康寧 (GLW) 2013 Q3 法說會逐字稿

Welcome to the Corning Incorporated third-quarter results conference call.

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

Thank you, Lola, and good morning.

Welcome to Corning's third-quarter conference call.

With me today is Wendell Weeks, Chairman and Chief Executive Officer; and Jim Flaws, Vice Chairman and Chief Financial Officer.

Before we begin our 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 will turn the call over to Jim.

Thanks, Ann.

Good morning, everyone.

Today I'll be focusing mainly on our results for Quarter 3 and our outlook for Quarter 4. However, we had a significant announcement last week, so I'll quickly recap that news and how it fits into our corporate strategy.

Corning is a Company with a long history in a clear strategic framework, which has three main components.

First, we grow primarily through global innovation.

And because our innovation, our operating leverage bring risks.

We also work to bring stability and balance to the Company with conservative financial strategies and a broad portfolio of businesses that participate in diverse markets.

Finally, we proactively live our values.

Last week we announced a series of agreements with Samsung that included an expanded technology collaboration and attaining full ownership of SCP.

We also announced incremental returns to shareholders with the new stock repurchase program.

Last week's announcement fits very well within our strategic framework.

First, it is outstanding financial transaction for the Company and for our shareholders, with strong accretion and increased cash flow.

We will be putting that financial strength to work for shareholders immediately with the new buyback program.

Second, it strengthens our LCD business worldwide with cost reduction opportunities, provides a simpler go-to-market approach and allows future lower capital spending.

It enhances our ability to service all of our glass customers, including specialty materials Gorilla Glass customers.

It enhances our 40-year relationship with Samsung and it preserves Corning's independence, allowing us to work with all customers.

This slide recaps the major elements of our announcement.

Corning will become 100% owner of SCP's LCD business.

We will have a 10-year supply agreement with Samsung for LCD glass.

We will expand our collaboration on technology development.

Samsung will directly invest $400 million in Corning.

And finally we have authorized $2 billion in an additional share repurchase, which is effective upon closing, which is expected to occur during the first quarter 2014.

This new share repurchase will offset the dilution from the common shares embedded in the convertible preferred shares issued to Samsung.

Resulting impact to our core financial statement is expected to be approximately $2 billion increase in sales, $350 million in incremental NPAT and an additional $500 million per year of free cash flow.

When you include the impact to the share repurchases, total accretion to EPS on a fully-diluted basis is approximately 20% in 2014 and 2015.

Before I jump into the quarterly details, I'd like to remind you we provide our results on a core earnings basis in order to exclude non-performance related items and increase transparency of our operating results.

Core financial measures are non-GAAP and of course we continue to report our GAAP results.

You can find detailed reconciliations on our website outlining the differences between these non-GAAP measures and the most directly comparable GAAP measure.

Let's turn to the third quarter.

Please to say our third-quarter results were very strong.

We experienced some headwinds in certain portions of the Company compared to our expectations entering the quarter.

However, thanks to excellent operational execution and cost control, we delivered a fourth consecutive quarter of year over year strong EPS growth.

In total, we delivered 17% growth in NPAT, 18% growth in earnings per share on a 10% increase in sales.

Display technologies continues to regain positive momentum.

During the quarter we renewed the contracts that we had announced at this time last year.

We think this is a very positive signal for our display business.

LCD glass price declines were again moderate in Q3, as expected.

Looking ahead, we expect Q4 price declines to be in the same moderate range as Q3 and our market share to remain stable going forward.

And our other businesses also performed well during the quarter.

Telecom nearly doubled net income year over year on a 24% increase in sales, specialty materials had sequential profitability gains, driven by Gorilla Glass manufacturing and sales.

Lastly environmental had year over year net income expansion, despite lackluster demand for environmental products and diesel.

Overall we are pleased with the third quarter.

Now I'd like to turn to our Quarter 3 core earnings results.

Sales were $2.1 billion, up 10% versus a year ago.

Gross margin was 44% up 1.5 points year over year, better than our expectation, driven by additional volume in display.

Gross equity earnings of $121 million were down 30% versus a year ago.

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

I'll provide more color on equity earnings in a few minutes.

Our core effective tax rate for Q3 was 18%.

We now forecast the full-year core effective tax rate to be approximately 17%.

Finally, core earnings per share were $0.33, up $0.05 over a year ago.

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.

I will turn to our segments and I will start with display.

We believe the overall glass market was up slightly in the quarter.

Sequentially Corning and SCP 's combined volume grew by low single digits.

Overall, our market share remains stable.

Core sales for display were $689 million in Q3, an increase of 7% versus last year.

Price declines were similar to Q2 and in the range we expected.

Core gross equity earnings from our display equity affiliates, which includes Samsung Corning Precision and also our OLED glass venture, Samsung Corning Advanced Glass, were $85 million in Q3, a decrease of 40% year over year and down 27% sequentially.

