康寧 (GLW) 2012 Q2 法說會逐字稿

Ladies and gentlemen thank you for standing by and welcome to the Corning Incorporated second quarter 2012 earnings results.

Is my pleasure to turn the call over to Ann Nicholson, Director of Investor Relations.

Please, go ahead.

Thank you John and good morning.

Welcome to Corning's second quarter conference call.

Jim Flaws, Vice Chairman and Chief Financial Officer, will start the call was some prepared remarks.

Before Jim starts, I'd like to remind you that today's remarks contain forward-looking statements that fall within the meaning of the Private Securities Litigation Reform Act of 1995.

They 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.

Now, I would like to turn the call over to Jim Flaws.

Thanks Ann and good morning everybody.

Now before I turn to our comments on the quarter and the outlook, I actually have an organizational announcement.

As some of you know, Ken Sofio, our Vice President, Investor Relations, has been working a reduced schedule since March.

Ken has been getting treatment for a serious medical issue.

Ken now needs to put full-time focus into his health.

As a result he will not be on the call this morning and he will not be doing follow-up calls with investors.

Ann Nicholson, Director Investor Relations, will be the primary IR contact in the interim; Ann will be supplemented by myself, Tony Tripeny, our Corporate Controller, and Mark Rogus, our Treasurer.

I have two requests of our investors.

Number one, we will try to be as responsive as normal but please recognize that our response time may take slightly longer and time allocations may be a little shorter as we return calls today and tomorrow.

Number two.

You can direct e-mails to Ken's email address with IR questions.

Ken's assistant, Kelly Williams, will forward them to Ann Nicholson.

You can also e-mail Ann or Kelly directly at the e-mail addresses shown on the screen.

We ask that you keep Ken in your thoughts and if you wish to send a personal e-mail to him, Kelly will see that it gets to him.

I appreciate your help at this time.

So, now onto the quarter.

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

If you haven't, you can find a copy on our IR website.

In January, we told you of the reset in the Corporation's profitability and our plan of forming bottom and marching up.

Briefly, I think we're making progress.

Form bottom is our mandate in the display business.

The phrase conveys the need to stabilize earnings and position ourselves to regain positive momentum.

The critical first step is to return to moderate quarterly price declines for LCD glass.

Today, I'm delighted to tell you that our quarter two price declines for LCD glass were indeed much more moderate than the previous two quarters averaged.

And just as important, we now believe price declines in Quarter Three will also be moderate.

Now, we need to continue to repeat this over the coming quarters while we execute our cost reduction projects.

We are also making progress on regaining positive momentum in Display, and this is all about new products for high-performance displays.

We've introduced Lotus and Willow glasses.

We have now formed our new OLED venture in Korea and we are shipping glass from that country.

We are also shipping glass in our wholly-owned Display business for TSD metal oxide black planes.

The march up portion of our plan is about capturing sales growth and expanding margins in Telecom, Environmental Life Sciences, and Specialty Materials with Gorilla.

And we are also making progress against these objectives, despite some macroeconomic headwinds.

So let me begin with our key messages this morning.

First LCD glass prices.

Q1 call I told you we had expected our glass price declines in the second quarter to be much more moderate than the average of the previous two quarters.

As I said in my opening, but it bears repeating, price declines for LCD glass were indeed much more moderate in Q2 and we believe the price declines in Q3 will also be moderate.

Second, as we assess the first half of the year for LCD glass, we see retail and supply chains statistics generally in line with our expectations.

Obviously, all is not perfect for the economies around the world but unit growth combined with area size increases for televisions have allowed us to keep our outlook for the 2012 retail glass market size.

On the supply-chain front we have come through Q2, always the trickiest quarter for Display, with inventories inline with our expectations.

Third, we told you in the last call we were very alert to potential worsening economic headwinds.

We are now experiencing those headwinds.

We have seen lower sales of light-duty environmental products, principally in Europe, and we believe the economy could start to impact heavy-duty diesel soon.

We have seen lower order rates than expected for some telecom products, not fiber, but in connectivity products due to project slowdowns.

We've factored in these headwinds going forward, but as you will see in a minute our outlook for Q3 continues to include growth in most of our businesses.

So with that intro I will walk you through our Q2 results and Q3 outlook.

Second quarter sales were $1.9 billion.

That was consistent with Q1 and down slightly from a year ago.

Gross margin was 41.7%, just slightly lower than the first quarter as expected.

Lower gross margins Display, driven primarily by the lower price, offset gross margin improvements elsewhere.

SG&A was up slightly on a dollar basis, while R&D spending was flat.

Just as a reminder, we do grant our annual merit increases in Q2 in the United States, which drove some of the increases.

Equity earnings of $259 million were up about 19% sequentially, compared to equity earnings of $218 million in Q1.

Dow Corning drove most of the increase with sales growth in both silicones and polysilicon.

Dow Corning results also included a favorable nonrecurring item of $11 million.

EPS excluding special items was $0.31, generally consistent with Q1, but a material decline from a year ago.

EPS, as stated here, is a non-GAAP measure.

A reconciliation to GAAP can be found on our website.

So, now for our quarter two segment results, I will start with Display.

