Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Corning Incorporated (NYSE:GLW)

Q42012 Earnings Call

January 29, 2013 8:30 am ET

Executives

Ann Nicholson - Director of Investor Relations

James Flaws - Vice Chairman of the Board, Chief Financial Officer

Analysts

Mark Sue - RBC Capital Markets

Rod Hall - JPMorgan

Wamsi Mohan - Bank of America Merrill Lynch

Amitabh Passi - UBS

Amir Rozwadowski - Barclays Capital

Jim Suva - Citi

Brian White - Topeka

Steven Fox - Cross Research

Patrick Newton - Stifel Nicolaus

Ehud Gelblum - Morgan Stanley

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Corning Incorporated quarter four 2012 earnings results. It's my pleasure to turn the call over to Ms. Ann Nicholson, Director of Investor Relations. Please go ahead.

Ann Nicholson

Thank you, John and good morning. Welcome to Corning's fourth quarter conference call. Jim Flaws, Vice Chairman and Chief Financial Officer will start the call with some prepared remarks.

Before Jim begins, I would 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 SEC reports.

Now, I would like to turn the call over to Jim.

James Flaws

Thanks, Ann. Good morning, everyone. I would like to begin today by looking back at 2012. This time last year, we knew we were facing some external headwinds. First in our display business, second in the solar business that are equity venture Dow Corning and third, in the macroeconomic environment.

In our LCD Glass segment, we had experienced significant pricing step down in Q4 2011 that would continue into Q1 of 2012. Those price declines unfortunately reset the corporation's profitability to a lower level. So, we laid out a plan to first stabilize the company's earnings and second to grow earnings again. Call this plan for modern workshop the key element of earnings stabilization was to moderate our price declines in LCD glass and also to regain positive momentum in the display segment and our plan to grow earnings again would be driven by a telecom environmental, specialty materials and Life Sciences segment.

I am very pleased to say now one year later, we have made great progress against both components over the course of 2012. Now, let me share some highlights from the year. Coming into 2012, we quickly brought our LCD glass supply in balance with our demand. We successfully moderated our price declines in Q2 and Q3. And late in the third quarter, we entered into new agreements with some LCD customers. Now these agreements caused Q4 price declines to be slightly above Q2, Q3 levels in our wholly-owned business, but we believe these agreements are integral part of our plan to stabilize our display business. And now, our Q1 price guidance is that we expect price declines to moderate from what experienced in Q4.

We achieved record sales and expanded gross margins of our non-display businesses and feel particularly good about achieving these results despite the worldwide economies' significant negative impact on all our segments. When the economic malaise affected our business in the second half, we quickly took actions to control costs, manufacturing groups responded with great performance and commercial groups captured all the opportunity.

We also retained our strong balance sheet while returning cash to shareholders in the form of an increased dividend and completion of the major stock buyback. We closed the significant acquisition in Life Sciences positioning it to become $1 billion business. And lastly, our young fast-growing Gorilla Glass business achieved $1 billion in sales, a 44% increase over 2011, so something we take tremendous pride in. It's a great example of how we bring life-changing innovations to market and demonstrates our ability to generate big revenue streams quickly.

Now I would like to turn to quarter four with some highlights. Quarter four was a record sales quarter 160 or one history, nice accompanying our new full year record sales, I think more importantly, we returned to year-over-year EPS growth in the quarter before special items. This demonstrates progress against our plan to form modern workshop and this improvement would have been even better if not for the sudden weakening the yen to U.S. dollar exchange rate, Hemlock's business conditions. I will talk more about these later.

Both our display and specialty material segment sales exceeded our initial expectations for the quarter. We believe display demand was driven by retail expectations for Q1, especially for Chinese New Year, and I will comment more on that in a minute.

Specialty material Gorilla Glass business grew almost 15%, sequentially as the supply chain dealt with surging smartphone growth and new product launches. On the other hand, environmental technologies sales were lower than expected as the light-duty auto industry took longer year in shutdowns and adjusted inventory in a continued softer demand environment.

In light of the current situation in market for solar grade polysilicon, Hemlock Semiconductor has seen steep declines in volume pricing in 2012. It's negatively impacted our equity earnings in the fourth quarter. Lastly, the yen, dollar exchange rate moved very sharply and significantly in December, negatively impacting our earnings in Q4 both, sequentially and year-over-year, and something we are watching closely as we enter 2013.

Now let me delve into the fourth quarter details. In quarter four, we had a number of special items. I had previewed these for you on our Q3 call. We took a corporate-wide restructuring charge to reduce our fixed cost. We actually realized some translation gains from the liquidation of an internal entity and we also took asset impairment charges in specially materials for our large cover glass operations and our other major equity venture is Dow Corning Corporation and Samsung Corning Precision. Our quarter results, today is ex-specials, which is a non-GAAP financial measure. Please refer to GAAP reconciliations on our website.

I am pleased to announce our results, both sales and earnings per share were above consensus for the quarter. Fourth quarter sales were $2.15 billion, up 5% versus Q3 and 14% from a year ago. Gross margins, ex-specials were 43%, consistent sequentially as we had expected. SG&A and R&D were flat on a dollar basis sequentially versus a year ago. They were also flat on a dollar basis and down as a percentage of sales reflecting our efforts at cost control.

Gross equity earnings of $198 million, excluding specials, were down about 14% sequentially and worse than our expectations, driven by even further volume decline at Dow Corning's subsidiary, Hemlock Semiconductor Corporation. I will expand my comments on Hemlock later in the call.

