康寧 (GLW) 2013 Q2 法說會逐字稿

Good morning.

Welcome to the Corning Incorporated second-quarter 2013 earnings results.

It is my pleasure to turn the call over to Ann Nicholson, Division Vice President of Investor Relations.

Thank you, Cynthia, and good morning.

Welcome to Corning's second-quarter conference call.

With me today is Jim Flaws, Vice Chairman and Chief Financial Officer.

Before Jim begins his formal comments, I would 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.

You should also note that this presentation contains a number of non-GAAP measures.

A reconciliation can be found on our website.

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

Thanks, Ann.

Good morning, everyone.

Our priority over the last 18 months has been to reestablish positive momentum in our Display technology segment, and to also grow our other businesses.

We had a very strong second-quarter, delivering our third conservative quarter of year-over-year double-digit EPS growth.

We further stabilized our Display technology business, and achieved growth in our Telecom, Specialty Material, and Life Sciences businesses.

Display continues to regain positive momentum.

LCD glass price declines were less than in quarter one, and in the range we expected.

Looking ahead, we expect Q3 price declines to be in the same moderate range as Q2, and our market share to remain stable going forward.

Combined with our new product developments and cost performance, we are delighted with Display's results in 2013, and we are growing our four other businesses.

All four provided solid operation results, collectively contributing to sales growth, and 40% higher net income on a year-over-year basis.

In total, with sales and gross margin up and S&A down, we delivered an additional $0.06 of EPS to the bottom line year-over-year, despite the weaker equity Company earnings.

This is a significant achievement against our commitment to investors to return the Company to earnings growth.

We believe three conservative quarters of double-digit year-over-year growth and on outlook for continued year-over-year earnings growth in quarter three, provides solid evidence that our strategy is working.

Now before we jump into the details, I would like to remind you that last quarter we began reporting our results as core earnings, in order to exclude nonperformance-related items and increase the transparency of operating results.

It excludes two significant items, yen exchange rate fluctuations and the results of the polysilicone segment of Corning's affiliate, Dow Corning Corporation, and several other items such as acquisition costs, restructuring charges and pension adjustments.

We report our results at a constant yen exchange rate of JPY93.

As a reminder, we chose the JPY93 rate because of the hedging we did that lasts through 2014.

To further reduce the impact of yen exchange rate fluctuations, core earnings exclude the impact of translation for the yen-to-dollar exchange rate and purchase collars.

And beginning in quarter two, it also excludes the yen-related transactions, specifically yen-denominated transaction hedges.

Removing the impact of these transaction hedges reduces our core EPS by about $0.01 in the first- and second-quarter of 2014.

It also reduces our previous estimate of 2012 core earnings.

A new 2012 summary and a 2011 core earnings non-GAAP reconciliation will be available on our website.

Our core earnings are non-GAAP financial measures, and of course, we continue to report our GAAP results, and please refer to the GAAP reconciliations on our website.

Ann Nicholson, in Investor Relations will be available after today's call to answer any questions you have about the financial reconciliations.

And now I would like to turn to our quarter two core earning results.

Our second-quarter sales were $2 billion, up 11% versus a year ago.

Gross margin was 43%, up 2 points year-over-year, and better than our expectation.

Specialty Materials and Telecom had particularly good margin growth versus last year.

Gross equity earnings of $173 million were down 18% versus a year ago.

As a reminder, the SCP portion of this is at constant yen.

I am going to provide more color on equity earnings in a few minutes.

Our core effective tax rate for Q2 was 16.6%.

Core earnings per share were $0.32, up $0.06 over a year ago.

Remember, core performance reports the results at a constant yen exchange rate of JPY93.

Better operating performances drove the core EPS improvement over analyst consensus.

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

Now versus a year ago, SG&A was down in absolute dollars and as a percentage of sales, and R&D spending was also down as a percentage of sales.

So now let me go into our detailed quarter two segment results, and I will start with Display.

Our view is the overall LCD glass market was up slightly in the quarter.

Sequentially, Corning and SCP's combined volume grew by mid single-digits, with volume in the wholly-owned Display business up digits mid to high single-digits, and SCP volume up low single-digits.

Overall, our market share remains stable.

Core sales for Display were $670 million in Q2, an increase of 21% versus last year.

Price declines were less than the first quarter, in the range we expected.

Gross equity earnings, also measured at a constant yen from our Display equity affiliates were $117 million in Q2, a decrease of 19% year-over-year.

For your modeling purposes, Display equity affiliates second-quarter Display glass sales in constant yen were about $564 million, a decrease of 12% from last year.

As a reminder, this represents Display glass sales only.

Our public filings will report our Display equity affiliates' total sales, which include other products.

I think it is important to also call out year-over-year volumes.

SCP volume in Q2 was consistent year-over-year, reflecting Korean panel makers' relatively constant utilizations with low capacity additions.

Our wholly-owned business volume was up more than 40% versus last year, primarily reflecting the strong growth in the Chinese market, as well as worldwide large-size television demand.

