康寧 (GLW) 2012 Q3 法說會逐字稿

Welcome to the Corning Incorporated quarter-three 2012 results conference call.

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

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

(Operator Instructions)

As reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Director of Investor Relations Ann Nicholson.

Please go ahead.

Thank you, Greg, and good morning.

Welcome to Corning's third-quarter conference call.

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

Wendell Weeks, Chairman and Chief Executive Officer, will join us for the Q&A.

Before Jim begins, 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.

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

These factors are detailed in the Company's SEC reports.

Now I'd like to turn the call over to Jim.

Thanks, Ann.

Good morning, everyone.

As we enter the fourth quarter, I would like to step back a little to reflect on the past 12 months for Corning before I cover the Q3 details and the Q4 outlook.

Corning's identity and strategy have been in place for a number of years, and remain unchanged.

We are the world leader in specialty glass and ceramics.

We grow primarily through internal innovation led by our R&D and material science and process engineering.

This focus allows us to innovate and create keystone components that establish market-leading positions in a variety of industries.

Now, we pursue this vision by adhering to a strategic framework which guides our decisions and helps us navigate good times and their opportunities, as well as the potential volatility of our industries in the macro environment.

We emphasize different parts of this strategic framework in response to changes in our environment.

The best current example of the framework helping us is our ability to push forward on innovation, and develop new businesses like Gorilla, and to also fund shareholder-positive actions despite a weak macro environment and turmoil in the LCD and photovoltaic industries.

Now, one year ago when we entered the fourth quarter of 2011, we were experiencing significant changes.

On the positive side, our financial health and declining need for capital expenditures led the Board to act to return more money to shareholders with a 50% increase in the dividend and starting a $1.5 billion share repurchase.

We were also experiencing positive momentum in our Telecom, Environmental, Specialty Materials segments led by increasing sales and improving margins.

However, on the negative side, we had experienced a significant share loss at a large LCD customer in Korea, and also were entering into what turned out to be a two-quarter period of significant price declines for LCD glass.

And at Dow Corning, our equity venture, we began to experience a collapse in the pricing of polysilicon for the solar market.

These events led us to announce to investors at the beginning of 2012, the Company would experience a reset to a lower level of profitability.

We laid out a plan for 2012 of forming bonds, primarily by stabilizing display performance and returning positive momentum to this segment.

And also by marching up, improving our earnings by growing sales and improving margins in our other segments.

We felt, and continue to feel, this plan will result in a return to earnings growth for Corning.

Now I'd like to give you a brief summary of our progress against this plan before I turn to the Q3 results.

I'm pleased to say we made good progress against these goals, especially in light of the current global economy.

We've held LCD glass pricing to moderate declines in Q2 and Q3, and we now have new agreements with key customers that we believe will stabilize our share, all the while diligently managing our LCD glass capacity to the level of demand.

I will discuss the new agreements in more detail later.

We've also had some positive revenue and earnings momentum in our other segments.

So, while Telecom will likely not meet our internal growth goals for the year, it remains well-positioned in key growth markets when the economy picks up.

As of Q3 year to date, Specialty Materials sales are up 13%, and even more in gross margins.

And with the pending close of Discovery Labware acquisition in Life Sciences, it will become nearly a $1 billion business.

Our Environmental business is feeling the effects of slowdowns in the auto business in Europe, and now the Class A truck industry.

But I would like to remind you that earlier this year, we secured long-term agreements with key diesel customers, positioning us for future growth driven by diesel engine regulations.

And we have several innovation programs with the potential for explosive growth.

So, we continue to feel good about the growth prospects of the non-LCD businesses, our innovation portfolio, and the expected free cash generation of Display in the Company as a whole.

These strengths, coupled with our continuing financial strength, led the Board to increase the dividend by 20% earlier this month.

Now, we've also expressed some worries about the economy on both our Q1 and Q2 calls, and unfortunately some of these are now coming true.

We are now at the point where the macro economy is weakening, affecting sales across most of our businesses with several not achieving the growth we had laid out at the beginning of the year.

We believe this weakness will continue into next year.

Therefore, as part of our plan to grow earnings, must be to contain costs.

We are currently thinking through several cost-cutting measures including slowing project spending, trimming fixed costs through restructuring, which will likely include headcount reductions, and slowing capital spending.

We have not made a final decision yet, but we anticipate taking a pre-tax charge of up to $50 million in the fourth quarter.

Now I'll turn to the third-quarter details.

I'm pleased to announce our results.

Both sales and earnings per share were above consensus for the quarter.

Third-quarter sales were $2.04 billion, up 7% versus Q2, and down 2% from a year ago.

Having sales above consensus has been a feat this quarter, and I'm very pleased that we did it.

Gross margin was 43%, up about 1 percentage point, as expected.

Higher volumes in Display and Gorilla Glass drove the improvement.

SG&A and R&D were flat on a dollar basis.

Versus a year ago, SG&A was up as a percentage of sales due to the non-repeat of two events that occurred in quarter three of 2011.

