Ann H. S.

Nicholson - Division Vice President, Investor Relations James B. Flaws - Vice Chairman & Chief Financial Officer Wendell P.

Weeks - Chairman, President & Chief Executive Officer R. Tony Tripeny - Senior Vice President, Corporate Controller, Principal Accounting Officer

Rod B. Hall - JPMorgan Securities LLC Amitabh Passi - UBS Securities LLC Patrick M.

Newton - Stifel, Nicolaus & Co., Inc. Mark Sue - RBC Capital Markets LLC Wamsi Mohan - Bank of America Merrill Lynch Simona K.

Jankowski - Goldman Sachs & Co. Joseph Wolf - Barclays Capital, Inc.

Steven B. Fox - Cross Research LLC Brian J.

White - Cantor Fitzgerald Securities

Thank you, Brad, and good morning. Welcome to Corning's Second Quarter Conference Call.

With me today is Wendell Weeks, Chairman and Chief Executive Officer; Jim Flaws, Vice Chairman and Chief Financial Officer; and Tony Tripeny, Corporate Controller. Before we begin our formal comments, I'd like to remind you that today's remarks contain forward-looking statements that fall within the meaning of the Private Securities Litigation Reform Act of 1995.

These remarks involve a number of risks, uncertainties and other factors that could cause actual results to differ materially. These factors are detailed in the company's financial reports.

You should also note that this presentation contains a number of non-GAAP measures. A reconciliation can be found on our website.

We have slides posting with our webcast today live that go with the formal comments. Now I'll turn the call over to Jim.

Thanks, Ann. Good morning, everyone.

I'm pleased to share with you our second quarter results, but before I dive into earnings, I'd take a minute to highlight our July 21 organizational announcement. In case you missed it, I announced my retirement effective at the end of November.

After 42 years with one of the world's most enduring and successful companies. And with the company in a very strong financial and operational position, I believe it's a good time to hand the reins over to the next generation of leaders.

I'm very pleased today to introduce you to Tony Tripeny, our current Corporate Controller, who many of you have met and who will become Corning's Chief Financial Officer in September. Tony has 30 years of finance experience at Corning, including playing a key role in numerous acquisitions.

In the last 10 years as Corporate Controller, Tony has been integral in forming and executing their current strategic framework and most recently delivering more than two years of earnings growth. Tony has worked very closely with me and more importantly, he and Wendell worked together for many years, including time in our telecom business.

I'm delighted that Tony is succeeding me. I'll be taking some time to introduce Tony to our investors over the next few months.

For today, Tony will be joining Wendell and me for the Q&A portion of the call. So now let's turn to our performance.

Our results clearly demonstrate we're executing to our 2015 plan, which we laid out for our investors in early February at our Investor Day. Our businesses are delivering strong results, our acquisitions are delivering synergies and opportunities for new growth, and we're returning even more cash to shareholders.

So let's start with a quick look at our overall first half performance. Core sales were up 2.3%, and without the impact of foreign exchange, that increase would have been 4.7%.

We are delighted with this increase, especially knowing we are not counting on sales growth from the Display segment. Our earnings and EPS growth were even more impressive over the first half.

Earnings were up 10.5% and would have been up 13.4% without the impact of FX. And we leveraged those earnings growth into higher EPS growth through our share repurchase program.

EPS was up 15.9%, and without the impact of FX, it was up 19%. We're delighted by these strong performance numbers, particularly given this period of low economic growth, and we hope you are also.

Now I'd like to highlight some specifics. In our Optical Communications business, we've been strategically positioning ourselves over the last several years by focusing on product innovations and acquisitions to capture growing demand in optical networks.

And we are winning. Customers are increasingly turning to our innovative solutions to solve their speed, capacity and cost challenges.

And while the overall telecom CapEx market grows by 2%, the optical portion is more than double that at 5%, and we're growing faster than the optical portion, in particular with our advantage solutions in fiber-to-the-home data centers. We're growing at twice the pace in the optical portion of the telecom market.

This strong performance began several years ago, and we think it will continue. Now let's focus again on the first half of 2015 and compare it to the first half of 2013.

Sales over this period are up 40%, and NPAT is up 72% over the last two years. We had strong results again in Q2 which I'll cover in more detail in a minute.

I want to emphasize the strong performances driven by both organic and inorganic sales growth. Before the impact of FX, our Q2 organic sales were up 10%.

And we grew 21% before FX, including the sales from acquisitions. We expect this outperformance in our Optical Communications business to continue over the next several years, assuming continued adoption of both fiber-to-the-home and bigger more efficient data centers.

Now turning to Gorilla Glass, Gorilla Glass remains the cover glass of choice for branded devices and is gaining share. Additionally, we have new products that are gaining traction and even more in the pipeline.

First, Gorilla Glass 4 is now designed into 43 models as OEMs embrace its superior drop performance. Its penetration is the fastest yet of any of our new Gorilla Glass introductions.

And even better, it has a price premium. Second, our sales of Gorilla Glass in China are up 45% year-to-date.

And third, we just announced our first smart phone customer using Gorilla Antimicrobial Glass. Finally, our overall efforts to drive volume, reduce cost and innovate with price premiums for the cover glass market have contributed to performance.

Specialty Materials gross margin is up 170 basis points year-to-date. Now turning to Display, the pricing environment for LCD glass continues to improve.

