Question-and-Answer Session
Operator
(Operator Instructions) Our first question comes from [C.J. Muse] - Barclays Capital.
[C.J. Muse] - Barclays Capital
On display gross margins, it looks like your COGS is going up by about $85 million which is a little bit higher than the 5 points you talked about for accelerated depreciation. Can you help me understand why that would go up so materially? Secondly, how should we think about gross margins for display going forward into 2009?
James B. Flaws
We called out the one-time impact of accelerated depreciation. What this really is relates to our tanks where we take them down and we had remaining life and we’ve got to accelerate that depreciation because once we take them cold the value of that is worthless and we have to rebuild it. That’s about 5 points.
Where we’re losing ground beyond that is that we are unwinding a series of [FX] hedges and we actually were growing our fixed costs because we’ve been programmed to have more capacity than what we had in the past quarter. Then obviously we have price declines of the 2% during this current quarter and clearly in a quarter where we’re making very strong changes to how we run, we’re not really getting any of our normal cost reductions.
We regard that there is probably an impact of over 12 points of dislocation here.
We are thinking very hard about what capacity we keep. We obviously don’t have a demand level for Q1 or Q2 next year at this point in time. We clearly have more capacity than what we’re cutting down to right now because we think we’ll grow back into it. But gross margins are obviously being penalized very heavily this quarter. We believe they will come back up next year as we finalize what level of capacity we keep for which quarter.
I’m not prepared at this time to give you an absolute number for next year but clearly it’s going to be higher than this very low range we’re putting out to you today.
[C.J. Muse] - Barclays Capital
In terms of that 12 points of dislocation you talked about, if I were to assume volumes were flat in Q1 versus Q4, does that mean that we should see a 12-point rise in your gross margin?
James B. Flaws
I’m not going to offer you any more guidance than what I have right now.
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