康寧 (GLW) 2011 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

And welcome to the Corning Incorporated second-quarter 2011 earnings results.

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

There will be an opportunity for your questions; instructions will be given at that time.

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

With that being said, it's my pleasure to turn the conference on to Mr.

Ken Sofio, Vice President of Investor Relations.

Please go ahead.

Thank you.

Good morning.

This morning, Jim Flaws, Vice Chairman and CFO, will have some prepared remarks before we go to the Q&A.

Those remarks do contain forward-looking statements, and they're in the Private Securities Litigation Reform Act of 1995.

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

And these risks are all detailed in the Company's SEC reports.

Jim?

Thanks, Ken.

Good morning, everyone.

Hopefully, you had a chance to read the press release we issued this morning on our second-quarter results.

If you haven't, a copy can be found on our Investor Relations website.

We had a very good quarter, with sales at $2 billion -- up 17% year over year, with EPS at $0.48.

The quarter met our expectations.

We did slightly better on volume in the wholly owned Display business than we had expected.

We were delighted with the broad-based sales growth in all our other segments.

This sales performance resulted in very good profitability.

I'll come back to the quarter in a minute; but I'd like to switch gears and talk about the macro-market outlook changes that we have adopted.

I'm going to start by highlighting 2 key forecast changes.

First, we are lowering our 2011 LCD glass market forecast to 3.3 billion to 3.4 billion square feet.

Our previous range was 3.5 billion to 3.7 billion square feet.

The display industry has been behaving more cautiously in recent weeks, driven primarily by weaker retail expectations for the second half.

We've seen most of the major television brands reduce their sales forecasts over the past month.

So, part of the reason for our lower glass forecast is because the industry appears to be expecting lower retail demand for televisions.

The supply chain appears to be preparing for a more muted second half by building less inventory in quarter 2, and by panel makers continuing to run at lower utilization rates -- or in some cases, lowering them further.

In general, it appears the supply chain is waiting a little longer to build inventory for the seasonal pull of the fourth quarter.

There is some good news in this behavior, as early inventory builds have led to correction issues in the past.

Second, we're now forecasting Gorilla Glass sales this year to be about $800 million.

We previously believed that Gorilla had the potential to generate $1 billion in sales in 2011, but that was always predicated on significant demand for TV cover glass.

We do not have any specific retail data yet for Sony televisions; but to date, there have only been a limited number of TV models with Gorilla Glass available, and most of them are on higher-priced sets.

As a result, we're now expecting to sell only about $50 million in TV cover glass this year, versus our original expectations of closer to $200 million.

The remainder of our Gorilla Glass business, which is for hand-helds and IT products, continues to grow robustly.

We anticipate sales for just those products to be $750 million this year, which would be triple last year's sales.

For those investors wondering if it's still our plan to reach $10 billion in sales by 2014, the answer is yes.

We just completed our annual long-term planning meetings, and our conclusion was the $10 billion sales target is well intact.

I also have an update on our 2012 CapEx plans and some exciting news on photovoltaic glass, but I will save them for the outlook section.

I'd like to review our second-quarter results in more detail.

Q2 sales were $2 billion, an increase of 4% over Q1.

But more impressively was the 17% increase over the second quarter of last year.

With the exception of Display, which was down slightly versus last year, each segment sales increased significantly over last year.

Our second-quarter gross margin is 44.3%, down from the 45.4%, but higher than we had anticipated due to the stronger-than-expected Display volume.

SG&A was $284 million, or 14% of sales, and in line with expectations.

Increase in SG&A from the first quarter reflects our annual merit increases, which for most employees occurred in April.

And RD&E was $172 million, or about 8.5% of sales.

Equity earnings were $428 million, an increase of 8% over the first quarter.

Other income was $43 million in Q2, versus $27 million in Q1.

The increase was due to the non-repeat of certain expense items from quarter 1.

Net profit after tax, excluding special items, was $758 million, up slightly versus first quarter.

Earnings per share, excluding special items, was $0.48 in Q2, up slightly from Q1.

Both net profit after tax and earnings per share, excluding special items, are non-GAAP measures.

Please see the reconciliation to GAAP on our website.

Impact to movements and exchange rates from Q1 to Q2 was not material to our results.

Now let me turn to our segment results for the second quarter, and I'll start with Display.

Display sales were $760 million, a decrease of 4% versus Q1.

The decrease was less than we expected, reflecting the start-up of Sharp's Gen 8 and Sharp's Gen 10 fabs earlier than we had anticipated, as well as higher-than-projected utilization rates at our Taiwanese and Chinese customers.

The stronger-than-expected glass demand at our wholly owned business kept us from building much additional inventory in Q2.

As a result, we ended the quarter with healthy glass inventory levels.

Glass price declines in the second quarter were moderate again.

The benefits of movements in the end was just a slight positive.

Display gross margins were lower in Q2 versus Q1, but higher than we originally expected, the reflecting stronger-than-anticipated volumes.

At SCP, volume was up about 10%, which is lower than our expectations, and reflects the Korean panel maker decisions to run at lower utilization rates during the quarter.

Price declines at SCP were again moderate.