Prices declined moderately in Q2 as expected. I spent some time on the April call explaining the difference between our overall price declines and what I called the heartbeat of glass price declines.

As a reminder, we are in the midst of a significant move from thick to thin glass. Because we've incented customers with price to make the switch, it makes our overall price declines look larger.

As a reminder, we did this incenting because our margin dollars on thin remain neutral to thick, and we gain free capacity. The heartbeat price decline focuses on price decline without the thick to thin impact and without customer mix impact.

We've been making very steady progress with the lower heartbeat declines as this graph shows. As we near the end of the big thick to thin conversion at some of our major customers, our overall price declines and the heartbeat decline should converge.

Prices for Q3 under most of our LCD glass contracts have now been set. I'm pleased to say we expect to see moderate price declines again in Q3.

You may recall that some of these contracts contain price mechanisms that establish defined relationship between our prices and the average prices offered by comparable glass suppliers. Customer input to date indicates the average price for LCD glass will result in moderate price declines in Q3.

So when you look at the heartbeat of pricing under our contracts, without the impact of product mix, on this basis, declines have been in the 2%s for four consecutive quarters, and we expect this to continue in Q3. Now during the quarter, we also reached an agreement with Gerresheimer AG to acquire their pharmaceutical glass tubing business that has operations in Vineland, New Jersey and Pisa, Italy.

With this acquisition, we expect to accelerate our innovations for the pharmaceutical glass packaging market. As part of the transaction, the two companies will enter into a 10-year supply agreement for pharmaceutical glass tubing and also form an equity venture, 75% owned by Corning, focused on accelerating Corning's innovations for the pharmaceutical glass packaging market.

The transaction enables Corning to bring its revolutionary new technologies to the pharmaceutical glass packaging market with Gerresheimer, a long-standing leader in the industry. In addition, we've now formed a new internal division called Corning Pharmaceutical Technologies with the new assets and an equity venture to drive our innovations into the marketplace at a faster pace.

It may take a while, but we believe the size of the prize here for Corning is $1 billion in sales. So now let me turn to our second quarter details and as a reminder, these are core results.

Second quarter sales, gross margin, operational expenses and equity earnings were all in line with our expectations coming into the quarter. The stronger dollar did reduce core sales in the second quarter by $61 million versus a year ago.

Primary currency exposure here is the euro. Gross margin was 45%, up year-over-year, driven by gross margin improvements in Optical, Environmental, Specialty, and Life Sciences.

SG&A and R&D spending were down in absolute dollars versus Q2 last year, driven by cost controls and the synergies from the CPM acquisition. Now net income was up 7% versus last year, despite the impact of a strong dollar, which had an impact of $18 million on our profit.

This impact versus Q2 results last year is approximately $0.01 per share, similar to what we outlined coming into the quarter. Earnings per share was $0.38, up $0.04, or 12%, versus last year and better than the Street consensus by $0.01.

I'm delighted with these results. Now let's go through the segments, starting with Display.

Display sales were $963 million in Q2. Sequentially, price declines were moderate and volume was up in the low single digits, both as expected.

Year-over-year volume was up nearly 10%. Gross margins in Display were consistent with last year, driven by the additional volume and synergies, offsetting price declines.

Net income was down just slightly year-over-year. Our continued cost reductions, boosted by the CPM synergies, moderate pricing environment have positioned us to maintain stability in this business and continue with strong cash flow generation.

We're delighted with the results. Now looking at the supply chain, we estimate forward-looking weeks of inventory ended quarter two slightly better than Q1, which is a positive indicator.

Our model indicates that forward-looking weeks of inventory will also shrink in the back half, and I'll discuss that more in the outlook segment. Now turning to Optical Communications, Q2 sales were $800 million, up 17% versus last year and better than our forecast.

Organic growth was 10% before the impact of foreign exchange and acquisitions made up the balance. Fiber-to-the-home and data center sales in North America drove sales growth.

Stronger dollar also impacted sales here by $27 million. Net income was up 44%.

Now Optical Communications has some euro-denominated costs, so the FX impacted profitability here only slightly. Additional volume in all parts of the business and acquisitions drove the higher net income.

In Environmental, Q2 sales were $260 million, down 9% versus last year, and that was driven primarily by foreign exchange trimming sales by approximately $17 million. We have some euro-denominated costs, but the majority of costs in Environmental are dollar based.

So the stronger dollar was a drag on year-over-year profitability and impacted net income by $6 million versus last year. But continued execution on costs helped the segment actually maintain net income year-over-year, delivering $46 million.

Now in Specialty Materials, Gorilla Glass volume was up mid-teens year-over-year. Versus last year, segment sales were down 9%, driven by the lower sales of advanced optic products, which is experiencing a cyclical downturn as part of the semiconductor industry and a strong dollar.

Continued cost reductions, growth of the Gorilla Glass volume and the Gorilla Glass 4 price premium helped improve profitability. So the segment was able to maintain year-over-year net income despite the sales decline.

In Life Sciences, Q2 sales were down 5% year-over-year and net income was consistent. FX was the primary cause of the year-over-year decline.

Net income would have increased 9% without the impact of foreign exchange rates. Equity earnings from Dow Corning were $63 million, in line with expectations.

