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Corning, Inc. (NYSE:GLW)

Q3 2008 Earnings Call

October 29, 2008 8:30 am ET

Executives

Kenneth C. Sofio - Division Vice President of Investor Relations

James B. Flaws - Vice Chairman of the Board, Chief Financial Officer

Wendell P. Weeks - Chairman of the Board, Chief Executive Officer

Analysts

[C.J. Muse] - Barclays Capital

Nikos Theodosopoulos - UBS

Brian White - Collins Stewart LLC

Mark Sue - RBC Capital Markets

Steven Fox - Merrill Lynch

Carter Shoop - Deutsche Bank Securities

Curtis Woodworth - J.P. Morgan

Jim Suva - Citigroup

John Harmon - Needham & Company

Ajit Pai - Thomas Weisel Partners

John Roberts - Buckingham Research

[Jeff Evanston - Sanford and Bernstein]

Operator

Welcome to Corning, Inc. third quarter results conference call. For the conference all participants’ lines are in a listen-only mode. However there will be an opportunity for your questions. (Operator Instructions) As a reminder, today’s call is being recorded.

It’s now my pleasure to introduce to you Mr. Ken Sofio, Division Vice President of Investor Relations.

Kenneth C. Sofio

Welcome to Corning’s third quarter conference call. This call is also being audio cast on our website. Jim Flaws, Vice Chairman and Chief Financial Officer, will lead the discussion. Wendell Weeks, our Chairman and Chief Executive Officer, will join for the Q&A.

Before I turn it over to Jim, you should note that today’s remarks do contain forward-looking statements out of the meaning of the Private Securities Litigation Reform Act of 1995. These statements involve a number of risks, uncertainties and other factors that could cause actual results to differ materially. These risks are detailed in the company’s SEC reports.

James B. Flaws

This morning we released our results for the third quarter which can be found on our Investor Relations website. In addition, for those of you with web access we’ve posted several slides that will summarize the important data from this morning’s prepared remarks. These slides will be available on our website after our call as well.

I’d like to begin with a top-level update on the display industry and our business. First, inventory turns measured in weeks improved panel maker and set assemblers in quarter three and are at healthier levels than they were before.

However the Taiwanese panel makers continue to lower their utilization rates again in quarter four. We believe they and the supply chain in general are preparing for a potentially weaker retail season this fall, a seasonally lower first quarter and potentially slower consumer demand for LCD televisions and monitors in 2009.

Evidence of this can be found in our recent announcements from panel makers and television makers such as Sony as well as recent retail data. US retail data for September showed LCD television unit sales were up 23% year-over-year but over the course of the month this growth rate slowed and we have seen further step-down in the first two weeks of October. We now expect panel makers in Taiwan to run at lower than 70% utilization in the fourth quarter.

As a result volume in our wholly owned business will be lower. We now expect our volumes to be 20% to 30% lower sequentially in quarter four. We are quickly moving to reduce our capacity this quarter in our wholly owned business by shutting down glass tanks to meet these lower market expectations. This reduction in our capacity will significantly lower our gross margins in quarter four but will allow us to better match our glass supply with demand going forward.

While the Korean panel makers continue to run at higher utilization rates than the Taiwanese, given Sony’s recent announcement of the apparent slowdown in retail demand we believe it is inevitable that softness will eventually show up at SCP. As a result we’re lowering our quarter four-volume expectations there as well.

Given the slowdown in retail and cuts in panel utilization rates we have lowered our estimated growth rate for the entire glass market this year. For 2008 we now expect glass market volume to grow between 21% and 23% versus our original expectation of 25% to 30% growth.

We feel that it’s likely that the consumer slowdown will continue into 2009 but it’s obviously very difficult to forecast next year at this point. However we think it’s prudent for us to plan on a lower growth rate in 2009 and plan our capacity accordingly. As a result we’re now using a market growth range of 5% to 15% for next year versus our most recent estimate of 15% to 25% growth. I want to caution you it’s very possible we’ll revise this range after we see the Q4 retail results and see the economic outlook for 2009.

Now let me turn to the details starting with our income statement. Our third quarter sales were $1.56 billion, 2% under the low end of our guidance range. Lower volume in our display and environmental segments led to the sales miss. Compared to a year ago sales were flat. EPS excluding special items was $0.46 and actually slightly higher than our revised expectations. This represents a 21% increase over the third quarter EPS ex specials of $0.38 a year ago. Net income excluding special items was $732 million, an increase of 18% over last year’s third quarter net income excluding special items of $619 million.

You should note that EPS and net income excluding special items are non-GAAP measures and the reconciliation to GAAP can be found on our website.

Continuing down the income statement, gross margin in the third quarter was 47% as expected. The decline from quarter two gross margin, which was 50%, was primarily due to the impact of lower volumes in our display business.

SG&A was $220 million or 14% of sales as expected. RD&E in the third quarter was $160 million, about 10% of sales.

Equity earnings were $382 million in the third quarter compared to $360 million in the second quarter, a sequential increase of 6%. The increase was due to stronger earnings at both SCP and Dow Corning. Third quarter equity earnings include an $18 million special charge at Dow Corning and last year’s equity earnings included a restructuring charge of $18 million at Samsung Corning CRT. Compared to the third quarter of last year, total equity earnings increased 60%.

Our tax rate in the third quarter was 14% and wrapping up our income statement our share count declined to 1.58 billion shares.

Our third quarter results included net special gains of $36 million or $0.03 per share. We recognized a $43 million gain from the settlement of a longstanding tax dispute and also released an additional $70 million of US deferred tax asset valuation allowances. We’ll receive cash from the tax settlement in either quarter four or quarter one.

These items were offset by a charge of $6 million related to the pending Pittsburgh Corning bankruptcy proceeding, a $14 million loss on the sale of a minor business, and a $39 million loss on cash and short-term investments. Lastly, we also had an $18 million reduction of equity earnings from Dow Corning related to losses on their cash and short-term investments.

Including the special items our third quarter EPS was $0.49 per share.

Now let me turn to the display segment. Third quarter sales were $696 million or 14% lower than quarter two. Volume at our wholly owned business was down 10% sequentially. Price declines were in line with previous quarters as we maintained our pricing strategy. Display segment sales were also negatively impacted by the yen moving from 105 in Q2 to an average of 108 in Q3.

Equity from SCP’s LCD glass business was $259 million in the third quarter, an increase of 6% versus $244 million in Q2. The increase was driven by strong volume gains of 12% offset by price declines and the impact of the yen. Price declines were consistent in SCP with previous quarters. For your modeling purposes, SCP’s third quarter sales were $896 million compared to $842 million in the second quarter, an increase of 6%. Net income in the display segment which includes the equity earnings were $635 million in the third quarter and lower than the second quarter.

