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Here’s the entire text of the Q&A from Corning’s (ticker: GLW) Q3 2005 conference call. The prepared remarks are here. We recognize that this transcript may contain inaccuracies - if you find any, please post a comment below and we’ll incorporate your corrections. And please note: this conference call transcript is a Seeking Alpha product, so feel free to link to it but reproduction is not permitted without the explicit permission of Seeking Alpha.

Questions and Answers

Operator

OPERATOR INSTRUCTIONS Our first question from Daryl Armstrong with Smith Barney.

Daryl Armstrong

Thank you very much. I have two questions. One on television and the other on margin. In terms of the historical data on television volumes across recessions, was that consistent strength was that accurate from a high end as well as low-end television sets? And then I have a follow-up.

Jim Flaws

So actually, haven't looked at the television sales during those these period of time by sales of television and that is relatively true that it was evenly placed. Not perfectly across the different sizes. And we don't have price data back to the '70's but we looked at the various sizes of televisions. Back then a 27 was a big one. It was relatively evenly spread versus small ones.

Daryl Armstrong

That is helpful. And then in terms of margin, the way I look as it that there are three drivers of margin expansion. One, LCD becoming a larger part of the overall corporate mix. And then second of all the up tick increased sales of Gen6 and Gen7 your the overall LCD volumes. And then third the improvement in the individual generations, let's say for instance Gen6 due to the improvements of yields net of pricing competition. As you think about your business over the course of the next few quarters, how do you rank order the importance of each of those three factors in terms of driving up margins?

Jim Flaws

Well, I think that the most important thing for us would be the additional volume of Gen6 and ultimately Gen7, which shows up in our base business. Right now our base business is really only Gen6. Our Gen7 is at S&P. We expect to have Gen7 on '5 and Gen8 in next year for our business. I think that the things you're missing in the margin would be the impact of price as a negative. And then the other impact will be our own ability to continue to improve our cost structure. And as you know, most of our additional capacity we are ramping in Taiwan where our cost structure is very, very low. So, I think those things are the other things you ought to be putting in your model.

Daryl Armstrong

That's helpful. Thank you.

Operator

Thank you. Our next question comes from Nikos Theodosopoulos with UBS.

Nikos Theodosopoulos

Thank you, I had a couple of questions. First of all, you gave us a sense that the LCD gross margin was up sequentially. Can you just give some color on the other businesses, whether the gross margin trend up or down and what was the gross margin in SCP in the quarter? And the second question I have is, you mentioned royalty income. Can you elaborate on what business that was reported in and what was the amount? Thank you?

Jim Flaws

The royalty income is all within one business. It is basically a royalty that comes out of our overseas operations in display paid to the U.S. where we developed the technology. But because of our tax treatment in the United States it absolutely helps our overall tax rate. In terms of the gross margins and the other businesses, environmental was basically flat. Life sciences was down a little and the other materials were down a little bit, too. But nothing material there.

Nikos Theodosopoulos

Well, what about telecom?

Jim Flaws

I don't remember what telecom was in the third quarter. A separate telecom was down just slightly.

Nikos Theodosopoulos

And the significance of the royalty income how large is that?

Jim Flaws

Sorry, we don't break that out.

Nikos Theodosopoulos

You don't break that out.

Jim Flaws

It's masked because it is an expense and an income when you look at the total Corporation.

Nikos Theodosopoulos

Right. I'm trying to get a sense of the profitability the core profitability of the LCD business. As you look at it second quarter versus third quarter it seemed to have improve dramatically. And I'm trying to get a sense was that mostly the gross margin improvement or was it kind of split evenly? Did the royalty income change dramatically sequentially?

Jim Flaws

The royalty income wouldn't affect the display as you've seen it in the segments you see it. Because it is both an expense over in Taiwan and then an income in the United States and then consolidated, so you don't see it. What's driving the margin improvement in the display business is our gross margin percent increasing, the overall growth of the business, leveraging our SG&A and R&D. And then lastly as I indicated that the way we allocate taxes, sequentially compared to quarter two, the tax benefit was great because we had this overall lower tax rate.

Nikos Theodosopoulos

Okay. And finally, the SCP gross margin, do you have that?

Jim Flaws

It was consistent with quarter two.

Nikos Theodosopoulos

Thank you.

Operator

Thank you. Our next question comes from C.J. Muse with Lehman Brothers.

C.J. Muse

Good morning. A couple of questions here. Yes first I guess first off, for your gross margin for your core display business you alluded to it getting closer to SCP. Can you give us I guess a tighter range in terms of what that number was like?

Jim Flaws

No. Sorry, I won't do that.

C.J. Muse

Okay. I guess looking forward to Q4, you gave up guidance for glass volumes. Yet your gross margin guidance is considerably low are than what you achieved in the third quarter. Can you comment on why that is?

