Corning Incorporated (GLW) Q2 2011 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by, and welcome to the Corning Incorporated Second Quarter 2011 Earnings Results. [Operator Instructions] And as a reminder, today's call is being recorded. With that being said, it's my pleasure to turn the conference on to Mr. Ken Sofio, Vice President of Investor Relations. Please go ahead.

Thank you. Good morning. This morning, Jim Flaws, Vice Chairman and CFO, will have some prepared remarks before we go to the Q&A. Those remarks do contain forward-looking statements under the Private Securities Litigation Reform Act of 1995. Those statements involve a number of risks, uncertainties and other factors that could cause actual results to differ materially, and these risks are all detailed in the company's SEC reports. Jim?

Thanks, Ken. Good morning, everyone. Hopefully, you had a chance to read the press release we issued this morning on our second quarter results. If you haven't, a copy can be found on our Investor Relations website. We had a very good quarter, with sales at $2 billion, up 17% year-over-year, with EPS of $0.48. The quarter met our expectations. We did slightly better on volume in our wholly-owned display business than we had expected. We were delighted with the broad-based sales growth in all our other segments. This sales performance resulted in very good profitability. I'll come back to the quarter in a minute, but I'd like to switch gears and talk about the macro market outlook changes that we have adopted. I'm going to start by highlighting 2 key forecast changes. First, we are lowering our 2011 LCD glass market forecast to 3.3 billion to 3.4 billion square feet. Our previous range was 3.5 billion to 3.7 billion square feet. The display industry has behaved -- been behaving more cautiously in recent weeks, driven primarily by weaker retail expectations for the second half. We've seen most of the major television brands reduce their sales forecast over the past month. So part of the reason for our lower glass forecast is because the industry appears to be expecting lower retail demand for televisions. The supply chain appears to be preparing for a more muted second half by building less inventory in quarter 2 and by panel makers continuing to run at lower utilization rates or, in some cases, lowering them further. In general, it appears the supply chain is waiting a little longer to build inventory for the seasonal fall of the fourth quarter. There is some good news in this behavior as early inventory builds have led to correction issues in the past. Second, we're now forecasting Gorilla Glass sales this year to be about $800 million. We previously believed that Gorilla had the potential to generate $1 billion of sales in 2011, but that was always predicated on significant demand for TV cover glass. We do not have any specific retail value yet for Sony televisions. But today, there are only been a limited number of TV models with Gorilla Glass available and most of them are on higher price sets. As a result, we're now expecting to sell only about $50 million in TV cover glass this year versus our original expectations of closer to $200 million. The remainder of our Gorilla Glass business, which is for handhelds and IT products continues to grow robustly. We anticipate sales for those -- just those products to be $750 million this year, which would be triple last year's sales. For those investors wondering if it's still our plan to reach $10 billion of sales by 2014, the answer is yes. We just completed our annual long-term planning meetings and our conclusion was the $10 billion sales target is well intact. I also have an update on our 2012 CapEx plans and some exciting news on photovoltaic glass, but I will save them for the outlook section. I'd like to review our second quarter results in more detail. Q2's sales were $2 billion, an increase of 4% over Q1, but more impressively was the 17% increase over the second quarter of last year, which -- with the exception of display, which was down slightly versus last year, each segment sales increased significantly over last year. Our second quarter gross margins, 44.3%, down from the 45.4%, but higher than we had anticipated due to stronger-than-expected display volume. SG&A was $284 million or 14% of sales and in line with expectations, increase in SG&A from the first quarter reflects our annual merit increases, which for most employees, occurred in April. And RD&E was $172 million or about 8.5% of sales. Equity earnings were $428 million, an increase of 8% over the first quarter. Other income was $43 million in Q2 versus $27 million in Q1, the increase is due to the non-repeat of certain expense items from quarter 1. Net profit after tax, excluding special items, was $758 million, up slightly versus the first quarter. Earnings per share, excluding special items, were $0.48 in Q2, up slightly from Q1. Both net profit after tax and earnings per share, excluding special items, are non-GAAP measures. Please see the reconciliation to GAAP on our website. The impact of movements in exchange rates from Q1 to Q2 was not material to our results. Now let me turn to our segment results for the second quarter, and I'll start with Display. Display sales were $760 million, a decrease of 4% versus Q1. The decrease was less than we expected, reflecting the startup of Sharp's Gen 8 and Sharp's Gen 10 fabs earlier than we had anticipated, as well as higher-than-projected utilization rates at our Taiwanese and Chinese customers. The stronger-than-expected glass demand at our wholly-owned business kept us from building much additional inventory in Q2. As a result, we ended the quarter with healthy glass inventory levels. Glass price declines in the second quarter were moderate again. The benefits of movements in the end was just a slight positive. Display gross margins were lower than Q2 versus Q1, but higher than we originally expected, reflecting the stronger-than-anticipated volumes. At SCP, volume was about up about 10%, which is lower than our expectations and reflects the Korean panel maker decisions to run at lower utilization rates during the quarter. Price declines at