Stronger dollar impacted Dow Corning sales and earnings, and reduced Corning's equity earnings by $4 million versus last year. Earnings were helped by a one-time IP settlement which was embedded in our original guidance.

Now let's turn to the balance sheet. We delivered free cash flow of $380 million in the quarter.

Our capital spending forecast remains at the $1.3 billion to $1.4 billion for the full year. During the quarter, we increased the rate of our share repurchases by about 25% compared to Q1.

We spent $626 million on share repurchases in the quarter. This increase reflects our view that the company's current – with the company's current performance and future prospects, our stock is undervalued.

We expect the company's cash generation to remain strong and we want to put the cash to work for shareholders. As a result, the Board of Directors authorized a new $2 billion share repurchase program on July 15.

Since October 2011, the board has authorized $9 billion of share repurchases. Our balance sheet cash is healthy at $5.5 billion, and we ended the quarter with approximately $2 billion of cash in the United States.

Now I'd like to swing to the outlook. First of all, we expect the Q3 impact of foreign exchange rates to be similar to Q2, or approximately a negative $15 million of impact and $0.01 of EPS compared to quarter three a year ago.

Let's start with Display. After analyzing demand at retail, talking with our customers and reviewing external research reports, we're updating our expectations for the LCD glass market.

We now expect the worldwide LCD glass market at retail to grow approximately 6% to 7% year-over-year in square feet. This forecast is down from our April view as we've reduced demand outlook for IT applications and television units in certain geographic markets.

This lowers our retail outlook by approximately 94 million square feet, or approximately 200 basis points. With monthly data available through May year-to-date, worldwide television unit sell-through is now behind our expectations and we've revised our view to flat year-over-year unit growth.

However, screen size growth is tracking better than our expectations and we're raising our forecast to the average size of televisions, which helps offset a portion of the weaker unit growth. We still expect television glass at retail to grow 8% and small format devices to grow 16% at retail this year.

I know small format devices may not excite you, but the 16% in this area is a 63 million square foot increase for the overall market for the year. We don't believe these minor adjustments in television demand reflect any fundamental change to the longer term drivers of TV demand, and continue to expect excellent long-term demand for televisions, driven by the replacement of older sets and technology innovations such as 4K television.

We believe the supply chain will work down some inventory in the second half and will bring down weeks of inventory by approximately two weeks by year end. We view this drop as a mild inventory adjustment.

So then for the LCD glass industry in the third quarter, we expect LCD glass market to be up by low single digits sequentially, and our sales volume to also be up in line with the market growth. We expect our share to remain stable.

We continue to see balanced supply/demand for Corning's Display Glass. We're running our online capacity at full utilization and we're keeping some of our capacity idle to maintain good balance.

We believe that other glass makers are also running their online capacity at full utilization, and they have publicly stated that they are keeping some capacity idle. Now let me turn to pricing.

As I mentioned, we expect to see moderate pricing declines again for our glass in Q3. I think the question on many people's minds is whether the interaction between the softening demand and the reduction of two weeks of inventory will cause more severe price drops in Q4.

Our conclusion is no, for a variety of reasons which I'll outline in a minute. First, though, let me outline our expectations on market volumes for Q3 and Q4.

We're forecasting a low single digit percentage sequential increase for quarter three and a corresponding decrease in quarter four. These volumes, combined with the large normal seasonality of television retail demand in Q4, are enough to bring inventories down a couple weeks.

And this calculation includes the softer television outlook that I mentioned earlier. We do not believe the sequence of volume shifts and inventory moves will trigger a more severe price event.

The industry is in a much stronger position than during past inventory adjustments. We believe price declines in our contracts will remain moderate for several reasons.

Panel makers are profitable, and they're getting the benefit of the weaker yen. There's a balanced supply/demand in the LCD glass industry.

The operating margins of our competitors appear, based on publicly available information, to be such that they can't afford large price declines if they hope to remain profitable. And the rapid thick to thin conversions that we saw in recent quarters are nearing completion.

So our future quarter-over-quarter ASP comparisons should no longer reflect as much those thin discounts associated with the conversions. Corning has a variety of levers to pull to steer calmly through slight market weakness and inventory adjustments.

These include idling capacity, especially at the time of normal tank repairs. We think industry conditions and those levers will help, and we believe other glass makers have similar options.

Now let me turn to Optical Communications. In Q3, we expect sales to be up mid-teens year-over-year, driven by the continued strength in fiber-to-the-home and data centers in North America.

Also contributing to revenue growth will be the impact of our three previously announced acquisitions. Our sales have been better than expected in the first half, and our outlook for the back half is for more growth, so we have upgraded our full year outlook here.

Expect Optical Communication sales will grow mid-teens for the full year. In Environmental, we expect continued strength in the end market in Q3.

Heavy-duty diesel and light-duty substrate sales are up versus last year, reflecting healthy end markets. However, we expect year-over-year Q3 sales for us to be down mid single digits due to the impact of the euro and other foreign exchange.

Now I'll turn to Specialty Materials. We expect Gorilla volume to be up high single digits sequentially but flat with last year's very strong Q3.

The mix effect of Gorilla Glass 4 will help somewhat, but the continued weakness in the advanced optics market, driven by softness at our semiconductor customers, will more than offset this, leading us to Q3 sales versus last year to be down by high single digits. In Life Sciences, we expect sales to be down slightly with last year's third quarter, driven by a weaker euro.

