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Corning, Inc. (NYSE:GLW)

Q3 2007 Earnings Call

October 24, 2007 8:30 am ET

Executives

Ken Sofio - Division Vice President of Investor Relations

James Flaws - Vice Chairman and Chief Financial Officer

Wendell Weeks - Chairman and Chief Executive Officer

Analysts

Mark Sue - RBC Capital Markets

Nikos Theodosopoulos - UBS

Steven Fox - Merrill Lynch

CJ Muse - Lehman Brothers

Brant Thompson - Goldman Sachs

Jeff Evanson - Sanford Bernstein

John Roberts - Buckingham Research Group

John Harmon - Needham & Company

Curtis Woodworth- JPMorgan

Tim Daubenspeck - Pacific Crest Securities

Carter Shoop - Deutsche Bank Securities

Daniel Gelbtuch - CIBC

John Anthony - Cowen & Company

Ajit Pai - Thomas Weisel Partners

Operator

Good morning and welcome to the third quarter earnings conference call. All participants will be in a listen-only mode. Today's conference is being recorded. If anyone has any objections, you may disconnect at this time.

I would now like to introduce your host for today's conference call, Mr. Ken Sofio, Division Vice President of Investor Relations.

Ken Sofio

Thank you. Good morning everyone. Corning's third quarter conference call. Call's being audio cast on our website. James Flaws, Vice Chairman and Chief Financial Officer will lead the discussion; Wendell Weeks, Chairman and Chief Executive Officer will join for the Q&A.

Before I turn the all cover to Jim, to note today's remarks do contain forward-looking statements under the meaning of Private Securities Litigation Reform Act of 1995. These statements involve risks and uncertainties of the factors that could cause actual results to differ materially. These risks are detailed in the company's SEC report.

James Flaws

Thanks, Ken. Good morning everyone. 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 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.

Overall, our third quarter results were excellent. Let me share with you some of the key data points, and then we can get into the details. We hit all-time records in the third quarter for gross margin percent, net income, earnings per share before special items.

Sequential volume growth and Display was strong in both our wholly owned business and at FCT. Panel inventory levels and Display supply chain appear to be healthy heading into the fourth quarter. Retail and market trends for LCD television looks strong, both worldwide and in the United States.

We currently see no evidence of credit concerns impacting consumers' decisions to purchase LCD televisions in the United States. Our telecommunications business rebounded in the third quarter posting 10% growth excluding the divested cabling business in quarter two.

Now let me go to the details starting with our income statement. Our second quarter sales were $1.55 billion, an increase of 10% over the second quarter and an increase of 21% over the third quarter a year ago.

Our EPS, both GAAP and non-GAAP was $0.38 and exceeded the top end of our guidance range by $0.01. Net income, excluding special items was $619 million, an increase of 13% versus the second quarter.

In comparison to the third quarter 2006, net income excluding special items was up $168 million or 37%. You should note that EPS and net income excluding special items are non-GAAP measures. Reconciliation to GAAP can be found on our website.

Our third quarter sales benefited from $12 million from the strengthening yen to U.S. dollar exchange rate, in comparison to the second quarter. Continuing down the income statement, gross margin on the third quarter was 47.8% and an all-time record for Corning.

SG&A was $212 million and only 14% of sales. We are delivering on our commitment to gain operating leverage and keep our SG&A spending growth at less than half the rate of sales. RD&E in the third quarter was $145 million or 9% of sales.

Equity earnings were $239 million in the third quarter compared to $220 million in the second quarter. Increase was primarily due to higher than expected earnings for Samsung Corning Precision.

Third quarter equity earnings included an impairment and restructuring charge at Samsung Corning CRT of $18 million. Due to the size of the charge it was treated as a special item this quarter. Investors will recall that we had $10 million of charges in quarter two at Samsung Corning CRT, which we did not take as a special.

Our tax rate in the third quarter was 15% including a $15 million non-recurring tax charge. Wrapping up our income statement, our share count for the third quarter was 1.6 billion shares.

We had two special items in the quarter three. The first was the impairment charge at Samsung Corning CRT that I mentioned a moment ago. Second was a pretax and after-tax gain of $16 million, primarily reflecting the decrease in market value of Corning common stock to be contributed to settle the asbestos litigation to Pittsburgh Corning.

Corning share price decreased during the quarter from $25.55 to $24.65. Thus the gain and loss essentially offset each other. Our GAAP EPS this quarter was also $0.38 per share.

Now let's turn to the segment results. I'll start with Display, which had an outstanding quarter. Third quarter sales were $705 million and 16% higher than last quarter. Volume was up 15% sequentially and at the upper end of our guidance range. Price declines were in line with our strategy.

It should come as no surprise that we will continue this pricing approach in the fourth quarter. Segment sales also benefited slightly from the strength in the end during the quarter. As a reminder, all of our glass is sold in yen. Pricing guidance we provide is on a yen-per-square-foot basis. As a result, changes in the yen and dollar exchange rate do not impact our pricing. Gross margin percent per Display segment remain consistent with the previous quarter.

Equity earnings from SCP were $160 million in the third quarter, an increase of 21% versus the $132 million last quarter. SCP's sequential volume increased 14% in the third quarter, which is higher than we anticipate.

As expected, price declines at SCP in the third quarter were in line with our wholly owned business. For modeling purposes, SCP's third quarter sales were $635 million compared to $574 million in the second quarter. SCP's gross margin increased slightly on strong manufacturing performance.

Net income in the Display segment, which includes equity earnings, was $540 million in the third quarter, an increase of 11% compared to the second quarter net income of $486 million. This increase is primarily the result of volume growth.  As a reminder, Q2 had benefited from a one-time tax benefit of $17 million in the Display segment.

In comparison to the third quarter of last year, sales on our Display segment increased 39% as volume gains of 57% were partially offset by price declines and unfavorable foreign exchange rate movements year-over-year.

Segment net income grew 37% year-over-year. For the three quarters to date this year, glass volume at our wholly owned business is up 42% compared to last year. SCP’s year-to-date volume is up 39%. So, our glass demand continues to be strong.

Moving to the supply chain, we believe panel inventories are in great shape heading into the fourth quarter. Panel makers experienced record shipments from September, which has led to lower inventories at many of them.

On the retail side, our preliminary data suggests the end market demand remains strong. In fact, our third quarter research indicates end market demand for IT television was stronger than our previous forecast.

