Corning Incorporated (GLW) Q2 2010 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. Welcome to the Corning Inc. Second Quarter 2010 Results Conference Call. [Operator Instructions] Now with that being said, I'll turn the conference over to the Vice President, Investor Relations, Mr. Ken Sofio. Please go ahead.

Thank you. Good morning. Welcome to Corning's Second Quarter Conference Call. This morning with Jim Flaws, Vice Chairman, Chief Financial Officer, will lead the discussion. Joining me will be, Wendell Weeks, our Chairman and Chief Executive Officer. Today's remarks do contain forward-looking statements and they fall within 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. We have these risks detailed in our SEC reports. Jim?

Thanks, Ken, and good morning, everyone. This morning, we released our results for the second quarter, which can be found on our Investor Relations website. We have posted accompanying slides online as well. In summary, we're very pleased with our second quarter results as they exceeded our optimistic expectations. I'll start with the highlights. Second quarter was a tremendous quarter as we posted record net income and earnings per share. EPS before special items was $0.58, that's $0.06 higher than the first quarter. All segments experienced year-over-year sales in net income growth in all but one segment increased sales sequentially. Gross margin increased from 47% in Q1 to 48% due to higher volumes and very strong manufacturing performance in both Telecom and Display. Our Display segment had an excellent quarter. Volume in the base business was up more than 10% sequentially and higher than expected. LCD TV retail sales have continued to exceed our expectations. Telecom had an excellent quarter as well. Sales were up 21%, sequentially driven by very strong fiber-to-the-home and also private network demand. Specialty Material sales increased 31% sequentially, led by a very robust Gorilla Glass sales. Gorilla Glass sales are currently on pace to be approximately $250 million this year. Free cash flow was exceptionally strong in Q2, $536 million. For the first half of this year, free cash flow is slightly over $1 billion. Looking ahead, we believe that third quarter has the potential to be another strong quarter for Corning. So let's get to the details. Second quarter sales were $1.7 billion, 10% increase from the first quarter and a 23% increase from a year ago. Our Q2 sales were negatively impacted by changes in exchange rates by approximately $27 million compared to Q1. Moving down the income statement, gross margin was 48% in Q2 compared to 47% in Q1. This improvement was the result of very strong manufacturing and higher volumes in Display and Telecom. Our gross margin did include $25 million in Gorilla-related startup costs at Shizuoka. Please note we did not record those costs as a special item. Excluding those startup costs, our gross margin would have been over 49%. Regarding OpEx, we were pleased with our level of spending this quarter for both SG&A and R&D. Other income of $65 million in Q2 consistent with Q1, and equity earnings were $474 million in the second quarter compared to $469 million in Q1. Our tax rate turned out to be 3.5% in the quarter which was slightly higher than we had forecasted. Net income, excluding special items, was $916 million in Q2 compared to $818 million in Q1. The negative impact from exchange rates was about $0.01. Our share count for the second quarter was 1.58 billion shares and consistent with quarter one. So let me dive into Display. Second quarter sales for the segment were $834 million or about 7% higher than Q1. Volume was up more than 10% and price declines down slightly. Sales were slightly negative impacted from a change in the yen to U.S. dollar exchange rate which averaged 92 in quarter two versus 91 in Q1. Display gross margins expanded in the quarter due to higher volumes and improved manufacturing performance. Equity earnings from SCP's LCD Glass business were $353 million in the second quarter, an increase of 3% from the first quarter. Volume was up more than 5% and pricing was down slightly. For your modeling purposes, SCP's second quarter LCD sales were $1.1 billion and consistent with the first quarter. As a reminder, this represents SCP's LCD sales only. Our public filings report SCP total sales, which include CRT glass and the other product sales. Now I'd like to turn to discussing the supply chain and I'll start at retail. Retail demand in Q2 was strong across all major products; notebooks, monitors and televisions. I'll start with the television retail data. In the past, the worldwide retail growth rates we provided were the summation of the top four regions of the world, North America, Europe, Japan and China. While our television forecast of 177 million had included all regions of the world, the previous worldwide monthly growth rates had only been the total of the four major regions. We are now able to track emerging Asia and South America, and so we're adding those to our worldwide monthly growth rate data. Developing regions such as these will be responsible for a significant amount of worldwide growth this year and beyond. For this year, we expect about 23% of LCD televisions to be sold in these regions. Using our new worldwide measure, LCD television unit sales at retail were up 42% in April, 34% in May. We don't have the complete data for June yet to provide a comparable worldwide growth figure for that month. In Europe, television growth was very strong, 20% in April, 34% in May. We don't have a final data for June yet but our preliminary estimates indicate it was also in the 30s, so again very strong. We think May and June demand may have been driven partially by the