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Corning Incorporated (NYSE:GLW)

Q4 2007 Earnings Call

January 28, 2008 8:30 am ET

Executives

Ken Sofio – Division Vice President, Investor Relations

Jim Flaws – Vice Chairman, Chief Financial Officer

Wendell Weeks – Chairman, Chief Executive Officer

Analysts

Nikos Theodosopoulos – UBS

Brian White – Jeffries

Steven Fox – Merrill Lynch

Curt Woodworth – JP Morgan

John Anthony – Cowen & Company

Mark Sue – RBC Capital Market

CJ Muse – Lehman Brothers

Carter Shoop – Deutsche Bank

John Harmon – Needham & Company

John Roberts – Buckingham Research

Jeff Evanson – Sanford Bernstein

Ajit Pai – Thomas Weisel Partners

Operator

Welcome to the Corning Incorporated Quarter Four Earnings Conference Call. [Operator Instructions] Now I’ll turn your meeting over to Mr. Ken Sofio, Division Vice President, Investor Relations.

Ken Sofio

Good morning and welcome to Corning’s Fourth Quarter Conference Call. This call is also being audio-cast on our website. Jim Flaws, Vice Chairman, Chief Financial Officer, will lead the discussion, and Wendell Weeks, Chairman and Chief Executive Officer will join for the Q&A.

Before I turn it over to Jim you should note today’s remarks do contain forward looking statements under 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.

Jim Flaws

Good morning everyone. This morning we released our results for the fourth 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 important data from this mornings prepared remarks. These slides will be available on our website after our call as well.

Overall our fourth quarter results were excellent. Let me share with you the key data points and then we can get into detail. We hit all time records in the fourth quarter in net income, excluding specials and in EPS, excluding specials. Gross margin percentage matched the record set in quarter three. We finished the year with operating cash flow and free cash flow that were all time records. Demand for glass was strong throughout quarter four and both our wholly owned business and SCP ran at full capacity. Inventory levels appear healthy leading into 2008. Evidence suggests retail sales of televisions in the US were very strong last quarter. Although we’re not recession proof we currently see no evidence of an economic downturn impacting our display business.

Let’s go to the details starting with our income statement. Our fourth quarter sales were $1.58 billion and exceeded the top end of our guidance range. More importantly fourth quarter sales were 16% higher than a year ago. EPS excluding special items was $0.40 and at the top end of our revised guidance range. This represents a 29% increase over fourth quarter EPS excluding specials of $0.31 a year ago. Net income excluding special items was $643 million an increase of 32% over last years net income excluding special items. You should note that EPS and net income excluding special items are non-GAAP measures. The reconciliation to GAAP can be found on our website.

Our fourth quarter sales benefited from the strengthening of the Yen and the US Dollar exchange rate by $31 million and another $11 million due to the strengthening of the Euro in comparison in quarter three. The Yen to US Dollar averaged $1.18 in quarter three and $1.13 in quarter four. EPS benefited by about $0.02 per share as expected in our revised guidance. Versus last year our fourth quarter sales benefited by $51 million from movement in Yen and Euro and EPS benefited by about a penny and a half.

Continuing down the income statement, gross margin in the fourth quarter was 47.8% and consistent with our third quarter. SG&A was $257 million and 16% of sales as expected. RD&E in the fourth quarter was $153 million and 10% of sales also as expected. Equity earnings were $267 million in the fourth quarter compared to $239 million in the third quarter. The increase is primarily due to volume growth in a positive foreign exchange impact at Samsung Corning Precision. Fourth quarter equity earnings included net special charges at Samsung Corning CRT of $14 million. There are also similar special charges totaling $18 million in the third quarter. Our tax rate in the fourth quarter was 10% and slightly lower than our guidance of 12%. Wrapping up our income statement our share count for the fourth quarter was 1.6 billion shares.

We had three special items in quarter four; the first was after tax gain of $103 million to reflect the release of valuation of certain deferred assets in Germany, we had expected this item. The second was a pre-tax and after-tax net charge of $15 million related to the Pittsburg Klein Litigation. The charge included a gain of $17 million reflecting a decrease in the market value of Corning common stock to be contributed. Corning share price decreased during the quarter from $24.65 to $23.99. This gain was more than offset by $32 million charge related to the increase in the fair value Pittsburg Corning Europe, which is an asset expected to be contributed to the settlement. The value of Pittsburg Corning Europe increased during the quarter due in part to the strengthening of the Euro. The third was the special charges of Samsung Corning CRT that I mentioned a moment ago. Including these special items our fourth quarter EPS was $0.45 per share.

Before I move on to the segment results for the quarter I’d like to recap our financial results for the full year of 2007. Two thousand seven represented our fifth consecutive year of significant growth especially on the bottom line. Let me start with sales, in 2007 our sales reached $5.86 billion an increase of $686 million or 13% over 2006. This represented the third highest annual sales year in our history. Gross margin for the year was 46.9% a significant increase over last years 44.1% and our highest percentage in our history.

SG&A was 15.6% of sales and lower percentage of sales than 2006 when it was 16.6%. 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 growth. Net profit after tax excluding special items was $2.26 billion, an increase of 27% over last year and again an all time record. Earnings per share excluding special items were $1.41 in 2007 or an increase of $0.29 over last year 26% up. As investors I hope you were as pleased with our financial results in 2007 as we were.

