康寧 (GLW) 2014 Q2 法說會逐字稿

Ladies and gentlemen, good morning.

Thank you for standing by, as today's conference assembled.

Welcome to the Corning Incorporated Quarter Two 2014 Earnings Results.

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

Later there will be an opportunity for your questions, and instructions will be given at that time.

(Operator Instructions)

As a reminder, today's conference is being recorded.

At this time, I'd like to turn the conference over to our host, Division Vice President, Investor Relations, Ms. Ann Nicholson.

Please go ahead.

Thank you, Tom.

Good morning.

Welcome to Corning's Second-Quarter conference call.

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

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

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

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

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

A reconciliation can be found on our website.

Now I'll turn the call over to Jim.

Thanks, Ann.

Good morning, everyone.

We're at the halfway mark for the year.

And as I think about where we've been and what lies ahead of us, I'll note that we've accomplished a great deal already and are poised to deliver a full year of strong earnings growth.

I'm delighted with our core performance results and the momentum we've created entering the second half.

We told you in February that we had four key items in our formula for success in 2014.

They were: number one, to continue the positive momentum in Display Technologies; number two, to integrate Corning Precision Materials and execute on our synergy plan; number three, to grow sales and profits of our other segments; and number four, to return cash to shareholders.

Reflecting on these now, we are mostly on track.

Even where we are not, there are some improving trends.

In Display, the end market of retail is on track; and we're seeing excellent volume and cost performance.

We're recovering from the product issue that we had and, most importantly, pricing is moderating after the speed bump in Q1.

Our CPM integration is going well, and we think the synergies will come earlier than our plan that we shared with you last October.

In our other segments, we are seeing excellent growth in Environmental and Optical Communications, actually stronger than our plan.

Our only disappointment is the slower growth in the cover glass market.

I'll speak in more detail on this in our outlook.

Finally, we are executing on the cash-to-shareholder goal through our repurchase program.

Now let's get to the second quarter results.

In the second quarter, we had our seventh consecutive quarter of core earnings growth, with earnings per share up 16% versus last year.

Also in the quarter, we attained more moderate price declines for LCD glass in the upcoming third quarter, actually returning to the rates we had experienced for most of 2013.

We also grew the Company's core sales with Optical Communications Environmental exceeding expectations.

We maintained strong control of operating expense, and we continued repurchasing shares, totaling approximately $200 million during the quarter.

Let's delve into the second-quarter details.

As a reminder, we are providing core performance results in order to exclude non-performance-related items and increase the transparency of our operating results.

Core financial measures are non-GAAP, and 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.

Second-quarter sales were $2.6 billion, up 28% versus last year, and a new record, driven largely by the consolidation of CPM sales.

Gross margin was 45%, was up year over year and sequentially, but slightly lower than our original expectation of 46%.

This was mainly due to lower Gorilla Glass sales versus our expectations.

SG&A and R&D spending were higher year over year in absolute dollars, driven primarily by the consolidation of CPM, but lower as a percentage of sales.

Gross equity earnings of $58 million were down 66% year over year, but that's primarily driven by eliminating the equity earnings of SCP following the acquisition.

Dow Corning equity earnings were up 17% year over year, and I will have some more detail on that in a minute.

Our effective tax rate was 17%, lower than quarter one, driven by the mix of sales by country and their differing effective tax rates.

Earnings per share where $0.37, up $0.05 over a year ago, and essentially in line with expectations.

During the quarter, we completed the announced $1.25-billion accelerated stock repurchase, and also bought approximately $200 million of shares on the open market.

We have approximately $400 million remaining on our current program and expect to continue share repurchases in Q3.

Now let's look at the detailed segment results, and I'll begin with Display.

Display sales were $1.1 billion in Q2, a 62% increase versus last year, driven by the additional sales from our now consolidated operations in Korea, Corning Precision Materials.

Q2 price declines were less than Q1, as we had expected.

The LCD glass market was up in the high single digits sequentially, exceeding our expectations for the quarter, driven by better expected sales for the World Cup.

We believe this demand may have pulled in some television units from the back half of the year, so we have not made any changes to our TV unit sales forecast for the full year at this time.

However, we are raising our TV screen size forecast.

Our volume in the second quarter edged up into the low teens sequentially.

Volume growth outpaced market growth, as we recovered share at the one customer in Korea.

Recall our Q1 volume growth was softer than the market growth, driven mainly by the technical issue with our product at one customer in Korea.

We have significantly improved performance in Q2, and have begun to recover share at this account.

Additional share growth is expected at this account in Q3.

We continue to expect our full-year volume growth to be in line with market growth, and our worldwide share to remain stable year over year.