World Cup but we don't have specific data to point to. In Japan, April was up 44%, May, 29% and June, 35%. These are all very strong growth rates, particularly May and June. As a reminder, the echo point program started last May so this is the first year-over-year apples-to-apples comparisons of LCD TV sales since the program started. For a market that was first to adopt LCD televisions and were more than 90% of all televisions sold each year are LCD, these are impressive growth rates. We believe a faster replacement rate is driving much of this growth. In China, LCD television unit sales were up 72% in April, 23% in May and 38% in June. The higher April growth rate was likely due to sales that were pulled ahead of the Labor Day holiday, we believe retailers there now begin promoting LCD televisions early, similar to how it's done here in the United States for Black Friday. The blended growth rate for April and May was 42%, in line with our expectations, as was June which was at our optimistic level. In the United States, sales were up 10% in April but down 7% in May and down 10% in June. The year-over-year declines in May and June were likely due to the tough comparisons to last year, which is when the second and final round of the digital conversion occurred. As a reminder, May and June are typically lower volume retail months for televisions in the United States. We have the first two weeks of July, one week was up and one was down. Obviously, the U.S. television market has not been as robust. We think one of the contributors has been the lack of promotions during this time. In the developing regions, emerging Asia sales were up 59% in April, 70% in May. South America sales were up 138% in April and 155% in May. We don't have the June data for either of these regions yet. And for your models, the monthly worldwide growth rates for LCD television unit sales, including emerging regions, were 23% in January, 45% in February and 47% in March. Now turning to monitors, sales continue to be on track with our forecasts. Our real-time data is based on shipments of the top nine monitor brands which make up about 70% of the worldwide monitor market. Year-to-date sales were up 12%. For the Notebook segment, which includes traditional notebooks, netbooks, slates and tablets, our data is based on the top five ODMs which make up about 75% of the worldwide notebook market. Year-to-date, shipments are up 50% and higher than our forecast. We now expect LCD TV unit sales in 2010 to be 185 million, which will be an increase of about 28% over last year. Our notebook estimate has also increased and is now 213 million units, an increase of 25%. Our forecast for monitors remains the same at 184 million. Retail data points are very strong and support our belief that the market is trending towards our optimistic case outlook. This should bode well for glass demand but as always, we need to think about the supply chain inventory levels. So I'll turn to that topic now. We measure the number of weeks of inventory in the supply chain, at panel makers, set assemblers and at retail. We believe that between 15 and 20 weeks of inventory in the supply chain is reasonable. At the end of Q1, we believe they're about 16 weeks of inventory. Investors with good memories our preliminary number for Q1 had been 17 weeks but our final number is 16, which we had concluded was reasonable heading into the second quarter. We also told you that inventory levels may expand in Q2 as a supply chain prepares for seasonally stronger second half. We believe this happened. Our preliminary models indicate they were roughly 18.5 weeks of inventory heading into Q3. I'll provide some more color on the supply chain in our outlook discussion. One comment on panel pricing. As you know, we view panel pricing as the canary in the coal mine. The panel prices are up, stable or even down moderately. We believe it's an indication that panel demand continues to be strong, suggesting strength further down the supply chain. Panel prices have been declining for most of the second quarter. These declines have been very moderate and in line with our expectations. We expect to see panel prices to continue to decline at a moderate measured pace throughout the third quarter. Moving to the Environmental segment, sales in the second quarter were $184 million and down slightly from an extremely strong first quarter, due primarily to changes in the euro to U.S. dollar exchange rate and slightly lower auto volume. In Telecom, second quarter sales were $441 million, up 21% from Q1 and stronger than our expectations. There were sequential sales increases in all product categories in all geographic regions. In particular, we saw a very strong demand for fiber-to-the-home and private network products in North America during the quarter. Compared to last year, Telecom sales were fairly consistent. Excluding divestitures, year-over-year sales were up 4%. Private network sales were up over 50% from last year which were mostly offset by a 34% drop in fiber-to-the-home sales year-over-year. The drop in fiber-to-the-home sales was not unexpected, given the planned slowdown by Verizon. Now sales in Specialty Materials were $126 million in Q2, an increase of $30 million or 31% versus Q1. This increase was primarily due to strong demand for Gorilla Glass in advanced optics. Gorilla sales are currently on pace to be about $250 million of sales this year. We recently reached an agreement to supply cover glass on LCD televisions. It should result in several hundred million dollars of additional sales in 2011. As a result, we believe Gorilla Glass has the potential to reach $1 billion of sales next year. In Q2, we incurred $25 million in startup and other construction-related