Now I’ll turn to our segment results for the fourth quarter. I’ll start with the Display segment which had an outstanding quarter. Fourth quarter sales were $774 million and 10% higher than Q3. Volume was up 7% sequentially and higher than our guidance range. Given the continued strong demand throughout the quarter our operations ran at full capacity and we sold glass out of our inventory again. Price declines were moderate and in line with our strategy. Segment sales also benefited significantly from the strength of the Yen 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 to Dollar exchange rate don’t impact our pricing discussion. Gross margin for the Display segment remained consistent with the previous quarter. Equity earnings from SCP were $177 million in the fourth quarter, an increase of 11% versus $160 million in quarter three. SCP sequential volume increased 6% in the fourth quarter which was also higher than anticipated.

As expected price declines at SCP in the fourth quarter were in line with our wholly owned business. SCP’s results also benefited from the strength of the Yen during the quarter. For modeling purposes SCP’s fourth quarter sales were $708 million compared to $635 million in the third quarter. SCP’s gross margin increased slightly on strong manufacturing performance and moderate price declines. Net income in the total Display segment which includes equity earnings is $580 in the fourth quarter increase of 7% compared to the third quarter.

In comparison to the fourth quarter of last year sales in our Display segment increased 25% led by volume gains of 31%. Price declines were just 7% and the movement of the Yen to US Dollar exchange rate was favorable. SCP’s equity earnings were up 20% over quarter four 2006. Segment net income grew 26% versus last year.

Looking back at 2007 our Display had an absolutely outstanding year. Sales were $2.6 billion, an increase of 23% over last year. Volume in our wholly owned business grew 38% and price declines were only 11%. We are very pleased with how successful our pricing approach worked this year. The impact of foreign exchange was slightly unfavorable for the year. SCP also had an outstanding year, sales were $2.4 billion compared to $2.1 billion last year. SCP’s volume grew 39% for the year and price declines were 15%. Segment net income for the year was $2 billion, an increase of 23% over 2006.

I’d like to spend a few minutes discussing the supply chain starting with LCD panels. In general panel makers ran at peak utilization rates through the end of quarter four. Although panel shipments were sequentially lower in both November and December panel shipment were up 11% quarter three to quarter four on an area basis. We believe their continuing strong run rates reflect an attempt to build some panel inventory. In fact we believe that panel inventories measured weak supply are lower heading into 2008 than they were heading into 2007.

Our conversations with panel makers indicate they continue to run at high utilization rates. We are anticipating that at some point in February these rates could fall slightly as some panel maker scale back for the Chinese New Year. However, some panel maker have recently stated publicly they expect to run at high utilization rates throughout quarter one.

On the retail side we have only limited data at this time. As usual our insight into what happened in the US market fourth quarter is more robust than our insight into the worldwide market. Our preliminary data suggests the end market demand remains strong. In fact, our fourth quarter research indicates end market demand for IT and television was stronger than our previous forecast. As always, I’d like to stress that our fourth quarter market information is only preliminary at this time.

This data represents our view in this based on a variety of sources. Be clear, the data that I am going to reference here relates to shipment from PC manufacturers and television monitor set makers to retailers. Starting with notebooks, about 31 million were shipped in the fourth quarter, higher than our expectations and a 6% increase versus the third quarter. LCD monitors about $43 million were shipped in the fourth quarter consistent with our expectations and the third quarter.

Moving to LCD televisions about 27 million units were shipped compared to 20 million in the third quarter. Penetration of LCD television into the worldwide TV market moved from 39% in the third quarter to 44% in the fourth quarter. While the final worldwide retail data will not be available for a few more weeks we saw some very positive data points in LCD television sales in the week leading up to Christmas in the United States. MPD an outside industry group reported that LCD television sales for that week increased 45% on a unit basis and 51% on a revenue basis compared to the same week a year ago.

The mix of LCD televisions were weighted towards larger much more expensive sizes. Conversely during the same week plasma sales were down 12% on a unit basis and down 20% on a revenue basis. This data supports our belief that LCD televisions did very well in the 40” to 50” market in the week leading up to Christmas here in the United States. As a result of our preliminary estimates for quarter four we believe approximately 77 million LCD televisions were shipped worldwide in 2007. This is an increase from our estimates of 75 million televisions just a few months ago and up substantially from our original estimate of 7 million sets heading in to 2007. Regarding US consumers, we continue to see no evidence that economic concerns are decreasing their appetite for LCD televisions.

Moving to an update on our total family class mix, mix of Gen five and higher in the fourth quarter was 90% and higher than the third quarter. Mix of Gen five point five, six, seven and eight glass was 60% in the fourth quarter and much higher than the third quarter. I’ll wrap up Display by commenting on EAGLE XG glass, as you may recall we entered 2007 with only 30% of our production converted. We are extremely pleased to have reached our goal of 100% by the end of the year. At SCP 50% of their production was converted to EAGLE XG at year end, they are on track to be 100% converted this year. Peter Volanakis, Chief Operating Officer will provide additional detail about the Display business at our annual investor meeting on February 8th.

Now moving to the Environmental segment, sales in the fourth quarter were $189 million slight decrease from the third quarter sales of $198 million. Auto product sales were $131 million in the fourth quarter and slightly higher than the third quarter. We were pleasantly surprised by the strength of Auto in Q4 which is typically the seasonally worst quarter. Sales were driven by strong demand in Asia; 131 million auto sales were also an all time record for quarter four. Diesel product sales were $58 million in the fourth quarter and lower than the third quarter sales of $72 million. Declines are a reflection of sluggishness in the US trucking industry.

