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Corning Incorporated (NYSE:GLW)

Bank of America Merrill Lynch 2014 Global Technology Conference Call

June 3, 2014 4:20 pm ET


Jeffrey Evenson - SVP and Operations Chief of Staff

James B. Flaws - Vice Chairman and CFO


Wamsi Mohan - Bank of America Merrill Lynch

Wamsi Mohan - Bank of America Merrill Lynch

Welcome to the Bank of America Global Technology Conference. For those of you who have not met, I'm Wamsi Mohan. I'm the technology supply chain analyst here at Bank of America Merrill Lynch. Thank you all for joining us today. It's my privilege to introduce Corning to you here. We have Dr. Jeff Evenson who is an SVP and Operations Chief of Staff at Corning, and Vice Chairman and CFO, Jim Flaws. The format is going to be a presentation first by Jeff, and then we'll get into Q&A. So thank you very much for being here, Jeff.

Jeffrey Evenson

Thanks, Wamsi, and good afternoon, everyone. Before I get started, I need to remind you that many of the comments we'll be making today have forward-looking statements. Actual results may differ materially from what I say and you can find detailed risk factors and additional information in our SEC filings.

Today I'd like to focus on three things. First, I'd like to go over Corning's goals for the year, like to give you an update on the progress that we've made against those so far in the year, and then I'd like to turn to Corning's future and talk about how we're thinking about growth over the next few years.

This year we have four primary goals; to continue the Display positive momentum; to integrate CPM and realize the synergies quickly; to grow sales and profits in our other segments; and return cash to shareholders. So with those in line, let's go through the progress on each.

First, we've made significant progress on restoring positive momentum in Display during 2013 and we believe that we can sustain the momentum in this business through 2014 despite the increased price pressure during the early part of the year. As you can see on the left hand side of this exhibit, and as we discussed in our earnings call, the first quarter price declines were more than moderate. Now things have gotten better in the second quarter and we expect in the second half that we'll return to the consistent moderate price declines of 2013. In terms of share, we expect 2014 share to be overall consistent with 2013.

The next aspect of momentum is how we're doing in individual product categories. In the middle of this chart, we look at high-performance displays and we see that as a rapidly growing segment that will make increasingly meaningful contributions to our momentum over time. Improvements in color reproduction and resolution put more demands on glass and our new Lotus family of glasses offers the performance that our panel manufacturer customers need for OLEDs or high resolution LCDs. We expect our share to continue increasing in the high-performance segment.

The third aspect to momentum in the Display business is relationships. Relationships are important because parallel innovation in glass, display design and display fabrication continues to be essential for advancing image quality, improving form factors and reducing cost. We invest significant technical resources and commercial time with our customers and related companies to push forward and have the right relationship, so we have insight on where to invest and push our leadership forward.

Let's move on to our second goal for the year. In January, we closed a transaction that moves our ownership of LCD assets in Korea from 50% to 100%. We call our new business Corning Precision Materials and it promises significant benefits, including accelerated cost reduction and reduced capital spending. We'll deliver meaningful synergies from CPM even this year and expect annual synergies to ramp up over the next several years. We're off to an excellent start and are going to provide further updates in our July earnings call.

We remain the lowest cost manufacturer in the display industry. Nevertheless, we believe that we can move our annual cost declines in display glass from about 10% to 12% per year to a new range of 12% to 14% over the next few years due to the value created by the CPM integration. Additionally, gaining full control of the Korean assets enabled capital spending avoidance. In total, we expect to avoid $350 million in capital spending over the next four years. At the reduced level, we'll be able to meet all the demand we see for display glass and also create new capacity for other applications like automotive and architecture.

Turning to our other segments, we expect to grow sales and earnings meaningfully in 2014. In Optical, we expect to grow twice the rate of telecom CapEx driven by our leading positions in fiber-to-the-home, data centers and wireless infrastructure. We are growing faster than the industry, both because of our exposure with priority spending areas and because these areas are switching towards optical technology. For the full year, we expect telecom revenue to be up mid to high single-digits. Net income is expected to be up double-digits driven by volume growth and positive mix.