As always, I like to stress that our third quarter market information is only preliminary at this time. This data represents our view and is based on a variety of sources. And to be clear, the data I'm referencing here relates to shipments from PC manufacturers and television set makers to retailers.

Starting with notebooks above 27 million were shipped in the third quarter, higher than our expectations and a 12% increase versus the second quarter. As a percentage of computers sold, notebooks jump from 43% to 46% in the third quarter.

The LCD monitors, about 43 million were shipped in the third quarter also higher than our expectations and the second quarter. We believe the penetration of LCD monitors increased to 89%.

Moving to LCD television, about 19 million units were shipped compared to 16 million in the second quarter. It was also higher than we expected. Penetration of LCD television into the worldwide color television market grew from 36% in the second quarter to 38% in the third quarter. Obviously, we’re extremely pleased with the overall end market demand heading into the fourth quarter.

Regarding U.S. consumers, we continue to see no evidence that credit concerns are decreasing their appetite for LCD televisions. Consumers continue to purchase LCD TVs and electronic retailers continue to offer financing incentives. In fact, two of the big box electronic retailers publicly stated they do not plan on eliminating those incentives.

Moving on to an update on our total family glass mix. A mix of Gen 5 and higher in the third quarter was 88% and consistent with the second quarter. Mix of Gen 5.5, 5.6 5.7 and 5.8 glass was 55% in the third quarter and slightly higher than the second quarter.

I’ll wrap-up Display by commenting on EAGLE XG, our conversion to one glass composition is proceeding nicely. At the end of the third quarter, EAGLE XG represented over 90% of our glass sales. We are well on track to convert a 100% of our glass to EAGLE XG by the end of the year. SCP has begun ramping up EAGLE XG this year and it is currently over the 40% of their sales.

Now, moving to the Environmental segment, sales in the third quarter were $198 million, an increase of 4% over second quarter sales of $191 million. We were anticipating sales to be flat sequentially. We do not experience the typical August slowdown in auto as U.S. manufacturers may have purchased additional product in anticipation of union strikes.

Auto product sales were $126 million in the third quarter compared to $128 million in second. Diesel products sales were $72 million in the third quarter, an increase of 14% over the second quarter sales of $63 million.

Segment net income was $14 million in the third quarter consistent with the second quarter. In comparison to a year ago, environmental segment sales increased 29% driven by higher auto and diesel volume. Auto sales were up 13% year-over-year, while diesel was up 76%.

In the Life Sciences segment sales in the third quarter was $78 million and consistent with the second quarter. Segment net income was $1 million in the third quarter and consistent with the second quarter.

Moving to the Telecommunications segment, sales in the third quarter were $472 million and 8% higher than second quarter sales of $438 million. Excluding the $9 million in Q2 sales related to our divested submarine cable business, telecom sales increased 10% as we had expected.

Experienced growth throughout the segment this quarter including increased demand for Fiber-to-the-Premises products and private network projects. Sales of hardware equipment products were $235 million in the third quarter, an increase of 7% the over second quarter sales of $219 million.

Sales in our fiber cable products in the third quarter were $237 million, an increase of 8% over the second quarter sales of $219 million. Fiber-to-the-Premise sales, which are primarily hardware equipment related, were $83 million in the third quarter compared to $73 million in the second quarter. Included in these sales were products shipped to our new Fiber-to-the-Premise customer in Europe.

Net income in the Telecom segment was $27 million in the third quarter compared to $40 million in the second quarter. However, as a reminder, the second quarter included $19 million from a one time gain in our sale of the submarine cable business. So, excluding that gain, telecom net income increased nicely during the quarter on higher sales volume.

I hope investors were able to make it to the fiber-to-the-home conference last month to see the demonstration of ClearCurve, our new ultra-bendable fiber technology. We're in the process discussing the new technology with several potential customers and the feedback so far has been excellent.

In addition, Verizon is currently using ClearCurve in a broad test trial in New York City, which has one of the nation's highest concentrations of MDUs. We are very excited about working with Verizon on this trial, helping them connect with a significant customer base.

I know many investors are interested in understanding more of this technology and the market opportunity. For those of you who missed the demonstration last month, a video of it will be found on our IR web site in the near future.

Regarding the market opportunity, I'd like to ask for your patience as we finalize the pricing premium and other discussions with potential customers, both within the telecom industry and outside the telecom industry. Once we have a good handle on the market size we will share that information.

I anticipate that we will provide a more comprehensive review of this market at our annual investor meeting in February. Moving on to our Other segment, sales in the quarter were $100 million basically flat with the second quarter. This was lower than we anticipated due primarily to weaker demand.

Turning to Dow Corning, equity earnings were $81 million compared to $88 million in the second quarter. Third quarter results included a one-time tax charge of $4 million related to revaluating U.K. deferred tax assets.

Now, moving to our balance sheet, we ended the third quarter with about $3.3 billion in cash and short-term investments, up from $3.2 billion at the end of the second quarter. Free cash flow was $272 million in the third quarter. Year-to-date we generated $460 million in free cash flow.

Our shareholders, I hope you all receive a dividend check we mailed last month or noticed your electronic deposit. We distributed about $80 million in dividends to our shareholders. Board recently approved another $0.05 per share for the fourth quarter payable in December. In addition, we repurchased approximately $5 million shares of stock or $125 million in cash in quarter three.

I'd like to wrap up by providing our guidance for the fourth quarter and some commentary about 2008 starting with Display.

We expect the glass market to remain robust in the fourth quarter. As panel makers continue to run at peak utilizations, we think market demand will be consistent in comparison to the third quarter. To meet market demand, volumes at our wholly owned business and SCP will be up 2 to 5% sequentially.

To meet this level of demand, we anticipate our operations will need to run at full capacity. A quarter four volume guidance is consistent with quarter four panel shipment guidance provided by some of the larger panel makers including the LPL, Samsung and AUO.

More importantly, the retail environment continues to look healthy, especially for LCD televisions. We're anticipating very robust LCD television sales in the fourth quarter. We believe LCD TV shipments will increase over 35% from $19 million units in the third quarter to $26 million units in the fourth quarter. Fourth quarter shipments this year will be more than 50% higher than last year when just $17 million were shipped.

