Corning Incorporated
Q3 2008 Earnings Call Transcript

Published: 29 Oct 2008

[Operator:]

Welcome to Corning, Inc. third quarter results conference call. For the conference all participants’ lines are in a listen-only mode. However there will be an opportunity for your questions. (Operator Instructions) As a reminder, today’s call is being recorded. It’s now my pleasure to introduce to you Mr. Ken Sofio, Division Vice President of Investor Relations.

[Kenneth C. Sofio:]

Welcome to Corning’s third quarter conference call. This call is also being audio cast on our website. Jim Flaws, Vice Chairman and Chief Financial Officer, will lead the discussion. Wendell Weeks, our Chairman and Chief Executive Officer, will join for the Q&A. Before I turn it over to Jim, you should note that today’s remarks do contain forward-looking statements out of 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.

[James B. Flaws:]

This morning we released our results for the third quarter which can be found on our Investor Relations website. In addition, for those of you with web access we’ve posted several slides that will summarize the important data from this morning’s prepared remarks. These slides will be available on our website after our call as well. I’d like to begin with a top-level update on the display industry and our business. First, inventory turns measured in weeks improved panel maker and set assemblers in quarter three and are at healthier levels than they were before. However the Taiwanese panel makers continue to lower their utilization rates again in quarter four. We believe they and the supply chain in general are preparing for a potentially weaker retail season this fall, a seasonally lower first quarter and potentially slower consumer demand for LCD televisions and monitors in 2009. Evidence of this can be found in our recent announcements from panel makers and television makers such as Sony as well as recent retail data. US retail data for September showed LCD television unit sales were up 23% year-over-year but over the course of the month this growth rate slowed and we have seen further step-down in the first two weeks of October. We now expect panel makers in Taiwan to run at lower than 70% utilization in the fourth quarter. As a result volume in our wholly owned business will be lower. We now expect our volumes to be 20% to 30% lower sequentially in quarter four. We are quickly moving to reduce our capacity this quarter in our wholly owned business by shutting down glass tanks to meet these lower market expectations. This reduction in our capacity will significantly lower our gross margins in quarter four but will allow us to better match our glass supply with demand going forward. While the Korean panel makers continue to run at higher utilization rates than the Taiwanese, given Sony’s recent announcement of the apparent slowdown in retail demand we believe it is inevitable that softness will eventually show up at SCP. As a result we’re lowering our quarter four-volume expectations there as well. Given the slowdown in retail and cuts in panel utilization rates we have lowered our estimated growth rate for the entire glass market this year. For 2008 we now expect glass market volume to grow between 21% and 23% versus our original expectation of 25% to 30% growth. We feel that it’s likely that the consumer slowdown will continue into 2009 but it’s obviously very difficult to forecast next year at this point. However we think it’s prudent for us to plan on a lower growth rate in 2009 and plan our capacity accordingly. As a result we’re now using a market growth range of 5% to 15% for next year versus our most recent estimate of 15% to 25% growth. I want to caution you it’s very possible we’ll revise this range after we see the Q4 retail results and see the economic outlook for 2009. Now let me turn to the details starting with our income statement. Our third quarter sales were $1.56 billion, 2% under the low end of our guidance range. Lower volume in our display and environmental segments led to the sales miss. Compared to a year ago sales were flat. EPS excluding special items was $0.46 and actually slightly higher than our revised expectations. This represents a 21% increase over the third quarter EPS ex specials of $0.38 a year ago. Net income excluding special items was $732 million, an increase of 18% over last year’s third quarter net income excluding special items of $619 million. You should note that EPS and net income excluding special items are non-GAAP measures and the reconciliation to GAAP can be found on our website. Continuing down the income statement, gross margin in the third quarter was 47% as expected. The decline from quarter two gross