Jim Flaws

So, overall for the Company, what you are going to see is the telecom business going down. And remember we have basically when you we lose the telecom revenues they fall at a very high incremental rate. And that is providing most of the down, if you will. If you all the way to the 43% versus the 46%, the telecom drop off is about 2/3 of that. The other potential pressure we see will be the question of what is the ultimate pace of price declines in the LCD business? As we indicated, we expect them to be only slightly down. Slightly is what we would think about similar to what we had in quarter one. So, that will be the potential, and I stress potential, downers within it. The up will be depends on how well we do in manufacturing in Taiwan where we are bringing on a number of new tanks.

C.J. Muse

Okay. And final question from me. I know glass and panel shipments don't necessarily correlate one to one but you're flat to up 5% guide for SCP seems rather conservative relative to Samsung's guide of up 8% and LPL's guide of mid teens growth in the fourth quarter. Can you help me understand the disconnect there?

Jim Flaws

Well, really remember what we've shipped to them in quarter three is showing up in their outlook in quarter four. And I think they indicated that their actual that their ramps were done. So, they are not adding manufacturing capacity really in this quarter. What you are seeing in their sales going out is what's coming out of what they've already manufactured and the inventory they have. But I think both of them indicated that they had achieved their ramped capacity on those two fabs.

C.J. Muse

Got you. So, your guide of flat to up 5% would suggest panel shipments out of Korea will be up sequentially in the first quarter?

Jim Flaws

We would hope so.

C.J. Muse

Got you. Thank you.

Operator

Thank you. Our next question comes from Steven Fox at Merrill Lynch.

Steven Fox

Hi, good morning. Jim, first of all going back to some of the comments you made about the excess inventory potentials. Is there any chance the panel makers would try to hold price and slow production as opposed to first trying to drop price and net pricing on say panels may not be a good leading indicator for monitors?

Wendell Weeks

This is Wendell. So, yes, there is always that chance but past behavior has not, if past behavior is any predictor of the future then they wouldn't do that.

Steven Fox

And if there was to be some kind of inventory correction that had to go on what do you think the lead time would look like in terms of them slowing production?

Wendell Weeks

It depends on the segment. As Jim pointed out, the pipeline tends to be shorter and under tighter control in monitors. Right? As opposed to LCD TV. Right now we don't see much concern in LCD TV, as Jim has said. But we do have to take a close look at what happens what our customers believe will happen in quarter one for monitors. Because we are counting on increased penetration in that. And it is once again, as Jim just said, we will sell glass in in quarter four for what ultimately our customers sell out in quarter one.

Steven Fox

And then just a quick question rate Jim. Is 25% a good number 20% to 25% a good number to flow through into an '06 model at this point?

Jim Flaws

Yes, I think that is a reasonable estimate right now. We will try to give you a lot more help on that. Obviously, we are having a little trouble doing the forecasting tax rates. But I would say for right now that is a good rate to use.

Steven Fox

Thanks so much.

Operator

Thank you. Our next question comes from John Harmon with Needham Company.

John Harmon

Hello, good morning.

Jim Flaws

Good morning.

John Harmon

I guess two quick questions. One, I noticed a change in the language in your press release. I'm talking about that LCD television penetration could be between 20% and 25% in '07 versus I think 21% is your latest forecast. Has the market researchers, have they changed their view or are you more optimistic about LCD TV?

Jim Flaws

I won't speak for all the market researchers but we clearly have moved up our own expectations of what we think LCD television penetration is going to be next year.

John Harmon

Thank you. And secondly given that fiber volume turned out much better than expected in Q3, could that accelerate the reopening of Concord or does that increase the probability of it opening next year?

Wendell Weeks

At this time one quarter does not change our position one way or another on Concord, sir.

John Harmon

But at present you still believe if current trends continue you can reopen it in '06?

Jim Flaws

No, I would say that we unless there was a more significant rebound in China it is not likely to be in '06.

John Harmon

All right. Thank you very much.

Operator

Thank you. Our next question comes from Brant Thompson with Goldman Sachs.

Brant Thompson

Hi, you gave us a lot of information about how consumers might behave relative to the TV market. And obviously we've talked about how that market can quickly result in corrections. But can give us your view on the monitor and notebook side, how higher energy prices and these types of things may impact that? And you had mentioned that you can see quicker corrections in inventory in the monitor market. But just kind of talk about how guard at the panel makers may impact you on the monitor side since that's really the bulk of the volume still.