Display's core net income was up 11% versus Q2 of 2012.

The results reflect increased sales and solid cost reduction efforts over last year, resulting in consistent percent gross margin.

The ability to maintain gross margins through cost reduction is a significant part of Display's plans to reestablish positive momentum.

Now on the supply chain front, we estimate inventory grew to 18 weeks in Q2, up from 17 at the end of Q1.

As a reminder, inventory was 18.7 at the end of Q2 last year.

We continue to monitor inventory, but we believe several factors are in play driving the increase.

First, we believe the supply chain inventory floor, or minimum carrying level to avoid stock outs has increased.

Screen size proliferation by panel makers has increased the number of models carried at retail, and therefore, the absolute amount of inventory in the supply chain.

We also believe the supply chain may need more inventory for growing and emerging markets.

I will comment more on the supply chain in our outlook section.

Now turning to Telecom, Q2 sales were $601 million, up 8% year-over-year.

The majority of the year-over-year increase was due to Australia's NBN project ramp, growth in wireless, fiber cable and data center projects in China.

Those offset the year-over-year decline we saw in Europe.

Sales beat our expectations, driven by stronger fiber and home projects in North America.

Sales grew 28% sequentially, driven by an increase in demand for nearly all products in all regions, particularly North American fiber in the home, in Canada, and China fiber and cable.

An acquisition in Brazil and the consolidation of a previous small equity affiliate also contributed to sequential and year-over-year growth.

Telecom's year-over-year net income was up 62%.

Earnings improvement was driven by the higher volume, as well as cost reductions in manufacturing and SG&A.

Quarter two was Telecom's highest sales and net income quarter in more than a decade.

Now moving to Environmental.

Q2 sales were down 8% year-over-year, and actually slightly below our expectations.

You will recall that the first half of 2012, heavy duty truck sales were very robust, and we were actually sold out.

Since then, the US Class A truck demand at retail and build rates have softened.

Our heavy duty diesel sales were down versus last year, and were the main driver of the division sales decline.

Light duty substrate sales were up slightly versus Q2 of 2012.

We do expect a slight uptick in heavy duty diesel sales in the coming quarters, and I will comment more on that in the outlook.

Now despite the environmental year-over-year sales decline, net income was actually consistent year-over-year, driven by strong operational execution in the auto business, offsetting decline in diesel product volumes.

Specialty Materials Q2 sales were up 17% sequentially as expected, and Gorilla delivered on its sequential growth target in the quarter.

Core net income was up 33%, with significant improvements in Gorilla Glass manufacturing performance versus last year.

We are very, very pleased with the improvement in Gorilla gross margins over the last several quarters.

In Life Sciences, Q2 sales were up 35% year-over-year due to the additional sales from Discovery Labware acquisition which closed in October of last year.

The acquisition integration is going very smoothly, and is accretive to the segment again this quarter.

Year-over-year core net income more than doubled on these additional sales.

Now moving to Dow Corning.

Gross equity earnings of silicones were down 19% year-over-year, down significantly from our original expectations.

These earnings were flat with Q1, but we had been looking for improvement.

Sales were down year-over-year, and pricing issues in lower-end silicone products in several geographies emerged during the quarter.

I will comment more on this in the outlook section.

Although we don't include Hemlock numbers in our core earnings, Hemlock results actually improved sequentially and year-over-year.

Our balance sheet remains very strong.

We ended the second-quarter with $5.5 billion in cash and short-term investments, with about $1.3 billion of that in the United States.

Our net cash position is $2.6 billion.

Cap spending is $244 million in the quarter, and we remain on track to spend approximately $1.3 billion in capital this year.

Free cash flow for the quarter was $62 million.

As a reminder, free cash flow is actually is a non-GAAP measure.

A reconciliation to GAAP can be found on our website.

You may recall in late April, we announced an 11% common stock dividend increase, and launched our $2 billion stock buyback program.

During quarter two, we repurchased $242 million of stock.

Now also during the quarter we entered into some new FX forward contracts to mitigate the potential negative impact of a weakening yen on our results above JPY93.5.

No upfront premium was required for these hedges.

These new contracts hedge about 25% of our projected 2015 yen earnings.

Now let me turn to the outlook.

In the third-quarter, we believe Corning is well-positioned to deliver a fourth conservative quarter of year-over-year EPS growth, driven by continued moderate LCD glass price declines, and growth in Telecom, Life Sciences and Environmental.

This optimism is cautiously tempered by the equity earnings performance of Dow Corning, and somewhat at SCP.

I will speak to each in more detail as I go through the forecast.

Let me start with Display.

Our current view of the end market in 2013, we expect retail as measured in square feet of glass to be up mid to high single-digits.

For reference, 2012 on a similar metric was 3.5 billion square feet.

We have revised our forecast for LCD television units to grow in the mid single-digits, given continued softness in Europe and Japan.

However, we are also raising our view of average screen size, driven by large-size television growth.

