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Corning Inc. (NYSE:GLW)

February 03, 2012 9:00 am ET

Executives

Kenneth Sofio -

Wendell P. Weeks - Executive Chairman, Chief Executive Officer, President and Chairman of Executive Committee

James B. Flaws - Vice Chairman, Chief Financial Officer, Member of Finance Committee and Member of Executive Committee

Analysts

Suraj Chopra

Mark Sue - RBC Capital Markets, LLC, Research Division

Ehud Gelblum - Morgan Stanley, Research Division

Jim Suva - Citigroup Inc, Research Division

Amir Rozwadowski - Barclays Capital, Research Division

Unknown Analyst

Edward George Shufro - Shufro, Rose & Co., LLC

Simona Jankowski - Goldman Sachs Group Inc., Research Division

Nikos Theodosopoulos - UBS Investment Bank, Research Division

Harlord Edward Shill - QCI Asset Management Inc

Chang-Jae Yoo

Jagadish K. Iyer - Piper Jaffray Companies, Research Division

John E. Roberts - Buckingham Research Group, Inc.

Sid Parakh - McAdams Wright Ragen, Inc., Research Division

Steven B. Fox - Cross Research LLC

Kenneth Sofio

Good morning. I'm Ken Sofio, Vice President, Investor Relations, and I welcome all of you to Corning's annual investor meeting and also those listening on the webcast.

Before I get started, today's remarks and likely the Q&A will have forward-looking statements. If not, this will be a very boring presentation. So please read through these. We also have a number of non-GAAP measures in our presentation today. The reconciliation for all of those are in the back of the presentations, also on the website.

Some logistics. First, as many of you probably already know, there's free wireless for our use this morning. Second, we have a parting gift for those in attendance today. If you're interested in it, simply hand in your badge at the registration desk on your way out to retrieve it. And also please, again, turn your cellphones and BlackBerries on vibrate or mute.

As far as the agenda this morning, we'll have formal presentations from both Wendell Weeks, our Chairman, Chief Executive Officer; and Jim Flaws, our Vice Chairman and Chief Financial Officer. Wendell will start us off with some opening remarks; followed by Jim with an overview of our 2011 results and financial outlook; and then Wendell will then come back up for a review of some of the exciting innovations we're working on.

Hope you find the presentation this morning to be informative. And with that, I'd like to turn the podium over to Wendell. Thank you.

Wendell P. Weeks

Thank you, Ken. Good morning, all. Try it again. Good morning, all. There you go. It's my pleasure to welcome our investors and potential investors to Corning's annual IR meeting. My opening remarks this morning will focus mainly on the challenges that we are facing and how we plan to address them. As always, our objective is transparency about our performance, our strategy and priorities and our growth opportunities.

I know we have some new investors with us today, so I'll begin with a brief overview of who we are and what we do [ph]. Then I'll discuss the challenges. Next, our Chief Financial Officer, James Flaws, will provide a brief recap of our 2011 performance before updating you on the progress that we've made on our path to $10 billion in sales. Finally, we'll look at some cool new product innovations that we expect to drive growth going forward. We hope to have some fun today and also give you better insights as to why we're so excited about Corning's growth opportunities.

Corning is a special company with a long history. In fact, last year, we celebrated our 160th birthday. Over the years, we've developed a distinctive identity as the world leader in specialty glass and ceramics. We create and make keystone components that enable high-technology systems for consumer electronics, mobile emissions controls, telecommunications, as well as life sciences. We succeed through sustained investment in research and development, 160 years of materials science and process engineering knowledge and a distinctive collaborative culture. Our corporate strategy is grounded in this identity.

We grow primarily through global innovation. We know innovation comes with risks, so we proactively work to provide balance and stability to the company. We participate in diverse markets to reduce our volatility, and we have a conservative financial strategy to offset our relatively high operating leverage.

Finally and most importantly, we always live our values to ensure the trust of all of our stakeholders around the world. We designed this strategy framework for good times and for bad. It guided Corning's recovery from our near-death experience during the telecom crisis. It helped us deliver the most significant period of sustained performance in Corning's history, and it enabled us to successfully navigate the worst economic recession since the Great Depression. You'll recall that Corning emerged from the 2008 recession with new innovations, improved market positions and higher profitability.

Our framework was tested again late last year and we're starting 2012 with 2 challenges. First, we're undergoing a reset in our LCD business. We're seeing significant pricing pressure, which will impact our margins and our profitability. Second, the upheaval in the solar industry is putting severe pressure on polysilicon spot prices, and that's impacting Dow Corning's earnings. Since Jim spent a lot of time on both of these topics last week on the earnings call, I won't go into details again this morning. Those details can be found in the press release and the archived webcast. We're also seeing our tax rate increase again this year.

So the company is in transition, but this management team has faced significant challenges before, and quite frankly, we're not afraid of challenges. Many in this room were here during the last one in late 2008. You saw how quickly we activated our rings of defense and successfully navigated through a very difficult economic situation. We know how to manage transitions and have proven this to our employees and our long-term shareholders.

We have a clear mandate. We're going to form bottom and march up. We've done it before, and we'll do it again. Corning has faced numerous challenges in its 160-year history and has always come out on the other side stronger than we were before.

Our first step is to stop the significant price declines in display. The most important tool that we have to accomplish this is to reduce capacity to get glass supply in line with market demand. This is why we decided to idle a significant amount of our glass capacity last quarter. Now when you're more than half the market, that really adds up. These actions will help move glass supply in line with glass demand, and that's a significant game changer when it comes to pricing.

There is always pricing pressure, but for pricing pressure to evolve into significant declines, there needs to be excess glass. These actions we have taken will reduce the amount of glass available. Our goal, to return to moderate glass price declines as soon as possible. I can't predict how fast this will happen. But if we're right about retail, glass supply will soon be in line with glass demand, and that will help.