In comparison to the third quarter of last year sales in our display segment were fairly consistent. Volume declined 2% and price declines were 8% year-over-year. Sales actually benefited from the strengthened yen year-over-year. Equity earnings from SCP’s LCD glass business were up 62% over Q3 of 2007 led by volume gains of 38%. Segment net income grew 16% versus last year.

Now I’d like to spend a few minutes discussing the current supply chain and retail environment. We believe panel inventories at the Taiwanese panel makers fell by one week in august and another week in September. Panel inventories are now at an average of four weeks which is considered to be a healthy level. Regarding utilization rates, the Taiwanese entered Q3 running in the mid-80% range but dropped utilization rates through the month of august to the low to mid-70% range. The average for the quarter was around 75%. However we believe the Taiwanese could lower utilization rates again.

In Korea the panel makers maintained very high utilization rates throughout quarter three in the low 90s.

At the set assembly level our data is not as robust but we believe inventory levels fell to healthier levels at the end of the third quarter.

On the retail side, we now have LCD TV unit sales for the US, China and Japan through September. Europe will be available in another two weeks. As a reminder, we use industry sources such as MPD, GFK, BCN and CMM.

Let’s start with the US September LCD TV unit sales which were up 23% year-over-year. This is lower than the expectations we had set for September at the beginning of the year but not a surprise given the heightened economic worries and the significant decline in the stock market that took place during the month. While the LCD TV unit sales in the first week were very strong, they were much weaker in the last week of September. According to MPD, US LCD TV unit sales were up 27% year-over-year in the first week of September but up only 12% in the last week. This intuitively makes sense given the credit crisis turmoil began mid-month.

We believe this trend continued to decline in the first two weeks of October although that data is now only preliminary.

The question for us now: Is the slowdown in consumer purchases of LCD televisions a temporary reaction to all the bad news, both headlines and real impact to consumers, or will it be longer lasting and affect the slope of LCD trends for 2009? Clearly we’ll be looking at the second half of October retail data along with Black Friday results in late November to see if the trend continues.

In Japan LCD TV retail sales in September were up only 15% year-over-year. This was also lower than we expected and lower than the previous month this year. We do not have weekly data for Japan to see if there was a similar trend as in the United States.

In China LCD TV retail sales in September were up 103% year-over-year. This was higher than we expected and higher than the previous month. October is usually a seasonally high month in China for television sales due to a week of national day holidays. This year the holidays ran from September 29 to October 5 so the end of September likely gave Chinese sales a boost with two days of the holiday week falling in September.

I’ll have some more detail on the current supply chain and retail results in my comments for the quarter four outlook.

Moving to the environmental segment, sales in the third quarter were $177 million, a 15% decrease versus the second quarter sales of $209 million.

Auto product sales were $112 million and much lower than we had expected. As we mentioned at a conference earlier this month, our sales were impacted by slower auto production in the United States. At the end of the quarter we began seeing much weaker demand in Europe and the rest of the world.

Diesel product sales were $65 million in the third quarter versus $77 million in Q2. The decline was due mainly to completion of heavy-duty retrofits for the Olympics in China. The US truck industry also remained very weak.

Segment net income was $15 million in the third quarter, a decline versus second quarter net income of $28 million.

In comparison to a year ago the environmental segment sales decreased 11% driven primarily by lower auto product demand and net income was consistent with the year ago.

Moving to the telecommunications segment, sales in the third quarter were $496 million, an increase of 4% over Q2. The increase was driven by a higher private network demand.

Sales in our fiber and cable products in the third quarter were $258 million, an increase of 4% sequentially. Sales of hardware and equipment products were $238 million in Q3 and also up 4% versus Q2. Fiber to the home sales which are primarily hardware and equipment related were $96 million in the third quarter and consistent with the second quarter. Compared to a year ago fiber to the home sales increased 16%.

Net income in the telecom segment was $25 million in the third quarter compared to $23 million in the second quarter. Compared to last year Q3 sales increased 5% but net income was lower due to higher operating costs.

Sales in our specialty materials segment were $101 million in Q3 and down slightly versus Q2. Compared to a year ago sales were up 6%. The segment posted a $1 million loss in Q3 versus $4 million of income in Q2.

In the life sciences segment sales in the third quarter were $83 million down slightly from Q2. Compared to a year ago sales were up 6%. Segment net income was $11 million slightly lower than Q2.

Turning to Dow Corning, equity earnings were $109 million including the loss of investments of $18 million. That’s an increase of 16% over Q2 equity earnings of $94 million. The higher earnings were driven primarily by Hemlock’s new capacity although silicones were up sequentially also. Hemlock’s new capacity is running well. We did begin to see weakness in demand for silicones late in the third quarter and we expect this softness to continue into the fourth quarter. For your modeling purposes, Dow Corning sales were $1.49 billion in Q3 compared to $1.38 billion in Q2.

On the balance sheet, with cash we ended the third quarter with about $3.2 billion in cash and short-term investments, down from $3.5 billion in the prior quarter. The most significant cash outflows were $500 million in share repurchases and $311 million in capital expenditures.

As a reminder, in July our Board approved a $1 billion stock repurchase program which was an addition to the $125 million remaining from the previous program. We will continue to monitor the overall financial markets along with our own outlook to help us determine the pace and timing of future stock repurchases under this program. However, at this time we are not buying back stock as we want to preserve cash until we know the extent of the current financial downturn.

Free cash flow in the third quarter was $472 million. For the first three quarters free cash flow was $595 million. Free cash flow is a non-GAAP measure.

I’ll turn to the outlook and give you some guidance for the fourth quarter. We are having difficulty forecasting sales for the company with the current economic environment. Display customers are shifting their utilization rates with little advance notice as they react to changes in their demand. Worldwide auto production has dropped significantly over the past month, a pace of decline we’ve not seen in many years. There’s also tremendous volatility in exchange rates. This uncertainty makes it more difficult for us to forecast demand for our products or to predict the impact of the exchange rates. As a result our guidance ranges are wider than usual.

Let me start with some thoughts on our business outlook. In display we’re currently forecasting fourth quarter glass volume at our wholly owned business and SCP combined to be down 10% to 20%. Glass volume at our wholly owned business is expected to be down 20% to 30% sequentially. For SCP we are currently forecasting quarter four volume to be down 5% to 15% sequentially.

Our quarter four-glass volume expectations are much lower than we expected even just two weeks ago. For our wholly owned business we previously expected the Taiwanese panel makers would continue to run their fabs in the low to mid-70% range in the fourth quarter. The last two weeks we’ve seen a sudden reduction in panel maker utilization rates as they adjust to changes in their demand. We now expect the Taiwanese panel makers to run under 70% utilization in the fourth quarter.

Regarding SCP, while the Korean panel makers have continued to run at a higher utilization rates than the Taiwanese, given Sony’s recent announcement on the slowdown in retail we believe it’s inevitable that some softness will eventually show up at SCP. As a result we’re exercising some judgment and lowering our quarter volume expectations there as well.