As I previewed EPS, excluding special items, was $0.34, even with Q3 and up $0.01 from versus a year ago. EPS, as stated here, is a non-GAAP measure and a reconciliation to GAAP can be found on our website. Foreign exchange rates negatively impacted our sales by $21 million and net income by $16 million sequentially in the quarter. For the year, sales were $8 billion, slightly up from 2011. Corporate gross margins, ex-specials, were down two percentage points driven by the significant year-over-year price declines on LCD glass business that I mentioned in my opening. Specialty Materials improved their gross margin by double digits in 2012 driven by higher volumes in Gorilla Glass. We improve gorilla manufacturing performance and reduced the losses of large-scale cover glass for the Sony televisions.

Now moving down to the income statement, gross, equity earnings, ex-specials, were 35%. Our effective tax rate increased for the year through 13% to 18%. The larger increase in Q4 reflects the accounting treatment that caught us up on the full year rate. Our full year tax rate was 18.4%. I have more to say about taxes later and also at our upcoming investor relations day, as the recent activity in Washington D.C. has actually benefited Corning.

EPS for the year, excluding special items, was a $1.29 versus $1.76 in 2011. The primary driver of the earnings decline year-over-year was the significant impact of LCD glass price declines in our wholly-owned business at SCP and reductions in Dow Corning's equity earnings. Again, EPS, as stated here is a non-GAAP measure and a reconciliation can be found on our website.

Now, I would like to turn to our detail quarter four and full year segment results. I will start with display. Display sales were $800 million in Q4, an increase of 5% sequentially and 3% versus last year. The Yen exchange rates negatively impacted sales by $27 million. Gross equity earnings, ex-specials, from our equity venture in Korea were $157 million in Q4, a decrease of 16% versus the third quarter. Results included Corning share of nonrecurring charges of approximately $12 million including pension expense.

During Q4, SCP also took some restructuring actions totaling $18 million in charges to our equity earnings, mainly for some asset write-offs. For your modeling purposes, display equity company's fourth quarter LCD sales were about $749 million, an increase of 1% versus the third quarter. As a reminder, this represents SCP's LCD sales only. Our public filings report SCP total which include various other products such as CRT, glass and ITO targets.

As we expected, our wholly-owned LCD glass volumes were up in the mid-teens sequentially and more than a third year-over-year, driven by customer utilization increases in our new agreements. Volumes at SCP were up slightly sequentially in year-over-year. Volume increases were in line with their customer utilization rates.

Now, recall in Q3 of 2012, we signed new agreements with some key customers. These agreements stabilized Corning's share at each and maintained a fixed relationship between Corning's pricing and competitive pricing at that customer. So far, these new agreements have had or intended in fact of keeping our share of the customers stable as required by the terms of the agreement. This share stability has allowed us to better forecast our capacity needs thus to maintain high levels of capacity utilization at our plants and improve our cost performance.

We also explained that initially we expected those new agreements would result in slightly higher price declines in Q4 than in the prior two quarters due to some initial adjustments to line up our prices with the requirements of the new agreement. In quarter four, we did in fact see middle single digit price declines in our wholly-owned business. However, SCP sales of new price declines remain more moderate in Q4.

Net income ex-specials were down 8%, sequentially driven primarily by the lower equity earnings at SCP. For the full year, display sales were $2.9 million, down 8%. Higher volumes were more than offset by price declines. Sales for the full year were not impacted by changes in the yen exchange rate.

Now turning to industry data, the glass market for 2012 was about 3.7 billion square feet. That's about 15%. On the supply chain front, we estimate that inventory grew measured weeks, the trunk in absolute square feet during the quarter, because Q1 is seasonally lower retail or watch inventories closely, but I will comment more on the supply chain in the outlook section.

As retail data for quarter four begins to come in, we estimate retails glass demand was approximately $3.5 billion in 2012 as expected. LCD television unit demand was essentially flat year-over-year on a worldwide basis. However, you take out Japan, where the absence of the echo point tax credit caused TV sales to be down 60%, the worldwide television unit demand last year was up 3%. We believe the weak macro economy, dampened demand during the year.

However, very importantly for us, large sized televisions continue to sell well all year driving the average screen size higher by 2 inches in 2012, and 50-inch plus televisions grew by more than 50% in 2012. And based upon what we saw at the Consumer Electronics Show, we have expectations of this trend continuing next year.

Now turning to telecom, quarter four sales were $540 million, up 3%, sequentially, and 10% year-over-year. The ramp of Australia's NBN project and reconstruction efforts followed by Hurricane Sandy drove the sequential increase. The year-over-year increase was also driven by the NBN project and increased sales of fiber China.

Net income, ex-specials, was up 23% sequentially, the primary driver improvement in earnings from Q3 were the higher sales and improved manufacturing efficiencies. Q4 net income, ex-specials was up year-over-year by 505% or $22 million. Improvement in net income was driven by the 10% sales increase and manufacturing efficiencies.

For the full year, sales were $2.1 billion, cable, fiber-to-the-home and wireless sales were up double-digit percents. We were quite pleased with these results given the weakening economy in the second half. The demand for fiber in China was strong every quarter.

Now, our telecom's annual net income ex-specials $135 million was down 20%. This earnings decline for the full year was due mainly to weaker product mix in the first half of the year and non-repeat of compensation bonuses versus 2011, which were very low in 2012 which we intend to pay bonuses in telecom.

In Environmental, Q4 sales were $219 million, down 6%, sequentially versus our expectation of flat-to-down down slightly. European demand for light-duty diesel products fell further in the fourth quarter and the impact of year end supply chain shutdowns was greater than anticipated.