For modeling purposes, SCP second-quarter LCD sales were about $1.1 billion, up slightly from the first quarter.

As a reminder, this represents SCP LCD sales only.

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

Equity earnings from SCP's LCD glass business were $319 million, up almost 9% versus the first quarter.

SCP Q2 results include a gain from transfer of LCD glass from SCP to our wholly owned business.

All in all, our total glass volume, including SCP, was up about 5% in the quarter.

This is in comparison to the worldwide glass market that grew about 2% in the quarter, and reflects good progress against our goal to recover some of the market share that we lost in 2009.

So, I'd like to spend a few minutes discussing the Display supply chain.

As I mentioned in my opening comments, it appears that the supply chain is waiting a little longer to build inventory for the seasonal pull of the fourth quarter.

This may be driven by expectations of a softer second-half demand at retail, and the current low levels of profitability of the industry.

As a result, we anticipate the supply chain will be more cautious, build less inventory, and consume less glass than we previously forecast.

In the second quarter, our model suggests a supply chain build only 85 million in inventory, in terms of square feet of glass.

This represents panel inventory of panel makers, set inventory at set makers, and finished product sitting at retail.

This build is much lower than last year, when the supply chain built over 200 million square feet of inventory.

As a reminder, that amount last year was actually higher than needed, and the supply chain then went through a mild correction late Q3 and the beginning of Q4.

This year, even with the industry's more muted second-half expectations for retail, supply chain inventories do not appear to be too high.

Our models indicate supply chain exited Q2 with a little under 17 weeks of inventory.

As I mentioned earlier, we lowered our glass volume expectations for the market to a range of 3.3 billion to 3.4 billion square feet.

Part of the reason is the expectation that the supply chain will be more cautious, as I mentioned above.

The other reason is the industry's lower TV sales expectations.

While our retail data, which is complete through May, does not indicate a slowdown in LCD television sales, many of the top TV brands have now lowered their 2011 expectations in recent weeks.

On this slide, you can see the lower expectations by television brand.

This information has been provided by DisplaySearch.

As a result, we lowered our LCD TV unit forecast for this year, from 222 million units to a range of 210 million to 212 million.

This revised range is generally in line with other industry estimates.

On this side, you'll see our original expectations by geographic region versus our revised forecast.

As a reminder, retail data always lags getting to us.

It typically takes between 4 and 6 weeks for different vendors to accumulate and analyze the data.

So, through June, LCD television unit demand at retail is generally in line with our original expectations for the year.

The first 6 months of the year, LCD TV unit sales were up 18%.

This compares to our original full-year growth of 16%, and our new revised growth rate of 10%.

We've summarized the year-over-year growth rates for television by month and by region on 1 slide, so I'm not going to go through all of the details.

I would like to call your attention to the recent European demand being below last year.

It is very important to remember that last year included the additional World Cup demand.

And the recent increases in Japan probably relate to the upcoming analog-to-digital broadcast cutoff.

Regarding the PC market, we've had no change to our previous forecast, and expect the PC market, excluding tablets, to grow 6%.

We expect tablets to approach 60 million, up from 20 million last year.

Based on our current expectations for glass demand in the second half, we are planning to continue to run our operations at full capacity, with the appropriate balancing between LCD glass and Gorilla Glass.

However, we'll continue to monitor the retail environment for any signs of further weakness.

As many of you know we have several levers available to adjust our output response to the significant changes in market demand, and are prepared to utilize these levers if demand dictates.

Now, turning to the Telecom segment, which continues to run at full capacity -- sales were $548 million, up 16% versus Q1 and up 24% versus last year.

Sequential growth was slightly lower than we guided, due primarily to some project timing.

Sequential and year over year growth was driven by all of our product lines across all geographic regions.

Optical fiber volume was up 40% year over year driven by strong demand in North America, Europe and China.

We shipped more optical fiber in the second quarter than at any time in our history, and fiber-to-the-home demand was up more than 60% year over year.

Our bottom-line performance was equally impressive.

Telecom net income was $46 million in Q2, up 12% versus Q1, and up more than 50% year over year.

We are seeing more of our sales dollars fall to the bottom line, as the mix of higher-margin products increases.

As Clark Kinlin said at our annual investor meeting, we feel very bullish about the Telecom business and the wealth of market opportunities in front of us -- not only this year, but over the next several years.

In our Environmental segment, second-quarter sales were $258 million, consistent with the first quarter, as expected.

Versus Q2 of last year, sales were up 40%.

This is one of our segments that posted strong gross margin improvement and significant margin gains.

Net income was $32 million in the second quarter, up 10% versus Q1 on flat sales; and net income a year ago was only $5 million.

We believe the Environmental segment is poised to capture significant growth over the next several years, while expanding its gross margin and profits as we improve our manufacturing.

Moving to Specialty Materials, Q2 sales were $283 million -- an increase of 11% over Q1, and more than double a year ago.

The significant growth was primarily due to Gorilla Glass.

We also saw significant gross margin expansion in this segment, led by Gorilla Glass for hand-helds and IT.

Back to gross margin, those sales is now above our corporate average.

Segment net income also grew significantly, from $8 million in Q1 to $23 million in Q2.

