Highlights From GLW's Q3 Conference Call: Sales Up Sequentially in Every Segment; Several Comments on Worldwide Outlook

October 26, 2009 1:29 PM EDT

Corning (NYSE: GLW) reports Q3 EPS of $0.42, 3 cents better than the analyst estimate of $0.39. Revenue for the quarter was $1.50 billion, which compares to the estimate of $1.42 billion. Shares started off in positive territory, but are now down 1.5%.

Highlights From GLW's Q3 Conference Call:

• 2010 LCD glass market expected to grow 15%.
  
• (CFO) Sales were up sequentially in every one of our segments.
  
• We believe LCD supply-chain inventories at the end of Q3 are at appropriate levels to meet fourth-quarter demand.
  
• Anecdotal data suggest LCD television sales in China were very robust during Golden Week. It appears the amount of inventory built for the holiday week was appropriate to meet the strong demand there.
  
• Retail sales of LCD televisions remain strong worldwide throughout Q3. This helped pull a significant amount of product through the supply-chain and kept inventory levels healthy. We anticipate the strong
  retail environment to continue in Q4.
  
• We expect panel pricing to continue to gradually decline in the fourth quarter. We do not view gradual panel price declines in Q4 as a negative.
  
• We do not believe utilization rates need to fall significantly for borrowing a much stronger end market than we currently anticipate, they're likely to be reduced.
  
• We expect our Display glass prices to be flat in Q4 at both our wholly-owned business and SCP.
  
• We believe the glass industry has the appropriate amount of capacity to meet our expectations for the 2010 glass volume.
  
• With our current view the end market demand and supply-chain, we are now forecasting the 2010 LCD glass market to be 2.7 billion square feet, up about 15% from this year.
  
• Q3 sales were 1.5 billion, a 6% increase from Q2.
  
• Moving down the income statement, gross margin was 40.5% in Q3 compared to 41.2% in Q2. The slight decline was due to 22 million in incremental accelerated depreciation charges related to Shizuoka plant following the August earthquake there. Excluding these charges, gross margin in Q3 would have been 42%.
  
• Both our Display segment excluding Shizuoka and our Environmental segment had good manufacturing performance in the quarter.
  
• SG&A was 219 million or 15% of sales in the quarter, R&D was 131 million in Q3, about 9% of sales.
  Other income was 48 million in Q3 compared to 41 million in Q2.
  
• Equity earnings were 418 million in Q3, which is an all-time record for Corning and 16% higher than Q2.
  
• We now expect our full-year tax rate to be around 2%, for the first two quarters the tax rate was zero.
  
• Net income excluding special items was 654 million in Q3 compared to 614 in Q2. About 24 million in increase is due to favorable exchange rates.
  
• Display: Q3 sales were 679 million, slightly higher than Q2. Volume and the pricing at our wholly-owned business were flat sequentially. Sales benefited from the change in the yen to US dollar exchange rate, which averaged 94 in Q3 versus 97 in Q2.
  
• Display gross margin was slightly lower in Q3 compared to Q2 due to the accelerated depreciation.
  
• Equity earnings from SCPs, LCD glass business were 317 million in Q3, an increase of 12% compared to 284 million in Q2.
  
• Volume was up 7% sequentially and pricing was flat. SCP also benefited from changes in exchange rates. For your modeling purposes, SCP third-quarter LCD sales were $1 billion, up 9% versus the second quarter. As a reminder, this represents SCP LCD sales only. Our public filings will report SCP's total sales, which includes CRT glass and other product sales.
  
• Net income in the Display segment, which includes equity earnings, was 600 million in Q3 versus 555 in Q2.
  
• Strong demand for LCD TV's continued throughout Q3.
  
• Worldwide LCD television unit sales at retail were up 29% in July, 27% in August. We don't have complete data for supply numbers provide a worldwide growth figure for that month, but for the regions that do have data, it's continued to be positive.
  
• In Europe LCD TV unit sales were also very strong. July and August sales were up 22 and 13% respectively.
  
• In the United States LCD TV unit sales were up 13% in July, 16% in August and 22% in September. As a reminder, the U.S. datas provided by NPD and their data does not include Wal-Mart (NYSE: WMT) and Costco (Nasdaq: COST). However, Costco recently reported August LCD TV unit sales grew 32% over the prior-year and their September sales were up 35%.
  
• Getting back to the overall supply chain, we believe the total inventory in terms of equivalent square feet of glass was about 800 million excess in Q3. This would be inventory at panel makers, set assembly and at retail.
  
• And at retail, we believe inventories there also increased compared to Q2 and are up about 10% in comparison to the third quarter of last year.
  
• Moving to the Environmental segment, sales in Q3 were 167 million, an increase of 27% over Q2 and much higher than we expected.
  
• Diesel sales in Q3 were 64 million, up 36% sequentially.
  
• Moving to the Telecommunication segment, sales in the third quarter were 450 million, an increase of 3% versus Q2 and in line with our expectations. We saw a strong demand for optical fiber in China during the quarter.
  
• In Europe, our sales quarter-to-quarter were consistent. However compared to last year, European Telecom market this year has declined due to lower capital spending by our customers.
  
• Sales in our fiber and cable products in the third quarter were 251 million, an increase of 7% sequentially. China's 3G build-out was the primary driver again this quarter. Sales of hardware and equipment products were 199 million in Q3, a slight decline from Q2.
  
• In the Life Science segment, sales for the third quarter were 92 million, compared to 81 million in Q2. Q3 sales included 7 million from recently acquired company Axygen.
  