Net income, ex specials was down 35%, sequentially, and 39% year-over-year driven by these lower sales and lower production volumes. For the year, environmental sales were down 3%, driven primarily by lower sales of light-duty diesel products in Europe. Heavy-duty sales were up in 2012 but were impacted in the second half by the slowing economy as Class 8 truck manufacturers adjusted production in their inventories. Environmental improved their gross margins three percentage points in 2012 due to strong manufacturing efficiency improvements despite the lower volumes.

In Specially Materials, we had another record quarter with sales up 10% sequentially and 68% year-over-year. Gorilla glass demand was up significantly in the quarter driven by IT and handheld customers ramping for new product introductions. Net income, ex-specials, was up slightly sequentially with improvements in Gorilla Glass gross margins. However this was partially offset by increased research spending on some new innovations in glass.

For the full year, sales were up 25% on an unprecedented demand for Gorilla Glass. Net income, ex-specials, for the full year improved primarily on expanding gross margins in Gorilla Glass business. Gorilla Glass gross margins, 40% above the corporate average in 2011, improve the 2012 on higher volumes. For those of you who are new to Corning's manufacturing processes, glass melting is a high fixed cost business, so we get more glass volume, we get good variable margins, sooner we run efficiently and this was the case in 2012. And we expect further gains in 2013 for Gorilla Glass.

In Life Sciences, our Q4 sales were up sequentially and year-over-year due to the additional sales from our large acquisition, which actually closed on October 31. The acquisition and integration is just underway. It's going smoothly. We expect this deal to be accretive to this segment. Net income, ex-specials, was up on additional sales.

For the year, Life Sciences sales were $657 million, up primarily due to Discovery Labware acquisition. Now net income was down year-over-year but this was due to the acquisition expenses, integration cost and some specials related to it.

Now turning to Dow Corning. Gross equity earnings, ex-specials, were down 13% in Q4 due to the lower sales of polysilicon. Versus a year ago, silicone sales were up slightly, but polysilicon sales are much lower driven by a dramatic lowering prices and lower volume due to the continuing softness of the solar market. This is reflected in year-over-year gross equity earnings decline of 33%.

During the fourth quarter, Dow Corning took special charges of $175 million for workforce reductions in both silicones and polysilicon and also for the write-offs of some polysilicon assets. Our share these charges was $87 million. The 2012 Dow Corning sales net income and our equity earnings were all down, driven primarily by the lower sales of polysilicon. The impact of lower polysilicon volume and pricing impact 2012 equity earnings by approximately $150 million, with about 24 million of it happening in the fourth quarter.

Turning to the balance sheet. We ended the fourth quarter with $6.1 billion in cash, short-term investments. Capital spending for the quarter was $526 million. Free cash flow for the quarter was zero but that’s due to the closing of the Discovery Labware acquisition. As a reminder, free cash flow is actually a non-GAAP measure. The reconciliation to GAAP can be found on our website.

We completed our share repurchase program during the quarter and also acted to increase the dividend by 20% in the fourth quarter. We ended the quarter with approximately $1.5 billion in cash in the United States. Our capital spending for the year was $1.8 billion, about $100 million lower than our forecast and our current expectation remains that cap spending in 2013 will fall year-over-year to about $1.3 billion.

Now to our outlook and I will start with display. Let me start with our view in the end-market. We expect the retail market, as measured in square feet of glass, to be up mid to high single digits. For reference 2012 was 3.5 billion square feet. We think, LCD television, in units, will grow in mid-single digits, but area growth will be higher. We believe the trend of consumers buying larger televisions will continue.

We are not as bullish on the PC market growth expecting 10% year-over-year unit growth, nearly all of it due to tablets and monitor units are expected to be down slightly.

Now for quarter one. As we near the end of January, we see the quarter one LCD glass market declining mid-single digit, sequentially. This reflects normal seasonality that we have seen in display. Our wholly-owned display business and SCP combined are expected to be down this mid-single digits.

Recall Q2 is actually the slower season at retail, so the supply chain should be moderate in Q1 to manage inventory. Now, some of you may recall that we expected the supply chain inventory to shrink in 2012 as measured weeks. In fact it actually expanded. Looking in 2013, however, we continue to believe it should shrink by about a half-a-week, but we admit it's a little bit of an unknown this early in the year.

You should also note that the LCD glass market and volumes in Q1 will be up year-over-year reflecting a larger market. As for glass prices, recall again that our new agreements with key customers. Last October, we explained going forward after Q4 with our share stabilized and the industry maturing, we expected price declines to moderate at all of our customers, including those with the new agreements. The price decline that we expect in Q1 is less than Q4 in our wholly-owned business

Now at SEP, price declines did not increase with Q4, so they are expected to be about the same as our wholly-owned business in Q1. As for our glass capacity, I want to reiterate, we intend to diligently manage our capacity, the supply as LCD enters its mature phase of growth. These new agreements actually help us better forecast our demand in 2013.

Now Q1, we continue to run at high utilizations to support demand and actually to rebuild some inventory for both, our Gorilla and LCD glass businesses, both of which had inventories for us well below we consider healthy. Doing so provide us added flexibility for the growth later in the year. Now moving to telecom, we expect Q1 sales to be consistent with the strong Q4 [posting] about 5% year-over-year and that's driven primarily by the NBN ramp.

Environmental, we expect Q1 sales to be consistent sequentially, it's down 15% year-over-year across both, light and heavy duty businesses and that's comparing to a very strong market in Q1 of 2012, when we had record auto production, very high volumes in heavy-duty diesel and healthier light-duty diesel market in Europe.

For the full year, we believe auto production will grow driven by strength in North America and Asia. We also believe tighter regulations in Europe and China will to lead growth in demand for heavy-duty diesel products.