Gross equity earnings from the equity venture in Korea, SCG, were immaterial.

Gross margins improved in Display, driven by the CPM consolidation.

Net income was up 9% year over year, reflecting the impact of additional sales in earnings from CPM.

We believe the supply chain inventory is healthy.

Q2 we saw supply chain inventory increase by approximately one week sequentially, as the industry begins the pipeline build for second-half sales.

On a forward-looking basis, weeks of inventory exiting Q2 of 2014 are at the same level as Q2 of 2013.

Additionally, panel prices continue to be stable or increasing, a strong indicator that supply chain inventory is healthy.

As we exit Q3, we would expect inventory to decline to less than 17 weeks on a forward-looking basis.

In our Optical Communications segment, Q2 sales were $686 million, up 14% versus last year and better than we had expected.

Sales for fiber and home solutions were stronger than expected in North America and EMEA.

All businesses and regions contributed to year-over-year sequential growth, with the exception of fiber sales in China.

Net income was up 5% versus last year, lower than the sales growth, primarily due to year-over-year price declines.

In Environmental, Q2 sales were $285 million, up 25% versus last year and better than expected.

Total diesel sales were up 38% as new regulations in China and Europe, as well as strong truck builds in North America, drove strong heavy-duty diesel sales.

Light-duty diesel and auto sales were up also versus last year.

Net income in this segment was up 42%.

Strong volumes in auto and heavy-duty diesel, as well as manufacturing efficiencies, led to record profits in Environmental.

In Specialty Materials, sales for the quarter were up 14% sequentially but lower than our expectations entering the quarter.

We believe our Gorilla Glass sales reflect what happened in the smartphone and tablet markets in the first half of the year.

In Q2, we've seen evidence of disappointing sell-through, which we believe contributed to our weaker sales into the supply chain.

In addition, we had a change in our expected ramp-up timing for some second-half model launches.

We expect to recover some of those sales in Q3, and I will provide more detail in our outlook section.

Net income in Q2 was up 38% sequentially, but down year over year 17%.

The lower year-over-year sales price, which had occurred in Q1, plus the non-repeat of our internal inventory replenishment from quarter two of 2013, impacted the segment's profitability.

Recall in the first half of last year, we replenished the inventory that been depleted in quarter four 2012, while this year our manufacturing volume is more closely aligned with the shipments in the quarter.

In Life Sciences, Q2 sales met our expectations for the quarter.

They were up slightly, and profit was consistent with last year.

Equity earnings for Dow Corning were $49 million including the earnings from Hemlock.

Earnings were up 17% versus Q2 of 2013.

This improvement is partially driven by the tax rate in the inclusion of Hemlock this year.

If we had had Hemlock in last year, the year-over change in equity earnings would have been minor.

Moving to the balance sheet, we ended the second quarter with $5.9 billion in cash and short-term investments.

We had very strong operating cash flow in the quarter.

Strong operating cash flow also resulted in strong free cash flow in the quarter of about $600 million.

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

You can find reconciliation to GAAP on our website.

We ended the quarter with a approximately $1.3 billion of cash in the United States.

Cap spending for the quarter was $232 million.

We are revising our capital spending forecast down for 2014, from $1.5 billion to about $1.3 billion.

The lower forecast is due to lower spending at both CPM and in our staff groups.

Turning to foreign-exchange exposures, we've taken some additional actions.

First, given our increased exposure to the Korean won with the SCP acquisition, we entered into a series of zero-cost collars during the quarter to hedge against movements in the US dollar to won exchange rate for 2014 and 2015.

We will now report the won at a constant rate of $1,100 in our core earnings, so investors can more clearly see our operational results.

These costs did not have a material impact to our GAAP results for the quarter.

Second, during the second quarter of 2014, we entered into a series of additional hedges with no associated premium, which will partially hedge the impact of the Japanese yen translation on our projected 2015, 2016, and 2017 net income.

The blended rate of these new average rate forward contracts is JPY99 per US dollar.

We have not made any decisions yet on the core reporting rate for 2015 and beyond.

We have some of 2015 hedged at JPY93, and now some at JPY99.

We'll keep investors updated on our activities and thinking on foreign exchange as the year unfolds.

Now going to outlook, I'll start with Display.

We have no changes to our expectations for LCD retail and glass markets for the year.

To reiterate, we expect the retail market as measured in square feet of glass to be up mid- to high-single digits.

We think LCD TV units will grow low- to mid-single digits, with area growth likely higher.

The trend of consumers buying larger televisions has continued.

We expect average screen size to increased 3% through 2015, driven primarily by increased affordability.