Through May, worldwide TV sales of televisions 50-inch and larger were up 118%.

Therefore, our view of demand for 2013 as measured in square feet remains the same.

As a fun fact, to help you understand the dynamic of these larger televisions, a 65-inch television has as much glass as four 32-inch televisions.

We factored into our forecast the conclusion of China energy savings subsidies, although there are of course, rumors that a more limited subsidy may be re-introduced this fall.

Area sell-through in China in the first half was up 30% year-over-year and higher than we had thought.

Given that, we are forecasting the second half area growth in China to only be about 5% versus the second half of 2012.

PC market, we expect 10% year-over-year unit growth, with all of that attributable to tablets.

Monitor units are expected to be down about 5%.

Now in quarter three, we, as we near the end of July, we see the Q3 LCD glass market consistent to up slightly sequentially.

We expect our wholly-owned Display business and SCP combined volumes to be consistent to up slightly with Q2 volumes, and our shares remain stable.

Q3 is typically when the supply chain expands inventory as measured in square feet in preparation for Q4 holidays.

We believe this will happen again in Q3 of 2013, although this may be at a slightly reduced amount, given the second half of demand in China that I just mentioned.

As measured by forward-looking weeks of inventory, we believe inventory will execute 3 lower than Q2.

We expect -- we estimate LCD glass prices to -- in Q3 will decline at a similar rate to Q2.

I think it bears repeating that moderate price declines in Q2, and our expectation they will to continue to moderate in Q3, provide another strong indicator that Display is stabilizing.

Now moving to Telecom, we expect Q3 sales to be up about 20% versus Q3 of 2012, driven by strong fiber in the home demand in North America, Australia, and Europe, enterprise growth due to data center projects, particularly in the United States and China, and of course the sales of our recent acquisition in Brazil, and a full quarter of the newly-consolidated affiliate.

For the year, we expect sales and earnings growth in Telecom driven by fiber to the home and enterprise projects.

We expect the China fiber market actually to be flat in 2013, due to large China Telecom tenders coming later than originally expected.

We expect the worldwide fiber market to be up slightly year-over-year, driven by emerging markets in India, other Asian economies, and Latin America.

In Environmental, we expect Q3 sales to be up slightly versus Q3 of 2012, driven by some recovery in the North American heavy duty diesel market.

We believe tighter regulations in Europe and China will lead to growth and demand for heavy duty diesel products as we begin to enter into 2014.

For the full year, we believe automobile production will continue to grow, driven by strength in North America and Asia.

Specialty Material sales are expected to increase sequentially about 10% in Q3 driven by Gorilla Glass.

We expect advanced optics sales to be consistent sequentially.

The semiconductor industry may be turning cyclically positive coming in the second half, so our advanced optic business could see growth in Q4.

In Gorilla Glass, our customers are moving to thinner glass which, of course, helps our manufacturing costs.

This is an important driver of Specialty Material's net income being up 35% year-to-date.

We expect the trend to thinner Gorilla Glass to continue.

We expect the retail market for cover glass for phones and tablets to be up significantly, around 30% in 2013.

Corning will feel less growth, with some work-off of excess inventory from Q4 2012 shipments, and also customer yield improvements this year.

However, the retail growth, combined with product leadership leaves us very excited about our opportunities for Gorilla Glass.

Yesterday, we announced our latest Gorilla Glass product, Gorilla Glass NBT, our unique solution for touch-enabled notebooks.

A major customer, Dell, will be integrating our glass into their new line-up of products launching this fall.

Corning Gorilla Glass NBT has 8 to 10 times the scratch resistance of chem strength and soda lime glass, has superior surface strength that allows for thinner designs.

At just a 1% to 2% of a device's retail price, we believe it is a very cost-effective solution for the protection of thinner, lighter, touch-enabled notebooks.

We are working with additional customers now, and expect to announce additional models in the coming months.

We will likely see Gorilla Glass sales for these new products, beginning the second half of this year and continuing in 2014.

We believe the market for touch notebooks could triple from 2013 to 2017, and Corning will have a significant incremental market opportunity as a result of this growth with our new NBT glass.

Now Gorilla Glass NBT is our latest advancement in cover glass technology, and we continue to work on additional innovations.

We expect to ship both our anti-microbial and anti-reflective Gorilla Glass products in the second of half of this year.

Now in Life Sciences, we expect sales to be up about 40% to 45% year-over-year, mainly due to the added sales from our acquisition.

Now let me turn to Dow Corning.

We had told investors in February that Dow Corning expected silicone sales to be up in 2013 and margins to improve.

As the year has unfolded, currency, the yen has created some drag.

Volume growth has been okay, especially in what we call the spec chemical portion of Dow Corning silicones or the higher margin products.

But their key issue is price pressure, especially in low-end silicone products.

The reasons are different in China and Europe, but the pain is the same.

Dow Corning is working through this by managing supply and shifting mix, while diligently focusing on cost reduction.