Display sales were $641 million in Q2, a decrease of 9% sequentially, and down 16% versus last year.

Volume was down in the mid-single digits, worse than our expectations, up consistent, mainly due to lower utilizations at some large customers.

Price declines were more moderate, as expected.

And the yen exchange rate was not a factor in comparing Q1 and Q2.

Volume in SCP was up in the mid-single digits sequentially, which was better than expected.

I'm pleased to say that SCP secured a multi-quarter deal with a customer which gave them some additional volume in Q2.

Equity earnings at SCP's LCD glass business were $184 million in Q2, an increase of 1% versus the first quarter.

For your modeling purposes, SCP's second quarter LCD sales were $739 million, an increase of 1% from the first quarter.

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

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

I'd like to spend a few minutes discussing inventory levels in the supply-chain, glass supply and demand, and retail.

Our preliminary estimate of inventory at the end of Q2 was roughly 15.3 weeks.

We think the supply-chain built a little over 100 million square feet of inventory in the quarter.

This number was in line exactly with our forecast.

As a reminder, Q2 is the lowest quarter retail all year long, so we always expect and experience inventory builds.

The key is not to build too much.

Q2 is the quarter that has caused problems in the past.

As of now with the build meeting our expectations, and with the number of weeks of inventory, it feels like the supply-chain is okay heading into the back half of the year.

As always we will continue to monitor inventory levels, especially as we progress through the third quarter when we see panel utilization climbing in anticipation of the fall retail season.

Utilization rates in Taiwan are expected to increase on average from 70% to 75% in Q3.

In Korea, we expect utilization rates to pick up slightly.

In Japan, we expect utilizations to increase substantially from the sub-50% level that we experienced in Q2.

Now we believe glass supply and demand remains in balance.

Tanks have been brought back online to support the anticipated seasonal Q3 increase in demand.

We are running our wholly-owned capacity at high utilizations driven by Gorilla glass and the expected Q3 seasonal uptick.

SCP continues to have capacity off-line and tends to keep it so.

At this time we would consider our glass inventory levels to be healthy.

Actually came into Q2 on the low side of healthy, so we built a small amount of inventory in the wholly-owned business during the quarter.

Now moving to retail.

Retail and supply chain statistics are generally in line with our expectations.

We are sharing some preliminary data that is a risk as final data does differ sometimes.

But with the uncertainty in the world's economies we hope it will help investors.

I'd like to add that we look at both unit data and area data by geographical locations.

Unit data reveals the number of consumers purchasing, especially year-over-year, and it helps me think about the impact of the economy.

Of course we look at area data, because in the end we sell by the square foot.

For the United States we've actually seeing positive unit growth rates all year.

Unit growth rates are small as we would expect in a developed economy that is fully penetrated.

Year-to-date unit growth is 3%.

Year-to-date area growth in the United States is 8%.

These numbers are in line with our expectations.

Larger average screen size are driving the better area growth.

In the US, 50 inch and above televisions are actually up 40% year to date.

In Europe unit demand was definitely weaker in the first quarter but has improved over the last three months.

Year-to-date units are down 5% and the area is up 2%.

The economic uncertainty makes forecasting difficult.

We'd love to see recent months' performance continue.

As expected, year-over-year unit sales in Japan are down due to tough year-over-year comparisons with last year's EchoPoint promotions.

We will expect to see easier comparisons starting in the fourth quarter.

In China, we are seeing mixed performance.

Now recall from the quarter one call that changing the time of New Year's holiday and promotion period made the early part of the year challenging to interpret.

I told you the combined December to February units were up 15%.

March and April were positive but not as strong.

And as we all know now, the May holiday season's sales were weak.

We are pleased to see positive unit growth in June in the preliminary numbers.

I feel our biggest risk in our television forecast is China, and we're closely tracking the situation.

On the positive side, China has now implemented a new stimulus that we feel could help television sales in the back half of the year.

Emerging Asia and South America continue to show excellent growth year-over-year.

In terms of PC demand for this year we're paying attention to the weak results in Q2 reported by the industry.

Our forecast for the year calls for desktops at 0% growth, notebook and netbooks at 7%, tablets at 50% growth.

We do not expect any growth in the monitor market.

In terms of glass demand at retail, our estimate remains 3.6 billion square feet.

As I mentioned on our January conference call, we have a variety of cases with retail demand being above or below the point estimate of 3.6 million (sic) square feet, driven primarily by different economic scenarios.

We still expect the supply chain to lower weeks of inventory by about a half week by the end of the year.

We expect the absolute amount of inventory to show a very slight increase year-over-year in square foot from the combination of retail growth offset partially by the decline in weeks of inventory.

In terms of our to migration EAGLE XG Slim, we continue to make excellent progress.

We have now met our goal of more than half our glass shipped being thin.

I'd like to comment on the new MOU announcement made on Tuesday relative to the new glass factory in China.

Samsung and Corning are planning to invest in a new equity venture in China to supply LCD glass to the new Samsung Suzhou Gen 8 panel fab.

This new entity has signed a MOU with the Wuxi new district in China on the intent to make this investment.

The final agreements between Samsung and Corning need to be signed and more importantly we need to receive appropriate government approvals.