Without the foreign exchange impact, sales would have been up the low single digits. Continuing the rest of our Q3 forecast, we expect Q3 equity earnings from Dow Corning to be approximately $65 million.

It's in line with Q2 in last year. Versus last year, sales are impacted by exchange rates there, but equity earnings are flat due to volume and cost benefits.

We expect our gross margin to be approximately 44%, consistent with last year. SG&A and R&D spending will be 13% and 8% of sales, respectively, and consistent with 2014.

Other income/other expense is expected to be a net expense of approximately $50 million. And our effective tax rate for 2015 is expected to be approximately 18%.

So summarize before we go to Q&A, we remain well-positioned in each our segments and are outperforming our competition. We're prepared to weather disruptions through our advanced products and lower cost position.

We are the best in the world at specialty glass and ceramics and optical physics, and these capabilities are becoming more and more relevant to a broad range of industries. When you put it all together, it's clear our strategy is working.

We're growing earnings today, we're leveraging our innovation for future growth and we're delivering significant value for investors. Now before I proceed to Q&A, I'd just like to thank investors for the opportunity I've had to engage with you as being Corning's Chief Financial Officer.

I've always enjoyed the opportunity to meet and discuss Corning with you. Now I'll turn it over to Ann.

Thank you, Jim. Brad, we'll open the lines for questions now, please.

Yeah, good morning, guys, and thank you for the question. Congratulations on retirement, Jim.

Good working with you over these last few years. So congrats on that.

And welcome, Tony, as well. I wanted to start off with, I guess, Jim, a little bit of discussion on the trajectory of demand through H2.

Clearly, you guys are reducing guidance for Q3 a little bit or at least missing our expectations a little bit as demand weakens here, but then the overall LCD glass demand picture you're painting actually causes us to think that our numbers are maybe a little low in Q4. So I guess I'd like to get some commentary on how you see trajectory yourself.

And maybe if you could tie into that a little bit of commentary on 4K. Panel pricing keeps dropping faster than we expected.

Do you guys think that elasticity on 4K could be now more accentuated in Q4 if consumers hang in there and prices are a little bit lower? So just wanted to get a comment on that.

And then lastly, I guess, just some demand color. All of us are trying to figure out what's going on with global demand generally, so any further color you can give us on what you see regionally, how – are you seeing any signs of stabilization, et cetera?

Sorry, a bunch of questions there, but thanks.

Thanks, Rob. Well, I enjoyed working with you also, and I think you just set the record for six questions in one.

Yeah, sorry.

So let me start with comments on the trajectory. Our July glass pulling from our customers, panel makers, is equal to what we've seen in June.

We're not actually seeing any slowdown from our customers at this point in time. So I hope that helps on the trajectory.

We believe, as I said in my outlook, that we will expect to see that there is some impact as customers recognize the inventory, the slowdown in the end market. And what we're showing is that we'll see a glass market demand go down in Q4 versus Q3.

We could get that wrong a little. I mean it could be a little higher in Q3 and declines a little more in Q4.

It's tough to tell. Right now, as I said, we haven't seen panel makers pull back.

Relative to ultra-high def, we clearly think it will be important in the coming years. As you know, our forecast of sell-in is 27 million units – our sell-through is 27 million.

Our forecast of sell-in is higher than that. We are – we believe that pricing points are approaching the inflection point.

We don't know if we'll get there in Q4. I suspect, given the overall weaker economic news, that maybe people will be driving that price premium down to the 1.5, in which case that should be very good for demand for us.

I think I got most of your questions.

Yeah.

And if I could just add a little bit of color for you, Rod. I can see how you can get to your numbers.

I do. And what makes it hard to do, just purely quantitatively is that you have some real behavioral dynamics here.

What happened is in the first part of the year, the set makers were quite worried that they could get enough panels to be able to support the back half's demand. And so they were building inventory.

Panel makers' inventory levels are very healthy and they're profitable. So they can support continued price declines in panels and still may decide to run with higher utilization than is currently in our forecast for quarter three.

So, therefore, you could run hotter in Q3 like you are anticipating. But then what we'd say if you're going to come back to the same total year, that would mean that quarter four would be less than what it is where we're coming to.

So I can see how you can get your cycle. It's perfectly reasonable.

I think the key thing for us is that what's the dynamic in glass. In glass, we have inventory levels at the low end of healthy.

And so that gives ourselves and our competitors really a lot of levers to adjust to whatever the quarter four is, assuming we're in the range of the total end market demand that we're discussing. Either we've got product development we can do, we've got glass tank repairs that we can pull ahead, right.

So we have all the levers that we need to sort of keep demand and supply, whether your cycle's right or the one that we're currently basing our forecast is right. Does that make sense?

Yeah, that's helpful, Wendell. Thank you very much.

Hi, guys. Good morning.

I just had a couple of questions. Jim, I just wanted to clarify your comments on Gorilla Glass.

I think you mentioned volumes flat year-over-year. I just wanted to confirm, how should we be thinking about ASP declines, and how should we be thinking about revenue trends for Gorilla Glass year-over-year?

And then just a quick question on LCD display. I think part of your assumption set assumes that the panel makers remain relatively healthy.

I was just wondering, what happens if things were to deteriorate and if they were to become unprofitable in the back half of the year, how should we think about the potential ramifications for you guys, especially with respect to glass pricing?