Dow Corning is resetting its expectations for the year in total for silicone's business, and we expect our total equity earnings from Dow Corning silicone's business to now show only slight improvement year-over-year.

Dow Corning expects earnings from its silicone segments to be down about 20% year-over-year, but the drop is more severe sequentially versus Q2, down almost 50%.

Part of the more severe sequential drop is driven by cost movements within inventories, which should reverse in Q4.

Dow Corning expects Q4 to bounce up, hopefully closer to the Q2 level of earnings.

Most concerning to us is the level of price competition in lower-end silicones in Europe and China.

We think this new Dow Corning information is different enough that I recommend analysts consider adjusting your models for the anticipated silicones impact.

Now let me turn to comment on Hemlock.

Last week the Chinese government did announce preliminary significant duties on Hemlock's poly going into China, up 53% in the trade case.

This is a preliminary determination and one of many steps on a long path towards a final determination in China.

While Dow Corning and we are disappointed with this preliminary finding, we have known this was a potential scenario for some time.

The United States trade representative has confirmed to the media after this preliminary announcement, they are in discussions with China regarding the global issues in solar technology, including panels and polysilicone.

Dow Corning has been and will remain actively engaged with all appropriate parties to seek a mutually acceptable settlement.

Ultimately, any tariffs on polysilicone on our modules will impact markets dynamics, but we do not anticipate any immediate impact in Hemlock Semiconductor's performance.

With the potential for tariffs looming, Hemlock Semiconductor sales in China were already significantly low.

And they have already adjusted output and staffing to match current demand, enabling Hemlock Semiconductor to operate cash flow positive in the second-quarter of 2013.

Now let me turn back to the remainder of our Q3 forecast.

We expect our core gross margin to be up 1% year-over-year, driven by manufacturing increased sales.

SG&A and R&D are expected to be down versus last year as a percentage of sales.

Core equity earnings is expected to be down about 25% versus last year.

And we expect our core effective tax rate for 2013 to be around 16%.

That concludes my opening comments.

Ann, I will turn it back to you.

Thank you, Jim.

Operator, we will now open the line for questions.

(Operator Instructions)

We will go to Mark Sue with RBC Capital Markets.

Your line is open

Thank you, good morning.

Some of the programs you have initiated such as capacity control, and the move to thinner glass are helping to improve gross margins.

So I am trying to get a sense of the sustainability of your efforts.

Are we at a point of diminishing returns, or are there further efforts to tactically improve gross margins?

And conversely, are we at a point where you are now getting the premiums, or the early signs of premiums, particularly as it relates to Gorilla Glass and for new applications such as NBT?

Maybe if you could help us there, please?

Well, Mark, I assume you are talking about our corporate gross margin.

As you know, that is always a combination of the mix of our various businesses.

But what we like about our business hand right now is, gross margins in Telecom, Specialty Materials, Life Sciences and Environmental are actually improving.

The corporate mix will obviously be dependent on the mix and the sales of those businesses.

But the fact that all are improving, leads me to believe that we have the potential to continue to move our year-over-year gross margins up.

Obviously, the most important thing for us remains Display, and we must have moderate price declines.

We had good price downward movement in Q2, being less than Q1.

Expecting Q3 to be in a similar range.

But we continue to believe this potential for price declines potentially to moderate even further as the quarters unfold.

So I would say, we are not running into diminishing returns in terms of sustaining gross margins.

Okay.

But it is premature for me to talk about the premiums on our new products.

I see.

Jim, now that we are almost anniversarying your price change to Gorilla's -- to Corning's price and the market price, the thought is that the price declines, the moderate product price declines will prevail.

How does that occur when you have a competitor that is still adding capacity, or is that just very localized, do you feel?

And at the same time, as we move towards the back half of the year, are there annual price negotiations that are still variable?

Or are we at a point where the pricing change that you have made is going to be beneficial for the industry going forward?

Well, obviously, I can't speak for our competition, but we believe that price declines have moderated for the entire industry, glass industry.

And particularly with the benefit to our panel customers from the yen, we believe there is potential for that to continue.

In terms of the capacity additions by our competition, we believe only one of our competitors is adding capacity in Korea.

And we believe even that is at a very moderate price.

We have learned that capacity there is smaller tanks.

So we are hopeful that we will be able to have an industry environment where price declines continue to be at a moderate level.

It is premature for me comment on price negotiations and contracts.

We will give you an update on that in October.

That's helpful.

Thank you.

Thank you.

Our next question will come from the line of Wamsi Mohan with Bank of America Merrill Lynch.

Your line is open.

Yes.

Thank you, good morning.

Jim, can you comment on the China deceleration in the back half as it pertains to Display?

I think you had mentioned an area growth of 5% in the second half?

What is the underlying unit presumption, and will your glass shipments match that level of growth, or are inventory levels such that you might be undershipping that level?

So we are looking for our glass shipments to be consistent to up slightly.

So units will be negative in China in Q3, and but area will be only slightly negative.