margin, which was 50%, was primarily due to the impact of lower volumes in our display business. SG&A was $220 million or 14% of sales as expected. RD&E in the third quarter was $160 million, about 10% of sales. Equity earnings were $382 million in the third quarter compared to $360 million in the second quarter, a sequential increase of 6%. The increase was due to stronger earnings at both SCP and Dow Corning. Third quarter equity earnings include an $18 million special charge at Dow Corning and last year’s equity earnings included a restructuring charge of $18 million at Samsung Corning CRT. Compared to the third quarter of last year, total equity earnings increased 60%. Our tax rate in the third quarter was 14% and wrapping up our income statement our share count declined to 1.58 billion shares. Our third quarter results included net special gains of $36 million or $0.03 per share. We recognized a $43 million gain from the settlement of a longstanding tax dispute and also released an additional $70 million of US deferred tax asset valuation allowances. We’ll receive cash from the tax settlement in either quarter four or quarter one. These items were offset by a charge of $6 million related to the pending Pittsburgh Corning bankruptcy proceeding, a $14 million loss on the sale of a minor business, and a $39 million loss on cash and short-term investments. Lastly, we also had an $18 million reduction of equity earnings from Dow Corning related to losses on their cash and short-term investments. Including the special items our third quarter EPS was $0.49 per share. Now let me turn to the display segment. Third quarter sales were $696 million or 14% lower than quarter two. Volume at our wholly owned business was down 10% sequentially. Price declines were in line with previous quarters as we maintained our pricing strategy. Display segment sales were also negatively impacted by the yen moving from 105 in Q2 to an average of 108 in Q3. Equity from SCP’s LCD glass business was $259 million in the third quarter, an increase of 6% versus $244 million in Q2. The increase was driven by strong volume gains of 12% offset by price declines and the impact of the yen. Price declines were consistent in SCP with previous quarters. For your modeling purposes, SCP’s third quarter sales were $896 million compared to $842 million in the second quarter, an increase of 6%. Net income in the display segment which includes the equity earnings were $635 million in the third quarter and lower than the second quarter. In comparison to the third quarter of last year sales in our display segment were fairly consistent. Volume declined 2% and price declines were 8% year-over-year. Sales actually benefited from the strengthened yen year-over-year. Equity earnings from SCP’s LCD glass business were up 62% over Q3 of 2007 led by volume gains of 38%. Segment net income grew 16% versus last year. Now I’d like to spend a few minutes discussing the current supply chain and retail environment. We believe panel inventories at the Taiwanese panel makers fell by one week in august and another week in September. Panel inventories are now at an average of four weeks which is considered to be a healthy level. Regarding utilization rates, the Taiwanese entered Q3 running in the mid-80% range but dropped utilization rates through the month of august to the low to mid-70% range. The average for the quarter was around 75%. However we believe the Taiwanese could lower utilization rates again. In Korea the panel makers maintained very high utilization rates throughout quarter three in the low 90s. At the set assembly level our data is not as robust but we believe inventory levels fell to healthier levels at the end of the third quarter. On the retail side, we now have LCD TV unit sales for the US, China and Japan through September. Europe will be available in another two weeks. As a reminder, we use industry sources such as MPD, GFK, BCN and CMM. Let’s start with the US September LCD TV unit sales which were up 23% year-over-year. This is lower than the expectations we had set for September at the beginning of the year but not a surprise given the heightened economic worries and the significant decline in the stock market that took place during the month. While the LCD TV unit sales in the first week were very strong, they were much weaker in the last week of September. According to MPD, US LCD TV unit sales were up 27% year-over-year in the first week of September but up only 12% in the last week. This intuitively makes sense given the credit crisis turmoil began mid-month. We believe this trend continued to decline in the first two weeks of October although that data is now only preliminary. The question for us now

