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Ken Sofio – Division VP, IR

Jim Flaws – Vice Chairman, CFO

Wendell Weeks – Chairman, CEO

Analysts

Mark Sue – RBC Capital Markets

Brian White – Collins Stewart

CJ Muse – Lehman Brothers

Steven Fox – Merrill Lynch

Brent Woodward [ph] – JP Morgan

Vijay Rakesh – Thinkpanmure

John Harmon – Needham & Company

Carter Shoop – Deutsche Bank

John Roberts – Buckingham Research

Jeff Evanson – Sanford Bernstein

Ajit Pai – Thomas Weisel Partners

Brendan Furlong – Miller Tabak

Nikos Theodosopoulos – UBS

Jim Silva – Citigroup

Andrew Abrams – Avian Securities

Corning Incorporated (GLW) Q2 2008 Earnings Call Transcript July 30, 2008 8:30 AM ET

Operator

Ladies and gentlemen, thank you for standing by and welcome to the Corning second quarter results conference call. At this time all participants are in a listen-only mode. Later we will conduct a question and answer session. Instructions will be given at that time. (Operator Instructions). As a reminder this conference is being recorded. I would now like to turn the conference over to our host, Ken Sofio, Vice President of Investor Relations. Please go ahead sir.

Ken Sofio

Thank you Alex. Good morning everyone and welcome to Corning's second quarter conference call. The call is also being audio cast on our website. Jim Flaws, Vice Chairman, Chief Financial Officer will lead the discussion and Wendell Weeks, Chairman, Chief Executive Officer will join 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 do 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?

Jim Flaws

Thanks Ken. Good morning everyone. This morning we released our results for the second quarter which can be found on our IR 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 in our website after our call as well. We are very pleased with our Q2 results, especially in these turbulent times and we like our position heading into Q3. We hope that the information we present today will help all investors understand our point of view on the LCD market and the potential for the second half. I’d like to begin with some important points regarding our Q2 results, Q3 expectations, and the LCD industry.

First in Q2, demand for LCD glass was strong throughout quarter two. Combined volume at our wholly-owned business and SCP was up 8% sequentially. Our wholly-owned business was up 1%, lower than our guidance due to an isolated manufacturing issue. I’ll comment more on that in a minute. SCP was up 15%, higher than we expected.

Second, panel makers ran at high utilizations in Q2, in the low to mid 90% range. They also built some inventory in preparation for the season with a stronger second half, as we told you they would. But in general, inventory levels at the panel makers were considered normal and in Q2, at about 5 weeks.

This is roughly the same level inventory at the end of Q2 last year. We believe the inventory was weighted – towards IT but this is specific to each panel maker. Those panel makers, such as Samsung who have strong television brands, reported no building of TV panel inventory.

Third, we believe the set assemblers, fearing a shortage of panels in the second half, may have built more inventory than necessary during the quarter.

Fourth, retail was strong throughout Q2. LCD televisions in the U.S. were 35% higher year-over-year in the month of June. In China, they were up to 62% year-over-year. So, in summary, Q2 was a good quarter.

Now, let’s turn to July. First, the reported panel pricing has come down significantly in July. These drops are consistent with our analysis that the set assemblers may have slowed their purchase orders to try and reduce their own inventories.

Second, overall, we believe panel makers’ utilization rates remained high in July. However, some panel makers have now announced lowering their utilization rates going forward to reduce their output and keep their own inventories in balance.

So, what are our expectations for Q3? We expect panel makers to maintain lower utilization rates until the set assemblers work off their inventory. We believe utilization rates for the Taiwanese panel makers will be in the low to mid 80% range. Others may keep their utilization rates high throughout Q3.

Second, despite utilization rate reductions by the Taiwanese, we expect total industry panel area shipments to be up Q3 over Q2. This has been supported by forecast from several panel makers.

Third, we believe the utilization cutbacks reflect a normal supply chain correction. This is especially true if the retail environment remains on track.

Fourth, regarding retail, we’re now halfway through the year and economic pressures have not caused LCD televisions to suffer at retail. U.S. LCD television sales have been up nearly 30% year over year each month. So, we believe, all the recent noise in the market is a supply-chain issue and not a change in the overall macro trend of LCD television penetration growth.

As a result, we expect another quarter of strong glass demand. Combined, our wholly owned business and SCP volumes will be up 49% sequentially. SCP volumes will be up 8% to 13% while our wholly owned business will be up flat to up 5%. The difference in growth rates may reflect the share gains of A Brand [ph] televisions which have the competitive advantage or strong brand name recognition.

Based on the actual retail data for the first half and expectations for Q3 and Q4, we still expect at least 105 million LCD televisions to be shipped this year. As a result, we still anticipate the overall glass market volume could be at the upper end of our 25% to 30% growth range.

Lastly, consistent with our strategy for cash usage that we have outlined for investors, we will continue to return excess cash to our shareholders if we feel our financial health is secure and if we have adequate funds for growth. In light of our strong balance sheet and positive outlook about our future prospects, this morning we announced our Board has approved a new $1 billion share buy back program.

So now, let me turn to the details and I’ll start with our income statement. Second quarter sales were $1.69 billion, 1% under the low end of our guidance range and 2% lower than street expectations.

Two events contributed to the lower and unexpected sales in Q2. The first would be the isolated manufacturing issue that impacted a small portion of capacity at one of our plants. Fortunately, the problem was corrected and the output has been improving steadily. But we did lose the opportunity to sell approximately 24 million in glass and it cost us $16 million in net income.

The second was foreign exchange rates. The Yen averaged 104.6 during a quarter and our guidance was based on 103. This impact on sales was 14 million. Without these two items, sales in Q2 would have been well within our guidance and street expectations.

Versus Q2 a year ago, sales increased 19%. EPS, excluding special items was $0.49 and within our guidance range and aligned with street expectations. This represents a 44% increase over second quarter EPS ex specials of 34 cents a year ago.

Manufacturing issue on Display impacted our quarter 2 EPS by about a penny, weakening the Yen in comparison to our guidance was not as material to EPS as it was to sales, due to our hedging strategies. That end term, excluding special items, was 782 million, an increase of 43% over last year’s second quarter net income, excluding special items of 546 million. You should note that EPS and net income, excluding special items, are non-GAAP measures. The reconciliation GAAP can be found on our website.

Continuing down the income statement, gross margin in the second quarter was a little over 50% as expected. The slight decline from Q1 gross margin, which was 52%, was primarily due to strong telecom sales which had a lower gross margin than our corporate average, as well as the manufacturing issue on Display I mentioned a moment ago. Manufacturing issue impacted our corporate gross margin by approximately 50 basis points in the quarter.

SG&A was 260 million and 15% of sales, as expected. RD&E in the second quarter was 163 million and about 10% of sales. Equity earnings were 360 million in the second quarter compared to 304 million in the first quarter, an increase of 18% and higher than expected. Increase was due to strong earnings of both SCP and Dow Corning. Compared to the second quarter last year, equity earnings increased 64%. Our tax rate in the second quarter was 13% and wrapping up the income statement, our share count for the second quarter was 1.6 billion shares.

Now, we expect three special items in Q2. The most significant related to the release of our U.S. deferred tax asset valuation allowances which resulted in a non-cash gain of 2.45 billion. Timing of the release was driven by the substantial increase in U.S. earnings over the past year, as well as our belief that positive U.S. earnings will continue.

Investors should note our book tax rate for 2008 will remain unchanged. In 2009, it is estimated to increase about 10 percentage points. We have previously communicated this potential increase in our tax rate and we believe most, if not all the analysts have reflected the higher tax rate in their 2009 estimates. Investors should note we currently have a 4.7 billion net operating loss and we do not expect to pay cash taxes in the United States for 4 to 5 years.

The other two special items related to litigation settlement in our Display segment, which resulted in a charge of 12 million, as well as some inspector's [ph] liability charge of 9 million related to the Pittsburgh Corning reorganization proceedings. Including these special items, our second quarter EPS was $2.01 per share.