Lower year over year volume of LCD glass, price declines and a higher tax rate impacted SCP's results versus the prior year.

The sequential decline was driven by more moderate sequential price declines and lower inter-company glass sales and some foreign exchange impact.

For modeling purposes, display equity affiliate's third-quarter display glass sales in constant yen were about $509 million, a decrease of 19% from last year.

As a reminder, this represents EAGLE XG and Lotus Glass sales only.

Our public filings report our display equity affiliates total sales, which include various other products.

Now when we consolidate sales from our acquisition of SCP, we will be reporting their LCD glass sales in our display technology segment results.

Sales from SCG and other products remain excluded in the equity earnings from those non-LCD glass entities will remain in the equity earnings line.

Equity earnings from those affiliates would have been immaterial in Q3.

Display's core net income was $304 million, down 9% versus last year, however without the equity earnings display's net income would have been up approximately 14%.

Strong wholly-owned results reflect increased sales and solid cost reduction efforts.

Our wholly owned display business increased gross margin slightly on a year over year basis.

On the supply chain front we estimate the forward-looking weeks of inventory contracted to 16 weeks in Quarter 3 as we expected.

This drop is due primarily to the higher seasonal volume in Q4.

We expect that the absolute level inventory will decline significantly in Q4 and that forward-looking weeks of inventory will be approximately 15.5 weeks at the end of Q4.

Now let me turn to telecom.

Q3 sales were $650 million, that was up 24% year over year and slightly better than our expectation of 20%.

The majority of the year over year increase was due to carrier growth in North America and EMEA as well as enterprise growth in North America, which more than offset year over year declines in China fiber sales.

The China fiber market was softer than expected in Q3 and we believe this will continue through Q4.

I'll give some more detail on this in our outlook.

The consolidation of previous equity affiliates and a small acquisition also contributed to sales growth year over year.

Telecom's year over year net income was up 86%.

Earnings improvement was driven by the higher volume and also cost reductions in manufacturing and SMSA.

In environmental, Q3 sales were down 3% year over year and slightly below our expectations.

Light-duty diesel sales were down versus last year on the weak European auto market.

And the US class 8 truck demand at retail and build rate remains soft.

Light-duty substrate sales were consistent with Quarter 3 of a year ago.

Now despite the environmental sales decline, net income was up 19% year over year, driven by improved manufacturing performance and cost reductions and operating expense.

Specialty materials Q3 sales were up 8% sequentially as expected, and Gorilla delivered on its sequential growth target in the quarter.

This is down approximately from 10% last year, due to our continued working off of extra supply chain inventory that was built during Q4 of 2012.

We've been dealing with this work-off of inventory every quarter this year and expect to be past the issue after Q4.

The good news is at a consumption level, glass usage going to retail has been up more than 30% this year.

Core net income was consistent with last year.

Gorilla Glass manufacturing improvements offset year over year segment sales decline.

We are very, very pleased with the improvement in Gorilla's manufacturing efficiency over the last several quarters.

In life sciences, Q3 sales were up 39% year over year due to the additional sales from the Discovery Labware acquisition, which closed on October 31 last year.

Year over year core net income was up 156%.

After one full year of ownership we are very happy with the progress of the Discovery Labware integration and it's positive impact on earnings.

We did feel some effects of the continuing government sequestration in this business.

We estimate the impact on sales in the quarter was somewhere between $5 million and $10 million.

Turning to Dow Corning, gross equity earnings for silicones were $28 million in Q3, consistent with last year and better than expected, driven by some favorable one-time items of approximately $14 million.

Sales were down slightly year over year and pricing issues continue primarily in Asia.

Although we're not including Hemlock in our core earnings this year, Hemlock was cash flow positive and we have been encouraged by some elements of Hemlock's performance.

Our balance sheet is strong, we ended the third quarter with $5.4 billion in cash and short-term investments with about $1.6 billion of that total in the United States.

Our net cash position is $2.6 billion.

Capital spending was $244 million in the quarter.

We now expect our total capital spending for the year to be $1.1 billion, down from our previous forecast of $1.3 billion.

Free cash flow for the quarter was $268 million.

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

You may recall late April we had announced an 11% common stock dividend and a new $2 billion stock buyback program.

During Quarter 3 we repurchased $209 million of our stock.

Year-to-date purchases on the April program are $441 million.

Now I will turn to our Outlook.

As we mentioned in our pre-release last week, Quarter 4 has normally had some seasonal down ticks in several of our businesses.

Longtime followers of Corning know the telecom pattern is usually seasonably down in Q4.

Last year, 2012, we did not follow that pattern due to hurricane Sandy and the NBN ramp in Australia.

However, we are expecting the normal seasonal downturn in telecom this year and that will be amplified by some specific items in telecom in other businesses.

These are likely to result in lower sequential earnings.

Also embedded in this outlook is our expectation of a slight pullback on display glass demand versus Q3.