[Kenneth C. Sofio:]

We’re ready to take some questions now.

[Operator:]

(Operator Instructions) Our first question comes from [C.J. Muse] - Barclays Capital.

[[C.J. Muse]:]

On display gross margins, it looks like your COGS is going up by about $85 million which is a little bit higher than the 5 points you talked about for accelerated depreciation. Can you help me understand why that would go up so materially? Secondly, how should we think about gross margins for display going forward into 2009?

[James B. Flaws:]

We called out the one-time impact of accelerated depreciation. What this really is relates to our tanks where we take them down and we had remaining life and we’ve got to accelerate that depreciation because once we take them cold the value of that is worthless and we have to rebuild it. That’s about 5 points. Where we’re losing ground beyond that is that we are unwinding a series of [FX] hedges and we actually were growing our fixed costs because we’ve been programmed to have more capacity than what we had in the past quarter. Then obviously we have price declines of the 2% during this current quarter and clearly in a quarter where we’re making very strong changes to how we run, we’re not really getting any of our normal cost reductions. We regard that there is probably an impact of over 12 points of dislocation here. We are thinking very hard about what capacity we keep. We obviously don’t have a demand level for Q1 or Q2 next year at this point in time. We clearly have more capacity than what we’re cutting down to right now because we think we’ll grow back into it. But gross margins are obviously being penalized very heavily this quarter. We believe they will come back up next year as we finalize what level of capacity we keep for which quarter. I’m not prepared at this time to give you an absolute number for next year but clearly it’s going to be higher than this very low range we’re putting out to you today.

[[C.J. Muse]:]

In terms of that 12 points of dislocation you talked about, if I were to assume volumes were flat in Q1 versus Q4, does that mean that we should see a 12-point rise in your gross margin?

[James B. Flaws:]

I’m not going to offer you any more guidance than what I have right now.

[[C.J. Muse]:]

Regarding your glass volume guide for ’09, can you be specific to what you expect for your core business alone?

[James B. Flaws:]

No, I can’t. We don’t yet know how if this turns out to be this level what the split will be between Korea and our base business. I think our belief right now is it’s more likely that Korea will be stronger but it’s very hard for us to judge the absolute split of that at this stage.

[[C.J. Muse]:]

In terms of your pricing strategy, can you comment on what you’re seeing in terms of market share trends given the weakening environment? Have you been seizing some share because of holding the line on price?

[James B. Flaws:]

We don’t think there’s been any significant move on share at this point in time.

[Operator:]

Our next question comes from Nikos Theodosopoulos - UBS.

[Nikos Theodosopoulos:]

Maybe I could just follow up a little bit on the last question. On the comment about shutting down some tanks, how should we look at these? Are these permanent shutdowns? Are they temporary? I’m trying to understand what you’re doing there. And are these spread out across different regions or focused in one area? Also, the cap ex guidance you still have for this year would suggest a meaningful sequential uptick in cap ex which seems to be inconsistent with the comments you’re making about lowering capacity. Can you explain that a little bit?

[James B. Flaws:]

Let me do the cap ex first. The biggest amount of cap ex in Q4 is really around [Jin Ten]. It’s both a combination as we drive to completion there as well as in Japan and we do capital projects, there’s actually a lag when the cash flows out the door. So you’re seeing some of that really kicking up both in the pace of construction that really started in the summer very strongly as well as the cash lag. It’s really driven mostly by [Jin Ten]. We clearly are stopping construction on [Tai Chung] Phase 4 construction so most of the uptick is coming from [Jin Ten]. In terms of the tanks we’re taking down, by and large the tanks we’re taking down are being temporary. I say temporary meaning that we are taking them cold but we’re not taking them out permanently. There may be some tanks that we choose to rebuild with some of our new technology but fundamentally we’re still assuming that we’ll be running these tanks because we think the LCD business will resume growth and we’ll grow into it. That’s one of the things we’ve always assumed about this business. If we got it wrong for a period of time and had a little too much capacity, we’d have to adjust the running rates but eventually we’d need them again. So by and large, the majority of the tanks we’re taking down would be temporary using your language; however we’ll keep them cold as long as we need to keep them cold.

[Nikos Theodosopoulos:]

In the meantime your depreciation hit is only going to be one quarter for those tanks and then if and when those turn up again, there should be a positive impact on gross margin. Is that a fair way of looking at it?

[James B. Flaws:]

Yes. When they come back up there’s a positive on gross margin. You have to understand on the depreciation. What we’re taking out of depreciation and accelerating is the delivery system at a tank refractory. The building and the rest of the equipment is still sitting there; it’s just idle. So that depreciation continues on. Once we restart these you’ll see a big uptick. Obviously our volume is down 10% versus where it was in Q2 and now we’re talking about it being down another 20% to 30%. We have a huge volume downtick versus where we were and there’s a lot of overhead in the factories that was being absorbed by that. So if we get volume coming back, you’ll see a nice move up in gross margins.

[Operator:]

Our next question comes from Brian White - Collins Stewart LLC.

[Brian White:]

Just on the pricing environment, for the December quarter you’re expecting a 2% sequential decline in pricing. Is that correct?

[James B. Flaws:]

That’s correct.