The new glass factory would start production in line with Samsung start up.

The ownership will be split 50/50 with Corning and Samsung.

The capital will be funded by equity injections by Corning and Samsung and by loans.

Corning's equity investment will be $100 million.

The new company plans to invest up to $600 million in phases over the next few years.

Now a portion of the equipment will actually be transferred from SCP, and as a reminder, SCP continues to have a significant capacity idle.

Lastly a comment on our high-performance displays.

Samsung Corning Advanced Glass was officially established in the quarter and we started shipping glass.

We are pleased with the progress we have made establishing programs with panel makers and hope to deliver a significant amount of Lotus glass to multiple customers by year-end.

Now in Telecom, sales were $559 million, up 10% sequentially versus our guidance of low to mid-teen growth.

Growth was driven by enterprise and optical fiber and cable in North America and China.

Compared to our expectations, we saw a slightly softer demand for optical fiber in EMEA and for legacy hardware products.

Net income was $36 million, up from $21 million in Q1, but down from $46 million a year ago.

The increase from quarter one was driven by the sales increase and a nonrepeat of a $3 million impairment in Q1.

Compared to a year ago, the decrease in net income largely reflects fixed cost increases driven by investments for sales growth and some unfavorable product mix.

Our fiber sales set a record in 2011, and we believe the market is on track to grow 10% or more in 2012.

The growth is fueled by wireless fiber in the home and infrastructure investments in emerging markets and economic stimulus activities elsewhere.

We're investing to meet this growth with investments in R&D for new products and capital efficient processes that will expand our capacity.

In Environmental, sales were $249 million, down 5% sequentially, which was weaker than our expectations.

Lower sales of light-duty diesel filters and substrates in Europe accounted for most of the sequential decline.

Net income Environmental was $34 million, compared to $40 million in Q1 and $32 million in 2011.

Year-over-year income was up 6% on slightly lower sales due to heavy-duty diesel gross margin improvement.

Specialty Materials sales were $296 million, up 3% sequentially and below our expectations.

Gorilla sales were up in the quarter, but less than we had anticipated.

Forecasting sales in any given quarter in IT and handheld has proven difficult.

The miss from expectations was due to a mix shift in orders late in the quarter that we could not react to.

We will get those sales in Q3 and Q4.

More on that outlook in a moment.

Net income was $34 million, up from $21 million in Q1, an increase was driven by continued improvement in Gorilla glass margins.

In Life Sciences, Q2 sales were $162 million, up 5% sequentially, and up from a year ago.

Net income was $11 million, consistent with Q1 and down slightly versus a year ago.

We continue to work with the government to get final antitrust approval for the BD acquisition; we continue to be optimistic we will get that approval soon.

More importantly we remain very excited by the transaction.

Now moving to Dow Corning, equity earnings were $61 million, up from $35 million in Q1.

Dow Corning did have two small nonrecurring gains, which approximately $11 million improvement.

Silicone sales were up slightly and margins improved due to manufacturing mix.

Polysilicon sales were up, driven by price.

Poly margin also improved.

I'd like to pause here and comment on the recent developments in China on polysilicon.

Ministry of commerce, MOFCOM, of the People's Republic of China, has initiated review of the United States and Korea manufactured polycrystalline silicon in response to Chinese polysilicon manufacturers' allegation that the companies like Hemlock Semiconductor Group have received unfair trade subsidies, and may have been dumping product in the Chinese market.

This review is part of a broader trade conflict, extending far beyond polysilicon solar industries as an escalating number of trade disputes have been initiated throughout the globe in the last year.

MOFCOM's investigation is expected to take 12 to 18 months.

Therefore at this time it's premature to speculate on any potential financial impact to Hemlock Semiconductor or Dow Corning.

Dow Corning and Hemlock Semiconductor continue to work closely with government officials from the United States and China to express the need for trade policies that acknowledge the dynamics and opportunities in new and emerging global industry, and are optimistic that a reasonable and mutually acceptable resolution is within reach.

Now turning to our balance sheet, we end the second quarter with $6.3 billion in cash and short-term investments.

Capital spending was $441 million in the quarter.

We also made the equity contribution of $104 million to our new Samsung OLED equity venture.

We had received a larger dividend from SCP in Q1, which essentially keeps Corning cash neutral on this new venture.

We're actually going to follow the same procedure for the new LCD glass factory in China that will supply Samsung's new panel fab in China.

Free cash flow to the corporation for the quarter was a positive $27 million, and as a reminder free cash flow is a non-GAAP measure.

A reconciliation to GAAP can be found on our website.

We also continued our share repurchase program during the second quarter.

We repurchased $314 million in the quarter, a much higher rate than quarter one, as we had guided you.

We ended the quarter with approximately $2.2 billion in cash in the United States.

As I mentioned in the Life Sciences section we have not received FTC approval for the BD transaction yet.

BD transaction will predominately be a US cash acquisition.

If the transaction closes this year, our US cash should end the year around $1.1 billion.

We expect capital spending for the year to be approximately $1.8 billion to $1.9 billion.

Capital spending in 2013 should be lower.

It could be above our previous forecast of $1.3 billion if we decide to pursue new process technologies for high-performance displays.