Regarding fourth quarter glass pricing, our approach will be consistent with previous quarters. More importantly, glass prices in the fourth quarter this year compared to last year will be just 8% lower. This is a significant change in comparison to last year when glass pricing fell 20% quarter four, 2005 to quarter four, 2006. We’re obviously very pleased with how our glass pricing approach worked this year.

Looking forward to 2008, we're anticipating another year's significant volume growth in the glass industry. We believe the market will grow at least 400 million square feet to similar the amount of glass industry added this year.

Regarding glass supplying demand our initial view is the glass market will again be relatively tight. This is based on our view of the end market demand in glass supply. Our glass supply assumptions are based on our capacity plans for 2008. Since we and SCP represent over a half the glass market as well as the public announcements made by our major competitors. We'll provide a more detail update to our 2008 assumptions during our annual investor meeting, which is scheduled for Friday, February 8.

Moving on to the telecommunications segment, we anticipate fourth quarter sales to be down about 10% sequential. Decline is a reflection of the typical seasonality that impacts the telecom industry in the fourth quarter.

We're extremely pleased with the performance of our telecom segment this year. We are on track to gross sales by 10% excluding the impact of the divestitures of our Japanese business into a joint venture in early 2006 and the sale of our submarine cable business in quarter two, 2007.

We are delighted with the 10% sales growth and declining prices. Including our fourth quarter expectation, segment net income this year will be well over $70 million, excluding the $19 million in special gains in the second quarter. This is an increase of more than 35% over last year's net income at specials.

We anticipate our environmental segment sales will be down about 10% sequentially, reflecting the typical seasonal decline in auto sales toward the end of the year. In addition, diesel sales will be lower, as a result of lower engine production in the quarter. Investors should note the environmental sales will be up over 20% this year driven primarily by diesel sales increasing 55%.

More importantly, segment net income will increase from just $7 million last year to over $40 million this year. In our Life Sciences segment we expect sales to decline slightly, market demand is seasonally weaker in quarter four.

Other segment sales are expected to be up 10% to 15% sequentially in the fourth quarter. This all result in fourth quarter sales in the range of $1.5 billion to $1.55 billion. Looking down the income statement for your modeling purposes, gross margin for the company should be between 47% and 48% in the fourth quarter.

SG&A is expected to be approximately 15% to 16% of sales and RD&E is expected to be around 10% of sales in the fourth quarter. As a reminder, SG&A for Corning is typically higher in the fourth quarter.

We anticipate equity earnings in the fourth quarter to be consistent with third quarter excluding the $18 million impairment charges in Samsung Corning. Equity earnings for both SCP and Dow Corning will be consistent in quarter three.

The tax rate for the fourth quarter is expected to be about 12%. Our fourth quarter EPS before any special items is expected to be between $0.36 and $0.38 per share. For the year, EPS before special items will be between $1.36 and $1.38 per share and more than 20% higher than last year.

Lastly, for modeling purposes, you should again use $1.6 billion shares for the fourth quarter and calculating EPS before special items. One note on the impact of foreign exchange rates on our guidance: our fourth quarter guidance is based on the yen to U.S. dollar rate of 116.

If the yen to dollar rate were to average two points higher or lower in the fourth we estimate our overall sales in net income after tax would be impacted by about $10 million. This includes the projected impact of our currency [inaudible].

Investors should note that we translate our Display results each day so the yen would have to make a drastic move at beginning of the quarter and remain there for the remainder of the quarter to have a material impact on our results compared to our guidance. Investors should also remember that the yen averaged 118 in quarter three. So if the yen does average 116 in Q4 our Display sales would benefit by about $15 million.

Before we go to questions and answers, I'd like to take a step back from the day-to-day volatility that we all feel in the Display industry and adjust some macro issues.

Display is obviously very important to Corning. Sales in our wholly owned business and SCP will approach $5 billion for the year. So we get why investors are so sensitive to every story about the business.

It’s important to pay attention to big trends. First, the end market trends remain very favorable. The IT applications of LCD remain robust as Notebooks continue to grow significantly and wide screen monitors move into favor.

LCD is proving to be the technology of choice for entertainment television. Sales of LCD television units have gone from $10 million in 2004 to $75million this year. LCD television in units should out sell CRT’s in 2008 and are overtaking plasma in large sizes.

In 2007, for the first time, more LCD television units will be sold than plasma in the 40-inch plus sizes. In 2008, we expect LCD TVs will most likely sell double the number of plasma units in the 40 inch and above space.

Second, Corning has maintained its leadership versus competitors. We continue to bring larger sizes and new compositions to the markets that benefit our customers. We continue to be a very reliable supplier, bringing quality products and meeting our commitments. We have also reduced our prices on a consistent basis.

Third, our pricing approach has worked in 2007 and we feel it will work again in 2008. We are already discussing pricing with our customers for 2008. Fourth, we're maintaining our high margins through a combination of our pricing approach and our manufacturing strategy.

Fifth, this is a relatively young industry. The supply chain is continuing to evolve. This has led to ever changing patterns of utilization quarter-to-quarter, as the industry deals with seasonality, inventory issues, technology substitutions, etcetera.

Pattern of glass shipments in the panel makers has been different in 2005, 2006 and 2007. A  different cycle in 2007 and by that, I mean, the earlier ramp in Q2 than moving to expected Q4 levels in Q3 and now holding them is fine and healthy as long as no excess inventory appears. And we do not see any evidence of any inventory issues today.

We have seen a slightly different pattern of sequential percentages than we and you originally expected, but the end result's turning out great. We also expect cycle in 2008 may be different as television moves to over 50% of the glass consumed.

So in summary, the end-market is growing, it's on track to our estimates. Our pricing approach is working. Our manufacturing strategy is helping our margins. We are not losing ground to competitors. And our total year-over-year numbers are strong, even though we did not always come out as we and you originally forecasted.

Ken Sofio

Thank you, Jim. We're ready to take some questions now.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Mark Sue from RBC Capital Markets.

Mark Sue - RBC Capital Markets

Thank you. I need just thoughts on the customer feedback on your pricing strategy. Are customers starting to look aggressively elsewhere because of what you did in '07 and does digging your heels in further potentially foretell a big delta on foreign revenues or do you think it's just a matter of grudging acceptance?