In Environmental, new and tighter regulations for heavy-duty diesel will deliver a new growth phase that is still in its early stage. Already in the first quarter, year-over-year sales and earnings were up 21% and 59% respectively. We expect double-digit profit growth in the Environmental segment going forward.

In Specialty, we expect good growth of the cover glass market for the next several years. We expect Gorilla Glass this year to be up more than 30% in volume, which is higher than consumption growth due to the inventory work-off that we experienced in 2013. We continue to innovate and enjoy outstanding customer relationships, which we believe will allow us to remain the leader in the cover materials segment for a long period of time.

In Life Sciences, government spending has been a drag on revenue growth, but we expect NIH budgets and our revenue to increase in the second half of the year.

Our fourth goal in 2014 is sustaining our program to return cash to shareholders. We entered a period of increased free cash flow in 2011 and began taking additional steps to return excess cash. From October 2011 to December 2013, we doubled the dividend and repurchased 13% of outstanding shares. We remained active in the first quarter of 2014 by completing our 2013 share repurchase program and launching a new $2 billion repurchase program associated with our acquisition of SCP. Going forward, we expect continued strong free cash flow and to consider additional share repurchases and/or dividend increases.

So, that's my overview of 2014 goals and progress. Let's now turn to Corning's future. First, you need to understand what makes us tick. The three sentences on this exhibit speak to our rich history of creating life-changing innovations and our desire to continue innovating and growing profitably. Corning's leadership in material science is based not only on a detailed understanding of glass, ceramics and customer relationships, but also on underlying competencies like measurement, process control and equipment design.

At Corning, very little is off-job. We devote significant effort and investment to developing custom and proprietary research tools, equipment and manufacturing processes. Our integration from material formulation to manufacturing process provides a unique advantage in a world that is increasingly outsourcing.

Additionally, we believe that precision glass is becoming even more important in the future. I would like to spend a few minutes telling you why. For over 3,000 years, artists have used glass because of the way it forms, because of the way it feels, and because of the way it handles light. These artistic properties attracted modern designers to consider using glass in new places, for example the most recent consumer electronics devices. But what really pushed them over the top are the technical properties of glass.

First, contrary to popular wisdom, glass is incredibly strong. Its theoretical strength is 10 gigapascals. Now my guess is not many of you measure things in pascals everyday, so let me illustrate. Let's consider building a scale that measures the pressure under the foot of an elephant. To get this scale to read 1 gigapascal, you would need to stack 10,000 elephants on top of each other. Now, I don't know in real life how to stack 10,000 elephants on top of each other, but what I can say is that Corning scientists and engineers are making great progress on tapping into this theoretical strength and moving up the S-curve. And although Gorilla Glass is incredibly strong, we still have very far to go before we reach the theoretical limit.

The second technical feature of glass is its inherent stability. Now, have you gone on a tour of maybe a European cathedral where the tour guide tells you that glass is a slow-moving liquid and therefore you see that it's slightly thicker at the bottom than at the top of the panes? Couple of people have heard that. It's completely wrong. Favorite tour guide story completely wrong. In fact, it would take 20 trillion times the age of the earth to create a visible change in the glass. The thermal and dimensional stability of glass helped us improve products from catalytic converters to high-resolution displays to interposer layers in semiconductors.

Next, glass is one of the most transparent materials known to man. The glass used for optical fiber is 30 times more transparent than the purest water and only about 1% less transmissive than pure air on a clear day. The extreme transparency of glass extends from the visible spectrum into the radio frequency spectrum, which makes it useful for mobile transmission if you want to do something like build a distributed antenna system.