We had credits then resulting from a reduction in contingent liability associated with an acquisition in Telecom, and we also had reversed an accrual for performance-based compensation.

Equity earnings were $230 million excluding specials, and were down about 11% sequentially and in line with expectations.

EPS excluding special items were $0.34, that's 10% higher than Q2, but obviously a material decline from a year ago.

EPS as stated here is a non-GAAP measure, and a reconciliation to GAAP can be found on our website.

Now I will turn to our Q3 segment results, and I'll start with Display.

Display sales were $763 million in Q3, an increase of 19% sequentially and down 6% versus last year.

The [n] exchange rate was not a factor comparing Q2 and Q3.

Equity earnings from our joint venture in Korea, SCP, were $187 million in Q3, an increase of 2% versus the second quarter.

For your modeling purposes, SCP's third-quarter LCD sales were about $745 million, an increase of 1% from the second quarter.

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

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

As we expected, LCD glass price declines in Display were moderate in Q3 at both our wholly-owned business and SCP.

LCD glass volumes also met expectations.

Our wholly-owned business volumes were up about 20% sequentially, driven by customer utilization increases.

Volumes at SCP were up in the mid-single digits sequentially, in line with their customer utilization rates.

The combination of moderate price declines, high capacity utilization from the higher volumes, solid manufacturing execution, led to an increase in gross margin in net income sequentially.

On the supply-chain front, we have come through Q3 inventories about 15.5 weeks on a forward-looking basis.

Because Q4 is seasonally larger, these weeks of supply are actually misleading.

We believe the supply chain built a little over 350 million square feet of inventory through the first three quarters in preparation for this seasonally strong Q4.

I will comment more on the outlook and risk in supply chain in my outlook session.

As final retail data for Q2 has come in, and Q3 begins to come in, we are now lowering our view of retail glass demand to be approximately 3.5 billion square feet.

The reduction is from the continuing sluggish worldwide demand for monitors -- we now believe monitor demand will decline year over year versus our previous view of flat -- and the reduced demand for television units.

TV units are tracking to about 208 million units into retail, a slight year-over-year increase.

The good news in the television market is that large-size televisions continue to sell well, driving the average screen size higher.

If we compare our forecasted TV units at the beginning of this year and now, the increase in size has made up for 60% of the unit shortfall as measured in area.

As I said in July, we believe the China region is our biggest risk.

China has been tracking below our forecast overall in the first half.

However, the new stimulus program implemented in August seems to be driving demand.

Preliminary August units were up 14%, and early indicators on their Golden Week holiday sales appear in line with our expectations.

We'll have some additional data on retail and our 2012 expectations in the appendix section of our slides, and you'll find them posted on our Investor Relations website later.

Telecom sales were $523 million, down 6% sequentially, and lower than our expectations.

The sequential decline in miss versus expectations was largely driven by lower sales in North America and Europe, offsetting growth in China.

Europe's miss is mostly due to the softer economy; North America was down due to project delays and a second-half decline in stimulus spending on optical cable in support of infrastructure projects.

Compared to last year, Q3 Telecom sales were down almost 7%, with strength in China offset by the lower sales across most product lines in North America and Europe.

Net income for the quarter was consistent with Q2.

Compared to Q2 of 2012, the impact of 6% lower sales was offset by improvement in manufacturing performance and a reduction in operating expense spending.

However, net income was down year over year by 57% or $47 million due to the non-repeat of the contingent liability reversal from M&A of $22 million in Q3 of 2011.

In addition, the compensation adjustment I already mentioned.

Environmental sales were $233 million, down 6% sequentially versus our expectation of flat to up slightly.

While we did see some sales increase in light-duty diesel after Summer shutdowns, our orders for heavy-duty truck products declined substantially as our customers reacted to their negative net orders over the past six months, and also began to manage inventory in lieu of slowing sales.

Q3 sales were down year over year due to lower sales in light-duty diesel.

Net income was down sequentially, in line with the lower volume in heavy-duty diesel.

Year-over-year net income was consistent on the lower sales due to the improving heavy-duty diesel gross margin.

We had another very good quarter in Specialty Materials with sales up 23% sequentially, and higher than our expectations.

Gorilla Glass sales hit a new quarterly record.

Net income was up 74% sequentially, 55% year over year, driven by the continued improvement in Gorilla gross margin.

I'm delighted to say there are now more than 1 billion devices worldwide containing Gorilla Glass.

It continues to be the cover glass of choice, with more than 33 brands as our customers.

We believe the increased Q3 volume beyond our expectations was driven by new device introductions in IT and handheld.

In Life Sciences, Q3 sales were down sequentially, and worse than our expectations of flat to up slightly, but they were consistent year over year.

The lower sequential sales were due to softening economy impacting end-market demand, and also distributer inventory carrying levels.

Net income was $9 million down from Q2 on lower sales and higher M&A expenses, and also down versus a year ago due to these M&A expenses and foreign exchange rates.