Once we form a bottom, we will grow from there. As you'll hear in a moment from Jim, we expect to grow sales and profits in Telecom, Environmental Technologies, Life Sciences and Specialty Materials, and we will supplement this growth with some of the significant cash flow from Display.

This company will grow, and we will take the necessary steps to make that happen. Our plan for the next 3 years: to grow profits from this new base while achieving our goal of $10 billion in sales, and we will generate a significant amount of cash flow along the way.

I will now turn it over to our Vice Chairman, James Flaws, to discuss the details behind our plan to grow sales, profits and cash. Jim?

James B. Flaws

Thank you, Wendell. Good morning, everybody. I'm delighted -- turnout this morning. Before I talk about our financials and business expectations, I do actually want to acknowledge our stock price performance. While our financial results have actually set a number of records over the past several years, we're not blind to the fact that our stock has not performed as well. And for most of us in the room, stock price is very important, so I'd like to talk about that first.

Now certainly, one reason for our stock performance in 2011 was due to the decline in our net income. On this chart, I prepared a top-level roll-forward of net income from 2010. One significant reason for decline was our higher tax rate. The largest part of this increase was actually due to the non-repeat of the $250 million repatriation benefit that we got in 2010, but we had disclosed this to you well in advance.

Obviously, what I like best on this chart is the exciting performance of our other business segments, where net income was up over 100%. Unfortunately, we suffered some headwinds from significant Display price declines and lower earnings from Dow Corning, with the largest impact to these in the fourth quarter. And it was those challenges that we believe ultimately were reflected in our stock price.

I'd like to say that management and the board recognize the stock performance, and we think we've taken a number of significant shareholder-friendly actions to address it. First, we raised our dividend 50%, pushing the yield to slightly above 2%. Second, we initiated a large share repurchase program and began aggressively buying back the stock as soon as we could. And third, we secured a significant increase in the dividend rate that we received from SCP. We expect this change could result in hundreds of millions of dollars of additional cash flow starting in 2012, and these can be used to fund future shareholder actions. So management and the board recognize how the stock has not performed as well as we'd all like, and we'll continue to be proactive in addressing it.

Now in tough times like this, both management and the board reflect on what kind of company we are and what we offer to our investors. I thought I'd share with you this morning how we view ourselves. First, we offer tremendous stability. We're financially sound. We are the market and technology leader in the industries we serve, as well as the lowest-cost producer for most of our products. Our businesses are all tied to significant megatrends, and Corning's business diversity helps reduce our volatility during market and economic upsets.

Second, we have the opportunity to for explosive growth outside of our existing businesses. As investors, you can think of this as optionality. Several innovations in our new business portfolio have the potential to become significant revenue generators. The flexibility of our fusion process allows us to leverage existing assets to support new businesses, including photovoltaics, new generations for Gorilla Glass and next-generation displays.

Third, we believe we offer tremendous value to our shareholders: strong cash flow, a reliable dividend and the earnings power to invest in growth. So that's how we view ourselves, and now, I'd like to take a closer look at our results.

We faced tough challenges, but 2011 was actually a year of tremendous accomplishment. We delivered the highest sales in Corning's history. We set records for gross margin dollars and for operating income, and we delivered our eighth consecutive year of positive free cash flow. We strengthened Corning's market position in most of our businesses. We shipped a record number of kilometers of optical fiber. We sold record units of diesel filters, and we nearly tripled the sales of Corning Gorilla Glass. And finally, our strong cash generation allowed us to reward shareholders with a dividend increase and initiating a share buyback based on the confidence that we and the board have in management in Corning's future.

So here's a closer look at the numbers. You can see that every business contributed to Corning's strong sales performance. And while the increase in display technology was driven primarily by foreign exchange, all of our other segments had double-digit growth. Our strong sales growth is directly tied to our commitment to research and development and Corning's ability to solve tough [ph] customer problems with our innovations. Of course, we measure our performance more than just sales. We also won new customers, launched exciting new products and seized opportunities to strengthen our hand. I'm not going to go through every item on this list, but I'd like to hit a few highlights.

We improved the composition of our industry-leading cover glass leading to our launch last month of Corning Gorilla Glass 2. We established new long-term agreements with major customers for our diesel products, which will help us manage capacity and ensure them reliable supply. And we strengthened Corning's position in China to meet the growing demand for optical fiber, LCD TV and emission control technology. And you'll recall from last year, we identified China as a key factor in our path to $10 billion in sales.

Turning to gross margins. Corning's 2011 gross margins were $3.6 billion, a 17% increase over last year and a new record. Now our gross margin percentage was down slightly due to the price declines in Display, but 3 of our 5 businesses improved. Higher-margin products drove a 1 point improvement in Telecom. Environmental Technologies margins improved 6 points due to stronger volume and increased manufacturing efficiencies. And higher volume of Gorilla Glass drove an 8 point improvement in gross margin in Specialty Materials.

Now we don't usually talk about operating income with you, but it's something we watch very closely. It measures performance in Corning's wholly owned business segments, and we thought it'd be a helpful data point for our discussion today. Excluding onetime items, operating income was $1.8 billion, the highest in our history and a 28% growth over the prior year.

Now as a percentage of sales, operating income was the second highest in Corning's history as a public company. In fact, the last time we were this high was 1954. In fact, every one of our wholly owned segment was up. We think this is a significant measurement of Corning's performance, and it also demonstrates our ability to control expenses during periods of sales growth.

Cash flow is something that's always on our mind. In 2011, we generated $3.2 billion in operating cash flow and had positive free cash flow for our eighth consecutive year, and that's particularly remarkable when you recall that we had a very high level of capital investment across our businesses in 2011. And we expect to generate even stronger free cash flow in 2012.

So we feel great about a number of our accomplishments for the past year, but of course, not everything went our way, and that was reflected in our overall corporate earnings. Equity earnings were down 24% due to the challenges at Dow Corning and Samsung Corning Precision. Dow Corning experienced raw material pricing pressure and also an upheaval in the solar market for polysilicon. And obviously, LCD price declines drove earnings down at Samsung Corning Precision. Corning's tax rate was also a significant factor. Now you recall, we were prepared for this increase and set expectations with shareholders on this well in advance.