We did not express a pullback in Quarter 4 of 2012.

Our year over year earnings comparison will be influenced for some of the same reasons but also for some different ones.

We had a significant supply chain inventory build in Gorilla Glass in Quarter 4 last year that will not repeat.

I will turn to display Outlook.

Let me start with the current view of the end market in 2013.

Expect the retail market as measured in square feet of glass to be up mid to high single-digits.

Right now it currently looks tracking to be at the high end of that forecast.

This is predominantly driven by the increase in the average screen size of televisions.

Worldwide unit sales of 50-inch plus televisions are up 93% year to date.

The television market in China continues to meet our expectations.

Sales of televisions to Chinese National Day holiday were as we expected.

Many industry analysts are describing the sales in China in the back half of this year as disappointing.

Please recall that we had forecasted the end of the China television subsidy, and for retail sell-through area demand, area to be up only 5% in the second half.

Let me turn to Quarter 4. For the LCD glass market we'll be down slightly.

We expect our wholly-owned display business and SCP combined volumes to be down slightly from Q3 but share to remain stable.

Inventory build-up from earlier this year is expected to feed the higher retail demand in Q4.

For our panel maker utilizations, we expect the supply chain inventory to reduce by approximately half a week from 16 weeks of inventory to 15.5.

We estimate LCD glass price declines to be moderate in Q4 and a similar moderate rate to Q3.

I'll spend a little extra time on telecom's forecast today to make sure you understand the current dynamics.

The call last year, our telecom sales in Q4 did not decline sequentially.

This is because of the disaster recovery efforts from hurricane Sandy increased Quarter 4, 2012 sales in North America.

And our fiber to the home sales to NBN ramped strongly in Quarter 4 a year ago.

In contrast, this year our sales in North America were at actually an all time high in Q3.

Our fiber to the home sales in Australia's NBN initiative were expected to ramp over the course of 2013 versus 2012, but construction delays have gotten worse and slowed the ramp.

We expect Q4 sales in Australia to be down significantly year over year.

Worldwide carrier sales are expected to be up 10% versus last year.

The fiber market in 2013 has not materialized as we had expected.

Optical fiber market had grown by an average volume of 16% the last decade and has that record highs for each of the last 6 years.

We had expected 5% to 10% market growth for 2013, but now believe the 2013 fiber market will be flat.

North America declined more than expected, China is flat and we observed contractions in some other key markets.

While we're still assessing our view of the 2014 market, inventory has been increasing in certain locations due to that flat 2013 market demand.

For Quarter 4 we expect telecom sales to be down low single-digits versus last year.

In total for the year, we expect 5% sales growth in telecom, driven primarily by fiber to the home and enterprise projects.

In environmental we expect Q4 sales to be up slightly versus Q4 of 2012, driven by a heavy-duty diesel market in China and Europe.

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

Full year sales environmental segment are expected to be down approximately 5% year over year, driven by the softness in light-duty diesel market in Europe and heavy-duty diesel in North America.

Specialty material sales are expected to be consistent sequentially but down 20% year over year in Q4, due to an inflated Q4 2012 by the previously mentioned inventory build in Gorilla Glass.

Expect advanced optics sales to be up year over year as demand for semiconductor industry continues to improve.

Gorilla Glass sales are down year over year due to IT hand-held supply chain over-build in Q4 2012.

This chart shows the cover glass sales volume versus industry consumption for IT and hand-held in square feet.

Q4 demand is up nicely year over year but the over-build in Q4 of 2012 puts our volume down versus last year.

Gorilla Glass 2013 sales volume is expected to be down 15% for us, due to the fact that last year's inventory build.

Adding to that decline is the lower large cover glass sales year over year.

Full-year we expect specialty materials sales to be down mid single-digits, driven by the impact of the supply chain build up and lower demand for large cover glass.

However, Gorilla profitability improved nicely this year and we expect net income to be up slightly.

In life sciences we expect sales to be down 10% year over year, mostly due to the full three months of added sales from our acquisition versus the partial quarter of 2012.

Did I say down?

Up 10%.

Dow Corning expects earnings from its silicone segment to be similar to Q3.

Expect our core gross margin be consistent year over year at 42%.

SG&A is expected to be 15% of sales and R&D 9% of sales.

Core equity earnings expect to be down about 20% versus last year.

SCP is expected to be the main driver caused by year over year price and volume declines.

Expect our core effective tax rate for 2013 to be about 17%.

That concludes my opening comments.

Ann?

Thank you, Jim.

Lola, we will open the lines now for questions.

(Operator Instructions)

Rod Hall, JPMorgan.

I wanted to kick off, Jim, with a little bit of further color on inventory.

Inventory was pretty volatile this year.

We got to the reduction that you'd called for the end of the year, or at the beginning of this year, but it's more than I think you guys were anticipating.

And I wonder if you could talk about the sustainability of these inventory levels in 2014?