[Brian White:]

I’m just curious. You’ve got panel makers losing money. You’ve talked about this meaningful deterioration in demand just recently. How will you be able to keep your pricing disciplined?

[Wendell P. Weeks:]

The first thing I’d point to is what happened in quarter three meaning that basic same question was leveled at us in quarter three. We once again said it was a good question but what we plan to do is to continue with our pricing strategy. As you saw from the announcement today in Jim’s comments, we did just that with our price coming down exactly as we said it would. So we’re planning on doing that again in quarter four. There’s always risk with a pricing strategy like this. Let’s do the positives and negatives on the balance. The positives for our ability to continue to execute our pricing strategy you see the actions that we’re taking to match our capacity with our view of the end market demand. In many ways that sets at the core of our pricing strategy that we build and maintain our capacity to our view of the end market demand. That move should help do that and our willingness to take the cost actions that are impacting our gross margin at this moment to put ourselves in a position to deal with the lower demand environment. On the negative side, we have as you point out our customers paying as high as well and our perceived premium we think versus our competition is growing so that’s some downside risk. As we balance that upside and downside risk together with our strong positive reputation on reliable supply and the quality of our product and our positions with the customers that really matter, it makes us believe at this time that we can maintain our pricing strategy.

[Brian White:]

On polysilicon, what type of pricing trends are you seeing in polysilicon?

[Wendell P. Weeks:]

It is still really too small of business to reach any statistically significant trend statement.

[James B. Flaws:]

Do you mean hemlock polysilicon?

[Brian White:]

Yes.

[Wendell P. Weeks:]

Oh. I thought you meant polysilicon on LCD. I apologize. Jim.

[James B. Flaws:]

Most of the business is really under contract so for us we’re just seeing the fixed pricing in the contracts that we put in place. Almost all the new capacity that ramped up this year is under contract. So we can’t tell much around significant changes in pricing. We are aware that there may be some weakness in the semiconductor market but that hasn’t really shown up for us yet.

[Operator:]

Our next question comes from Mark Sue - RBC Capital Markets.

[Mark Sue:]

Jim, considering the deteriorating environment, can glass volumes potentially be down next year or is that unrealistic? And how low can panel utilization rates get near term? If you can just help us extrapolate what we should see for volumes as we start 2009.

[James B. Flaws:]

I have to answer your first question by saying it’s possible but I don’t think probable that absolute volumes will go down for glass. Utilization rates, I think a lot will depend on the decision by some panel makers about how fast they ramp the new capacity. Via our judgment if market demand is weak, why would you ramp a new Gen 8.5 or Gen 8 when there’s overall demand weak. But I think that’s where it’s very important that as you think about calculating percents utilization, we’ve seen this mistake made in the past that a lot depends on how people put in place a new fab or they count that when they say they’re running at 70% or whether they don’t. We believe that some of the new capacity will not start up when it was originally supposed to nor will it ramp at the pace. But obviously the industry overall right now is operating at a much lower utilization rate. I can’t tell you exactly where it would be. Obviously we have seen in the past for short periods of time the industry go down to 50 but it’s hard to imagine that number for a sustained period of time.

[Mark Sue:]

What about right sizing the business? I understand R&D will stay near 10% but are there other things that we can do to show earnings growth next year in terms of cost savings?

[James B. Flaws:]

We haven’t given out a number for R&D next year at this stage so I think the question for us is

[Mark Sue:]

And lastly, tax rate? Any change there for next year.

[James B. Flaws:]

As of right now we still think we’ll be going back to accruing US taxes so if that changes we’ll update you but we still think it’s going to be the same as we disclosed previously.

[Operator:]

Our next question comes from Steven Fox - Merrill Lynch.

[Steven Fox:]

Going back to the market share question, how comfortable are you that your two major competitors are taking similar steps to control capacity and right size their business at this point? Do you have any insight into that?

[James B. Flaws:]

I really can’t comment on our competitors. You need to talk to them directly. We have seen several analyst reports that said that people were adjusting their capacity but I can’t comment on whether those are accurate or not. We think you should call them directly.

[Steven Fox:]

Getting back to the cost question, historically 10% has been a pretty good R&D bogey. For those of us trying to model next year, what can you say about how quickly you would react to what could be a tough first half in order to get the SG&A and R&D ratios into a reasonable range?