Wendell Weeks

Actually, we have been positively surprised as the year has gone on with our customers' acceptance of our pricing strategy. Actually, there was recently an article in Taiwan news from our top customer in Taiwan, basically along those lines, that pointed out they viewed us as absolutely the leading supplier, most reliable and that we have been behaving very responsibly over a long period of time.

So in general, I would characterize our customer relations at this time as being very positive, more positive than they were earlier in the year and probably more positive than they were at the end of last year.

Mark Sue - RBC Capital Markets

Okay. I think, you’re painting a positive picture of demand and market share and inventories. But, I think people were expecting a little bit more for the December quarter guidance. If you could explain to us the delta, that would be helpful.

James Flaws

I'll be happy to discuss that. I just want to amplify Wendell’s comment on the pricing with our customers. I think the acceptance of our pricing strategy and how it's working for our customers with consistent down pricing at small levels, can be reflected also in the fact that we have moved far earlier to be discussing pricing for 2008 with many customers than we had before and those discussions are going quite well.

Relative to the quarter for sequential guidance, I think that a many investors were overlooking the fact that the industry had ramped-up earlier in quarter two than what we had and they had expected. And then in quarter three had moved to near peak utilizations. And frankly, there isn't that much room to go in terms of panel makers in quarter four. Many cases panel makers are running over 95% utilization.

So, there's not a lot of room to grow and we think some analyst expectations for additional glass growth in quarter four are not reflecting appropriately the fact how much the industry have moved up starting quarter two. As I said in my commentary, frankly in quarter three we got to where I think many people thought where we would be in quarter four, and there isn't much room to move up.

So I think that's the primary difference rather than the fact that the industry should be looking for more.

Operator

Our next question comes from Nikos Theodosopoulos.

Nikos Theodosopoulos - UBS

I had a couple of questions on LCD. Can you elaborate a little bit in this quarter the SCP gross margin went up, the consolidated one did not and they both grew double digits sequentially. Can you explain why the consolidated gross margin also wouldn't have benefited?

And as you look out to next quarter given that you'll be running at full capacity in the fourth quarter and with a modest sequential up-tick in volumes, wouldn't we expect to see gross margin in the LCD business improve for both consolidated and SCP given you're running at full capacity? Thank you.

James Flaws

Well, I think at SCP, you may recall that, we have slipped down a little bit and they had an excellent manufacturing quarter. So, I think that's the primary reason they improved. I think that, we've often told investors that our cost reductions are not perfectly smooth quarter-to-quarter.

So, when we look at the total years we'll talk about in February, I think, you'll see a very robust cost reduction program again for our wholly owned business and the fact that it will be greater than our pricing and margins will be up slightly for the year.

Relative to quarter four, I'm not looking for anything substantially different in gross margins. We think we'll be able to maintain our very robust levels.

Nikos Theodosopoulos - UBS

Okay. Given that in the fourth quarter, you'll be running at full capacity and you’ve given some initial forecast next year for about 25% industry growth. The panel makers keep talking about continued shortages next year.

What's your strategy going into next year, in terms of adding additional volume? Are you going to add based on the market growth of 25% or would you add different numbers based on, perhaps, a desire to gain some share next year or not? Can you talk about how you approach the capacity additions for next year?

Wendell Weeks

So over the long term, what we continue to do is follow our strategy of adding capacity based upon our view of the end market growth. And we've done that consistently and we will continue to do that consistently.

Right now, in our dialogue with our customers, it once again looks pretty tight for 2008 and we'll do our best to fulfill our customers’ requirements of us. But our capacity planning is always based on our view of the end market.

Operator

Our next question comes from Steven Fox from Merrill Lynch.

Steven Fox - Merrill Lynch

Good morning. Just going back over the margins for second on the Display business or just as a whole, it seems like as you add capacity during the course of the next several quarters you'll be running fairly tight.

Would those additional unit volumes result in any incremental margin or should we be thinking about margins from Display and the SCP as sort of maintaining at these very good levels for the next year or so?

James Flaws

The incremental units that we add because they are so modular really don't have the same leveraging effect that you normally think about in the way of fixed cost, because they are relatively small increments to add to fix costs and volume at the same time. So you don't see that effect. Really, you do see some improvement when we get incremental capacity from running our existing units better. And that's what's led to our cost reductions to help offset the price reductions.

But frankly, as we talked about in the past, our goal is to maintain these very high gross margin percents we have year in, year out and that's what we're hoping to do again as we head into next year.

Steven Fox - Merrill Lynch

Great. And then just one question on moving to Generation 10 technology, do you anticipate that you’ll maintain the typical one year lead over your competition, as you move over to the next Generation?

Wendell Weeks

So, it's hard to comment on exactly where our competition is. I think the most important news on Gen10 is that we were invited by Sharp to co-locate with their new and what will be the first manufacturing of Gen10 panels in the world.

And so, I think that action by Sharp speaks for itself and I really can't add much to it.

Operator

Our next question comes from C.J. Muse from Lehman Brothers.

C.J. Muse - Lehman Brothers

Good morning. Thank for making taking my call. First off, now that you have visibility to your glass volumes through year round and considering the new pricing strategy that you adopted beginning of the year. Can you comment on what impact you see that having on your market share?

Wendell Weeks

So we don't see in the quarter any sort of significant movements in market share one way or the other. Our current view and market as you heard from Jim, is that it's relatively flattish quarter three to quarter four. You will see our volume guidance up 2 to 5%.

Numerically, you can calculate. It looks like a share gain but frankly you're going against 400 million square feet of glass market in quarter four and single digit millions moving one way or the other is just sort of lost in the noise. I think you have to step back overall and say what are we try to accomplish this year in Display?

What we try to do is do a new pricing strategy that would significantly moderate the decline of prices while overall maintaining our position in the market. And as we said at the beginning of the year, the place that we anticipated to lose a little share would be in Korea with LPL mainly because of LG's long-term concerns with dealing with the Samsung affiliate.

So other than that, our pricing strategy and our market share strategy has really stayed very consistent.

C.J. Muse - Lehman Brothers

Right and secondly, given the time lag in terms of dividends off of tax earnings from your equity affiliates. Jim, can you comment on your thoughts around free cash flow for 2008 and what your plans are on that front?

James Flaws

We will be reviewing our ability of our equity companies to pay dividends as we get towards the end of the year and we’re expecting very strong dividends from both SCP and Dow Corning again next year. We haven't set them at this point in time.