Moreover, we believe screen-size growth will be robust beyond 2015, driven by ultra-high-definition television penetration, which favors large-size televisions.

In the current year, we've raised our screen-size forecast significantly in the above 30-inch group for televisions.

As I said earlier, we continue to feel good about the glass market this year.

Inventory levels appear healthy, and glass supply seems aligned with demand.

We expect the LCD glass market be up low single digits in Q3 versus Q2.

Corning's glass volume is expected to be up mid-single digits, driven by the continued share recovery of the one customer in Korea.

Now, we expect LCD glass price declines in Q3 to further moderate and to be at the rates that we experience for most of 2013.

We're delighted by this return to the moderate levels.

In the first quarter, we closed on the acquisition of SCP, now CPM, and began integration activities.

These activities are proceeding very well.

We realized about $15 million pre-tax in synergies during the second quarter, and are tracked for $30 million in the third quarter and $90 million in synergies for the full year.

As promised, we are also updating our synergy forecast for the out years and now believe we can attain the $170 million in synergies in 2016 which had been in 2017, and ultimately attain a $210-million run rate in 2017.

Moving to Optical Communications, we expect Q3 sales to be up in the mid-single digits versus Q3 of 2013, driven by continued strong sales of fiber in the home and wireless.

Given the strong start to the year, especially in Q2 and our current outlook, we now expect full-year sales to be up in the high-single digits, due to growth in fiber in the home, data centers, and wireless optical connectivity.

Environmental, we expect Q3 sales to be up 20% to 25% year over year, driven by the continued stronger heavy-duty sales in the United States, and due to new regulations in Europe and China.

Turning to Specialty Materials, we expect segment sales to be up about 10% versus the second quarter, driven mainly by higher Gorilla Glass volume.

We expect an increase in Gorilla Glass volumes driven by new model launches, leading to sequential sales and gross margin growth.

We are making some significant reductions to our forecast of the covered glass markets for the year.

These changes are most significant in the tablet area and on touch notebooks.

The touch-on notebook market is not developing at the pace we expected, and our share remains similar to last year.

The change to our outlook for tablets is having the largest impact on our forecast.

We now estimate the overall media tablet market only growing approximately 8% to 10%, nowhere near the pace we had expected entering 2014.

And this growth is occurring only in unbranded media tablets.

We have not lost any share with branded media tablets; but because our share of unbranded tablets is lower, our overall share will slip slightly this year compared to last.

We have not made any significant change to our smartphone forecast at this time, but the second-half ramp of new models is important to us.

Of course, one reminder, smartphones are much smaller than tablets; so the square-foot impact of a phone is much smaller.

Again, our share forecast in phones remains similar to our original expectations.

Overall, we now expect the covered glass market in volume to grow 14%.

At a supply-chain consumption level, we should be up 10%.

We expect our shipment level volume to grow 20% year over year, due to the impact of the inventory correction last year.

Overall, the 20% growth is down from our original expectations for the year and is a disappointment.

In Life Sciences, we expect sales to be up slightly from last year's third quarter.

Continuing on with the rest of our third-quarter forecast, we expect third-quarter equity earnings from Dow Corning to be approximately $40 million to $45 million, down slightly versus Q2, driven by the return to a normal tax rate.

We expect core equity earnings for Dow Corning to be approximately $225 million for the full year, driven by the single-digit silicone sales growth, proved margins in silicones, and 20% sales growth at Hemlock.

As a reminder, we expect customers to meet their polysilicon obligations from the contracts in Q4, which will drive equity earnings up over Q3.

Our total equity earnings for Q3 are expected to be $45 million to $50 million.

We expect gross margin to be 46%, driven by Display and Gorilla Glass.

Display's gross margin accrues versus last year due to the consolidation of CPM.

SG&A and RD&E spending should be about 13% and 8% of sales, respectively, consistent with Q2.

Now finally, for your modeling purposes, I'd like to focus on three items to make sure you have our latest thinking.

These three are Other Income and Other Expense, our tax rate, and the number of shares outstanding.

First, our Other Income/Other Expense line in the P&L has several moving parts.

So I thought for your modeling purposes I would run through this line item.

Investors should recall that we no longer have the royalty income from SCP following its consolidation.

Expenses in Other Income/Other Expense are very steady.

The main component is interest expense, which runs approximately $30 million per quarter.

Miscellaneous other items are also smaller and run approximately a $20-million quarterly expense.

Unfortunately, interest income on our cash is pretty small with the low interest rates.

As a reminder, we invest our cash very short term.

So for Q3, we expect Other Income/Other Expense to be a net expense of $45 million to $50 million.