Gorilla Glass sales were roughly $190 million in Q2, an increase of about 24% over the first quarter.

Included in this amount are sales of TV cover glass, which declined sequentially.

Excluding TV cover, Gorilla Glass sales increased 35% sequentially.

As I mentioned earlier, we now expect Gorilla Glass sales to be $800 million this year.

While this expectation is lower than what we previously discussed, it is triple last year's sales.

Gorilla Glass represents the most significant growth engine for Corning.

During the second quarter, we were designed in a dozen more products, including devices for Motorola, Nokia, Onova, and Samsung.

Gorilla Glass now has 440 design wins since the product was launched, including another 60 models launching the market within the next 90 days.

Gorilla Glass clearly continues to be the cover glass technology of choice.

Moving to Life Sciences, sales in the second quarter were $155 million, up 8% over the first quarter, higher than our expectations.

Versus last year, sales were up 24%.

About half of the year over year growth was due to acquisitions.

Turning to Dow Corning, Q2 sales were $1.7 billion, up 6% from the first quarter and up 8% versus last year.

Equity earnings were $95 million in Q2 versus $91 million in Q1.

Regarding polysilicon spot prices, they've fallen significantly since the first quarter.

However, the current spot prices are still well above prices in our long-term contracts.

For those who keep track of poly pricing, you'll note that market prices today are still higher than the last significant price decline from a few years ago.

To date, Dow Corning has not had a customer change -- 1 customer either change or reduce their purchase order.

Demand remains very strong.

In fact, Dow Corning is getting requests from our tier-one customers to do another round of pre-funding to lock in poly supply through 2017 [at the end].

Turning to the balance sheet, we ended Q2 with about $6.4 billion in cash and short-term investments, versus current and long-term debt of just $2.3 billion.

Free cash flow was a positive $54 million in Q2.

The largest outflow of cash during the quarter was CapEx, which was $494 million.

Based on our capital spending to date, we expect [to timing] our projects for the remainder of this year.

We expect our total CapEx this year to be at the lower end of our previous guidance range at $2.4 billion to $2.7 billion.

On this slide, you can see our original range and updated forecast by segment.

I would like to call your attention to the Display and Specialty Materials capital spending numbers.

A large portion of the Display capital spend for this year is for the expansion of our Taichung facility.

While this expansion is for a new LCD capacity, it's actually needed to replace the existing LCD tanks and the process of being converted to Gorilla Glass.

So, while the spending is technically within our Display segment, we did not convert existing tags to Gorilla.

We would have had to build the tanks for Gorilla.

On this slide, you can see a breakout of the spending by major project.

The new plant in Beijing will cost about $400 million this year, while the expansion of Taichung replaced the capacity being converted over to Gorilla will cost about $500 million.

We've also budgeted about $350 million for what we call strategic asset protection.

We have some lessons learned from the earthquake and power disruption at our plants in 2009.

We're making some investments to improve the business continuity of our factories, and also buying extra precious metals.

We believe this spending will help prevent damage to our plants, and also enable faster recovery from adverse events.

As a reminder, we carry precious metals at cost, and they are not consumed during production; so these assets could be sold if no longer needed.

Obviously, this spending is considered strategic by us.

It is discretionary.

And if we were looking for levers to reduce capital spending, this could be one of them.

We've also reviewed our capital project road map for 2012, and have some initial estimates for you today.

Barring any lag between project completion spending, we anticipate the 2012 CapEx to be between $1.9 billion and $2 billion.

On the slide, you can see the breakout.

Most of the planned capital spending will be for Corning products that are poised to grow very rapidly over the next several years, such as Gorilla Glass, substrates for catalytic converters, diesel filters, optical fiber, and of course, the completion of our new Display glass facility in Beijing, China.

In Telecom, we've been running our operations full, and need to add more capacity to meet this growing industry.

We expect the strong growth rates you've seen so far this year to continue, especially in optical fiber, fiber to the home, and enterprise networks.

In Environmental, we announced an expansion of our Shanghai auto substrate plant last week.

Spending for that is included in this number.

Life Sciences, which is included in other, we are also expanding our China operation.

China is clearly poised to grow faster than the developed world, fueling demand for more autos, telecom networks, TVs, and healthcare products.

Now, while the hyper GDP growth we saw over the past several years may slow slightly, according to industry experts, even slower GDP in China will be higher than most regions of the world.

And we are continuing to invest to capture our share of that opportunity.

On this slide is a breakout for Display and Specialty Materials for 2012.

For Display, the majority of spending will be on the completion of the new facility in Beijing and completion of the expansion of Taichung.

Now, moving further down the balance sheet, inventory increased from $841 million at the end of Q1 to about $917 million at the end of Q2.

This increase was almost entirely related to Gorilla Glass, as we were preparing for the significant increase in demand in second half.

There was some additional inventory build in Display, although it was much less than we had expected.

We expect to see good top-line growth in the third quarter, led primarily by Gorilla Glass and Display.

We expect even stronger bottom-line growth, driven by the higher sales and gross margin expansion.

Display, we expect our total glass volume, which includes the wholly owned business and SCP, to be consistent with the second quarter.