SCP is going to be expanding next year significantly, but we believe they will be able to pay a substantial dividend and we will be evaluating at Dow Corning. I think for the corporation's free cash flow, the most important dynamic going into that would be of the pace of the Gen10 investment in Japan should we reach final agreement with Sharp that will have pretty big influence on our capital.

We will give you some guidance obviously as we get to the end of the year.

CJ Muse - Lehman Brothers

Okay. I guess a follow up there, Jim. On the OpEx side, great cost control there in Q3 down to 23%, well below what you guided. But then you are guiding up again in Q4. And I guess there is some end of year expenses there. When you look to 2008, do you see a shift here where 23% to 24% is kind of the right range for OpEx?

James Flaws

We do have some more year end expenses. There are some things that occur naturally in quarter four for us. We’ve always gone up a little. Relative for 2008, we are not changing from our strategy; I would like to separate OpEx into two components.

First, in terms of SG&A, the kind of goal that we've been talking about for the last few years which is have our SG&A increases really less than half our rate of sales, that’s something that the management team is committed to doing again in 2008 so that should help.

The RD&E number I think will be very depended on the success of our development with a number of things and whether we can move some of our big projects to the next stage; if they do that might increase spending a little bit more. But, I think that would be good news overall.

So we will try to give you more guidance on it then. But leverage wise, you should see some plus; the only thing that we could move it up would be if RD&E moves up and that’s gonna be a long-term good thing.

C.J. Muse - Lehman Brothers

Last two quick questions from me. First, do you expect another charge for Samsung Corning Company Limited in Q4 and then secondly, for the other revenues that you guided up 10% to 15%, is that principally on the semiconductor optical lenses seeing some strength?

James Flaws

Latter question is yes. On semiconductor area and on Samsung Corning CRT, we could have a charge in quarter four and possibly in quarter one but we are coming to the end of our sequences of charges with that.

Operator

Your next question comes from Brant Thompson from Goldman Sachs.

Brant Thompson - Goldman Sachs

I have got two questions. The first, just going back to the margins in the glass business. So if you're able to hold utilization rates extremely high and pricing relatively stable, are you hitting the point where the ability is just to bring cost out of the business has changed? So therefore you are maintaining margins as opposed to seeing greater margin expansion in that total consolidated business; is it more of a cost issue? Thanks.

James Flaws

No I mean, our goal has been to have our cost reduction program match or exceed if we can price reductions and we didn't have a goal trying to move our margins up. Our goal’s long-term to have a robust rate of cost reduction to at least offset our pricing. It’s possible in a given year that it might be little bit more and therefore allow margins to move up.

I think you should not focus too much on any one quarter because our cost reductions in a given quarter and also when we bring on new capacity--the onslaught of depreciation as an example--can influence a given quarter. But, we have not seen a lessening in our list of projects to continue to reduce cost.

Brant Thompson - Goldman Sachs

Then any comments with regard to an outlook for Dow Corning as we look into 2008. How should we be thinking about how that might trend?

Wendell Weeks

I don't have any comments today on it. We're actually about to review their plan for next year in the next few days. They clearly are influenced by the global economy. Silicone, aside from polysilicone, do tend to move with the economy. So we have to see how that's going around the world. And then polysilicone there will be some additional capacity next year and as we get to our January announcement we'll tell you when that's likely to show up within the cycle next year.

Operator

Your next question comes from Jeff Evanson from Sanford Bernstein.

Jeff Evanson - Sanford Bernstein

In previous calls you mentioned some changes in utilization of class both because of tiling yield and because of just better manufacturing techniques. I'm wondering if you could give us an update on how those are progressing? The gap between the area that the panel manufacturing shipped to customers and the glass that you need to ship to them to make that happen and how we might think about that gap changing next year?

Wendell Weeks

So we don't have any very new update on panalization or yields. Everything that we're seeing was consistent with our last update to you, Jeff. What we see from panel makers is if you take a look at the quarter four sequential guidance from LPL, SCC, and AUO is area growth in the mid-single digits from LPL, SCC said shipment unit growth of a couple of percent. AUO large panel shipment's flat; TV shipments up low teens.

So it's pretty consistent with what we're talking about with our overall glass market, and you know, I don't think there is much to be mind in the near term around the panalization and yield factor. We will do our natural update of those and get back to you as soon as we know something new.

James Flaws

I'd just like to comment on one other thing about looking at the shipments from panel makers, assembly versus our own numbers. People have to remember there are inventories that exist at our panel makers both inventories glass and inventories of their own finished panels.

So particularly when there is a quarter where there is relatively low percents for us and for them that can have a bigger impact than it has in some quarters when their growth rate is in their teens.

Operator

Our next question comes from John Roberts from Buckingham Research Group.

John Roberts - Buckingham Research Group

Given that the increase in size is a strong driver of square inch growth, could you update us on where you think the average size LCD is now or will be a year from now relative to a year ago?

James Flaws

I think we're looking at televisions to end the year a little over 31. And they were 28 last year. I don't have a new number for next year, but we do expect to grow again next year. But unless we're very surprised on large size, the rate of growth in inches per year will be less next year than it was this year.

John Roberts - Buckingham Research Group

28 to 31 are about a 25% increase in surface area? Even if you don’t have the numbers.

James Flaws

I don't have the numbers on the top of my head like that, but I’ll let you figure that out but we are looking forward to grow next year. I think one of the things we’re very interested to see and to learn things from is what's happening in retailers to see what's happening with 40-inch and 50-inch LCD televisions this holiday period.

For the first time, we'll expect to see 50-inch LCD’s with full 1080 go head to head with plasma having full 1080 and the price points for LCD will be very competitive. If that does well, it'll have a big influence on the average size.

John Roberts - Buckingham Research Group

Then secondly, I thought the 10% earnings growth at Dow Corning was relatively modest given high low prices I think, sometimes drive substitutions toward silicones and adhesives and fluids. I think semi conductor and solar were pretty robust during the quarter. So could you comment - I know 10% is pretty good growth but I thought it might have been higher.

James Flaws

If you're looking at year-over-year?

John Roberts - Buckingham Research Group

That's right.

James Flaws

Third quarter versus third quarter a year ago. So third quarter, we really haven't brought much capacity on Hemlock year-over-year. You may recall last year we had growth in Hemlock but mostly incurred last year but since the second half of last year, we haven't had it very much so, you're not seeing the same impact there.