SCP were again moderate. For your modeling purposes, SCP's second quarter LCD sales were about $1.1 billion, up slightly from the first quarter. As a reminder, this represents SCP LCD sales only of public filings report SCP's total sales, which include CRT glass and other product sales. Equity earnings from SCP's LCD glass business were $319 million, up almost 9% versus the first quarter. SCP Q2 results include a gain from transfer of LCD glass from SCP to our wholly-owned business. All in all, our total glass volume, including SCP, was up about 5% in the quarter. This is in comparison to the worldwide glass market that grew about 2% a quarter and reflects good progress against our goal to recover some of the market share that we lost in 2009. So let's spend a few minutes discussing the Display supply chain. As I mentioned in my opening comments, it appears that the supply chain is waiting a little longer to build inventory for the seasonal pull of the fourth quarter. This may be driven by expectations of a softer second half demand at retail and the current low levels of profitability at the industry. As a result, we anticipate the supply chain will be more cautious, build less inventory and consume less glass than we previously forecasted. In the second quarter, our model suggests supply chain build only 85 million in inventory in terms of square feet of glass. This represents panel inventory at panel makers, set inventory at set makers and finish product sitting at retail. This build was much lower than last year when the supply chain build over 200 million square feet inventory. As a reminder, that amount last year was actually higher than needed, and the supply chain then went through a mild correction late Q3 and beginning of Q4. This year, even with the industries more muted second half expectations for retail, supply chain inventories do not appear to be too high. Our models indicate supply chain exited Q2 with a little under 17 weeks of inventory. As I mentioned earlier, we lowered our glass volume expectations for the market to a range of 3.3 billion to 3.4 billion square feet. Part of the reason is the expectation of the supply chain will be more cautious, as I mentioned above. The other reason is the industry's lower TV sales expectations. While our retail data, which is complete through May, does not indicate a slowdown in LCD televisions sales, many of the top TV brands have now lowered their 2011 expectations in recent weeks. On this slide, you can see the lower expectations by television brand. This information has been provided by a display search. As a result, we lowered our LCD TV unit forecast for this year from 222 million units to a range of 210 million to 212 million. This revised range is generally in line with other industry estimates. On this side, you'll see our original expectations by geographic region versus our revised forecast. As a reminder, retail data always lags getting to us typically takes between 4 and 6 weeks for different vendors to accumulate and analyze the data. So through June, LCD television unit demand at retail is generally in line with our original expectations for the year. The first 6 months of the year, LCD TV units sales were up 18%. This compares to our original full year growth of 16%. And now our new revised growth rate of 10%. We've summarized the year-over-year growth rates for television by month and by region on one slide, so I'm not going to go through all the details. I would like to call your attention to the recent European demand being below last year. It is very important to remember that last year included the additional World Cup demand. And the recent increases in Japan probably relate to the upcoming analog to digital broadcast turnover. Regarding the PC market, we've had no change to our previous forecast. We expect PC market, excluding tablets, to grow 6%. We expect tablets to approach 60 million, up from 20 million last year. Based on our current expectations for glass demand in the second half, we are planning to continue to run our operations at full capacity, with the appropriate balancing between LCD glass and Gorilla Glass. However, we'll continue to monitor retail environment for any signs of further weakness. As many of you know, we have several levers available to adjust our output response to the significant changes in market demand and are prepared to utilize these levers if demand dictates. Now turning to the Telecom segment, which continues to run at full capacity. Sales were $548 million, up 16% versus Q1 and up 24% versus last year. Sequential growth was slightly lower than we guided due primarily to some project timing. Sequential and year-over-year growth was driven by all of our product lines across all geographic regions. Optical fiber volume was up more than 40% year-over-year, driven by strong demand in North America and Europe and China. We shipped more optical fiber in the second quarter than any time in our history. And fiber-to-the-home demand was up more than 60% year-over-year. Our bottom line performance was equally impressive. Telecom net income was $46 million in Q2, up 12% versus Q1 and up more than 50% year-over-year. We are seeing more of our sales dollars fall to the bottom line as the mix of higher margin products increases. As Clark Kinlin said at our annual investor meeting, we feel very bullish about the Telecom business and the wealth of market opportunities in front of us, not only this year, but over the next several years. In our Environmental segment, second quarter sales were $258 million, consistent with the first quarter, as expected. Versus Q2 of last year, sales were up 40%. This is one of our segments that boasted strong gross margin improvement and significant net margin gains. Net income was $32 million in the second quarter, up 10% versus Q1 on flat sales, and net income a year ago was only $5 million. We believe the Environmental segment is poised to capture significant growth over the next several years, while expanding its gross margin and profits as we improve our manufacturing. Moving to Specialty Materials. Q2 sales were $283 million, an increase of 11% over Q1 and more than double a year