We are looking for area to be up in Q4 in China.

And remember, there are Chinese holidays again, in the later part of the year.

Okay, thanks.

And a quick follow-up, on Specialty Materials, it looks like the revenue outlook was a little softer than most expected.

Can you address if this is an inventory correction-related issue, or is it weaker demand given the deceleration in tablets, and to some extent in smartphones?

Any update you might have for us on auto?

Thanks.

So on auto, I don't have any update for Gorilla at this stage.

Now relative to Gorilla for consumer electronics, we have been working hard on modeling the supply chain.

And we believe that there was excess inventory built up by a number of customers from the fourth quarter, and that is being worked off this year.

And then the second thing, of course, is that we have seen yield improvements in the supply chain over the course of the year.

So those two things have been -- and it may be reflected in what you perceive as the softer demand for Gorilla.

If you take those out, I mean I think would have -- we are looking at the amount of Gorilla being pulled from the supply chain, to go in the phones and tablets going to retail, and we think it is growing nicely.

Obviously, it always depends somewhat on model launches in the phone business.

But that is what is affecting it.

But really, we did have some excess inventory carried over this year.

Thanks, Jim.

Thank you.

Our next question comes from the line of Rod Hall with JPMorgan.

Your line is open.

Yes, thanks for taking my questions.

I just have a couple, Jim, for you.

One is you had commented on the Chinese subsidy.

You expect it may come back down again at the end of the year.

Are you assuming that subsidy reduces in your guidance for Q3, or are you assuming it is static in Q3, and then we will wait and see what happens, and decide how to guide for Q4?

So that is my first question.

And then the other thing is, I wanted to ask you about -- I know you normally don't like to comment too much on capacity utilization.

But it feels like utilization for glass capacity is getting relatively high, and I wonder if you could just comment on that?

Give us any color on what you think capacity utilization looks like.

And then also for panels, just where are we with capacity utilization, and where you think we will be as we get into the seasonally high months here, heading into the back end of the year?

Thanks.

That is a lot of questions.

So on our assumption on China demand is, we are assuming the subsidy has gone off, and we are not including anything coming back in our outlook for the remainder of the year.

All we have heard is some rumors, is there may be a new subsidy in the fourth quarter.

But that is not in our demand at this point in time.

Relative to capacity utilization, our wholly-owned Display business is relatively full.

We are delighted by that, as you saw the very strong shipments in quarter two.

Gorilla, because of the inventory work-off is not as full right now.

We have significant capacity still offline at SCP.

Panel capacity, I mean, we think there is adequate panel capacity to meet what we see as retail demand.

Okay.

Thanks, Jim.

Thank you.

Our next question comes from the line of Patrick Newton with Stifel.

Your line is open.

Yes, thank you.

Good morning, Jim.

I wanted to dive a little bit into Display inventory levels.

You seem relatively comfortable with the 18 weeks of inventory level.

But I am curious if we go by geography, are there any areas where inventories were more elevated or lean, and specifically focusing on China, given your expectation for lack of subsidies in the second half?

And then, do you have any concerns on inventory levels in tablets or smartphones relative to TVs?

I don't have any detailed information on tablets/smartphone inventory.

On Display inventories, I would -- I wouldn't characterize it as relatively comfortable.

I am always nervous when inventories get to an 18-week level.

We have done a lot of work on trying to figure out, is the items that I talked about with the more sizes really having an influence?

And we have some positive information that says that has been contributing, but I remain nervous about the 18 weeks.

I don't have a lot of geographic information.

We only -- the only thing that I will comment on is, that we believe that there has been an excess of 32-inch televisions built in China.

And that -- that is the only place that I am aware of where there is a potentially significant problem that is local -- that is localized.

All right.

Thank you.

And then I guess, as a follow-up on the Gorilla Glass outlook, I am trying to understand, you did make the comment that touch could be shipping, specifically the Gorilla Glass NBT in the second half of '13.

I was wondering if any of that is baked at all into your guidance for 3Q?

And then, the comments that you made about cover glass for phones and tablets increasing about 30% year-over-year, but you have yield improvements and inventory heading into the year, I am trying to circle that back to your previous guidance, I think that Gorilla Glass would grow double-digits year-over-year.

Could you help us perhaps narrow that range between double-digits and 30%?

I -- I guess I would say that, when we look at the amount of inventory, and the amount of yield issues that have occurred for this year, that we would -- we would have thought that the demand for Gorilla on us would be greater.

And when we adjust for those two things, we are seeing -- we would say that there definitely is greater than 30% growth.

But those two items have harmed us, if you do a comparison year-over-year.

But still double-digit expectation for Gorilla Glass growth year-over-year?

Yes.

Okay.

And then, I am sorry, and the touch notebooks at all baked into Gorilla Glass for 3Q?

Yes, but at very small levels.

We are still, unsure about how fast the consumer acceptance will come on touch notebooks.