They also had some expenses related to two expansions; they’re obviously expanding Hemlock dramatically. That capacity hasn't come online and there is some expense there and we're beginning to see some expense affecting the P&L from the large dimethyl expansion that’s underway in China.

But you haven't seen much additional metric tons coming on in Hemlock this year and year-over-year. In the first half of this year, you did see it gaining numbers the first half of 2006 there, but not the back half.

John Roberts - Buckingham Research Group

I know you don't provide specific guidance but it sounds like acceleration then at Dow Corning?

James Flaws

I'm not giving any guidance on Dow Corning yet.

Operator

Your next question comes from John Harmon from Needham and company.

John Harmon - Needham & Company

Just one question I want clarification on. You said in the fourth quarter you plan to be running at capacity at your LCD glass factories. Is that the level you want to run at? Clearly it's good for margins but do you typically plan on keeping a bit of extra capacity around? And does that mean you came up a little bit short in terms of your forecasting for the year?

And the second question is when you start filling ClearCurve, are you going to count that as a premium fiber? [inaudible]

James Flaws

Just a comment. We were running very full also on quarter three in shipping out of inventory. Remember one of our goals beginning of this year was to try and deal with the cycle by building some inventory in the first part of the year and being able to ship it in the back part of the year.

So we ran very full in quarter three, took a large amount of inventory. We'll take some of that inventory again in quarter four. Not only inventories will be quite low so we've been running full.

We certainly don't have a goal of being absolutely full, but frankly, we'll take it. Demand from our customers is quite robust, and their inventories are very low which is boding very well as we head into 2008.

Wendell Weeks

I'd add to that and so nothing negative happening on the operations side; really all our operations are doing very well in terms of productivity and it's just we have really good demand. So, we would like to have a little more leeway than what we have right now and we’ll work hard to get it and we'll keep at our productivity.

As to ClearCurve yes, we do anticipate that the whole ClearCurve product family will be a premium set of products. Mainly because it adds so much value especially in MDU applications as much as doubling productivity for our customers.

That being said it's going to be a little different than other premium fiber products you may remember from the past, because only around 30% of the all-over revenue opportunities in the fiber optic cable per say for a connected apartment unit. Another 70% is at hardware and equipment.

So although I think all the products would be premium products within our overall family, they'll be split up a little differently than maybe you would think about normally, although the fiber part in and of itself is not as large as being able to capture the premium revenue opportunity across the whole product set - if that makes any sense to you.

Operator

Our next question comes from Curtis Woodworthfrom JPMorgan.

Curtis Woodworth- JPMorgan

You know, Jim, you commented on the variance and the patterns in terms of the sequential volume growth this year in the Display business. I guess I'm wondering what the right way to think about this dynamic is because you have the seasonality issue where usually in the fourth quarter you get more robust TV sales, and then you also have the dynamic and maybe the panel manufacturers are getting better at managing the seasonality.

Do you think this year was perhaps better for the supply chain in terms of how the year unfolded in the sense that it's more consistent production and the panel guys leveled production to maybe not have to ramp up so quickly in the back half of the year?

To me it seems like this actually could be a positive development for the industry even though it's outside the norm and obviously the street is negative on 4Q. But I guess I'm just wondering how you think about it and going forward do you think the seasonality concern in the industry is actually less of a risk here? And that whole supply chain is getting better at flexing up and down for this?

James Flaws

Yes, Kurt, I totally endorse that opinion. We think it's actually been very positive. You may recall back in February we were concerned that the supply chain waited too late to ramp.

They could actually just not have enough to satisfy end market demand and that was one of our fears and we were frankly we’re delighted in quarter two and began moving up to beat our own estimates because we haven’t seen it at the beginning of the quarter. But as the quarter unfolded, we did.

And basically they moved up to what we have afraid they would have only in quarter three and late quarter two and then in quarter three they moved up to the original forecast to be quarter four levels and maintain them. I think what we're seeing is some--I hesitate to use the word—maybe some maturity in how the supply chain thinks.

There isn't as much surplus in panel making capacity as there used to be. As the IT business has achieved essentially maturity with penetration rates and monitors being almost at 90% and television now moving well up. We may be seeing more of an even utilization going forward.

This raises the question whether we should be thinking more about year-over-year comparisons as being the primary metric that we talk about here. But we're delighted, we think it's been very positive. And frankly it's been very positive for our customers. Notice the recent announcements from the Taiwanese in terms of their MTAT as a percentage of sales, there's some stunning numbers being put on the board by our customers.

Curtis Woodworth- JPMorgan

Great. And in terms of the market is going to be clearly very tight in the fourth quarter and then maybe the supply eases up in 1Q. I mean, in terms of your price discussions, I know there is probably not a lot you can say, but on the margin, do you feel like the panel makers are more willing to commit to make the longer term price agreements, relative to the past? Given concerns for shortages?

Wendell Weeks

What I would say is that we are feeling relatively confident that we could continue our pricing strategy that we started this year and continue to execute that into next year, and our dialogue so far with our customers have been positive. That being said, we've still got a lot of work ahead of us.

Curtis Woodworth- JPMorgan

Okay. And last question. In terms of the product mix and Display, looking out in 2008 obviously TV is going to become much more part of the overall mix. So the question is, I'm not sure if you can answer it, if you look at ‘08 relative to where your mix changed this year would you expect a more sizable mix shift next year to larger generation size substrates to meet that demand?

James Flaws

The base is so large now it's hard for any individual to move fast to make a big change statement. We have in Korea, we just have Samsung having started their Gen8 basically and that will be a plus for us. And hopefully Sharp’s Gen8 continues to ramp up and we've got the big 7.5s in Taiwan that are not yet at full ramp.

So, that should be a help to us, but we also have people who have talked about putting additional Gen5 capacity in and so it's hard to say you're going to see something real material. Actually, if you look at our percentages we give out every quarter, it's not like they’ve been moved dramatically any time.

Operator

Our next question comes from Tim Daubenspeck from Pacific Crest Securities.

Tim Daubenspeck - Pacific Crest Securities

Thank you. The first question, I apologize if you stated this but can you tell me what the quarter-over-quarter price declines was backing out the exchange impact?

James Flaws

Quarter-over-quarter, for quarter three?

Tim Daubenspeck - Pacific Crest Securities

Yes. Q2 to Q3.