We are working with the government to get antitrust approval for the BD acquisition.

We expect we will get this approval very soon.

More importantly, we remain excited by this transaction.

After we close the deal, we will provide more details on our plans.

Moving to Dow Corning, equity earnings were down 38% ex-specials in Q3, mainly due to the lack of two nonrecurring gains from Q2, and also a higher effective tax rate in the United Kingdom based on tax law change.

Sales of polysilicon were down on exports of solar to China.

Our speculation is this is due to the trade disputes.

Versus a year ago, silicone sales are up slightly, but polysilicon sales are much lower driven by dramatically lower pricing due to the continued softness in the solar market.

This is reflected in the year-over-year equity earnings decline of 57% ex-specials.

Now, in Q3, Dow Corning also recorded a $20 million NPAT credit for contract settlement.

Corning chose to not reflect our share of this gain in our non-GAAP earnings for the quarter.

Dow Corning did resume paying dividends in Q3; Corning received $50 million in dividends in Q3 from Dow Corning.

Moving to the balance sheet, we ended the third quarter with $6.4 billion in cash and short-term investments.

Capital spending was $422 million.

Free cash flow for the quarter was a positive $214 million.

As a reminder, free cash flow is a non-GAAP measure, and a reconciliation to GAAP can be found on our website.

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

We repurchased $187 million shares in the quarter, leaving us with about $125 million left on the authorization entering Q4.

We enter the quarter with approximately $2.36 billion of 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 be primarily a US cash acquisition.

If the transaction closes this year as we expect, our US cash should end the year about $1.4 billion.

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

Our current expectation for capital spending in 2013 will be $1.3 billion.

Now I'll turn to our outlook, and I'll start with Display.

As we near the end of October, input from panel makers indicates continued strong utilization levels that, if maintained, would result in a Q4 glass market sequentially of flat to down low-single digits.

However, our top-down look based on retail demand trends and the level of inventory leads us to a view that the Q4 glass market could decline sequentially between the low-single digits and the mid-single digits, or slightly worse than the panel makers input to us.

We're basing the guidance for Corning on this top-down look at the market.

Based on this view, we expect volume of our wholly-owned Display business and SCP to be flat to down low-single digits.

Our new agreements with key customers, stabilized share at specified levels will help achieve this volume performance.

For glass pricing, the new agreements we have entered into have mechanisms that establish a relationship between Corning's price and the market price.

These new customer agreements will assist us in maintaining Corning's market position at specified levels.

We believe these new agreements will allow us to manage our capacity more efficiently, and enable us to continue to improve on our cost position.

However, as a result of the agreements, we do expect slightly higher price declines in Q4 than the prior two quarters.

We expect to maintain high levels of utilization at our wholly-owned manufacturing sites as a result of these new agreements, and have no plans to expand LCD production capacity beyond our committed supply.

Our new LCD facility in Beijing is now melting glass, and we are shipping in Q4.

This facility provide our Beijing customer with outstanding local service, while allowing us to direct capacity in Taiwan and Japan to the very rapidly growing Gorilla Glass business.

To close on Display, and I'm sure just until the Q&A portion of this call, as the LCD industry continues to mature, we believe going forward we'll enter a new era marked by more stable share and slowing price declines.

We believe our customers will benefit from our recent actions, as it stabilizes supply and allows us to invest in innovation for their current and future technologies.

Moving to Telecom, we expect Q4 sales to be consistent versus Q3 with normal seasonal declines offset by realization of some of those delayed projects from the third quarter.

We believe our Telecom sales will be up in the low-single digits for the year, obviously less than our original expectations established in February, but solid nevertheless, given the European economy and slow downs in some projects.

Environmental, we expect sales to be consistent to down slightly sequentially with some seasonal decline from auto customer holiday shutdowns.

Specialty Materials should have another strong quarter led by Gorilla Glass.

We expect sales to remain at the high level of Q3 led by growth in IT and handheld Gorilla sales, offsetting slowing sales of our semiconductor products.

Life Sciences, we expect sales to be down about 5% on normal seasonality.

At Dow Corning, we expect equity earnings to be up about 25%, driven primarily by a tax rate decline.

Now, continuing on with the rest of our Q4 forecast, we expect gross margin to decrease by almost 1 percentage point, driven mainly by pricing in Display.

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

Equity earnings excluding special items should be down about 5% sequentially.

Our tax rate for the year will be about 19%.

For FX, the yen has been relatively stable for most of the year.

We are hopeful there will be no weakening.

As a reminder, our results move with changes in the yen to US dollar exchange rate -- a weaker yen lowers our results, and a stronger yen helps.

If the yen averages 1 point higher or lower in Q4, we estimate our sales and net income would increase or decrease by approximately $6 million.

That concludes my opening comments.

I'll turn it back to Ann.

Thank you, Jim.

Operator, we'd now like to open the lines for questions.

(Operator Instructions)

Mark Sue, RBC capital.