We occasionally get some positives in this area that we will mention -- for example, Intellectual Property settlements.

Second, our effective tax rate for 2014 overall is expected to be approximately 19%.

The projected rate is higher than 2013, driven by the addition of CPM's income, which is taxed at the Korean tax rate at 24%.

Finally, I know our share count has confused some investors with the full impact of the Samsung-owned convertible preferred shares on our fully diluted share count.

Please remember that Q2 saw the full impact of the security.

Q1 did not have the full impact.

Also, please remember that our fully-diluted earnings per share are done on an average basis for the quarter.

Our quarter fully-diluted share count for Q2 was 1.43 billion.

Our current forecast for the average fully diluted share count for Q3 is just under 1.42 billion.

Obviously, depending on the stock price and our Q3 purchasing activities, the number may vary slightly.

That concludes my opening comments.

Ann?

Thanks, Jim.

Okay, Tom, we'll now open the lines for questions.

(Operator Instructions)

Rod Hall, CIP Morning.

Also representing JPMorgan, (laughter)

I'm glad you didn't change jobs.

No.

We haven't changed the firm name, either.

I had two quick questions for you, Jim.

One, I wondered -- it sounds like the Gorilla, the weaker Gorilla guidance really all comes down to tablet demand, and not really smartphones.

I just wanted to make sure that I got you to comment on color on alternative materials that have been discussed for smartphones, and whether there's any impact at all from that, that you see in Q3 and beyond, at least this year, anyway.

I also wanted to -- we were surprised that Display guidance was a little bit weaker.

We thought that 4-K demand probably would start to pick up in the back end of year, so I'd be curious to hear your commentary around 4-K demand, and how you see that playing out this year.

Are you still as optimistic about it as maybe you were at the beginning of the year?

Thanks.

On Display, I'm disappointed that you're disappointed, because Display is doing fine.

Just a reminder, Q2 was stronger, so it makes the sequential not look as big going into Q3.

But we think the Display market is behaving nicely and in line with our general expectations.

Relative to the 4-K televisions, we never expected very much of that this year.

We just don't think the price points are at the level.

We could be surprised, obviously, with the holiday season.

Maybe some people will order more than we're expecting.

But we really think 4-K or ultra-high def is really a 2015 to 2016 phenomenon.

But we feel very good about the Display market, the television market.

World Cup was very good.

We fell overall very good about the market.

On Gorilla, you are correct.

If you look at our expectations in our forecast by type of product, it is tablets that is the big change statement.

We just got that really wrong about what was happening in the tablet market, and we have adjusted down our forecast for that dramatically compared to our original expectations.

That is overwhelming the impact in the reduction of what we expected for growth for Gorilla this year.

In terms of smartphones, I won't comment on specific customers and materials, but we continue to believe that Gorilla is going to be the material of choice for branded smartphones.

I remind you that we are launching Gorilla 4 this year.

We have already won models with that product.

Okay.

Jim, can I have one follow-up, which is on the yen hedge.

I wonder if you could -- you made some further commentary there.

Can you give us any -- I'm not sure I caught what you're thinking we should therefore be modeling in terms of a hedge rate.

I know that continues to come up every quarter, and you've been deferring on what the average hedge rate ought to look like in 2015.

Can you clarify your commentary around that, and help us understand if you were us, what would you be modeling there?

For this year we're not going to change the rate of 2014.

What we've had, you should continue to model that.

I think to help investors right now I would model next year at the same rate, and then most likely at the end of the third quarter we'll give you the rate for next year.

Our reported results next year we will restate 2014 to whatever the new rate is.

Obviously, we are not hiding from investors the fact that the yen going forward is lower, and we've given you the amount of money that that net income is.

But I would continue to model at the JPY93 rate for the remainder of this year.

To help investors, so you can understand the volume growth and other things, I would use JPY93 right now for 2015.

Then when we announce our Q3 results we're going to give you a rate for the next year.

Okay.

Thanks a lot, Jim.

Mark Sue, RBC Capital Markets.

Yes, thank you.

This is [Amit Druble] calling on behalf of Mark Sue.

How should we think about the annual pricing contacts for LCD glass?

Longer term, I believe they are set to be removed in 3Q.

Any preliminary thoughts there would be helpful?

You're lowering your CapEx expectations for the year.

Just going forward, how should we think about CapEx as a metric, maybe a percentage of sales or something?

On the latter, on CapEx we don't think about it as a percentage of sales because the Company has a level of maintenance, which probably is around $800 million.

The rest is for expansion, and that can vary depending on the pace of projects.

We haven't updated our outlook for it 2015 on CapEx yet.

I'll do that in the quarter three call.