So what I mentioned on Gorilla Glass in Q3 is the volume would be flat versus Q3 a year ago. Just as a reminder, Q3 a year ago was extremely high because of some of our customers big model launches.

So we're actually delighted that we're holding it flat with that. Price declines, we have price declines on Q3 and a price premium on Gorilla Glass 4.

So as we see more Gorilla Glass 4 showing up in the mix, particularly as we head into Q4, you actually should be seeing a very stable price effect. And we're looking for a very good quarter four in Gorilla, also.

On panel makers, I just won't speculate. I mean, their profitability is much higher right now than it has ever been in any softening period or inventory correction.

So it would take a fairly massive drop in panel prices, and we are not forecasting that. We're expecting panel prices to drop about 9% going forward, and they'll still remain profitable if we're right on that.

Okay. And then if I just...

Can I just add one quick thing for you on Gorilla just for fun, right. So for fun, through quarter two, we just passed cumulative $4 billion in revenue in Gorilla, and over 1 billion square feet of glass.

And the nice thing about the price piece here is we anticipate overall for Specialty, CSM, take a double-digit profit growth here, including Gorilla, for the year. And that what Gorilla 4 is going to allow us to do is basically flatten price declines, and that's going to be terrific.

And then I guess just a quick follow-up probably for you, Wendell, just on telecom. Can you just give us maybe some color on the demand?

You've mentioned fiber-to-the-home in your commentary. Would love to get just kind of incremental insight in terms of the geographic trends you're seeing.

And then just sequentially, you're guiding to sales kind of flattish. Just wondering, is that just seasonality or are you seeing some sort of maybe moderation in demand?

So for Optical, I think Jim used this, probably the most fun statistic, which is we normally say that our long-term goal in Optical is to grow at twice the rate of telecom CapEx. And what we've been seeing now for quite a while is actually, excluding acquisitions, we're growing at four times telecom CapEx, and including acquisitions, over 10 times telecom CapEx.

And what's driving that is a combination of the right products, but also our strength in the right regions to get to your second question. So we're seeing very strong North America, we're seeing very strong fiber-to-the-home, and we're seeing very strong data center work.

And that combination of our strong position in data centers and our strong position in fiber-to-the-home is what's behind this really sort of powerful growth story.

Just one another comment, you mentioned sequential. Ordinarily, Q3 and Q2 sequentials are pretty flat.

But we're delighted by the year-over-year in both of those quarters being up the mid single digits in sales. So generally, if you look at telecom's cycle, absent anything strange, low first quarter, higher second and third quarters, and then fourth quarter is where the most variability in history shows up.

Again, thanks, guys, and, Jim, congrats.

Thank you.

Was just going to add, I think that that growth in the third quarter is in the mid-teens.

Year-over-year, right?

Yeah, that's correct. Year-over-year.

Yeah, I was talking sequentially.

Okay. Cool.

Thank you.

Yeah, thank you for taking my questions, and Tony, congrats on the new position, and, Jim, congratulations on the retirement.

Thank you.

Thank you.

I guess, Jim, I want to focus on what you touched on with the move from thick to thin glass nearing completion. I think previously, you discussed thin as being 0.7 mm or less.

And so I'm trying to help get some clarity on how thin can the industry actually go. When you make the comment that it's nearing completion, does that mean that we're nearing getting the industry below 0.7 mm, or are we approaching a lower thickness like 0.4 mm?

What I'm talking about is the move where we start from 0.7 mm and now I'm talking about getting to 0.5 mm. But clearly in some formats, we have some customers at 0.4 mm and smaller generations, but what I was talking about as the big move was what we started in 2008 when almost everybody was 0.7 mm and getting most people to 0.5 mm.

Okay. And if we think about that move in going to 0.5 mm and kind of the capacity that it naturally builds for you, are there any CapEx implications on the horizon, where kind of as this move to thin starts to near completion, that Corning will have to start investing in glass capacity?

No. I think we still think we have productivity increases coming.

As some customers go below 0.5 mm, we're not expecting to offer price discount for that, but we still should get capacity from it. So the only CapEx that is on the horizon for us is the – as you have more glass, you have to finish it even though your melting capacity doesn't have to go up.

And so we've been spending on some capital for finishing and then the only thing that will be on the horizon for glass capacity would be if someone were to build a Gen 10 operation in China, which we've talked about, I think, now for over a year. But we don't expect that to be on the horizon until late 2016, early 2017.

Okay. And just one cash question, Jim, since that's your favorite topic is you've announced that $2 billion buyback.

I think that expires at the end of 2016. In that timeframe, I think you should pay out about $1 billion in dividends.

So given that kind of $3 billion and returning capital to shareholders, I think you've mentioned you have $2 billion in cash in the U.S. So I'm curious if just cash from operations will allow you to fund the total $3 billion and return on value to shareholders, or is there a need to repatriate cash or find another way to finance those returns?

Well, we're always looking for ways to bring cash back from offshore and as I think you've seen, we've been successful doing that. We did raise some debt in the second quarter.

So we're very comfortable, our ability to continue to do this without giving you the exact specifics about repatriation.

Thank you. Good luck.

Thank you. Thank you, Jim.

It's been a pleasure, and welcome, Tony. I have a question on FX.