Segment net income was $23 million in the fourth quarter compared to $14 million in the third quarter. In comparison to a year ago the Environmental segment sales increased 22% driven by higher auto and diesel volume. Auto sales were up 25% year over year while diesel was up 16%. We were extremely delighted with the results from both Auto and Diesel in the full year of 2007. Auto sales were $508 million an all time record an increase of 13% over 2006. Diesel sales were $249 million, an increase of 52% over 2006. Segment net income was $60 million in 2007 that’s significant improvement over 2006 net income of only $7 million. Tom Hinman, Senior Vice President and General Manager of Diesel will provide more information about Diesel at the annual investor meeting.

In the Life Sciences segment sales in the fourth quarter were $75 million and slightly lower in the third quarter as expected. Segment incurred a loss in the fourth quarter of $5 million primarily due to higher operating expenses related to Epic. For the full year sales were $307 million, an increase of 7% over last year and an all time record. Profitability of the segment also improved.

In Telecommunications sales for the fourth quarter were $430 million or 9% lower sequentially as expected. Compared to the fourth quarter of last year Telecom sales were up 6%, they were up 16% if you exclude the impact of the divestitures. Sales of hardware and equipment products were $217 million in the fourth quarter a decrease of 7% sequentially. Sales in our Fiber and Cable products in the fourth quarter were $213 million a decrease of 10% sequentially. Fiber to premise sales which are primarily Hardware and Equipment related were $70 million in the fourth quarter compared to $83 million in the third quarter.

Fourth quarter fiber to premise sales reflected seasonably lower sales in North America offset by increased demand from Europe. Compared to the fourth quarter a year ago Fiber to premise sales were up 37%. Net income in Telecom segment was $12 million in the fourth quarter compared to $27 million in the third quarter. For the year Telecommunications segment sales were up 3% however excluding the divestiture of our non-strategic cabling business in Q2 of ’07 and the transfer of our Japanese business to an equity venture in 2006 Telecom sales were up 10% for the year.

Positive movements in exchange rates, primarily the Euro did impact sales by $37 million for the year. Segment net income for the year was $108 million compared to $7 million in 2006. As a reminder 2006 net income was impacted by a $44 million restructuring charges and 2007 benefited from a $19 million one time gain. Excluding these one time items, Telecom’s 2007 net income increased by 75%. We are extremely pleased with the overall performance of our Telecom segment this year.

Now let me take a moment to update you on ClearCurve, pilot production of ClearCurve fiber has begun. In December we completed our first commercial shipments of ClearCurve. In addition, the initial test trials by Verizon in multiple-dwelling units or MDU’s in New York City were completed. Feedback from these trials was very positive. We expect another round of trials in New York City to begin shortly. We continue to receive very strong interest in ClearCurve from other players in the telecom industry. Larry Aiello, CEO of Corning Cable Systems will provide additional information on the market opportunities for ClearCurve at our annual investor meeting.

Lastly, you should note that we have completed the partial re-opening of Concord and are manufacturing product there. We’ve been very pleased with manufacturing performance of the plant so far. In our other segments sales in the fourth quarter were $114 million, an increase of 14% sequentially.

Turning to Dow Corning, equity earnings were $84 million slightly higher than the third quarter. As a reminder third quarter results included a one time tax charge of $4 million related to revalue UK deferred tax assets. Dow Corning did see significantly higher raw material costs in quarter four. I’ll talk more about this in our outlook section. We were very pleased with Dow Corning’s 2007 performance. Sales topped $4.9 billion, an increase of 13% over 2006; net profit excluding specials was 14% of sales. Both sales and earnings were records for Dow Corning. Equity earnings from Dow Corning totaled $345 million, an increase of 15% over 2006 excluding special items. Investors should note that equity earnings from Dow Corning represent 16% or $0.22 per share of our earnings this year. Cash dividends from Dow Corning total $130 million in 2007.

Moving to cash we ended the fourth quarter with about $3.5 billion in cash and short term investments up from $3.3 billion at the end of the third quarter. Free cash flow was $346 million in the fourth quarter, for the year free cash flow was $806 million, much higher than original estimates and another all time record for Corning. Operating cash flow was over $2 billion for the year another record. Regarding our stock repurchase program during quarter four we purchased approximately five million shares of stock for $125 million.

I’d like to wrap up by providing our guidance for the first quarter and some commentary about 2008. We expect first quarter sales to be between $1.59 and $1.62 billion this would represent an increase in 23% and 26% increase over last years Q1 sales of $1.3 billion. Our first quarter EPS before special items is expected to be between $0.41 and $0.43 per share this would represent a 45% to 54% increase over last years Q1 EPS excluding specials of $0.28. Moving down the income statement we believe gross margin has the potential to increase in quarter one to 49%. SG&A is expected to be approximately 14% to 15% of sales and RD&E is expected to be around 10% of sales in the first quarter.

We anticipate equity earnings in the first quarter to be consistent with the fourth quarter excluding $14 million in net special charges at Samsung Corning. Dow Corning equity earnings are expected to be 5% to 10% lower sequentially as higher raw material prices are impacting the results. They will be moving to raise prices to recover these costs. Regarding our tax rate for the first quarter its expected to be between 12% and 15%. Lastly for your modeling purposes you should again use 1.6 billion shares for the first quarter and calculating EPS before special items.

Moving to our Display outlook, we anticipate our wholly owned business and SCP will continue to run at full capacity in the first quarter. First quarter glass volume will likely be consistent meaning plus or minus a point or two with the fourth quarter for both. This guidance is consistent with announcement made by several panel makers who stated they will continue to run at high utilization rates throughout quarter one. We believe panel inventories were low heading into January and there’s a need to replenish, we’ll begin to build inventory in preparation for seasonal demand later in the year. In addition, panel makers may decide to keep their first quarter utilization slightly higher in anticipation of additional television demand from the Beijing Olympics.