ago. The significant growth was primarily due to Gorilla Glass. We also saw significant gross margin expansion in this segment, led by Gorilla Glass for handhelds and IT. Back to gross margin, those sales is now above our corporate average. Segment net income also grew significantly from $8 million in Q1 to $23 million in Q2. Gorilla Glass sales were roughly a $190 million in Q2, an increase of about 24% over the first quarter, included in this amount are sales of TV cover glass, which declined sequentially. Excluding TV cover, Gorilla Glass sales increased 35% sequentially. As I mentioned earlier, we now expect Gorilla Glass sales to be $800 million this year. While this expectation is lower than what we previously discussed, it is triple last year's sales. Gorilla Glass represents the most significant growth engine for Corning. During the second quarter, we were designed into a dozen more products, including devices for Motorola, Nokia, Lenovo and Samsung. Gorilla Glass now has 440 design wins since the product was launched, including another 60 models launching the market over the next 90 days. Gorilla Glass clearly continues to be the cover glass technology of choice. Moving to Life Sciences. Sales in the second quarter were $155 million, up 8% over the first quarter, higher than our expectations. Versus last year, sales were up 24%, about half the year-over-year growth was due to acquisitions. Turning to Dow Corning. Q2 sales were $1.7 billion, up 6% from the first quarter and up 8% versus last year. Equity earnings were $95 million in Q2 versus $91 million in Q1. Regarding polysilicon spot prices, they've fallen significantly since the first quarter. However, the current spot prices are still well above prices in our long-term contracts. For those who keep track of poly price -- you'll note the market prices today are still higher than the last significant price decline from a few years ago. To date, Dow Corning has not had a customer change, one customer either change or reduce a purchase order. Demand remains very strong. In fact, Dow Corning is getting requests from our Tier 1 customers to do another round of pre-funding to lock-in poly supply through 2017 [indiscernible]. Now turning to balance sheet. We ended Q2 with about $6.4 billion in cash and short-term investments versus current and long-term debt of just $2.3 billion. Free cash flow was a positive $54 million in Q2. The largest outflow of cash during the quarter was CapEx, which was $494 million. Based on our capital spending to date and the expected timing of our projects for the remainder of this year, we expect our total CapEx this year to be at the lower end of our previous guidance range of $2.4 billion to $2.7 billion. On this slide, you can see our original range and updated forecast by segment. I'd like to call your attention to the Display and Specialty Materials capital spending numbers. A large portion of the Display capital spend for this year is for the expansion of our Taichung facility. While this expansion is for a new LCD capacity, it's actually needed to replace the existing LCD tanks and the process of being converted to Gorilla Glass. So while the spending is technically within our Display segment, if we did not convert existing tags to Gorilla, we would have had to build the tanks for Gorilla. On this slide, you can see a breakout of the spending by major project. The new plant in Beijing will cost about $400 million this year, while the expansion in Taichung to replace the capacity being converted over to Gorilla will cost about $500 million. We've also budgeted about $350 million for what we call strategic asset protection. We have some lessons learned from the earthquake and power disruption at our plants in 2009. We're making some investments to improve the business continuity of our factories and also buying extra precious metals. We believe this spending will help prevent damage to our plants and also enable faster recovery from adverse events. As a reminder, we carry precious metals at cost, and they are not consumed during production. So these assets could be sold if no longer needed. Obviously, this spending is considered strategic by us. It is discretionary. And if we were looking for levers to reduce capital spending, this could be one of them. We've also reviewed our capital project roadmap for 2012 and have some initial estimates for you today. Barring any lag between project and completion of spending, we anticipate the 2012 CapEx to be between $1.9 billion and $2 billion. On this slide, you can see the breakout. Most of the plant capital spending will be for Corning products that are poised to grow very rapidly over the next several years such as Gorilla Glass, substrates for catalytic converters, diesel filters, optical fiber and of course, the completion of our new display glass facility in Beijing, China. In Telecom, we've been running our operations full and need to add more capacity to meet this growing industry. We expect the strong growth rates you've seen so far this year to continue, especially in optical fiber, fiber-to-the-home and Enterprise Networks. In Environmental, we announced an expansion of our Shanghai auto substrate plant last week, spending for that is included in this number. Life Sciences, which is included in Other, we are also expanding our China operation. China is clearly poised to grow faster than developed world, fueling demand for more autos, telecom networks, TVs and healthcare products. Now while the hyper GDP growth we saw over the past several years may slow slightly, according to industry experts, even slower GDP in China will be higher than most regions of the world. And we are continuing to invest to capture our share of that opportunity. On this slide is a breakout for Display and Specialty Materials for 2012. For Display, the majority of spending will be on the completion of the new facility in Beijing and completion of the expansion of Taichung. Now moving further down the balance sheet, inventory increased from $841 million at the end of Q1 to about $917 million at the end of Q2. This increase was almost entirely related to Gorilla Glass as we are preparing for the