Should we still be expecting a half a week reduction over 2014?

Do you think if we hold at these levels, what you are thinking there.

Also on the CapEx, just a clarification.

Is the new CapEx number now including the elimination of that Chinese plant build or is that still yet to come?

On optical, if you could talk a little bit about -- if there is any more color you could give us in terms of what is going on in North America?

Is this a single carrier effect that you are seeing?

Or is it more broad-based in terms of what is happening with optical fiber demand?

Thanks.

Okay, that is a lot of questions.

On inventory in the display industry, inventory in absolute terms built as we marched through quarter one and quarter two significantly, and somewhat in quarter three.

At the end of quarter two we got to 18 weeks, and now we're at 16.

As we do that, we are always forward looking.

So the drop of from 18 to 16 really reflects the fact that Q4 forward-looking volume is always so much higher.

In quarter four what we expect is the absolute amount of inventory to drop.

We look forward-looking relative to Q1, and think will be a little below 16 at 15.5.

It is our expectation right now that there is no reason for the inventory to be very different from this 15.5 to 16.

Frankly, our precision on our accuracy on ability to do the half a week is pretty suspect.

I would say we are delighted by the fact that we think we are back at that 16 level and maybe 15.5, because as you know, we didn't like being at 18.

Relative to the CapEx question, Rod, the $1.1 billion is the forecast for this year.

You may recall the China television plant was never in Corning's wholly-owned numbers.

So you would not be seeing that in any of the guidance that we would have been talking about.

The drop from $1.3 billion to $1.1 billion reflects two elements.

One, we're always a little slower on capital spending than what we think we're going to be.

And second, we are pacing, given the slightly moderate, more moderate sales growth than what we expected.

That's probably split about half and half.

But the China was not a factor in that at all.

Wendell, you want to comment on optical in North America?

Sure.

In North America, what we saw was this year the end of the stimulus program.

And that is what has led to the lower volume levels.

We had expected that after -- we did expect the stimulus to end and the volumes to drop as a result.

But it was what base would it return to?

And we had expected the base to have shown a little more growth than what we are currently forecasting.

On a longer-term basis, we're pretty bullish on North America.

If you're a close watcher of the space, you will have seen comments from a major carrier.

Them getting more aggressive on fiber to the home, which we take as very encouraging.

Great, thank you, guys.

Mark Sue, RBC capital markets.

The pricing display glass seems to have been moderate for numerous quarters now.

With Samsung a stronger partner and an important shareholder, can we call victory on pricing?

Will moderate pricing prevail?

Perhaps what has been the response from non-Samsung customers?

And if that is the swing factor to watch in terms of pricing as we move into 2014?

Then, Jim, an overall early read as we look into next year, how you feel about global demand for display glass?

And then, Wendell, a follow-up on your question.

If the fiber may have peaked due to the lack of stimulus now here in North America, and if I look at some of the big projects overseas, that seems to be winding down.

How should we think about the demand for fiber?

Is that a trough year that we should be entering into?

Thank you.

I will start and then turn it over to Wendell.

On the pricing for LCD glass, I don't think you can declare permanent victory.

We have to remain ever vigilant about this.

We're obviously delighted by what you mentioned, Mark, with the number of quarters we now had a moderate level.

I would call your attention also to something we announced this morning.

That is the renewal of the agreements that we announced last October, which had the structure at certain customers where our position was determined by the contract, and the pricing would be related at that customer would be done by what the competition did to that customer.

We were very excited to have those be renewed for this upcoming year of 2014.

In some cases we now have contracts that extend beyond 2014.

I will never spike the ball in victory, but we really have made a lot of progress.

Wendell, let me take the early read on 2014 and then I will turn it over to you for the comments on what other customers are saying about the Samsung agreements.

Our early read right now, Mark, is that we're heading into 2014 in a pretty good position in display.

If our expectation is right, that there is a little pullback in utilization in Q4, at panel makers, we think that makes the inventory situation be very good heading into next year.

We continue to feel that television sales will be strong.

For us it is all about size.

As I reported, we are seeing great year-over-year demand in large-size televisions.

We are feeling pretty good about early read on 2014 for LCD.

Wendell, do you want to comment about reaction from other customers?

I would say so far the reaction from our other customers to our recent series of agreements with Samsung has been positive.

I leave after the conference call today, on a world tour to spend some time with a number of them face to face.

But so far the reaction has been positive, that they view it as an enhancement of our ability to act independently across the globe.

And they're net taking it has a positive.

More to come.

Once again, ever vigilant on those items.

In the end it will be our ability to innovate for them and serve them well that will keep them loyal with us.

You also had a question on telecom.

I want to make sure I understand it.

You were asking that are we entering a slower period for telecom in the upcoming year?

Is that what you were asking?

Yes.

Since the stimulus is would down here and some of the larger projects overseas seem to have peaked, do we see a lull before we see growth again maybe into 2015?