I was delighted to see in the Best Buy circular of last week, quite a few advertised.

But we put in a fairly low level right now.

Great.

Thank you for taking my questions.

Good luck.

Thank you.

Our next question comes from the line of Steven Fox with Cross Research.

Your line is open.

Thanks.

Good morning.

One clarification, and then one question on LCD glass.

Just on the, Jim, on the guidance you have provided, you referenced year-over-year comparisons versus gross margins and expenses.

Is that versus the restatements already provided, the $0.29 and 44% gross margins, or is there something else that has to be restated out of that, that you also mentioned?

And then secondly, just on the LCD glass, the two big dynamics seem to be China and average screen size increasing.

Is there any sense for how much the China subsidies helped, in terms of that 40% growth in the first half?

And then, in terms of average screen size increasing, it seems to -- you seem to be implying an acceleration in sort of average screen size, even versus what you talked about at the analyst meeting.

Any more color on how that is helping maybe in the second half of the year?

Thank you.

So the demand -- the screen size thing is becoming increasingly important.

We really started seeing this large-size impact start last year.

We were uncertain whether it would continue to grow this year, but it definitely is.

And it seems to be accelerating.

And so you are right about that.

I think all of my statements on gross margin are -- relate to our restated results from the prior year.

And as I mentioned on our website, we have done some updates on that, and many analysts asked us to do 2011 also.

So we are going to be publish -- putting that on our website, too.

And then, just in terms of China, how much do you think it helped, the subsidies helped in the first half?

I don't have a detailed number right now.

Okay.

Fair enough.

Thanks.

Thank you.

Our next question comes from the line of Brian White from Topeka.

Your line is open.

Hi, Jim.

Good morning.

When we think about Gorilla Glass on the notebook, I just want to be clear.

Are most of these wins primarily coming at the screen level, or are you also providing Gorilla Glass for the back casing and the keyboard?

That is a level of detail I just don't know, Brian.

I am sorry.

Okay.

And when we think about this ramp, you said obviously you have Dell.

About how many other customers do you have?

And is this more of a fourth quarter ramp, or it really does start in earnest in the third quarter?

It starts in the third -- in the third quarter in earnest.

I don't have a list of the number of customers.

But we think our market share on touch on notebooks has been climbing.

Initially, there was a lot of -- our competition was really subtle on, and -- for cost reasons.

And we believe our market share on touch notebook wins has climbed every -- is climbing every quarter.

So we are quite pleased by that.

But we begin shipments in earnest this quarter.

Again, as I mentioned in reply to an earlier questioner, what we are just uncertain about, is how well this -- these notebooks will do at retail.

Obviously, a pretty weak PC market.

But definitely in terms of the models that will be out there, we are increasing our market share.

So if I have a $500 notebook, this is a $50 to $100 price for the consumer?

I am sorry.

I couldn't hear you.

If you have a $500 notebook, this 1% to 2%, is the cost of the Gorilla Glass?

$50 to $100?

No.

1% to 2% is like $5 to $10.

$5 to $10.

Okay.

Thanks.

Thank you.

Our next question comes from the line of Jim Suva with CitiGroup.

Your line is open.

Thank you very much, and congratulations.

It sounds like that you are indeed building in no return of the China subsidy into your outlook, which I think is a positive.

Under the premise of, if the China subsidy were could to come back, do you have the capacity to ramp production?

And if so, what is a typical lead time for you to pour the glass, get it into the channel, for then it to make it onto the shelves, or sell into the local Chinese citizen if the subsidy were to return?

Well, we do have capacity and the lead time is relatively short, as we are in Asia.

And it is pretty easy for us to do that.

So I would say definitely, about two months or less we can have capacity there.

Great.

Thank you very much.

Thank you.

Our next question comes from the line of Amitabh Passi with UBS.

Your line is open.

Thank you.

Jim, first question for you, I was wondering if you could comment on LCD demand trends in some of other geographies, particularly Europe and North America?

North America has been good, driven by sizes for the most part.

Europe has been weak.

Japan has been We think actually Japan television will probably be flat for the year, now that we have anniversaryed that.

These are in terms of units.

We are seeing good growth in the other Asian markets, in Latin America and the Middle East in terms of units.

I am curious relative to expectations, are these geographies generally in line, weaker or better?

I would say Europe is weaker.

Most of the rest are in line in terms of units.

And then size is ahead of our expectations.

Okay.

And then, Jim, just based on the stock buyback that you did in the quarter, I would have expected a larger decrease in the share count.

Should we expect some of that to show up in 3Q, or were there some offsets?

Well, remember the stock buyback didn't start until later in the quarter.

I mean, we didn't make the announcement until the end of at least one month had gone by.

Yes.

Okay.

So we should expect some of that to show up in the share count in 3Q?

Yes.

And then just any, any help you can give us in terms of your appetite to sustain buybacks at these levels, or how you are thinking about just capital allocation?

Oh, we have a $2 billion program authorized by the Board, and we expect to continue to buy back in Q3.