Jim, if we consider LCD TV penetration rates it appears future LCD demand will be increasingly driven by replacement and more and more it does seem the macro can extend replacement rates for LCD.

If we add to this the concerns on monitor demand which is tied to PC units, which has turned negative, I'm wondering if glass volumes may not grow next year unless the environment gets better.

Maybe just your preliminary thoughts on volume growth as we move forward.

That would be helpful.

We are planning on volume growth next year in the business.

Obviously, that's somewhat dependent on where the supply-chain ends this year and the amount of inventory.

As I indicated, they built quite a bit.

But we believe that we will see growth in the glass market next year.

We think televisions will growth and we have to keep reminding everybody that size matters here.

The fastest-growing segment is the 50-inch and above.

Obviously that is a lot more glass for us.

One thing that is very interesting about the television market this year -- sales of televisions below 30 inches, the units are actually negative year-over-year, and that is making it look like a television unit growth is not as great.

Obviously could be influenced by tablets but when you look at the 30 to 40, 40 to 50, and 50 and above we're seeing good growth rates and if you take out the small size you are seeing good user growth and obviously the area is really helping us.

So we are planning on the glass market growing next year.

And we will give out a number in January after we see how the supply chain finished the year.

If I could add to that, I think if you take a look at this year, which certainly hasn't been the easiest economic environment ever, and it's easy to forget that with the price moves down in LCD, because you're not seeing the revenue growth, volume growth is actually quite robust.

And there is nothing about that dynamic other than you can have in a given quarter or two supply chain moves one way or the other that we think changes going forward.

There's going to be more displays sold in the future than there are now and it's going to continue to be robust and the key thing is getting pricing stable and continuing to drive new apps.

And the pricing, the changes that you just made earlier on in the year we made some price changes and we saw moderate price declines.

We're going to see a dip in the near-term with the new price agreements.

How does that revert once we start the year -- does that normalize and so the net of it for the full year is still a lower moderate rate of declines for overall pricing?

We certainly hope so.

Perhaps it would help if we explained in a little more detail how it is our agreements with customers are working and what has changed.

Let's start with the way previous agreements worked.

We would set a price, we would go out with a price and then usually competition would have to price under us to get share.

Now, over time, our premium would build up with this approach, leading to share volume and price volatility.

Usually in times where supply and demand got a little bit off kilter.

Now, let's talk about our approach now.

What we have done with these new agreements is to set our market share and set a fixed relationship between our price and the market price.

Now, with the agreements that are starting in quarter four, there will be an initial correction to take into account the premium that had built up under the old agreements and that is captured within the guidance you heard from James.

Now let's talk about going forward.

If you just think through the game theory and think through how these things actually work, logic would lead you to conclude that this new approach should give us steady share at the customers, and allow us to smooth our operations as well as reducing price volatility.

Of course, the underlying foundation for all of this is always managing glass supply to demand.

Now as we look forward, barring supply chain motions in any given quarter, we expect very high utilization and we are not planning to expand our capacity beyond committed supply.

And on the supply and demand, also I think something people don't always think through is what we have done to create more balance.

So first, we are getting the increased capacity to serve the growth in the display industry from increased productivity, a combination of thin as well as running better.

So that has continued to improve the supply level.

Our costs tend to be by the pound and we sell by the square foot.

Now as we increase our output, what we are doing is we're freeing up capacity to serve the high-growth Gorilla market which we are also taking thinner This combination does a couple of things.

First, it makes it possible for us to more closely match supply and demand which aids in the pricing of LCD.

Second, and quite importantly, it enables us to grow our revenues without having to invest as much capital which increases the cash returns for our shareholders and improves our return on investment.

As I describe the totality here, you see what we're trying to do is set the table to be able to have an environment of better price stability as well as better cash returns for shareholders.

I see.

So it does cap your market share near-term but improves profitability longer-term.

I think cap is an interesting word.

What we seek to do -- let's look at what happened over the last year.

Basically as Jim said, in the opening, we had a series of motions at a particular customer where one of our competitors tried to significantly increase their share.

Here we are a year later, worldwide market shares are basically where they started before all that.

And what has happened is just a lot of motion underneath the water but we're back to pretty much where we were before this whole thing started.

So we are not taking to gain share overall as a Company.

We are happy in the leadership position that we are in.

What we are seeking to do is have better stability of our volumes and to have a less volatile environment.

We think that's good for customers; we think it's good for the industry.

That's helpful.

Thank you gentlemen and good luck.

Amir Rozwadowski, Barclays.

Just to follow-up, Wendell, on some of the commentary around this set relationship and pricing versus market pricing.

Does is still involve a premium to competitors and does the mechanism adjust intra-quarter?

Specifically, is there some sort of band for market share or if a customer underperforms in a certain quarter, can they have any sort of outlet for the extra glass supply?

Just trying to understand the dynamics of the pricing structure.

I am not going to comment on the exact relationship between our price and the market price for obvious competitive reasons.

Now will we see intra-quarter motion?

The idea behind the agreements is that the share is that as well as the fixed relationship.