Next, glass is effectively impermeable. It's been used for thousands of years as a container because of its effectiveness of protecting its contents from contamination by the surrounding environment. Let's consider an example. A molecule of oxygen takes about two weeks to pass through a piece of high-tech plastic 1 mm thick. The same oxygen molecule would take 30 billion years to pass through 1 mm of silica glass. What does that mean for mobile technology? Well, for starters, impermeability makes glass an ideal enclosure for advanced display technology such as OLED which decay rapidly if exposed to oxygen or water molecules, and 30 billion years meets the warranty demands of even our most demanding customers.

So, glass has been integral to our lives for a very long time, and given its technical and design properties, it's becoming even more relevant today. From consumer electronics to communications, life-sciences and other markets, we believe our material set coupled with our unique capabilities and collaborative culture position Corning for another growth surge.

So let's take a look at a few examples where we expect to create entirely new revenue and earnings streams. First, we're introducing Gorilla Glass in the automotive market. We have our first win with BMW's i8 and several other OEMs are evaluating Gorilla for windows, windshields and sunroofs. The auto glass market is over 5.5 billion square feet with laminates accounting for about 60%. Gorilla Glass offers both reduced weight and improved performance for the automobiles, and so we feel really good about our hand.

Second, the market opportunity for commercial windows exceeds 25 billion square feet and we think dynamic glass will capture a meaningful share. The pristine surface quality and mechanical stability of our glass enable superior electrochromic performance while increasing yields and reducing costs. We're collaborating with [Vu] (ph) an innovative startup and our JDA is both ahead of schedule and delivering strong results.

Next, in January of this year we launched the world's first antimicrobial cover glass which combines all the benefits of Gorilla Glass with an antimicrobial agent that inhibits the growth of bacteria, mold and mildew, and we have a next-generation glass in our lab that kills bacteria [indiscernible]. We see multiple applications. There are more than 1 billion touch devices sold annually and there are opportunities at healthcare, restaurants, appliances and even retail kiosks.

Let's turn to Willow, our new ultra-thin flexible glass. Global shipments of flexible displays are expected to reach almost 800 million units by 2020, up from effectively zero today. We expect Willow to be a key enabler of this market and for Corning to participate in a big way. Willow also appeals to designers outside consumer electronics, which we expect to create significant growth over time.

As the last example for today, let's look at wireless. We continue to be encouraged by the market's response to our recently launched all-optical distributed antenna system, the ONE Wireless Platform. 5 million commercial buildings exist in the United States and less than 10% currently have an indoor cellular solution. So this is a significant opportunity for us. Our solution enables clear signals and maximum bandwidth, even in really tough indoor environments like convention centers and stadiums. We have numerous engagements underway and we expect significant deployments to happen in the second half of this year.

So we're excited about our portfolio. We don't know for sure when we'll see the payoff from these investments but we do know that some of them are going to pay off significantly and we're working hard to make that happen.

To summarize, we believe that we'll continue to deliver value to shareholders in three fundamental ways. First, we offer the strength and stability to seeded innovation over the long term. We have a strong balance sheet. We are the market technology and cost leader in each of our businesses. Collectively, our segments offer diverse opportunities with meaningful synergies among the businesses.

Second, we expect continued earnings growth and strong cash flow that support the option for additional dividend and/or share repurchases. Third, we expect profitable top line growth in 2014 and for the next several years driven by Optical Communications, Environmental, Specialty and Life Sciences. We're confident in our ability to create Corning's next growth surge and deliver value over the long term by delivering entirely new sales and earnings streams.

Now, I'm going to turn it over to Wamsi for Q&A.

Question-and-Answer Session

Wamsi Mohan - Bank of America Merrill Lynch

Thank you, Jeff. Let me kick off with a few questions, maybe first on the Display business. If you could first start to address the accelerated rate of decline of the cost structure, can you elaborate on what is enabling you to go set to a new level of cost declines at this 12% to 14%?