Now specialty material sales are expected to decline about 30% in Q1 of the very high growth of Gorilla in Q3 and Q4. Now for comparative purposes, I want to remind you that Gorilla sales have always been weakest in the first quarter. This is due to the industry seasonality. I think the supply chain maybe adjusting some inventory in Q1 after some buildup in Q4.

For the year, we expect double-digit market growth and it should be very strong driven by the penetration of touch and notebooks. We expect to the impact on this in the second half the year. Life Sciences, we expect sales to be up about 15% due the added sales from our acquisition.

Now turning to Dow Corning, we expect equity earnings from Dow Corning to be down in the quarter. Silicone sales are expected to be about flat, but the demand for polysilicon in Dow Corning's consolidated subsidiary Hemlock Semiconductor was down severely to about half of what we had in Q4. This will significantly impact the profitability of Dow Corning, and therefore we expect equity earnings from Dow Corning to be only a few million dollars for quarter one.

Now I am going to take some extra time on Hemlock situations this morning and I referenced it again on Investor Day. I am going to comment mostly on polysilicon portion of solar industry. I believe you know there have been significant impacts to other portions of the solar industry, wafer, cells, installation, government subsidies that are related in some cases causing the impact to our poly market.

I will just pause to remind you that Hemlock also makes polysilicon for the semiconductor market and that part of our business remains fine with prices strong and demand good. Now there have been two primary step downs that have affected Hemlock's business. First, the market for solar poly began to suffer in 2011 as growth in the solar market was less than expected in a maturing market and by the impact of new poly capacity brought online worldwide. The solar poly industry moved to a significant overcapacity position and this resulted in steep declines in the spot price of poly. The drop in the spot price was so severe in quarter four of 2011 that long-term contractual customers of poly producers such as Hemlock and others strongly request negotiations on price.

Now long-term followers of Corning would recall that Hemlock prepared for this eventuality by requiring customer prepayments against the contracts. The theory was that, even if the spot price went down lower than contract, customers would not attempt to walk away from these contracts and their prepayments. However for Q4 of 2011, the spot prices had fallen so for, actually in to the mid-$20s level, that contractual customers were requesting contract modifications.

Now Hemlock responded by making some temporary adjustments to the contracts. The price was lowered substantially and done quarter by quarter. However, in return for this change, customers were not allowed to earn back their prepays. These temporary adjustments did not change the firm commitment of customers to the take-or-pay nature with poly over the life of the contract. Hemlock made these modifications with the expectations and perhaps I should say hope, that the industry would sort itself out by shutting down excess capacity and the price would climb back over time.

The second big step down here relates to trade disputes on solar. In the United States, there was a dumping complaint against China solar cells inventory. The initial ruling in spring 2012 called for duties being imposed. Last summer, in July, China announced the dumping investigation on the polysilicon imports for solar into China. First against the U.S. S U.S. sellers of poly and later expanded the case to include Korea and the European makers of poly.

China's Ministry of Commerce, known as MOFCOM, is investigating and has announced that they will have a preliminary ruling due in late February 2013. The Chinese market has been very important for Hemlock sales of solar poly. As the MOFCOM investigation became known, Hemlock began experiencing declining solar sales in to China. This started in August and then reached higher levels in the fourth quarter. It is our belief that no importer of solar poly wants to be subject to potential retroactive business. Given excess of poly capacity inventories, why would they take a chance.

This is the second step is impacted Hemlock so much in Q4 and will in Q1. Obviously, we don’t know what MOFCOM will rule and if they will even stick to their February date. We also don’t know how the industry will react to whatever the ruling is. All I can tell you is Hemlock is preparing for a variety of different scenarios including difficult ones.

The market for solar grade polysilicon is almost nonexistent now as the industry deals with excess inventories and the way its resolution of these area's trade exists. We believe solar customers are just not buying polysilicon until they have more certainty regarding the MOFCOM investigation of China.

As I mentioned earlier in the call, Hemlock Semiconductor imports some assets. These brutal conditions in the solar polysilicon market are impacting our equity earnings but we believe that Hemlock's board will actually take appropriate action to minimize these losses, even if it requires further impairments and layoffs. Now we will communicate with you as we learn more regarding the MOFCOM investigation and the implications for Hemlock.

I would like to remind you that at Hemlock, they prepared for negative volatility in the solar polysilicon industry. Hemlock had built additional capacity based on the long-term contracts with these customers. These contracts have actually very firm language about customer obligations to fulfill their commitments and Hemlock reinforced these contracts by mandating customer prepays. We believe Hemlock is in a strong position to mitigate against severe issues. If necessary, the management team will move to enforce the take-o-pay in nature of the contracts. These contracts actually held up last year in resolution for one customer and Hemlock believes they will again in the future, if needed. Potential timing of restructuring impairment and contract resolutions may make the individual quarters for Hemlock bumpy. However, Corning believes that Hemlock has the ability to reset operations to the lower level if that's where the market is and reduce the negative drag in earnings. Corning also believes the strength of the contract should allow Hemlock to offset the impact of any possible asset impairments or restructuring.

The people in the solar industries are very disappointing. We actually continue to believe that polycrystalline solar technology does have a future. However, it may be a bumpy road. In the meantime, we believe Corning investors should judge Corning's earnings per share without the ups and downs at Hemlock. We will begin helping [evaluate] Corning on those basis.

Now let me turn to the rest of our Q1 forecast. We expect gross margin to decrease by two points, driven mainly by lower sales during the quarter. SG&A and R&D spending will be consistent with the fourth quarter.