We believe these panel utilization reductions in Taiwan and inevitably in Korea are a reflection of the supply chain preparing for weaker holiday sales and potentially lower demand in 2009.

As the LCD television becomes the largest driver for glass and panel production, the supply chain is influenced to a much greater degree by the seasonal ebb and flow of TV demand. We believe the supply chain is concerned about the typical seasonal drop-off in retail demand in quarter one. In addition we believe the supply chain is reacting to continued negative economic news which has spread beyond the United States into Europe and Asia.

As a result we’re revising both our late and ’09 market growth estimates for LCD glass. Let me cover 2008 first. We believe the market growth will now be closer to 21% to 23% and this is lower than our original 25% to 30% volume growth estimate from earlier this year. Square footage terms, we now believe the total glass market will be between 2.11 billion and 2.15 billion square feet this year, an increase of about 360 million to 400 million square feet over last year but 100 million to 150 million square feet lower than we previously expected.

We believe there are three factors influencing the supply chain and the overall glass market. First, the sales of 40” and larger televisions at both panel and retail were on track with our expectations through the late summer. It is now apparent that are expected increase in sales of these larger televisions is not going to happen at the rate we previously assumed. As a result we now forecast up to 3 million fewer 40” and larger televisions will be sold at approximately 17 square feet per TV. This would suggest 50 million less square feet of glass.

Secondly, we’ve seen a further deterioration in monitor sales over the past month. Monitor sales have shown signs of weakening all year which was reflected in our forecast but we have seen further weakness recently. As a result we’re lowering our monitor unit expectations by about 8 million units which equates to about 30 million less square feet of glass.

Finally, the LCD supply chain may be anticipating fewer LCD TVs sold in both ’08 heading into ’09. Set makers and retailers are shooting for lower inventory targets at year-end also because they have lower expectations for sell-through in quarter one.

We expect our total glass volume for both wholly owned business and SCP to be up 20% to 22% this year in line with market growth. However there is a real disparity in growth rates between Taiwan and Korea. This disparity by geographic region has become much more pronounced in the second half. We believe this shift is a combination of a few related factors.

First, the Taiwanese panel makers don’t have direct market access to strong television brands. It is their panel orders that suffer during supply chain corrections. Companies like Samsung which currently have a leading share of the LCD television market will cut purchases of Taiwanese panels disproportionately over their own panel production. We believe LG and Sharp do the same. As a result, in times of lighter demand the Taiwanese panel makers suffer unequally.

Second, Korea television brands allow for better visibility into the retail market. As a result they generally keep fewer weeks of panel inventory so even heading into the supply chain correction Korean panel makers had lower amounts of inventory to allow them to maintain very high utilization rates throughout the third quarter. As I mentioned a moment ago, we’re anticipating utilization adjustments there as well.

Nonetheless with almost 10 months of demand behind us the geographic drain to glass demand is evidence in our expectations for volume growth this year at our wholly owned business versus SCP. While we expect our combined volume growth to be 20% to 22%, volume growth at our wholly-owned business for the year will only be around 6% to 7% and SCP volume growth will be much higher, around 33% to 35%.

Looking ahead to 2009 we believe the glass market growth could be lower as a result of weakening economies around the world. At our February investor meeting, our early estimate for ’09 was between 20% and 25%. Earlier this October we lowered the bottom and expanded the range to be 15% to 25%.

Given the continued economic uncertainty and the very recent slowdown in LCD TV unit demand in the second half of September, we believe it’s prudent to adjust this range at this time and more importantly to adjust our capacity and cost structure to reflect the new range. Our revised estimate for 2009 volume growth is 5% to 15%. On a [inaudible] we’ll be updating this range as the fourth quarter retail results become known and as we understand general economic trends heading into the first quarter.

This would be a good time to discuss the capacity decisions we recently made. We have decided to shut down several tanks until they are needed again. In addition we’ve delayed construction on the fourth phase of our [Tai Chung] facility. Please note we are not delaying construction on our new [Jin Ten] facility for [Shock]. We made these decisions to proactively adjust our glass capacity in an effort to match demand. These steps will reduce unnecessary costs and help us to improve display gross margin in future quarters.

Our investors should note in the fourth quarter there will be one-time costs primarily accelerated depreciation from these decisions. We’ll not realize the benefit of these actions until subsequent quarters. As a result our display gross margin for quarter four will be about 20% to 30% points lower than previous quarters. The impact of our capacity reduction decisions this quarter, just mainly from accelerated depreciation, was about 5% points. The balance relates to lower utilization on the remaining capacity.

Of course when market conditions improve we’ll have the flexibility to reinstate capacity as needed.

If SCP’s sequential volume declines are at the top end of our range, their margins will likely be lower as well.

Regarding our glass pricing, we’re sticking to the strategy we implemented in early 2007. As a reminder, the fundamental principle of our pricing strategy is to maintain consistent rates and price declines over the long time versus gaining marginal share reprice in the short term. As a result we plan on lowering pricing in Q4 at the same pace we’ve been on over the past eight quarters. SCP price declines will be consistent with previous quarters also.

Regarding exchange rates, our fourth quarter guidance assumes a yen to US dollar exchange rate of $1.01 compared to Q3’s average yen to dollar exchange rate of $1.08. If the yen were to average $1.01 for Q4, display sales and earnings would benefit by approximately $35 million.

Moving to our telecom segment, we anticipate fourth quarter sales to be down about 20% sequentially versus our record third quarter sales. The lower telecom sales reflect normal seasonality plus the impact of stronger US dollar to Euro exchange rate. In addition we’ve experienced a slower order rate over the last few days which could be economy driven.

Regarding our fiber to the premise program, we’re not able to name the customer but we are very pleased to announce we have a second major fiber to the home customer in Europe. Given our Q4 telecom guidance we expect telecom sales for the year to be up just 4% versus last year. Higher fiber to the premise sales were mostly offset by lower than expected private network sales in North America and softer equipment sales in Europe.

We are also in the process of reviewing our cost in capacity requirements within the telecom segment.

We anticipate environmental segment sales in Q4 to be down about 20% sequentially. While we typically experience a seasonal decline in Q4 for auto gasoline products, we are also being impacted by a slowdown in auto production in the US, Europe and Asia. In addition the US trucking industry remains sluggish.

Looking forward to 2009 we anticipate worldwide auto volume could be down 5% to 8% and we are adjusting our capacity to prepare for these levels. In diesel we anticipate the heavy year-to-year trucking industry could remain very weak next year. Our life sciences segment Q4 sales are expected to be down about 15% sequentially reflecting normal seasonality.