Hedging will eventually roll off, so perhaps your thoughts on your plan of action, considering additional hedging at the moment seems cost prohibitive. So do we think about passing the increased costs down to your customers, or do we revisit U.S.-based pricing, which is in effect a price hike as well for your customers?

So maybe you're thinking there.

So I'll start. We're continuing to look for innovative ways to deal with what I'll remind everybody is in 2018, it's quite a ways away.

And the possibility of is there something that we can do with a unique hedging structure that might allow us to not have the impact of the yen going from essentially ¥99 to the low ¥120s right now. So we continue to evaluate that.

We also are evaluating whether we could return to U.S. dollar pricing and perhaps ways of doing that are pricing some of our new products in U.S.

dollars. And fundamentally, we also think that the industry, the glass industry, will continue to reduce price declines to a lower and lower level and maybe could even flatten them out or raise them at some point in time.

So we're hard at work at that but we're not panic-stricken, either as we go along. It's only the middle of 2015.

Okay. Sounds fair.

Jim, a question on screen sizes. We are moving to larger screens and 4K will come initially in larger sizes.

Are we getting to a point of diminishing marginal utility reaching optimal screen sizes? You're getting the benefit of size offsetting slowing units, so the question that we get is how long can that last?

Well, we don't see it slowing down. I think you've heard me say that every year, I have a bet with our team that we're going to exceed their forecast and we just raised it again.

The average screen size – I use the 30-inch and above metric because I think it's more useful – is growing very nicely again this year. And the thing that's really going to be helpful for us, I think, in the future is that as 4K becomes a bigger and bigger proportion of demand, that drives you to getting a bigger television.

And right now, the average 4K television is over 50 inches. And if you think about that compared to the average television in the 30-inch and above category, which is really only 41 inches right now, so as that grows as part of demand, we think we'll continue to see average screen size grow.

The other thing I'll remind everybody is that televisions actually are getting average screen size up. Television itself doesn't have to grow as much because the manufacturers have continued to reduce the edge size or what we used to call the bezel, although many televisions don't really have one of those plastic things anymore.

And so we continue to think this is going to help us for a number of years.

Helpful. Last thing, Wendell, if we took a look at telecom, how about your thoughts of accelerating M&A for telecom and Clark and his team.

It is a segment growing very fast. Can we add velocity to deal-making, considering this positive outlook?

How about a blank check for Clark?

No such thing as blank checks. But the core of your idea, which is that given the strength of our position and how much win there is in our category, we would like to accelerate that further with continued acquisitions.

That's clearly our strong intent and it's just a matter of getting the ones that are the right fit at the right price.

That's helpful. Thank you, and our pleasure, Jim.

Thanks, Mark.

Yes. Thank you.

Congrats, Tony; and Jim, we will miss you. My first question's on Display profitability expectations.

Previously, you had expected that to be flat on a year-on-year basis. Now given the slowdown you've alluded to, can you talk about the magnitude of potential profit decline for the full year on Display?

And I have a gross margin follow-up.

So clearly with less volume, we would expect not to have the ability to hit the flatness that we were hoping for in Display. Probably, we'll have a little bit down.

But I won't categorize how much that is at this point in time, but it could be slightly down. If you saw, it was slightly down in Q3 when our volume wasn't as strong as it had been in Q1.

We continue to feel like we've got excellent cost reduction ideas and the Display team is working on how they can do even better in cost reduction in this period of slightly lower demand.

Thanks, Jim. And then your gross margin guidance indicates a step down here from 45% to 44% in the third quarter, but you're guiding shipments up quarter-on-quarter for LCD glass.

So should we conclude that your LCD utilization rate is going to be down quarter-on-quarter in 3Q? And in the fourth quarter, you're expecting the market to be down seasonally, so should we expect gross margins to also contract sequentially from Q3 to Q4?

No, I think that we have a little bit of an impact in Q3 from inventory changes, but that's just slight. But I'm not expecting our gross margin in Q4 to be materially different.

And last one from me if I could. Jim, you noted that the heartbeat pricing and true pricing to converge over time here, but can you help us with what the magnitude of the delta that exists now between the heartbeat of LCD glass pricing and true pricing over this quarter and maybe over the last couple of quarters?

Thank you.

I'll just give you a rough CFO math. We're in the 2%, and the overall pricing is in the 3%.

But we definitely think we'll drive that overall pricing down and start to converge.

And this ties to an earlier question and an answer you heard from Jim. I want to make sure that we have portrayed this accurately for you.

We believe the market will continue to move to thinner. Okay?

We have requests from customers, of course, at 0.4 mm and all the way down to 0.3 mm. And we're developing glasses that, of course, that go to 0.1 mm or 0.2 mm.

What's different about our approach is we're not going to sell those at a discount. That's our preferred strategy.

So that's what begins to bring this – the combination of the first set of moves to get down to thinner glass, sort of 0.5 mm area. As that comes to completion, that will naturally bring that sort of heartbeat or invoice pricing sort of in line with the mix level, which is the thinner versus thicker.

But then the next step is that now, as we inevitably go thinner still, which competitively we love to do because our process is fundamentally better equipped to go thin than our competition's processes, that our strategy is to do that without a pricing decline. Now it remains to be seen how effective we'll be with that, but that is our plan and approach.

Does that make sense?

Yeah, it does. Thanks, Wendell.

Hi. Thanks very much.