Jeffrey Evenson

Yes, so if we start off on the 10% to 12% decline that we've been experiencing recently, part of that is driven by the shift to thinner glass, what our customers would want. So if you think about going from a piece of glass that's five sheets of paper thick to a piece of glass that's three sheets of paper thick, we get significant savings from that because our cost roughly scale with volume. Our customers get benefit from it because they want to make thinner displays.

On top of this, we are consistently able to think about how to run our manufacturing lines and our equipment more efficiently. What's happening to jump from the 10% to 12% to the 12% to 14% with the integration of the Korea assets is that the Korea assets are the most efficient in the world. In our prior JV structure, we didn't really have access to these. We had significant amounts of capacity available because a couple of years ago we had a decline in our market share at LG. We're now able to use that for the rest of the world which results in this accelerated scale.

Wamsi Mohan - Bank of America Merrill Lynch

Great, thank you. When we step back and just look at the supply/demand maybe imbalances that we have sort of gone through over the last few years, how would you characterize the state of supply/demand as we stand here today?

Jeffrey Evenson

So we think of supply/demand at two levels, one is the panel level where are our customers in terms of supply/demand, and then where is glass in terms of supply and demand. In terms of panels, we feel pretty good about that. We're actually seeing panel prices going up in some segments. We've heard some noise that the IT segment is actually particularly tight right now. So that seems very healthy to us from our customer standpoint.

At the glass level, we believe that worldwide demand is roughly in line with the capacity that's being operated. When we think of our capacity, we only think of the tanks and the equipment that we have up. We have some that we are not using right now, that we can use that for automotive or architectural over time, but we think that that's in line as well.

So we think that there's a pretty healthy balance across the industry right now and that's one of the reasons why we expect share to remain stable in 2014 versus 2013. Anything to add on that, Jim?

James B. Flaws

When you look at what's happened with glass pricing or LCD glass pricing over the last few years, there have been several quarters of sort of a normal pace of price declines, but then every now and then you get hit with some circumstance that causes the base of price declines to be higher than normal. So as investors should we be thinking that on an ongoing basis we should expect these one-offs that create the pace of price declines to be closer to a 15% year-on-year range, or should we think that the pace of price declines – I mean these were some accentuating circumstances, we'll sort of work through those, now we're at a more stable price point where – more stable point in time where the price declines would continue to moderate for multi-quarter, not – maybe multi-year rather than multi-quarter.

Jeffrey Evenson

I would say that if you look back to 2013 where quarterly price declines were in general under 3%, we would define that as moderate price declines. I think early this year that there were some special circumstances related to pricing among customers at various places that we think led to a decline. As we look forward, what we see is a supply/demand balance, we see fairly stable customer relationships, we also see that the major competitors in this industry are struggling with profitability which fortunately for us we are the lowest cost provider of display glass in the industry, and we think all those factors together will lead to a generally favorable pricing environment for us where we can manage the business through our cost reductions to maintain profitability.

Wamsi Mohan - Bank of America Merrill Lynch

As you look through your competitors, there's been some talk of some increased capacity expansion in China from one of them at some point next year. What are your views on expanding capacity in China? I know when you did the SCP acquisition, Samsung originally had some intention to build some capacity there. I think you guys have sort of spoken about walking away from that at that point in time. But then there's the question of tariffs and about the relative advantage of building locally in China. So as you look at the China situation, how would you characterize the potential for building new LCD glass facility over there?

James B. Flaws

So I think short-term, we are not planning to have new melting capacity there. We have the ability to ship excess capacity in from Korea. Even with tariffs, it's much better economically to ship the Gen-8 piece of glass in than build a brand-new facility. Longer-term, I think that you could develop a case where you might need some capacity, particularly if someone chooses a generation that's different than what you've got excess capacity in, but at least in the next couple of years we don't see that happening.

And relative to capacity, you mentioned one of our competitors making a decision to do that, they have also announced along with that that they would be shutting down capacity in Japan, which is similar to what they did when they went to Korea. So we continue to see the established players in the glass industry being pretty cautious about new footprint of glass-melting.