It's in line with our expectations for the overall glass market in Q3.

At our wholly owned business, we expect volumes to grow in the mid- to upper-single digits sequentially, a volume growth primarily driven by a full quarter of higher production levels at Sharp.

We expect glass price declines will continue to be moderate.

With price declines at a lower level, we'll be using the word moderate going forward.

If we experience a significant [excursion] in pricing, we'll of course disclose that change.

Now at SCP, we expect Q3 volume that should be down in the mid-single digits, compared to Q2.

With the exception of Sharp's temporary curtailment of production in Q2, glass demand from panel makers in Japan, Taiwan, and China has been stronger than our initial expectations.

Korean panel makers have been running at lower utilizations, and these are lower than we had expected, for actually the past 9 months.

We believe this is a trend that will continue for the foreseeable future.

Regarding panel prices, we would not be surprised if they stayed flat for the remainder of the quarter.

With the exception of a 2-week period in May, panel pricing was flat for most of Q2.

Although some in the industry were expecting more consistent panel price increases in Q2, we did not expect that to happen.

In the past, consistent panel price increases have only occurred when there have been panel supply constraints.

The amount of excess panel capacity currently, we do not anticipate such constraints in the near future.

We do expect the supply chain in total to build some inventory in Q3, in preparation for Q4.

Based on our models, we expect the number of weeks in inventory, on a forward-looking basis, to actually be lower actually in Q3.

We don't usually provide guidance beyond the quarter, but we thought it important to note that the worldwide glass demand is expected to increase in the fourth quarter, assuming retail remains healthy and there's no negative change in the economic output.

And as a reminder, the Chinese New Year in 2012 will be earlier.

In our Telecom segment, we expect third-quarter sales to be up slightly in comparison to a very strong Q2.

Our ability to supply is extremely tight right now, as most of the markets we participate in, such as optical fiber, fiber to the home, and enterprise networks, are all growing substantially.

We are working hard to leverage our existing capacity, as well as ramping up some additional capacity to meet demand.

Compared to last year, Q3 Telecom sales are expected to be up about 20%.

As a reminder, the strongest quarters for Telecom, in terms of sales, have been Q2 and Q3, historically; and the increase of sales between Q2 and Q3 is usually slight.

For example, in '08, '09, and '10, the increase in sales between Q2 to Q3 was 4%, 3%, and 5%.

We expect sales in the Environmental segment to be consistent with the second quarter, and up 25% year over year.

Like Telecom, our ability to supply is extremely tight in this area.

Life Sciences sales are expected to be up slightly sequentially.

In Specialty Materials, sales are expected to grow in the upper single digits sequentially and 90% year over year, driven primarily by Gorilla Glass.

Gorilla Glass for IT and hand-helds is expected to increase 20% sequentially, offset by lower sales in other product lines within Specialty.

Moving back to the income statement, we expect our Q3 corporate gross margin percent to grow by a couple percentage points, due to the higher volume in Display and continued manufacturing improvements in Gorilla.

SG&A is expected to be consistent on a dollar basis, and thus lower on a percentage of sales in Q3.

R&D will remain around 9% of sales, if not slightly lower.

We expect equity earnings to be down in the upper-single digits, as lower SCP earnings will more than offset higher equity earnings at Dow Corning.

Moving to taxes, we expect Q3 and 2011 tax rate to be about 15%.

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

For your modeling purposes, for every 1-point move in the yen, our sales and net income move by about $10 million.

The net income impact includes SCP, where a stronger yen, which also improved their results.

Before I move to Q&A, I'd like to mention that we remain very confident in our innovation portfolio, and have made some significant progress on advancing several of our RD&E programs in recent months.

One of the future growth opportunities we're investing in today is specialty glass with thin-film photovoltaics.

It is well known in the PV industry and by investors that Corning Glass has demonstrated record efficiency levels on the research side of sales in silicon tandem this year.

Some of you may recall in April, that General Electric announced a record 12.8% on a full-size cad tel module, which was recently verified by NREL.

I'm happy to report this 12.8% record module used Corning's photovoltaic glass.

We continue to be very encouraged by the progress we've made in recent months, and remain confident we'll have a TV customer by the end of the year.

The other future opportunity is OLEDs.

We believe OLEDs will develop to become important to the display industry in the future, and will require new glass compositions to maximize OLED potentials.

We have developed a new glass for OLEDs, which is in customer qualification tests now.

And we're also working on new glass composition for large-size OLEDs.

These innovations combine with our strong growth of existing new products, such as Gorilla cover glass, clear-curve optical fiber, Pretium EDGE products for data centers, and diesel filters will provide a solid foundation for our growth in sales.

So, that completes my formal comments this morning.

Ken?

That was great, Jim.

Thank you.

John, we are now ready to take some calls.

Thank you.

(Operator Instructions) Nikos Theodosopoulos, UBS.

Two quick questions.

For this year, based on the new expected volume growth for LCD, it looks like it's -- volume growth will be slower than price declines.

And my question is -- what do you see, if anything, that's going to change that next year?

We've been waiting for this TV replacement cycle, and it just doesn't seem to be happening.