And I wanted to add my congratulations to Jim and Tony as well. Wendell, if I can follow up on the point you just made there at the end.

Were you saying that you no longer expect to be pricing at a discount starting with thicknesses of 0.4 mm and below? And I just wanted to understand the premise behind that.

Is it that you don't expect your competitors to be able to achieve those kinds of thicknesses or maybe not at the same cost structure as Corning?

Yes. The second is that while we would – 0.4 mm is one level, 0.3 mm is another, right.

We believe that competitively, it gets harder to do. And there isn't as much cost improvement as you begin to move to those thicknesses because of the relative difficulty of the way – of handling that much glass flow and doing it in a stable way.

The way you have to think about as you go thinner, and it's why we get more square footage out when you do it, is the way you go thinner is you go faster. The faster you pull glass, the more unstable the sheet becomes when you're doing something like fusion.

And when you're doing something like float, you've got a fundamental problem of the relative weight in the physics of the glass on top of a tin bath. Those things combine, we think, to give us an opportunity to be able to differentiate ourselves on thin.

0.4 mm is more within the range of our competitor's capabilities than 0.3 mm is, easily. But what we believe is there's an opportunity here for us to try to change that pricing trajectory for thin and maybe even especially for stuff that we can only do uniquely, much like we did Gorilla Glass, to price in dollars.

We expect there to be competition in 0.4 mm; 0.3 mm we think it'll be harder still. But this is part of our plans to try to stabilize Display long term and, ultimately, we'd like it to turn the corner and start making – growing profitability wise.

Like I said, remains to be seen. Can it happen?

Right? Remains to be seen how all the competitive dynamic will play out.

But that is the approach we'd like to take.

Okay. That's helpful and just maybe to bracket that a little bit in terms of kind of magnitude.

How far away are we from the transition to 0.5 mm being done? Or maybe put another way, what percent of volume remains to be converted?

And then maybe if there's any similar guidepost you can put around some of the other transitions you've talked about over the next two years or three years, that would be helpful.

We don't give out specific numbers, but I would say over the past three quarters, you've been seeing very big moves in the average amount of glass going thick to thin, and these upcoming quarters, two quarters, it will be much smaller.

Okay. And then, Jim, just one more near-term question for you, which is that you talked about channel inventories coming down for the industry in the second half of the year.

But the guidance for the third quarter volumes to be up in the low single digits still would imply normal seasonal or even slightly above seasonal growth for the industry, which seems to put more of the onus for the correction on the fourth quarter. And I guess I was curious why you wouldn't expect that to happen earlier, most likely in the third quarter, especially given some of the guidance by the panel makers.

So normally, we do see a slight increase in the absolute level of inventory in Q3. We are expecting a little bit of build in absolute square footage, that's based on what the panel makers are running right now.

And then we always see a big downdraft in the absolute square footage in Q4 with the big seasonality of television. If we see a slight correction from panel makers in, for example, September, the last month of the quarter, that could be slightly different.

But right now, what the panel makers are giving to us is not showing it that way.

I would prefer your approach. I mean I would prefer you to be right, which is then to correct more in quarter three and make it even slighter in quarter four.

But past behavior tells us it'll probably run the way it is, we've described earlier on the call. You heard Rod, it could even be a little hotter in quarter three.

Great. Thank you.

Hi. Can you guys hear me?

Okay. Thank you.

Again, congratulations to Jim and Tony. Thanks a lot for all your help.

I guess I wanted to focus on cash for a second. I don't think this was answered.

Can you just give us where we are on the balance of the original share buyback? You mentioned the $623 million (sic) [$626 million] (51:42) in the quarter.

How much is less than the $1.5 billion along with the $2 billion, and are there points at which you would think about accelerating? Is that share price driven or market driven?

So I think for Q1 and Q2, we were a little over $1.1 billion and obviously, we continued to buy in July, which isn't finished. We have not completed the $1.5 billion but we will complete it shortly, and then we'll be available to start spending on the $2 billion.

That's our process to finish one and then open up the other one officially. And we, clearly, at these lower stock prices for Corning, which we think are below appropriate value, we buy more.

Great. And then a question on the telecom.

I don't know if you've given out – give us a favor – you mentioned the different growth rates. Could you give us a split right now of the difference between the traditional telecom spend and the data center spend?

And you mentioned focusing, I guess, on the acquisitions, will there be a focus to stay within that enterprise or the data center side of the business, or do you see opportunities across telecom right now?

I think from an M&A standpoint, we wouldn't be just in the data center spend, I mean we'd be across telecom. If you go back to Wendell's earlier answer to the question, we've seen a lot of growth in the fiber-to-the-home in the carrier area, and I think that that is certainly something that we're very strong at.

It's easy to see where you could generate value in terms of synergies there in terms of different products or different geographies. So as we look at it, we look at it as telecom in total, not just data centers.

And can you give any directional on the sizes of this business? Is the data center business measurable right now?

Is it 10% of the business, or is it still just a growing smaller business?

It's clearly greater than 10% of our business.

We give enterprise total. Enterprise is running about 25% of all of our sales in Optical.

Great. Thank you, Ann.

Thanks. Good morning.

Jim, congratulations. I'm looking forward to seeing the book that comes out of your retirement.

Thanks, Steve. You'll be in it.

Thanks.

I'll be talking about the Mets.