Equity earnings excluding special items will be down 35%. Our effective tax rate for 2013 will be about 19%. This projected rate is only slightly higher than 2012 as we expect a higher mix of income from our wholly-owned business, which were taxed at higher rates than equity earnings. However, it's much lower than what we previously told you, because the U.S. law signed in effect on January 3rd, included a tax extenders, which are very favorable to Corning.

Now, as investors know, we currently price for LCD glass in Japanese yen. We have highlighted impact of yen to U.S. moves for investors for many years versus the foreign exchange rate moves. We do believe that the strengthening yen put more price pressure on LCD business in periods from 2008 to 2012. The current weakening yen has potential to help us moderate price declines.

As you know the yen has depreciated very suddenly, actually more than 10% since the beginning of December. Of course, we are hopeful there will be no further weakening. At the same time, we are considering various actions to minimize its impacts if it weakens further.

As a reminder, our results move these changes in the yen to the U.S. dollar exchange rate. Our LCD glass is sold in the yen. When the yen weakens, it lowers our display results. On the other hand it improves panel makers results, because the panel industry [sales]. When the yen strengthens, the opposite happens. Specific to Corning, if the yen moves one point higher or lower in Q1, we estimate our sales would decrease or increase by $8 million.

Now similar to panel makers, we also have some Gorilla glass manufacturing cost in the yen, but all of our Gorilla glass is sold in dollars, so the net impact of a one point move on our net income is only $6 million.

Now that concludes my opening comments, and I will turn it back to Ann.

Ann Nicholson

Thank you, Jim. John, we'd now like to open it up for questions.

Question-and-Answer Session

Operator

Certainly. (Operator Instructions). First with the line of Mark Sue with RBC Capital Markets. Please go ahead.

Mark Sue - RBC Capital Markets

Thank you. Jim, we understand your focus on share stability for display glass to better forecast capacity and so far so good. What do the predictive indicators on pricing change foretell about the market share intentions from your competitors?

I asked since every action has a reaction, and I am wondering if rationality maybe prevail in the industry or do you feel that competitors are still considering what they should do at this time and due to external factors such as currency that should imply some share shift in the forthcoming quarters.

James Flaws

Mark, after what you speak direct to our competition about their intentions, we believe what we've seen in quarter one both, in terms of how the contracts are working on our share and on more moderate price declines indicates that now we believe the industry is moving to more moderate price declines for LCD glass, so that's the only initial indicator I can give you.

I believe our competition is announcing the results today next week, so we look forward to hearing what they have to say about guidance, but that's our strong belief that we can see moderation the price declines in the LCD business.

Mark Sue - RBC Capital Markets

Okay. Then maybe if I touched on Gorilla glass, where you are focusing on moving up more capacity there? Gorilla Glass, which is still highly differentiated, are we at a point where prices for Gorilla Glass can actually start stabilizing or not decline since it is a premium product that is going to a lot of premium end markets such as smartphones and tablets? What should we assume for pricing for Gorilla Glass for the balance of the year?

James Flaws

We expect prices to decline on Gorilla. This remains a new product. It's in a consumer electronics industry. Although we think we can keep up with any price declines. The price declines in Gorilla tend to happen in the first quarter of the year. So you should expect some price declines this year. But we are very confident we can keep up with that in terms of our cost reduction and experience the great growth that we expect from this market going forward and we continue to do very well with all customers. Our recent announcement of our Gorilla 3 went over very well at the Consumer Electronic Show and we are expecting a strong conversion rate of new customers through this improved damage resistant glass.

Operator

Our next question is from Rod Hall with JPMorgan. Please go ahead.

Rod Hall - JPMorgan

Jim, I wanted to clarify one thing you said, which is, I know that you said that specialty materials is expected to be down 30% sequentially. Just wanted to make sure that we heard that right. Then if that is correct, Jim, can you give a little more color on that, is that then to due demand driven decline that are a little bit more decline than you would have anticipated or is there something else going on? Are there other structural changes in the use of Gorilla Glass and some factors coming up? That sort of thing? So, if you maybe could give some color on that.

Then, the other thing, maybe more on the positive side, I wanted to ask you about is the panel industry, just maybe if you could comment, in 2013, about the supply capacity of the panel industry. Whether you think the supply gets short as we move through 2013 or just what you think the situation there is and how that might come back and impact glass pricing?

James Flaws

Sure, Rod. So, on gorilla, I did say 30% and we think it is probably slightly higher than what the normal seasonality that we have experienced in Gorilla to be, probably because there was a little inventory build in Q4 but we now are six-year Gorilla and what we determined is Q1 is always the quarter where we see the weaker demand. So it is demand driven but that demand maybe partially affected by inventory.

We see no change in market share for Gorilla. In fact, we think Gorilla 3 will actually improve our position. It’s a much better product. So we are not worried about the slight down in Q1 and actually anticipating very strong growth in the remainder of the year. In the back half of the year, we think touch will begin emerging on notebooks and as you know, notebooks are about twice as big as a tablet and many times bigger than the smartphones. So we think that will be good for us. So we are not worried about the slight down in Q1.

Relative to the panel industry, it is a little hard for us to judge. Clearly the panel capacity has been moderated in terms of the growth over the past year and the new panel capacity in China by LG and Samsung is not coming on fast. So, as we continue to see the LCD market grow and I would emphasize again the large scale televisions and I mentioned the growth of 50 inches in the last year and average size going up. I don’t know if you had a chance to go to Consumer Electronic Show but clearly very large size and increasing focus on high-definition for those, I think, we will use up panel capacity whether it actually gets to its shortest or not, it is hard for me to judge from my position. But I would say there are good signs in the panel industry as well as in the LCD glass business.