So that's a brief recap of 2011, and now I'd like to turn to 2012. I'd like to start with a slide that Wendell showed a few minutes ago. I think it's a good summary of what we're trying to accomplish. Our plan for the next 3 years is to grow profits from this new base because -- that we are forming while we're achieving our goal of $10 billion in sales. And along the way, we expect to generate a significant amount of cash flow.

Now last year, we told you we wanted to be a bigger, more balanced company, and we outlined how we could achieve that goal. After a year, our plan to reach $10 billion in sales has actually not changed, but our path there has. With the display market reset, our volume and price assumptions have changed, impacting Display's role in our growth. Also, the TV cover market has not panned out as well as we hoped, lowering Gorilla Glass demand expectations through 2014. Looking beyond that time frame, Wendell will show you something that may raise those expectations again. On the positive side, we actually have increased our sales and margin expectations for both our Telecom and Environmental Technology segments.

So I'd like to walk you through each of our segments, and I'll start with Display. We expect Display sales to be flat in the future as volume increases will likely be offset by price declines. However, the business will remain a powerhouse in terms of profit and cash flow generation. We remain confident in our ability to maintain gross margins post this reset when we return to moderate price declines. And looking ahead, regardless of the technology path, all those high-performance displays will require specialty glass. Remember, at our core, we believe we're in the display glass business not just in the LCD glass business.

I'll cover volume first. The retail market actually continues to grow. In fact, we expect double-digit growth through 2014. And when you add that up, it's over 1 billion square feet of new glass demand. LCD televisions will remain the largest market for glass. We expect LCD television units to grow at 9%. And since the fastest-growing category will be televisions 40 inches and larger, area growth will be higher.

We'll also begin to see the emergence of OLED televisions. Due to the expected retail price points, the number of units sold will be very low initially. Our estimates here are in line with other industry estimates, including DisplaySearch, and I'll come back and talk about all of that some more in a moment.

And I'll also note at the bottom of the slide that LCD TVs will reach full penetration in terms of annual units sold in 2014. However, as a percentage of the installed base, it will still remain very low, and we've given you more details on that in the appendix.

We also have another year of data behind us, and it supports the industry expectations that the replacement rate of LCD televisions will be faster than CRTs. While this is actually not driving a substantial amount of sales today, we believe it will in the future.

Now the other factor that influences glass demand for us going forward will be the supply chain dynamics. And after what we experienced in 2011, I don't think any of us will forget this.

We commissioned a study with McKinsey last quarter to understand the potential supply chain inventory trends. And again this was covered in detail on our conference call last week. But the conclusion was supply chain inventory levels will likely decline slowly over time. Unfortunately, we don't live in a perfectly linear world, so we'll continue to monitor supply chain behavior and its impact on glass demand.

Now turning to the topic of cost in Display. We believe we can reduce our costs, on average, by 10% a year over our plan, and we have a high degree of confidence in achieving this. The caveat here is we must be running our available capacity relatively full to achieve the most cost benefit. Reducing cost in a high fixed-cost structure is all about increasing throughput. Once a tank is lit, the glass coming out of it is very low cost. So you're always looking for ways to get more glass out of your existing tanks, manufacturing it faster and faster.

Now one of the most significant cost levers we have over the next few years is the migration to thin glass. Since we melt in pounds and sell in square feet, when you can sell more glass out of the same batch materials, it's a good thing. Now there've been some questions from our investors on this topic. The concern is the move to thin glass will free up even more capacity during a time where there's already excess. We don't think that that's likely. The migration to thin glass will actually occur over several years. And over this period of time, market demand will grow by at least 1 billion square feet. However, let me elaborate.

First, our customers have to spend some cash to adjust their equipment to handle thinner glass. It's not a material amount of money, but it comes at a time when they're not doing that well financially, so they clearly will be prudent on spending. Second, most panel makers are not moving from the standard 0.7 millimeter thick glass to 0.4 millimeter all at once. Many will take more intermediate steps, for example, moving from 0.7 to 0.6 before going thinner. And lastly, some panel production lines will never go thin. And that's because there's not a market need for all products to go thin. For example, you may not care if your monitor sitting on your desk goes thinner, while you obviously do for your cellphone, tablet and television.

So we've calculated the benefit of going thinner will have on our glass output, and we believe it will deliver a significant increase in glass production on our existing assets. For us, we expect more than 50% of our glass will be thin by the second half of 2012, and this will result in a significant decline in CapEx spending in this segment, which I'll show you in a moment.

Now with thin leading the way on reducing costs, we remain confident in our ability to maintain gross margin. This chart shows the last 7 years of both price declines and cost reductions. And while price and cost do not move at the same pace, we've demonstrated our ability to keep up over time. Those of you who are wondering why we're only committing to 10% cost reductions when our history has been 12% on average, the honest answer is we could have some years above 10%, but that's a pretty high hurdle rate to commit to.

Now the migration to thin glass will be one of the main reasons our CapEx in Display will actually be falling by $1 billion over a 2-year period. As a reminder, 2012 CapEx actually includes $400 million of cash outflow related to spending that occurred in late 2011 in Taichung and Beijing, and those are likely to be the last significant expansions in Display for quite a period of time. After 2013, Display CapEx is actually expected to fall to maintenance CapEx level for this business.

Now looking ahead, as our devices become more advanced and displays move to higher and higher resolutions, the technical requirements on glass become much more difficult to solve. And finding solutions to difficult technical problems is actually one of our core strengths as a company. OLEDs is one technology that's received a lot of press lately. And for those of you who have never seen an OLED Display, we actually have some in our product booth. OLED displays are very vivid, with blacker blacks and a rich color gamut, and they also have a much faster response time than LCDs. But OLEDs actually still have many technical challenges that need to be solved even after a decade of research. Now from a glass standpoint, we're intimately involved in solving these challenges. Why? The reason is simple. We're in the display industry, and we'll always bring advanced glass solutions to the market no matter what the technology is.