But I would not expect the fact we lowered it this year means that we are pushing projects to next year.

Relative to the pricing contracts, the contracts remain in place.

Many of them have automatic renewals unless somebody chooses to exit.

We have contracts that go into next year already.

We think that they're continuing to do what we expected, and think our customers are quite pleased with them.

Thank you, and good luck, folks.

Thank you.

Wamsi Mohan, Bank of America Merrill Lynch.

Yes, thank you.

Jim, on the Gorilla could you just clarify.

In the press release you note as one of the reasons for the weaker 2Q is lower-than-expected sales for planned new models.

Is that impact also related primarily to tablets from a dollar basis, or is there some smartphone also in there?

That's primarily smartphones and new models.

Okay, thank you.

Your gross margin of 45% was slightly below your expectations.

Can you reconcile that with the statement that the synergies are actually coming in earlier than planned?

Then can you talk about what's driving the higher synergies in the outer years for CPM?

Thanks.

The gross margin impact versus our original expectations was due to the shortfall in Gorilla sales.

As you may recall, Gorilla glass itself, not parts, is the highest gross margin product the Company has.

That's why we reduced our expectation.

Display is doing fine and gross margin improved quarter two over record one.

I would say that the primary reason that the synergies are coming in faster is we're having an incredibly effective integration.

The Management of CPM has embraced working with our Display team, led by Jim Clappin.

We are delighted with the progress we've made.

We are finding more opportunities.

I think the biggest thing we are finding is we can move faster than we originally thought.

We are delighted with the pace of integration.

You're always a little apprehensive when you do something of this size, but it's going terrific and I think our team, both our CPM employees and our Display employees, are doing a great job.

Thanks, Jim.

One final clarification on the Gorilla.

When you mention the shortfall related to smartphones and new products, is that timing-driven for you, or is it demand-driven?

Is it broad-based or fairly narrow in terms of customer scope?

Thank you.

I won't comment on customer scope.

We think it's timing-based.

It's always been difficult for us when people have new models to know exactly when they're going to be pulling.

The difficulty for us is because of the length of the supply chain.

We generally know the models and we have a forecast, but exactly how the supply chain pulls, it's very difficult for us to forecast.

Thank you, Jim.

Amitabh Passi, UBS.

Hi.

Good morning, everybody.

Jim, I was wondering on the Display gross margin improvement from 1Q to Q2, can you give us some sense of the magnitude?

Was it a couple hundred basis points, or greater or lower?

I'll have to think, I don't have every number memorized.

It was, I think, about 1.5 points.

That's helpful, thank you.

Given the fact that you're seeing some recovering Gorilla glass sales going to the calendar 3Q, should we expect Company gross margin then to trend maybe closer back to the 46% you had expected in 2Q, or any help in terms of thinking about GM?

Yes, that is our expectation, 46%.

Okay, got it.

My final question for you is just any help on the telecom strength.

You cited fiber-to-the-home and North America and Europe.

Is this tier one?

Is it broader-based across tier twos, tier threes, as well?

Any incremental insight there would be appreciated.

It's very exciting for us.

We were talking about it yesterday, that it's very broad-based.

We are seeing good growth from our tier one customers, our very large customers in fact, even some who we thought had finished up more continuing to buy.

Unfortunately, we can't name all our customers here, but it is very broad-based.

I think it is really indicating what we basically said a decade ago, which was fiber-to-the-home is going to be very powerful force in the market.

The fact that it's so broad-based, we are very excited by that.

One last comment on that.

I actually saw a little bit of an up-tick in the NBN project, which has undergone some changes with the change of government down there, but there was good demand on that in the most recent quarter.

Okay, thank you.

I will step back in queue.

Simona Jankowski, Goldman Sachs.

Hi, thank you.

I just had a couple more follow-ups on Gorilla Glass.

Just the first one was whether the -- it sounded like you expected some delay on the Gorilla 4. I just wanted to understand that was impacting your out-quarter guidance; and also that was still coming out in time to capture some of the major products that you are expecting to be in, in the second half?

Our new version of Gorilla is not being delayed.

We are in production.

We are already shipping some product.

We will in Q3.

We have one model, so there is no delay relative to that.

Okay.

Then it sounded like you did not change your expectations for Smartphone covered glass demand for the market as whole for this year, but you seem to be embedding some slow-down in product sales for the second half within the smartphone category.

Is that a function of what you expect for your own products into some of your customers, or for some of your customers' sales?

We believe that smartphones had a little bit of an impact on our sales in our sales in Q2, because some customer sales were not as strong as what they had originally expected.

But overall we're not changing the market for the year for smartphones.