Our telecom, environmental and life science segments’ sales guidance assumes a US dollar to Euro exchange rate of $1.27. The impact of a stronger dollar reduces fourth quarter sales in these segments by about $35 million sequentially.

Quarter four sales in our specialty materials segment are expected to be consistent with Q3. The [inaudible] results in quarter four sales are expected to be in the range of $1.2 billion to $1.3 billion.

Our fourth quarter EPS before special items is expected to be between $0.20 and $0.28 per share. The impact of our capacity reductions is $0.02 a share. As a reminder, EPS before special items is a non-GAAP measure.

Moving down the income statement we believe gross margins will be between 31% and 36%. As I mentioned earlier, gross margin will be impacted by lower volumes in display as well as the impact of the accelerated depreciation costs from our capacity reduction decisions. This will impact corporate gross margin by about 2.5% points. In addition we expect to see lower gross margin in telecom due to lower than expected demand.

SG&A is expected to be about 18% of sales and RD&E is expected to be around 14% of sales in the fourth quarter. The percentages are higher than usual but they are more of a reflection of lower sales than a significant increase in expenses.

Interest income is expected to be $10 million lower in Q4 as we’ve sacrificed higher interest rates for safer investments. Royalty income which is included in other income should also be $10 million less in Q4 if SCP’s volume is at the low end of our guidance range.

We anticipate equity earnings in the third quarter to be 5% to 15% lower sequentially. Dow Corning equity earnings are expected to be between $100 million and $107 million. Dow Corning is seeing the impact of a slowing economy on their base silicone business. Demand for polysilicon and hemlock is expected to remain strong.

Regarding our tax rate for the fourth quarter, it’s expected to be around 15%.

Lastly, investors should use 1.56 million shares in Q4 for their models.

In summary, our fourth quarter guidance and ’09 expectations reflect an accelerating economic decline. In response we’ve initiated actions to reduce capital spending, scale back manufacturing operations, curb the rate of growth in R&D, and reduce our overhead to manage costs. If the business continues to deteriorate further, we will consider additional capacity and operational adjustments. Specifically to capital spending, we’re evaluating further reductions to our previously disclosed guidance for ’09 of $1.6 billion to $1.7 billion.

Before I open up the call for questions, I’d like to make some remarks about our company, how we and senior management and the Board think about the company’s position. It is clear that our end markets and our customers are being affected by worsening economic conditions around the world. The onset of these impacts have varied for us.

The US auto industry and heavy-duty diesel markets have been weak all year. The European and Asia auto markets started weakening during the summer. The LCD monitor retail market has been weak all year but the television market remained strong until the last few weeks. The LCD supply chain has been correcting since midsummer and may continue to need to do so into early Q1. The Dow Corning silicone business began to weaken in August.

We are clearly not immune to the impact of a global recession nor are we immune to the volatility seen in the stock market. At times like this, and we’ve been here before, we know it’s hard to differentiate our company from the thousands of others that are being battered by the stock market on a daily basis.

Let me leave you with a few thoughts about how we think about ourselves.

We have a strong balance sheet; one that we believe can withstand a prolonged downturn in the economy. We currently have $3.2 billion in cash and short-term investments; we’ve been very prudent in keeping significant amounts of cash over the past few years despite the wishes of some investors. At times like this, cash is obviously king. Unlike some companies we don’t need to participate in the commercial paper market. As a reminder, we also continue to expect to have full access to our $1.1 billion revolving credit facility which does not expire until 2011.

Second. While it’s always been important to have a lot of cash, finding a safe place to put it has not been as easy as it once was. I can tell you the majority of our current cash and short-term investments are maintained in safe government-backed securities and bank deposits.

Third. Regarding our debt level we have $1.5 billion in debt. This means we have $1.7 billion more cash than debt. So if all the debt was due today, we’d be able to pay it off. Again, there are companies that cannot make the same claim. For us there are no material amounts of debt due for the next two years. In fact, over the next four years the total debt due is less than $250 million. So again we feel very good about our strong cash position in these difficult times.

Fourth. Even though our stock has fallen over the past few months, the strength of our competitive position has not changed during that time. In almost all markets we participate in, whether it’s display glass, optical fiber, ceramic substrates, we continue to be the market leader in terms of having the best products, best technology and lowest cost. Just because our stock price is lower, we haven’t stopped innovating, stopped our cost reduction programs or stopped providing our customers with the best products in the world. We continue to be a world-class supplier in the markets we participate in.

There is also no change in the long-term macro trends in the industries we participate in. We may be in a slower demand cycle due to the economy but the fundamental growth engines that drive our business over the long term have not changed. Consumers may purchase less LCD TVs in the near term but that does not mean consumers will go back to purchasing CRTs.

Of the 1.9 billion televisions in households worldwide at the end of ’07 only 8% were LCDs and we believe at some point almost all will become LCDs. The CRT market is collapsing and LCD is the product of choice. There are no comparable competing technologies on the horizon. The long-term macro trend of consumers around the world replacing their old CRTs with LCDs or putting LCDs in rooms in their homes where no televisions are today has not changed.

We continue to like the display business and we think it’s another 20-year+ business for us.

The same can be said for our fiber and diesel businesses. The increase in bandwidth driven by video content is only increasing over time. Consumers and businesses continue to ask for faster connection speeds and bigger bandwidth. The industry continues to move from copper to fiber. It’s a trend that will continue for a long time.

In diesel there are regulations in place in the United States, Europe and Japan which will fuel the future growth of this business. There are regulations in place requiring tighter emission requirements on heavy and light duty vehicles in these countries in ’09, 2010, 2013 and 2014. These tighter regulations will mean more advanced emission control systems which represent opportunity for us. There are regulations coming in the next decade on marine and locomotive engines.

We’ve been the market leader in gasoline emissions industry for the past 30 years in terms of product innovation technology and we plan on being the leader in the new diesel market for the next 30 years.

Lastly, we’re continuing to invest in the future. This is more than just a tagline. This is the lifeblood of our company and the investments we make today will help this company and shareholders in the next decade. We will continue to invest in research and development in good times and bad. If you don’t believe us, just look back at what we did during the telecom and Internet bubble of 2001. We could have easily gotten back to profitability if we’d stopped spending on R&D. We didn’t. We kept innovating and that decision has helped spawn a new round of innovations that we sell today.

So for those investors who’ve been scared and gotten out of coin stock or the market in general, we understand. Times are tough. Markets are making even the most seasoned investors nervous. Just know that we’re not going anywhere and when you’re ready to invest again we’ll be here.

Kenneth C. Sofio

We’re ready to take some questions now.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from [C.J. Muse] - Barclays Capital.

[C.J. Muse] - Barclays Capital

On display gross margins, it looks like your COGS is going up by about $85 million which is a little bit higher than the 5 points you talked about for accelerated depreciation. Can you help me understand why that would go up so materially? Secondly, how should we think about gross margins for display going forward into 2009?