To that end, I'm pleased to report that we have formed a new equity venture with Samsung Mobile devices. This new company will be the majority supplier of OLED glass to the world's #1 producer of OLEDs. The new company, which has not yet officially been named, will also have the ability to supply other Korean-based manufacturers with OLED glass. We're very excited about the new company and the opportunity to continue our 40-plus year relationship with the Samsung group. And Wendell's going to have more on high-performance displays, such as OLED, during his technical product demonstrations in a minute.

So that concludes my formal comments on Display this morning. Wendell and I will be happy to address any questions during the Q&A. And of course, Jim Clappin, who leads our Display business, will be available also.

Now I'd like to turn to Telecom, where we have materially increased our sales expectations. You may recall from last year, we said Telecom could reach $2.6 billion in sales by 2014. We now expect this segment could reach $3 billion. And acquisitions could actually provide further sales growth. As a reminder, Telecom is a $300-billion-a-year industry. Now we participate in several smaller markets of that huge industry, and these markets are all poised for significant growth, and we remain well positioned in each. The megatrend that's driving growth in all these markets remains the hypergrowth of bandwidth demand. IP traffic and subscription growth has been placing a significant burden on network infrastructures around the world. It's a global issue, and we are seeing network providers around the world step up with significant investments. We're well positioned in each of these markets, given our superior product offering and world-class manufacturing.

Now in the interest in time, I'm only going to touch on 2 of these markets. In the fiber market, we have seen a significant increase in fiber deployment over the past several years. In fact, the fiber market has actually set records in terms of kilometers shipped each year for the past 3 years. The fiber market today is double what it was in 2000. And more importantly, the amount of premium fiber shipped has grown at a much faster rate than the standard single-mode fiber. We remain the world's largest producer of fiber, as well as its lowest-cost producer. And as one of the leaders in our Telecom business recently announced, Telecom is back.

We're also the world's largest producer and low-cost leader of Fiber-to-the-Home products. These are Corning's inventions that in the early days of Verizon FiOS rollout. Now back then, not everybody thought consumers would want this amount of bandwidth through their home. Today, many of us wish we had it. We're seeing significant Fiber-to-the-Home deployment worldwide. Our most significant win recently is the $1.5 billion National Broadband Network in Australia, which starts this year. So these are just 2 examples of why we've materially increased our telecom expectations between now and 2014. Wendell is going to show you an exciting third example during his presentation. And both Marty Curran, who runs optical fiber; and Clark Kinlin, who run CCS, will be available at our product booth to answer questions.

Now I'd like to turn to Specialty Materials, which is driven by Gorilla Glass. Gorilla Glass is the industry cover glass of choice. We are actually hard pressed to name a device that has a competing glass on it. Today, Gorilla Glass protects more than 600 million devices worldwide, and that number is growing rapidly. We expect the market for cover glass to grow materially through 2014, led primarily by handhelds and tablets. And as I discussed in Display, thin is a key trend in cover glass also. Our Gorilla Glass 2 will help enable this trend.

Now the supply chain here is still evolving. We provided a detailed overview of this during our call last week. And those slides are actually in the back of the presentation. The short answer is our customers' yields continue to improve, and that impacts the amount of glass demand. We're all working closely with our customers to help them better understand how to handle and process our glass. And we hope it actually leads to improved yields for them over time. You might think this is a paradox for us, we help improve yields, they buy less glass. But ultimately, it drives down the cost of the product we're putting on the phone, and cover glass can migrate to more and more lower-cost phones.

Looking ahead, we still believe there's significant upside potential for growth not only within consumer electronics, but in industries outside of consumer electronics. Now we also still believe cover glass for TV is an opportunity for us. And while we recently did impair some of our assets to produce large-size cover glass, we have kept a large portion of them, as well as all of our technical capabilities. TVs continue to evolve. There's not much doubt they're going to get thinner, and many in the industry are working on solving the technical hurdles of moving the pixels closer to the edge of the screen. And there are likely only a few in the room that don't expect televisions to offer enhanced interactive capabilities, such as gesture and touch, in the future. In fact, Wendell's going to have a great example of the future of televisions in his demonstration. This is a future that will require tough, strengthened cover material for protection and structural integrity, and we believe that material will be Gorilla Glass.

Another reason we remain so excited about Gorilla Glass is unlike LCDs, this product has a good chance of expanding outside consumer electronics into different very sizable markets. I'm not going to spend too much on these other than to say we've made some good progress here, and Wendell will show you some cool products in a few minutes. Jim Steiner will also be available after the presentation to help answer questions on these markets.

Now in Life Sciences, we're actually well along our goal to double sales to $1 billion by 2014. Life Sciences remains a very attractive industry for us. We're the market leader in the segments that we participate in, and our plan is to grow sales through a combination of organic growth and selective M&A. We've done that both over the past year, increasing our sales by 17%. There are many opportunities for us to grow this business, including moving into adjacent product offerings, expanding our access into new geographic region such as China. I won't spend time discussing each, but Wendell and I will be happy to answer questions during Q&A. And more importantly, Richard Eglen, the Head of our Life Sciences business, is available in the product booth as well.

Now to our Environmental segment, which is another business where we recently have increased our sales forecast. There are many reasons why we love this business. Obviously, we're excited about the potential for significant sales growth and margin expansion. But more importantly, these products improve lives. These products we sell today are actually the direct descendants of our ceramic substrate invention 40 years ago. Every catalytic converter on every car worldwide can be tied back to this invention. This product single-handedly improved the air quality in cities around the world along with the health of millions of people. Back today, the air coming out of our devices is often much cleaner than the air going in. So it's hard not to be proud of these accomplishments the products have achieved over the years. And you could imagine what they're going to do for growing cities such as Beijing.