Do you see this as being a trend again next year, where volume growth is at or below price declines?

And then, as a second question on OLEDs, can you comment on how you view that opportunity, in terms of average selling price and average margin contribution, versus your current LCD business?

Thank you.

So, on the latter question, I'm not prepared to talk about the average selling price or margin contribution.

We will be able to make the product on our existing LCD tanks.

So, we don't expect to have to spend much capital for it.

And it's just too early for us to comment, because we're just now on qualification on small sizes.

On LCDs, I think we're not giving guidance for next year.

I just will comment that if you look at the total square footage of glass, our models sold at retail versus the total square footage of glass at retail last year, our models would say it's going to be up just slightly over -- around 12%.

It is the glass market, because of inventory builds, that's growing slowly this year.

We're -- the industry is building less inventory.

But at retail, we're seeing about 12% growth, even in our most conservative models for television for year end.

So, we still expect to see demand at retail, which ultimately is the most important driver.

And price declines are clearly going to be very moderate levels for the quarter below that level.

Okay, that's helpful.

Just a follow-up -- as you talk to your customers, and set makers, and so forth, what do you see is driving the next TV replacement cycle?

It seems like 3-D has not been the driver of that.

Is that -- do you still view that as the driver, and it's just time -- time is needed to get more content?

Or do you see something else driving the replacement cycle?

Thank you.

We were never believers that 3-D would be a strong driver initially.

I think there were other people who were quite hopeful of that.

We believe that the drivers will be -- the replacement being faster than what it was in the CRT era, are going to be the overall quality of the television continuing to get better.

The refresh rate, the fitness of the product will be things that consumers value; and our consumer research has said people are -- they view those -- they value those quite highly.

I think it's just speculation about 3-D, as to whether at some point when it becomes more important to people, whether there isn't that much content.

And again, it's not that you're going to be watching everything on television in 3-D.

You're really buying a 2-D television that you occasionally watch as 3-D.

We believe that people will replace on a faster rate going forward than they have in the past, and I think DisplaySearch a few months ago published a giant study on this, which I would point you to.

Okay, thank you.

Mark Sue, RBC Capital Markets.

Jim, recognizing that the price premium may be behind a slow demand for Gorilla Glass for TV applications, are there things the industry can do to stimulate demand?

Are you considering giving up more margins on Gorilla Glass to draw out increased volumes?

Maybe share your thoughts overall to kind of drive the volume growth for Gorilla Glass for TV applications.

We have no plans to do anything further on pricing to do that.

So, we've put forth what we think is a very good product.

We have some innovations that we could do, in terms of reflectivity, if the customer wanted to do something on that.

But we're not planning to make any price moves on TV cover.

Can you give a sense of what the price premium might be, that might get a crossover point?

Would it be 10%, 20%?

Any thoughts on what might stimulate demand on regular LCDs?

I have no -- it would be just pure speculation on my part, Mark.

Okay.

Maybe separately, as we look at the outlook -- adjusted outlook, any thoughts on OpEx control, similar to what we saw several years ago?

Not just near term, Jim, but how we should think about longer-term planning assumptions for OpEx?

I think that short-term, given the slightly reduced outlook, we will be tougher on our operating expense growth.

Longer term, our model has been to try to contain SG&A to be about half the rate of growth of our sales.

And so, we get leverage from that.

We don't measure that that way every quarter, but that's what our goal is.

R&D is more program-driven and generally hasn't hit that target, but we believe we have enough innovations to justify our higher growth rate there.

But even R&D, I think we'll be very cautious about letting it grow too fast.

That's helpful.

Thank you, and good luck, gentlemen.

C.J.

Muse, Barclays Capital.

First question, Jim, and I know you hate looking out beyond the quarter.

But I was hoping you could talk a little bit about the trajectory particularly for LCD, as you balance more muted volumes with ASP degradation; but also the move to thinner glass and how we should think about that trajectory going forward into Q4 and beyond.

Well, thin is an important part of our cost-reduction program.

We're continuing to advance the percent of glass that we ship to be thin.

We just recently did our five-year planning process, and our expectation is that our business moves up every year, in terms of the percentage being thin.

One of our major customers, on one of their lines, has just gone to 100% thin; so, we think it's validating it being good for our customers as well as being good for us.

So, it's an important element of our ability to keep up with price declines.

And as long as we don't have too many ups and downs in terms of utilization, we think that allows us to maintain our gross margin percent.

Okay, that's helpful.

And then, my follow-up question, kind of bigger picture in terms of cash redeployment to shareholders.

It appears as though CapEx plans for LCD and Gorilla are pretty much done for '11 and '12, and provides you the capacity that you need to support growth for multiple years.

And you're sitting here with about $4.1 billion in net cash.

So, curious what your discussions are like today with the Board, and when you think we'll hear something on that front that I think would prove to be positive for this story and the stock.

Well, I won't predict exactly when, but I will tell you that we have begun conversations with the Board about the cash and what we should do with it.

So, it is definitely on the Board's agenda now.

Thank you.

Wamsi Mohan, Bank of America, Merrill Lynch.