So, now I'd like to turn to our outlook and I'll start with Display.

In the third quarter the total volume of our wholly-owned business and SCP should be up in the low double digits sequentially as panel makers increase utilizations to supply the seasonally stronger retail demand in the second half.

Customers in our wholly-owned business have averaged lower utilizations throughout the first half so we expect volume in our wholly-owned business to have more upside sequentially.

At SCP volume should up sequentially, as well.

The obvious risks for volume are economic ones and sudden supply-chain reductions.

For glass pricing, as I've mentioned before, we expect our price declines to continue to be moderate in Q3.

Turning to Telecom, we expect sales to be consistent sequentially in line with normal historical seasonal trends.

We expect demand to be strong for fiber and cable and for enterprise solutions.

In environmental, we expect sales to be flat to up slightly driven by a seasonal uptick in light-duty vehicle builds.

Specialty Materials should have a very strong quarter led by Gorilla glass.

We expect sales to be up 10% to 15% sequentially, led by growth in IT and handheld Gorilla sales.

In Life Sciences, we expect sales to be flat to up slightly.

At Dow Corning we expect equity earnings to be down about 30%, driven primarily by the absence of the nonrecurring gains of $11 million in Q2 and seasonal plant shutdown-related expenses.

We do expect Dow Corning to begin paying some dividends to Corning again in the third and fourth quarter.

Now continuing on with the rest of the corporate quarter three forecast, we expect gross margin to increase by almost 1 percentage point, driven by volume increases in display.

SG&A and R&D will be consistent as a percentage of sales in the third quarter.

Equity earnings, excluding special items, should be down by about 10% sequentially.

Our tax rate for the year is forecasted to be around 19%.

For foreign exchange the yen has been relatively stable in Q1 and Q2.

We are hopeful there is no weakening.

As a reminder, our results move with changes in the yen to US dollar exchange rate.

A weaker yen lowers our results, a stronger yen helps.

So, if the yen average is 1 point higher or lower in Q3 we estimate our sales and net income would decrease or increase by approximately $7 million.

So that concludes my opening comments.

Ann?

Thank you Jim.

John, we'd now like to open the line for questions.

Certainly.

(Operator Instructions)

Rod Hall, JPMorgan.

Just a couple of quick questions.

One Jim, I wonder if you could talk a little bit about demand linearity through the quarter and how that progressed.

Trying to get a feel for how rapidly demand might be deteriorating particularly in Europe and in China.

And then I would also like to get some feel for the capacity situation out there.

I think you said that you have more or less fully utilized capacity.

How does that compare to the 25% capacity you guys took off-line a couple quarters ago?

Is most of that now reutilized or are you talking about more full utilization of the stuff that's already running?

If you could just give us some update on that.

And then lastly on that China JV, just a clarification, are you guys going to guarantee the loans into that JV or can you give us some idea how the loan mechanics work into that operation?

Thanks.

Sure.

So in reverse order on the new Chinese venture.

What's happening is Samsung and Corning are each putting in $100 million, approximately.

That will be funded for each of us by dividends out of SCP and then the remainder of the funding, $600 million, and I emphasize that's spent over time, will come from loans from SCP to the new venture and therefore will not have any guarantee from Corning.

So fundamentally, our cash going in is $100 million and that's $100 million extra that we're getting out of dividends from SCP, which is by way the exactly what we did with the OLED venture.

In terms of capacity our wholly-owned capacity is running at high utilizations driven by a combination of Gorilla and the uptick in LCD glass heading into Q3.

However if you recall the original 25% included our worldwide capacity and we still have significant capacity off-line at SCP.

In terms of demand linearity, I think your question was around Q2 and what we saw was weakening in light-duty filters in Europe pretty much consistently starting in April.

And in China the weakness in cars was really with the shutdowns that occur towards the end of Q2.

In Telecom we saw weakness throughout the quarter in Europe principally in our legacy products.

Okay.

And Jim just given you are seeing weakness here, are you guys -- you didn't say anything about your 230 million TV unit expectation for the full year.

Is that something that's under consideration or do you think it still makes sense at this stage to keep that number?

I don't think our forecast was ever 230 million.

It was in the low 220 millions.

I think there is some risk that it could be in the upper two-teens.

On the other hand the flip side is from an area point of view that's not hurting us because we're actually seeing stronger average sized television growth this year.

Okay great.

Thanks a lot.

Mark Sue, RBC Capital Markets.

Thank you and Ken, hope you feel better.

Jim just a question on the supply industry supply-side.

Do you think that the industry might consider and Corning might consider idling capacity after a near-term volume bounce in the near-term considering the North American seasonality and possible rebound in China, the [hoja] capacity study?

And subsequently what is the impact on price declines?

Should we think about more moderate pricing declines to continue from now till year-end or can we see a step function down if the supply-chain further reduces their inventories?

So in terms of industry capacity utilization, obviously our competitors will have to speak for themselves.

But for Corning we have the ability to throttle back relatively easily.

We always have a certain number of tanks that are coming up for their normal repair.

And so to the degree that we saw in the fourth quarter and the need to do that we can do that relatively easily.

Because there is always some tanks that we need to repair.