Consistent glass volume in quarter one would result in year over year growth of about 45%. Regarding quarter one glass pricing, we expect price decline to be consistent with recent quarters. It’s very important for investors to note based on our quarter one volume guidance we do not expect quarterly growth rates near 2007, if you’ll recall our volume declined 13% in quarter one last year. Our forecast indicates that glass demand will not increase or decrease significantly on a quarter to quarter basis given the relative tightness in the glass and panel markets.

Absent any impact of a weaker economy which I’ll comment on in a minute we expect glass makers and panel makers to be running full out and we expect the demand this year. We’ll provide more detail about the 2008 glass market growth drivers as well as our views on the cycle of the year at our annual investor meeting next week.

Moving on to Telecommunications, we anticipate first quarter sales to be up about 5% sequentially. In comparison to Q1 of last year we expect Telecom sales to grow about 10% excluding the impact of divestitures. We anticipate Environmental segment sales in quarter one to be up about 5% with growth in Auto and Diesel. Our Life Sciences Segment we expect sales to increase slightly. Other segment sales are expected to be down 15% to 20% due to normal seasonality.

One note on the impact of foreign exchange rates on our guidance. Our first quarter guidance is based on the Yen to US Dollar rate of $1.09. If the Yen/Dollar rate is to average two points higher to lower in the first quarter, we estimate our overall sales in net income after tax would be impacted by about $12 million; this includes the projected impact of our currency hedging. Investors should also remember the Yen averaged $1.13 in quarter four so if the Yen does average $1.09 in quarter one our display sales will benefit by about $24 million.

Before we go to Q&A I’d like to spend a moment to discuss the US economy and how a potential slow down might affect Corning especially our Display business. I want to be exceptionally clear on this topic, we are not forecasting slow down and we have not seen any signs of a slow down in our businesses other than the previously acknowledged sluggishness in the heavy duty truck market. However, we are not ignoring the possibility of a recession. We have researched and are modeling the impact of past recessions on the IT market and on the overall television market. We’ll discuss this in more detail at our annual investor day on February 8th.

We have over two thirds of our total company sales from outside the United States. However, it’s clear that a significant portion of LCD glass is driven by the US end market. We estimate that 30% of the glass used for IT ends up in the US market and we know that 30% of LCD televisions sold last year were in the United States. Given Display is currently the most significant growth driver of the company let me focus my commentary on potential impact of the economy there.

Investors have focused their questions in two areas; will US consumers slow their purchases of televisions and what would the impact be? And second will US corporations lower their IT spending and what would the impact be? We are not economists, we don’t employ one and we are not forecasting a slow down but we can help you model the impact of a slow down on these segments. You’ll have to develop your own economic assumptions.

Let me cover LCD television first and start by telling you that we have not seen any slow down in this market. LCD televisions did very well in the holiday season. Let me walk you through how much glass would be impacted if LCD TV’s slowed in the United States slowed. I suggest you grab a pen and a piece of paper. The average LCD television has about 11 square feet of glass so one million LCD televisions equates to roughly 11 million square feet of glass. About 23 million LCD televisions were sold in the United States in 2007, 2008 we expect that number to be 29 million. As an investor you’ll need to make your own assumption as to how many LCD televisions you believe will be sold.

If you were to assume for example that the LCD television market will be flat in the US this loss market growth would equate to about 66 million square feet of glass. As a reminder the total worldwide market the share is expected to be 2.2 billion square feet so a flat US television market in the United States is less than 3% of the worlds demand for glass. I’d like to stress this flat case does not represent our belief only theoretical model to demonstrate the impact to you. It’s possible the impact of technology substitution could help mute some of the affects of potential economic down turn.

Now let’s look at corporate IT and made the assumption that US companies decide not to increase their IT spending. To make my point I’ll walk you through the market data again. The entire glass market last year was 1.7 billion square feet, 45% or about 780 million square feet went to IT products such as notebooks and monitors. Of that amount 30% was for IT products sold in the United States or about 230 million square feet. Corporate spending represents 60% of IT purchases in the United States so of the 230 million square feet about 140 million related to corporate purchases. With this data Investors can plug in their assumptions for Corporate IT spending this year.

If, for example, you believe spending will be flat this year instead of up 10% that would equate to 14 million square feet of lost market demand or less than 1% of the worlds demand for glass and not very material compared to the total worldwide market for glass. As investors you need to determine your view of the relative of the likelihood of a slow down in LCD television demand or Corporate IT spending in the United States.

Hopefully by providing you with the amount of glass in play you’ll be able to accurately model the impact of your own economic forecast. As I indicated we’ll provide more insight into potential impacts of the economy at our investor session. As I noted in the press release we’ll let investors know promptly of any significant changes that we experience. Before I leave this topic I want to remind investors of one of our lessons learned as we discussed in the past. We’ve been very careful about adding fixed costs in relatively good times we’ve enjoyed over the last three years since given the strong incrementals. We will continue to be cautious on spending in this potentially difficult time.

Ken Sofio

We’re ready to take some questions now.

Question & Answer Session

Operator

We will now begin the question and answer session [Operator Instructions] our first question comes from Nikos Theodosopoulos from UBS.

Nikos Theodosopoulos – UBS

I had a question on the gross margin within the LCD wholly owned business. I think you said on the call it was flattish sequentially in the fourth quarter. I’m trying to understand what happened there given the volumes were up and the pricing was as it was in the prior quarter why we didn’t see an uptake there? What’s your expectation on that business going in to the first quarter of 2008 in terms of the gross margin on LCD?