[James B. Flaws:]

We don’t think about it as a percent so I think the real question is

[Steven Fox:]

Relating to the equity income, if you look at your outlook for Q4 equity income, it doesn’t seem to imply much of a margin degradation in the SCP business but yet it sounds like you’re worried about that. Is that something we should think of happening maybe on a quarter lag you would see a substantial decrease in SCP margins say in Q1 similar to what we’re seeing this quarter in the wholly owned business?

[James B. Flaws:]

I think it’s very hard for us to judge because we may end up with this imbalance continuing and we clearly have outlined less weakness in Korea than what we’re seeing elsewhere. Therefore they shouldn’t have to have the same impact on their capacity reductions. But we don’t yet have a new operating plan tank-by-tank for Korea. When we do we’ll give you an update on what the impact might be for quarter one. But clearly we are not going to let SCP end up having a lot more capacity in whatever their market is going forward.

[Operator:]

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

[Carter Shoop:]

I wanted to talk a little bit about the capacity coming off line. I was hoping you guys could quantify how much capacity you’re planning to take off line and how long it’s going to take to actually take the tanks off line, be it the middle of this quarter, end of the quarter, first quarter, etc.?

[James B. Flaws:]

Clearly we talked about that our volume was down 10% versus Q2. We put a lot of that inventory in Q3. We’re talking about potentially the sales rate being down 20% or 30% so in total if we’re going to stay at this rate, we clearly could take that percent. Tanks are starting to come down as we speak. They’re all individual timings. But we expect to have a lot of this happen over the remainder of this quarter.

[Carter Shoop:]

When you look at cap ex at 2009, can we walk through where that cap ex is going in regard to how much is going to display versus other business segments and talk about how low that can come down depending on your current outlook for 2009?

[James B. Flaws:]

I’m not prepared to give you the details but display remains the biggest part of it. It will be the finish of the [Jin Ten]. We’re not going to change that. I think the remainder of the display capital will be very dependent on what we see as the pace of repairs and then cost reduction capital for display. It’s just too premature. We do have to spend some money on diesel despite the relatively low market vibrancy right now. We believe that we need capacity for 2010 so there will be some diesel capital spending. And we’re evaluating the capital spending in the rest of the company and just haven’t made any decisions yet. I can tell you it’s definitely going to one direction, and that’s down.

[Carter Shoop:]

My understanding for the Jin Ten facility was that we’re only going to see another $100 million to $200 million in 2009 versus 2008. Is that still a good figure to think about?

[James B. Flaws:]

I don’t think we’ve ever given out the details of Jin Ten at that level.

[Carter Shoop:]

Could you maybe comment about what maintenance cap ex would be for display on an ongoing basis, be it 2009 and beyond?

[James B. Flaws:]

No. I prefer not to do that today.

[Carter Shoop:]

Can you comment about foreign exchange in SCP, how the Korean won versus Japanese yen is impacting margins in the fourth quarter and what your assumptions are for the Korean won in the fourth quarter?

[James B. Flaws:]

We’re not looking for much change on the Korean won. We’re obviously not the world’s best predictors of foreign exchange. Clearly the won I think is giving some differential advantage to the Koreans at this stage in terms of the panel makers but beyond that we sell in yen in Korea and then obviously translate the results back to the United States into dollars.

[Carter Shoop:]

On days payable outstanding, it looks like they’ve almost doubled year-over-year. Can you walk through why that has increased and if that is sustainable going forward?

[James B. Flaws:]

I’d have to double-check that. It may be something to do with the pace at which the businesses are bringing down their spending because we often see that effect but we basically are not doing anything significant in terms of stretching out our payables.

[Operator:]

Our next question comes from Curtis Woodworth - J.P. Morgan.

[Curtis Woodworth:]

Is the majority of the capacity that you’re taking out related mainly to Taiwan?

[James B. Flaws:]

It’s Taiwan and Japan.

[Curtis Woodworth:]

Looking at the fourth quarter given the volume guidance down 20% to 30% in the wholly and 5% to 15% in SCP, what do you think the aggregate end market is going to look like in the fourth quarter and how much of an inventory reduction process is impacting that number?