charges at Shizuoka to prepare it to make Gorilla Glass for television covers. There will be additional costs in Q3 but they'll likely be lower than the Q2, and we expect to begin manufacturing later this quarter. In Life Sciences segment, sales in the second quarter were $125 million, up 6% versus the first quarter. Turning to Dow Corning, they had record sales and income in the second quarter, driven by strong silicon and Hemlock sales. For your modeling purposes, second quarter sales were $1.55 billion, an increase of 14%. Equity earnings from Dow Corning were $111 million, consistent with the first quarter. As a reminder, the first quarter had included a one-time tax gain of $21 million. Excluding this, our Q2 equity earnings were up 22% sequentially. Silicon demand continues at a very high level and the strongest in developing regions such as China and Latin America. Hemlock's been running well and running at full capacity. In polysilicon, spot pricing has been stable. Now turning to the balance sheet, we ended the second quarter with $4.3 billion in cash and short-term investments, up from $3.9 billion last quarter. Free cash flow was $536 million and much higher than we expected. For first half, our free cash flow was about $1 billion. As a reminder, free cash flow is a non-GAAP measure and the GAAP reconciliation is on our website. I'd like to discuss what we're doing with some of these cash. Hopefully, you saw our two CapEx announcements from last week. In summary, we're adding capacity in many of our businesses to be prepared to capture a significant amount of future growth. In China, we're expanding our auto substrate plant. We're also building a new manufacturing distribution center for Life Sciences. And we are adding a new melting and finishing factory for our LCD business. In total, we're preparing the company to be in a position to capture significant new sales opportunities over the next four years as we strive to get Corning to the $10 billion sales level. As a result, our capital spending will likely to be closer to $1.2 billion this year versus our previous estimate of $1 billion, and looking ahead to 2011, our capital spending will likely to be at least $2 billion. We're also looking at our debt obligations coming due over the next several years. As you know, we have what we call a clear runway strategy. Simply put, we would like to avoid significant debt maturities over the near-term, usually the next three to five years. In the past, we've proactively reduced our refinanced near-term debt obligations, and given the current low or attractive interest rate environment, we may do so again this year. So now turning to our outlook. As I mentioned at the beginning, we believe the third quarter has the potential to be another strong quarter for Corning. We expect the glass market to remain robust in comparison to the very strong quarter two. In Display, we expect our total glass volume to be consistent with the very strong second quarter. Volume at our wholly-owned business will be likely to be flat to down slightly. While at SCP, volumes should be up slightly. We anticipate glass price declines at both our wholly-owned business and SCP to be similar to the previous quarter. As I mentioned earlier, we believe the amount of inventory in the total supply chain heading into Q3 was at 18.5 weeks. This is inventory at panel, makers, set assemblers and at retail. It's been our experience to date that between 15 to 20 weeks is a reasonable range. Supply chain inventories fall below 15 weeks. We notice out-of-stocks, grows about 20 weeks, we notice the industry moves to a more severe supply chain correction. We think milder utilization cutbacks by panel makers will help the supply chain from building too much inventory heading into Q4. We have already received some changes from panel makers. We believe this is very prudent, rational decision, to prevent inventories from climbing too much. We do not think the utilization changes reflect retail market concerns. This is based on the retail data we have to date. The amount of products that were shipped from retailers to consumers for all applications in the first half was up significantly. In Q1, the year-over-year increase was 24%, in Q2 it was 29%. If this pace continues which is what our forecast suggests and the supply chain takes a prudent view of its inventory levels and moderates production levels accordingly, we do not expect to see an overbuild of inventory in the supply chain heading into Q4. Now turning to Telecom, we expect third quarter sales to be flat to down slightly in comparison to the very strong second quarter. We expect our sales in Environmental Life Science segments to be consistent with Q2. And especially Materials, we anticipate Q3 sales to be up 25% sequentially, driven by Gorilla Glass. Dow Corning, we expect to Q3 equity earnings to be down slightly. Moving to the income statement, we expect our corporate gross margin in Q3 will be consistent with Q2. SG&A and R&D, as a percentage of sales, will be consistent quarter-to-quarter. Investors should note that movements in the yen to U.S. dollar exchange rate influence our results. For your modeling purposes, every one point move in the yen, our sales and net income moves by about $10 million. The net income impact, including SCP, where a stronger yen will also improve their results. Regarding our Q3 tax rate, we expect it to be between 4% and 5%. Given our Q2 performance and our expectations for Q3, our total profit outlook for 2010 is more positive today than it was a few months ago. We expect to be earning more money this year, so we think this will lead to an average tax rate to the year of 4% to 5% versus our previous estimate of 2%. Ken?