Jim Flaws

The gross margin for the year was up slightly, the quarters are never perfectly smooth we can have additional fixed costs that comes along in manufacturing. We were delighted with the gross margin being the same as it was in quarter three. For 2007 it will be obviously dependent on our ability to continue to hold the moderate price declines and a level of cost reduction. As we’ve said many times we’re not looking for a predicting margin increases here. We’d be delighted frankly to hold this very high gross margin for a long period of time. It will be very dependent on that ratio between pricing and cost reduction. We’re not going to give full year guidance at this stage.

Nikos Theodosopoulos – UBS

Do you have a full year tax rate estimate for ’08? I think in the first quarter you said 12% to 15%. Should we assume that for the full year or is it hard to say at this point?

Jim Flaws

I think that’s a reasonable assumption, I will be discussing more taxes and quite a bit more detail on February 8th. If you had to plug a number in today that probably a good range.

Operator

Brian White from Jeffries your line is open.

Brian White – Jeffries

Could you talk a little bit about pricing for 2008, it sounds like in 2007 pricing was down 11% for the wholly owned and 15% for Samsung Corning Precision, could we expect better pricing in 2008?

Jim Flaws

The pricing of 11% for the full year in our wholly owned business, if you look at the year basis it includes some carry over affect of the steep declines in 2006. I think the fourth quarter is more representative of what we were really trying to accomplish which was down 7% quarter over quarter. Samsung Corning Precision price declines were greater in 2007 at 15% primarily because they had a big catch up in the beginning of 2007. If you go back to 2006 they didn’t decline as much as we did. Clearly what we’re trying to accomplish is to continue this very moderate level of price declines in 2008.

Brian White – Jeffries

When we look at your capex in the Display business for 2008 you said about $800 million to $1 billion for Display and it looks like $400 million would be for 10-G Fab in Japan. Of the remaining $400 to $600 million what percent of that is going to be towards maintenance versus expansion?

Jim Flaws

Maintenance is relatively a small amount of our capital, if you have to repair tanks they do have a limited lifetime but clearly expansion dominates our capital spending. We do expect adding capacity again in 2008 in Taiwan. The other thing that’s impacting our capital is unfortunately the price of platinum for precious metals which we don’t consume but its part of how we make the glass and that’s been up a little. Maintenance is a relatively small amount of the $800 to $1 billion.

Operator

Steven Fox from Merrill Lynch your line is open.

Steven Fox – Merrill Lynch

Going back to the outlook for Q1 at that type of pace it looks like you would be sort of under serving your customers for the full year based on what you talked about previously. Can you talk about the decision timeline for maybe meeting customer demand relative to their expectations and where you sit on that currently?

Wendell Weeks

I wouldn’t necessarily conclude that we don’t think we would be able to keep up with our customers. It is indeed true that quarter one has started very, very strong and we have more demand for our glass than we have the ability to supply. Right now if the world continues to evolve the way we think that it will that our increases quarter to quarter would be limited to our ability to increase our through count. We anticipate to be able to hold our share this year and be able to keep up with our customers.

Jim Flaws

The only comment I would make is a reminder is that when you look at area shipments from all panel makers you have to keep in mind that panel makers are continuing to improve their own yields and improve their productivity from panelization. We plan on that so we say glass shipments are up ‘x’ they may be up ‘y’ a little bit more it’s because per unit of production going to the end market they need less glass. That’s something that happens every year, this past year in 2007 I think it was the first time investors have paid as much attention to it and we can talk more about that on February 8th.

Steven Fox – Merrill Lynch

On the Beijing Olympics is that a real big sensitivity number. I know it gets a lot of press but if you talk about the 2.2 billion square meters of glass how much is that going to really influence the full year?

Jim Flaws

In terms of that true end market I think that our belief that supporting goods don’t really change dramatically in the number of units sold. However, it can influence how the supply chain operates. You may recall for the World Cup supply chain built and ran a little earlier. The reason for raising it is I think it may change the cycle a little bit. We are not expecting it to be a dramatic change to the true full year number.

Operator

Curt Woodworth from JP Morgan your line is open.

Curt Woodworth – JP Morgan

I just wanted to clarify a comment that I think you made regarding comparisons of quarterly growth rate in 2007 relative to 2008. Did you say that you thought that volumes would be relatively flat per quarter in 2008?

Jim Flaws

No I did not say that would be flat, what I said is the ups and downs per quarter on a cycle during the course of the year would be more muted than what we had seen this past year at a very minimum starting off quarter one we were down 13% quarter one [inaudible] look much higher so we obviously are not going to experience that this year. The other reason why I think it will be more muted will be the fact that we and the panel makers appear to be operating very close to full capacity so the increases will be primarily tend to be when panel markers bring on additional capacity. We are not saying its going to be flat we are just going to say the quarters beyond down as much as you saw this past year.

Curt Woodworth – JP Morgan

Can you talk about the timing of some of your capacity expansions this year relative to the industry?

Jim Flaws

No, we are not prepared to go to that level of detail.

Curt Woodworth – JP Morgan

Your volume guidance for Display I think you exceeded your guidance for 11 out of the past 12 quarters. I’m just wondering relative to your model can you comment on where the upside has been. It seems like the penetration rate has been significantly higher than what you originally anticipated. I think last year you said ’08 your penetration forecast was 45%, right now we’re already 44%. If you can comment on that and perhaps what you see in ’08, is it LCD television penetration rate?