I'm not sure if that's a good thing. So just in terms of looking at some of the new product development, I know you touched a lot on thinner glass and hopefully the positive impact there.

Can you just sort of round out the status on some of the other innovations you're working on? So it sounds like we're still a little whiles away from seeing like 0.4 mm into the mix, but what about things like Lotus NXT and Project Phire and then especially the Iris product that you rolled out, how are those things factoring into the rest of the year or maybe where the timeline stands on those?

Thanks.

Great. So NXT is out there now and beginning its qualification cycle.

We look to that area as a spot where we'll be able to improve our profitability in high-performance displays over the coming quarters. Early returns are pretty good for customers.

But our share traditionally in that piece of the market tends to be a little bit lower, and so we're replacing our competitor, and that's just going to take some cycle time. Most of those products go into these smaller mobile devices and so they're spec-ed all the way through by the brand, so you've got to go through two quals.

But we're encouraged by our opportunity to improve profitability there. On Phire, what we're doing now, our first products, we've got our first order on Phire, but it's going to be on – the first ones are going to start a little smaller, so it's going to be on wearables.

More to come. This is a brand-new process as well as a brand-new product so its ramp cycle's going to be a little slower.

What we like about it is it offers the opportunity to significantly increase our revenue and profit per device sold, as well as having scratch performance approaching sapphire, but the outstanding drop performance of Gorilla where sapphire has that weakness of not as good a drop performance. Iris.

Iris, which is adding the third piece of glass in a television for the backlight, what we've seen here is sort of split early on, just like you would normally expect. We've got a brand-new tech that's attacking an established plastic position.

What we're seeing out of plastic is I'm introducing some new materials to try to get thinner to sort of fight off the glass attack. And right now, that's sort of running 50-50 in early debates for very early adopters.

Some people are trying the new plastic set, some people are trying the new glass. It's going to take a little bit of time for us to sort out who wins what in that upcoming technology node.

I think the good news is television's getting thinner, opens up that opportunity for us. Now we'll see who wins and who loses in that space.

The final one I'd touch on is – Jim didn't get a question on it, but he did talk about it through in the opening is you saw our announcement on Gerresheimer, the formation of Corning Pharmaceutical Technologies. What that is about is a significant innovation that we have been on for a number of years.

This is an industry that moves slowly because it's highly regulated. That being said, we've got a really good product idea here that is sort of a Gorilla-size opportunity for us.

It's going to take some time. It's going to take a lot of effort.

But we feel like that one is going to be one that hopefully in a year or so we'll be talking about a lot more.

Great. That's all very helpful, and good luck to everyone going forward.

All right.

Thanks, Steve.

Thanks, Steve. We have time for one more quick question.

Hey, Jim, I'm wondering if you could talk a little bit about TV demand in China, what you're seeing there. And also, I see you made an announcement around a new Gen 0.5 LCD glass substrate finishing facility.

So maybe talk a little bit about Corning's strategy in terms of fab in China.

So the announcement was a finishing factory in China. I think it was Gen 8.5.

(59:24).

(59:24).

And that is we have melting in China in Beijing. We have room to grow that bigger if we need to.

And then we have – are capable of building finishing factories next to our customers and shipping glass to them. So that's been our strategies to date in China.

Now your first question was on China demand?

China demand.

China demand has been mixed so far. The May holidays were weaker, and we're anxiously awaiting the June numbers.

What we are seeing is that in China, where traditionally most – a lot of the demand was driven in these big holiday periods, Chinese New Year, May Day, National Day in October, is that there's now an increased number of online sales. And our initial tracking of that looks like that's more consistent during the year.

And we think that June will actually be a very strong month for that. But that being said, we did lower our China unit forecast based on what we think is a slowing economy, slightly from what we'd seen before.

And glass capacity, I think, because people miss this sometimes on thin, and we sort of take it as everybody understands it, so therefore we're not that clear about it. But when we move to thin, you get more glass out of the melting side, but you still have to finish it by piece.

So when you see us invest in additional finishing capacity, that is the small part of the overall capital spend, but we're still going to need to do that to be able to place the higher flow out of the melting tanks. In terms of melting tank type CapEx, that's going to move more with new Gen size and big regional moves like the ones that Jim's talking about the Gen 10 or Gen 10.5, and that's pretty early in the game there.

Okay. Great.

It's been a pleasure, Jim. Congrats.

Thanks, Brian.

Okay. Let me just wrap up quickly.

Our first half results were outstanding. I think very importantly over the last four quarters, the heartbeat of price declines in our LCD business have been trending very favorably, and we expect this to continue in Q3 and Q4.

And we think the industry conditions will prevent more severe price drops. Our long-term demand for television remains strong driven by replacement rate and innovations such as 4K.

I think our sales and earnings growth in Optical has been outstanding, and demand in the areas of fiber-to-the-home and enterprise solutions are strong. And we're capturing a disproportionate share of the market profits, thanks to our advantage products.

And the acquisitions in Optical are really delivering synergies and creating more opportunities for growth. And finally, very important, we're delivering our commitment to return cash to shareholders.

We have a strong balance sheet and cash flow, and we continue – plan to continue to return excess free cash flow. So in summary, we had a great second quarter and feel our market positions remain strong.

Ann?

Thank you, Jim, and thank you all for joining us today. A playback on the call is available beginning at 11:00 a.m.

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