Thank you, Jim. And John, we are ready to take some questions.

[Operator Instructions] And first, with the line of Mark Sue with RBC Capital Markets.

Is your sense that panel inventories may decline from 18.5 weeks as we move in from 3Q and into 4Q just as we extrapolate the supply chain data? And with utilization rates starting to decrease, how should we start thinking about sequential display volumes in 4Q for both you and Samsung Corning Precision and should we also extrapolate the thought that pricing will still be normal as we finish 2010?

So we're expecting our pricing to stick to our strategy so we have no reason to think that we'll be moving off of that. And we expect that glass sales will be fine heading into Q4, assuming that the very strong year-over-year demand at retail continues. I just want to remind you that the 18.5 weeks I gave you, was not just panel makers, it includes set assembly and retail and actually the majority of the inventory and supply chain as opposed to panel makers.

And Jim as we start thinking about 2011, there’s some investor thought that eventually, that the demand for display will stop suddenly. Maybe if you could just give us your big picture views of kind of what your early thoughts are for 2011 and attrition-wise and growth-wise?

So we don't believe the demand base LCD glass is going to stop suddenly at all. We believe that we will continue to see good demand led by television, particularly as emerging regions continue to grow very rapidly. We expect that the IT market will continue to be strong, and we believe that television demand and established television markets will continue to grow, particularly as we start to move into replacement cycles. As I indicated in my remarks, we think Japan is the leading edge of this. We're now having sold significant number of televisions for most of this past decade. We're seeing very strong growth even excluding the echo point program, and we think that a replacement cycle will be shorter for LCD televisions and CRTs. So we're not looking for any sudden halts in growth in the base LCD business.

Our next questions from Nikos Theodosopoulos with UBS.

First of all, Jim, if the Gorilla Glass business does hit $1 billion next year, can you talk about what kind of margin profile it would have at that kind of run rate? And would it be incorrect to look at the historical gross margin profile of the LCD business as it ramped to give us a reflection of what might happen to Gorilla? So that’s question number one. And question two is, can you give some color on CapEx next year, the incremental from this year? How much of that is China expansion versus the Gorilla Glass expansion?

So the margin structure for Gorilla will be below our corporate average in the near term. Our model for our Gorilla business opportunity is the glass portion of the product, should have margins similar to display. But the finishing portion, which can range from simple line exchange to other products such as anti-glare and screen printing will have very low margins. So short-term, you should expect the margin structure for the overall Gorilla to be less than the corporate average. On the finishing processes, these are very new to us and we are working to improve the cost structure of those as we go forward. But we're very confident about the glass portion and some on the handheld items where we've been finishing for a while, we're improving our costs there. Short-term, Gorilla will be below our corporate average. I'm not prepared at this stage to give out details on the capital spending for next year driven by individual projects. As we get closer to the end of the year, we'll break the out spending. But China, in general, is a large portion of our CapEx next year as we will be spending on the Display factory, the Environmental factory and Life Sciences.

Just a quick follow-up. That was good color on the Gorilla margin. Do you think that if the business gets to the $1 billion target next year, it would still be below corporate average, given the lower margin on the incremental processes? Or do you think there's a chance that you can improve the margin there so that it can get to corporate average?

Well, it will not be at the corporate average.

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

Can you help us on what your assumptions are to get to the $1 billion in 2011 for Gorilla Glass, perhaps in terms of what sort of penetration rate you're assuming in your TV assumption for 2011? And how much of that $1 billion will come from TVs versus say, smaller-sized applications and tablets?

We're not prepared to break out that detail at this stage.

I think the way you should begin to think about Gorilla is in two pieces. The fundamental jump being where we've continued to be doubling every year since we have been at this, the setting around with the touch interface. So if you want to get a feel for sort of the fundamental growth rates in that piece of the business, handheld and IT, then what you want to get an opinion on is how fast do you believe and what do you think the penetration will be of touch interface into our electronic devices, and that's something you can gather up a lot of opinions on. For me, I believe that is continued to be one of the most significant trends in Consumer Electronics and will continue until almost all devices have a touch interface in some way, shape or form. So we feel very good about how early we are in the stages of penetration there. And then there's another piece that’s begun to enter which is that from the design standpoint and from a functionality standpoint, Glass offers some tremendous advantages, specially our very strong glass versus plastic. First, it's a very authentic material, right? Next, it is much more damage-resistant, especially to things like scratches. It's more transparent, both to light but that then for equates to images, especially things like 3D images and it's also RF transparent, very unique. Finally, from a design standpoint, you have to understand that the thermal properties of glass. It has both a much higher heat capacity as well as a higher thermal conductivity and that's why when you touch glass, it's cool to the touch and it stays cool when it's in your hand because it doesn't warm. So all of those things also establish another drum beat in the business which is that of design. That, in our own engineering way, is much harder for us to predict and give a firm guidance on. So that's going to be a little bit of let's get some more experience. You will begin to see it around you, these borderless design TVs, other devices that I'm not at liberty to talk about at this time, and then you'll be able to get your own feel and opinions.