Then lastly you mentioned your expectations for higher TV sizes now than traditionally.

Can you quantify that?

I think you've see me carry around this special chart that I have, that I do for just myself on greater than 30 inches televisions.

Versus where we came into the year we moved up just a little less than about a half an inch on that one; which delighted me, because I think that's the most important metric.

We're actually quite surprised that smaller televisions for the first time weren't negative.

They grew this past quarter.

But as you know, the most important one for me is the average above 30.

Okay, thank you.

Mehdi Hosseini, SIG

Jim, sorry to -- going back to Gorilla.

I have a clarification.

Do we have a sense of what Chinese handset OEMs are using for cover glass?

Do you think your market share there is comparable to other regions?

We do have numbers there.

Our market share is less, but our market share is improving there.

First amount of alumina silicate glass, which is what we call the family of Gorilla glasses or specialty glasses is moving up as a percentage of overall phones there.

Our share of alumina silica improved, also.

Okay.

It is well documented that the big Korean OEM did lose market share in Q2.

Their results were disappointing.

That to a large extent explains what happened to your Gorilla sales in Q2.

Is that a fair assessment; Korea OEM versus Chinese OEMs?

I will not comment on any specific customers.

Okay.

Moving on to the operating margin.

If you could just remind me again, did you say that Gorilla revenue will be up 20% in calendar year 2014, or did I misunderstand you?

Gorilla volume is up 20%.

Okay.

If your operating margin was 17% for specialty material in 2013, how should we think about margin expansion here, with volume up 20%?

You have price down significantly, which we talked about in Q1, so you're not going to see the operating margin expansion.

Okay.

Even with volume up 20%, are you suggesting margins will go flattish?

Yes

Okay.

Thank you.

Joseph Wolf, Barclays.

Thanks.

First question is an elaboration on the last one.

If you think about the lower end, and you've talked about your strategies there and telling us a little bit more about that, have your increased or sped up the time table for addressing some of that lower end of the cover glass market, given the market dynamics?

Would that involve any new kinds of spending?

We really haven't made a final decision about, something we talked earlier in the year about whether we should have a different version of strength in glass, to go after the low end of the market in China.

We still are evaluating that.

We are spending quite a bit on new cover glass materials.

But I don't think that would materially change our operating expense, if we chose to pursue that.

Okay, then on the cash side.

You've bought down the CapEx, and said it probably won't get added to next year.

Could you talk about areas of focus, things that you've pulled back and where the reduction in your CapEx forecast comes from?

If you circle back to the cash buy-back, can we look for an increase in that $400 million as we move to the second half of the year, given the strength of the free cash flow?

The reduction in CapEx occurred because we, after going through all the plans at CPM, we determined that some of the projects did not need to proceed.

Then the other area was in what we call loosely here our [STAS] capital, where we're going to spend a little bit less on that.

Relative to share repurchases, there's no change in the share repurchase on our existing program.

As I said, we have approximately $400 million.

Our plan is to spend that money this year.

Anything beyond that would take the Board of Directors putting together a new program.

Historically, they wait until we finish a program before they start a new one.

Okay, great.

Thanks, Jim.

Patrick Newton, Stifel.

Thank you for taking my questions.

Good morning, Jim.

Two different questions one on pricing, and I guess one on Optical Communications.

On the pricing side, you talked about panel pricing trends in the quarter remaining relatively healthy.

I'm curious as your thoughts on whether the tight capacity trends are somewhat sustainable in the intermediate term, or whether you think it's due to, perhaps some temporary drivers in the quarter, which would be the World Cup strength that you alluded to, or maybe some benefits from the IP refresh due to the end-of-life of Windows XP?

What our Display commercial team believes and what they're hearing from our customers is the tightness is going to continue into the fourth quarter.

I'm noting some of the panel makers who have been announcing in the last couple days making similar comments.

We have to take that at their word that they're continuing to run at a strong level, and are giving us indications they're going to do that into the fourth quarter.

We think the IT thing has been a pleasant surprise basically all year long.

We think it's more than just the Windows thing.

We know that corporations have extended their refresh cycles, but they can't go on forever.

Some of our IT customer contacts actually flagged this to us earlier back in the spring, that they thought that the IT portion of the market was going to be stronger and actually tight.

We feel generally overall quite good about the panel utilization, the tightness, that leading to firm panel prices, and that continuing.

Any concern that this tight utilization could lead to some capacity build?

I won't comment on our customers building panel fabs.

As you know, there are a number under construction in China.

But suddenly someone making a sudden decision to a panel fab does not -- you're talking about that showing up a year and half later, so I would doubt that to be the case.