Rod Hall - JPMorgan

And Jim, could you just deeply follow up the first part of that question. Thank you for that. But I wanted to just see, could you maybe make a more general comment on your views of consumer demand situation right now? Do you feel that demand here is starting up is little weaker than you would have anticipated? Just generally any color you can give us on what you are thinking on consumer demand would be interesting.

James Flaws

You are asking for Gorilla demand at retail?

Rod Hall - JPMorgan

No just more general consumer demand, because you had made the commentary on TV demand maybe be little bit with a weaker year. I mean, do you feel like consumer demand in general at least the part with consumer demand you had stayed to is a little bit weaker than normal here heading into Q1? [Each year] report you think is going on with the consumer.

James Flaws

I would say. I have to break it down by geographies, but in the U.S. I think television demand is fine heading in the Super Bowl. People forget that people buy televisions after Christmas. In China, we've had good contact with our customers who by the glass there, and Chinese television sellers, remember the Chinese brands are about 70% there. Their expectations are for a good Chinese New Year. And, demand, I think it remains mediocre in Europe. That's really no surprise.

In our car business, which is the other consumer phenomenon that we experienced. Car demand, I think, in the United States remain strong, very weak in Europe. I think car demand in China looks fine. We do not feel like we've seen this big downdraft from the United States, from the payroll tax rolling back on and obviously the fiscal cliff negotiations, no help. A lot of the American accept they very welcome, so we were not seeing the big downdraft in consumer demand.

Operator

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

Wamsi Mohan - Bank of America Merrill Lynch

Yes. Thank you. Good morning Jim you mentioned mid single-digit growth for the LCD glass industry equates to about 3.7 million square feet. Where are we with glass supply now and where do you think will be exiting this year?

James Flaws

So, it's a little harder question to answer, Wamsi, than it used to, because how the mix for or Gorilla versus LCD, but we would say right now supply demand balance seems healthy. It was probably very tight in Q4, but healthy. We remain very full right now. The place where we have capacity down is in Korea. There really is no new footprint being built with one exception, I believe, of any duties one new tank in Korea, and so we are not really seeing new capacity come online.

Obviously, everybody is continuing to progress to more thin glass, but that is a more gradual, so we expect the supply demand balance to remain in pretty good shape as we continue to grow so and we got it right in terms of fact the glass demand will grow again this year.

Wamsi Mohan - Bank of America Merrill Lynch

Okay. Thanks, Jim, and can you talk about what assets are getting written off at SCP? I think you've previously spoken about repurposing some of these assets and China. Is that still happening and in this write-off, is this incremental to that?

James Flaws

So what we did at SCP, they had bought some assets for expansion that we never implemented there and some of the assets were moved to their new project in China, but some of the assets actually couldn’t be moved. They are more fixed in nature, so that's what we impaired there. We are really not expecting that capacity again in Korea with what we know right now for LCD. So, it was really around the plans they had in 2011 that capacity that we put on hold and then now will move in equipment can be moved to China that it can't writing off.

Wamsi Mohan - Bank of America Merrill Lynch

Okay. Thanks. And last one for me, can you talk about what options you are looking at to mitigate the impact of the yen. Is this more along the line of hedging or is it actually changing the underlying denomination in which glass will be priced? Thanks.

James Flaws

We are looking at both alternatives. One alternative would be to go to U.S. dollar pricing. I think you are probably aware that the majority of the supply chain both, our customers get paid in dollars and most of the other components are priced in dollars. Then, we are also looking at whether we should hedge to protect ourselves from weakening in the yen.

Wamsi Mohan - Bank of America Merrill Lynch

And when would you make the determination.

James Flaws

I would tell you it's one of my top topics that I am working on.

Operator

Our next question is from Amitabh Passi with UBS. Please go ahead.

Amitabh Passi - UBS

Hi, thank you, Jim. My first question is for you. Any update on where we are with Gorilla Glass penetration and markets such as automotive? Then with respect to Gorilla Glass 3, how do we think about the potential benefit to Corning? Is there any sort of pricing premium you garner or is it simply just a higher or better value that you provide to your customers at existing pricing?

James Flaws

So, on the latter it's a better value that we provide to our customers. That's fundamentally what we do, actually, in all of our products. As we go through generation shifts, we try to provide better value to them. I think that’s getting very good reception. On Gorilla for automotive, as I think I said on an interview fairly recently, we are very confident that we will have an order this year for Gorilla Glass to be put on a car. Don't think big volumes, but the first order is the most important. So, I think, we remain very confident that that could occur this year.

Amitabh Passi - UBS

Just maybe as a quick follow-up, Jim. You have taken quite a bit of charges related to workforce reductions as well. How do we think about potential benefits flowing through your P&L through 2013?

James Flaws

I think that we are looking for, as a result of the wholly-owned restructuring about maybe $60 million of cost benefit.

Amitabh Passi - UBS

In OpEx or at COGS?

James Flaws

It's spread between both. Probably a little bit more on the OpEx than on cost of goods sold.

Operator

Our next question is from Amir Rozwadowski with Barclays. Please go ahead.

Amir Rozwadowski - Barclays Capital

Thank you very much and good morning, first. Jim, just touching on Gorilla Glass, it seems like you continue to have very strong end-market demand there. In thinking about your addressable market, you just touched upon the automotive opportunity but how should we think about what your expectations are for touch-enabled devices outside of what have now been the traditional markets such as smartphones and tablets? Could we find ourselves in a position where there is incremental growth in the end market that you guys are looking at to put Gorilla Glass in to by this time next year?