Now I'm not going to walk through all the details we provided at the UBS conference in November. It was at that event that Mark Beck, the head of this business, outlined the key assumptions, including our estimates for auto and truck production. Slides from that presentation can be found in the appendix, and Mark will be available to answer questions later.

Now to reach our $10 billion sales goal, we also need to create a new business or businesses that generate at least $400 million in sales. Now we have got several new innovations could be the driver of these sales. I'll just focus on one of them this morning, and that's our new specialty glass for thin-film photovoltaics. I hope you all saw our announcement this week that we secured our first commercial order for photovoltaic glass. It's a milestone event for us, coming after 3 years of development. The time is right for our innovation -- innovative solution. With poly prices actually dropping in half, solar companies are looking for a way to cut costs and increase the watts per dollar generated. Our glass is actually a perfect solution. It provides a 20% to 30% increase in efficiency, which is a significant improvement. We're excited about this new opportunity and hope to be able to name the customer shortly. And as Eric Musser outlined last year for you, we expect China to provide significant growth opportunities for all of our businesses. As the world's largest market already for optical fiber, autos and televisions and actually the fastest-growing market for pharmaceutical R&D spending, all of our businesses will benefit. And we continue to anticipate that at least 20% of our worldwide sales will be in China in 2014.

So that's my recap on our plan to reach $10 billion. The path is different, but we have every confidence in our ability to get there.

And now I'd like to turn to Dow Corning. As you heard from Wendell, Dow Corning is also facing some challenges, both in its silicone and polysilicon business. In silicones, they are actually experiencing a significant increase in raw material costs. And in Hemlock, the business is feeling the effects of the upheaval in the solar industry. Slower demand growth caused by weaker economies and reduced subsidies and excess capacity worldwide has led to a significant decline in poly prices. Both of these challenges are resulting in a reset of Dow Corning in terms of their profitability.

Now in response to the falling poly prices, Hemlock has modified a number of their sales agreements to provide temporary pricing relief, while preserving the long-term favorable relationships with its customers. The company is also going to be active to enforce its contracts. In fact, Hemlock already reached a significant settlement with one of its customers that had exited the business. That resolution resulted in a significant cash payment from the customer. Lastly, Hemlock has decided to delay certain plant expansion activities until market conditions for poly improve. Now despite these challenges, Dow Corning remains the market leader in specialty chemicals. It's the largest producer of both silicons and polysilicon in the world. And most importantly, it's always the low-cost producer in both segments. It's at difficult times like this where being the low-cost producer provides a key advantage. Today's Hemlock costs are below spot prices, and although reported spot pricing has ticked up in recent weeks, we think it's actually still below the production cost at many of our competitors. At some point, poly prices will firm and rise, and Hemlock will again be a profitable contributor to Dow Corning, and our longer-term view of Dow Corning as an important contributor to Corning's earnings and cash flow remains unchanged.

Now I'd like to switch gear to talk about other contributors to our earnings growth for the next few years. Now recall this slide from earlier. Our goal here is to form bottom and March up from there. I spent most of the morning outlining our sales goal. I'll summarize sales and then work down the rest of the income statement. Sales growth will average 8-plus-percent between 2011 and 2014. Most of this will be organic, but we'll get some help from M&A. And with additional acquisitions, we could push that sales growth number higher. Corporate gross margin in 2011 was 44%. In Q1, it'll be about 43%. And we believe we can get gross margins back in the mid-40s. Now as a reminder, as always, our corporate gross margin is tied to the mix of our segments. So I'd like to talk about each. As I said earlier, we believe we can maintain Display gross margins post the reset, assuming price declines are moderate from here. It's a big assumption, but one we think is reasonable given capacity actions. Investors have actually asked if we could grow Display margin again, on the earnings call. I said I thought it was unlikely, but to do so, we would need a few quarters of nominal or no price declines.

Now in Telecom, we actually expect gross margins to expand, as the mix of higher-margin products, such as Fiber-to-the-Home and Enterprise Networks, increase. Environmental, we expect to -- improved manufacturing performance will help expand our gross margin. And as I outlined earlier, we made tremendous progress here and have confidence we can do more. Specialty Materials will be driven by the continued mix towards Gorilla Glass, which is actually the second-highest gross margin product we have. And in Life Sciences, we expect gross margins to remain consistently high. We should see some improvement as acquisitions are integrated. So overall, we believe we have a very reasonable path to return gross margins to the mid-40s.

Now for operating expense. We believe our SG&A and R&D will likely decline as a percentage of sales, which will allow us to maintain operating margin in the low 20s. So we feel good about our consolidated operations. However, below the operating line, we will feel some pressure from lower equity earnings and higher taxes. Biggest contributor of lower equity earnings will be from SCP, due mainly to higher taxes in Korea, and the same issue we're facing in our wholly owned business, volume increases offset by price declines. Now we actually discussed the higher taxes in SCP last year, and repeating that slide in the appendix this year. Dow Corning earnings have also stepped down in our plan, due mainly to pressures in the poly market.

Now as we discussed last year, our tax rate will increase between 2011 and 2014. This year, it's going to be about 20%. It could grow to low-20s in 2013. The reasons for the increase here -- are here and you can also find a reconciliation of them in the appendix. And I would like to remind you all that we continue to use our NOLs, which apply to income generated in the United States. Our NOLs don't expire until 2023, but we'll likely utilize them much faster. Now our corporate tax rate could move lower in 2013 if Congress decides to either pass corporate tax reform or if they would approve the Extenders Bill, as they have in many years past. Our share count will also be lower as we move through 2014, as first, we finish repurchasing shares under the current authorization. And if the board authorizes another program, then obviously, our share count could fall further.

In summary, we're planning on growing our earnings from the 2012 level. Our plan is to form a bottom and grow up from there.

My last topic this morning is cash flow. We expect to generate significant cash flow through 2014 through a combination of higher equity company dividends, lower capital spending and improved operating performance. This excess cash will give us the financial flexibility to return more cash to shareholders and also produce -- pursue additional M&A opportunities. Now one note on M&A. We tend to use it only to supplement our organic growth. We are not interested in doing a large transformational deal for the company.