James Flaws

Q2 to Q3 a year ago?

Tim Daubenspeck - Pacific Crest Securities

No, no, sequential, I apologize, it is sequential.

James Flaws

It was in line with our guidance very well.

Tim Daubenspeck - Pacific Crest Securities

So, 1% to 2% sequential?

James Flaws

Yes.

Tim Daubenspeck - Pacific Crest Securities

Okay, and then there's been some discussion of LPL potentially selling the business. Could that potentially have any impact in terms of the share within the panel market as some of those inherent Korean conflicts could potentially be removed?

Wendell Weeks

No, I think we're on a pretty level course right now with LPL. We always look at any sort of changes that are happening with our customers with great interest. But so far I would comment that things are progressing exactly as we would have thought and in line with our strategies.

Tim Daubenspeck - Pacific Crest Securities

And then finally, in terms of 2008 telecom with the bendable fiber, are you building in any expectations of share gains within cable and hardware in 2008?

Wendell Weeks

It's still a little early. Remember, we just completed our field trials with the first of our product family and we’ll going to just be starting to commercialize in the quarter four with the first of the product family and then we have a number of other field trials in quarter four of other pieces of that family for MDUs.

So it's a little early for us to be able to give any degree of accuracy. What exactly the revenue impact's going to be. This is a significant new product and as such, there’s a lot of excitement. But also as such it's going to take us a little time to find out exactly how big an opportunity it is.

Operator

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

Carter Shoop - Deutsche Bank Securities

Good morning. I wanted to talk about the glass business in 3Q when you look at the standalone business excluding SCP I was a little bit surprised we didn't see more upside there. I realize it was at the high end of expectations.

When you look at a lot of your panel customers, particularly in Taiwan, we saw those customers actually deliver substantially above their guided range. Just to throw a few numbers at you, if you look at your customers, which I estimate represent roughly 50% of your business in the standalone glass business, your customers did about 32% in regards to a sequential gain in 3Q versus your 15%.

And that compares to about 24% growth in 2Q for your customers where you did 12%. So while I understand inventory can sometimes have an impact there, it appears that you meaningfully underperformed those customers over the last two quarters and now you're looking for just in-line expectations.

So can you help me understand why there's a little bit of a disconnect there?

James Flaws

We don't think we meaningfully underperformed what they did. So we saw sequential growth of 15%. And if you add up all of our customers, they were perhaps a little bit greater than that. But we don't think there was a meaningful difference. We don't think we were losing share at our panel making customers.

Wendell Weeks

I think what you have to do is you have to step back and take a look at the total macro because we're so large in the market. You have to step back and take a look at the total. And if you just take a few customers and what happens with their particular shipments in any given quarter that is only one piece of it and then you put that together with the overall supply chain movements and it's really hard to conclude much.

In total, we're really comfortable with where we are and where we're going to end up the year and that we're in line with market growth. So we feel pretty good.

Carter Shoop - Deutsche Bank Securities

Fair enough. We looked at the trend over the past three years and actually there's been a very tight correlation and then it's really started to disconnect here a little bit over the past two quarters. I wasn't sure if that was anything to worry about. But I guess we'll wait and see what happens in 4Q.

In regards to 4Q growth and expectations, are you limited at all, I know you mentioned that you are at full capacity; if capacity was a non-issue, would we be seeing a higher sequential number for guidance here?

James Flaws

So you're saying theoretically if we could make more, could we sell more?

Carter Shoop - Deutsche Bank Securities

Correct.

James Flaws

So theoretically yes, but it's hypothetical.

Wendell Weeks

So I think the right way to think about it is full capacity; it's tight and we're scrambling, we're trying to make as much as we can for our customers, and we will do our best.

Carter Shoop - Deutsche Bank Securities

A couple of more quick ones here. On competitive pricing, have you seen an environment change at all with your two largest competitors in this quarter or last quarter?

James Flaws

Okay Carter, when we add up all the panel makers that exist in our base in Korea, we don't see area shipments from panel makers to set makers by our math being materially different from our 14% to 15%.

I think sometimes people focus on just a few who give the numbers. Actually not everybody does give area numbers. But in our best estimate and we generally know since we supply everybody what people are running at. Their shipment's out; we know what they tell us what their inventories are. We're not seeing a number where that area numbers are substantially different from what we saw sequentially.

Carter Shoop - Deutsche Bank Securities

That's including Korea?

James Flaws

Yes.

Carter Shoop - Deutsche Bank Securities

Already excluding Korea. I mean the SCP business looked like it trended kind of in line with expectations. It was the non-SCP business that relates to our divergence and based on our checks, you are at least maintaining share with Sharp and with these customers in Taiwan you get to about 70% of your overall business. And those vendors are the ones you meaningfully outperformed you on a sequential basis in 2Q and 3Q.

James Flaws

I think we disagree with that.

Carter Shoop - Deutsche Bank Securities

Okay. Fair enough. And the last question on the tax rate, a little bit below expectations in the quarter and then for guidance, where do you see that shaking out for 2008 if you can comment on that?

James Flaws

I haven't given guidance yet for 2008 so we'll give comment later on. Did you want to answer the pricing question?

Wendell Weeks

So not much to add beyond that our pricing strategy looks like it's working. We don't have any deep insight into exactly what's happening with our competitors' pricing but ours is going exactly as we laid out.

Operator

Our next question comes from Daniel Gelbtuch from CIBC.

Daniel Gelbtuch - CIBC

Just as a follow up to that. With regard to the very tight environment it's pretty clear I don't know if you had any representatives at the DisplaySearch Conference, but it sounds like for the next two maybe even three years it's going to be a tight environment.

Are you getting any pushback from your pricing strategy?

Wendell Weeks

In my experience, customers always would like lower prices, so there's always pushback. But I think the good new here is if we just step back to the beginning of the year when we laid out we were going to pursue this new pricing strategy, that at the same time we were going to convert all of our customers over to a new super green glass, as well as pursue Gen10 and we wanted to do all this, while maintaining our position in the market.

I think the good news is we are into quarter four is all of that has occurred. So, from an operations standpoint, from an execution standpoint, we really are delighted with where we are right now in Display. And as we look forward, right now it's a very positive environment for us to continue to execute our strategies.

