Corning (GLW)

Q3 2011 Earnings Call

October 26, 2011 8:30 am ET


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

Kenneth Sofio -


Simona Jankowski - Goldman Sachs Group Inc., Research Division

Wamsi Mohan - BofA Merrill Lynch, Research Division

Nikos Theodosopoulos - UBS Investment Bank, Research Division

Ehud Gelblum - Morgan Stanley, Research Division

George C. Notter - Jefferies & Company, Inc., Research Division

Ajit Pai - Stifel, Nicolaus & Co., Inc., Research Division

Jim Suva - Citigroup Inc, Research Division

Rod B. Hall - JP Morgan Chase & Co, Research Division

Amir Rozwadowski - Barclays Capital, Research Division

Mark Sue - RBC Capital Markets, LLC, Research Division



Ladies and gentlemen, thank you for standing by. Welcome to the Corning Incorporated Quarter 3 2011 Results. [Operator Instructions] It is my pleasure to turn the call over to Mr. Ken Sofio, Vice President of Investor Relations. Please go ahead, sir.

Kenneth Sofio

Good morning. Welcome to Corning's third quarter call. This morning, Jim Flaws, Vice Chairman, Chief Financial Officer, will have some prepared remarks before we move to the Q&A. These remarks do contain forward-looking statements that fall within the meaning of the Private Securities Litigation Reform Act of 1995. They involve a number of risks, uncertainties and other factors that could cause our actual results to differ materially. These risks are detailed in the company's SEC reports. Jim?

James B. Flaws

Thanks, Ken. Good morning, everyone. Hopefully, you had a chance to read the press release we issued this morning on our third quarter results. If you haven't, a copy can be found on our Investor Relations website.

We had a good quarter, with sales approaching $2.1 billion, which is up 30% year-over-year, and with EPS, excluding special items, at $0.48. In summary, Telecom, Environmental, Specialty Materials and Life Sciences all had significant year-over-year growth. Glass line in our wholly owned business -- Display business did better than our realized expectations from early September. SCP volumes did not decline as much as we anticipated but were still down significantly sequentially. Our quarter 3 results did benefit from the strengthening of the yen.

I'll come back to the quarter in a minute, but I'd like to highlight our key messages this morning. First, third quarter glass volume at our wholly owned business was up sequentially in the mid-single digits but down more than 20% at SCP. We did regain share at our wholly owned business in Q3, but SCP lost some share. Second, price declines in Q3 were in line with our expectations. Third, retail demand for LCD televisions remain strong throughout September. The data we have so far for October in the U.S. also shows good demand.

Despite the continued strong retail environment, panel makers ran at much lower utilization rates during the third quarter, especially in Korea. Strong retail demand in Q3, coupled with lower production rates, led to a significant contraction in supply chain inventory during the quarter. We believe supply chain inventories exited the quarter around 14 weeks.

Looking ahead, we expect Korean panel maker utilization rates on average to be higher in Q4 than Q3. Utilization rates outside of Korea in Q4 will be comparable to Q3 but will vary by panel maker. Volume at our wholly owned business in Q4 will be flat to down slightly compared to the better-than-expected volume levels in Q3. Volume at SCP is expected to be up at least 20% due primarily to our regaining share and higher utilization rates at panel makers. We expect pricing pressure to be more significant in Q4 than in previous quarters. As we told you before, our glass typically enjoys a price premium in the market. Pricing varies by customer depending on factors such as amount of glass they purchase from us, but by and enlarge, our glass sells at a premium worldwide. Over time, if that price premium becomes too high at a particular customer, we will feel more pressure to reduce price to narrow the gap, pressure to become even greater when there's excess glass capacity available, which is the case now. As a result, we will likely lower pricing to a greater degree than we have in previous quarters in order we may keep our premium at an acceptable level and maintain our market position.

At Dow Corning, we're seeing significant price declines in silicones. In polysilicon, spot pricing is declining and will now affect Hemlock's spot sales. Dow Corning's equity earnings could be down as much as 40% sequentially.

We expect to see normal seasonal fourth quarter declines in other businesses such as Telecom, Environmental and Life Sciences. In Specialty Materials, sales will be lower sequentially, reflecting lower parts demands for tablets, as well as a potential start of a cyclical downturn in the semiconductor industry.

Lastly, we are very pleased to announce we've reached an agreement with Samsung to increase the cash dividend from SCP effective in 2012.

Now turning to our third quarter results, Q3 sales were $2.1 billion, an increase of 3% over Q2 and 30% over last year. All of our segments posted solid double-digit percentage growth over last year. Earnings per share, excluding special items, were $0.48 in Q3 and consistent with Q2. Our Q3 EPS benefited from the reversal of compensation accruals in the quarter, which was probably $0.025. The strength in the yen also benefited our results by almost another $0.02.

The third quarter gross margin, in terms of dollars, was an all-time record for Corning at $978 million. Gross margin percentage increased, as we had expected, from 44.3% in Q2 to 47.1% in Q3. The growth was primarily driven by strong operating performance in Display and Specialty Materials. Q3 gross margin included about $16 million onetime benefits, including the adjusted compensation accruals. As a reminder, Q2 had included $8 million in project spending that did not repeat in Q3. So excluding these onetime items, gross margin increased about 2 percentage points in the quarter.

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