[James B. Flaws:]

The aggregate market we would say is down somewhere between 10% to 20%. It shouldn’t be materially different from what we are. We don’t really think there’s a big share shift going on within the quarter. I think that in our numbers we’ve thought about maybe there’s 30 million square feet being impacted here on contraction but it’s really hard for us to judge exactly how much is coming out of this.

[Curtis Woodworth:]

In terms of that growth rate for the industry, on a year-over-year basis it seems like that would compute to somewhere between maybe 10% to 15% decline year-on-year in area growth. Given the fact that LCD TVs are almost 60% of demand in the quarter or maybe a little higher, to get to that level it would seem that you’d have to have negative TV area growth in the quarter. Is that fair?

[James B. Flaws:]

That’s occurring because all those televisions have already been built. When you model the supply chain, what’s going to happen is the inventory contracts dramatically in quarter four as all this stuff is sold at retail. Actually the total supply chain, the amount of square footage in inventory goes down like 80 million square feet during this period of time. What we’re saying is that may have been greater by 30 million than what we originally thought because of this contraction but the supply chain ordinarily goes down and there is less at a glass production level of televisions that [inaudible] because they’ve already all been made.

[Curtis Woodworth:]

In terms of ’09 capacity additions, I know you’re still going to ramp the Jin Ten but previously you were contemplating additional glass volume for the industry of I think around 350 million to 400 million square feet. Now that you say 10% that’s 215 million square feet. With the reductions you’ve announced, do you feel that you’re more aligned with that 215 number right now or would you have to take further steps in early ’09 to readjust your capacity to that type of number?

[James B. Flaws:]

If we get the growth right overall, I don’t think we have to take substantially different. I think the question will be the balance in Korea versus Taiwan.

[Wendell P. Weeks:]

If I could build on that because we’ve had a number of questions that centered around our customers’ utilization; where is that going to be at? Where are we going to be at in Korea versus Taiwan versus Japan? What I just want to do in terms of perspective for you is, there is going to be some dissidence between what you’re going to hear from customers, what you’re going to take a look at by different regional players, potentially by other glass players, and the reason is that if you take a look at where we were through the summer and in the last times that Jim Flaws and myself have talked to you, what we’ve said is that of course like everyone we’re concerned about what the state of the economy is and how that will impact our business, but we were very trapped by this relative strength of the retail data. What Jim just shared with you now is that we track through the weekly trends and we’re seeing some weakness now in retail versus our expectations. So now what we’re doing is we’re using our judgment to look beyond the current data and set our plans on where we think the level will be. When we do that it’ll mean that we’re going to be at least for a time period in a different place than some other players in terms of how they’re thinking about it and how they’re explaining it. It will take us some time to assure. Are we right or not? We’d like to see what actually happens in the holiday selling cycle through retail and then it will take some period of time to adjust our costs and capacity and bring those in line in the right regions to be able to set our sales correctly for what we perceive will be much stronger economic headwinds than we’ve perceived before. So until that really settles down, you’re going to hear a lot of different noise from a lot of different players of the industry mainly because we’re using our judgment to get where we think it’s going to be even though everything’s not lining up exactly that way right now.

[Curtis Woodworth:]

Jim, the 12 points of the gross margin decline you’re anticipating next quarter, you commented about FX hedges and just general dislocation. I didn’t catch all of that. Can you just provide a little bit more clarity on to what comprises that 12 points?

[James B. Flaws:]

What we talked about is that we have about 5 points of accelerated depreciation. That priced down 2. We really have no ability to do anything on costs and we’re shutting down such a huge amount of capacity so that price falls to the bottom line as normally you would hope to offset price reductions. Then on FX we have a series of hedges that we had that we put in place for higher volumes of transactions that we have to unwind. That’s one-time in nature. And lastly, we have some fixed costs that we were adding to the business that obviously we don’t need because the business isn’t growing. So that’s what comprises the 12 points.

[Operator:]

Our next question comes from Jim Suva - Citigroup.

[Jim Suva:]

Considering the capacity reductions and turning off the tanks so they go cold and the depreciation as such, it seems like reasonably as we look at the linearity of Q4 versus Q1 that Q1 margins have to come down even more just given the linearity. Is that a reasonable statement?