significant increase in demand in the second half. There was some additional inventory built in Display, although it was much less than we had expected. We expect to see good top line growth in the third quarter, led primarily by Gorilla Glass and Display. We expect even stronger bottom line growth driven by the higher sales and gross margin expansion. In Display, we expect our total glass volume, which includes the wholly-owned business and SCP, to be consistent with the second quarter. It's in line with our expectations for the overall glass market in Q3. At our wholly-owned business, we expect volumes to grow in the mid to upper single digits sequentially, a volume growth primarily driven by a full quarter of higher production levels at Sharp. We expect glass price declines will continue to be moderate. With price declines at a lower level, we'll be using the word moderate going forward. If we experience a significant excursion in pricing, we'll, of course, disclose that change. Now at SCP, we expect Q3 volume to actually be down in the mid-single digits compared to Q2. With the exception of Sharp's temporary curtailment of production in Q2, glass demand from panel makers in Japan, Taiwan and China has been stronger than our initial expectations. Korean panel makers have been running lower utilizations and these are lower than we had expected, for actually the past 9 months. We believe this is a trend that will continue for the foreseeable future. Regarding panel prices, we would not be surprised if it stayed flat for the remainder of the quarter. With the exception of a 2-week period in May, panel pricing was flat for most of Q2. Although some in the industry were expecting more consistent panel price increases in Q2, we did not expect that to happen. In the past, consistent panel price increases have only occurred when there have been panel supply constraints. The amount of excess panel capacity currently, we do not anticipate such constraints in the near future. We do expect the supply chain in coal to build some inventory in Q3 in preparation for Q4. Based on our models, we expect the number of weeks in inventory, on a forward-looking basis, to actually be lower actually in Q3. We don't usually provide guidance beyond the quarter, but we thought it important to note that the worldwide glass demand is expected to increase in the fourth quarter, assuming retail remains healthy and there's no negative change in the economic outlook. And as a reminder, the Chinese New Year in 2012 will be earlier. In our Telecom segment, we expect third quarter sales to be up slightly in comparison to a very strong Q2. Our ability to supply is extremely tight right now, as most of the markets we participate in, such as optical fiber, fiber-to-the-home and Enterprise Networks are all growing substantially. We are working hard to leverage our existing capacity, as well as ramping up some additional capacity to meet demand. Compared to last year, Q3 Telecom sales are expected to be up about 20%. Now as a reminder, the strongest quarters for Telecom in terms of sales have been Q2 and Q3, historically; and the increase of sales between Q2 and Q3 is usually slight. For example, in '08, '09, '10, the increase in sales between Q2 to Q3 was 4%, 3% and 5%. We expect sales in Environmental segment to be consistent with the second quarter and up 25% year-over-year. Like Telecom, our ability to supply is extremely tight in this area. Life Sciences sales are expected to be up slightly sequentially. In Specialty Materials, sales are expected to grow in the upper single digit sequentially and 90% year-over-year driven primarily by Gorilla Glass. Gorilla Glass for IT and handheld is expected to increase 20% sequentially, offset by lower sales and other product lines within Specialty. Moving back to the income statement. We expect our Q3 corporate gross margin percent to grow by a couple of percentage points, due to the higher volume in Display and continued manufacturing improvements in Gorilla. SG&A expected to be consistent on a dollar basis, and thus lower on a percentage of sales in Q3. R&D will remain around 9% of sales, if not slightly lower. We expect equity earnings to be down in the upper single digits, as lower SCP earnings will more than offset higher equity earnings at Dow Corning. Moving to taxes. We expect Q3 in 2011 tax rate to be about 15%. Investors should note that movements in the yen to U.S. dollar exchange rate influence our results. For your modeling purposes, for every 1 point move in the yen, our sales and net income move by about $10 million. The net income impact includes SCP, where a stronger yen, which also improved their results. Before I move to Q&A, I'd like to mention that we remain very confident in our innovation portfolio, and have made some significant progress on advancing several of our R&D programs in recent months. One of the future growth opportunities we're investing in today is specialty glass with thin-film photovoltaics. It is well known in the PV industry and by investors that Corning glass has demonstrated record efficiency levels on the research side of sales in silicon-tandem this year. Some of you may recall, in April, that General Electric announced a record 12.8% on a full size cad tel module, which is recently verified by NREL. I'm happy to report this 12.8% record module used Corning's photovoltaic glass. We continue to be very encouraged by the progress we have made in recent months and remain confident we'll have a PV customer by the end of the year. The other future opportunity is OLEDs. We believe OLEDs will develop to become important to the display industry in the future and will require new glass compositions to maximize OLED potentials. We have developed a new glass for OLEDs, which is in customer qualification tests now. And we're also working on new glass composition for large size OLEDs. These innovations, combined with our strong growth of existing new products, such as Gorilla cover glass, ClearCurve optical fiber, Pretium EDGE products for data centers and diesel filters will provide a solid foundation for our growth in sales. So that completes my formal comments this morning. Ken?