Now, let me turn to our segment results for the second quarter. I’ll start with Display. Second quarter sales were 809 million or 2% lower than Q1. The volume at our wholly owned business was up 1% and lower than expected due to the isolated manufacturing problem at one of our plants which impacted shipments to one customer during the quarter. Problem was self-inflicted and output is steadily improving.

Excluding the impact on manufacturing issue I mentioned earlier, our sequential volume would have been within our guidance range of 2% to5%. The remainder of our glass operations ran at full capacity for the quarter. Normal price declines were inline with previous quarters.

Equity earnings from SCP LCD glass business were $244 million in the second quarter, an increase of 20%, versus $203 million in quarter one. Increase was driven by strong volume gains of 15%, excellent manufacturing performance, and favorable exchange rates. Price declines were consistent with previous quarters. For your modeling purposes, SCP second quarter LCD sales were $842 million compared to $737 million in the first quarter, an increase of 14%. Net income in the Display segment which includes these equity earnings was $685 million in the second quarter, slightly higher than the first quarter. The segment at net income includes the $12 million litigation settlement, which was a special item.

In comparison to the second quarter of last year, sales in the Display segment increased 33%, led by volume gains of 26%. Price declines were 8% year-over-year and the movement of the yen to US dollar exchange rate was very favorable. Equity earnings from SCPs LCD glass business were up 85% over Q2 of 2007 led by volume gains of 40%. Segment net income grew 39% versus last year.

Now, I'd like to spend a few minutes discussing the current supply chain and retail environment. It's clear that most of the news coming out of Asia over the past weeks has worried investors. I'd like to start by talking about what the supply change did in Q2, and then we can walk through our thoughts for Q3 and the second half.

Panel inventories in Taiwan grew in Q2 on an average from four weeks entering the quarter to about five weeks by the end of the quarter. This is a level we consider to be normal entering the third quarter. In fact, this is about equal to the level inventory heading into Q3 last year.

Regarding report of panel pricing, prices dropped significantly at the end of Q2, and these drops have continued in July. Due to the severity of the price declines and the length of time over which they've occurred, it's now apparent there's a buildup of inventory in the supply chain. Our hypothesis is that it's mostly at the set assembly level. While we and you can track retail data and panel shipments, there is no market data available for set assembler inventories.

We suspect some of the excess inventory has been built their anticipation with tight panel supplies in the second half. With more visibility and confidence in the second half panel supply, we believe set assemblers are adjusting down that over-built. The good news is that retail remains on track. If retail strength continues as expected, fueled by lower retail pricing, we expect that excess inventory in the supply chain can be worked off.

I'd like to take a moment to comment on our supply chain model and give you some conclusions we've drawn from it. We modeled the LCD industry at four supply stages. The first is glass shipments to panel makers. These are our shipments and when we give you the glass market statistics, it is at this level. With our market share and industry contacts, we have a high degree of confidence in these numbers.

The second stage is panel maker shipments to set assemblers. We have pretty good confidence in these numbers triangulating from a variety of sources. We also modeled inventory changes at the panel makers. The third stage is shipment into retail. We have good confidence in these numbers. They come from sources that you can purchase also. The last stage is obviously from retail to consumers. We buy our market research data around the world and you can buy the same information.

We think our data represents about 50% coverage in television, but as you know, some major US retailers and warehouse clubs do not provide data. We supplement this data with regular conversations with major retailers and also branded manufacturers. We model inventory changes in levels in the set assembly and at retail, and we model the entire industry in glass volume obviously trying to build in expected efficiency improvements.

We have two important observations and perhaps they should be characterized as beliefs. First, the sequential growth percentages every quarter at each level are different and often commented on this to investors when they ask, “Why isn’t our growth rate the same as panel makers in the given quarter?”

Second belief is that supply chain in the aggregate must fill the inventory to support the end-market growth. The supply chain cannot increase terms infinitely. As an example, we think 500-million square feet increase uphold from the retail level probably requires approximately 150 million to 200 million square feet of new inventory in the supply chain to support that level of retail growth efficiently.

We have been modeling the industry stage this way for three years. As we've commented many times, there is not a typical year for the Display industry because it changes as television has a bigger impact in the seasonality, and as glass and panel capacity is tight or not.

We entered 2008 expecting the supply chain to be tight. We expected this along with the Beijing Olympics timing. We drive the supply chain to run stronger earlier in the year. We forecasted the supply chain would build 140 million square feet of new inventory in the first half and that is about 60 million more than the built in the first half of last year.

The main reason why this is important is that we believe that retail demand have increase of about 500 million square feet is about the same in '07 and '08. So, the supply chain should not need to build more inventory than they did in 2007. Remember my comment about our second belief on terms.

We compare our model today for the first half to our model at the beginning of the year. We think that the 140 million square feet in inventory built that we've had projected is now 160 million, an increase of 20 million. That is only 1% of the world’s annual end market but is 4% of a quarter. However, we think that this built of set assembly is now a 100 out of the 160, whereas we originally had forecasted it only to be 60 of the 140 in our opening forecast.

It is this analysis that drives us to believe that the current panel pricing drops are being driven by the set assemblers. They built enough inventory and had built significantly more in the first half of '08 than '07, 100 built this year versus 50 in '07 at set assembly. There are also sensing the panel capacity will not be as tight. Another reason is slow purchases and expected lower prices. Our panel makers have not overbuilt their inventory so far but if they don't trim utilizations during this period of adjustment, they will. So they will now trim and keep their inventories in balance. This will let set assemblers work off inventory.

The recent panel price changes reflect this war of balance between the two supply chain stages. Of course, all these is playing against the retail environment that feels uncertain, although the first 6 months have been great, and the seasonally stronger demand of back-to-school and holidays is around the corner. If these remain on track, then utilization cutbacks are exactly what we've described, a normal supply chain correction.

So what are we seeing for utilization changes? We are now seeing Taiwanese panel makers lower utilization to low to mid-80% range for their large sized lines, which are typically 10, 5, and higher. We expect them to stay at this level before beginning decline on September. These utilization cuts are part of the balancing between set assembly inventories and panel price declines.

The ultimate good news is that year-to-date retails has been strong and further price reductions that flow through the retail should help spur consumer demand. We believe utilization rates can move higher once inventory and set assemblers have been adjusted to more appropriate levels.

Clearly some panel makers have stated their Q3 utilization rates will remain at 90% or higher. Investors should note that utilization rates vary by panel maker. Investors have also reacted negatively to June in Q2 panel shipment announcements. I believe it's important for investors to look at shipment data for all panel makers in their entirety and not just individual panel makers before drawing conclusions. While some panel makers had lower than expected shipments in Q2, others had come in as expected. Investors should note that individual panel maker shipments results can be influenced by their share gains or losses, their pricing decisions, and their product mix. In the long run, we continue to believe the most important metric for investors to watch is retail sales results of LCD products. It is the retail sell-through that drives the ultimate [ph] demand for glass and will overcome and drive the supply chain.

So what are we seeing at retail? All retail reports through June have been very positive. June LCD TV sales in the United States were up 35% year over year according to NPD Group's retail tracking service. This continues the trend we are seeing throughout 2008. LCD television sales have been up 30% each month, year over year. For the first six months this year, retail sales have been very strong with LCD television sales in the United States up 37% versus the first half a year ago.

We know investors continue worry about the impact of the US economy in LCD television sales. As we've shown you several times in the past, TV sales have done well in past recessions. We should also note that these worries have been with us all year and each month we still seek consumers buying televisions. We cannot guarantee they'll continue to do so but we are encouraged by the resiliency of television purchases in the United States. And lastly, investors should be remember only 30% of TVs are sold worldwide or in the United States.