Wendell Weeks

We are going to be addressing our model for LCD demand next week at the investor session. I think the characterization is right that our model has been consistently more conservative than what we actually end up experiencing. We’re going to go through some of the reasons we think that happens and also what we are considering about how to change going forward. I think you are on to one key topic which is penetration, and related to that is what’s happening with the competing technologies. That’s one factor, side is another factor and what we’d like to do is actually run through those in a more systematic way with you next week. We are feeling the same way you are, perhaps its time for us to consider a model that gets at some of these other factors that we are starting to see.

Curt Woodworth – JP Morgan

What’s the capacity expansion at Hemlock going to be this year? I know you have a lot of capacity coming on first quarter.

Jim Flaws

I think we are going up to 14.5 metric tons compared to 10,000 this past year. There really is none in quarter one, it starts coming after that.

Operator

John Anthony of Cowen & Company your line is open.

John Anthony – Cowen & Company

Looking at your operating margins and I’m sure you want to cover this in more detail at the analyst day but if you could give us a sense whether the leverage is going to come more form the top line or holding your expenses flat this year? I’m curious also if you’d be willing to comment on whether you think you can exceed 25% in any given quarter this year?

Secondly, can you also give us a sense for when you think the truck sales might bottom in the outlook for DPS business, do you think that’s first half phenomenon or do you not yet have a sense?

Wendell Weeks

Let’s start with trucks, if we were to take a look at, let’s go back to 2006 there were Class 8 300,000 sold medium heavy duty and bus around 300,000 for a total 2006 heavy duty diesel around 630,000. In 2007 that same comparable number was 355,000 with a combination of the impact of the buy in 2006 as well as a little more sluggish demand hitting the trucking industry. In 2007 the amount of trucks that were compliant with the new rules was 285,000. Sales of our product overall were up a little over 50% year over year.

As we turn to next year our current estimate would be a total heavy duty diesel demand to be in the range of 375,000 to 475,000 compared to the 2007 number on the compliant that I just ran through around 285,000. That would say that we anticipate increasing sales of our products this year and we would expect due to a combination of pre-buy not being here as well as at some point this year the heavy duty diesel market picking up.

Jim Flaws

A comment on the leverage, I’m not going forecast operating margins, we actually don’t use that as a metric for the company it’s really a combination of all of our businesses. Clearly if the Display business behaves as we expect and if, as Wendell just indicated, you get the volume up tick from diesel we are hopeful for gross margin to be up, as we indicated quarter one being up versus quarter four and we do expect to again hold our SG&A expense growth to be significantly less than our sales rate of growth. We’ll see R&D grow substantially during the course of the year.

Operator

Mark Sue of RBC Capital Markets your line is open.

Mark Sue – RBC Capital Market

Perhaps you can share with us the level of inventory granularity that you usually shared by the panel makers and if the data has become more reliable or less reliable in recent quarters to give us a sense of the thoughts on the March seasonality?

Jim Flaws

We believe the panel maker’s inventory data is quite reliable. It’s reported on monthly by the Taiwanese and the Koreans do report fairly regularly. Inventories at the panel makers themselves as reported are quite reliable and we spend quite a bit of time with them going through their inventories. The place that is less detailed remains past the panel makers as you go out into the set assembly and modules and then getting to retail where the data is clearly less good. We think the panel making inventory data is quite reliable and we go through it in great detail by type of product, IT or television, by size of panels and we think it is quite reliable. We estimate that a number of weeks inventory that people have as I indicated in my opening remarks we think the number of units in inventory at panel makers is actually substantially less than what it was the same period in 2007.

Mark Sue – RBC Capital Market

On the Telecom business maybe if you can give us your thoughts on just demand overall in terms of that the major carriers are planning of the deployment for fiber and also the reception thus far for ClearCurve that would be helpful?

Wendell Weeks

Telecom overall the public side we continue to see strength in the access portion of that market with both fiber to the node and fiber to the premise architectures. Public markets around the world seem very strong. The private networks side we are anticipating good growth in the coming year in data centers as well. A pretty good environment [inaudible] some impact from the economy. Almost all of our comments here are excluding anything that may happen to the economy.

As far as ClearCurve, we are getting very strong reception from the market. We hope to have a sale to one of the major PTT’s here in the near future.

Operator

CJ Muse of Lehman Brothers your line is open.

CJ Muse – Lehman Brothers

Can you remind me what your glass volume outlook is for 2008?

Jim Flaws

We’ll be going over our glass volume in more detail next week so the previous number given out was 25% but you’ll hear a new exciting number in 10 days.

CJ Muse – Lehman Brothers

On the cost side, last year it looked like you were guiding every quarter SG&A about 16% here in Q1 you are guiding 14% to 15% and I guess a two part question here. One, is that 14% to 15% sustainable throughout all of ’08? Secondly, given that 16% actually came in at 15% and change arguably is that 14% to 15% conservative that it could be at the lower end of that range?

Jim Flaws

I won’t give you full guidance, the only thing I’ll comment on when you start using a percent; remember our top line got a little bit of lift from Yen exchange rate where much of our operating expenses are in Dollars. When the top line goes up from that the Dollar in the SG&A isn’t going to move as much. This will give us a little help on the percent. I’ll just comment that what we’re trying to do is hold the SG&A to grow at less than half the rate of sales again this year. Clearly exchange rates if they were to stay where they are today for the Yen for the whole year would obviously make than an easier goal to be accomplished.

CJ Muse – Lehman Brothers

On the Display business can you comment on what your outlook is for tax rate there here in 2008?

Jim Flaws

The tax rate for Display I think will be slightly higher than it was this past year by a couple percent within the Display business itself.