I think there's well-known plans of expansion in China.

Frankly, that's the only place there is any panel expansion really at this point.

All right, thank you.

Shifting gears to Optical Communications, can you help us understand the contribution that you're seeing from data centers, or your visibility into data center builds or upgrades?

You mentioned NBN kicking in a little bit in the current quarter.

Could you remind us where you stand on the project as far as the duration remaining, and the percentage of completion from a Corning perspective?

The duration still is quite long, but they are still evaluating whether they are going to take the pure fiber-to-the-home technology all the way that they originally planned.

We have had some favorable comments that maybe they will do better, more than what they said last October but I don't have any percentage of completion.

I don't have the data center numbers with me.

That's been good this year, but I don't have any specific numbers.

I know enterprise was up I think about 10% in the quarter.

Thank you.

Good luck.

Ehud Gelblum, Citigroup.

Couple of questions.

Want to hit on pricing in LCD, and then hit on Gorilla for a second.

The calculations of low teens volume growth.

Is it right to assume that pricing in LCD was down around 6% to 7%?

That is too high.

Okay, so low teens is barely low teens?

That's where my script led.

In my script I said edged into.

Right.

I heard that.

I just want to make sure it wasn't -- or how big an edge it was, but that makes a lot more sense.

Then your expectations for Q4, given that you managed to get your pricing contracts for Q3 back into the moderate range of 2013.

Should we essentially be expecting that to continue into Q4, or are there other reasons that you would not be comfortable thinking that far ahead?

I'm thinking that far ahead.

We think all the things that are going on in the industry would lead us to have the confidence that we will be able to have another moderate quarter in Q4.

Okay, that's helpful.

Going back to a previous question on Gorilla, and your comments of delays and variability in some product launches.

Were you implying or talking about launches in Q2 that are now getting pushed out into second half from customers, or are you talking about launches that you expected for Q3 that are getting pushed out later into Q3 or into Q4?

I was talking about launches in the second half of the year that we, because of the length of the supply chain, we'd be getting call on the product shipping in the May-June time frame, and that was less than what we had expected against our forecast in the month of July which are, obviously, almost finished.

We are seeing pull on that front.

Okay.

With LCD inventory lease, I believe you said it was around 17 weeks right now.

Can you give us a sense as to what Gorilla inventory weeks look like in the channel from your shipment on through?

No, I said LCD was at 18 weeks in Q2.

I don't have any information on Gorilla in the supply chain.

It's very difficult to get information on the number of weeks.

Do you think it's contracting, or is it staying roughly where it is?

I assume that's higher than 18?

I just said, I don't have information on the supply chain for Gorilla, so I can't give you a number of weeks.

Okay.

I appreciate it.

Sorry about that.

Last thing I wanted to explore a little bit was Hemlock.

It's now obviously back in the equity earnings as of Q1.

From the guidance it looks like you expect it to be relatively flat, and then up in Q4.

Can you give us a little overview on the trends going on there, and how we should be modeling that going forward?

Yes, we actually disclosed in our Q1 what the Hemlock numbers were last year.

Quarter two of last year we made some money, so by quarter three we didn't make any money last year in Hemlock.

It's very uneven.

That unevenness comes about by how the customers are on the contracts pull their product.

In general, our experience last year was Q4 was very strong, because that's when people must meet their contractual demand.

They can delay for a couple quarters, but they have to take it.

Overall, I think we see very positive trends right now in the polysilicon market.

Spot prices have moved up quite a bit from where we were.

The down side would be that we just had announcement on Friday night by the US government about more anti-dumping regulations.

We don't know how that will impact the growth of the market.

Fundamentally, we're not really shipping into China today, so it doesn't really affect Hemlock very much.

Okay, appreciate it.

Thank you.

Steven Fox, Cross Research.

Thanks, good morning.

First question, just going back on the CPM synergies.

Jim, if you're pulling forward some of the synergies expected in 2017 into 2016, and we look at the $90 million for the full year this year, is it a straight line in terms of how we should think about synergies for 2015 more back-end loaded?

Any color you can provide there would be helpful, and then I had a follow-up.

I don't have the synergies handy, broken quarter by quarter.

I doubt that there is a lot of variability as it goes through, but I just don't have that level of precision.

Okay.

Secondly, just getting back to the unbranded cover market, cover glass market.

Given the growth opportunity there, I don't know if there's any more color you can provide in terms of where you're actually getting some of the growth from.

I know you addressed some of this in some earlier comments, but just trying to understand anything you can do to maybe accelerate your penetration, if not by the end of this year but into 2015, and what that opportunity could look like?

Thanks.

I'm not sure what you mean by unbranded, Steve.