We also just received June retail sales of LCD televisions in China. Despite the fears of the earthquake would have a lingering impact on consumer behavior, LCD television unit sales bounced back up in June to be 62% at year over year. We believe the continued strength of LCD television sales as due in part to the continuing collapse of the CRT market.

On this slide, you’ll see June television sales in the United States broken out between LCD, plasma, rear projection, and CRT. And while LCD television sales were up 35% versus a year ago, CRT sales were down 71%. Based on the first half data, we believe the worldwide television market is still on track to reach at least 105 million units this year. Our estimates are consistent with many of the A-brand television manufacturers as well as electronic retailers.

Investors have also been concerned that the economy will influence consumers to purchase a smaller less expensive television. On this slide, we have worldwide LCD sell-through by screen size for this year through May which is our most recent data. As you can see, since the beginning this year, the percentage of televisions 14 inches and higher have been consistent around 24% to 25% of all televisions sold. Now compared to a year ago, the percentage of LCDs sold over 14 inches has actually grown significantly. On this chart you can see the screen size break out by month for the last year, which is where I'd like to draw your attention to June 2007. A year ago, televisions 14 inches are higher were only 16% of the total compared to 26% today.

An interesting conclusion that can drawn from this data is the shift from smaller to larger televisions. In June of 2007, smaller televisions between 10 and 29 inches were 1% of the total, today, they are only 33% and falling.

I would like to address one more topic that investors have asked about – 2009 panel capacity additions and their impact on glass demand and pricing. Some of investors concerns, panel makers will put in too much capacity next year. Glass makers will follow with too much capacity. And then the end market demand does not support all the panel and glass capacity, there will be excess glass capacity which will lead to significant glass price declines. Those are a lot of assumptions but let start with the panel capacity expectations.

Based on panel maker’s public announcements, they will be adding in total between 25% and 30% in capacity next year. Some investors believe there will be far more new panel capacity to be added. It's important to note not all capacity additions start on January 1 and even more importantly, typically it takes months, sometimes more than a year for new fabs to run at full capacity.

Here is the listing of the new fabs being added next year based on public announcements. As you can see, many do not start until the second quarter and most will not reach full capacity until 2010. So regardless whether there will be excess panel capacity in 2009 or not, key question is – what will the additional glass capacity be?

Based on our capacity previously and the public announcements by the glass makers, we believe glass capacity will grow between 20% and 25% next year which is in line with our expectations of end-market demand. So even if glass makers put in excess capacity, we expect the glass market to remain tight and glass price declines to remain moderate.

Now let me share with you some of the historical data to help put this in context. Again, for those who have web access, read the chart comparing the panel capacity additions to glass capacity additions.

In 2006, panel makers added 51% of new capacity while glass makers added 48% in line with end-market demand. In 2007, panel makers added 42% of new capacity while glass makers added 45%, again in line with end-market demand. This year, panel makers are adding about 32% of new capacity while glass makers have announced 30% increase, maybe slightly higher but in line with end-market demand.

We agree there is likely to be some excess panel capacity being added next year. But as we are seeing today, panel makers either lower their utilization rates or slow their ramps as needed to adjust to market demand. Based on our analysis of panel maker capacity additions, timing and market demand, we believe panel makers may need to run at slightly lower utilization rates in comparison to the last two years.

Now let me take a moment to walk you through some of the end-market data for Q2. As always, I'd like to stress that our second quarter market information is only preliminary at this time. Data represents our view and is based on a variety of sources. To be clear, the data we reference here relates shipments from PC manufacturers and television monitor set makers to retailers. We estimate approximately 23 million LCD television shipments in Q2 compared to the second quarter last year, LCD television shipments were up 45%. Penetration to LCD television worldwide TV market improving 46% in the first quarter to 51% in second quarter.

The data also suggests that notebook sales were very robust in Q2. About 32 million were shipped in the second quarter which is higher than our expectations. Notebooks were about 46% of all PCs sold up from 43% a year ago.

Moving to LCD monitors, about 43 million were shipped from the second quarter slightly higher than the 42 million shipped in quarter one.

I would like to turn to the other segment, so I'll start with Environmental where sales from the second quarter were $209 million, a 6% increase over the first quarter of $197 million.

Auto product sales were $132 million in the second quarter versus $137 million in Q1. Strong demand internationally was more than offset by weak demand in North America. Diesel product sales were $77 million in the second quarter up 28% versus Q1 sales of $60 million. Heavy-duty diesel sales were up slightly due to retrofit demand in China. Light-duty diesel sales were up significantly due to strong demand in Europe.

Segment net income was $28 million in the second quarter, significant increase over the first quarter net income of $13 million. In comparison, to a year ago, Environmental segment sales increased 9% driven primarily by positive exchange rates and higher diesel sales. Net income doubled.

Turning to telecoms, sales from the second quarter of $477 million, an increase of 13% over Q1. The increase was driven by fiber to the home demand as well as strong fiber volume. Sales in our Fiber and Cable products in the second quarter were $248 million, an increase of 16% sequentially. Sales of hardware and equipment products were $229 million, an increase of 11% sequentially. Fiber to the home sales which are primarily hardware and equipment related were $99 million in the second quarter, a 29% increase compared to Q1.

Second quarter fiber premise sales were driven primarily by strong demand in North America compared to a year ago fiber to the home sales increased 36%. Net income in the telecom segment was $23 million in the second quarter compared to $11 million in the first quarter. Compare to last year, sales increased 11% excluding the sales from the business we divested in April last year. Net income was consistent excluding the $19 million gain we made from the sale of that business last year.

One additional note, our Corning cable systems business has seen significant material cost increases and we’ll be implementing price increases to offset these costs. Sales on our specialty material segment were a $104 million in Q2, an increase of 25% over Q1 sales of $83 million. The increase is due to strong demand for our advanced optics and technical materials products. Compared to a year ago, sales were up 9%.

In our Life Sciences segment, sales from the second quarter were $87 million, a 7% increase over Q1 sales of $81 million and compared to a year ago, sales were up 12%. Segment net income was $16 million, an increase of 60% versus the first quarter of 45% versus last year. Our Life Sciences business also plans to increase prices to offset increases in material costs.

Now turning to Dow Corning, equity earnings were $94 million, an increase of 18% over quarter one equity earnings of $80 million. The higher earnings were primarily driven by strong worldwide demand in base silicon business across all segments. We are pleased to note the general health of the silicon portion of Dow Corning’s business has not been significantly impacted by the economy. Outside, we buy our raw material prices. Dow Corning's been able to partially offset these rising costs with higher pricing in the quarter. For modeling purposes, Dow Corning sales were $1.38 billion in Q2 compared to $1.28 billion in Q1.

Now let me go to the balance sheet. Moving cash, we ended the quarter with about $3.5 billion in cash and short-term investments up from $3.3 billion last quarter. Free cash flow was $295 million in the second quarter. As always, free cash flow is a non-GAAP measure.

As I mentioned earlier this morning we announced the $1 billion share repurchase program effectively immediately. This is in addition to our previous repurchase program of $500 million of which only a $125 million remains. This decision was based on the strength of our current balance sheet which we believe contains more than enough cash and short-term investments to protect the financial health of the company and our confidence in our future cash flow projections which should allow us the flexibility to fund our significant R&D initiatives and other investments.

We’ve spoken to the rating agencies about the larger repurchase program and they’ve confirmed our new program will not have an impact on our current debt rating level of triple B-plus or BAA1.

Now let me go to the outlook. I’d like to wrap up providing our guidance for the third quarter. We expect third quarter sales to be between $1.65 billion and $1.72 billion. This would represent an increase of 6% to 11% over last year’s Q3 sales of $1.55 billion.

Our third quarter EPS before special items is expected to be between $0.48 to $0.51. This would represent a 26% to 34% increase over last year’s Q3 EPS ex specials at 38%. As a reminder, this is a non-GAAP measure.