CJ Muse – Lehman Brothers

On the Dow Corning front I would have thought there was an uplift but I guess as you said not much capacity coming online from Hemlock in Q1 and that is being offset by higher material costs. Are you seeing a re-pricing of contracts that were signed years ago such that not only do you benefit from the uplift in capacity end but also some ASP uplift for that business as you look out through ’08?

Wendell Weeks

There’s no re-pricing of the Hemlock contracts and we deliberately took a strategy when we did those pre-buys with them in getting the cash in. We knew the price would be significantly below spot and we honor those contracts with our customers. The impact on Dow Corning is that disappointment is not the Hemlock volume or pricing it really is that raw material costs spike dramatically in the fourth quarter and that is a problem for us in the silicone side of the business and we are working to try to recapture some of that. Hemlock is behaving quantity and pricing as we expected.

Operator

Carter Shoop of Deutsche Bank your line is open.

Carter Shoop – Deutsche Bank

On the Display outlook I know we are going to get a lot more information here in 10 days but if we look at your panel customers it seems like the consensus outlook right now is roughly 30% volume growth. Is there any reason to believe that you wouldn’t see a similar type of growth and if so could you maybe walk me through some of the variables?

Jim Flaws

You expect to see the panel area shipment for the industry as a whole to be above our view of the glass share market shipment because you would expect our customers to improve their own yields. They lose product as they manufacture and try to get better every year plus particularly when demand is strong they will run their operations to maximize the glass loss through the panelization which is to trim loss in effect. When demand is weaker the industry sometimes forces them to sell something that is not quite a good for them. Just as you saw in 2007 you should see total panel area shipments above total glass shipments but we are not prepared to give you a number for each until 10 days from now.

Carter Shoop – Deutsche Bank

Could we talk about Dow Corning’s margins, it seems like we’ll see a little bit of a hit in the first quarter and then in the second half of the year are we going to see roughly a similar type of positive impact from higher pricing for the silicone business being offset by the capacity of additions in Hemlock, is that the way to think about the margin structure for that business going forward?

Jim Flaws

For silicones we’ve seen a slight margin erosion due to the mismatch between cost increases and price in the back half of ’07. Our goal was to try and get pricing up to cover that, we have some hopes that raw material costs will not stay at this peak level but we obviously can’t control that. Hopefully we are at a low point on the silicone side of the business in terms of margins if we get the price coming up.

Hemlock remains extraordinarily profitable and much more profitable than silicone business so if you want to look at the total of Dow Corning it’s obviously a question of the mix and how fast the capacity comes up at Hemlock.

Carter Shoop – Deutsche Bank

Can you discuss your outlook for free cash flow in the first quarter?

Jim Flaws

Free cash flow in quarter one is slightly negative, the free cash flow is always a slight negative to us in quarter one but it was only slightly negative. We intend to have significant positive free cash flow for the year.

Operator

John Harmon from Needham & Company your line is open.

John Harmon – Needham & Company

I was wondering if you could elaborate a bit on what you’re saying about your ClearCurve fiber. You said that Verizon completed one section of testing, what’s involved in the second amount of testing they are doing and if things just go perfectly when do you think you could see revenue from them?

Wendell Weeks

What Jim was talking about is that whenever you’ve got a product that is [inaudible] what carriers will do is go through something called field testing in addition to all the laboratory based testing that they do, that is exactly what it sounds like which is they deploy it in real situations with live customers and see what happens, but on a limited basis, then they carefully monitor it. ClearCurve is not just one product, it’s a whole suite of products that will redo our whole fiber to premise offering to MDU’s and as a result different ones are getting tested in different ways and different field trials.

When Jim said that they went well, what he means specifically is that no issues were identified and that our value propositions look like they are upheld by real world experience. What happens after this is a carrier would go through a formal decision process on whether or not to bring this into their network and then go through all the process it takes to actually buy a brand new product. That’s where we stand, it’s all positive news. As I said, we would hope to see, already we’ve done our first commercial shipments to some smaller companies and we would hope to see a major carrier do a purchase of ClearCurve in the not too distant future.

John Harmon – Needham & Company

I realize the ultimate cap on your glass shipments would be plant capacity but is there any way to characterize at which level capacity is tighter, on the panel level or on the glass level. If you said the glass supplies are tight, clearly you are able to add capacity. Does that mean that your competitors are not?

Jim Flaws

It’s our belief that the glass industry in total is adding capacity pretty much in line with what our expectations are for the end market. They are historically as always been a little bit more panel making capacity than end market. Glass supply as best as we can tell from our own projections in our public announcements and competitors by and large on tract for keeping up with estimates for the end market.

John Harmon – Needham & Company

Does that mean that you and your competitors are just adding capacity at roughly the same rate of the market growth?

Jim Flaws

In general that’s what we and our competitors have been doing the last couple of years. In any given quarter the panel makers can bring up a new fab ahead of the end market and obviously in any given quarter glass makers may start up a new large tank and may have more supply in the quarter but on an annual basis that’s what we think is happened the last couple of years and will happen again this year.

Operator

John Roberts of Buckingham Research your line is open

John Roberts – Buckingham Research

Some European countries have already made the switch to all digital broadcasting ahead of the US, has that been a non-event, I think it’s expected to be a relatively minor event when it occurs here in the US but sometimes consumers get confused between digital and high-def and I don’t know whether it caused any change in volume patterns in those countries that made that change in Europe?