That was great, Jim, thank you. John, we are now ready to take some calls.

[Operator Instructions] First, with the line of Nikos Theodosopoulos with UBS.

I guess, 2 quick questions. For this year, based on the new expected volume growth for LCD, it looks like it's -- volume growth will be slower than price declines. And I guess, my question is, what do you see, if anything, that's going to change that next year? I mean, we've been waiting for this TV replacement cycle, and it just doesn't seem to be happening. Is there -- do you see this as being a trend again next year, where volume growth is at or below price declines? And then, just as a second question on OLEDs, can you comment on how you view that opportunity in terms of average selling price and average margin contribution versus your current LCD business?

So on the latter question, I'm not prepared to talk about the average selling price or margin contribution. We will be able to make the product on our existing LCD tanks. So we don't expect to have to spend much capital for it. And it's just too early for us to comment because we're just now in qualification on small sizes. On LCDs, I think we're not giving guidance on for next year. I just will comment that, if you look at the total square footage of glass, our models sold at retail versus the total square footage of glass at retail last year, our models would say it's going to be up just slightly over -- around 12%. It is the glass market because of inventory builds that's growing slowly this year. The industry is building less inventory. But at retail, we're seeing about 12% growth even in our most conservative models for television at year end. So we still expect to see demand at retail which ultimately is the most important driver and price declines are clearly going to be -- we're at moderate levels for the quarter below that level.

Okay, that's helpful. Just a follow-up, as you talk to your customers and set makers and so forth, what do you see as driving the next TV replacement cycle? It seems like 3D has not been the driver of that. Is that just -- is that -- do you still view that as the driver, and it's just time -- time is needed to get more content? Or do you see something else driving the replacement cycle?

So we were never believers that 3D would be a strong driver initially. I think there are other people who are quite hopeful of that. We believe that the drivers will be replacement being faster than what it was in the CRT era, are going to be the overall quality of the television continuing to get better. The refresh rate -- the fitness of the product will be things that consumers value and our consumer research has said people are -- they view -- they value those quite highly. I think it's just speculation about 3D as to whether, at some point, when it becomes more important to people or there isn't that much content. And again, it's not that you're going to be watching everything on television in 3D. You're really buying a 2D television that you occasionally watch as 3D. We believe that people will replace on a faster rate going forward than they have in the past. And I think DisplaySearch, a few months ago, published a giant study on this, which I would point you to.

Our next question is from Mark Sue with RBC Capital Markets.

Jim, recognizing that the price premium may be behind a slow demand for Gorilla Glass for TV applications, are there things the industry can do to stimulate demand? Are you considering giving up maybe more margins on Gorilla Glass to drive increased volumes? Maybe just your thoughts overall to kind of drive the volume growth for Gorilla Glass for TV applications.

We have no plans to do anything further on pricing to do that. So we've put forth what we think is a very good product, we have some innovations that we could do in terms of reflectivity, if the customer wanted to do something on that. But we're not planning to make any price moves on TV cover.

Jim, do you get a sense of what the price premium might be that might be the crossover point? Would it be 10%, 20%? Any thoughts on what might stimulate demand on regular LCDs?

I have no -- it would be just pure speculation on my part, Mark.

Okay. Maybe separately, as we look at the outlook, adjusted outlook, any thoughts on just kind of OpEx control, similar to what we saw several years ago, and not just near term, Jim, but how we should think about longer-term planning assumptions for OpEx?

So I think that short term given slightly reduced outlook, we will be tougher on our operating expense growth. Longer term, our model has been to try to contain SG&A to be about half the rate of growth of our sales and so we get leverage from that. We don't look at that, that way every quarter, but that's what our goal is. R&D is more program driven and generally hasn't hit that target. What we -- we have enough innovations to justify our higher growth rate there, but even R&D, I think, we're being very cautious about letting it grow too fast.

And next, go to C.J. Muse with Barclays Capital.

I guess, first question, Jim, and I know you hate looking out beyond the quarter. But I was hoping you could talk a little bit about the gross margin trajectory, particularly for LCD, as you balance maybe more muted volumes with ASP degradation, but also the move to thinner glass and how we should think about that trajectory going forward into Q4 and beyond.

Well, thin is an important part of our cost reduction program. We're continuing to advance the percent of glass that we ship to be thin. We just recently did our 5-year planning process and our expectation is that our business moves up every year in terms of the percentage being thin. One of our major customers, on one of their lines, has just gone to 100% thin. So we think it's validating it being good for our customers, as well as being good for us. So it's an important element of our ability to keep up with price declines. And as long as we don't have too many ups and downs in terms of utilization, we think that allows us to maintain our gross margin percent.

Okay, that's helpful. And then, I guess, my follow-up question, kind of bigger picture in terms of cash redeployment to shareholders. It appears as though CapEx plans for LCD and Gorilla are pretty much done for kind of '11 and '12 and provides you the capacity that you need to support growth for multiple years, and you're sitting here with about $4.1 billion in net cash. So curious, what your discussions are like today with the board and when you think we'll hear something on that front that I think would prove to be positive for this story and the stock.

Well, I won't predict exactly when, but I will tell you that we have begun conversations with the board about the cash and what we should do with it. So it is definitely on the board's agenda now.

Our next question is from Wamsi Mohan with Bank of America Merrill Lynch.