Probably similar to slightly higher levels, maybe.

Got it.

And then just one final one from me, fiber to the home.

You talked about strength in North America.

Just wondering where you are seeing that, is it with the Tier 1s or some of the smaller operators?

Any incremental insight there would be helpful.

That strength was mostly Canada.

Got it.

Okay.

Thank you.

Thank you.

Our next question comes from the line of Joseph Wolf with Barclays.

Your line is open.

Thanks.

I was just -- I wanted to come back to the inventory and the work you have done on the global side, and the differences between China, and I guess the rest of the world?

And where you are in terms of reading that, and how we can think about that going forward in terms of maybe even not talking about price declines moderating, but prices starting to stabilize and maybe improve?

I am not sure I follow your question.

Are you asking about inventory in the supply chain regionally?

Regionally, and how that fits into, I guess you talked about a very strong demand into China, and Korea being kind of consistent.

So if there is a global element to that inventory, and whether that will impact any pricing in 2014?

As of right now, I don't have a reason to believe that we won't stay on this moderate price declines that we have experienced for these quarters.

There is nothing that we are seeing right now.

In terms of the level of inventory, I don't have a lot of details, as I mentioned in response to an earlier question, about where the inventory is.

I did mention, that in China that (inaudible) seems to be an excess of the small-sized televisions, 32s.

But beyond that, I don't have a lot of detail.

I think that the worry that you are probably touching on is, if there is a sudden inventory correction, that that could impact on pricing.

But right now, we are not feeling that.

In fact, our order rate in July, and our order rate for August is remaining quite strong.

Okay.

Great.

Thank you.

Thank you.

Our next question comes from the line of Simona Jankowski with Goldman Sachs.

Your line is open.

Hi.

Thanks very much.

I just had a question on Display, and then a couple follow-ups on Gorilla.

As far as on Display, you ended Q1 with what you considered were tight internal inventories, and were air-shipping some product.

Is that still going on, or do you feel like you have caught up now, in terms of your own inventories and production?

And also, did you convert any additional tanks to Gorilla in the second-quarter, or are you putting that on hold for now giving the situation in Gorilla you talked about?

So we are not converting more tanks to Gorilla right now, as the supply chain works off some of the inventory.

In terms of our own inventories, we actually remain tight.

We did airship in Q2.

We hope to not ship any -- airship in Q3.

But we are still tight.

We wouldn't mind having more Display inventory.

Corporately, on inventories, we have built inventory.

The build is largest in Telecom, where we built over $100 million inventory, and we have built some Gorilla inventory.

Okay.

And then on Gorilla, where you talked about the perceived softness there in the guidance.

You commented on thin glass.

Is that impacting the revenue growth levels in Gorilla?

In particular, if that is causing you to get a lower ASP per square area?

And then also, I wanted to get an update on your expectation for 3-D glass, if that is something that is going to ship this year, and is going to be a meaningful contributor?

And then lastly, it seems that Asahi's Dragon Trail is gaining some traction in the market, and is starting to get used as a second source.

Is that impacting your Gorilla expectations?

I don't think Dragon Trail is really impacting our expectations.

Clearly, we don't have quite as strong a share as what we had originally, but it is still extraordinarily high.

I don't have an update on 3-D.

So I am sorry.

I just, I am not current on whether we are going to ship anything this year or not.

I know the program is continuing to move ahead.

And on the thin glass in Gorilla?

Thin glass in Gorilla, there is really -- I mean, it is just a -- it is primarily an impact on our cost.

Okay.

So it doesn't change the ASP per square area?

I mean, just, it is primary impact is on our cost.

Okay.

Thanks very much.

Thank you.

Our next question comes from the line of Ehud Gelblum with Morgan Stanley.

Your line is open.

Hi, Jim.

How are you?

A couple questions, across a couple different segments.

Quickly start on Telecom.

You mentioned a, an affiliate that you brought in house.

Can you just give a sense, a sense to what it was, how large it was, and how much that impacted numbers?

And then you also mentioned in Telecom, that there were delays in China in some large fiber deals.

Do you have any color on what caused those delays?

Was it the change in management that happened in a couple Chinese carriers, and how far out those got pushed?

And then I have some questions on LCD and Gorilla.

So the, a small company was a previous joint venture that our Corning cable systems unit had.

Its impact was about $5 million in Q2, and I think it will be almost $10 million in Q3 in terms of consolidated sales.

It is really relatively tiny.

The Telecom tenders were from -- that we were expecting tenders to happen earlier.

I can't tell you why they don't.

And you probably heard me say in the past, that we believe all of the Telecom business in China is ultimately controlled by government policy.

So whether it was the management changes or not, I can't know for sure.

But definitely tenders that we expected earlier have not happened yet.

They are -- there is a tendering process right now.

What we just don't know is when it will be complete, and how much the volume will be.

But definitely against our original expectations for China, this has been a slowdown.

Okay.

That's helpful.

