there for gross margin to continue improving next year?

I don't have the exact numbers right in front of me, in terms of the gross margin improvement versus -- I think probably improved about 4%.

The auto business, catalytic converters is back to its historical levels in the mid-40s.

Obviously, the challenge for us is in the diesel opportunity.

And we think there's a lot of room to move.

Our light duty filters today have good gross margins.

They can get better.

Our heavy duty business has terrible gross margins, but we believe that we can get them up also.

So, as air freighting ends, and as our manufacturing performance improves in diesel, we expect to see the overall segment gross margins move up as we March through 2012, when we expect the diesel business to be -- finally hit the sales we've been hoping for.

Thank you.

And we'll go to Vijay Rakesh with Sterne Agee.

Please go ahead.

Yes, hi guys, thanks.

Just on the Gorilla glass, I know you mentioned going to bigger tanks.

Should that improve margins on that, closer to the LCD Glass margins, as we look at next year?

And what's accompanied the landscape on the Gorilla glass?

We do expect to improve gross margins in the Gorilla glass, on the glass alone for IT and Handheld.

We're not expecting to get all the way to the LCD margin.

But we think we'll all be very happy with the margin level, particularly going to larger tanks does help.

Competitive landscape, the competitive landscape is wider than it is for LCD glass, because we have to compete with Sodaline.

You can have strength in Sodaline, and we now have a competitive product from one of our LCD manufacturers in the specialty glass.

We never expected to have this field all to ourselves, but we continue to believe that we have the leadership in terms of performance in this area.

John, we're approaching 9.30.

We have time for one more call.

And that will be from George Notter with Jefferies.

Please go ahead.

Hi, thanks very much, guys, for squeezing me in here.

I would love to ask about -- a couple more questions on Gorilla glass.

So, when you look at your ability to ramp your capacity there, how long does it take to convert traditional tanks to gorilla glass?

And then, when you think about next year and the capacity you're driving towards, was that fairly well aligned with demand, or is it likely that there will be some excess demand out there, and you're not able to fulfill all the orders that you'd like?

We don't give out the glass changeover time for competitive reasons, but it's not a long period of time.

I think what you're starting to see in the Gorilla business, and you'll see more next year, is that business is getting large enough to where Gorilla can have dedicated tanks to it, that don't have to change a lot.

Up till now, the Gorilla business has been primarily in Kentucky, at our older, smaller tanks, and we've had to do a lot of changing around.

As it gets larger, and we have dedicated large tanks running all year round, it's a cost advantage to us and we don't have to go through these changes.

But they're not very large.

Your second question was?

Just on your ability to meet demand next year, would you expect that with the capacity you're planning, does that align with the demand you see, or is there still some differential there?

I would say that we're getting closer to being in balance for next year, simply because we've taken steps to provide more capacity to the Gorilla business.

Wendell would say that he still thinks he could sell more.

So, I think we'll have to see where we stand at the end of the first quarter.

But I think there's more upside than downside in Gorilla.

Great, thank you.

Jim?

Just a quick couple of closing comments.

In terms of investor events, we're going to be in Toronto on November 3, and we'll be hosting an open luncheon for investors.

If you're interested in attending, please contact our Investor Relations department.

Second, our next formal presentation will be at the Barclays Technology Conference in San Francisco on December 8.

We hope to see many of you there.

And lastly, we have a formal date for our annual investor meeting in New York City.

It will be on Friday, February 4, starting at 8 AM, and ending around noon.

For more details and to register for the conference, please log onto our Investor Relations website on corning.com.

Ken?

Thank you, Jim.

Thank you all for joining us this morning.

A playback of the call, will be available beginning at 10.30 AM eastern time today, will run until 5 o'clock eastern time on Monday, November 15.

To listen, dial 800-475-6701.

The access code is 174406.

Audio cast will also be available on our website during this time.

And John, that concludes our call this morning.

Please disconnect all lines.