Jim, the glass volumes now are expected to grow only 6% this year versus your original expectations of 17% at the beginning of the year on a sort of apples-to-apples basis. So given this, is there any consideration of cutting LCD-related CapEx? And I sort of mean in aggregate for 2011 and '12. You're talking about actually increasing CapEx given some of this production capacity that you're converting over to Gorilla, which is leading to incremental Taichung expansion. But on the other hand, the end markets are a lot slower than you anticipated at the beginning of the year. So I'm just trying to understand, is the China LCD build still as strategic to you as you thought before? And even though you're spreading it maybe across a longer period of time. And what is specifically the need to increase the Taichung facility, especially if you're going to get some offset from thinner glass?

So the increase in Taichung is built around the fact that we are doing 2 things. One, we're giving -- already giving existing capacity to Gorilla, and we expect to have to give more capacity to Gorilla for next year. And therefore, we're going to do that by taking the LCD glass; and then, therefore, we're going to make LCD on newer, larger size Gens. So it is driven by that. We clearly are capable of slowing the spending at Beijing if the ramp there by our customers does not turn out to be what we expected. I think the question for us is really going to be, what capacity do we need for 2013 and '14? And whether the capitals -- if we continue to see lower rates of growth in LCD glass and thin being very successful, you may see the capital spending for Display come down even more. I will comment that on the growth for the glass market, I just want to make sure that my point earlier was understood. It is the fact that this year, the supply chain is building less inventory than they normally would for the growth that's happening at retail that makes the glass market look like it's growing a smaller number, even with the reduced IT forecast, the reduced television forecast at retail in what is very muted economic scenario, we're seeing at retail glass demand growing 12%. People can't take inventories to 0, so ultimately that growth rate shows back up for us. So we are being very cautious about the capital. We will adjust and potentially slow it down, but we definitely will take steps to be careful on the capital. But that being said, Gorilla is continuing to grow quite well and we're actually winning even more than what we expected for future models. So I think that's a big driver. The other thing, as you saw on our detail on CapEx, the chunk of this money that we're spending right now is around this asset protection program. Approximately half of that is assets that are fixed that we're doing to protect ourselves in the event of national disasters such as an earthquake. The rest is in precious metals, which we feel will retain their value. We'd like to have in the event of -- we need to have emergency repairs. But they are not assets that value go away. So we are being cautious about not overspending, but those are the primary reasons for it.

Okay. And as a follow-up, you mentioned incremental work that you've been doing on the OLED side. And in the past, you've sort of spoken about some of the technology challenges associated with implementations using a single sheet of glass. Do you expect for these large size OLED sets that you're contemplating in the future, that they would have a single sheet of glass implementation, or still continue to have 2 sheets as they are currently today?

That's really a question for our customers as to which model they assume that they're going to go. Some people are thinking about using 1 sheet, every one that's made today continues to use 2 sheets a glass. Our point of view is we're in the display industry. No matter what the display is, we're going to provide a glass for it. So if people need 1 sheet, it'll be one. It may have to be a much higher performance piece of glass, if it's only 1 sheet as opposed to 2. But we plan to sell glass to OLEDs as they become more important. Again, I'd stress I think this is a small percentage of the volume today. I believe the total OLED square footage of glass this year, probably is about 10 million square feet, but we are preparing to be ready for whatever direction the technology moves.

Our next question is from George Notter with Jefferies. George Notter - Jefferies & Company, Inc.: I wanted to ask you about, again, the CapEx plan looking into next year and beyond. At one point, I think, there was a view that you could build a second manufacturing facility in China. Certainly, I guess, now, I'm trying to understand what the perspective is there. I assume that's certainly not in the CapEx budget for next year, and I'm wondering if that is a reflection of any changes that you see in the Chinese market opportunity. Is it a change in the tariff structures for importing glass? Or walk us through that, that would be great.

So we haven't made a final decision, but I think if there is going to be a second factory it would be to support Samsung, and it's likely that, that would be done using some of SCP's money. It's not a final decision yet.

And we'll go to Jim Suva with Citi.

Following up on your commentary about gross margins improving a couple percentage points next quarter, there's a lot of moving parts that we think about within Corning. Can you help us understand, kind of a bit longer term is, are those levels at the higher gross margin level sustainable, or do we need to start factoring in some other things? And those other things, for example, what I mean is, maybe, for example, when you start to bring on your new China factory, I would assume there's some ramping costs there. Or you'd mentioned that you expect to start selling some PV sales. I don't know what to assume there about for margins. Is it comparable or below? Or how should we think about gross margins going forward about? Is this going to see a benefit in Q3 then, when you start to build in some one-time items or some reoccurring items for margins?

So PV's impact on us is likely to be relatively minor because it will ramp slowly. As we get a customer, then we'll start talking about the margin impacts. But I don't think you should have expected that much influence on the overall corporate average in the near term. Neither will Beijing, we will actually choose to ramp in tanks, multiple tanks in the facility, it's not like we're going to have a light switch and light them all up at one time. We'll ramp them more slowly. Therefore, the depreciation clock on them will start on a more phase basis. Again, the business is so large today that even the Beijing facility now starting up will not have much influence. The biggest influence on the Display margins is our ability to generally run relatively full and then to keep price declines and cost reductions relatively equal, which we think we have a good shot at doing. Corporately, as long as we make that happen on Display, we actually believe we have margin expansion opportunities in Telecom and Environmental, which will as those businesses grow and are expanding their margins should help our corporate margin. And then lastly, assuming we're right about where our cover glass is going in the future on devices, it's actually a higher gross margin on corporate average. So we think we have a very good shot at sustaining it as long as Display behaves the way we think it's possible.