Now here's a look at our capital spending from 2011 through 2013. 2011 spending was $2.4 billion, while spending this year will be about $1.8 billion. As a reminder, about $400 million of this year's spending actually relates to capital projects that were completed late last year. As we move ahead to 2013, we expect capital spending to fall between $1.2 billion and $1.3 billion or at least down $1.1 billion from our levels last year. I would like to note for the company, normal maintenance capital is approximately $600 million. So any amount above that is really driven by our capacity to pursue growth.

Now the largest drop in capital spending is -- be in Display, which will fall by almost $1 billion over a 2-year period. We do plan on adding capacity to support our plan to reach $10 billion in areas such as Telecom, Environmental, Specialty and Life Sciences. As a reminder, we also have consistent priorities for the use of our cash. We entered last year, 2011, with a relative fortress balance sheet. The financial health of the company was and remains very strong. And this allowed us to fund our research and development, add capacity and pursue M&A. And it also allowed us to return more cash to shareholders last year. With our forecast for cash flow, we believe we have the ability to return even more cash to shareholders. Now our preferred method of distribution is dividends. We'd like to make our stock one that investors want to hold in good economic times and bad economic times. We're not quite there today with a yield of just slightly over 2%. But we believe we may be able to increase our dividend over time and, thus, increase our yield and make this stock a product investors want to own. We'll also consider future share repurchase programs, obviously assuming our stock price is trading below where we think it should be.

Now I thought it might be interesting to show you what we've done with our cash flow over the last 5 years. We believe we've been good stewards of the cash over that time. Of the $13 billion in cash generated in the last 5 years, about 20% has been returned to our shareholders. We've also put about 20% into ensuring Corning's stability, but we don't expect to have to repeat that going forward. Lastly and most importantly, we've reinvested 60% back into the company, either through investments in capacity or M&A. Now given our expectations for lower CapEx going forward, we expect the percentage of cash that's earmarked for our shareholders to be higher.

So in summary, while we are facing some challenges, we have a management team in place that's dealt with challenges before. We know how to manage through tough times. We will form this bottom and grow up from there, while achieving our sales goal and generating a lot of cash. Growth will be led by our Telecom, Environmental and Life Sciences and Specialty Material segments. And we'll continue to invest in new technologies. So this is a fitting place for me to stop and ask Wendell to come back up and show you some of the exciting things we're working on. Thank you.

Wendell P. Weeks

Thank you, Jim. Now last year, we did something that was unusual for Corning. We're going to do something unusual again this year. But what we did last year was rather than talking about our innovations with PowerPoints, a bunch of technical data, explaining the details of our value prop, we shared our vision of the future with a video called The Made of Glass. And it was a vision of the future in the not-too-distant future. For those of you in the audience, I'm sure almost all of you have seen it. If you didn't, you're some of the few people that haven't, but let's sort of reflect back on what you saw in that world. First, our video portrayed a world with seamless delivery of realtime information, where people stay connected in a very genuine way, through a virtual world that is literally at their fingertips.

Now we were stunned by the tremendous response. The video that generated more than 17 million views on YouTube for a brief period of time. We beat Lady Gaga. She had better staying power. And more importantly, it prompted hundreds of inquiries from potential customers and development partners. That was good publicity for sure. But what we were most excited about was the tremendous energy around this vision and the conversations that it prompted with companies who want to work with us to help bring that vision to life. Now they include industries that you might expect, like software, hardware and networking. But we also have been engaged by entertainment content providers, retailers, hospitals and more. Now predicting the future is always a risky business, and we don't expect things to turn out exactly like our video. But we truly believe in this world of communication and connection. Now the question you have to ask yourselves is: Do you believe in this world? Now I can't answer that question for you. But what I can do is tell you what is required from a technology and materials perspective to make that world a reality. Now let's recall for a moment what you saw in the video.

First, it's a mobile world. It requires devices that are thin and lightweight but also durable and damage-resistant, and it depends on robust wireless and wireline connections and device-to-device connectivity. It's a visual world that dissolves the boundaries between the natural world and virtual environments and augmented reality. It requires transparency to ensure crystal-clear pictures and also the pixel density to transmit vivid colors and lifelike images. It's a world of intuitive interfaces, where people interact with technology in a very natural way, so a world of devices that are esthetically pleasing, seamless and comformable, with a cool and natural feel. And it's a world powered by complex technical capabilities just beneath the surface to ensure that the information is always right there at your fingertips. Now of course, this world also requires massive bandwidth to ensure fast, reliable connections and new forms of collaboration, and we love that. Finally, it's a world of life-enhancing technologies, where everyday surfaces are transformed from one-dimensional utility into sophisticated electronic devices, where common products deliver uncommon benefits.

Now we're excited about this world because it depends, absolutely depends, on highly engineered specialty glass and fiber optic technology. Now in the past year, I have visited dozens and dozens of customers and potential partners. They've validated our vision, and they're turning to Corning to help solve some of their toughest technology problems. Even more exciting, these interactions have unlocked totally new collaboration opportunities as we learn about each other's capabilities. So today, we're going to try to do something that's difficult, which is how do we re-create that customer experience for you and give you a closer look at the products that are helping create that connected world in our video. So we have asked for a volunteer. Suraj Chopra of Citadel has graciously agreed to join me on stage for a hands-on experience to try to give him and you all a feel why our customers are so excited. Please, Suraj. Welcome.

Suraj Chopra

Thanks, Wendell.

Wendell P. Weeks

How are you doing today?

Suraj Chopra

Doing all right.

Wendell P. Weeks

Welcome, Suraj. Wait, you got to first do the display. Have you ever broken any glass in your life?

Suraj Chopra

Many times.