Can you help us with the gross margin in the Display business for the next quarter? You're ramping Taichung in Gorilla Glass', you spoke about higher inventory at the end of the 2Q, and your guidance of flat volume shipments which would imply some sort of quarter-over-quarter decline in gross margin in Display. Is that the right way to think about it or is there any other specific offsets that you would point to?

Our gross margins will be very strong again in the quarter. I won't give you any more specific numbers than that but you shouldn't expect big changes either way.

Our next question is from Steven Fox with CLSA. Steven Fox - Credit Agricole Securities (USA) Inc.: First of all, from a standpoint of looking at the panel industry, you seem to be suggesting a pretty diverse change in behavior going into the second half of the year. Is there anything you can point to that gives you confidence that the panel makers are going to behave responsibly over the next few months in order to keep inventories down? And then secondly, just the explanation around Gorilla Glass was very helpful but just curious, it seems like the Gorilla Glass market obviously has to be driven next year a lot more by TVs and we were expecting. And so is that something that we should start seeing in the first half of the year, second half of the year? How does that sort of play out qualitatively?

So I'm not sure what you meant by diverse by the panel makers but we believe the panel makers are beginning to trim utilizations very moderately as we speak. We have already received some notices of pullbacks both at SCP and our in wholly-owned business, and I think, for example, a panel maker announced results last night in talking about trimming very moderately. So we think that's all very appropriate to pull back just a little. I mean, the percentages are very tiny but we think that's appropriate. So we would say it is responsible and in line with inventories and what's happening in the market.

So, I think what you're picking up in terms of the acceleration of the growth rate it is indeed to the television covers are helping that. Basically, what we've been running on is this business continues to double, and what we're seeing a potential to do next year, it's not in the bag but the potential to do next year is we're doubling our doubling rate. And with that doubling of our doubling rate is my brand new app., which is borderless TV design and the applicability of Gorilla to that borderless design. New app, new product and you should expect to see that product and that application go with our customers' normal new model launch dates.

Next, we'll go to Brian White with Ticonderoga. Please go ahead.

When we think about the [indiscernible] (39:56) program that you announced this morning, you said it would be several hundred million in revenue in 2011, which equates to about 16 million units. Is this with one customer or multiple customers?

We've announced just that we have an agreement with one customer. We have the potential to have other customers.

And then on the glass pricing, it sounds like the decline in September quarter, you expect to be consistent with June quarter. Just remind us, when panel makers are cutting utilization and they discuss excess inventories, do they typically come back for greater price cuts or do they stand still versus previous quarter?

I have to say that panel makers ask us for price declines basically everyday, whether they're cutting or raising utilization. So there's no consistent behavior related to their output. I would just say, we're sticking to our basic strategy. We expect to have similar in Q3 versus we had in Q2. I'd just like to emphasize, I want to make sure people are not reading too much into these moderation utilization cuts. As an example, one panel maker talked about going from like 97% to 94% utilization. They're really very tiny cuts. Don't take this as a huge statement of change.

I know, Jim, it's just a directional change. That's why people get concerned.

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

I was hoping you could talk about the impact of the adoption of thinner glass at your customers and what impact that will have, if any, incrementally, to ASPs and gross margins as you look to Q3 and Q4?

I think the way to think about thinner glass is on a timeframe that is more than quarter-to-quarter. You are right to focus on thin glass. It is going to be, over time, one of the more significant trends in display. It matters to customers. It matters to our customers' customers. And what it does for us is it increases our degree of competitive advantage to the industry because of the way in which we happen to make it. It also provides us excellent opportunity to reduce costs. So we would view it as being a good thing relative to gross margins over time and relative to our competitive advantage. Remember, in these businesses, our gross margins are already very, very high. So talking about improving them is perhaps not as important as being able to maintain these very high levels. And then, we'll be very much a part of that, you're right to focus on it. More to come but it's just not going to happen overnight. These are significant product changes, significant long-term trends.