Wamsi Mohan - Bank of America Merrill Lynch

Great. When you look at some of the players who are trying to become a legitimate player and they haven't really yet, [LG KAM] (ph) comes to mind for instance, have you seen any change in their ability to make high-quality TFT glass and any more ramp-up of capacity from their end?

James B. Flaws

So [LG KAM] (ph) has one tank operating phase at one, second one under construction on and off for a period of time. They do supply some glass but it's very limited quantity. The other inventions are in China. There are quite a few of them but their success at making glass has been very limited and usually at much lower gen sizes than where all the new capacities going in. So making LCD glass still remains a really, really hard thing to do. I mean frankly if it was easy, we would have had a lot more competition before this. So we don't think that the new entrants short term are really going to put much of a changed statement into the supply/demand balance.

Wamsi Mohan - Bank of America Merrill Lynch

Great. Jeff, you mentioned thinner glass. Where are we in terms of customer adoption of thin and how thin can thin go?

Jeffrey Evenson

Sure. If we define sheet glass which is the things when we talk about Generation 6 through Generation 10 or other generations, that glass I think around three sheets of paper thick, two sheets of paper thick is probably about where it stays. Right now, significant portion of the industry, our customers have already shifted to thin. It turns out that given our customer mix, we tend to be a little bit thicker than our other customers do because one of our large customers has not yet made that shift in a significant way.

When you talk about how thin glass can go, our Willow platform that I mentioned during the prepared remarks is about 8% thinner than a dollar bill. Once you get that thin, the glass starts to bend. The bendability of glass depends on how thin it is. We think that we can make glass even thinner than a dollar bill on a consistent basis and we see that being used in everything from flexible displays and thin display components to semiconductors for interposer layers, to protective barriers on walls and in architecture.

So, I think there are a lot of opportunities to make thin glass and that's a tremendous opportunity for Corning because it's hard to do and our manufacturing costs goes down as you do it because we can use the fixed assets much more efficiently on an area basis.

Wamsi Mohan - Bank of America Merrill Lynch

Great. When you think about one of the drivers of demand, I mean clearly TVs are quite important. When you look back and I think few years ago, we thought the replacement cycle was maybe in the six to seven year sort of timeframe for large-screen TVs or LCD TVs. Where do you think we are on this TV replacement cycle for LCD for LCD replacements and how much of the overall installed base of TVs do you think has moved over now to LCD?

James B. Flaws

So at the end of last year the installed base of television around the world was about 50% flat-screen. Obviously the overwhelming majority of that is LCDs, there are a few plasmas. The issue is that, at the end of last year out of about 1.250 billion of them, only about 250 million were five years or older, and what we think that number will grow very rapidly now because you're starting to add years of 200 million sets being sold.

Once you get televisions beyond five year timeframe, becomes a potential replacement decision for consumers, and coupled with the fact that televisions continue to get better, we think we're about to start to move into the sweet spot of not just people replacing CRTs but really first flat-screen televisions being changed. And if you can think back five years ago, you may have bought a 40 inch television for $2,000. You're now buying a 55 inch television for under $1,000 and you're about to have ultra-high def coming your way at cheaper prices.

So we think all those things enhance the replacement cycle. So we keep adding about – on the installed base, you keep adding about 8% a year to the base of televisions being flat-screen, and then on top of that, you are starting to hit that sweet spot where people begin swapping out flat-screens. We know from our studies in Japan where the first ones are sold, that is happening and it's happening at a faster rate than it did in the CRT era.

Wamsi Mohan - Bank of America Merrill Lynch

Would you say that ultra-HD can be a material catalyst of increased screen size growth, even if not unit growth but increased screen size growth, so the pace at which annually screen sizes globally have been growing is roughly an inch or so a year, does ultra-HD inflect that to a higher rate like maybe 1.5 or something closer to 2?

James B. Flaws

Jeff, maybe you want to comment on the pixels and what it does?