James B. Flaws

We called out the one-time impact of accelerated depreciation. What this really is relates to our tanks where we take them down and we had remaining life and we’ve got to accelerate that depreciation because once we take them cold the value of that is worthless and we have to rebuild it. That’s about 5 points.

Where we’re losing ground beyond that is that we are unwinding a series of [FX] hedges and we actually were growing our fixed costs because we’ve been programmed to have more capacity than what we had in the past quarter. Then obviously we have price declines of the 2% during this current quarter and clearly in a quarter where we’re making very strong changes to how we run, we’re not really getting any of our normal cost reductions.

We regard that there is probably an impact of over 12 points of dislocation here.

We are thinking very hard about what capacity we keep. We obviously don’t have a demand level for Q1 or Q2 next year at this point in time. We clearly have more capacity than what we’re cutting down to right now because we think we’ll grow back into it. But gross margins are obviously being penalized very heavily this quarter. We believe they will come back up next year as we finalize what level of capacity we keep for which quarter.

I’m not prepared at this time to give you an absolute number for next year but clearly it’s going to be higher than this very low range we’re putting out to you today.

[C.J. Muse] - Barclays Capital

In terms of that 12 points of dislocation you talked about, if I were to assume volumes were flat in Q1 versus Q4, does that mean that we should see a 12-point rise in your gross margin?

James B. Flaws

I’m not going to offer you any more guidance than what I have right now.

[C.J. Muse] - Barclays Capital

Regarding your glass volume guide for ’09, can you be specific to what you expect for your core business alone?

James B. Flaws

No, I can’t. We don’t yet know how if this turns out to be this level what the split will be between Korea and our base business. I think our belief right now is it’s more likely that Korea will be stronger but it’s very hard for us to judge the absolute split of that at this stage.

[C.J. Muse] - Barclays Capital

In terms of your pricing strategy, can you comment on what you’re seeing in terms of market share trends given the weakening environment? Have you been seizing some share because of holding the line on price?

James B. Flaws

We don’t think there’s been any significant move on share at this point in time.

Operator

Our next question comes from Nikos Theodosopoulos - UBS.

Nikos Theodosopoulos - UBS

Maybe I could just follow up a little bit on the last question. On the comment about shutting down some tanks, how should we look at these? Are these permanent shutdowns? Are they temporary? I’m trying to understand what you’re doing there. And are these spread out across different regions or focused in one area?

Also, the cap ex guidance you still have for this year would suggest a meaningful sequential uptick in cap ex which seems to be inconsistent with the comments you’re making about lowering capacity. Can you explain that a little bit?

James B. Flaws

Let me do the cap ex first. The biggest amount of cap ex in Q4 is really around [Jin Ten]. It’s both a combination as we drive to completion there as well as in Japan and we do capital projects, there’s actually a lag when the cash flows out the door. So you’re seeing some of that really kicking up both in the pace of construction that really started in the summer very strongly as well as the cash lag. It’s really driven mostly by [Jin Ten]. We clearly are stopping construction on [Tai Chung] Phase 4 construction so most of the uptick is coming from [Jin Ten].

In terms of the tanks we’re taking down, by and large the tanks we’re taking down are being temporary. I say temporary meaning that we are taking them cold but we’re not taking them out permanently. There may be some tanks that we choose to rebuild with some of our new technology but fundamentally we’re still assuming that we’ll be running these tanks because we think the LCD business will resume growth and we’ll grow into it.

That’s one of the things we’ve always assumed about this business. If we got it wrong for a period of time and had a little too much capacity, we’d have to adjust the running rates but eventually we’d need them again. So by and large, the majority of the tanks we’re taking down would be temporary using your language; however we’ll keep them cold as long as we need to keep them cold.

Nikos Theodosopoulos - UBS

In the meantime your depreciation hit is only going to be one quarter for those tanks and then if and when those turn up again, there should be a positive impact on gross margin. Is that a fair way of looking at it?

James B. Flaws

Yes. When they come back up there’s a positive on gross margin. You have to understand on the depreciation. What we’re taking out of depreciation and accelerating is the delivery system at a tank refractory. The building and the rest of the equipment is still sitting there; it’s just idle. So that depreciation continues on. Once we restart these you’ll see a big uptick.

Obviously our volume is down 10% versus where it was in Q2 and now we’re talking about it being down another 20% to 30%. We have a huge volume downtick versus where we were and there’s a lot of overhead in the factories that was being absorbed by that. So if we get volume coming back, you’ll see a nice move up in gross margins.

Operator

Our next question comes from Brian White - Collins Stewart LLC.

Brian White - Collins Stewart LLC

Just on the pricing environment, for the December quarter you’re expecting a 2% sequential decline in pricing. Is that correct?

James B. Flaws

That’s correct.

Brian White - Collins Stewart LLC

I’m just curious. You’ve got panel makers losing money. You’ve talked about this meaningful deterioration in demand just recently. How will you be able to keep your pricing disciplined?

Wendell P. Weeks

The first thing I’d point to is what happened in quarter three meaning that basic same question was leveled at us in quarter three. We once again said it was a good question but what we plan to do is to continue with our pricing strategy. As you saw from the announcement today in Jim’s comments, we did just that with our price coming down exactly as we said it would. So we’re planning on doing that again in quarter four. There’s always risk with a pricing strategy like this.

Let’s do the positives and negatives on the balance. The positives for our ability to continue to execute our pricing strategy you see the actions that we’re taking to match our capacity with our view of the end market demand. In many ways that sets at the core of our pricing strategy that we build and maintain our capacity to our view of the end market demand. That move should help do that and our willingness to take the cost actions that are impacting our gross margin at this moment to put ourselves in a position to deal with the lower demand environment.

On the negative side, we have as you point out our customers paying as high as well and our perceived premium we think versus our competition is growing so that’s some downside risk.

As we balance that upside and downside risk together with our strong positive reputation on reliable supply and the quality of our product and our positions with the customers that really matter, it makes us believe at this time that we can maintain our pricing strategy.

Brian White - Collins Stewart LLC

On polysilicon, what type of pricing trends are you seeing in polysilicon?

Wendell P. Weeks

It is still really too small of business to reach any statistically significant trend statement.

James B. Flaws

Do you mean hemlock polysilicon?

Brian White - Collins Stewart LLC

Yes.

Wendell P. Weeks

Oh. I thought you meant polysilicon on LCD. I apologize. Jim.

James B. Flaws

Most of the business is really under contract so for us we’re just seeing the fixed pricing in the contracts that we put in place. Almost all the new capacity that ramped up this year is under contract. So we can’t tell much around significant changes in pricing. We are aware that there may be some weakness in the semiconductor market but that hasn’t really shown up for us yet.

Operator

Our next question comes from Mark Sue - RBC Capital Markets.

