Corning Q3 2010 Earnings Call Transcript

Corning (GLW)

Q3 2010 Earnings Call

November 01, 2010 8:30 am ET

Executives

Kenneth Sofio -

James Flaws - Vice Chairman, Chief Financial Officer, Member of Finance Committee and Member of Executive Committee

Analysts

Nikos Theodosopoulos - UBS Investment Bank

Brian White - Ticonderoga Securities LLC

Yair Reiner - Oppenheimer & Co. Inc.

Jim Suva - Citigroup Inc

Rod Hall - JP Morgan Chase & Co

Vijay Rakesh - Sterne Agee & Leach Inc.

Carter Shoop - Deutsche Bank AG

George Notter - Jefferies & Company, Inc.

Christopher Muse - Barclays Capital

Mark Sue - RBC Capital Markets Corporation

Steven Fox - Credit Agricole Securities (USA) Inc.

Simona Jankowski - Goldman Sachs Group Inc.

Presentation

Operator

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Ladies and gentlemen, thank you for standing by. Welcome to the Corning Inc. Third Quarter 2010 Earnings Results. [Operator Instructions] With that being said, I'll turn the conference now to the Vice President of Investor Relations, Mr. Ken Sofio. Please go ahead.

Kenneth Sofio

Thank you. Good morning, and welcome to Corning's Third Quarter Conference Call. This morning, Jim Flaws, Vice Chairman and Chief Financial Officer will start the call with some prepared remarks and then go to Q&A.

These remarks do contain forward-looking statements and 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 on our company's SEC reports. Jim?

James Flaws

Thanks, Ken. Good morning, everyone. This morning we released our results for the third quarter, which can be found on our Investor Relations website. We have posted accompanying slides online as well. Here are the key messages you will hear today. First, our third quarter segment results were in line or better than revised guidance we provided on September 14. Telecom, Environmental and Specialty Materials sales all exceeded our expectations for the quarter. Telecom sales were up 5% sequentially, driven by strong fiber-to-the-home and private network demand. Environmental sales were up 13% sequentially, driven by stronger auto and diesel demand. And Specialty Material sales were up 26% driven by Gorilla Glass and Advanced Optics.

Second, our Q3 results did benefit from a stronger yen-to-US dollar exchange rate in the quarter. Our free cash flow was $208 million in quarter three. For the first three quarters, our free cash flow now totals $1.2 billion. Glass volume in total for our wholly-owned business and SCP declined 8% sequentially, which was in line with the overall glass market. Worldwide retail sales of LCD televisions, with the exception of the United States, continue to be strong in the third quarter.

Inventory levels at the panel makers and for the supply-chain in total have improved. For the entire supply chain, we believe there are about 17 weeks of inventory exiting the third quarter, down from 18.5 weeks entering the quarter.

We saw a modest increase in utilization rates at the Taiwanese panel makers in October, which in turn resulted in a modest increase in demand for our glass. We believe this was in response to improved panel inventories and expectations for strong holiday retail demand. We are forecasting panel maker utilization rates to remain modestly higher the remainder of Q4 in comparison to the low point last quarter, which was in September. However, there is the possibility rates could be lower on average for Q4 versus Q3.

As a result, we expect worldwide glass market volume could be flat to down slightly in the fourth quarter. We expect fourth quarter volume at both our wholly-owned business and SCP to be in line with the overall glass market. Worldwide glass demand remains on pace to hit 3.1 billion square feet this year. Our glass price declines may be more pronounced in the fourth quarter versus prior quarters. And lastly as a reminder, the fourth quarter is typically a weaker seasonal quarter for several of our businesses including Telecom.

Now let me go to the details. Our third quarter sales were $1.6 billion, a 6% decrease from the second quarter and an 8% increase from a year ago. Our Q3 sales benefited from changes in exchange rates by about $45 million versus Q2.

Moving down the income statement. Gross margin was 45% in Q3 compared to 48% in Q2. The decline was a result of lower volumes in our Display segment, which offset higher margin performance in Telecom, Environmental and Specialty Material segments. Gross margins included $20 million in Gorilla-related startup costs at Shizuoka. Please note, we did not record this as a special item. And as a reminder, our Q2 results also included $25 million in startup costs at Shizuoka.

Operating expenses on a dollar basis were basically flat quarter-to-quarter. Other income declined from $65 million in Q2 to $2 million in Q3. The decline was primarily due to a $30 million loss on a retirement of debt. During the quarter, we issued long-dated bonds at very attractive rates, and we repurchased bonds with higher coupon debt. The loss was incurred on the tender of that debt and was treated as a special item in Q3.

Our results were also negatively impacted by about $20 million in pretax foreign exchange loss in the quarter. As a reminder, we hedge monetary assets and liabilities that are denominated nonfunctional currencies. Gains and losses from these activities show up in our P&L. Exchange rates were very volatile in Q3, and our hedges can not always be perfectly matched to the movement in the underlying exposure. In any quarter, we can experience incremental gains or losses due to foreign currency movements. This quarter, those losses totaled $10 million.

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