Jim Flaws

We don't have the same kind of history on the, IT usage of this during a long number of recessions in particular. Remember about the IT market, it is driven not only by the consumer behavior but also by the corporate IT budgets. So, we don't have the same ability to say what's happened. What we have focused a little bit on, is done informal surveys of other CFO's about what their IT budgets are for the upcoming year on the corporate side and basically we're not I'm not sensing declines. If anything, in fact, they're up. But it is hard to judge and it is very possible that a consumer who might have been thinking about a flat panel display might put off that purchase but we just don't have enough history about it. As you've indicated the bad news about the monitor market is it is probably flows quicker to us than the television does. But we just don't have any kind of history to judge that. I would say if the thing that we focus most on right now, is what is happening in the monitor market rather than the television market in terms of potential impact on us from December and January.

Brant Thompson

And then if I could have a quick follow-up on the pricing changes in the pricing environment. Over the last couple of quarters we saw some pricing I guess down in the first quarter, flat in the second and third quarter and then you are expecting to be down a little bit into this next quarter. As we look out into 2006, given that you are seeing pricing competition really for the first time in Gen6 now, should we expect the price declines to be steady sequentially throughout the year or would it follow a similar trend?

Jim Flaws

Well, what we have said consistently what we anticipate is price declines on an annual basis in the high single digit range. And we've provided information in the past that shows that though you can have given years where it is a little more shallow or a little more steeper; that the important point is when we show how we have done on cost that we have been able to over that period of time decrease our costs by at least the rate of price decline.

Brant Thompson

Thank you.

Operator

Thank you. Our next question comes from Jeff Evenson with Sanford Bernstein.

Jim Flaws

Jeff, are you there?

Jeff Evenson

Yes. Investors probably appropriately focus on the size mix of LCD glass substrate. Can you comment on the non-size parameters like surface properties, expansion coefficients and perhaps in the future poly silicon and its impact on purchase decisions?

Jim Flaws

Jeff, do you mean specifically on TV or across the whole sweep of the product line?

Jeff Evenson

On TV.

Jim Flaws

On TV. So I think that the three main areas to focus on from the technical standpoint is; that as you go bigger the challenge gets harder. From both the stress standpoint and on overall glass requirements. And that tends to play to our strength. So, we continue to have product entries that will I think match up nicely with those tightening specifications. To Poly Side we don't think that is going to be a force in TV. However, that we will see it in smaller displays. And once again, the technical challenges of the glass increase in Poly Side especially around processing temperature. And, once again, we have got some new technology that we feel really good about that will position us very nicely in that market.

Jeff Evenson

Thanks.

Operator

Thank you. Our next question comes from Matthew Smith with CIBC.

Matthew Smith

Good morning, gentlemen. Two questions, if I may. Firstly, on the ASP's I think in the past you've said that historically you have commanded a double digit premium in terms of your glass ASP's relative to the competition. I'm wondering if that is still the case? And whether or not you are seeing any pressure to bring down that premium as the as Asahi and so on get better at supplying Gen6 glass? And then secondly on the diesel business, if we can switch gears a bit. Can you give us an update on where you are with your letters of intent with North American and European customers? And when might we see some of those LOI's converted to formal deals? Thanks a lot.

Wendell Weeks

First a general comment on the competition and your particular focus on Gen6. I think it is important to remember that we started commercial production in Gen6 sort of mid 2003. And really the first competition showed up selling in Korea to a customer who isn't that close to Samsung Corning precision and therefore, had a lot of motivation to buy it from someone else in the fall of 2004. And we are still the majority supplier there. Now, 2.5 years later we have another competitor finally showing up with commercial quantities in Taiwan and Japan. We anticipated competitive entry long before this and are more than ready for that. Remember, we only had about a one-year lead in Gen5 and we have continued to expand our profitability in that product line. A part of that relates to the premium that you spoke to but more importantly is continued improvements in productivity. We would expect to continue to have some degree of premium. Mainly because of the better glass quality and our strong reputation for being able to reliably produce it. Remember, we've already turned in a commercial producing Gen7 and have already begun sampling larger sizes and are in the midst of building our Gen8 plant.

Matthew Smith

Thank you very much.

Jim Flaws

Diesel, you asked about where we are on the supply agreements. We are continuing to negotiate. These are difficult contracts. Not so much for price but more to make sure we understand the warranty and performance requirements in the contract. But we continue to make very good progress on that with our customers and are hopeful of reaching conclusion in the fourth quarter.

Operator

Our next question comes from John Roberts with Buckingham.

John Roberts

I'm not sure any one said nice quarter yet, guys but maybe that is becoming a little bit routine to you.

Wendell Weeks

No. And we always appreciate hearing it. Thank you very much.

Matthew Smith

The questions first on Dow Corning, which is also non-petroleum based but they sell into markets with a lot of petroleum based alternatives. So, in a high-energy environment, should we be expecting their earnings to accelerate here?

Jim Flaws

I would not be expecting acceleration right now. They're they have some energy components sales. Although, obviously much more smaller than most of the commodity players. But they are also running very close to near capacity at there basic plants. So, I don't see a lot of room for big acceleration. But we do have a seasonality method. As you know, the first half for Dow Corning is usually much stronger than the second half.