In terms of pricing, I'm delighted by the Q3 pricing that we basically have reached agreement with almost all of our customers already.

I'm not giving guidance for Q4 at this stage but we are quite hopeful that we will be able to again have Q4 pricing be moderate.

Clearly that's our goal.

Got it.

And then separately just the Telecom business seems somewhat resilient.

Does it feel that business might, the trends there continue, or do we come out somewhat peak and do they actually become impacted by the macro themselves, the telecom side?

Maybe your thoughts of telecom sustainability, maybe beyond the near-term.

Well the positive news for Telecom is that we think we are on the right side of the optical substitution transition with most of our products.

And so compared to a lot of other telecom equipment providers we have that going for us.

The flip side, we're not immune to the macro environment.

We started to feel that as I mentioned in Europe and we've seen some projects we expected to happen, happen at a slower pace.

But fundamentally, we feel very good about where we stand with our products.

Demand for fiber remains very strong, particularly in China.

We have good fiber to the home visibility.

The Australian project regrettably is starting slower than what we expected and we probably should have remembered that because Verizon did also originally.

But we feel pretty good about Telecom.

I think our biggest worry would be Europe in Telecom.

That's helpful.

Thank you.

Good luck, gentlemen.

Wamsi Mohan, Bank of America Merrill Lynch.

Ken, I hope you do better soon.

Jim can you address the need to set up another LCD glass melting operation in China.

You characterized this market at the last analyst day as a mature market, sort of flattish over the next several years.

I'm sure you have extensive analysis to support this but can you share maybe what is the cost differential to a panel maker if you shipped from Sakai which is running at low capacity utilizations or frankly SCP, versus making a local in China?

And also, you have other operations in Beijing.

Could you talk about the ramp-up of that facility too?

That's a very complicated question, so I'll take a shot at it.

As you recall in China when Chinese government requested applications from the panel industry to build several years ago, there were nine applications and I think five were approved.

They have been phased I think appropriately by the various panel fab manufacturers on a very delayed manner.

So we basically have BOE up and running, China stars up and running, and none of the other new ones are really running.

So Samsung had received approval for their Gen 8.5 panel fab.

They have started construction but it's on a much delayed basis from what they originally planned.

This new facility is a small facility and it's located very close to theirs, will be built in phases, and only as they need it.

And so it's not like we're turning it all on at once.

The same thing is true for our Beijing facility.

We are actually going to write up a capacity in the second half of this year but it will be on a very phased basis.

We can ship in from Korea to Samsung.

It would not come from our Japanese facility.

And they could do that.

I won't comment on the economics, but clearly Samsung very much wanted to have a glass facility built there next to their fab.

But we are going to be very, very careful in our managing our overall capacity.

And I will comment that at SCP we expect capacity to remain significantly idled with the loss of LG share.

Jim, thanks.

What equipment are you specifically expecting to move from SCP to China?

We are not giving out that detail at this stage.

Okay.

And on the specialty side, sales came in a little below expectations.

You alluded to mix shift and others.

Can you give us anything a little more specific over there?

Was it just the relative sizes that impacted volumes.

So you had a more mix towards smartphones as opposed to tablets in the quarter.

I'm sorry I'm not at liberty to give you more detail.

I can just say that in the last month we received the surprise that the customer wanted a different product shipped and we had to scramble to try and make that and we couldn't get it done in the month of June.

Okay thanks, the last one for me.

Have you seen any incremental activity in designs for Gorilla particularly as it relates to automotive and anything related to Windows 8-based applications?

Thanks.

In terms of auto, we are working with several car manufacturers and are quite hopeful that we will get something designed in.

As we've said before, the pace of the auto industry is quite a bit slower compared to consumer electronics.

We are working with a number of people on touch devices.

And I think people are hopeful about the impact of Windows 8. But I really can't give you any quantity forecast.

Thanks Jim.

Amir Rozwadowski, Barclays

Jim when we were going over your commentary on [ASVs] and progression of in terms of the marketplace, it does seem as though the shared issue that you folks were dealing with earlier this year and late last year now seems to be behind you folks.

Is that an appropriate characterization?

Yes.

I mean it's very obvious that we lost significant share in LG last year and it's no secret that was the customer.

But I think by and large, we think shares have been relatively stable.

In any given quarter they can move up and down a little, particularly because some customers may run at higher utilizations than others.

But right now we think the share situation is relatively stable and it is our goal to maintain our share.

Okay, so going forward in terms of your expectation you don't see any potential additional sort of potholes or anything along those lines that could cause material fluctuation in terms of your share?

I'm not expecting any.

I don't have a perfect crystal ball Amir, but I would say that I'm not aware of that.

And I think what I'm delighted by, our display team in heading into quarter three has reached agreement with our customers, we are quite hopeful that with the utilizations ticking up in Japan that will be good for us.

So not expecting any share potholes and as I said our goal is to maintain our worldwide share.

In any given quarter, it can move up and down a couple points but generally that's what we expect to have happen.

Okay that's very helpful Jim.

Then in thinking about overall demand environment, you did mention that you expect utilization to pick up in the back half of this year as we head into the fall selling season.

What are your expectations around the fall selling season and the holiday selling season this year.