Mark Sue - RBC Capital Markets

Jim, considering the deteriorating environment, can glass volumes potentially be down next year or is that unrealistic? And how low can panel utilization rates get near term? If you can just help us extrapolate what we should see for volumes as we start 2009.

James B. Flaws

I have to answer your first question by saying it’s possible but I don’t think probable that absolute volumes will go down for glass.

Utilization rates, I think a lot will depend on the decision by some panel makers about how fast they ramp the new capacity. Via our judgment if market demand is weak, why would you ramp a new Gen 8.5 or Gen 8 when there’s overall demand weak. But I think that’s where it’s very important that as you think about calculating percents utilization, we’ve seen this mistake made in the past that a lot depends on how people put in place a new fab or they count that when they say they’re running at 70% or whether they don’t. We believe that some of the new capacity will not start up when it was originally supposed to nor will it ramp at the pace.

But obviously the industry overall right now is operating at a much lower utilization rate. I can’t tell you exactly where it would be. Obviously we have seen in the past for short periods of time the industry go down to 50 but it’s hard to imagine that number for a sustained period of time.

Mark Sue - RBC Capital Markets

What about right sizing the business? I understand R&D will stay near 10% but are there other things that we can do to show earnings growth next year in terms of cost savings?

James B. Flaws

We haven’t given out a number for R&D next year at this stage so I think the question for us is: What’s the overall level of R&D for the company, whether it shows any growth in dollars at all? Originally we were planning for a significant growth and we probably won’t let that happen. We’ve frozen hiring across the entire company for salaried people and less critical jobs and basically we did that during the summer. That will help keep our fixed costs down to a low level. But we’re committed to trying to get a cost structure in place for what we see for our overall sales. But I won’t comment on earnings growth for next year at this stage.

Mark Sue - RBC Capital Markets

And lastly, tax rate? Any change there for next year.

James B. Flaws

As of right now we still think we’ll be going back to accruing US taxes so if that changes we’ll update you but we still think it’s going to be the same as we disclosed previously.

Operator

Our next question comes from Steven Fox - Merrill Lynch.

Steven Fox - Merrill Lynch

Going back to the market share question, how comfortable are you that your two major competitors are taking similar steps to control capacity and right size their business at this point? Do you have any insight into that?

James B. Flaws

I really can’t comment on our competitors. You need to talk to them directly. We have seen several analyst reports that said that people were adjusting their capacity but I can’t comment on whether those are accurate or not. We think you should call them directly.

Steven Fox - Merrill Lynch

Getting back to the cost question, historically 10% has been a pretty good R&D bogey. For those of us trying to model next year, what can you say about how quickly you would react to what could be a tough first half in order to get the SG&A and R&D ratios into a reasonable range?

James B. Flaws

We don’t think about it as a percent so I think the real question is: Do we just hold R&D spending where it is in terms of dollars heading into next year basically keeping the same amount of people? We’re evaluating whether there are any programs that maybe should be stopped at this stage. We haven’t made any decisions.

On SG&A I think we basically have frozen the dollars with the exception of what would be inflation for next year and we’re making decisions but haven’t made any yet about whether there should be any reductions. We don’t think about them as a percentage of sales on a short-term basis. Obviously on a longer-term basis we do.

Steven Fox - Merrill Lynch

Relating to the equity income, if you look at your outlook for Q4 equity income, it doesn’t seem to imply much of a margin degradation in the SCP business but yet it sounds like you’re worried about that. Is that something we should think of happening maybe on a quarter lag you would see a substantial decrease in SCP margins say in Q1 similar to what we’re seeing this quarter in the wholly owned business?

James B. Flaws

I think it’s very hard for us to judge because we may end up with this imbalance continuing and we clearly have outlined less weakness in Korea than what we’re seeing elsewhere. Therefore they shouldn’t have to have the same impact on their capacity reductions. But we don’t yet have a new operating plan tank-by-tank for Korea. When we do we’ll give you an update on what the impact might be for quarter one. But clearly we are not going to let SCP end up having a lot more capacity in whatever their market is going forward.

Operator

Our next question comes from Carter Shoop - Deutsche Bank Securities.

Carter Shoop - Deutsche Bank Securities

I wanted to talk a little bit about the capacity coming off line. I was hoping you guys could quantify how much capacity you’re planning to take off line and how long it’s going to take to actually take the tanks off line, be it the middle of this quarter, end of the quarter, first quarter, etc.?

James B. Flaws

Clearly we talked about that our volume was down 10% versus Q2. We put a lot of that inventory in Q3. We’re talking about potentially the sales rate being down 20% or 30% so in total if we’re going to stay at this rate, we clearly could take that percent. Tanks are starting to come down as we speak. They’re all individual timings. But we expect to have a lot of this happen over the remainder of this quarter.

Carter Shoop - Deutsche Bank Securities

When you look at cap ex at 2009, can we walk through where that cap ex is going in regard to how much is going to display versus other business segments and talk about how low that can come down depending on your current outlook for 2009?

James B. Flaws

I’m not prepared to give you the details but display remains the biggest part of it. It will be the finish of the [Jin Ten]. We’re not going to change that. I think the remainder of the display capital will be very dependent on what we see as the pace of repairs and then cost reduction capital for display. It’s just too premature.

We do have to spend some money on diesel despite the relatively low market vibrancy right now. We believe that we need capacity for 2010 so there will be some diesel capital spending. And we’re evaluating the capital spending in the rest of the company and just haven’t made any decisions yet. I can tell you it’s definitely going to one direction, and that’s down.

Carter Shoop - Deutsche Bank Securities

My understanding for the Jin Ten facility was that we’re only going to see another $100 million to $200 million in 2009 versus 2008. Is that still a good figure to think about?

James B. Flaws

I don’t think we’ve ever given out the details of Jin Ten at that level.

Carter Shoop - Deutsche Bank Securities

Could you maybe comment about what maintenance cap ex would be for display on an ongoing basis, be it 2009 and beyond?

James B. Flaws

No. I prefer not to do that today.

Carter Shoop - Deutsche Bank Securities

Can you comment about foreign exchange in SCP, how the Korean won versus Japanese yen is impacting margins in the fourth quarter and what your assumptions are for the Korean won in the fourth quarter?

James B. Flaws

We’re not looking for much change on the Korean won. We’re obviously not the world’s best predictors of foreign exchange. Clearly the won I think is giving some differential advantage to the Koreans at this stage in terms of the panel makers but beyond that we sell in yen in Korea and then obviously translate the results back to the United States into dollars.

Carter Shoop - Deutsche Bank Securities

On days payable outstanding, it looks like they’ve almost doubled year-over-year. Can you walk through why that has increased and if that is sustainable going forward?

James B. Flaws

I’d have to double-check that. It may be something to do with the pace at which the businesses are bringing down their spending because we often see that effect but we basically are not doing anything significant in terms of stretching out our payables.