Our Q3 guidance is based on a yen-to-dollar exchange rate of 108. Exchange rate in quarter two was 104.6. Investors should note that the sales site Q3 estimate, sales estimate of $1.79 billion an EPS estimate of $0.50 are based on exchange rates between 103 and 105. For those analysts who were using 103, the impact to Q3 is approximately $45 million on sales and $0.03 on EPS. For those analysts who are using 105, the impact is about $30 million on sales and $0.02 on EPS. We would ask all analysts to use 108 in their estimates going forward for Q3 and Q4.

Now moving down the income statement, we believe gross margins will remain at least 50%. SG&A is expected to be approximately 15% of sales; RD&E is expected to be about 10% of the sales from third quarter. Dow Corning equity earnings are expected to increase 20% to 30% sequentially driven by the growth in the base silicon business and the benefit of new capacity in Hemlock Semiconductor. The new capacity is online and ramping well. Regarding our tax rate for the third quarter, it’s expected to be between 12% and 15%.

Now moving to our Display outlook, we anticipate third quarter glass volume, our wholly-owned business, and SGV combined will grow 49% sequentially. Glass volume at our wholly-owned business is expected to be flat at 5% sequentially. Normal price declines in the quarter are expected to be around 2%. SCPs volumes expected increase between 8% and 13% sequentially. SCP price declines will be consistent with our pricing strategy.

As I mentioned earlier in the call the difference in growth rates between SCP and our wholly-owned business reflects the current strength of certain television brands, primarily Samsung. Samsung recently announced they’re reducing their panel inventories by cutting back on buying panels from the Taiwanese. We think this is a reflection of the current panel capacity environment and the recent strength by A-brand televisions versus B-brand and it reinforces the Taiwanese utilization trimming that I mentioned earlier.

SCP equity earnings will be impacted by about $15 million, (inaudible) average is 108 in Q3 compared to Q2 as a result SCP equity earnings could be flat topped slightly.

Moving to the telecom segment, we anticipate third quarter sales to be flat at 5% compared to our very strong second quarter. We anticipate the environmental segment sales in Q3, it will be flat sequentially. Higher diesel sales will be offset by lower auto demand.

And in our Life Sciences and special material segment we expect Q3 sales to be consistent with Q2. Ken?

Ken Sofio

Thank you, Jim. Alex, I believe we’re all ready for some questions now.

Question-and-answer Session

Operator

Thank you. (Operator Instructions). And we'll go to our first question with Mark Sue with RBC Capital Markets. Please go ahead.

Mark Sue – RBC Capital Markets

Thank you and good morning. Understanding that your comments on supply, are there any July indications of macro impact on retail demand? Do you think there was some pre-buying related to the Olympics which caused set assembly makers to build inventory?

Jim Flaws

Sue, we believe that set assembly did build this year earlier than normal for two reasons. One would have been the Chinese Olympics and the other would have been that they expected tight supply capability in the back half of the year. We have no hard data on macro change in retail environment for the month of July. We generally get that about three weeks after the end of the month and I'll point out it’s only July 30 today.

Mark Sue – RBC Capital Markets

And Jim, considering the new utilization by panel makers during the current quarter and higher set assembly inventories, what kind of glass seasonality should we assume in the holiday quarter? It’s hard to kind of look back at historics but if you could kind of give us some qualitative measures?

Jim Flaws

Well, we clearly have seen different seasonality every year, but as I indicated in my remarks earlier this year, we have never expected that the Q3 going to Q4 would be up very much because we thought the supply chain was building earlier and we have no reason to change that expectation right now. We’re hopeful that these utilization cuts in Q3 will pull back some of the inventory that was there, but we’re not expecting a robust quarter-over-quarter growth in Q4 for the glass market as told.

Mark Sue – RBC Capital Markets

And lastly Jim, with everything going on, do you re-assess your planned production increases or at least throttle it back a little bit?

Jim Flaws

We’re continuing to run full with – we have failed to build any inventory on as what we’ve talked about with our manufacturing upset that actually shorted customers. So we’re continuing to run full. We’re not changing our plans for capacity additions for next year. Clearly, we have the ability on a given tank repair or given tank start up to moderate at this time, but given what we continue to see in the end market and retail around the world, we don’t see a reason to change our capacity additions at this point in time.

Mark Sue – RBC Capital Markets

Okay. Thank you and good luck gentlemen.

Operator

Next question comes from the line of Brian White with Collins Stewart. Please go ahead.

Brian White – Collins Stewart

Yes, good morning. Just on the pricing environment, panel prices are going down fairly quickly. Some of the panel makers are trying to get cost downs that are higher than what they’ve had in the past, have you actually had panel makers ask for a better pricing in the second half of the year?

Jim Flaws

Yes, we have, and we’ve had panel prices – panel makers ask for lower prices even when they’re raising their prices. There’s never been a meeting where they haven’t asked for a price reduction. So, this shouldn’t come as a surprise as they’re going down. I will tell you that we are holding firm on our prices.

Brian White – Collins Stewart

Okay. Great. And just linearity of the June quarter, was there anything that’s different or maybe you can talk about how the quarter typically trends in terms of linearity up to three months in the June quarter?

Jim Flaws

The June quarter was very consistent throughout the quarter. We didn’t see any real shifts in terms of capacity utilizations in the June quarter. All the months were quite good and the month of July was actually quite good and it’s just at the end of July that we’ve had some panel makers begin to either start to trim or announce the trims for August. So June quarter was quite good.

Wendell Weeks

And I think as we deal with the series of questions that you’ve had on the seasonality and on pricing, I think what’s important to do is to reiterate. As we look at the total year, we still feel good about being at to high-end about 25% to 30% of growth in LCD glass for the year. So given we expect the total year to still come in where we thought it would. We continue to therefore you can see our guidance to quarter three then it tells you what we think about quarter four and then all of that would therefore be consistent with the way we laid out our pricing strategy at the beginning of the year. So, other than the – what we view is the supply chain correction that Jim went through, I thought, very effectively in the first part of this conference call. We see the year coming out largely the way in which we thought it would when we started the year. So we don’t see any reason to change our strategies.

Brian White – Collins Stewart

Okay. Thank you.

Operator

Next question comes from the line of CJ Muse with Lehman Brothers. Please go ahead.

CJ Muse – Lehman Brothers

Yes. Good morning. Thank you for taking my question. In this first question, on the plant shutdown and where you talked about not having sufficient inventory to supply that particular customer, can you comment on their ability to source from the two other guys and how much excess supply there is out there for the glass market currently?

Jim Flaws

Well that particular incident that you’re talking about that supply of that particular glass is very tight and regretfully, we put customer through some hard times during this quarter. So that tightness of glass, they felt and we felt right away with this regrettable manufacturing incident. We're working our way out of it. So we hope to be on track and we’ve improved significantly with our delivery to that particular customer.

CJ Muse – Lehman Brothers

Can you feel good that that will not have a material impact on your Q3 results?

Jim Flaws

Anytime you have a manufacturing incident like this, it takes a little while to recover from it. We believe that the worst of it’s behind us and that we’re ramping steadily up. We’ll still feel a little bit of a drag though but we believe that the worst of it’s behind us and we’re going to be okay.

CJ Muse – Lehman Brothers

Okay. Was there an impact on pricing because of this to that particular customer?

Jim Flaws

It didn’t impact our total pricing or our normal pricing. However, the particular way in which this manufacturing event presented itself is it also gave our customer some issues in their factory and we helped them make that right in terms of that economic impact on price per se where we try to make that right for the impact on their throughput.

CJ Muse – Lehman Brothers

That’s great. And then I guess, on the SG&A front, Jim, I think you guided the 14% and it came in at 15.4% or roughly $20 million higher than what you’re looking for initially. Can you comment on what happened there and how we should think about the SG&A going forward?

Jim Flaws

I don’t see – I don’t think there’s anything material on SG&A during the year in the market. We are spending a little bit but there’s nothing material no material change.