So in any given quarter, even for the year, we should not see motion in the share figure.

You can see motion in the price figure and then of course overall market demand can move up or down but our share figure locks down.

So what that would mean is that most of the dynamic in our customer supply chain would be played out with the other glass suppliers as opposed to us.

Does that make sense?

That is very helpful.

And then switching gears a bit away from pricing, you folks have been very proactive in terms of returning cash to shareholders with a number of dividend increases.

Obviously getting towards the tail end of your buyback allocation.

I was just wondering in terms of strategically, you mentioned CapEx is coming lower, cash flow generation seems to be improving.

Is share buybacks part of a longer-term strategy for the Company at this point?

Should we expect some sort of additional announcement post the completion of the current allocation?

I would love to hear some color from that standpoint.

The Board will consider returns to shareholders probably on a regular basis.

As you saw in October, Amir, they moved the dividend up by 20%.

It's now up 80% over a 12-month period of time.

I'm sure they will consider also our cash position and where the cash is and think about share repurchases again.

But I would not anticipate an immediate announcement.

But the Board will continue to monitor this on a regular basis.

Great, thank you very much for the incremental color.

Amitabh Passi, UBS.

Maybe a big picture question Jim, Wendell, for either of you.

I was curious, how did the quarter progress?

Did you think trends got worse through the quarter?

I'm trying to get a sense -- it looks like your year-over-year trends have improved but yet your tone, extremely cautious.

Just trying to get a sense for whether the environment is worsening or do you think we are seeing some level of stability at these levels?

Clearly as quarter three unfolded, we saw some step downs in two of our businesses and that really occurred primarily in August in Telecom and Environmental.

Where Environmental we saw cutbacks in orders from heavy-duty truck makers and in Telecom we just saw business not materializing that we expected.

I would say Environmental is continuing to get worse.

Telecom has been relatively stable since that step down in August.

And I think the reason that you see the mix is on the other hand, Display as the quarter moved its way through, both Display and Gorilla were good.

And Gorilla got extraordinarily good and is continuing really strong momentum.

I think when you step back and look at the total, the strength in our glass side more than offset any issues on Telecom and Environmental.

So why you hear the mix in tone is that we want to make sure that we are cautious in the economic environment that we face.

But at the same time we are happy with the way in which we're playing out our hand in Display.

And in those areas where we have big innovations, you're seeing them behave like big innovations which is, no matter what the wind you tend to sail pretty fast.

Maybe as a quick follow-up, Jim, the $50 million of restructuring you are taking in the fourth quarter, how should we think about the associated savings related to those cost restructuring plans?

I'm not prepared to give you the numbers yet, but it clearly will be more than what the charge of the restructuring is.

By the way, that $50 million we expect to be mostly cash.

There's no asset write-offs in it.

Okay thank you.

Jagadish Iyer, Piper Jaffray.

Two questions, Jim.

First, I'm trying to reconcile -- you had made a commentary that panel makers utilization are improving.

Why should pricing decline in such a scenario in Q4?

I just want to make sure that I understand correctly.

Is that for a single customer or across-the-board?

I think I made the comment that customer utilizations improved in Q3.

We expect them at best to be similar in Q4, maybe slightly down.

From price point of view, our perspective is that we are in a consumer electronics industry.

Price is going to come down over time.

We expect, our goal is to have price declines every quarter to be moderate if we can.

The increase in Q4 versus Q3 on price is, as Wendell indicated, related to the new contracts and some catch up.

But our price declines are not just at one customer.

And if you take the base heartbeat of what we're seeing on the pricing in quarter four, it is as Jim described, it is that moderate price down that we seek and that we think is going to continue going forward.

And then it is just a matter of that switch in approach ends up with us having to overcome that premium that just builds up over time under the old way.

Just as a follow-up, Jim you talked about that 6 to 7 year timeframe that the product gets refreshed.

Given the macro the situation in terms of how we see the uncertainty, how much conviction do have that it is likely to materialize going forward in quarter three?

Thanks.

You are talking about the 6 to 7 year replacement rate?

Exactly.

We remain pretty confident about the replacement rate.

Sometimes we see events like in Japan where through the eco-point they pull forward all their replacement rate into a concentrated period of time.

But our evidence says that replacement rate is continuing to be along with our expectations.

Obviously you have some places in the world where macro vents can overwhelm that, if your economy is really terrible.

And clearly in some of the southern European countries that's obviously occurring.

In terms of the fundamental of people replacing LCDs, we are now starting to get to the point where in some markets LCDs are crossing over that 5-year age and that's where we start to see it.

And we are closely monitoring it.

We still think its going to happen.

I think the other place you have got to look to for replacement rate is the new technologies that are coming.

It is really hard to tell what year they will have an impact.

Whether it is '13, '14, that is hard to tell.

However what is easy to tell is that they will.

On very large-size displays you have a tremendous amount of innovation that you are not quite seeing yet, but we are because we are working with folks on it that are going to change the way that customers experience flat panel displays and that will help spur it.