Operator

Our next question comes from Curtis Woodworth - J.P. Morgan.

Curtis Woodworth - J.P. Morgan

Is the majority of the capacity that you’re taking out related mainly to Taiwan?

James B. Flaws

It’s Taiwan and Japan.

Curtis Woodworth - J.P. Morgan

Looking at the fourth quarter given the volume guidance down 20% to 30% in the wholly and 5% to 15% in SCP, what do you think the aggregate end market is going to look like in the fourth quarter and how much of an inventory reduction process is impacting that number?

James B. Flaws

The aggregate market we would say is down somewhere between 10% to 20%. It shouldn’t be materially different from what we are. We don’t really think there’s a big share shift going on within the quarter. I think that in our numbers we’ve thought about maybe there’s 30 million square feet being impacted here on contraction but it’s really hard for us to judge exactly how much is coming out of this.

Curtis Woodworth - J.P. Morgan

In terms of that growth rate for the industry, on a year-over-year basis it seems like that would compute to somewhere between maybe 10% to 15% decline year-on-year in area growth. Given the fact that LCD TVs are almost 60% of demand in the quarter or maybe a little higher, to get to that level it would seem that you’d have to have negative TV area growth in the quarter. Is that fair?

James B. Flaws

That’s occurring because all those televisions have already been built. When you model the supply chain, what’s going to happen is the inventory contracts dramatically in quarter four as all this stuff is sold at retail. Actually the total supply chain, the amount of square footage in inventory goes down like 80 million square feet during this period of time. What we’re saying is that may have been greater by 30 million than what we originally thought because of this contraction but the supply chain ordinarily goes down and there is less at a glass production level of televisions that [inaudible] because they’ve already all been made.

Curtis Woodworth - J.P. Morgan

In terms of ’09 capacity additions, I know you’re still going to ramp the Jin Ten but previously you were contemplating additional glass volume for the industry of I think around 350 million to 400 million square feet. Now that you say 10% that’s 215 million square feet. With the reductions you’ve announced, do you feel that you’re more aligned with that 215 number right now or would you have to take further steps in early ’09 to readjust your capacity to that type of number?

James B. Flaws

If we get the growth right overall, I don’t think we have to take substantially different. I think the question will be the balance in Korea versus Taiwan.

Wendell P. Weeks

If I could build on that because we’ve had a number of questions that centered around our customers’ utilization; where is that going to be at? Where are we going to be at in Korea versus Taiwan versus Japan?

What I just want to do in terms of perspective for you is, there is going to be some dissidence between what you’re going to hear from customers, what you’re going to take a look at by different regional players, potentially by other glass players, and the reason is that if you take a look at where we were through the summer and in the last times that Jim Flaws and myself have talked to you, what we’ve said is that of course like everyone we’re concerned about what the state of the economy is and how that will impact our business, but we were very trapped by this relative strength of the retail data.

What Jim just shared with you now is that we track through the weekly trends and we’re seeing some weakness now in retail versus our expectations. So now what we’re doing is we’re using our judgment to look beyond the current data and set our plans on where we think the level will be. When we do that it’ll mean that we’re going to be at least for a time period in a different place than some other players in terms of how they’re thinking about it and how they’re explaining it. It will take us some time to assure.

Are we right or not? We’d like to see what actually happens in the holiday selling cycle through retail and then it will take some period of time to adjust our costs and capacity and bring those in line in the right regions to be able to set our sales correctly for what we perceive will be much stronger economic headwinds than we’ve perceived before.

So until that really settles down, you’re going to hear a lot of different noise from a lot of different players of the industry mainly because we’re using our judgment to get where we think it’s going to be even though everything’s not lining up exactly that way right now.

Curtis Woodworth - J.P. Morgan

Jim, the 12 points of the gross margin decline you’re anticipating next quarter, you commented about FX hedges and just general dislocation. I didn’t catch all of that. Can you just provide a little bit more clarity on to what comprises that 12 points?

James B. Flaws

What we talked about is that we have about 5 points of accelerated depreciation. That priced down 2. We really have no ability to do anything on costs and we’re shutting down such a huge amount of capacity so that price falls to the bottom line as normally you would hope to offset price reductions. Then on FX we have a series of hedges that we had that we put in place for higher volumes of transactions that we have to unwind. That’s one-time in nature. And lastly, we have some fixed costs that we were adding to the business that obviously we don’t need because the business isn’t growing. So that’s what comprises the 12 points.

Operator

Our next question comes from Jim Suva - Citigroup.

Jim Suva - Citigroup

Considering the capacity reductions and turning off the tanks so they go cold and the depreciation as such, it seems like reasonably as we look at the linearity of Q4 versus Q1 that Q1 margins have to come down even more just given the linearity. Is that a reasonable statement?

James B. Flaws

No. We wouldn’t agree with that because we tend to get a lot of the one-time nature of these costs behind us assuming we’re right on the fact that we’ve got the capacity at the right level, which we may be wrong. But if we’re right and we get through all this and we’ve got it matched up correctly, then that stuff disappears. If we’re wrong and the market’s even worse than what we though, then you’d have another round.

Jim Suva - Citigroup

Regarding inventory, it looks like it went up about $25 million or $30 million this quarter and looking back through history really in the Q3 September quarter there hasn’t been an inventory build. Given the economic indicators, can you maybe just walk us through how inventory builds given what we know about the supply chain and inventory buildup or if there’s something unique in there that we should be aware of?

James B. Flaws

What you had is the primary inventory builder in Q3 was really in display where we commented that for four quarters in a row we actually had been reducing inventory below what we wanted. When we first saw the weakness we kept running and put that square footage of glass into inventory because we were running below where we wanted to. Obviously now with the downturn outlook, we don’t want to do that anymore but that’s where it basically ended up.

Operator

Our next question comes from John Harmon - Needham & Company.

John Harmon - Needham & Company

There’ve been a lot of exhaustive questions. I’m down to just a couple. Currently you don’t really have the visibility but it sounds like you’re expecting glass demand in Q1 to fall in with what’s just historical seasonal patterns are for consumer electronics where as in prior years they’ve been staying a bit flattish in Q1 versus Q4?

Wendell P. Weeks

I think what we need to be careful about is over-concluding on Q1 and relative seasonality for next year. The order of March for us has been let us see where as we move, as I just said, from what we had previously believed about the end market to what we believe now about the end market this year. The first thing we need to do is get that correction in place and deal with that for quarter four and for our view of 2009, which is still maturating. We’re going to know a lot more as we work our way through this selling season.

After we sort out where we think we’re going to be overall in 2009, we’ve given some directional guidance today, then we’ll start to backfill into what we think the seasonality looks like. We’re a little concerned to give too much information on what we think about quarter one mainly because we don’t want to misdirect. Let us figure out where we’re going to be overall in ’09 and then we’ll be able to be a lot more forthcoming on how we expect the seasonality to play out.