CJ Muse – Lehman Brothers

Okay. And then I guess, last question from me. Given some of the uncertainly with inventory of panel makers running it 68 weeks and your comments about inventory at set assemblers, how do you think about managing your capacity additions? I know you said in the prior question that you’re sticking to your plans but do you see yourself at the margin delaying by a quarter or so just to make sure that keep glass supply tight?

Jim Flaws

So first of all, we don’t think panel makers are at 6 to 8. The only place anybody is above there maybe a couple of people, particularly in China, who are above 6 but the Taiwanese, which is the most important to us, are 5 and in Korea we’re lower. And second answer to your question, we don’t intend to change our capacity plans. As we said before, we love to actually rebuild some inventories so we have the ability to do better as a customer supplier, we're running very light and so we’re not planning to make our change any changes at all. Basically, we’re running we ran full in Q2.

Wendell Weeks

And the build what Jim is saying, you take a little step back to understand why we put in the capacity. We do is we start with an all based on our view of the end-market demand. We do our best not to follow the panel makers to their cycles of putting in too much capacity. It's too little. We say, what we believe is going to happen in that market demand and we build for that, and as long as we do that and glass supply should remain relatively in balance with demand which should in turn support our pricing strategy. So we do our best not to overreact to the supply chain prohibitions that we’re experiencing right now. Because if we do, you can very easily end up in the wrong place. We go to our pricing strategy stand point or on the other hand from the service and share standpoint and I think that’s why we call the glass model that Jim just went through. I think it’s very informative and helpful.

CJ Muse – Lehman Brothers

Great. Very helpful. Thank you.

Operator

And our next question comes from the line of Steven Fox with Merrill Lynch. Please go ahead.

Steven Fox – Merrill Lynch

Hi, good morning. I have two questions. First of all, is there any other specifics you can provide on the manufacturing issue in terms of what exactly happened?

Jim Flaws

Sure. We had an employee who didn’t operate to our SOP. That’s very rare that something like that occur and we had to recover from it.

Steven Fox – Merrill Lynch

Okay. And in terms of what kind of generation glass this was? Was this larger sized glass I assume?

Wendell Weeks

We don’t want to really comment on it. There’s been plenty of speculation about this item.

Steven Fox – Merrill Lynch

Okay.

Wendell Weeks

– noise level in Japan and I’m sure if you are really curious you could find somebody with a theory but I’m not going to give any of those theories to you, Steven.

Steven Fox – Merrill Lynch

Okay. Fair enough. And then the last question would just be on – in terms of what the customers and the retail checks are turning up, there’s definitely a risk that the economy could get worse in the second half of the year. Are your customers anticipating some of that in the orders they’re talking about and what does that mean also from next year (inaudible) year-over-year but do you expect the steady mix of TV sales in the second half? You just talked about those impacts from changes in the economic environment?

Jim Flaws

Well, I think, we’ve been dealing with this all year long, Steve. The fear that the – every time everybody asked us if the next quarter where they think the economy will reach up and grab us and so it’s very possible but we kind of – we’re weathering our way through one of the weaker seasons at retail in which is late spring or early summer and it looks like it’s going okay and then we run into the holiday and back-to-school. I think the only thing that we can say from our customers' point of view is they’re expecting to have terrific prices at retail on the back after the year. We’re hearing fabulous prices for 32-inch televisions. So that perhaps could influence size a little bit but we’re still having people plan on quite a strong retail – strong fourth quarter retail.

Steven Fox – Merrill Lynch

Great. Thank you.

Wendell Weeks

I want to build just this a little bit on what Jim said because I said he has had the conversation with our chief operating officer this morning, Peter Volanakis, and he was commenting actually on the slide that Jim showed when he was doing the walk through this morning with you on the conference call which is when people get concerned about the economy which is granted not a great economy right now, they tend to compare that with, for instance, sort or 25% to 30% growth that we’re talking about and it sounds like, wow, that much growth in a consumer product in this economic environment, does that make sense? But what people miss is that (inaudible) let's take a look at June. I want to reiterate something that Jim went through is categorical growth. If you add up all the different technology types for Display LCD, PDP, rear projection, and CRT, and say what was category growth year-over-year in June in the US sell through. It's only up 4% right? And so that actually jives very well with the data that Peter Volanakis has presented early in the year that said we actually have gone back and analyzed past times of economic malaise and what you see is the television sales tend to hold up in that.

So 4% growth in this type of environment doesn’t t sound that bad or it doesn’t sound like much, but then within that figure, what you see is the old technologies really getting slaughtered. So you got a rear projection and CRT down 70% and that makes room for the strong flat panel growth like LCD above 35% and I think people have a hard time keeping all that in their minds. But if you take a look at it 4% growth makes some sense in this economy and then the power of penetration of the new technology is what’s driving our growth rate so much higher. I just think it’s important you keep in mind.

Operator

Our next question comes from the line of Brent Woodward [ph] with JP Morgan. Please go ahead sir.

Brent Woodward – JP Morgan

Yes. Hi. Good morning.

Jim Flaws

Good morning Bert.

Brent Woodward – JP Morgan

Jim, in your prepared remarks you talked about the on a go forward basis, you feel that panel makers are going to run at relatively lower utilization rates than they have in the past, yet you still feel that you’re going to run at basically capacity. So is that statement essentially saying that you think the review of the market is definitely higher, kind of relative to where you're at right now?

Jim Flaws

That our view of the market is higher than their view, is that what you said?

Brent Woodward – JP Morgan

No. I'm just trying to think that why would they be running at lower utilization rates certainly in the back half of the year when you have strong seasonal demand, relative to you guys running at a 100% capacity?

Jim Flaws

Well, remember we're talking about our shipments in our base business being at worst flat to Q2. So and they could be up and then you know that SCP to be quite strong. We’re going to – we obviously could make a little more in Q3 than what that forecast implies and we‘re going to rebuild some inventory but not a whole lot. We think their utilization trends are really reflecting their desire to try to help stabilize the panel pricing for themselves which will occur with the set assembly. It works off some of the inventory but in talking to all of our customers, we’re not getting a sense that people are having a different view with the end market than what we do. What we have is that there is some uncorrection [ph] in the supply chain. When frankly you go back to the beginning of the year, we knew that people were building – the question was whether it was too much or not and they’re now – their point of view is probably it did turn out to be a little too much.

But we’re not that different in terms of what we’re running versus what we think the end market is.

Wendell Weeks

The panel makers – remember also they started off with more capacity in the ground relative to demand than we do, right? So that – because they have built in to their own – their own views of share et cetera, so that also makes it hard to relate directly their utilization to our utilization if that makes any sense to you.

Brent Woodward – JP Morgan

Right. Okay. And Wendell, on the penetration rate, can you guys give us an update on globally where you see penetration rates right now. I mean if you look at the NPD data, the US penetration rate for LCD is running at about 82% and at the start of the year and you forecast North American penetration rate at 77%. So it seems like it's running considerably higher than you initially thought. I wonder if you could describe a little bit more insight into that globally.

Jim Flaws

I think the danger with the penetration rate heard is always – what's happening with CRTs? So clearly, CRTs are falling more rapidly. Not everybody who is going to purchase one of those is turning over to purchase an LCD. Quite a few are. So that's what I think is making the penetration rate look higher than what we originally expected. The absolute units of LCDs around the world appear to be basically on track with what we said originally but because there’s fewer CRTs being sold that is changing the penetration rate.

Brent Woodward – JP Morgan

Got it. Okay.

Wendell Weeks

That is very well said sir. Some of that – the economic impact that people are concerned about is being felt primarily by the old technology. Correct?

Brent Woodward – JP Morgan

Right. Okay. Thank you.

Operator

And our next question comes from the line of Vijay Rakesh with Thinkpanmure. Please go ahead.