Jim, the glass volumes now are expected to grow only 6% this year, versus your original expectations of 17% at the beginning of the year, on a sort of apples-to-apples basis.

So, given this, is there any consideration of cutting LCD-related CapEx?

And I sort of mean in aggregate for 2011 and '12.

You were talking about actually increasing CapEx, given some of this production capacity that you're converting over to Gorilla, which is leading to incremental Taichung expansion.

But on the other hand, the end markets are a lot slower than you anticipated at the beginning of the year.

So, I'm just trying to understand -- is the China LCD build still as strategic to you as you thought before?

And -- even though you're spreading it across a longer period of time.

And what is, specifically, the need to increase the Taichung facility, especially if you're going to get some offset from thinner glass?

Thank you.

The increase in Taichung is built around the fact that we are doing two things.

One, we're giving -- already giving existing capacity to Gorilla, and we expect to have to give more capacity to Gorilla for next year.

And therefore, we're going to do that by taking the LCD glass; and then, therefore, we're going to make LCD on newer, larger-size Gens.

So, it is driven by that.

We clearly are capable of slowing the spending at Beijing, if the ramp there by our customers does not turn out to be what we expect.

I think the question for us is really going to be, what capacity do we need for 2013 and '14?

And whether the capital -- we continue to see lower rates of growth in LCD glass and thin being very successful.

You may see the capital spending for Display come down even more.

I will comment that on the growth for the glass market, I just want to make sure that my point earlier was understood.

It is the fact that this year, the supply chain is building less inventory than they normally would for the growth that's happening at retail that makes the glass market look like it's growing at a smaller number.

Even with the reduced IT forecast, the reduced television forecast at retail, and what is very muted economic scenario, we're seeing that retail glass demand grow 12%.

Now, people can't take inventories to zero, so ultimately that growth rate shows back up for us.

So, we are being very cautious about the capital.

We will adjust and potentially slow it down, and -- but we definitely will take steps to be careful on the capital.

But that being said, Gorilla is continuing to grow quite well, and we're actually winning even more than what we expected for future models.

So, I think that's a big driver.

The other thing, as you saw on our detail on CapEx, a chunk of this money that we're spending right now is around this asset protection program.

Approximately half of that is assets that are fixed, that we're doing to protect ourselves in the event of a national disaster, such as an earthquake.

The rest is in precious metals, which we feel will retain their value -- we'd like to have in the event of -- we need to have emergency repairs.

But they are not assets that value go away in.

So, we are being cautious about not overspending, but those are the primary uses for it.

Okay.

Thanks, Jim.

And as a follow-up, you mentioned incremental work that you've been doing on the OLED side.

And in the past, you have sort of have spoken about some of the technology challenges associated with implementations, using a single sheet of glass.

Do you expect for these large-size OLED sets that you're contemplating in the future, that they would have a single sheet of glass implementation?

Or still continue to have two sheets, as they are currently today?

That's really a question for our customers, as to which model they assume that they're going to go.

Some people are thinking about using one sheets.

Every one that's made today continues to use two sheets of glass.

Our point of view is, we're in the display industry.

No matter what the display is, we're going to provide a glass for it.

So, if people need one sheet, it will be one.

It may have to be a much higher performance piece of glass if it's only one sheet as opposed to two.

But we plan to sell glass to OLEDs as they become more important.

Again, I'd stress -- I think this is a small percentage of the volume today.

I believe the total OLED square footage of glass this year probably is about 10 million square feet, but we are preparing to be ready for whatever direction the technology moves.

Okay, thank you.

George Notter, Jefferies.

I wanted to ask you about the CapEx plan looking into next year and beyond.

At one point, there was the view you could build a second manufacturing facility in China.

Certainly, I'm trying to understand what the perspective is there.

I assume that's certainly not in the CapEx budget for next year, and I'm wondering if that is a reflection of any changes that you see in the Chinese market opportunity.

Is it a change in the tariff structures for importing glass?

Or -- walk us through that, it would be great.

We haven't made a final decision, but I think if there is going to be a second factory, it would be to support Samsung.

And it's likely that that would be done using some of SCP's money.

But that hasn't been -- it's not a final decision yet.

Got it, thank you.

Jim Suva, Citi.

Following up on your commentary about gross margins improving a couple percentage points next quarter, there's a lot of moving parts that we think about within Corning.

Can you help us understand, a bit longer term is, are those levels at the higher gross margin levels sustainable, or do we need to start factoring in some other things?

And those other things, for example -- what I mean is, maybe, for example, when you start to bring on your new China factory, I would assume there's some ramping costs there.

Or you had mentioned that you expect to start selling some PV sales.

I don't know what to assume there for margins.

Is it comparable or below, or how should we think about gross margins going forward?

Is this going to see a benefit in Q3 then, when you start to build in some one-time items or some reoccurring items for margins?

Thank you.

PV's impact on us is likely to be relatively minor, because it will ramp slowly.

As we get a customer, then we'll start talking about the margin impacts.

But I don't think you should have that -- expect it -- that much [influence] on the overall corporate average in the near term.

Neither will Beijing.

We will actually choose to ramp the tanks -- multiple tanks in the facility.

It's not like we're going to have a light switch and light them all up at one time.