And then the other is take a look at notebooks is, one thing we know with high degree of confidence is touch is going to come to notebooks.

Right?

We have seen a lot of new product sets that people are working on to do that.

And they're quite exciting.

What we don't know is when the combination of Windows 8, the brands who are designing these new types of notebooks and Intel with some of the processing piece, that it all comes together in a compelling package.

Is that '13?

Is it '14?

It's hard to tell.

But what is pretty easy to tell is that is going to lead to both a strong refresh cycle as well as nice new demand for us on both touch and the monitor side.

Thank you.

Ehud Gelblum, Morgan Stanley.

A couple quick things.

I apologize for this, but going back to the new contracts in Display, are all the glass providers -- your competitors in Japan and others, have they agreed to similar contracts?

So is this an industry-wide thing or is this something that Corning initiated separately and does this go across all of your customers including BOE and Samsung's new China business that you are supporting?

And it was asked about intra-quarter pricing, to understand the mechanism, you are guaranteed a certain percentage I assume or share of each one of these customers requirements each quarter.

And they decide what the price is?

Does it change from quarter to quarter?

A little bit of flavor around that would be helpful and then I have a follow-up on Gorilla.

Jim will probably help me through it because you had a lot of questions buried in there.

First one was, what are our competitors doing?

I don't know, you should ask them.

The second one on what customers have we reached these type of agreements with -- the ones that we consider to be significant from a volume standpoint as well as how that particular dynamic is playing out in the customer on what they want to do and how they want to work their way through it.

And each customer is a little bit different.

The final one is asking on the mechanics basically of it.

What we would expect in any given quarter, that once the market share already is set, guidance is across that year.

And then in any given quarter, our price is set with a fixed relationship to the market price which we would expect to stay consistent for a given quarter.

There should not be significant intra-quarter moves assuming that it all works the way we are planning for it to work.

And that is the way the mechanics work.

Does that make sense?

A little fuzzy.

Who decides the market price?

And that can change from each quarter to each quarter?

There will be a level of detail underneath that I'm not going to want to go into but it is what is the actual market price.

And then it will be a fixed relationship between that and our price which should account for any sort of noise that may be in differential perception.

Okay, helpful.

And Jim, CapEx guidance, basically in line for 2013 but a little bit on the higher side of your previous guidance.

With macro getting worse, could we see CapEx perhaps come down from that $1.9 billion for '13?

And a big picture question, back to you Wendell, is Gorilla Glass in autos.

That's always gotten me excited.

How far away is that?

You talked about that at the analyst day earlier in the year but is that something we can look at in the next couple of years or is that more like 5 or 6 years away?

Ehud, on the capital, you may have misspoken, but the $1.9 billion is this year; our number for next year is $1.3 billion.

That was our number that we have had for a while and on the July call we had some risk that it might climb.

We now think it won't climb so we're very confident about the $1.3 billion.

It's possible it could be lower, but it is $1.3 billion for next year.

And to automotive, we are getting some really nice pull and engagement actually, as recently as this last month.

That is the good news.

I think you just have to keep in mind that the automotive industry does not move like tech and consumer electronics.

So even once you have a platform win, it is a while before that platform win turns into commercialization.

So it's got a little bit slower heartbeat, as much as both us and our customers probably wish it went a little faster.

Great, appreciate it, thank you.

Patrick Newton, Stifel Nicolaus.

The first one, I'm trying to understand the variance in Display results from your very strong wholly-owned business and somewhat weaker SCP results and I was hoping you could discuss share at the problematic customer earlier this year and later last year, whether that stabilized, grew, or contracted sequentially and also thoughts on share with that customer on a go-forward basis.

Additionally Samsung announced, I believe it was on Monday of this week, that they are terminating their LCD contract with Apple.

I wanted to get your thoughts around how this announcement perhaps impacted SCP's Q3 result and how this could impact your wholly-owned business on a go-forward basis given your exposure to Apple's other qualified suppliers.

And then I have a follow-up.

I will try and take some of these and maybe Wendell will take the Apple question.

Our wholly-owned business was quite strong as we expected when we entered the quarter.

That was driven primarily by increased utilization in Japan.

You may recall in Q2, our primary customer there had lowered their utilization quite a bit.

We expected it come back and a dating Q3 and that really drove the larger increase because of that.

We had good demand at our other wholly-owned customers, especially in China.

For Samsung Corning Precision, basically they have two customers.

The utilization rate at those two customers didn't change very much during the quarter.

So we didn't really expect to see much change in demand there relative to the one customer, we announced that we had a deal with them for the entire year.

I think we made that announcement in the spring and so there really hasn't been any change with that customer since the spring.

We obviously expect to continue to supply them and have not yet entered into negotiations for next year.

But will and hope to be a supplier with them and continually what we have done over the latter part of the nine months of this year.

Wendell, I will turn it to you to talk about Samsung and Apple.

For mental and physical health, we try never to talk much about anybody who lives in Cupertino or Seoul.