Vijay Rakesh – Thinkpanmure

Yes. Hi guys. Just going to go over this whole retail and panel production time once again. You said Taiwan inventory was up from 4 to 5 weeks which is seasonal given that they’re going into Q3. Why then would they be cutting utilization back 10% for the quarter? It just seems if Q3 is going to be strong that they would – and things are – the build up is fierce and they’ll continue to go with it.

Jim Flaws

Their cutbacks are related too because even they’ve seen panel prices fall very dramatically. We’ve often warned that this is a leading indicator and they – because of the panel price drops, it’s really an indication of the inventory not at their level, but really, what’s happening at set assemble level where we do think there’s been a substantial build. So, yes, people are preparing for seasonally stronger back half of the year but there clearly is more than is needed for that at this stage and that’s why that’s showing up in panel prices and the panel makers are reacting very appropriately to trim back a little.

To just comment on the utilization comment a little bit more again. There’s a danger in using percent here because the panel makers actually were adding capacity. So our actual shipments in our base business' current turnout would be about the same as what we shipped in Q2 even though the overall utilization cut sounds like it’s down quite a bit. Remember they had – they were having capacity added at this point in time. So we could turn out to ship them about the same amount of glass in the quarter, obviously lower in the month of August than we were in June and July but September could be greater than that, end up with a flat quarter.

Vijay Rakesh – Thinkpanmure

Okay, so if their July/August is coming down and your glass shipment is coming – going up quarter to quarter, what are we missing? You have heard AUO, CMO, LPL. All the panel guys cut back on utilization except for Samsung. What is missing in that equation?

Jim Flaws

I don’t think there’s anything missing in the equation. What – you have to look at what their area of shipments are. A number of people have talked about an increase in the area of shipments, what they’re taking in at glass from (inaudible) their inventories in total but I don’t think you’re seeing anything wrong with the math and the model.

Wendell Weeks

I think the important thing always to do and we really worked hard at this starting a number of years ago is you’ve got to figure out where you think the end market is. Now, we still have half the year left. We don’t know exactly what’s going to happen in retail and sell through in that back half of the year. Maybe there will be an impact. May be it won’t be as good as it is that we’ve experienced in the first half. All we have is sort of looking in the rearview mirror. When you look at the rearview mirror, what’s happened through June, you see very strong sell through performance. The sell through performance that really supports what we’ve been saying, which is, we’re going to grow LCD glass in the upper end about 25% to 30% zone. You got to spend your energy on what do you think is going to happen in the back half on sell through and do you buy what we currently believe, we think very plausibly what we see in the total year working. And then to not get fooled by what happens between set makers, panel makers, what happens with the given utilization, what happens here on price or they’re on price. As long as you’re trying to figure out how a longer time period's going to work, a year, something like that, then that sort of logic will carry you through any of this sort of short term perturbations that you’ll experience trying to track a bubble through the supply chain.

Vijay Rakesh – Thinkpanmure

Got it. And then lastly, on the gross margin side came down to about 200 BIPS as you mentioned, 50 BIPS of that was a manufacturing issue. The guidance is for 49 plus on the full spectrum, but is that kind of where first quarter is impacting it and is that where margins will be going forward?

Jim Flaws

So, for the corporation we saw guidance to be at least 50% in Q3. What drove it down in Q2 was a combination of manufacturing problem and the rest was the mix of the business with telecom.

Vijay Rakesh – Thinkpanmure

Got it. Okay. Thanks a lot.

Operator

Next question comes from the line of John Harmon – Needham & Company. Please go ahead

John Harmon – Needham & Company

Hi. Good morning.

Jim Flaws

Good morning.

Wendell Weeks

Good morning.

John Harmon – Needham & Company

I guess just sorting of thinking about this. You're making glass base on your view of the year which you've made perfectly clear but seems like in terms of the inventory, there was doubt that maybe the industry ran a little hotter than it should in the second quarter, which would imply in the third quarter. There could be some excess capacity around there with some of the panel makers cutting capacity. Is that reasonable and could there be any less affect on pricing?

Jim Flaws

Excess capacity in glass?

John Harmon – Needham & Company

Yes. Given that – certainly some panel makers that have been running in full capacity are running at lower capacity that would imply there might be some excess glass out there?

Jim Flaws

So we would say no which either – there might be a small amount but you know in an industry that takes 500 million square feet in quarter, if there’s an extra 20 million square feet, there might be available. It's not going to influence pricing. We’re definitely not changing pricing.

Wendell Weeks

So what we try to do in the analytics is integrate. When you see in those public announcements from the panel makers of what they’re going to do with their utilization. What we try to do is integrate all that into the guidance that Jim just gave you. Total family glass shipment volume being up 49% quarter three versus quarter two which were tighter than we expect obviously, to ship more glass in quarter three than we did in quarter two. And so we try to integrate all that utilization input and then that‘s where we based our guidance on.

John Harmon – Needham & Company

Okay. Thank you. And just one more please, it seems – I think panel makers got cut up short. The last time we had a similar type of inventory behavior but given if it takes three months to go from glass to finish television, given the strong fourth quarter seasonality, in other words, if you want a TV on the shelf by the holidays, you probably got to make the glass this quarter. Do you think the panel makers might be little short sighted again and not thinking about the strong seasonality of the fourth quarter?

Jim Flaws

No, we don’t think the panel makers are short sighted. We think they are acting very appropriately. We do think that there’s a large amount of inventory at set assembly level then we can help in all the back half of the year and so we don’t think they're making a bad decision with what they’re doing now.

We don’t expect this lowering of utilization rates to stay there for a long period of time. They clearly want to influence the panel pricing environment but we clearly expect them to begin ramping back up. I think it will vary a little differently for each panel maker, particularly relative to their strength in the end market but we definitely expect them to ramp back up.

John Harmon – Needham & Company

Okay. Thank you.

Operator

Next question comes from the line of Carter Shoop with Deutsche Bank. Please go ahead.

Carter Shoop – Deutsche Bank

Hi. Good morning.

Jim Flaws

Good morning.

Carter Shoop – Deutsche Bank

A couple of quick questions here on the manufacturing problems, can you quantify the anticipated drag in 3Q?

Jim Flaws

I don’t think – I will be surprised if we would be even talking about it in terms of a drag.

Carter Shoop – Deutsche Bank

Okay. In regards to the inventory level of the Taiwanese panel customers, any thoughts on how it went from 4 to 5 weeks from the beginning to the end of the quarter? Do you have a sense (inaudible) the information, but do you have a sense on where inventories were or are closing out this month?

Jim Flaws

No. It's – the month isn't even over yet. It doesn't end until tomorrow. I’m sorry we don’t know.

Carter Shoop – Deutsche Bank

Two more quick ones. For SCP, you talked about $15 million I think it's in charges. Is that in 3Q that you're anticipating and can you elaborate on that?

Jim Flaws

That was an effects movement.

Carter Shoop – Deutsche Bank

$15 million?

Jim Flaws

In comparison Q3 versus Q2, there’s $15 million effects downward – (inaudible) Q3 versus Q2 with the use of – 108.

Carter Shoop – Deutsche Bank

Okay. I’m trying to better understand the comments about SCP earnings contribution only being flat to up slightly. If you take the mid point, the volume, you take a 3% effects drag and a 2% drag to pricing, it seems like it should be up at least 5%?

Jim Flaws

We're bringing on new capacity to Korea to get prepared and that will bring additional costing but it won’t be in any output this quarter. The other thing is the tax rate will go up just slightly in Q3 versus Q2. So those two things are unfortunately combined with the effects kind of dampening the fabulous volume were getting.

Carter Shoop – Deutsche Bank

That’s helpful. Last question, can you discuss your level of confidence about maintaining your present strategy into 2009, as it sounds like you're anticipating a moderate oversupply situation at your customers?

Jim Flaws

We’re very confident about maintaining our pricing strategy. We’ve said and as we’ve demonstrated in 2007 that we’re willing to stick with this and as long as we’re reasonably correct on the end-market and how it flows through the supply chain, we think our strategy is are very good and we will stick to it.