James Flaws

Yes, Amir I hope you come to our IR Day on February 8, because Jim Clappin will be addressing our outlook for both but we continue to expect smartphones to grow as a percentage of overall phones. We think we are the product of choice for that. We think tablets will continue to grow in all formats, both small and the normal size that we have got used to.

I think the big upside, for us, in consumer electronics for Gorilla will be touch moving into the notebook market. I think you may have heard Wendell talk about this longer range. We think this doubles the size of the potential opportunity for Gorilla. We think PC manufacturers are going to drive to put touch on that. Obviously the cost of incremental touch on a computer has to be not too extreme but we think that people are working on that and obviously work around products that will help them to do that at a lower cost. So I think the future is very bright but Jim Clappin is going to be walking through our detailed forecast in both areas.

Amir Rozwadowski - Barclays Capital

Great, and then also Jim, if I may, a clarification on your LCD outlook. Given your expectations for moderate price decline, does that factor in any adjustments related to the recent move in the end? How should we think about that?

James Flaws

So, my comment on pricing as always I speak only in the yen-to-yen price declines. We obviously believe that the recent weakening in the yen which has benefited the panel makers should help us in trying to maintain low price declines. Remember that they took pain from the yen strengthening over that period of time. That increased the pressure on us. That's to be realized but when I gave you the moderate, it's the yen-to-yen.

Operator

Next, we will go to Jim Suva with Citi. Please go ahead.

Jim Suva - Citi

Thank you and congratulations there to you and your team there at Corning. It looks like you are really putting a nice foundation. When we look at your comments around Q1 seasonally being softer for glass, can you just help us understand a little bit of this with the context of that because if I would look back factually, it looks like Q1 glass has been going up sequentially every year. Now maybe it has to do with the volatility of what has happened to the supply chain and now changes to contract and things like that, but it just looks like historically Q1 has been up from Q4 and I think if I am correct that actually China represents more TV sales than the U.S. I would expect that and wonder if the normal seasonality could necessary historically going forward and then the follow-up if you can just talk about what is kind of a normal seasonal for each the quarters of your year how when we look at seasonality for glass. Thank you.

James Flaws

So you are correct that we have seen quarter ones be greater than quarter four by slight amount. It really however was very dependent on what inventory positions are at the end of Q4, so we actually expected Q4 inventory work off to be a little bit greater, so you we factor in that as we think about we call the normal seasonality. I think you in our model, obviously model our own glass, the panel makers, the set assembly and at retail, but I would be happy to maybe our IR Day to spend some time with you on the seasonalities by quarter.

I think a couple years ago, we actually laid it all out in a graph, but it is the combination of what we would normally see seasonality that's were talking about in fact that the supply chain is coming out little bit heavier on inventory than what we originally expected. They haven't done that. We probably would have been saying it's a year-over-year increase.

Operator

And we'll go to Brian White with Topeka. Please go ahead.

Brian White - Topeka

I am wondering if we could talk a little about the Gorilla market obviously is focused on tablets and smartphones, but few years ago you announced a TV customer, where are we in that market? Also, if you could talk about maybe the opportunity in notebook and auto. Thank you.

James Flaws

So, Brian, the opportunity in auto I think still exists. We believe that as I said earlier in the question will have a customer this year, and so we are still hopeful the auto industry I think moves at a slower pace than consumer electronics.

In terms of Gorilla, clearly, the strength has been in smartphones and tablets. We are believers to tablets will continue to grow very nicely. We think there is no question that smartphones continue to come on the higher and higher percentage of phones sold, but I think the big upside opportunity is touch being extended to notebooks as we go through the course of this year and into next. I think those are where the big opportunities are.

Operator

We'll go to Steven Fox with Cross Research. Please go ahead.

Steven Fox - Cross Research

Thanks. Good morning. Just few questions. First of all, Jim, what exactly is the yen rate that you are factoring into your Q1 guidance? And then secondly, with regards to Hemlock, is there any way and this pretty difficult question, but is there any way to sort of gauge the downside from here in terms of the risk to Corning's balance sheet or results going forward. Any help on that would be appreciated. Thanks.

James Flaws

Sure. On the yen, we don't actually as you know give sales guidance, but as we think about the yen, we think about what the rate is at the time that we put together our forecast, so we would have been thinking in the $80 million kind of range. We are not the world's best predictors of exchange rate, so we don't try to predict where it's going to go.

On HSC, yes, we can help you. I am going to do that at the IR Day, and when we file our 10-K, we'll walk you through it in more detail. You should not consider that any kind of risk in restructuring there has any impact on Corning's cash position. It would have, obviously, an impact on Dow Corning's earnings and therefore would flow through to us as a special, but it's not a cash issue but we will actually outline all those risks for you on February 8th and in our 10-K filing.

Steven Fox - Cross Research

That's helpful. Thanks so much.

Operator

Our next question is from Patrick Newton with Stifel Nicolaus. Please go ahead.

Patrick Newton - Stifel Nicolaus

Yes. Thanks. Good morning, Jim. Just to beat the dead horse on Gorilla, I guess in this expectation of a second half rebound largely driven by notebooks, is this based on notebooks and Ultrabook SKUs that are currently ramping with OEMs? I'm trying to get a sense of the risk of to your numbers of how the sell-through of these products goes and whether or not we could potentially have a similar issue to the Gorilla glass story that we did in 2011 based on the TV being somewhat of a flop?

James Flaws

Well, first of all we don't regard Gorilla as a dead horse.

Patrick Newton - Stifel Nicolaus

I meant on the question, the number of questions on the topic.