We'll ramp them more slowly; therefore, the depreciation clock on them will start on a more phased basis.

Again, the business is so large today, that even the Beijing facility starting up will not have much influence.

The biggest influence on the Display margins is our ability to generally run relatively full, and then to keep price declines and cost reductions relatively equal, which we think we have a good shot at doing.

Corporately, as long as we make that happen on Display, we actually believe we have margin expansion opportunities in Telecom and Environmental, which will, as those businesses grow and they're expanding their margins, should help our corporate margin.

And then, lastly, assuming we're right about the -- where cover glass is going in the future on devices, it's actually a higher gross margin or corporate average.

So, we think we have a very good shot of sustaining it, as long as Display behaves the way we think it's possible.

Great.

Thank you very much.

Simona Jankowski, Goldman Sachs.

Hi, this is Erin Riley on behalf of Simona.

I just have a couple of questions.

My first is on your Specialty Materials segment.

I'm wondering if a lower mix of TVs in your assumptions for that segment going forward affects your margins assumptions there.

Yes, it does.

It actually makes it better, because the gross margin on the TV cover is very weak.

So, actually, not selling that actually improves the margin structure, especially in [screens].

Okay, thank you.

My second question is on your longer-term sales targets.

You reiterated your $10 billion in sales target.

Does that mean that you have incremental confidence in non-display businesses, given that there's a softer outlook in display right now?

Or are you expecting a stronger rebound in Display, going forward?

I think we have increased confidence in Telecom and Environmental that allows us to believe that we definitely could hit the $10 billion, even with the weaker Display numbers.

Okay.

Thank you very much.

Vijay Rakesh, Sterne Agee.

Just wondering, on the [challenge re-entry] in the second quarter, you mentioned [pursuing a] deal in distribution.

What is it in weeks, and how does it compare to normal?

I think our comment was on inventory for the supply chain.

And we would say usually in Q2 that's the quarter that we see the most risk with inventory climbing, approaching 18 weeks.

And the fact that we're actually below 17 in quarter two is a very good sign.

So, that was my only comment, I think.

Got it.

And on the tablet -- for the tablet and smartphone market for cover glass, it looks like tablets and smartphones are growing pretty nicely, if you look at next year, also.

Wondering what your expectations on Gorilla Glass was for next year, especially with better margins now on the Gorilla Glass?

We haven't given the guidance yet for Gorilla for next year.

We will a little bit later this year.

But we see two things that would cause us to say it's going to continue to grow.

We see that the mix shift of people in smartphones, and we believe tablets are a device of choice for many consumers today.

So that's good news; and most importantly for us is that we are not losing share to our competitors there.

So, we expect business to grow.

We'll give you some guidance later this year.

All right, thanks.

Brendan Furlong, Miller Tabak.

A question for you on -- do you expect the usual industry kind of inventory drawdown in Q4, to set up for the industry refresh in Q1?

And along with that, do you expect -- is Sharp expected to be a one-quarter bump here in terms of catch-up, and then we kind of ease off again in Q4?

Our belief is that the inventory does draw down in Q4 on the total supply chain, simply because the peaking of televisions in Q4.

We don't -- [we do -- would] expect later in Q3 that we might see some utilization increases.

Our Q4 class demand is up versus Q3 for the industry.

And given the early arrival of the Chinese New Year, we would expect that that would drive demand a little bit more in the fourth quarter.

And on the Sharp issue, do you expect that to be a one-quarter a bump?

Well, we have no reason to believe Sharp won't continue to run at the rate they are now.

Basically, what they did is, they corrected their inventories in April and the very beginning of May and then brought both their Gen 8 and Gen 10 back.

And assuming that Sharp themselves does okay in the retail market, we have no reason to expect them not to continue to run.

Excellent.

And then, a question on the TV market in general, replacement rates and all the rest of us.

Does -- what are your customers saying of potential for Smart TV to accelerate the replacement rate in 2012 and 2013, when 3-D is pretty much a [boss]?

But will the Smart TV be the great hope for everybody in the industry?

Thank you.

Sure, I'll categorize it as a great hope, but I think our customers believe, as we do, that Internet connectivity for televisions will become an increasing importance to consumers.

Whether it is enough by itself to change the replacement rate after this would be speculation on my part.

But definitely, our customers and we believe that it is an important attribute as people make their decisions going forward.

Okay, thank you.

Ajit Pai, Stifel Nicolaus.

A couple of quick questions.

The first is on your Telecom segment.

And after a long time, you've -- sort of talking about capacity constraints for that business over the past couple of quarters.

And while that segment has shown some very significant operating margin improvement, how much more is there left in that segment?

And can you talk about the pricing trends in that industry, whether they've improved materially since -- with all the overcapacity going away?

And then, I'll go to my second question.

Pricing trends have definitely improved.

There's still a lot of customer power; our customers are very large.

But definitely, I would say, compared to a number of years ago, the pricing trends have improved.

And we're -- we definitely feel like we're going to see continued demand; and as a result, we're going to actually, for the first time in many years, spend a little capital against this business.

And the operating margins from the low teens, could they creep up into the high teens or break into the 20%s over time?