Carter Shoop – Deutsche Bank

That’s helpful. Thank you very much.

Operator

The next question comes from the line of John Roberts with Buckingham Research. Please go ahead.

John Roberts – Buckingham Research

Good morning guys.

Jim Flaws

Good morning.

Wendell Weeks

Good morning.

John Roberts – Buckingham Research

Could you give us an update in your strategy for requiring deposits in advance of glass expansions? We’re working that down. I don’t know how that trends over the next several quarters to next couple of years.

Jim Flaws

Well, we’re not getting any new deposits for glass and so we just it's working its way out in terms of our casual statement. We break it out for it separately but we just began this in 2005 and it's basically winding its way off and will all be gone pretty soon in terms of impact on the cash flow statement.

John Roberts – Buckingham Research

Have there been any recent changes to payment terms, I know you gave us average selling pricing but is the duration or terms of it contracted change at all?

Jim Flaws

There's been no change in terms of our day sales outstanding what we ask our customers to pay on recently. Remember the way that deposits work. At the moment, (inaudible) we get these two things separate. Deposits are – when somebody gets an invoice from us and then goes to pay it, they're allowed to use a certain amount of their deposit as effect, I'm going to send you X amount of dollars. Please take some out of this deposit I gave you and that’s all regulated. But we have not changed our terms to customers saying, “Hey you're going to get X more days to pay."

John Roberts – Buckingham Research

Thank you.

Operator

The next question comes from the line of Jeff Evanson with Sanford Bernstein. Please go ahead.

Jeff Evanson – Sanford Bernstein

Good morning. I'm wondering as you look at the strength of the A-brand as you call them that’s promoting much more rapid growth in SCPs and in Taiwan say, how that your B-brands might respond and what that would mean for you all?

Wendell Weeks

That's a great question and I would say also one of the hardest things for us to predict is what we call regional mix that you usually plays out around this A-brand versus B-brand dialogue. So what we believe is that the A-brands will continue to be strong this year and that the B-brands will have to follow and therefore you’ll get some recovery there as well. But I would say it’s always hard to forecast what’s going to happen in the end-market. That's stark, right? And then we try to pick which of the brands are going to have most share of propensity towards air or goes up. So I would hate to say anything to predict definitely about it.

Jeff Evanson – Sanford Bernstein

The second is, as you think about the mix between SCP and the wholly-owned business, clearly from a revenue perspective, it’s better off if the sale happens at the wholly-owned business, Taiwan or Japan. What about from an earnings perspective, is there a preference for you all where the glass goes?

Jim Flaws

We still prefer that it shows up on our wholly-owned business even though as SCP is very profitable but clearly getting 100% of that revenue even though SCP is very efficient, you'd rather have it. But we're delighted to have our shared position with the two large players in Korea and so we have no regrets.

Jeff Evanson – Sanford Bernstein

And counting the royalty that you get on SCP, how long does that royalty stand in place?

Jim Flaws

A long time.

Jeff Evanson – Sanford Bernstein

Great. Thanks guys.

Operator

The next question comes from the line of Ajit Pai with Thomas Weisel Partners. Please go ahead.

Ajit Pai – Thomas Weisel Partners

Yes. Good morning.

Jim Flaws

Good morning.

Ajit Pai – Thomas Weisel Partners

Two quick questions. One is about your second largest consolidated business, that’s your telecom business. If I look at the revenues, while it's growing nicely it seems to have sort of negative operating leverage. Your earnings actually operating income is down, your net earnings are down while the revenues are up.

Can you give us some color as to one of the safety factors that you’ve mentioned about the table side of things, inflation [ph] pressures there, is there something else that’s impacting those earnings and when that can change, or when will that change?

And then the second is in your Life Sciences segment, you had some pretty incredible profitability this quarter almost 20% operating margins or close over there, can you give us some colors as to whether this is a one-time issue or it’s on an ongoing basis, you actually expect profitability that’s where it is now.

Jim Flaws

For (inaudible) cable let (inaudible) Life Sciences, so we definitely in telecom did not have the profitability leverage we would have liked with the volume. There are a couple of things going on, we clearly have some material pricing cost increases I’ve talked about and we’re moving to recover that.

We did have some additional costs that we had to put in ourselves to help us. We implemented a new supply chain system which we’ve been planning for quite a while but in order to bridge as we went through it and will not harm customer shipments, we did add some cost.

And lastly within the mix of products within telecom, we do have one richer product that has been on decline. We’ve known it was on decline and that decline has accelerated a little bit so that’s what’s going on in telecom but we obviously are not happy with the margin weakness that we’ve seen in telecom and are working very quickly to try and get that back so that we get the volume if it falls to the bottom line. Wendell, you want to comment on the great performance we’re having in Life Sciences.

Wendell Weeks

Well first of all, thank you fro noticing Life Sciences. That profitability is exactly what our strategies and efforts have been about and we planned for that to be the way our Life Science business looks going forward.

Ajit Pai – Thomas Weisel Partners

Okay and then on the telecom side, is there any change in the pricing environment, is it a pricing issue not in terms of the cost of goods sold to you but more in terms of what you can charge for your products that is impairing the ability to expand those margins or is everything on track with the second plant you’ve brought in line or are there any unexpected expenses that you faced over there?

Jim Flaws

There’s no issue with Concord on fiber – fibers going terrifically. The margin issues are really occurring in our cable systems of business and we are going to move to raise prices and are notifying our customers there but it’s really more of a cost base issue and mix issue within cable systems. But in terms of our manufacturing, particularly in fiber, we’re doing fabulous.

Ajit Pai – Thomas Weisel Partners

And that leverage should start showing up over the next couple of quarters from the fiber side?

Jim Flaws

You’ve definitely been seeing fiber leverage already but the only problem is fiber is just too small within the overall mix but we’re definitely getting it.

Ajit Pai – Thomas Weisel Partners

Okay, thank you so much.

Jim Flaws

Thank you.

Operator

Our next question comes from the line of Brendan Furlong with Miller Tabak. Please go ahead.

Brendan Furlong – Miller Tabak

Good morning guys, thanks for taking my call. Touching mark on the gross margin issue, the 50 basis points hit that you took on the manufacturing problem, is it a good assumption that you’d get a 50 basis points back this quarter and then I’ve got quite a couple of other questions.

Jim Flaws

We certainly hope to get a lot of it back.

Brendan Furlong – Miller Tabak

Okay and then the other question I have, from the industry went through panel bills, inventory driven down cycle if you will because the demand obviously is there on the long-term basis, do you think that brought us back out of the cycle was the panel makers took their CapEx? With them bringing down new libation are you hearing anything from the panel makers that possibly they might rein in their CapEx a little bit in ’09?

Jim Flaws

We have not heard any change in capital spending but I do think it may be a little premature to hear about that. I think that more likely what you’ll see is a delay in start-up with some of these new facilities rather than an absolute cancellation of one of them.

Brendan Furlong – Miller Tabak

Well that’s good news. My last question is, you talked about the build up in the A list set assembly guide. Obviously Sony had a big inventory build yesterday when they reported, why wouldn’t – why wouldn’t that fit into SCP – your outlook for SCP next quarter?

Jim Flaws

Well SCP supplies Samsung, though obviously it supplies Sony but for a part of Sony’s product. Sony also buys from a number of players as you think you know they don’t manufacture anywhere really they’ll (inaudible) themselves but in terms of what Samsung has done particularly with their own trim backs and what they buy from the Taiwanese , they’re showing no change in their production rates and that’s what they demonstrate – that’s what they called out publicly.

Brendan Furlong

Understood. Thank you very mech.

Operator

And our next question comes from the line of Nikos Theodosopoulos with UBS. Please go ahead.