James Flaws

I would say that the Sony television experience was obviously very disappointing for us, probably for Sony too. In the beginning of 2010, Sony told us what they were going to do and put it on a broad part of their line, including moderate priced televisions and then one year later, they didn't do that.

That was very disappointing to us because we actually invested to do that for them. I don't regard that to be a sign for touch on notebooks. I guess you have the opportunity to talk to all the notebook manufacturers and software manufacturers about what they believe and where touch is going to go. I guess we could be wrong. I think the wrong here would be, maybe that the upside isn't as great as what we expected

I don't see any potential disappointment coming in smartphones or tablets. So I think the question is whether touch on notebooks is a more moderate introduction or becomes a very strong introduction. We will have to see how that plays out. But we don't think the Sony television experience is a good forecast of that.

Patrick Newton - Stifel Nicolaus

Okay, that’s good to hear and then I guess for your full year outlook for Gorilla and the double-digit market growth, does this include any of the high probability auto win? Or would that all be upside your expectations, should that actually occur in 2013?

James Flaws

That would be all upside.

Patrick Newton - Stifel Nicolaus

Okay, perfect and then I guess just last one. Given that you have utilized your $1.5 billion share repurchase with your CapEx expectations declining in 2013 and solid free cash flow, should we anticipate any type of repurchase allotment or is that something that you are looking at carefully?

James Flaws

I think the board is very focused. Obviously they would like to try to improve the performance of the stock. They won't, as I said many times, prejudge what their actions are. I think that they will continue to look at it as we they through the course of the year. But I am not going to say exactly what they would do. I think that you have seen over the last 15 months the board being very active in trying to return money to shareholders through dividends increase and a large repurchase. So, I think that they will remain focused on that.

Ann Nicholson

So, John, we have got time for one more question.

Operator

That will be from the line of Ehud Gelblum with Morgan Stanley. Please go ahead.

Ehud Gelblum - Morgan Stanley

A couple of things. First of all, for the year, can you give us a sense as to how you look at volumes for wholly-owned versus SCP and how we should be thinking about volume growth for the two of them? Then I just wanted to see if the share contracts that you are in right now, do they set the pricing at the beginning of each quarter as you negotiate? I guess there is not much negotiating going on? Or do they change because you have promised, if I understand the math, in market price, can they change over the course of the quarter if the market price changes? The reason I asked is NEG reported last night and they said that they were unclear on what pricing was going to be like in Q1 because they hadn't finished their price negotiations. So I wonder if their price negotiations when they are finished over the next few weeks change whatever the market price is? Does that change what you have to match as well? Or are you set and anything that NEG might do would only impact you for the June quarter. Thanks.

James Flaws

So I won't comment on NEG. I will just say that we are set for quarter one. These contracts work at the beginning of the quarter and we are done. So we are not expecting and expect any change from that. Relative to wholly-owned and SCP forecast, I have to admit we are not the best forecasters of getting it right, the split there. Right now, we would expect to see slightly greater growth in our wholly-owned business than at SCP. So we are not really seeing an expansion of capacity at our Korean customers whereas we have seen that in our wholly-owned business, particularly in China. So, I would say we tend to think it would be slightly in favor of the wholly-owned business, but again I offer you we are not the best forecasters of how it splits.

Ehud Gelblum - Morgan Stanley

That’s helpful. If I could just follow-up the comment that you made in the conference call in preamble that a one point change in the yen impacts your revenue by $8. Last quarter it was $6, and I noticed it could have bounced around between $6 and $9. What are the main elements to how that changes? What changed from last quarter to this quarter to make it a $6 change versus an $8 change? I know that's too technical, but just trying to gauge where that sensitivity comes from.

James Flaws

It's around the fact that Gorilla is a larger proportion of our business and Gorilla is priced in dollars.

Okay. I would like to finish with a few comments. We have a few IR announcements. We will be holding our Investor Day in New York City on February 8 at Cipriani. This year, in addition to the normal crowd favorite hands-on demonstrations that our business exhibits we are going to give a detailed overview of our growth expectations for 2013. In addition to our CEO, Wendell Weeks and myself, three of our business group leaders will be speaking to you about their plans to march up our earnings. It's going to be very informative and hands-on, and I hope you will consider attending in person.

To summarize, the highlights of our call, we think we made great progress on our plan to stabilize display and grow earnings on our other businesses during 2012, and while the economy did impact some of our plans, we took actions to control costs and achieve new sales and business profitability milestones.

I think most importantly, we grew earnings per share ex-specials year-over-year in quarter four and this is the first time we have done this since 2010. We see this as an indication we began our return to earnings growth.

Our Gorilla glass business attained $1 billion in sales after only six years. We made a key acquisition of Life Sciences, we finished $1.5 billion share buyback and also increased our dividend by 20%. And although deep downturn in the solar market is impacting Dow Corning and our equity earnings in the short-term, we believe we have ways to mitigate it.

We are coming into 2013 with the expectations in growth in several businesses. We do have some caution about the yen, but we intend to maintain stable Display earnings with moderate price declines, manage our glass capacity well. And with glass reductions and telecom, specialty materials, and life science environmental are poised for growth in 2013, so we look forward to seeing you at our Annual Investor Meeting on February 8th. Ann?

Ann Nicholson

Thank you, Jim, and thank you all for joining us today. A playback of the call is available beginning at 10.30 am Eastern Standard Time this morning and will run until 5 pm Tuesday, February 12. To listen, dial 1-800-475-6701. The access code is 276093. The audio cast, of course, is available on our website during that time.

John, that concludes our call. Please disconnect all lines.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Corning's CEO Discusses Q4 2012 Results - Earnings Call Transcript
This Transcript
All Transcripts