Are you expecting, embedded in your guidance, typical seasonality or are you taking it a notch lower with respect to the current macro environment?

I think it varies region by region.

US, we are expecting to see relatively consistent unit growth.

We are expecting to see the larger televisions do better as they have all year long.

I think the place, as I indicated in my comments, that we have the most concerns about would be China, as to what the growth rate there will be in the back half of the year.

And then if not in China, as you know it's not a traditional fall retail season like it is in the United States and Europe.

And I think that's the one that we are most concerned about.

In Europe, we are not looking for robust unit sales although as I mentioned, we are delighted that last three months have been year-over-year, units have been up and area even more strongly in Europe.

So that's good news.

Okay.

That's helpful Jim.

Then lastly we've seen you folks put some of your cash to work either through acquisitions, obviously we are seeing some of the setups on the JV side, as well as a pickup in terms of your buyback this quarter.

In the past, you guys mentioned that you're going to be more proactive around utilizing your cash balance.

Any other developments that we could expect to hear on that front?

Has you are thinking at all changed with respect to using your cash on shareholder return initiatives or anything along those lines?

I have nothing to announce today.

We still have some money left on our share repurchase.

Obviously we would love to close the BD deal.

We are looking at some smaller acquisitions from time to time in telecom but there is nothing imminent.

We shouldn't be looking for any announcement right away.

But we are very alert to trying to improve shareholder returns and so I'm sure we will be discussing that as the year progresses.

Great.

Thank you very much for the incremental color, Jim.

Steven Fox, Cross Research.

Two questions, Jim.

First of all, in terms of the outlook for the wholly-owned glass business, is the thing driven more by one or two customers especially one that's underutilized into the third quarter?

And then secondly on the Gorilla glass outlook, any color you can provide in terms of units versus area, in other words are you seeing it being driven more by tablets in the second half or at least in this coming quarter?

Any color on those two issues would be helpful.

Thanks.

I don't have any unit data that I can give you on Gorilla, I'm sorry.

In terms of outlook for our utilization in our wholly-owned business, we obviously are expecting a significant increase in Japan.

But we are seeing utilization ramp already at our Taiwanese customers and in China.

So it is really relatively across the board in our wholly-owned business.

Obviously there's some customers we have stronger positions with and when they ramp up it helps us more.

Great.

And then maybe just to ask the Gorilla glass question a different way -- relative to your expectations for the quarter going forward how are you factoring in the economic environment into the demand for handheld devices where Gorilla is designed in?

As you know, we have difficulty forecasting Gorilla.

And on the positive side is we continue to feel smartphones are growing, continue to feel touch is prevalent on smartphones.

We are not feeling any competitive loss there.

The downside is it's hard for us to tell whether the economy is in fact going to impact phone sales.

We think tablet sales are relatively strong.

There obviously are from time to time model changes that influence quarters but we are not sensing economic weakness in the Gorilla business but it is a very difficult business for us to track because the supply chain is much more complicated than it is in display.

Okay.

Fair enough.

And of course, all my best wishes to Ken and his family.

Thanks.

Thanks, Steve.

Amitabh Passi, UBS.

Jim, I think this morning one of your Japanese competitors reported and guided for flat volume in the September quarter versus your low double-digit increase.

Should we take that to mean that you're potentially getting share in the third quarter relative to your competitors and what does that imply in terms of downside risk to pricing is removed through the rest of the year.

And then just as a follow-up you talked about some capacity still left in your share buyback plan.

Can you just remind us how much is left in your buyback plan?

On the latter question, I think about $300 million is left in the existing buyback program.

On our competitor's announcements this morning I think you should talk to them.

The thing for you to think about analytically is their customer portfolio and what's happening with their customers.

Okay.

(multiple speakers) -- what's happening with our customers.

I do not anticipate that we are going to experience anything other than moderate price declines as we talked about.

Okay appreciated.

Thanks, Jim.

Ehud Gelblum, Morgan Stanley.

Jim, couple questions.

First, on Dow Corning a little bit aside from the current conversation, did I hear you correctly incentive volumes and margins were up, competitors like [Bocker were] down and expect from the macro that Dow Corning should be doing probably a little bit worse?

Just trying to understand the correlation.

I know there was the one-time, but in terms of revenue it sounds as though revenue was doing better there.

So wanted to understand it.

Did I misunderstand something or is something else going on there that is maybe one-time in nature or what is the difference there?

Then on SCP, I think you mentioned something about signing a multi-quarter deal with I believe it was a new customer -- I'm not sure if it was a new customer or existing customer, but if you could give us some more clarity on that, that would be great.

And then can you give us an update on the Gorilla side, how the yield improvements are impacting your long-term growth.

I understand that in the near-term there was an impact to mix in Q2 that you couldn't supply and therefore that might be why it's so strong in Q3 but if we expand over multiple quarters, if you can help us correlate your previous comments on yield improvements over the last couple of quarters to what we should be expecting from Gorilla going forward.

So I will try to get those questions.

So on Gorilla, over time our customers are improving their yields as they take our glass and finish it.

We do not believe that that yield improvement had any impact on the Q2.

We think we had more significant impact from yields last year and we think it's a more gradual improvement.