Nikos Theodosopoulos – UBS

Yes. Thanks. I’ve just three very quick questions. On the production revenues of $24 million or the impact, I should say, is that something you think is pushed out or do you – was it lost revenue, in other words, did competitors make up the difference in the quarter?

Jim Flaws

It’s hard to tell. It’s hard to tell.

Nikos Theodosopoulos – UBS

Okay.

Jim Flaws

And now, there’s a – Jim is saying, we have our ideal which is you can’t make glass in the past.

Nikos Theodosopoulos

Correct. Okay. Fair enough.

Jim Flaws

Okay.

Nikos Theodosopoulos – UBS

On gross margin, can you give us the SCP gross margin in the quarter and it looked like the LCD (inaudible) was down sequentially. I guess the production (inaudible) in FX led to that but can you give some color on that?

Jim Flaws

Nikos, the first part SCP gross margins in the quarter were 78%.

Nikos Theodosopoulos

Okay. What – why was that – what led to that strength?

Wendell Weeks

They’re running very well. They had great volume growth as you saw and great – we’re starting to see the second-gen 8 ramp at Samsung. So, SCP has rebounded from some manufacturing issues that beginning to get the benefit of Eagle XG. We’re delighted by that.

Nikos Theodosopoulos – UBS

You think that’s kind of a new level for the company, are you going forward or were there some one time things that helped or what’s your sense on that?

Jim Flaws

As I’ve mentioned earlier, I want to respond to when the question was seen and we will have a little bit of a drag this upcoming quarter because we have some new capacity that’s coming along that will lower it a little bit but definitely we expect the SCP to have gross margins in the 70s.

Nikos Theodosopoulos – UBS

Okay. And my last question was on environmental. It looks like the EBIT margins went double digit this quarter which was – I think, obviously positive. Is that something that’s also sustainable going forward or was there something one time that helped there?

Jim Flaws

I wouldn’t call it one time. I think what you’re seeing is what we’ve been talking about which is that diesel’s profitability is going to continue to improve. However, it still got some lumpiness to it.

For instance, in quarter two, one of the reasons our diesel sales were up was, what you hope for will see on TV pretty shortly – which is we’ve sold and awful lot of diesel particularly filtered to Beijing to help clean up the air before all the athletes arrive. So it still got some loppiness to it. We don’t yet have the diesel business exactly the way we want it in terms of revenue production and we still have some of the issues with the US trucking industry. So it’s got – it’s still a little too early but in general the trend that you’re noting is the trend we wanted on, is the trend we’re planning on, and hopefully environmental is only going to continue to get better over time.

Nikos Theodosopoulos – UBS

Okay. Thanks for answering the question.

Operator

And our next question comes from the line of Jim Silva with Citigroup. Please go ahead.

Jim Silva – Citigroup

Thanks. Could you give a little bit of color on – you had planned in Q2 to rebuild a little bit of your internal glass inventory and with the production issues that you’ve had, you worked some down. Can you give some color on how much you worked down versus what your plan was and what you need to restock or has it been fully done – it sounds like you actually need to restock a little bit of Corning internal glass.

Jim Flaws

I might – I don’t have a specific number but we’d love to build some inventory and we’re now our (inaudible) in twelve months in a row where we were going to – unable to build any inventory. So we’d be happy to build some but I’m not going to dollarize it.

Jim Silva – Citigroup

Alright.

Jim Flaws

We’d like to get out of here, shipping would like to get out of a lot of different things. It’s just too tight right now.

Jim Silva – Citigroup

Okay, but could you give us any type of – without a dollar amount like a percent or even like that, less than 5%, less than 10%, or any parameters there?

Jim Flaws

No, I will no comment.

Jim Silva – Citigroup

Okay. In last question, the production, is it fully resolved?

Jim Flaws

As we said in the comment, we’re steadily improving. I wouldn’t call it fully resolved. It takes a while to get it behind us entirely. We’re very – we feel very good about the improvement panel to run. We’re confident that we're going to get this behind us but it’s not totally behind us yet.

Jim Silva – Citigroup

And the timeline for that totally behind you, would that be exiting Q3?

Jim Flaws

Well, if I was able to tell that, then it would never happen to begin with right? So, – – this is a – what our current plan is that the impact this quarter will not be material, and that’s our current plan, but you never know until you’re out of it.

Jim Silva – Citigroup

Okay, thank you.

Operator

And our next question comes from the line of William Bogow [ph] with Omega Advisors, please go ahead. Mr. Bogow, your line is open.

Wendell Weeks

Let’s go to the next question.

Jim Flaws

The next is the last one too.

Operator

Thank you and our final question comes from the line of Andrew Abrams with Avian Securities, please go ahead.

Andrew Abrams – Avian Securities

Two questions. First, have you guys seen any change in your cost structure, I mean your manufacturing cost structure, I know the panel guys have seen some cost increases on the material side how much of any have you seen? And second, if we could talk just a little bit more about the size issue, let’s make the assumption in this discussion that smaller panels are being sold at least in North America relative to what was expected earlier in the year or may be late last year. If we see increases in the number of those units, where do we start to get parity with what might have been larger units sold in assumptions made last year?

Jim Flaws

I will answer on the second question first, so you need to ask where we originally talked about the growth going from a 22 million televisions to about 28 million to 29 million, and If you were to assume that others make up numbers, let say 2 million of those which supposed to be at growth supposed to be 40s and turned out to be 32 inch televisions and you get about the half amount of glass in the 32 versus 40, so you have to (inaudible) sell it. If you sell the two million of 32s instead of two million of 40s, you got to sell up to 2 million extra 32s to make up that glass difference.

As our data show, we’re not yet seeing that, but if that‘s how you would estimate the impact. On cost, I won’t dollarize for the corporation but we are seeing cost increases in materials, principally resins and life sciences and the products that go into a cable systems either hardware or armory in the cable. They are not material enough that we know, it’s changing our results for the corporation obviously on top of it more to raise prices there.

Energy is important to us, over all but we – energy tends to be as a percentage of our cost, to be below 10%, so it has not been a significant item for us, yet but we are obviously paying attention to it. We’ve not it show up on our primary raw material which is sand and clay, although certainly transportation costs have factored in that.

Andrew Abrams – Avian Securities

Great thank you.

Operator

I’m going to turn to Jim for some brief closing comments.

Jim Flaws

I have a couple of investor-related announcement and also some closing comments. First of all, Ken will be hosting an Investor luncheon in Toronto on August 6. If you’d like to attend, give him a call and Wendell will be presenting at the City Group Technology conference in New York City on September 3.

Now regarding the results over the first six months of the year, I could not have been more pleased especially in light of economic environment we’ve been in. Our first half sales were up 21% versus a year ago and our EPS excluding – special items is up 50%.

Looking ahead, we remain delighted about our current business opportunities and opportunities for the future. There has been some negative reactions to the news coming out of the Displays supply chain. We believe that market trends of LC growth continue remain robust. We hope to remind investors in any given quarter, there can be adjustments in supply chain. Obviously, the panel makers and set assemblers are doing that right now.

Key for us will always be the underlying growth rates of the end markets for the LCD participates in and specially the penetration of the television or TV market. We have no change to our longer term views of this growth. We also hope investors were pleased with our decision to return additional cash back to share holders, which is consistent with our strategic framework. In addition, we also hope investors were pleased with (inaudible) our decision in selling immediately following the quarter. You’ll be happy to note that all 16 B Executives will refrain from doing so this quarter.

In closing, we remain optimistic about our prospects, short term and long term and hope that investors will share our optimism.

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 a.m. ET today and will run until 5.00 pm ET on Wednesday, August 13th. To listen, dial 800-475-6701. No password is required. The audio cast will also be available on our website during that time. Alex that concludes our call this morning, please disconnect all lines.

Operator

Thank you ladies and gentleman, now that concludes the Corning’s second quarter results conference call. Thank you for your participation, you may now disconnect.

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Source: Corning Incorporated Q2 2008 Earnings Call Transcript
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