Jeffrey Evenson

So the reason that ultra-HD could materially increase the screen size is because your screen size is in some ways limited by your viewing distance. If you're an average 40-year-old male and you're viewing from 10 feet away, which would be a pretty typical distance in North America, you don't really want to have a television bigger than 70 inches because you'll start to see the pixels. With ultra-HD, there is no concern, you could go up over 100 and you'll be fine. So there's potential for exactly what you described.

I have not linked the numbers closely enough between demand of HD and how fast the picture size would go up, but I think it could have, as the prices of ultra-HD come down, a positive effect on the growth. And of course 10% growth in the diagonal size is 20% area growth. So that's a really great thing for us.

Wamsi Mohan - Bank of America Merrill Lynch

Yes, absolutely. When you think about – you commented on sort of the pixel density being significantly higher, so effectively even at the same screen size, you would actually perhaps reduce the viewing distance. So one of the concerns that has limited larger screen size, adoption of larger screen size TVs maybe in developed markets is just the ability to how far away you place this TV and share physical space, but with ultra-HD we take the barrier sort of away because now you can actually sit closer than you were before with the larger [screen] (ph).

Jeffrey Evenson

That's a great point. I would point out though that if you look at diagonal size of televisions by region, China has traditionally had the highest diagonal size.

Wamsi Mohan - Bank of America Merrill Lynch

Do you think that continues? I mean it seems as though there might have been some early adopter effect because of when LCDs originally got introduced and the affordability and the price points that they were, or do you think that continues?

Jeffrey Evenson

I don't know, I don't understand all the demographics of that.

Wamsi Mohan - Bank of America Merrill Lynch

Switching gears to Gorilla, so clearly you highlighted a lot of growth drivers that you're excited about and a lot of them fall within the Gorilla umbrella, so when you think about automotive, so far what we've heard is obviously the BMW announcement, you're working with other OEMs. BMW seems to be an internal sheet of glass between the rear seats and the front. But what has been an impediment to adoption, more broader adoption, within sort of maybe the windows or the sunroof or windshield? And can you characterize sort of the glass, as I understand that even if Gorilla were adopted, it would be one sheet of soda lime with a laminate in Gorilla, is that the right way of thinking?

Jeffrey Evenson

That's roughly the right way to think of it, and I think that the key impediment to adoption has been our work to figure out how to make those laminates at scale and reproducibly. I think that we need to do further work in the supply chain so that becomes an industry-standard thing to do and that car companies can start using it much more broadly at whatever volume they would like.

The resulting product is going to be more expensive than a soda lime laminate because it's more expensive to make Gorilla Glass than it is to make soda lime glass. But I think that as we look across the auto spectrum, you see a lot of movement towards paying additional cost for materials that allow you to reduce the mass of the vehicle. Gorilla Glass is one of those, there are fairly well established ratios for the auto industry, and I think we can get in under those ratios in very many cases and that this can grow.

Wamsi Mohan - Bank of America Merrill Lynch

If you think about a five-year timeframe, I mean largely right now IT end markets, smartphones, tablets, these dominate sort of Gorilla consumption, as you look out five years can you see the mix being lesser IT relative to everything else that could potentially work out in this pipeline of growth opportunities?

Jeffrey Evenson

I think we'll certainly have a lower mix of consumer electronics but we're not forecasting what that mix will be.

Wamsi Mohan - Bank of America Merrill Lynch

Okay. Any questions here in the audience? Could you just wait for the microphone please? Thank you.

Unidentified Participant

I know you get asked about this a lot but just on the sapphire cover glass, and I know all the technical reasons you've come up with and I get it, but it seems like the projection is that the cost for sapphire eventually is going to become very, very low, maybe equivalent to where Gorilla is now. Is there any price points or market points that you would look at where you would reconsider your position on sapphire?