The comment on Q2 was really around a mix related with customers changing their orders from one thing to another very late in the quarter and we just couldn't react quickly enough.

At SCP, it's an existing customer that we signed multi-quarter deal with.

Dow Corning is a complicated company but our silicone business had volume increases and also had the benefit of, thankfully, some lower raw material cost structure.

On the polysilicon side what we saw was slightly higher prices in the quarter.

Polysilicon, which is perhaps the one that has more comparisons to Bocker -- it's a very difficult industry to predict right now because of what's going on in the solar industry.

But we think that Hemlock did quite well in the most recent quarter.

But it's a really hard industry to predict right now.

Great.

As a follow up, was it the mix shift in Q2 that is causing the strong growth into Q3 or is it the seasonal trend?

I'm sorry.

Relative to Gorilla?

Correct Your guidance for Q3 is strong for Gorilla and I'm wondering if that is seasonal or that's because you couldn't meet some demand in Q2 because of this late quarter mix shift and therefore that got pushed into Q3 and we're seeing a one-time bump.

No.

We don't believe it's a one-time bump.

We think it's related to strong end-market demand for our products, our customer's products using the glass.

Okay so we should be assuming that the yield improvement story that was an issue before is less of an issue like you said before and therefore we should be assuming nice strong growth for Gorilla going forward.

Hope so

Okay.

Appreciate it.

Thanks.

Jim Suva, Citibank.

Thank you very much to Corning and you and your team there.

My first question has to do kind of just a bigger picture Jim as you look at the capacity expansions.

Can you help people better understand the concern about excess supply coming into the industry of glass as there is quite a bit of idled capacity today and we know you we hear you talk about coming in with very measured ramps.

But can you talk to us about the strategy of going into China?

Is it more so that the customers are kind of strong-arming you into it or how come this industry isn't going into permanent oversupply.

In the case of our new venture in China, our customers are partnered with Samsung.

And this has been known, we actually have talked about this for quite a while.

I think investors kind of hoped it wouldn't happen but we've always known it would happen at some point.

Clearly Samsung will make their own announcements about the timing of their panel fab there but I think you should expect this not to be a sudden giant increase in capacity for the panel or the glass industry.

We are building a factory to supply Samsung; it's a small factory; it's going to be relatively close to them.

We're going to be very measured about how fast we ramp -- spend the money first and ramp the tanks.

We're doing the exact same thing in Beijing.

We're being very measured about how we bring up the capacity.

I don't think you should expect us to do any further capital spending for glass in Korea or in our wholly-owned business in Japan or Taiwan.

I think any capacity increases that we will get over the longer sweep of time will be around a productivity principally from Thin.

I think that's by and large, my observation's probably true for the industry as a whole.

I don't think you're going to be seeing a lot of new footprint there.

So you should be thinking that this glass factory in China is very big and I will remind you that there is a significant amount of capacity in Korea that is off-line and likely to stay off-line.

And as my quick follow-up, when you mentioned that gross margins for the Company in total is going to increase about 1 percentage point.

That's pretty good news.

Is the strength behind that mostly driven by the increase of your wholly-owned utilization or is it a combination of other factors -- the strength from the wholly-owned last side of display?

It's clearly the wholly-owned business with good volume growth this upcoming quarter, again moderate price decline should help our gross margin.

Thank you.

Congratulations to you and your team according.

Thanks, Jim.

George Notter, Jefferies and Company.

I was curious about the decision to formulate a joint venture with Samsung in China.

I think you certainly have the option to try to take the business to your wholly-owned division.

What was the rationale there?

Any flavor would be helpful.

Thanks.

Well I think we talked about before for Samsung when our original agreement, which is now almost 20 years old with them, they had the right if they wanted to put a panel operation in China that SCP could ship into them in consultation with them, we decided a better answer would be to build a new venture there.

A small one and supply directly rather than ship in from Korea.

But I am not at liberty to give you much more details than that.

But they always had the right to self supply their panel fab in China from way back in 1995 when the original agreement was put in place.

Thanks.

Carter Shoop, KeyBanc Capital Markets.

This is [Steve Shu] filling in for Carter.

Thanks for taking my question.

Can you guys talk about how your environmental tech division is positioned for the transition towards natural gas for the heavy duty truck sector?

We are not expecting much, a significant switch in that at this stage.

But clearly it could have an impact on the demand going forward because you don't need a diesel-particular filter.

But we are not expecting a significant shift at this point in time.

Okay thank you very much.

Simona Jankowski, Goldman Sachs.

A couple of questions.

First, I think you mentioned that half of your glass is now thin.

Do you have an expectation of where that might be by year end or by next year?

And then secondly, on the China JV how much capacity do you think that will add to your combined wholly-owned and SCP capacity?

And also when you talk about the $100 million investment there, is that just a net reduction to your free cash flow or is there any other offset to that that you can have a by reducing your capital intensity elsewhere?

On the investment in the new glass venture there what you will see is a higher dividend from SCP for an extra $100 million sometime in the back half of the year and then we will turn around and put that into the equity portion of the new China factory.

That is the only Corning financial impact and so essentially neutral and free cash flow over the course of the back half of the year.