[James B. Flaws:]

No. We wouldn’t agree with that because we tend to get a lot of the one-time nature of these costs behind us assuming we’re right on the fact that we’ve got the capacity at the right level, which we may be wrong. But if we’re right and we get through all this and we’ve got it matched up correctly, then that stuff disappears. If we’re wrong and the market’s even worse than what we though, then you’d have another round.

[Jim Suva:]

Regarding inventory, it looks like it went up about $25 million or $30 million this quarter and looking back through history really in the Q3 September quarter there hasn’t been an inventory build. Given the economic indicators, can you maybe just walk us through how inventory builds given what we know about the supply chain and inventory buildup or if there’s something unique in there that we should be aware of?

[James B. Flaws:]

What you had is the primary inventory builder in Q3 was really in display where we commented that for four quarters in a row we actually had been reducing inventory below what we wanted. When we first saw the weakness we kept running and put that square footage of glass into inventory because we were running below where we wanted to. Obviously now with the downturn outlook, we don’t want to do that anymore but that’s where it basically ended up.

[Operator:]

Our next question comes from John Harmon - Needham & Company.

[John Harmon:]

There’ve been a lot of exhaustive questions. I’m down to just a couple. Currently you don’t really have the visibility but it sounds like you’re expecting glass demand in Q1 to fall in with what’s just historical seasonal patterns are for consumer electronics where as in prior years they’ve been staying a bit flattish in Q1 versus Q4?

[Wendell P. Weeks:]

I think what we need to be careful about is over-concluding on Q1 and relative seasonality for next year. The order of March for us has been let us see where as we move, as I just said, from what we had previously believed about the end market to what we believe now about the end market this year. The first thing we need to do is get that correction in place and deal with that for quarter four and for our view of 2009, which is still maturating. We’re going to know a lot more as we work our way through this selling season. After we sort out where we think we’re going to be overall in 2009, we’ve given some directional guidance today, then we’ll start to backfill into what we think the seasonality looks like. We’re a little concerned to give too much information on what we think about quarter one mainly because we don’t want to misdirect. Let us figure out where we’re going to be overall in ’09 and then we’ll be able to be a lot more forthcoming on how we expect the seasonality to play out.

[John Harmon:]

I think you said before you were going to complete the transition to Eagle XG by the end of the year. Does the fact that you’re turning off some tanks, are there any benefits in it? Does it let you accelerate that or do it better in any way?

[James B. Flaws:]

No. Eagle XG for Corning was basically done.

[Wendell P. Weeks:]

In SCP we are continuing our march to finish that conversion. I think you’re quite right. Even in times as markets slow down, it’s the time to continue to accelerate our cost improvement moves.

[John Harmon:]

What was the cash write-off you took with the Corning or Dow Corning and what was it?

[James B. Flaws:]

We had both. In Corning’s cash we had some money invested with financial companies in bonds so we took a both realized and impaired loss, and then at Dow Corning in their cash they had some Freddie and Fannie securities that they had to impair also. We tried to not be concentrated in any particular investment but we got it wrong in a couple of financial institutions.

[Operator:]

Our next question comes from Ajit Pai - Thomas Weisel Partners.

[Ajit Pai:]

Just looking at your cash flows, this particular quarter was probably one of the strongest quarters I’ve seen for Corning in terms of cash flows. Could you talk about what primarily impacted that even though you’re guiding to reduced earnings on a go-forward basis a large part of that will be attributed to sort of noncash elements as well as depreciation of plants, etc. with the declining demand? While you’ve already exceeded the guidance given at the beginning of the year for about $500 million in free cash flow, you’re already above that right now, what can we expect for 2009 as far as that’s concerned.

[James B. Flaws:]

Let me finish for 2008. Free cash flow would be negative in quarter four because capital spending will be up and we will not have as strong an operating cash flow in Q4 with the amount of operations that we’re taking down. It’s premature for us to do a 2009 cash flow depending on what the company is going to do operationally. The most difficult thing we’ll have in determining the cash flow will be the balance again between the equity companies and our wholly owned business in display. Clearly we expect capital spending next year to be lower than it was this year but it’s premature for me to forecast operating cash flow.

[Ajit Pai:]

About three years ago when you had some dislocation in demand in terms of where you had capacity and where the demand was in terms of you wholly owned business and SCP, you had some client shipment going on at that time. Do you foresee an environment where that could begin again over the next year or year and a half or do you think that’s probably not likely to happen?