When you look at your models and your customers slightly lowering their utilization rates, where do you see inventory kind of ending up in aggregate exiting this quarter? And I guess, as part of that question, can you talk about expected linearity of glass shipments within Q3 and when you think maybe we could see an inflection point the other way on the positive side?

So we expect supply chain inventories to peak at the end of Q3 and will be coming down in Q4, obviously driven by the very strong retail pattern that occurs in the fourth quarter. We would expect that if weeks of inventory were right about the seasonality of the year-over-year growth at retail, being continue the strong rate that we've seen, we expect next year to be an overall growth rate for the glass market. And I won't call the exact quarter of what it's going to be, but we expect next year to be a growth year as long as we're right about the worldwide economies.

And next, go to Rod Hall with JP Morgan. Rod Hall - JP Morgan Chase & Co: I wanted to first of all, follow up on inventory and just ask, can you give us the absolute level, then, to inventory exiting Q2? And then, can you talk also on inventory about where you think what level and number of weeks we peak at in Q3 as we move through that quarter? And then, my second question is with regards to CapEx. I'm just wondering -- I mean, CapEx is accelerating a lot. I know you guys, it sounds like you're factoring in continued recovery in the global economy but we do have some questionable trends in terms of consumer confidence and so on, and I just wonder if you can talk a little bit about how much of that additional CapEx, maybe the $2 billion for next year, is committed? And how much you would have flexibility to pull back on if things did slow down?

So, first of all, our view is that we've never been able to tie consumer confidence directly to LCD purchases, when there have been dips before. So the only slowdown we really have seen, as I mentioned in my comments, is really United States televisions. Bu we're expecting to see good growth again for Gorilla and for LCDs next year. The capacity we're putting in the ground is really for 2012 by and large. The Chinese television market continues to grow very nicely. We don't expect to see any reversal of that growth. But clearly, these are big capital expenditure programs, and we always have the ability to moderate the rate of spending. So if we're wrong on this, we'll stretch out the capital. I doubt we would cancel it. We made that mistake in late '08 and actually have been harmed by not having capacity since then. But we certainly could stretch out the capital spending quite a bit. But against what we see in LCD, what we see in Gorilla, what we see in the China car market, we are pretty confident about the places we're investing and why we need the capacity. So we feel pretty good about that. In terms of your first question on inventory, I'll just say that we expect -- we ended at 18.5 weeks by our estimate at the end of Q2. We expect that we will not exceed the 20-week measure in Q3, and then the number of weeks of inventory begins to decline.

Let me just add a little bit on the capacity piece from a strategic standpoint which is, one of the things we've tried to do with our flat glass adjacency programs, like Gorilla and photovoltaics [ph] (47:26), is over the long period of time, we're derisking our capacity investments because we're developing multiple uses for the assets. This allows us to feel even more confident that we'll make use of the capacity as we do a really good job of market development in these other areas where very high valued uses of glass. So we feel better now, I think, than we have in a long time. Rod Hall - JP Morgan Chase & Co: If we think about a more cautious scenario -- just because we like to do scenario planning on this end of things, and I guess you guys do too, probably -- but would we be thinking just a couple hundred million of flex on the CapEx next year? Or would it be more than that? I'm trying to get a feeling for how much that CapEx could be stretched if you decided to do it?

How much it could be flexed down? Is that your question? Rod Hall - JP Morgan Chase & Co: Yes. How much flex down you might have if you were to get into it because it sounds like, as Wendell said, there is a strategic need to have more capacity going out into the future. So even if we saw an economic downturn, you would probably want to continue to build. So I'm just wondering, would flexibility on CapEx and your definition equate to a couple hundred million? Does it equate to $500 million? Just trying to get a feel for how flexible that number is.

$500 million.

And next, we'll go to Jim Suva with Citi.

Looking back at your Investor Day, you kind of laid out kind of how the year is going to progress according to plans for glass shipments of Q2 glass shipments being down, then Q3 up and then Q4 down. Obviously, time has progressed and we know more information now, and Q2 was much stronger-than-expected volumes, and Q3 now flat off a higher base. Can you help us understand how it all shakes out for kind of Q4 your production plans? And then my follow-up question would be -- there's really no mention on solar update yet. A few months ago, you were shooting snowballs and hale pieces at the services which sounded quite interesting, but now there's kind of literally no mention at all during the conference call. Has your solar efforts been delayed or tabled? Or what's the status on that?