Daniel Gelbtuch - CIBC

Okay. And as far as, just on a macro long-term view, where do you think the market can be growing in over the next two-three years on annual basis. What do you think will be a fair supply estimate?

Wendell Weeks

We will update that when we get together with you all in February, give another multiyear outlook. One thing that we have said previously, and I think Jim just covered at the beginning of the call is we have said that we anticipate next year to be up at least 400 million square feet as a market.

But we haven't gone out further than that. We’d like a chance to update you on that when we all get together in New York.

Daniel Gelbtuch - CIBC

And then just to switch gears to telecom, any update on what you see in the macro environment for '08 and '09? And I guess, for '08 and '09 for Corning, are there any other operating leverage levers that you look to for '08 and '09?

Wendell Weeks

Let me start with overall market trend, and then let Jim comment on any levers. So what we see there is really continued maturation of the fiber and the access markets. At the beginning of the year, we said what we wanted to see happen was continued growth in Fiber-to–the-Premises, not only at Verizon but having some others also adopt that technology and we have seen that happen.

And then we wanted to see the fiber to the node type architectures also gain momentum. And we've seen that as well. So as we look forward, we'd say that's going to continue to be a source of growth for us, as customers around the world pushing fiber deeper and deeper into the network.

Daniel Gelbtuch - CIBC

As far as operating levers for Corning per say, in any of your segments beyond LCD obviously?

James Flaws

I think the biggest lever will be the impact of diesel as we go through the next couple of years. We believe that the heavy duty truck manufacturers are basically reaching the end of their, if you will, engines from last year, trucks from last year, and so we'll see good diesel growth again in 2008 and 2009.

And that will have substantial operating leverage for us as volume flows into our factory and as we continue to get better at manufacturing. So, I would say that's the biggest lever that we have outside of LCD within our wholly owned.

Operator

Our next question comes from John Anthony from Cowen & Company.

John Anthony - Cowen & Company

Good morning. Couple quick questions on Environmental. Can you give us a sense of how much of an impact, if any, the heavy duty versus light duty had on the overall sales mix? In other words, is light duty big enough that it's meaningfully contributing to diesel yet?

James Flaws

Yes. Light duty's definitely meaningful to us in terms of volume and is moving up in terms of profitability. So definitely is becoming meaningful to us. Heavy duty is still the most important to us right now.

John Anthony - Cowen & Company

Can you give us a sense for the rough split within the diesel line, how much is heavy and medium and how much is light?

James Flaws

No, we’re not prepared to give that level of detail today.

John Anthony - Cowen & Company

And can you also give us a sense quickly for where the margins are in the Environmental business, specifically how diesel's been trending, and other volumes aren't quite what you expected given the inventory levels that were build last year. But can you give us a sense of when we might see a sizable improvement in the margins?

James Flaws

We've seen it on improvement this year already and you will see another substantial improvement next year driven primarily by diesel. So you're seeing it. We didn't get quite the volume we originally hoped this year. But we expect to get volume next year and you’ll see a substantial move up in margins.

John Anthony - Cowen & Company

Okay. And Jim, is that margin improvement going to be based more on the volume increase or are there going to be adjustments to the cost structure and the production structure that will contribute there as well?

James Flaws

You are going to get the utilization effect, you get the volume effect of selling more and in fact we already have fixed cost by and large in place for it, that's an effect for us, and we're improving our manufacturing. So you're going to see substantial operating leverage from diesel next year.

Operator

Our last question today comes from Ajit Pai from Thomas Weisel Partners

Ajit Pai - Thomas Weisel Partners

Two quick questions, the first one is regarding your quarterly cash flows. I mean typically the fourth quarter has the strongest cash flows of the year. Do you expect that trend to continue?

And then the second question would be about your telecom business, which is on the long haul side. Can you just broadly geographically describe the trend you're seeing there like in terms of North America, in terms of Europe and then in terms of Asia - wherever there are trends that you can spot particularly?

James Flaws

We expect a very strong free cash flow performance in quarter four. You are correct. That is very often our best quarter during the course of the year.

Wendell Weeks

And in telecom, we've seen a lot of strong growth in North America as well as in China and in Europe. When you want to divide it by network type, though, the bulk of the growth, you're seeing in the more developed markets is in the access piece of the market, Fiber-to-Node, Fiber-to-the-Prem, similar type architectures in Europe. As well where you're still seeing some good strong metro-build out in the less developed countries.

Ajit Pai - Thomas Weisel Partners

Right. The second plan that you brought out this year, could you give some color as to what kind of progress has been made over there? Whether it’s progressing on track? Whether you’re ramping it faster than you expected at the same pace? And where capacity utilization over there is right now?

Wendell Weeks

So we did two announcements this year. We did the Shanghai expansion of our facility in China as well as the restart of our Concord facility here in the U.S. Both are progressing very well. Of course we've got a lot of room for future growth in Concord but so far so good from an execution standpoint.

Ajit Pai - Thomas Weisel Partners

Okay. Thank you.

James Flaws

I'd like to wrap up with a few comments. First of all, for those of you who didn't notice, we had a new format on our press release this quarter in response to comments of having some simpler headlines. If you have any feedback on it, please give it to Ken.

Second, if you’ve seen in the investor related announcements, Peter Volanakis, our President and Chief Operating Officer will be presenting at the UPS Technology Conference in New York City on November 13. And on November 28, I'll be presenting at the Credit Suisse Technology Conference in Scottsdale. Finally on December 6, Kate Asbeck our Senior VP of Finance will be presenting at the Lehman Brothers Technology Conference in San Francisco. And we certainly hope to see you at one of these events.

Regarding our results for the third quarter, we wouldn't have been more pleased. The company hit all-time records as I said for gross margin, net income, EPS before special items. As I mentioned the last call, we view these records as major milestones given our long history. And we tend to deliver on our quarter four results. If we do, the company will have total new sales up approximately 12% and EPS ex-specials up well over 20%. So we're delighted with our performance.

Thanks for joining us this morning. And we look forward to seeing you in the near future.

Ken Sofio

Thank you, Jim, thank you, Wendell. Thank you all for joining us this morning.

A playback of the call will be available begin at 10:30 A.M. Eastern Time today to 5:00 P.M. Eastern Time Wednesday November 7. To listen, dial 203-369-1538. No past word is required and the audio cast will also be available on our website during that time.

Julianne, that concludes our call. Please disconnect all lines.

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