[James B. Flaws:]

It will be one of the things that we go to explore as we get a feeling of how the market is settling and do we have capacity at SCP or in the wholly owned business that could benefit one another. Clearly if it does, we’ll do it.

[Operator:]

Our next question comes from John Roberts - Buckingham Research.

[John Roberts:]

TV demand is pretty price elastic. Do you think the strong yen at some point is going to temper some of the recent price declines that we’ve been seeing in both the US and Europe?

[James B. Flaws:]

We actually don’t believe that but obviously that’s not something that we can control. That will be very dependent on what the branded set makers decide to do as a result of that but we would be very surprised if they took that into account.

[John Roberts:]

Pricing’s going to continue to move irrespective of what’s going on with the yen recently.

[James B. Flaws:]

The yen has moved back substantially over the last few days anyway.

[Wendell P. Weeks:]

Plus remember how much of the cost structures in Korean won too so we also have to work through that.

[John Roberts:]

You used $1.01 for the fourth quarter guidance. You didn’t use a round number like 100. Is that like the one-week last average or how’d you come up with $1.01 given the volatility in the yen?

[James B. Flaws:]

There’s no brilliance on how we came up with the $1.01.

[Kenneth C. Sofio:]

Operator, we’re running a little late. We’ve got time for one more caller.

[Operator:]

Our next question comes from Jeff Evanston - Sanford and Bernstein.

[Jeff Evanston:]

A couple of questions on telecom. First, you gave guidance for sequentially revenue down 20%. Could you give us some color on any differences you’re seeing between public and private networks? And second, you mentioned that your operating costs were running a bit higher in telecom. If you could give us some comments on the sources of that?

[Wendell P. Weeks:]

On the sales down from quarter four compared to quarter three, normal seasonality usually eats up about 10 points. Hard to call normal seasonality because every year’s a little bit different but roughly we think that about 10 points down. The impact of a stronger US dollar versus the Euro’s about another 4. What we’re seeing is just in very recent days in the last week a lower order rate for fiber in some of the emerging markets as well as some inventory adjustments in some of our key cablers. We believe that that could be economic driven. Also we’re expecting some lower private network orders in quarter four versus quarter three; once again, somewhat related to the economy we believe. It’s not outsized in private versus public so I don’t think we’re going to see a significant mix deterioration per se because we also see fiber to the prem down about 15% in quarter four versus quarter three even though it’s up about 14% year-over-year. That’s the rough mix we’re seeing. Once again we’re using a little bit of judgment on where we think quarter four is going to be based on relatively few days of activity relatively recently.

[Jeff Evanston:]

And the operating expense?

[Wendell P. Weeks:]

On op ex at the beginning of this year we added some fixed costs in some selected areas based primarily on growing much more rapidly in the private network space. We’ve gotten some of that growth but about half as much as we thought we should have. What we would seek to do is make a correction in that fixed cost structure going forward. It’s higher than we think it should be. We also had some conversion costs to SAP that has lifted op ex higher than what we would have liked. And, fiber to the prem in Europe even though we’ve recently announced our second major customer we’d expected to announce that a little earlier, have a little more revenue, we had some fixed costs for them and another player. So overall when you take a look at where we are with a fixed costs and telecom you should expect us to take some actions to lower that fixed cost structure to match better to where we think the revenues are going to be.

[James B. Flaws:]

Just a couple of quick closing comments. People in [inaudible] will be presenting at the UBS Technology Conference in New York on November 18. I’ll be presenting at the Barclays Capital Global Technology Conference in San Francisco on December 10. Obviously we hope to see you at one of these events. It’s closing, it’s not apparent to anything in our current situation has changed, the fundamentals that drive our current businesses. The world is still yearning for a cleaner environment and there still is a need to deliver huge amounts of data as fast as possible and a superior way to view it on. But, even with these overall drivers, we think now is the time to be more cautious about our spending commitments. The caution is showing up in our decision to control our fixed costs, reduce capital spending and also be cautious on the level of R&D spending without changing our overall commitment to R&D.

[Kenneth C. Sofio:]

Thank you all for joining us this morning. A play back of the call will be available beginning at 10