We're just putting together our view of that.

I would say we have some opposing factors.

In terms of fiber volume, then I find the hypothesis that you are laying out has some merit in terms of fiber volume.

A lot of it though, pivots around China.

And this year China was relatively flat in terms of fiber volume demand.

China can be opaque as it looks forward.

I think your hypothesis has some merit on fiber demand.

I think on overall telecom sales, though, it is a little different.

We're seeing an awful lot of strength in enterprise, those are all of our data center builds.

We are seeing an awful lot of strength in our wireless product set.

I think telecom sales are about a lot more than fiber volume.

So I do not know that your hypothesis holds for overall telecom sales.

Does that make sense to you?

Yes, that's helpful.

Thank you and good luck, gentlemen.

Wamsi Mohan, Bank of America.

Jim, can you bridge the SCP equity income between Q2 and Q3?

It looks like it is down from $117 million to $85 million, that is a 25% or so decline.

Was there incremental share loss there?

And roughly what percent of SCP capacity is currently unutilized?

And I have a follow up.

In quarter one and two we were averaging about $125 million net income.

In quarter three we were at $85 million and it will probably be about $80 million in quarter four.

That clearly is a step down.

We have known this for a while.

The impact is we continue to have price erosion and unlike our wholly-owned business, we have no volume growth and actually have a little bit of volume decline.

Is not a share loss.

Share remains the same as it did at both our large customers in Korea.

We did have some other impacts.

Some of the strength in income at SCP in the earlier part of year was actually them making product and selling it to us under our old agreements.

You may recall that we had told you in the first half of the year our wholly-owned business is relatively full.

We had SCP make product for us and under the old agreement they kept the majority of those profits.

There also was a little FX impact in this quarter, but fundamentally not a share loss.

There is not growth and demand in Korea right now.

Prices go down there and that impacted -- and we are not having them make product for us.

Obviously this all resets when we get to the deal closing, then we can use the worldwide capacity most efficiently.

Relative to your comment on capacity in Korea, we have a significant amount off-line there.

That significant amount off-line comes about from what happened in the fourth quarter 2011 when the LG share stepped down dramatically.

That is where we have a big opportunity to use those very efficient tanks going forward.

thanks.

And as a follow up, given the utilization rate [cardset] panel makers that you alluded to, can you talk about if you are taking this opportunity to also cut utilization rates in display?

And what the anticipated gross margin impact from such cuts could be?

Thank you.

You are seeing the gross margin impact in our corporate guidance, which was down for the quarter.

That is driven primarily by display, some by telecom.

We have a normal sequence of tank repairs coming up, so we will take advantage of those repairs that will allow us to throttle back a little.

I do want to emphasize that this pull-back from panel makers that we are talking about is not a significant one.

We are talking about our volume in Q4, only a small percentage as versus Q3.

So it is not a big deal, but it is down.

I would characterize it, it is really a feathering as we come out to that end of the year.

The degree of precision on whether or not -- how much we'll feather is in the pretty precision area.

So this is a subtle move.

It is not a significant move.

Thanks, Wendell.

If I could just follow up to that, to get to a 2- to 3-week reduction in inventory, that is quite a material amount in inventory weeks.

What sort of TV unit sell-through would you need for that inventory week number to -- for large-size TVs?

Would you need for the inventory number to move down to the 2 to 3 weeks?

Wamsi, I don't think you realize that we have already achieved a couple of weeks because of the forward looking.

As you know, the television demand jumps up seasonally dramatically.

The square footage at retail in quarter four versus quarter three, in absolute square feet, goes up by 33% driven by the seasonality.

Primarily in North America and somewhat in Europe because of the holidays.

Obviously large-size televisions help that.

We always see that type of seasonality.

It is that increase of a couple of hundred million square feet at retail that gets pulled out of the supply chain that causes the absolute number to come down.

Thanks, Jim.

Thanks, Wendell.

Amitabh Passi, UBS.

I had a couple of questions, as well.

Jim, Wendell, for you.

You talked about re-upping or renewing our contracts.

I was wondering if you can update us in terms of whether there is any changes in either market share or pricing assumptions.

And then Jim, I wanted to confirm if I look at your fourth quarter guidance, do you anticipate core EPS to be down year-over-year?

I wasn't sure what you said about OpEx.

My final question was around the Gorilla Glass guidance.

I would've expected a seasonal uptick in the fourth quarter, so surprised that you're guiding sales to be sequentially flat.

Thanks.

Gorilla, being sequentially flat, we did have some new model launches in Q3.

I think there's a possibility it could go up a little, but right now we are thinking it is flat sequentially.

You want to comment on the renewal of the contracts and the terms?

Sure.

We are really happy that we have done the renewals to extend those contracts, at least through the end of 2014.

As Jim said, some them of them now stretch beyond that.

In all of them, these are not market share-gaining moves.