Jeffrey Evenson

So from a material science perspective, we're a big manufacturer of crystals. In fact I think in terms of industrial crystals, we may be the largest manufacturers with polysilicon and calcium fluoride, et cetera. What goes into making those, because it is a defined crystal structure, is the melting temperatures of the material that you are working with and the formation rate of those materials. Those are physics, you can't really change those. And it's our perspective as material scientists, that it's extremely difficult to grow a quality crystal that is cheaper than certain limits as it's much higher in costs than Gorilla Glass.

So I guess I disagree with the premise of your question that sapphire could become cost-effective with Gorilla, and I think that from our perspective, from what we know now about sapphire , that it would not be an attractive return for our investors for us to be active in that space.

Unidentified Participant


Jeffrey Evenson

I think the physics, the formation makes it incredibly challenging. People can sometimes come up with processes that are breakthrough but it would be very surprising looking at any other crystal that is grown today, including silicon which is pretty common [indiscernible], that somebody would come up with a breakthrough like that.

James B. Flaws

The other comment I would add is that Gorilla is not standing still. We've been lowering the cost on it and it's still a relatively new material for us, and as we demonstrated in our Display business, we have the ability to reduce cost on a pretty consistent basis and Gorilla is also coming down in costs. So even though sapphire might reduce its cost somewhat, I mean we still think we have ability to lower the cost of Gorilla and at the same time improve its performance. So I think we continue to believe we have chosen the right horse in this race.

Wamsi Mohan - Bank of America Merrill Lynch

Jim, in terms of the yen and how far out it's hedged right now, I think you recently extended the hedge a little further out than what you said in the last earnings call. So can you talk about how you view – how you would report core earnings starting from next year? Do you think that core earnings are something, conceptually at least, if we don't know the exact hedge level, it's something that would change every couple of years, or maybe now that you have hedged the yen out for a longer period of time can stay sort of at a new hedge level for multiple years, how do you conceptually think through it, even if there is not a particular hedge level that you could share right now?

James B. Flaws

So when we did the initial hedges at the beginning of 2013 after the yen weakened dramatically with the change in the Japanese government, we only went out a couple of years principally because we thought we might get the industry to convert to U.S. dollar pricing. As time unfolded, it looked like we were unable to do that and so that's what led us to this year in the first quarter beginning to think about the years beyond 2014. We had already hedged part of 2015. And so what we put in place latter were some hedges for 2015, 2016 and 2017. We deliberately haven't hedged 100% of our forecast in every year yet because the worst thing for us would be to be wrong on the amount of hedging that over-hedge, but we hedged significant portions of it.

It's our intent to develop a new core rate. We are thinking about when we disclose that to investors but we have told you that a majority of these new hedges are at 99. It would be my desire as CFO to make a change to a new core rate, to tell you that and to have it be stable for at least three years so that you wouldn't have to deal with it. In retrospect, I actually originally wanted to do the first hedges for three years not just two, but I got outvoted on that but for good reason probably.

We know it's disquieting for investors for us to change the core rate frequently. So I think some time as soon as either July or latest October, we're going to give you a new core rate. And it's not like we can hide the value of the yen. I mean everybody sees it every morning when they wake up and they look at their iPhones. But basically most of the new hedges were done at 99.

Wamsi Mohan - Bank of America Merrill Lynch

Can you talk about, just really quickly, I think we're almost running out of time, how much cash you have within the U.S. now and are you able to increase that level because of the SCP transaction that could potentially drive increased share repurchases or drive other use?

James B. Flaws

So I think at the end of last quarter we had $1.5 billion in the United States and we have some hope of bringing back some more cash at the end of this year, but cash offshore versus onshore is very difficult for us, as it is for many tech companies right now, and obviously we would love Washington to help us out in some regard there. But we are in the midst of our share repurchase program, we just finished the accelerated share repurchase a little earlier in May and we're now doing open market repurchases with the remaining part of our repurchase allowance.

Wamsi Mohan - Bank of America Merrill Lynch

Great. I think we're just about out of time. So, thank you so much. Thanks, Jeff. Thank you, Jim.

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