• Turning to Dow Corning, equity earnings in Q3 were 92 million up 59% versus Q2 of 58 million. Sequential increase was driven by a higher demand in both the silicone segment, as well as Hemlock. Silicone sales have grown each month, over the past several months.
  
• Free cash flow was an outflow of 114 million in Q3, free cash flows and non-GAAP measures and a GAAP reconciliation is on our web site.
  
• We were successful in reducing inventories again from 647 at the end of Q2 to 618 million at the end of Q3. The biggest decline this quarter came from Environmental and Telecom.
  
• Gross margins in our Display business will be higher in the fourth quarter as the non-repeated Shizuoka repair cost will be only somewhat offset by repair cost at Taichung. Fixed cost drag from our Gen 10 plant in Q4 should be comparable to Q3.
  
• We believe utilization rates for the panel makers outside of Korea will fall from above 90% to somewhere in the 70s later this quarter.
  
• Right now our supply chain models indicate there will be approximately 700 million -- 750 million square feet of inventory exceeding Q4.
  
• So on summary, while it's possible there could be too much inventory heading into Q1, we do not view it as the most likely case. We feel good about the supply chain today and expect to remain healthy heading into Q1.
  
• Our recent forecast suggests that worldwide glass market will be about 2.7 billion square feet in 2010, an increase of around 15%. We expect about 156 million LCD TV unit sales next year, up from around 130 in this year.
  
• In our Telecom segment, we expect Q4 sales to be down 15%. As a reminder, Q4 sales are normally lower compared to Q3.
  
• In our Environmental statement, we expect Q4 sales to be between 10 to 15% lower sequentially.
  
• In Life Sciences, we anticipate Q4 sales to grow more than 25% sequentially, all due to Axygen, which is the company we acquired in mid-September. Excluding Axygen Life Science sales would have been just slightly lower.
  
• In Specialty Materials, we expect Q4 sales to be flat to down 5%, and at Dow Corning, we're expecting another good quarter. We believe equity earnings could grow 10 to 15% sequentially.
  
• We expect our corporate gross margin will be consistent in the third quarter, but the increase in Display will be offset by lower volumes in Environmental and Telecom. SG&A will be slightly higher reflecting normal year-end accruals. R&D will likely be around 10% of sales. We expect our tax rate to be between 2 and 3% in Q4.
  
• (Q&A) Jim, have you started to see retail inventory levels decline as we head into the holidays or is it too early to tell? And can we see a scenario where retailers don't have enough inventory? And conversely, if we don't get the sell through that we're anticipating -- are there indications that the panel makers will move faster this time around to adjust their utilization rates? (A)We think retail inventories are appropriate right now. As you can imagine the scenario where demand is very strong and maybe there would be shortages. But right now, we think they're at an appropriate level and they -- retailers have built a little to get ready for the holiday season in this country and in Europe in particular.It's hard for us to predict the reaction of panel makers to demand. I think everybody remembers last year when panel prices fell so dramatically, but we don't feel they are -- we're seeing a repeat of that. So we think it's unlikely that we'll see drastic reductions in utilizations. But it's difficult to forecast.
  
• And separately Jim, as you have more visibility into your planning and as your overall demand picture brings up for next year, how should we think about operating expenses, R&D in particular as we start 2010? (A)I think you'll see R&D levels to be relatively consistent year-over-year. And -- so I don't think you'll see a big shift there. SG&A will probably grow with inflation, but again, I don't think you should expect to see big changes in SG&A.
  
• Then I guess moving to Dow Corning, I kind of think of it as a late cycle traditional type business with Hemlock added to the mix which -- you know at some point I would think we would start to see some pricing risk there. And so I guess, how do you think about the growth rate for that business into 2010 and 2011. And what kind of both earnings and dividends should we expect? (A)I'm not ready to give a guidance on Dow Corning for next year at this stage. I mean we have seen increased demand for silicones all year long, and we saw something very unusual for Dow Corning in the late December of '08 and January of 2009 where initially we don't see as violent a move in terms of destocking by our customers as we saw this time. Before [ph] we think we are passed that, and we have seen consistent robust demand overall -- some segments stronger than others. But they have a very high R2 versus economic growth around the world. So it all depends on what you think the growth rate is. If the economies grow, they will grow in silicones. Hemlock, it's much difficult to predict, obviously stock prices are down quite a bit. But our customers all continue to take their contractual obligations, and so we will just have to see how the solar spot market develops.
  
• First of all on Gen 10, given the better than expected or less than expected drag in the quarter, why does the Gen 10 factory still have the same type of margin drag this quarter?And if you can also just sort of play out when it would get sort of to a neutral effect on margins? (A)Well, because we're bringing on additional unit capacity this quarter, which with fixed costs will just be starting up, there will be no production off the tank that we're starting up. So there's more volume, we have some more additional fixed costs, if not producing. And I would say, as we exit next year, we're assuming that our customer is taking all the volume that they said they're going to, it shouldn't be a drag.
  
• And then, just on the -- I think I heard that you said the fiber-to-the-home business or sales into that type of market were less than expected or negative offset. Can you just talk about what's going on in that market? How it's been affected by the economy and how to play out until next year from what you're hearing from the carriers? (A)Well, for fiber-to-the-home, what we're seeing is more of a slowdown in some of the major projects around the world. Some of its inventory correction at those carriers were fiber-to-the-home is well established in just how they're managing their projects. But in Europe, we're seeing a little bit more of a slowdown versus what we expected and I think that's driven by a combination of regulatory to-date and just timing on more full commitment from some of the major players there.

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