These are market share-stabilization moves.

So no change in our share at these customers and no change in the pricing mechanism.

I will finish up with your question about core EPS.

As you know, we don't give official EPS guidance.

Our hope would be to have it be flat sequentially.

But it is possible with this down-draft in telecom, because of the year-over-year seasonality we are having this year, we didn't have last year, and the fact that we don't have the inventory build in Gorilla that we had last year, that we could be lower year-over-year on core EPS.

Okay, perfect.

Thank you, guys.

Joseph Wolf, Barclays.

Thanks for taking a couple of questions.

Quickly on the CapEx with the reduction of about $200 million, how should we be thinking about a catch-up next year?

Or is it too early to think about that based on what is changing, given the Samsung deal?

And then on the cover glass you mentioned that some of the large sizes were down and that drove some of the results.

Could you talk about new opportunities that you may be seeing for large cover glass?

Maybe new designs or things that are out there for 2014?

Okay, I'll start out by the CapEx.

The $200 million being down, we are not expecting that we will see a big roll-over into next year.

We are still holding right now our forecast of $1.3 billion for next year.

That excludes what would be the impact of consolidating Samsung.

But if I remind you, when we consolidate Samsung's ongoing capital, we do get the benefit of all of their cash flow.

Right now we are expecting to be about $1.3 billion next year also.

Wendell do you want to talk about large cover glass?

Yes.

We continue to work at a number of different opportunities for large cover glass.

I think you will understand if I don't speculate directly on the timing of those and the like.

However, we are pursuing them in both consumer electronics and non-consumer electronics applications.

We are not counting on a big surge in the near term.

But we believe that long-term there is a strong opportunity for thin and light large-area covers.

Great, thank you.

Steven Fox, Cross Research.

Just a follow up on the Gorilla Glass question.

What change between Q3 and Q4?

Because it seems like Q4 is a little bit weaker than you would have thought just a few months ago.

Secondly given my understanding of what you are saying about sell-through of Gorilla Glass at the retail level, is it too soon that once this inventory correction is over that you are still looking for that type of growth next year?

Thank you.

I don't think there has been a real change to inventory from our point of view on Gorilla.

We have been dealing with the inventory work-off all year long.

The consumption cycle can vary depending on when model rollouts happen.

Clearly, year-over-year consumption, quarter four of 2012 versus this year, is up.

We feel pretty good about that sequence.

The consumption level last year, quarter four was down from quarter three just like it is slightly this year.

We believe that when we finish working off this pile of inventory that was built in quarter four last year, after quarter four, and the thing that we are interested in is the growth of IT and hand-held.

And the rollout of touch and notebook should drive year-over-year growth for Gorilla next year.

As we think about it, Steve, I think at the end-market level, we are seeing phones that are touch-enabled up about 25% this year, and tablets up about 30%.

We see continued nice growth next year.

I think always the challenging thing about forecasting quarter to quarter in Gorilla is the relatively long and complicated supply chain.

I think Jim hit on the good news, which is we believe that as we get through the fourth quarter of this year, we will have worked through the last of the overhang, of the over-ordering from our customers in quarter four of last year.

I totally hear you.

The supply chain, given its length and complexity, can be difficult to forecast in any given quarter.

But the year-over-year trends at the consumption level continue to look good to us, Steve.

That is totally fair.

Then one very quick follow up.

Did you wind up shipping as much as you thought into the touch notebook market for the second half of the year?

Or how would you describe that?

Thanks.

On touch on notebook, think there's a couple of areas.

First of all, the overall penetration of touch into notebooks has ended up being less than what we have thought it would be at the beginning of the year.

Some of this has to do with some of the challenges of Windows 8. Some of it has to do with some of the challenges of what will notebooks work like with touch?

And will they be convertibles?

Will they just be notebooks that work just like a notebook but I can touch it too?

All of that I don't think yet has been worked through with a clear product concepts by our brands.

I think the penetration is certainly lower than what we would have thought at the beginning of the year.

And the notebooks continue to be price- and volume-challenged.

We do believe that this will be overcome.

That touch will be an important part of notebooks going forward.

And that ultimately, about half of them will be touch-enabled.

That we will continue to do is work to devise product that makes that a more compelling product, as well as to deal with some of the lower-end attack of lesser materials.

Because of the incredible price sensitivity of these notebooks, and that no one has yet to find a way to turn touch into a compelling price feature.

Great, that's all very helpful.

Thank you very much.

Jim Suva, Citi.

I wanted to ask a question.

On this acquisition of SCP, you laid down a 20% accretion.

Can you talk a little bit about the implied buyback timing or inherent assumption under that.

Is it for the full $2 billion to be employed on the very early part of the year or averaged through the year?

And what is Corning's intention for that large stock buyback, for the timing?

We said the 20%.

We said approximately, but our intent is to get those shares taken out of the market as soon as we can.