(laughter) I don't want to comment on any of that dynamic.

What I will do though is, at the core of your question gets into very high-performance displays.

Do we have really nice channel to market either through a direct relationship with the brands or through the appropriate players in the panel display chain?

And I would say we feel good about that.

And actually with what is going on for us right now in high-performance displays, those very high pixel count displays, as well as creating backplane engines for things like OLEDs, we are feeling stronger and stronger with every passing month rather than vice versa.

I guess it was worth a try, Wendell.

For my follow on Jim, I want to ask the same kind of display pricing but in a different way looking at the P&L and on gross margin.

If we look at gross margin, I understand that the guidance for sequential decline, I think you said pertains to a pricing reset in Display in 4Q.

But if I take your comments about the preliminary expectation of volume growth in the display business in 2013, should we expect to see an improving gross margin trajectory as we move through the year given that preliminary thought?

Obviously, it would be a combination of what the volume is for next year and what pricing is for next year.

If we achieve what we hope to on moderate pricing and have that carry for the entire year, and with the volume that we think is possible, you might see a slight increase in Display gross margins.

And clearly relative to the corporation, it will depend on what the other businesses are doing.

The good news for us right now is Gorilla is well above the corporate average.

And therefore, like we have experienced in years past with Display, when its pulling strong it actually is helping drive our corporate number up.

So in the future when I talk about our corporate gross margins, hopefully they will be less all about Display margins and about the impact of Gorilla helping out.

All right, thank you for taking my questions.

Steven Fox, Cross Research.

Two questions please.

First of all, with return to forward technology trends, I think Apple is highlighting on their new product introduction yesterday, the use of thinner glass and I was curious if that announcement in any way is accelerating the use of thin glass.

And if you could tie that into where we are with Willow developments, whether you've had any progress during the quarter.

And then secondly, if we could talk a little bit about diesel and Gorilla Glass gross margins.

Putting aside the volumes for second, can you talk about where operationally the gross margins are, whether there is more room to improve or you have them at optimal levels?

That'd be helpful.

Thanks.

Great.

On the forward tack once again, we're going to follow our general rule of never talking about anybody who lives in Cupertino or Seoul.

So I will now generalize.

We are continuing to see really a trend that we started in glass which is to push towards thinner, to gain more and more momentum.

And you see that in a variety of different product offerings.

And it's really validating our strategy from a technical standpoint and from a productivity standpoint.

That is great.

On Willow.

Willow is a really big idea that we continue to make good progress on both in our ability to do it in commercial levels of production as well as market development.

Being said because it's a big idea, in any given quarter, it isn't going to feel like there's a lot of progress on the outside because, until the fundamental supply chain, it changes so much, it's going to take a while for a really strong obvious market pull to arrive.

And then when it does, it will scale very rapidly.

It will be one of our classic innovations where everybody will go, what is going on?

What is going on?

I haven't heard a lot about Willow and then it will turn on like a light which and the really big.

And which exact market it's going to hit first, it is hard for us to tell.

But we certainly feel good about our progress so far on that.

Jim, do you want to touch on margins?

And then I will build on diesel?

I would say on Gorilla, we still feel the potential for margins to improve.

They're really quite good right now.

We are delighted by them that we think that potential to improve.

On diesel, I'll let Wendell comment.

My own take is that we made quite a bit of improvement in diesel margins but I think we still have manufacturing projects that when we have the volume will allow our gross margins to improve in diesel also.

Without doubt, that's the case.

We've got a lot of momentum there.

And now we just need the volume to come on back and I am certain that it will.

When is hard to tell but people are going to buy heavy-duty trucks again.

Great, thank you very much.

Simona Jankowski, Goldman Sachs.

A couple of questions.

First, when you talked about exiting the quarter with 15.5 weeks of inventory, can you remind us how that compares to what would be a normal level of inventory heading into Q4?

Put another way, if you can try to quantify the amount of excess inventory that you see right now and where those pockets are.

So we would say normal is hard to judge in this business because of all the cycles we've seen.

(laughter) But I would say it's definitely more than what we expected to have be there.

And I would say that from our perspective, we would say it is probably 50 million square feet, 50 million to 70 million more than we would have expected at this stage.

The thing that is harder for us to judge is as the LCD business has grown rapidly in what I will call the more emerging markets, in China as it has expanded in more rural regions is whether the supply chain is more inefficient and therefore that is a reason why we may be seeing more inventory.

But I would say that is my characterization of the risk of too much inventory right now heading into the fourth quarter.

And implicit in your guidance for Q4, is that you think some of that may get reduced which is why you are taking a more conservative stance than what the panel guys are saying.

Why do you think you have that different view than the panel makers?

Why are they not seeing the same dynamics as you are and why are they still planning to run a equal if not slightly higher utilization levels into Q4?

This comes down to something we have been debating with something ourselves.

We could fundamentally be wrong and there may be stronger demand that they are seeing that we are not.

And therefore they have good judgment on why they should keep running and they're not going to end with that much inventory.