Our next question's from Simona Jankowski with Goldman Sachs.

This is Erin Riley on behalf of Simona. I just have a couple of questions. My first is on your Specialty Materials segment. I'm wondering if a lower mix of TVs in your assumptions for that segment going forward affects your margin assumptions there.

Yes, it does. It actually makes it better because the gross margin on the TV cover is actually very weak. So actually, not selling that, that actually improves the margin structure, especially in screens.

Okay. My second question is on your longer-term sales targets. You reiterated your $10 billion in sales target, does that mean that you have incremental confidence in non-Display businesses given that there's a softer outlook in Display right now? Are you expecting a stronger rebound in Display going forward?

I think we have increased confidence in Telecom and Environmental that allows us to believe that we definitely could hit the $10 billion even with the weaker Display numbers.

And next, go to Vijay Rakesh with Sterne Agee. Vijay Rakesh - Sterne Agee & Leach Inc.: Just wondering on the channel inventory in the second quarter, you mentioned it was lower at retail and distribution. What is it in weeks, and how does it compare to normal?

So I think our comment was on inventory for the supply chain. And we would say, usually in Q2 that's the quarter that we see the most risk with inventory climbing, approaching 18 weeks and the fact that we're actually below 17 at quarter 2 is a very good sign. So that was my only comment, I think. Vijay Rakesh - Sterne Agee & Leach Inc.: Got it. And on the tablet -- and looking at the tablet and smartphone market for cover glass, it looks like tablets and smartphones are growing pretty nicely, if you look at next year also. Wondering what your expectations on Gorilla Glass was for next year, especially with, kind of, better margins now on the Gorilla Glass?

We haven't given a guidance yet for Gorilla for next year, we will a little bit later this year. But we see 2 things that would cause us to say it's going to continue to grow. We've seen the mix shift to people in smartphones, and we believe tablets are a device of choice for many consumers today, so that's good news. And most importantly, for us, is that we are not losing share to our competitors there. So we have a business to grow, we'll give you some guidance later this year.

And next, go to Brendan Furlong with Miller Tabak. Brendan Furlong - Miller Tabak + Co., LLC: A question for you on -- do you expect the usual industry kind of inventory drawdown in Q4 to set off for the industry refresh in Q1? And along with that, do you expect -- is Sharp expected to be kind of 1 quarter bump here in terms of catch-up, and then we kind of ease off again in Q4?

So our belief is that the inventory does drawdown in Q4 and the total supply chain, simply because the peaking of televisions in Q4. We don't -- we do -- would expect later in Q3 that we might see some utilization increases. Our Q4 cost demand is up versus Q3 for the industry. And given the early arrival of the Chinese New Year, we would expect that, that would drive demand a little bit more in the fourth quarter. Brendan Furlong - Miller Tabak + Co., LLC: And on the Sharp issue, do you expect that to be 1 quarter bump?

We have no reason to believe Sharp won't continue to run at the rate they are now. Basically, what they did is they corrected their inventories in April, in the very beginning with May, and then brought both their Gen 8 and Gen 10 back. And assuming that Sharp themselves does okay in the retail market, we have no reason to expect them not to continue to run. Brendan Furlong - Miller Tabak + Co., LLC: Excellent. And then, a question on the TV market, in general, replacement rates and all the rest of us. Does -- what are your customers saying of potential for smart TV to accelerate the replacement rate in 2012, 2013, when 3D is pretty much a bust. But will a smart TV be the great hope for everybody in the industry?

Sure. I'll characterize it as a great hope, but I think our customers believe in, as we do, that Internet connectivity for televisions will become increasing importance to consumers and whether it is enough by itself to change the replacement rate -- that would be speculation on my part. But definitely, our customers and we believe that it is an important attribute as people make their decisions going forward.

Our next question is from Ajit Pai with Stifel, Nicolaus. Ajit Pai - Stifel, Nicolaus & Co., Inc.: A couple of quick questions. I think, the first one is on your Telecom segment. And after a long time, you've sort of talking about capacity constraints for that business over the past couple of quarters. And while that segment has shown some very significant operating margin improvement, how much more is there left in that segment? And can you talk about the pricing trends within that industry, whether they've improved materially since -- with all the overcapacity going away? And then, I'll go to my second question.

So pricing trends have definitely improved. I mean, there are still a lot of customer power. Our customers are very large. But definitely, I would say, compared to a number of years ago, the pricing trends have improved and we definitely feel like we're going to see continued demand. And as a result, we're going to actually, for the first time in many years, spend a little capital against this business. Ajit Pai - Stifel, Nicolaus & Co., Inc.: And the operating margins from the low teens, could they creep up into the high teens or break into the 20s over time?