We haven't made a final decision on what we are doing in terms of whether we will do an accelerated stock repurchase program or not.

As soon as we do make that decision we will let you know.

Our desire is to get them out of the share count for 2014.

It sounds like, in other words not averaged through the year, but rather very front-end loaded sp you can get the EPS benefit for the whole longevity of the year, rather than spreading it gradually over the year.

Is that correct?

That would be our tendency, to try to lean that way.

Great.

Thank you very much.

Patrick Newton, Stifel.

First one for Jim or Wendell.

Pertaining to your LCD pricing mechanisms being in place now for about four quarters and your announced renewal.

I'm curious if you could discuss any competitive responses you have seen during this time?

We try not to opine too much on what our competitors are doing.

What has happened for us on moderate price declines has obviously been influenced on those customers where we have these clauses.

What our competitors do can have an impact.

I think overall the industry has seen moderate price declines.

But I won't comment in more detail about our competitors.

You obviously can look at their public statements.

All right.

And then on SCP, the $350 million in incremental income that you have guided to implies a continued erosion the fundamentals at SCP, relative to even the most recently reported quarter.

Can you help us understand what gives you comfort that these fundamentals are going to stabilize?

What kind of thought process is behind you achieving your targeted $2 billion in free cash flow for the next four years?

I would start out by saying, we do expect erosion to continue at SCP in quarter four.

Once we take over, we believe that we will have the ability to manage that operation in a way that we can stop the erosion.

We clearly expect to get synergies from better utilization of the worldwide set of tanks that we have.

We will be able to get out of some high-cost facilities.

We do expect volume growth next year.

The way we will be thinking about this is we will no longer be telling you what SCP is, we will be telling you with our worldwide LCD business is, and also our Gorilla business.

Remember, this year we have been dealing with Gorilla basically not having the growth we expected because of this overhang of inventory.

We will now get that growth again because we will be matching the consumption level.

That has got to come out of tanks that we need to operate.

That is where we're going to get some of the benefit going forward.

We are pretty confident that we will be able to achieve that $350 million incremental.

I think if we take a look at the fundamentals here, we expect Korea as a market to customers in Korea to be relatively stable.

They have been, and we expect them to continue to.

We are quite happy with our market share in Korea and our customer share at both of those players.

For us, the acquisition is about cost reduction and being able to utilize that low-cost capacity to serve our growing other customer bases around the globe.

That is where that real stabilization comes from on the financials.

To your first question, I would just amplify what Jim said.

For us, these customer agreements aren't about our competitors, they are about our customers.

Approaching -- one of the main reasons that we have extended them is that we have noted, and our customers have noted, that it has significantly improved our ability to focus on what really matters to our customers around innovation, service, quality, et cetera.

It has taken the whole tone of our dialogue and focused it on how do we improve each other's situations in a more integrated way?

That is one of the main reasons that we have extended them.

All right, thank you very much.

Last one for me, Jim, is on Gorilla, to make sure I understand what you are implying.

It seems like you are now looking for flat to slightly up Gorilla revenue year-over-year given the 4Q guidance.

As recently as last quarter of believe you reiterated a 10% year-over-year Gorilla growth.

You been aware about the inventory issues now for several quarters.

I am curious, it sounds like something on the demand side is the delta between what you expected last quarter versus the new guide.

Am I reading the gross rate correctly?

If you could elaborate a little bit on what has changed sequentially outside of the inventory.

Thank you.

I'm struggling following your numbers for Gorilla.

I think this may be best.

While we are pausing here, I think is, are you talking about the consumption level that you saw on that slide?

Are you talking about our sell in?

I'm talking about purely about your revenue recognition on Gorilla.

I think by my math we do not have an absolute number 3Q.

I believe you said your guidance is flat on a revenue basis for Gorilla, sequentially.

No, we said flat volume, I believe.

Flat volume, okay.

That helps explain it.

I will have to go re-jigger my math.

In essence, that 10% number year-over-year growth, I am assuming is coming down slightly?

10% in what?

You'd originally guided to Gorilla Glass revenue to grow 10% year-over-year in 2013.

That was a long time ago.

As recently as last quarter you implied that that was still --

I think we had a sequential.

I think we're probably best served here maybe if you and Ann could do a follow-up and sync up the models.

Make sure we are not talking past each other.

I think we're probably best served by that.

All right, will do.

I 'm worried we're talking past each other.

Perfect, thank you.

Brian White, Cantor Fitzgerald.

I'm wondering if you could talk a little bit about -- you talked about 2014 in your expectations for TVs a little bit.

What type of volume growth in glass should we be thinking about for 2014?

We haven't given official guidance yet for the market for next year, but I think that we would be expecting probably directionally the class demand in the absence of inventory shifts that we're not expecting to be, again, in the upper single-digits.

Okay.

The inventory situation in Gorilla, is there one customer?

Or is that multiple customers?

Multiple customers.