So the chart we showed at the Investor Day was not our production. It was the glass market overall. Our production, if that's the question you're asking, is we're going to continue to run our production full-out through the remainder of the year. We would still desperately like to rebuild a little bit of inventory. Obviously, we've gotten wrong twice in the last six months' cycle of the quarters. You may recall, in quarter four, we thought Q1 would be down and Q2 up. And then as we got to the beginning of the year, we thought Q1 would be up, Q2 down. As it turns out they were all up sequentially. And so we don't get it precisely right in terms of the sequence. We think we've been more accurate about the end market. So we're thinking that there'll be a -- quarter three will be a very good quarter for the glass market overall. It will vary a little between Korea and the base business, but coming off of the very strong quarter two combined with my enter [ph] (51:12) utilization cutbacks, and we're expecting Q4 to be a good quarter also.

And on photovoltaics, I mean, how much good news can you guys take in one small period of time? I still feel good about photovoltaics and watch the space. More progress, things are doing good.

And we go to John Roberts with Buckingham Research.

Dow Corning up 22% in earnings sequentially and up 14% in sales sequentially. Do they have their own Gorilla Glass project ramping up? Or how do you explain that kind of sequential improvement?

Well, Hemlock contributed nicely in Q2. Silicones are doing great. We're seeing strong demand around the world. They are having to deal with start-up costs of their China facility which is ramping now. But even that has been, I think, a little less of an impact in what we originally expected. So silicones are going great. I think, if I recall at the top of my head, China sales this year up 48% first half versus first half. But even in North America, silicone sales were up. So of course, we regard Dow Corning in total as like a Gorilla to us. So we're very happy with them and they're doing great.

Secondly, Jim, do you have any thoughts on the 2011 tax rate? It should be a normal year. I don't know if your guidance you gave back that at the investor center about normal tax rates changed in light of some of the mix here or the capital spending in Gorilla Glass ramping?

Well, my ability to forecast tax rates is not that great, as a number of investors have pointed out, but we're expecting, as I said in the last call, to be around 20%. That assumes that there is no help from the U.S. government on tax extenders, which appears we're unlikely to get. And obviously, the big repatriation benefit we got this year won't repeat. So we're planning around 20%, but our tax department is highly incented to come up with ways to make it lower.

Our next question is from Carter Shoop with Deutsche Bank.

In regards to Gorilla Glass, when talking about the margin profile at that billion-dollar run rate, you mentioned that it would be below the corporate average. Just to clarify that, are we talking about gross margins, operating margins or a net margin there with equity earnings? Or all three?

So the comment we're making about is for our Gorilla Glass, what is the gross margin or manufacturing margins? What we said is it would be below the corporate average next year, and that is driven by the fact that on the -- primarily on the cover glass -- that we have a lot of new finishing processes that dilute the margin. The glass portion of cover glass will be very strong gross margins. But we will be a little below the corporate average next year for Gorilla Glass but it is gross margins.

And adding to that, to Jim's comment, it is like you would expect for us, the returns, or margins, are closely following those process steps with what kind of capital is required. So glass margins are very good, as Jim said, similar to Display because that is where the high capital piece is. Downstream, we have combination of manufacturing ourselves and outsourcing steps and for those, the level of capital is dramatically less, and margins are also less. And the functionality of those steps tend to be less so they tend to drive a lower price value as well. So it's -- we like the profitability of the business from a return standpoint, and I think a lot just depends on what metric we end up giving you over time. If we're using a gross sales figure, then you think about the gross margins over time as this business grows. We'll think through the right way to give you transparency so that you can tell from which segment it's growing, what type of margins grow within those individual segments. But we're still kind of early here, and I think it just doesn't feel quite so early because the numbers are getting so big so fast, but that has more to do with the explosive growth than it does dealing with how we'll ultimately be able to talk to you about this business.

And as this market gets larger and we see these numbers increase, can you discuss your expectations for how the competitive environment is going to evolve?

It's early still. We've had a pretty clear runway for a long time with Gorilla. I thought we'd get followed more quickly than we have. But what it's been is a real materials conversion battle. So it's been glass versus plastic, and then high-tech glass versus low-tech glass has been what's dominating the competitive picture. And obviously, that's gone well for us. Now we're beginning to see other high-tech glass players come in, which we would have anticipated earlier. And we feel good about our competitive advantages. But I think now, other people are starting to come into play that will increase the overall category growth as folks begin to understand actually how flexible and durable glass is as a material and I think the real loser here long-term will be plastic and really cheap glass.

When we think about a second source for some of the products you have in the marketplace, could we see a second source introduced over the next two to three quarters for some of your higher volume applications in Gorilla Glass?