Matthew Smith

And then when we talk about the LCD share of the TV market, it is sort of with the assumption that the total TV market is not growing. But as we get a ramp in digital broadcasting over the next couple of years, the installed base of TV's still have very little digital penetration, I think. So, should we be thinking about the total TV market maybe accelerating a little bit and then LCD picking up a good part of that incremental growth?

Wendell Weeks

I think that is a good point. The overall category growth that we would say for TV have increased in the low single digits. And that with the advent of a strong digital broadcasting and the move towards digital, it could have a prompting to give people a reason to have to buy a TV. Especially, if the digital broadcasting bill that is work its way through Congress right now goes through. Because people's analog sets will be obviously challenged. Remember, that digital goes very well with LCD TV since it is naturally digital. So, perhaps there's is a an opportunity here with digital signaling becoming predominant providing some upside to overall category growth. Remember, the key thing we want is people to have a good reason to buy TV's. Once they have that we feel really good about the competitive nature of the LCD TV technology.

Matthew Smith

Thank you.

Ken Sofio

We have time for one more question.

Operator

Thank you. The final question comes from Ajit Pai with Thomas Weisel.

Ajit Pai

Good morning and congratulations on a really solid improvement in your balance sheet over the past couple of years.

Jim Flaws

Thank you very much. We appreciate that.

Ajit Pai

A couple of quick questions about that. Now, that you are in sort of a net cash situation I think for the first time in almost 20 years; what do you intend to do with that cash in 2006 and beyond? Do you want to continue to have leverage on the balance sheet or what will you use that for?

Wendell Weeks

So actually, we were kind of researching to figure out the last time we had the situation. I appreciate you pointing that out to us. We are going to keep a large amount of cash going forward simply as part of our stability metric. Because we know we are in tech businesses, we will have some debt. We don't expect it to get greatly above the amount of debt we have. What we're really going to do with that cash is reinvest it in the business and there is two places. One is obviously our capital expending for near term business, such as either display or diesel. More importantly, I think for investors, is that reinvesting in our research and development for hopefully businesses that will be appearing at the end of this decade. So, that is why we are maintaining the cash for both stability purposes and the ability to reinvest in R&D.

Ajit Pai

And when you look at your planned extension of Gen8 capacity that's being over there, Gen8 and higher, when do you expect that to come online? I think you mentioned 2006 but you didn't indicate whether it is the middle of the year or end of the year.

Jim Flaws

It will be in the first part of the year.

Ajit Pai

In the first part. So, is it safe to assume that the second quarter would be seeing a ramp over there?

Jim Flaws

We clearly expect it to start in the second quarter. But ramps of new big fabs don't happen really fast. So but we clearly intend to be prepared to ship Gen8 glass in the second.

Ajit Pai

Okay. Just moving on to the operating margins in the environmental business. Those margins have been hovering in the close to zero for awhile now. I think largely driven by your sort of large investments in the diesel opportunity. Are you seeing any deteriorating trends right now in the regular auto business? And then in the diesel opportunity, when do you expect like the sort of margins over there to move up into double digits? How many quarters or years would it take?

Jim Flaws

So, we are not seeing a deterioration in auto. We would like to see a little by the more improvement in auto but we are not seeing a deterioration. Diesel, I don't think you should look for much improvement before the beginning of '07, when we begin shipping quite a bit of volume.

Ajit Pai

Thank you so much and congratulations again on a very solid quarter.

Ken Sofio

Jim, do you have some closing comments?

Jim Flaws

I do. Just a few closing comments. Clearly we are very pleased with our outstanding performance in the third quarter and are excited about our prospects for the fourth quarter. We've got excellent momentum as we start the fourth quarter especially in LCD glass. And with regards to display, we are looking forward to seeing how successful LCD television continues to be in this very important holiday season. Our belief is retail prices will generate substantial sell through and that '06 will turn out to be the inflection point in LCD television.

One late breaking piece of new. I'm aware that Verizon announced this morning their 2006 plans for homes past. And they announced the 3 million homes and also the details on their connect rate where they have been marketing the service and that looks favorable to us. So, we are pleased by that news now also. Two final notes. On investor relations announcements; on November 2, I will be presenting at the Morgan Stanley conference in Phoenix. And then November 15, Pete Volanakis, our Chief Operating Officer, will be presenting at the UBS Global Communications Conference in New York City. Ken?

Ken Sofio

Thank you Jim. Thanks Wendell. Thank you all for joining us this morning. A playback of the call will be available beginning at 10:30 Eastern Time today. Will run to 5:00 pm Eastern Time on November 10. To listen dial 402-220-9717. No password is required. The audio cast is also available on our website during that time and that concludes our call. Please disconnect all lines.

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