We don't ever give gross margin segment comments by segments.

I will just tell you that we believe that the gross margin in the Telecom segment could improve.

Got it.

And then, the second question is just looking at one of your M&A strategy, and then also the Life Science segment.

So there, your margins have actually fallen on a year-over-year basis, at an operating level.

So, how much of that is investment and the impact of the recent acquisitions?

And do we expect the margins in that business to eventually get back and exceed the margins of the first half of last year on the operating side?

And from an M&A perspective, is -- you've acquired in the Life Sciences side, you've also talked about looking more closely on the Telecom side.

Is there an update in terms of the pipeline and strategy for continuing to bolster some of your non-display businesses with acquisitions?

We definitely believe that corporately, we will bolster our overall growth rate by acquiring.

And two industries we're focused on are Life Sciences and Telecom.

We did do one Telecom acquisition earlier this year.

We're working on a Life Sciences one today.

The margin down in Life Sciences is definitely due to integration issues on acquisitions, and then getting through that phase.

And then, second, Life Science is one of the business where we actually have commodity pressure because of resins, and we actually have raised prices to overcome that.

But we were a little behind on that in Q2.

Got it.

Thank you so much.

John Roberts, Buckingham Research.

What caused you to move glass from SCP to the wholly owned operation during the quarter?

We actually -- it was related more to quarter one.

We bought glass from SCP in Q1; and because it's in effect an inter-company sale, we can't recognize the margin until that glass is actually sold to a customer.

So, that was the recognition.

But in quarter one, we were tight [on] glass at our wholly owned, so we bought some from SCP.

And secondly, how do you expect to bring OLED into your manufacturing mix?

Is that going to be made here in the US, sort of small-scale plant, and cycle between PV and OLED glass initially?

I think it will be made in Asia.

Asia.

Thank you.

Operator, I know we probably have some more people in the queue, but we're running up close to 9.30.

So let's take one more call.

Rod Hall, JPMorgan.

Thanks for getting me in there.

Just a couple quick questions.

Jim, I wonder, could you just let us know what you think the minimum inventory level in the channel might be?

You're saying below 17 weeks.

How low can they go, would be the question?

And I wonder if you could just give us any quantification on what you mean by moderate pricing declines.

I'm assuming that's a little bit worse declines than the normal expectations.

On pricing, I'm not going to comment anymore.

The levels are quite low, and it's just moderate.

So, I won't make any further comment.

On inventory -- so, unfortunately, we once saw it go down to 13 weeks -- and that was when everybody was panicking in late '08, you may recall, thought the end of the world was near.

So, they clearly can do that.

I will tell you, having done that, they then experienced tremendous out of stocks in quarter one of 2009.

So, they really realized that was a bad outcome; but clearly, mechanically, it is possible.

I would think that that is unlikely to have that episode repeated; but clearly, they could make that choice.

But we think it's more likely that they might run in the 16-week range for a period of time, especially given the weak profitability of the industry.

You don't want to take inventory risk.

But I would -- we would be very surprised if that repeated, the 13 weeks.

Okay.

And then, I'm just -- I did want to follow up with -- on the Telecom segment, as well, and just ask -- we've seen some evidence in Q2 reporting that Telecom's buying behavior is a little bit muted.

Maybe expectations for [H2] aren't that great, but you guys seem pretty confident.

I'm just wondering what the source of the confidence is.

Is it the Chinese optical build?

Is it -- can you give us any more color on that?

I would say that the confidence we have versus some other people in the industry is particularly our strong position in fiber to the home, with those projects around the world being quite robust.

Then, and second, would be because of our strong position in optical fiber, and the demand for optical fiber around the world is quite strong.

So, I think that positions us differently than some of the other telecom companies that may be in your coverage, as an example.

Yes.

And is it fair to say APAC is probably the region where there is the most demand at the moment, or is that the wrong assumption to make on the optical side?

I will tell you that there is good demand in North America.

Okay, okay.

Thanks a lot.

Jim?

Just a couple quick closing comments.

First, on investor relations, we will be presenting at two conferences starting in September.

On September 8, we'll actually be one of the keynote speakers at the Citi Technology Conference in New York City.

And then, on September 13, Jim Clappin, who is the President of our Corning Glass Technologies, which includes Display and Gorilla, will be presenting at the Deutsche Bank Technology Conference in Las Vegas.

Just a couple of closing comments -- we feel very good about our set of businesses.

As I mentioned previously, it's rare to have all our segments pulling in the same upward direction.

At our investor meeting in February, we highlighted that all of our businesses are expected to grow over the next four years.

We believe our first-half results are evidence of that.

I am particularly pleased with the gross margin expansion in bottom-line growth in Telecom, Environmental, and Specialty Materials.

And lastly, we're making progress in our new business areas, such as photovoltaics and OLEDs, which we believe can provide new longer-term growth opportunities for the Company.

Ken?

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

A playback of this call will be available beginning at 10.30 AM Eastern Time today and will run until 5.00 Eastern Time Wednesday, August 10.

To listen, dial 800-475-6701.

The access code is 209752.

Audiocast is also available on our website during that time.

John, that concludes our call today.

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