Wendell Weeks

We haven’t done an analysis of a particular countries demand versus when they made that cut over. It’s probably worthwhile for us to take a look at, give us a sec to do that, maybe we can talk next week about that with you. In general I think you layout what our current point of view is which is in the near term we don’t expect that to be a major impact. However, over the long term it will certainly help take that embedded base of analog TVs and make them obsolete at a faster rate. In the near term we would say that it’s not a major event.

John Roberts – Buckingham Research

Do you have an estimate yet of what you think the average size of LCD TV was in the fourth quarter or an average for all of ’07 or do we have to wait for next week for that?

Wendell Weeks

You’ve got to wait for next week; we’ve got to save something.

Operator

Jeff Evanson from Sanford Bernstein your line is open.

Jeff Evanson – Sanford Bernstein

A couple of questions on Telecom, first Wendell you mentioned demand for both fiber to the premises and fiber to the node, just in our looks at press reports of satisfaction surveys between Verizon and AT&T as well as the customer subscription rates it looks like Verizon is getting better results with the fiber to the premises architecture than AT&T with fiber to the node. What do you think it would take to convince companies that are doing fiber to the node now to do more fiber to the premises?

Wendell Weeks

Fiber to the prem type architectures are now in trial and a very significant percentage of carriers around the world. That interest level has increased strongly and we actually just added last year another major European based carrier for the architecture. That being said, I think that it’s important to note that both fiber to the node and fiber to the premises remain very legitimate access choices. There are good reasons to do either one, and a lot of it depends on how much a carrier believes how much bandwidth they think will be required for a user in the future.

What they think technology trajectories of the various components of systems as well as compression. Also what the topography is of their particular network, how much buried, how much aerial. I think that it’s far from clear yet what is the right choice for carrier’s point of view. I think that remains to be seen and until such time that becomes very clear what the right choice is I think you’ll see carriers do both.

Jeff Evanson – Sanford Bernstein

Earlier today Cisco introduced a new switch for the data center and our research suggests that because of virtualization and other factors you should see a significant shift to 10 gigabit per second connections in data centers versus one gigabit over copper today. When people go from one to 10 it’s often the best choice for a variety of reasons to use optics. Do you guys see that as a significant growth driver for you and is there an opportunity for a multi-node version of ClearCurve?

Wendell Weeks

Two good questions in there. Yes we do see that move towards 10-G as being a good positive driver for us and actually Peter Volanakis is going to be leading a charge for us to introduce a whole new generation of data center based products that we’ll hear more about in the coming year. We do also believe that there is a significant value proposition for bend resistant fiber in the data com world and watch this space, more to come.

Operator

Ajit Pai of Thomas Weisel Partners your line is open.

Ajit Pai – Thomas Weisel Partners

A couple of quick questions, the first one is about SCP, I think you mentioned the pricing declines in SCP were about 15%. Could you walk us through how much of that is to do with the generational mix and how much of that is to do with the currency or the factors that competitors and dynamics there? On SCP as well, what the tax rate was, I remember the tax rate sort of rises over time, could you give us some color as to what it was a year ago, this year and then what you expect it to be a couple of years down the road?

James Flaws

On the tax rate I don’t have that handy I’ll let Ken follow up with you on that. There have been under tax holiday and it will gradually increase but there aren’t any sudden changes right now. In terms of SCP pricing, the generation impact has been muted and we do come down on new generations relatively rapidly but the businesses are so large today that you don’t see the same impact of generational pricing. What really drove the 15% for SCP versus the 11% was in quarter one of ’07 they kind of caught up with declines we had made in ’06 in our wholly owned business. If you look that their fourth quarter price declines of ’07 compared to ours they are very similar and very small.

Ajit Pai – Thomas Weisel Partners

On Concord I think you provided a brief commentary about things ramping their quite well. Could you give us some color as to Concord, is it more fiber to the prem kind of fiber and also the capacity utilization profitability etcetera, what kind of variable margins is to be expected and where are things right now?

Wendell Weeks

The Concord will be making product aimed at our single mode business and manufacturing came up terrific and you see the same high incrementals there that you see in our overall fiber business. You may recall we indicated that the total additional fixed costs that we were adding to Concord on an annual basis was $5 million. We are seeing great incrementals and very good performance there. We are delighted by the plant and the people.

Jim Flaws

As I mentioned several times our annual investor meeting will be held at the Mandarin Oriental Hotel in New York City on February 8th. Our key business leaders will be on hand to speak to investors, showcase their products, and answer your questions. Products will include our Epic [inaudible], diesel filters and display graphs. There will also be a live demonstration of ClearCurve fiber technology in action. In addition, several members of our research and development group will be there to showcase some exciting project that are currently in our labs.

You’ll hear formal presentations by senior executives and have the opportunity to ask questions. Expect it to be an informative event; hopefully you’ll be able to join us. I encourage you who are interested to register on our website, seating is limited. A few last comments on 2007-2008, quarter four was strong and is giving us excellent momentum heading into quarter one. Two thousand seven overall was a very strong year, our pricing approach and cost reduction allowed continued growth in LCD to deliver terrific profits. LCD is clearly winning the format war, CRT’s are disappearing and LCD’s have won the 40” television market versus plasma and we believe LCD’s will do well in the 50” plus space.

Telecom has rewarded our patience and our investment with both excellent revenue growth and cash generation. The long awaited diesel lift off has occurred with 50% sales growth. We are very excited about our prospects for 2008 and look forward to seeing you next week to share out outlook. Thank you for joining us this morning.

Ken Sofio

Thank you Jim, thank you Wendell, thank you all for joining us this morning. A playback of the call will be available beginning at 10:30 am ET today until 5:00 pm on Monday, February 11th.

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