So we've had some second sources already come in from a variety of different levels. And I think you're best off trying to talk directly to those folks. It is like most things that are very high-tech, in glass it isn't hard to figure out some of the very small handful of people who have the capability sets to even begin to play.

On Dow Corning, the 10% drop in earnings sequentially, is that primarily from the expansion in China? Or was there something else going on there on a sequential basis?

There's a series of small things that add up. There's no one thing that's causing it. So China's part of it. There are some other costs that are increasing but there's no one thing.

And we will move on to Yair Reiner with Oppenheimer. Yair Reiner - Oppenheimer & Co. Inc.: First question is on Gorilla Glass again. The $25 million in one-time start-up costs that you incurred in the second quarter -- will those be repeated in the third quarter or will that be an incremental tailwind?

We will have a repeat of some of the costs. It will be less than $25 million, though. Yair Reiner - Oppenheimer & Co. Inc.: Okay. And then, you said that your utilization should remain basically full-out through the remainder of the year. So I gather from that, that we should expect your inventories to also increase. If so, at what level do you think your inventories are adequately rebuilt?

They're not adequately rebuilt in any of our forecasts. We would love to be able to increase them a little bit more. So there's nothing about the production and market environment as a negative to us in this regard. We would take every piece of glass we could make and put it in inventory. And when those get back to adequate levels, it'll allow us to switch over and make more Gorilla Glass which we could sell more if we could. Yair Reiner - Oppenheimer & Co. Inc.: Given your CapEx plans for China, what is your view right now on what those CapEx plans imply in terms of share of the Chinese market? Is it going to be about a quarter of the market as it is overall? Or closer to the 50% that you own together with SCP?

The China market, what we're putting the capacity in, in Display is for 2012 and beyond. We expect to have, as the new large-scale panel fabs there ramp up, we expect to sign contracts with panel makers and where we get a contract with them, we'll have very high share. And as we see more approvals there, we'll be able to update you on what our share is. I will emphasize that the Chinese market is very big already, and we have a large part of that, but driven by our imports from Taiwan and Korea.

We always think about us as being much in China as being much closer to the overall family share figure than it is are individually.

It's time for one more call.

And that'll be from George Notter with Jefferies. George Notter - Jefferies & Company, Inc.: I was interested in your comments about the retail sales strength for LCD TVs. If I look around your TV prices year-on-year, I think they've been pretty flattish in many markets. We've seen a lack of promotional activity, as you've said earlier in the call. It seems like we really haven't been able to dive down into -- dig into elasticity of demand on TVs. How do you feel about the retail sales strength right now in light of the fact that pricing really hasn't come down? And when we think about next year, do you really need to see 20%-ish kinds of cuts in TV price points in our order to really drive double-digit unit sales in TVs next year? What's your thought?

We clearly have not seen, particularly in this country, that much price promotion. And obviously, without price promotion in what is a slow period of time for televisions anyway, we think that contributes to slow demand. We do think we'll see price declines in the fall. I would remind you, even though we're very pleased by the pace of the panel price declines, they will add up. So over four-month period of time for most of the normal television models, you've seen panel prices descend 10%. So it's nice that it's moderate only 2.5% per month. That's good for the integrity of the supply chain, but ultimately, it'll be good for at retail that that will show up, we think, this fall in lower prices. We do think that as some of the set makers begin to get better at making some of the LED televisions that you'll see price declines on those. And you really haven't seen as much of that yet so we think that will help drive demand also. And lastly, we think replacement rate will help drive demand. So we'd like to see a few more price promotions. We expect we will see that this fall. And coupled with new features, we expect to see demand grow.

Back to you, Jim.

Thanks, Ken. Just a couple few comments. We think Q2 was a great one for Corning, and we are actually quite upbeat about Q3. We think the supply chain inventory, the moderate utilization cuts, moderate panel price declines and very strong retail demand worldwide bode very well for us. We're delighted by our progress in Gorilla. This business is going to more than triple this year. And if we're right about next year, we'll go up close to 4x. We're delighted about our progress in China in many of our different businesses, and we hope that investors are pleased with our results and our direction. One final administrative note, we will be in Boston on Tuesday, August 3, and we'll be hosting an open luncheon for investors. If you'd like to attend, please contact our Investor Relations department. Ken?

Thank you, Jim. Thank you, Wendell. Thank you all for joining us today. A playback of the call will be available beginning at 10:30 a.m Eastern Time today, run until 5 p.m. Eastern Time on Wednesday, August 11. To listen, dial (800) 475-6701. The access code is 165308, and the audiocast, of course, will be available on our website during this time. John, that concludes our call. Please disconnect all lines.