Corning's Disappointing Outlook: Interview with CFO

| About: Corning Inc. (GLW)

Corning (NYSE:GLW) posted Q2 revenue of $1.69 billion and profits before special items of 49 cents a share. The top-line was just shy of the Street consensus of $1.72 billion, and profits were in line with expectations. The company said glass volume increased 8% sequentially and 33% year over year.

The LCD glass producer sees Q3 revenue of $1.65 billion to $1.72 billion and profits of 48-51 cents a share. The Street has been looking for $1.79 billion and 50 cents. The company expects glass volume to increase 4%-9% sequentially.

Corning said Q3 guidance assumes a yen-to-U.S. dollar exchange rate of 108, compared to an exchange rate of 105 in Q2. The weaker yen is expected to reduce Q3 sales and net income by about $30 million.

Corning said some LCD panel makers appear to be cutting production. “We have recently seen some panel makers, primarily in Taiwan, reduce their utilization rates due to what we believe is an inventory build at the set assembly level of the supply chain,” CFO Jim Flaws said in a statement. “Despite this normal supply chain correction, we continue to believe that the LCD glass market will grow at the upper end of our original guidance range of 25% to 30% this year because retail demand for LCD products has remained strong.”

The company expects its telecom segment sales to be flat to up 5% sequentially in Q3. Environmental technologies segment sales are expected to be flat. Specialty materials segments sales are also seen flat; the life science segment is expected to be “‘consistent with the previous quarter” as well. Dow Corning’s earnings are expected to increase 20%-30%. Samsung Corning Precision earnings are expected to be flat to up slightly, with volume gains offset by exchange rates and price declines.

The company noted that the Life Sciences segment and Corning Cable Systems business have seen “significant material cost increases” and will raise prices to offset these costs. “Dow Corning is also experiencing significant inflation in certain raw materials costs and has implemented price increases as a result,” the company said.

The company also announced a new $1 billion stock repurchase plan.

The sell-off in Corning shares today reflects disappointment with the company’s third quarter revenue outlook. In an interview with Tech Trader Daily this morning, Corning CFO Jim Flaws says the lower-than-expected forecast reflects two underlying issues.

One, the company expects some strengthening of the yen against the dollar in Q3. Corning is forecasting an average exchange rate of 108 yen to the dollar; the rate in Q2 was 105 yen. And Flaws notes that the Street had been forecasting 103 yen to the dollar for Q3. The 5 yen difference represents a $45 million swing in the top-line, he notes.

The other issue, he says, is that some of the company’s Taiwanese panel customers are pulling back on glass purchases, as they see inventories building in the supply chain. Flaws says there are no signs yet of end-demand issues; but he says there is “quite a bit of inventory” at the set-assembly level, which is the layer of the supply chain in between retail and the panel manufacturers. Flaws says that the panel makers do not actually have excess inventory, but that they would without some reduction in output. “It’s a class supply chain correction, but we have no evidence to date of an end market slowdown.”

Flaws says that the data shows continued strong demand for televisions, with industry sales up 35% in the U.S. in June, with 62% growth in China, despite the earthquake.

Meanwhile, Flaws says there is no evidence, despite some analyst assertions to the contrary, that U.S. TV buyers are switching to smaller screen sizes. He says that the percentage of screens sold in June that were above 40 inches was the same in June as in January. And he says that on a year-over-year basis, the percentage is up dramatically. He says that it is certainly possible that some buyers later in the year could decide to buy a 32-inch set rather than a 40-inch as a way to save some money; a trend towards smaller sets could impact glass demand. But they are not seeing that yet.

On the company’s diesel filter business, Flaws says that there has been no impact on demand from the macro slowdown in the light-duty diesel market; but he notes that demand in the heavy-duty diesel market has been under pressure for a year, with freight volumes down and people buying fewer new trucks.

As for Corning’s telecom business, Flaws says the growth in private networks this year has been slower than the company had expected, with financial services companies, or instance, not spending as much to build out their own networks. But he sees no big macro impact at this point on carrier spending on bandwidth.

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