Wendell P. Weeks

Then you're qualified for what we're going to do first. Okay. Now what we realized is that -- why don't you stand right there -- what we realized when we wanted to try to create this world is one of the first things we needed to do was we needed to obsolete our industry-leading cover glass, and we did just that. What we've done is move from Gorilla Glass to Gorilla Glass 2. Now Gorilla Glass 2 is 25% more damage resistant. That means that our customers can produce devices that are 20% thinner with the same legendary strength of Gorilla. And because our costs are by the pound, when we make it 20% thinner, it also was a 20% cost reduction, right? So it's one thing to say the words. It's another thing to see it in action. So that's what we're going to do here. First, this is Kevin. Kevin's from our labs. Suraj?

Suraj Chopra

Hi, Kevin.

Wendell P. Weeks

All right. Now we test the strength of glass and really any material in a variety of different ways. One of the first ways, if you want to understand how strong a material is, is you damage it a little because that's the way the real world is, right?

Suraj Chopra

I'm up for that.

Wendell P. Weeks

You're up for damaging things a little? What a surprise. Okay. So what we're going to do is -- this a little bit of silicon carbide, very hard. And what we do is we damage the surface of the glass with that, so it's sort of -- it's the way we interact with everyday life. First thing we're going to do is we're going to take a piece of strengthened soda lime, which we often compete against. And you see that little damage area in the center?

Suraj Chopra

Yes.

Wendell P. Weeks

Great. Why don't you mount that into that lever? The idea is to get that circle. There's a Ph.D. in your future. Kev, why don't you work this, the lever press? Okay, so what you can see is it took around 62 pounds of pressure to break that particular piece of competitive glass, right? Now let's try the same thing. This time, why don't you pick that piece of glass up with a piece of 1-millimeter Gorilla Glass, okay? So it's 1-millimeter thick. Quite often, that's what you're experiencing on devices like your smartphone. If you mount that device into this lever press, we're going to do the same thing. Kevin's going to have to apply a little more muscle, a little more. Man, you need you to hit the gym, brother. Okay. And what you can see, he's going to run that up to around 130 pounds of pressure on a damaged piece of the glass, and it still holds intact. You can confirm for the audience that, that is still one piece. There you go.

Suraj Chopra

Still one piece.

Wendell P. Weeks

Okay. So now what we've done with Gorilla Glass 2 is we've changed the glass composition, and we've made it even stronger. And what our customers want to do with that is they want to make it thinner. So they want to go from a 1-millimeter piece of glass to a 0.8-millimeter piece of glass.

Suraj Chopra

Just to make sure there.

Wendell P. Weeks

Just to make sure there. You're so suspicious, man.

Suraj Chopra

It's definitely 80% of the width.

Wendell P. Weeks

Great. If you mount that up, and let's do the same test. Come on, you can keep going. You can get there. Okay. So what do you see? Basically, much thinner but with the same legendary strength. So this is coming to touch devices near you soon. Now that's just one way we test the strength of glass. If you come this way, we'll do another. Gosh, I'm starting to have some anxiety about this. There's another way that we test glass, which is rather than abrade it, we test the unabraded strength of the material. And to do that -- you can step right in there -- we use this device. This is an impact hammer, generating about 2 Joules of force. So the first thing I want you to do is -- this is a piece of bamboo, which is actually a very hard piece of wood, because I just want you to take that impact hammer and put it on that piece of wood. You kind of liked that, didn't you?

Suraj Chopra

Yes.

Wendell P. Weeks

Now, what you...

Suraj Chopra

Do I get to take these home with me or...

Wendell P. Weeks

Yes, you can. Just as long as you don't hit any CEOs with it, okay. Okay? So if you take a look, you can actually see the damage on that piece of wood. So why don't you arm that again. Okay, that's a lot of force.

Suraj Chopra

I need to hit the gym too.

Wendell P. Weeks

There you go. Now what we're going to do -- don't just jump to the next stand [ph], okay? Now what we're going to do is. We're going to take a 1 millimeter piece of Gorilla, right, very thin, and we're going to mount that in there. And you're going to set that bad boy loose right on there. Don't touch the top, that's okay, just let it go right on the edge. That's armed. It should go down. I don't know that you got this thing armed. Let's try to [ph] set it off again. Okay, now set that right in the middle of the glass. There you go. All right. Yes? Not broken.

Suraj Chopra

No scratches.

Wendell P. Weeks

So pretty cool.

Suraj Chopra

Right.

Wendell P. Weeks

Put down the impact hammer. Step away from the impact hammer. All right. Now so what you've seen there is 2 traditional measures of strength. There's another, which is does it scratch. Now the reason plastic got just torn by glass is because plastic scratches very easily. But even though glass is much more scratch-resistant, not all glass is created equal.

So what we're going to do now is do a scratch test. It's an industry standard scratch test. And what you do when you want to scratch glass is you take a diamond tip indenter and you apply force to it and then you ramp that force up as you drag it across the glass. Makes sense, right. Now what you're going to see in a moment is you're going to see a term called a newton, right. Now to put in perspective for you what is a newton of force. A newton is the same force as taking a 4-pound ball, pretty heavy, right, and dropping that from about 3 feet. So why don't you do that? Okay. So we're going to take that force, that's 1 newton, and what I'm about to show you is we're going to ramp that all the way up to around 4 newtons, which would be the equivalent of 4x the height of that same ball. There you go.

Suraj Chopra

4x it. Right 4 times 3 equals 12.

Wendell P. Weeks

All right. So let's see that video. Let's take a look right here.

[Presentation]

Wendell P. Weeks

So you're going to see soda-lime glass on the left, 1/2 a newton, opens right up, highly visible. Our competitor is a luminous silica glass in the middle, doing okay, doing okay, but as we get up around 3 newtons, what's going to happen is it's going to move from plastic deformation into shear deformation, and that'll get a highly visible scratch. Actually, if they keep on doing that, that glass is going to break. Now take a look all the way over to the right, that's Gorilla Glass 2, and you see really no expansion of that. To put that in perspective for you, here is that actual same piece of glass of Gorilla 2, right, and you can see there is a scratch in there. But you really got to look for it. I've tried [indiscernible].