Could you help me?

Yes, I'm sorry.

On the unbranded tablet market, where you're selling cover class right now.

You mentioned the only growth you're seeing some tablets right now is unbranded OEMs?

We have share there.

We do quite well with that.

It's just we don't have the same share as what we have in some branded ones that you're very familiar with in the United States.

We're always trying to demonstrate that our Gorilla products are a better quality product and provide better damage resistance.

I think that's really our approach.

Combined with marketing, which we do a small amount of and intend to continue to do that.

We shifted more of our marketing spend to Asia going forward.

I think those are the things we could do.

Okay.

Thank you very much.

Brian White, Cantor Fitzgerald.

Wondering if you could talk a little bit about pricing for Gorilla Glass.

Given this slow-down, what has happened to pricing in the quarter, and as you look forward into the September quarter?

The sequential price declines Q2 to Q1 were almost immaterial, I'd say.

We had the big step-down that we talked about in Q1, but really nothing of any significance in Q2.

I think we have a minor amount in Q3 in one of our contracts.

I think the next big change statement will likely be, because most of these contracts are annual, will be Q1 of next year.

Frankly, it's a little early for me to know what that would be.

I don't think we expect price to be a big play for the remainder of this year.

Okay.

Jim, in the December quarter we should expect Gorilla Glass to grow sequentially?

Given some of these delays we should see a little bit of growth in the December quarter, or not?

It is really hard for me to judge right now.

I think it would be -- my general feeling is it might be flattish volume Q3 versus Q4.

A lot will depend on the pull of these models.

But the big step up from where we've been running occurs in Q3, in terms of volume.

Okay.

Finally, if you could just give us a general direction how important the tablet market is to Gorilla?

Is it 20%, 30%, just some ball park range would be great.

The tablet market is about 40% of our demand.

Great.

Thank you.

We obviously expected it to be more than that originally in the year.

Okay, fantastic.

Thanks.

Andrew Abrams, JG Capital.

Hi, a quick question on the TV market.

You mentioned about some pull-in from the World Cup.

Would you expect that to have a material impact on what you would have expected for third quarter in terms of TV demand, or is it insignificant enough not to make a difference?

I think falls into the insignificance.

We were just delighted by -- sometimes we get people overly focused on sporting events.

For example in Europe in the month of May, televisions were up 13%, where as for the four months prior to that they basically were just up or down in the single digits.

In South America in the month of April up 25%; 64% in the month of May, but it's not going to change our numbers overall.

Okay.

Lastly, on your plans for the assets from SCP, I know you were doing some conversions in Korea toward Gorilla Glass.

Based on your outlook for Gorilla Glass on a general basis, are those plans going to change, or is that more locational than volume-wise?

Obviously, we don't have a need as much Gorilla right now, but our plan still remains as tanks in Japan reach the end of their life on Gorilla.

They will go down permanently, and then we will shift that demand over to Korea.

The pace may be slightly slower, but I know that we have a couple tanks that were going to light on Gorilla at the end of the quarter three heading into quarter four.

Got it.

Thanks very much.

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

Alberto Moel, Sanford Bernstein.

Good morning, Jim.

Just a question on the downstream Gorilla business.

As you know, you sell blanks to the customers and then they finish them.

But I understand that there is some work that you've been doing in downstream.

You bought a laser company for laser cutting and so on, so forth.

Do you have some update on where that's sitting, and where that business is heading?

I'm curious to know if you have any color on that?

Thanks.

The downstream business, the parts business has quite a bit of variability to it quarter by quarter, so I don't have much of an update.

The laser business is going quite well.

I think shipments will be quite strong in quarter three.

I don't have a list of the customers so I can't really help you on that.

Parts business varies up and down in the quarters, but the mainstream for us in Gorilla is selling glass.

Thank you.

Okay, so we will wrap up.

I've got one IR announcement.

We will be appearing at the Citi conference on September 3 in New York City.

I'd like to remind you of a couple of highlights.

The most recent quarter was our seventh consecutive quarter of year-over-year earnings growth.

We are absolutely delighted by the LCD glass price declines.

In the third quarter they moderated further, and I think very important to us is we are back to the rates that we saw for most of 2013.

The integration of Corning Precision Materials is going very well, already delivering results, and will be better than original plan.

Plan to achieve the $90 million in synergies this year, part of our additional $350 million impact for the year.

I think Optical Communications and Environmental segments are having fabulous years, particularly Environmental.

We are delighted by that.

We think we're on track to deliver sales and earnings growth in every business for the full year.

Feel really good about our first-half results, and are confident we can deliver on the plan.

Ann?

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

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