We don't ever give gross margins comments by segments, so I will just tell you that we believe that the gross margin in the Telecom segment could improve. Ajit Pai - Stifel, Nicolaus & Co., Inc.: Got it. And then, the second question is just looking at one of your M&A strategy and then also the Life Science segment. So there, your margins have actually fallen on a year-over-year basis, at an operating level. So how much of that is investment and the impact of the recent acquisitions? And do we expect the margins on that business to eventually get back and exceed the margins of the first half of last year on the operating side? And from an M&A perspective, is -- you've acquired in the Life Sciences side, you've also talked about looking more closely on the Telecom side. Is there an update in terms of the pipeline and strategy for continuing to bolster some of your non-Display businesses with acquisitions?

So we definitely believe that corporately we will bolster our overall growth rate by acquiring. The 2 industries we're focused on, are Life Sciences and Telecom. We did 1 telecom acquisition earlier this year. We're working on a Life Sciences one today. The margin down in Life Sciences is definitely due to integration issues on acquisitions and then in getting through that phase. And then second, Life Sciences is one of the business we actually have commodity pressure because of resins, and we actually raised prices to overcome that but we were a little bit behind on that in Q2.

And we'll go to John Roberts with Buckingham Research.

What caused you to move glass from SCP to the wholly-owned operation during the quarter?

We actually -- it was related more to quarter 1. We bought glass from SCP in Q1. And because it's, in effect, an intercompany sale, we can't recognize the margin until that glass is actually sold to a customer. So that was the recognition. But in quarter 1, we were tight on glass at our wholly- owned, so we bought some from SCP.

And secondly, how do you expect to bring OLED into your manufacturing mix? Is that going to made here in the U.S. sort of small scale plant and cycle between PV and OLED glass initially?

I think it will be made in Asia.

And that will be from Rod Hall with JPMorgan. Rod Hall - JP Morgan Chase & Co: Just a couple of quick questions. I guess, Jim, I wonder, could you just let us know what you think the minimum inventory level in the channel might be? I mean, you're saying below 17 weeks. I mean, how far -- how low can they go, I guess, would be a question? And I wonder if you could just give us any quantification on what you mean by moderate pricing declines. I'm assuming that's a little bit worse decline than the normal expectation.

So on pricing, I'm not going to comment anymore. The levels are quite low and it's just moderate, so I won't make any further comment. On inventory -- so unfortunately, we once saw it go down to 13 weeks and that was when everybody was panicking in late '08, you may recall, thought the end of the world was near. So they clearly can do that. I will tell you, having done that, they then experienced tremendous out of stocks in quarter 1 of 2009. So they really realize that was a bad outcome. But clearly, mechanically, it is possible. I would think that, that is unlikely to have that episode repeated, but clearly, they could make that choice. But we think it's more likely that they might run in a 16-week range for a period of time, especially given the weak profitability of the industry. You don't want to take inventory risks, but I would -- we would be very surprised if that repeat of the 13 weeks occurred. Rod Hall - JP Morgan Chase & Co: Okay. And then on just -- I did want to follow up with -- on the Telecom segment as well and just ask -- we've seen some evidence in Q2 reporting that Telecom's volume behavior is a little bit muted, maybe expectations for H2 aren't that great, but you guys seem pretty confident. I'm just wondering what the source of the confidence is. Is it the Chinese optical build? Is it -- I mean, can you give us any more color on that?

So I would say that the confidence we have versus some other people in the industry is, particularly our strong position in fiber-to-the-home with those projects around the world being quite robust. Then -- and second would be because of our strong position in optical fiber, and the demand for optical fiber around the world is quite strong. So I think that positions us differently than some of the other telecom companies that may be in your coverage, as an example. Rod Hall - JP Morgan Chase & Co: Yes. And is it fair to say APAC is probably the region where there is the most demand at the moment, or is that the wrong assumption to make on the optical side?

I will tell you that there is good demand in North America.

Jim?

Just a couple of quick closing comments. First on, Investor Relations. We will be presenting at 2 conferences starting in September. On September 8, we'll actually be one of the keynote speakers at the Citi Technology Conference in New York City. And then on September 13, Jim Clappin, who's the President of our Corning Glass Technologies, which includes Display and Gorilla, will be presenting at the Deutsche Bank Technology Conference in Las Vegas. Just a couple of closing comments. We feel very good about our set of businesses. As I mentioned previously, it's rare to have all our segments pulling in the same upward direction. At our investor meeting in February, we highlighted that all of our businesses are expected to grow over the next 4 years. We believe our first half results are evidence of that. I am particularly pleased with the gross margin expansion, the bottom line growth in Telecom, Environmental and Specialty Materials. And lastly, we're making progress in our new business areas, such as photovoltaics and OLEDs, which we believe can provide new longer-term growth opportunities for the company. Ken?

Thank you, Jim, and thank you all for joining us today. A playback of this call will be available beginning at 10:30 a.m. Eastern Time today and will run until 5:00 Eastern Time Wednesday, August 10. To listen, dial (800) 475-6701. The access code is 209752. Audiocast also available on our website during that time. John, that concludes our call today. Please disconnect all lines.