On LCD, obviously, screen sizes have been growing for the last, I would say, almost 18 months or so.

To what extent do you think the significant fall-offs in glass pricing that we have seen over the last 18 to 24 months, how much do you think that has contributed to the -- people just buying larger TVs because the price points have come down, primarily because glass pricing has come down.

And so now that we are -- that we are now in 2013, in an era of moderate price declines, as we get into 2014 and beyond do you think that maybe we will see an end to the larger screen sizes?

You see what I am saying, that maybe the larger screen sizes are linked to the lower prices.

When you stop having lower prices, you stop having larger screen prices a little later too?

Yes.

So I don't think the glass price declines have been the primary reason why pricing at retail have gone down.

Obviously, it has contributed.

And for panel makers, also the fact that the yen has helped them on their profitability has gone up.

I just think that the price points and quality of televisions are so incredible, that it is hard to imagine people buying a small television now.

And now, I spent -- I got up in this early this morning, and read a whole bunch of retail television ads for the past months.

And I am just stunned by -- remained stunned by how low the price points are.

So I am not expecting price points to go back up on large televisions next year.

And I think, we will begin to see sometime next year, 2K/4K showing up.

Obviously, that will be more expensive initially.

But I don't think there is any going back on this size phenomenon.

Okay.

So I don't think prices will go up.

I was just wondering what you thought about the glass prices going down, impacting the total price at retail.

On the Gorilla side, you mentioned Dell.

So are we to assume that they are the -- you said there were other OEMs coming out as well.

But are we -- assume that Dell is the only one that really will be using Gorilla in any type of volume in 2013, and the rest of them are out in 2014?

And then you had a previous comment, I think in the last conference call or previously before that, that you expected I believe 10% of notebooks and laptops to be either touch or have cover glass.

I was wondering, what your current expectations are?

Is it still in line with the 10%?

And is that in line with the guidance now for Gorilla and Specialty Materials?

Well, the guidance for the year was around 10%.

It will be higher at the -- in the fourth quarter.

I won't comment on customers.

Dell is the one that announced with us yesterday.

But we expect to be on a number of notebook manufacturers.

In 2013?

Yes.

Okay.

That's helpful.

I appreciate it.

Thanks.

Operator, we have time for one more question.

And that will be from the line of Jagadish Iyer from Piper Jaffray.

Your line is open.

Yes, thanks for taking my question.

Two questions, Jim.

I just wanted to understand on, when you said you don't have any updates on the automotive segment.

I just wanted to find out what is the gating item there, in terms of the adoption of these specialty glasses for these sunroof applications?

And then I have a follow-up, please.

Well, it is always hard to get your first customer.

We had hopes that we would get on a certain model.

That has not turned out right now.

But we are still trying very hard.

But this is a fairly revolutionary new product for the auto industry, and it is always hard to win your first one.

So beyond that, I can't say.

I mean, we haven't stopped trying.

So do you have any timeline when we could potentially hear?

Is it probably later this year or maybe next year?

I don't have a new timeline.

I actually thought I would be already announcing.

So I am -- we are a little disappointed by that.

Okay.

Just quickly on when can we have some -- when do you think you will have some meaningful uptick of the Willow Glass, you are actively engaged with customers.

When do you think we can have -- expect to hear more on the traction on Willow Glass?

For which product?

The Willow glass.

Oh, Willow.

Sorry, I misunderstood you.

I think we will talk more about Willow in the October conference call.

Thank you.

Okay.

So we will wrap up here.

I just have a couple of Investor Relations comments.

First, in case you missed our announcement, in June we did officially appoint Ann Nicholson Division VP, and she will be leading our Investor Relations function.

We are delighted to recognize Ann's performance with this promotion.

Our second announcement is, we will be speaking at the Citi Technology Conference on September 4 in New York City.

I would like to summarize a few highlights of the call.

First, we have made great progress on our plan to stabilize Display, and then return to positive momentum in the segment.

Second, we are executing on our goal to grow earnings in our other businesses.

In addition to volume growth, strong operational execution and cost reduction efforts have been a significant driver of profitability improvements.

We grew our core earnings per share year-over-year by double-digits, the last three-quarters.

We think this is strong evidence we are marching up.

Fourth, Dow Corning silicones are not improving year-over-year, and that is a big disappointment to us.

Finally, as we look forward to Q3, we are confident we will have our fourth conservative quarter of year-over-year core earnings growth, despite the weak Dow Corning outlook.

It will be driven by moderate glass declines in LCD, and growth in Telecom, Life Sciences, and Environmental.

Ann?

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

A play back of the call is available beginning at 10.30 AM Eastern Time today, and will run until 5.00 PM Eastern Time on Tuesday, August 13.

To listen, dial 800-475-6701.

The access code is 297023.

The audiocast, of course, is available on our website during that time.

Operator, that concludes our call.

Please disconnect all lines.

Thank you.

And ladies and gentlemen, that does conclude your conference call for today.

You may now disconnect.