That would obviously be a good news story for us, that they don't end up with inventory and retail is stronger.

We may be subject to our particular modeling and our experience with the volatility of supply chain in the past but they may be right.

And if they are, we'll be happy to ship it to them and we'd be delighted if they ended with less inventory, better retail.

Okay and just to follow-up on the whole contract pricing discussion, you mentioned that you have done these contracts now with a number of your larger volume customers but that some customers, like one of your SCP customers, you have yet to renegotiate a contract into next year.

Can you give us a sense of roughly -- are you done with the majority of these at this point or do we have another sizable chunk ahead and the reason I ask is trying to anticipate if we may see another pricing reset next quarter as the next chunk of customers get into these pricing readjustments?

We would not expect the correction of a premium to be a recurring theme because at the core of what we are doing, is to have this set relationship.

That being said, I think the key thing to watch for as we go forward is going to be supply and demand imbalance, what's happening overall with the market.

I think that will be more of the leading theme as well as is the table that we have tried to set here, does that end up playing out the way that we would hope that it would?

And logic would say it ought to.

Just to be clear on why you would not expect the correction of a premium to occur for one more quarter, is that because the amount of volume that at this point has been renegotiated is much larger than what remains to be negotiated or is it because the one that remains the potential adjustment is much smaller?

I would say the first is a more correct statement than the second.

Got you.

All right, thank you very much.

John Roberts, Buckingham Research.

Does Dow Corning have its own restructuring plan in addition to what Corning is talking about here?

Dow Corning does have their own restructuring plan, they have been reducing people ever since the second quarter.

But we are not anticipating a special charge.

They been doing it on a consistent basis.

Scope it out for us at all -- will it turn their earnings you think?

Do they ask that the quarter still declining in terms of earnings?

It all depends, John, on Hemlock and that is the wildcard there.

As you know, going into the polysilicon crisis that occurred, actually about this time a year ago, this was an extraordinarily profitable business and pricing has plummeted and now we've seen demand into China plummet with the trade wars.

So that overwhelms.

But I think that silicon margins are likely to grow slightly.

We have time for one more question.

Mehdi Hosseini, Susquehanna Financial.

Going back to earlier questions about the industry, how should I think about penetration of LEDs into the overall TV market?

And I'm asking that because it seems to me that we are exiting 2012 with a 70% penetration.

And yes, there's growth for larger size LED TVs, but doesn't that imply that despite inventories that are coming under control, there could be below average growth until the next catalyst for the replacement appears?

Any thoughts you have would be great.

And I have a follow-up.

Sure on LED penetration I will just give you some statistics.

Actually, the place where LED penetration is really low is the United States.

It's only achieved slightly over 50%.

Japan is the highest, that's probably no surprise, it is in the 80%s.

And Europe has been moving up but still only getting in the 70%.

We think LED is an important part of replacement factor.

It makes what used to be a thin television super thin, and as you see the ads for this upcoming holiday season people are emphasizing thin.

So I think LED is still a driver along with other improvements in the technology.

What is the overall penetration worldwide as we exit 2012?

Are you implying that it's actually well below 70%?

Yes I do believe its well below 70%.

Got it.

And then on the Gorilla, and more on the mobile market, should we expect typical seasonality into early next year especially with some of the OEM partners that are already out with the new products, they may take a pause until the next refresh comes in?

We don't have, unfortunately, a typical seasonality with Gorilla that we have been able to prove.

Part of this is that the supply chain is actually far longer in the Gorilla cover glass business than it is in the LCD business.

Obviously, there can be some large customers who can have an influence when they do a big rollout.

But we have seen customers do more frequent rollouts of models and so it's always possible we have a pause, but right now, we're having a hard time keeping up with our customer demand for Gorilla.

Got it, thank you.

I would like to wrap up.

I just have a couple of comments here.

First from an IR point review we will be speaking at the UBS Global Technology Conference in New York on November 14.

And also we will be at the Credit Suisse Technology Conference in Scottsdale on November 27.

We will be delighted to see our investors there.

In terms of summarizing some of the things we've talked about today, we think we have made excellent progress on our plan to stabilize Display and grow our earnings potential in the other businesses.

In Display we are delighted with our new agreements with key customers and we think they will give us strong benefits in 2013.

Demand for Gorilla is very strong and we expect it to continue into Q4.

We've got very good operating cash flow.

The Board reacted by increasing the dividend 20%, increasing our 12-month increase in dividends to 80%.

We obviously are feeling some effects of the macro economy but management is reacting quickly to control costs through the restructuring and will offset some of those impacts and hopefully allow us to grow earnings in 2013.

Lastly I would like to make one comment.

First of all, on Ken Sofio.

Ken continues to progress and appreciates very much people who e-mailed him.

And second of all I would like to thank Ann, Linda, and Kelly for stepping in and doing a great job with IR over these past few months.

With that I will turn it back to you, Ann.

Thank you, Jim.

Think you all for joining us today.

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