Multiple customers.

Okay.

I want to clarify, I may have missed, EPS growth was a little confusing.

I thought you said flat quarter on quarter, but that you came back and said year over year it could be flat.

I just want to be clear, are you talking year over year?

Or are you talking sequentially could be flat or slightly down?

We said sequentially EPS could be down.

And we said that year-over-year EPS could be flat or slightly down.

Right, thank you.

Simona Jankowski, Goldman Sachs.

On the contract renegotiation, it seems like you guys completed that a bit earlier that last year and also for a longer term.

Also is seems like this year it didn't have a price reset like it did last year.

And all of this in the context of what seems to be an environment with a little more excess inventory in the supply chain than what we had last year.

Is there anything we can read into that as far as Corning having a better structural or competitive position relative to a year ago?

Timing was identical to a year ago.

The recent you are referring to was the impact of the first initiation of this, as we had to get reset in quarter four as a result of the agreement.

But the timing was identical for those.

I think what you should read into it is that our customers are really delighted with the agreements.

They like the way in which this allows us to work together.

I think that is why it seems like such a calm, easy event, is it's something our customers really want to do.

Got it.

Also it does seem to have been extended for a longer period of time.

It seems like last year it was a one-year extension or contract, and this year it seems to have been for longer.

It is a real mix by the customers.

What we let our customers do is pick what they like.

And then what we were willing to agree to.

I think if we were willing, we probably could have gone even longer with more customers.

But as Jim said, for us, this takes constant vigilance.

So in each of these moves, we try to measure twice.

Okay.

And then a quick one on Gorilla.

Can you characterize the competitive environment there?

And whether that has played any factor into the slightly lower expectations?

Really we haven't seen much change in the competitive environment.

It is not a market share issue for us in any of the major brands.

We continue to feel very good about our share.

That being said, there is more growth in the very low-end piece of the smartphone market, or on white goods for tablets, the no-named tablets in China.

These are phones, for instance, that sell for less than $150.

In that area, we have not penetrated as highly as you would normally expect us to.

But our competition there is not from other alumina-silica glasses, it is just from thin window glass that is chem-exchanged.

What we're doing now is we're taking a look at what we should do in that market segment to compete against a very low-end product that, really, we haven't seen since the very beginning of the cover glass effort.

So long ago, in hand-held and tablets, we defeated that as of inferior material.

And now we have got to figure out how to address it in a market segment that is addressing a different piece of the market.

In a way I'm looking at that as a really nice opportunity.

Sorry for the long answer, but I thought maybe a more fulsome answer would be helpful to you.

No, that was very helpful.

Thank you.

Lola, we've got time for one more question.

Augment -- Piper Jaffrey.

Two questions.

First, Jim, you talked about the demand for 2014, I wanted to get your thoughts on what is your early read on supply in terms of the glass?

We have talked about capacity being taken off-line, but is there any early thoughts into how supply is going to be for next year?

And then I have a follow up.

We think glass supply remains relatively stable.

We have seen disciplined behavior by the glass industry, including ourselves.

So we're not expecting any sea change in glass supply as we head into 2014.

As a follow up, you did say that inventory is going to be finished up by the end of Q4 for specialty materials.

I was just thinking about, as we look at 2014, and as you start to roll out new products, how should we be thinking about growth rates for these new products potentially driving year-over-year growth in specialty materials for 2014?

Or should we still expect consumer devices there, the mobile devices, to be the main driver here?

Thank you.

I think you should continue to think about the mobile devices to be the main driver.

I think you will see some touch on notebook improve as well.

And most of the other areas around large format and other applications are going to be slower moving, as opposed to the speed you see out of mobile consumer electronics.

Thanks, Jagadish.

Jim?

Just to wrap up comments, first on investor relation events.

We'll be attending the UBS Technology Conference on November 20 in a new location, Sausalito, California.

Second, we will have a group at the Credit Suisse Technology Conference on December 30 in Scottsdale.

A brief summary of the highlights of the call, we remain very excited by last week's announcement on the purchase of the remainder of SCP's LCD business.

We're looking forward to closing in quarter one and realizing the synergies that Wendell was talking about from the integration.

I think we are delighted by our performance in Q3.

We had strong results across all of our businesses.

We're expecting normal seasonality in Q4, but obviously additional headwinds from China fiber demand.

We are very happy with the progress return of positive momentum in display.

Combining the synergies of the deal, the Q4 moderate price declines, and now the vast majority of our 2014 volume under contract should continue that momentum.

For the Company, we feel we've got fundamentals in our businesses that are solid.

And lastly for you shareholders, we are very committed to continue to return more cash towards you.

Ann?

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

A play back of the call is available beginning at 11.00 AM Eastern today and will run until 5.00 PM Eastern on Wednesday, November 13.

To listen, dial 800-475-6701.

The access code is 304926.

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

Lola, that concludes the call, please disconnect all lines.