John Harmon - Needham & Company

I think you said before you were going to complete the transition to Eagle XG by the end of the year. Does the fact that you’re turning off some tanks, are there any benefits in it? Does it let you accelerate that or do it better in any way?

James B. Flaws

No. Eagle XG for Corning was basically done.

Wendell P. Weeks

In SCP we are continuing our march to finish that conversion. I think you’re quite right. Even in times as markets slow down, it’s the time to continue to accelerate our cost improvement moves.

John Harmon - Needham & Company

What was the cash write-off you took with the Corning or Dow Corning and what was it?

James B. Flaws

We had both. In Corning’s cash we had some money invested with financial companies in bonds so we took a both realized and impaired loss, and then at Dow Corning in their cash they had some Freddie and Fannie securities that they had to impair also. We tried to not be concentrated in any particular investment but we got it wrong in a couple of financial institutions.

Operator

Our next question comes from Ajit Pai - Thomas Weisel Partners.

Ajit Pai - Thomas Weisel Partners

Just looking at your cash flows, this particular quarter was probably one of the strongest quarters I’ve seen for Corning in terms of cash flows. Could you talk about what primarily impacted that even though you’re guiding to reduced earnings on a go-forward basis a large part of that will be attributed to sort of noncash elements as well as depreciation of plants, etc. with the declining demand? While you’ve already exceeded the guidance given at the beginning of the year for about $500 million in free cash flow, you’re already above that right now, what can we expect for 2009 as far as that’s concerned.

James B. Flaws

Let me finish for 2008. Free cash flow would be negative in quarter four because capital spending will be up and we will not have as strong an operating cash flow in Q4 with the amount of operations that we’re taking down. It’s premature for us to do a 2009 cash flow depending on what the company is going to do operationally. The most difficult thing we’ll have in determining the cash flow will be the balance again between the equity companies and our wholly owned business in display. Clearly we expect capital spending next year to be lower than it was this year but it’s premature for me to forecast operating cash flow.

Ajit Pai - Thomas Weisel Partners

About three years ago when you had some dislocation in demand in terms of where you had capacity and where the demand was in terms of you wholly owned business and SCP, you had some client shipment going on at that time. Do you foresee an environment where that could begin again over the next year or year and a half or do you think that’s probably not likely to happen?

James B. Flaws

It will be one of the things that we go to explore as we get a feeling of how the market is settling and do we have capacity at SCP or in the wholly owned business that could benefit one another. Clearly if it does, we’ll do it.

Operator

Our next question comes from John Roberts - Buckingham Research.

John Roberts - Buckingham Research

TV demand is pretty price elastic. Do you think the strong yen at some point is going to temper some of the recent price declines that we’ve been seeing in both the US and Europe?

James B. Flaws

We actually don’t believe that but obviously that’s not something that we can control. That will be very dependent on what the branded set makers decide to do as a result of that but we would be very surprised if they took that into account.

John Roberts - Buckingham Research

Pricing’s going to continue to move irrespective of what’s going on with the yen recently.

James B. Flaws

The yen has moved back substantially over the last few days anyway.

Wendell P. Weeks

Plus remember how much of the cost structures in Korean won too so we also have to work through that.

John Roberts - Buckingham Research

You used $1.01 for the fourth quarter guidance. You didn’t use a round number like 100. Is that like the one-week last average or how’d you come up with $1.01 given the volatility in the yen?

James B. Flaws

There’s no brilliance on how we came up with the $1.01.

Kenneth C. Sofio

Operator, we’re running a little late. We’ve got time for one more caller.

Operator

Our next question comes from Jeff Evanston - Sanford and Bernstein.

Jeff Evanston - Sanford and Bernstein

A couple of questions on telecom. First, you gave guidance for sequentially revenue down 20%. Could you give us some color on any differences you’re seeing between public and private networks? And second, you mentioned that your operating costs were running a bit higher in telecom. If you could give us some comments on the sources of that?

Wendell P. Weeks

On the sales down from quarter four compared to quarter three, normal seasonality usually eats up about 10 points. Hard to call normal seasonality because every year’s a little bit different but roughly we think that about 10 points down. The impact of a stronger US dollar versus the Euro’s about another 4.

What we’re seeing is just in very recent days in the last week a lower order rate for fiber in some of the emerging markets as well as some inventory adjustments in some of our key cablers. We believe that that could be economic driven.

Also we’re expecting some lower private network orders in quarter four versus quarter three; once again, somewhat related to the economy we believe. It’s not outsized in private versus public so I don’t think we’re going to see a significant mix deterioration per se because we also see fiber to the prem down about 15% in quarter four versus quarter three even though it’s up about 14% year-over-year. That’s the rough mix we’re seeing.

Once again we’re using a little bit of judgment on where we think quarter four is going to be based on relatively few days of activity relatively recently.

Jeff Evanston - Sanford and Bernstein

And the operating expense?

Wendell P. Weeks

On op ex at the beginning of this year we added some fixed costs in some selected areas based primarily on growing much more rapidly in the private network space. We’ve gotten some of that growth but about half as much as we thought we should have. What we would seek to do is make a correction in that fixed cost structure going forward. It’s higher than we think it should be.

We also had some conversion costs to SAP that has lifted op ex higher than what we would have liked. And, fiber to the prem in Europe even though we’ve recently announced our second major customer we’d expected to announce that a little earlier, have a little more revenue, we had some fixed costs for them and another player. So overall when you take a look at where we are with a fixed costs and telecom you should expect us to take some actions to lower that fixed cost structure to match better to where we think the revenues are going to be.

James B. Flaws

Just a couple of quick closing comments. People in [inaudible] will be presenting at the UBS Technology Conference in New York on November 18. I’ll be presenting at the Barclays Capital Global Technology Conference in San Francisco on December 10. Obviously we hope to see you at one of these events. It’s closing, it’s not apparent to anything in our current situation has changed, the fundamentals that drive our current businesses. The world is still yearning for a cleaner environment and there still is a need to deliver huge amounts of data as fast as possible and a superior way to view it on.

But, even with these overall drivers, we think now is the time to be more cautious about our spending commitments. The caution is showing up in our decision to control our fixed costs, reduce capital spending and also be cautious on the level of R&D spending without changing our overall commitment to R&D.

Kenneth C. Sofio

Thank you all for joining us this morning. A play back of the call will be available beginning at 10:30 Easter Time today and will run till 5:00 Eastern Time on Wednesday, November 12. To listen dial 1-800-475-6701. No password’s required. Audio cast will also be available on our website during that time. That concludes our call. Please disconnect all lines.

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Source: Corning, Inc. Q3 2008 (Quarter End 9/30/08) Earnings Call Transcript
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