I don't have the exact timing of which quarter it will fall.

But we could get the dividend in one quarter and the investment in another but essentially it's neutral to our free cash flow for the new venture.

In terms of Thin, we are not giving out a forecast but we continue to expect that every quarter the percentage of glass going thin will increase and it will do so again next year and the year after.

Ultimately, we will get to a point where almost all the glass will be thin.

And in terms of how much of capacity will increase overall with the China JV?

It's a very small number.

We're not giving out the exact number but it's a small number.

Okay, thank you.

Jagadish Iyer, Piper Jaffray.

Two questions, Jim.

First, how should we think about the mix between the Gorilla Glass 1 and the Gorilla Glass 2. Is there a qualification cycle or is it a seamless replacement and then is it fair to assume that 2013 will be majority of Gorilla Glass 2 and then I have a follow-up.

The answer to the latter is yes.

What we find is the transition is generally around a model change.

People very rarely have an existing model that has one glass in it and then will change to another.

So we've been going through this but the transition is going seamlessly and customers are enthusiastic about Gorilla Glass 2.

And this year do you think, can you give us some idea about the mix between Gorilla Glass 1 and 2, please?

We are not disclosing that.

I'm sorry.

Okay.

Just a quick follow-up.

You gave some thoughts on the stimulus in China for the second half of this year but you also mentioned there is some risk from China.

If you look at the track record in terms of what the stimulus has done in China there was a big uptick in LCD a few years ago.

But can you kind of give in that context how do you see in terms of how things are most likely to play out this time versus the last time?

So it's a tricky thing to judge because when that stimulus was done three years ago, originally the penetration of LCDs was much lower than it was today.

But it's our belief that this will have some impact because the spread of LCDs is still moving, I'll characterize it westward in the country.

And so we think it will be positive but maybe not as big of a pop is what we experienced when they rolled it out three years ago.

Thank you.

John, I think we have time for a couple more questions.

Medhi Hosseini, Susquehanna International

Two questions.

One on balance sheet.

Jim, how should we think about the free cash flow either in terms of absolute value or margin in the second half of the year?

And I have a follow-up.

We expect free cash flow -- it's really two components.

So I'll first say that we think operating cash flow will continue to be excellent in the third and fourth quarter.

On free cash flow, it will all depend on the timing of the closing of the BD transaction.

So if it closes in the third quarter it's obviously a very big outflow.

Displays in the fourth quarter would affect that one, but other than that we expect strong operating cash flow and I don't think our capital spending will be all that different in the quarters going forward.

Sure.

But on the blended basis for the second half should we expect free cash flow margin of mid single-digit?

I'm sorry we are not quantifying the forecast of free cash flow.

Okay.

And moving on to your comment about the total number of TV shipment for this year low 220 million.

To what extent are you concerned that there may have been demand pulled in due to Olympics or do we need to be even focusing on this given how Olympics have played into the TV shipment in the prior years?

It's always difficult for us to judge exactly sporting events and the impact on television demand.

I would say compared to prior Olympics, remember the Chinese Olympics, I would say there is much less talk about the Olympics being a big driver in televisions this year.

We do suspect there was some influence because of European soccer earlier this year may have had a little bit of influence, but we are not expecting as much of an impact from this Olympics as we did in 2008 with the Chinese Olympics.

Got it.

Thank you.

Andrew Huang, Sterne Agee.

Correct me if I'm wrong but I thought I heard you say that SCP would be transferring some equipment from Korea to Suzhou for the new JV.

So first is that correct and can we take that to mean there would be very little net increase in glass capacity?

They are transferring a small amount of equipment but as I've said several times now the capacity from this new facility which is still quite a ways in the future is not a very large amount.

Okay and then as a follow-on question, I think you mentioned at the last minute there was a change in demand for Gorilla glass.

Can you give us a little more color on what that change was?

We have a customer who had ordered a particular products in Gorilla and then reduce that and changed it -- mixed into other products and we were unable to respond quite fast enough.

Okay thank you very much.

Thanks, Andrew and thank you, Jim.

Thank you all for joining us today.

A playback of the call -- I'm sorry, Jim go ahead.

We have one more announcement before we wrap up.

We do have one IR announcement.

We will be speaking at the Citi Technology Conference on Thursday, September 6, in New York City.

Just like to offer one summary comment about our quarter.

I think we're making progress on our plan to form bottom and display.

We've had one quarter of moderate price declines behind us and we're executing on another quarter of that.

We will only know for sure when we see bottom in the rear view mirror but I actually feel very good about our progress so far.

Our other businesses are on track to gross sales and improved profitability.

Obviously we are not happy with increasing economic headwinds affecting some of them.

The worry is that economic headwinds make the march-up results perhaps be slightly smaller.

So we can't control the world economies but we can control our costs and we tend to do so when we see more weakness.

We look forward to updating you at the end of quarter three.

Ann?

Thanks Jim.

A playback of today's call is available beginning at 10.30 AM Eastern Standard Time and will run until 5 PM Eastern Standard Time on Wednesday, August 8. To listen dial 800-475-6701.

The access code is 253774.

Of course an audio cast is available on our website during that time.

John, that concludes our call.

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