Suraj Chopra

You can barely see it, yes.

Wendell P. Weeks

Right? So you can imagine therefore, right, why that has tremendous value for our customers or to you, right, because things get scratched and you want things that are harder to scratch.

Suraj Chopra

Absolutely.

Wendell P. Weeks

Makes sense. Now the next thing is that as you're touching all these displays, what's easy to forget is what you're touching is light, okay? And the way we get that light is by applying energy, and we take electrons, turn them into photons and the photons have to get all the way through that glass so that you can see them, right.

Suraj Chopra

Right.

Wendell P. Weeks

All right. So if you take a look at a little bit of data here, what you see is what is the optical transmission of the glass. Higher is better than lower. You see Gorilla Glass 2 across the top at 92% and then you see 2 of our competitor glasses well below at about 1% below. What the people in the audience can see is you'll see that you can actually see that on edge in terms of the color. You see the Corning glass, competitor B and competitor A, right. You can see an actual tinge to it. Let's show it to you in person, right. So if you take that, just put that on angle. That's Gorilla. You see how transparent that is?

Suraj Chopra

Right.

Wendell P. Weeks

That is competitor A. You see it's got like a green tinge?

Suraj Chopra

Yes.

Wendell P. Weeks

Right? And that is competitor B. You see like it looks like yellow.

Suraj Chopra

Yes.

Wendell P. Weeks

Okay. So not only are you going to get color shift, which by the way really matters, to designers and display guys. But also, what that means is it takes more photons to get through our competitors' glass. More photons means it's going to need more electrons. More electrons means it's going to draw your battery life down faster. All right.

Suraj Chopra

More power...

Wendell P. Weeks

Okay, so if we step back and think about what I've just shown you with Gorilla Glass 2, basically, it's way more damage resistant, right. It's therefore going to be able to be a lot thinner. It's going to be able to have 20% cost reduction, better scratch performance and better optical. We think we've done a pretty good job of obsoleting our own technology, don't you?

Suraj Chopra

Absolutely.

Wendell P. Weeks

Okay. So let's move from Gorilla to Displays. Now in this maturing LCD display business, there's actually a quiet revolution going on. And that revolution is that we're beginning to develop displays, as a matter of fact, you're probably carrying one on your person, that have much higher resolution, much faster refresh rate and much faster response time. So let's first take resolution. And I'm going to have you take a look at a screen again here. To put this in perspective is the pixel size on that -- how big is your TV? Is that too personal a question?

Suraj Chopra

Well, it's funny you ask. I just ordered a 60-inch TV.

Wendell P. Weeks

There you go.

Suraj Chopra

For $999.

Wendell P. Weeks

You're the problem I'm having with pricing pressure, man.

Suraj Chopra

No, but Sharp makes it, so...

Wendell P. Weeks

That's great. I love it. And I'm right off my Gen 10 glass. I love it. Okay. So what you're looking at in that TV, and I'm so glad you bought one, is a pixel size of about 70 microns, right, or pixels per inch of about 70. Now your smartphone, on the highest resolution ones, has a pixel size of only 80 microns, right, or 300 ppi. So what those smaller pixels give you is much better definition, right, much better resolution. So if you go to smaller pixels, you need smaller transistors to drive them. If you need smaller transistors to drive them, you actually have to change the backplane materials. If you change the backplane materials, guess what you need?

Suraj Chopra

New type of display.

Wendell P. Weeks

New glass. That's right, man. You're going to need a new type of glass that is more thermally and dimensionally stable, right. And that's exactly what we're doing. And to show you why that matters, we're going to, once again, show you and the people in the audience a video. This is showing what happens in sort of OLED manufacturing to glass. First, you start off with a nice piece of glass, right, and sort of a simulation of what happens in our customers' process. First, being heat. Much higher heat than today's manufacturing processes. And if we were just to use today's glass, you can see that it warps or sags. Actually, glass under enough heat can shrink. But if you look at the new Corning glass that's on the right, you'll see it's every dimensionally stable and thermally stable. That's why you see those little scratches, it's made of our competitors' glasses, right. Those scratches are a big problem with small electronics because they cause shorts, right. So you want a pristine surface and better thickness control because if I'm going smaller, when I had a bigger pixel, it sort of bridged that gap, right. It sort of averages out the thickness ratio [ph]. And if I go smaller...

Suraj Chopra

More distorted.

Wendell P. Weeks

You got it. That's exactly right. And so as we see these quiet revolution of displays, what's going to happen is that we need to change the glass. Now here's some good news, right. We know how to do it. Matter of fact, we just introduced Lotus, that has 200% higher processing temperatures, 50% tighter dimensional control, as well as tighter voltage range. The other bit of good news is it makes it much harder on our competitors, right. So the industry isn't necessarily maturing from a technology standpoint. And we're going to get the chance to re-up our competitive advantages, right. And even better news, we can make this on the same assets, so it's not -- I know your next question, we're not going to spend a lot more capital for it, No, we're good. All right. So now, let's move. We've been talking about glass the way we always have for displays. And the glass comes like this, right. That's actually a piece of display glass. What we can do, we introduced this last year in a sort of prototype version, which is flexible glass. That's a piece of glass in between there, and you can see it's so thin that it becomes flexible, okay.

Suraj Chopra

This is actually glass?

Wendell P. Weeks

That's actually glass that's in there.

Suraj Chopra

It feels likes the plastic almost.

Wendell P. Weeks

Well, we're protecting the outside with plastic so that you don't cut yourself with glass, right. Very astute feel. We're going to use those sensitive fingertips in a moment, right. Now we showed that to you last year. Let's talk about where we are with it now. We're going to start producing this year on meter-wide sheets large volumes of this glass. So first, let's sort of think within the box, right. You can make glass that is 5x thinner than the glass that's right there. Being 5x thinner, given the way in which we're making it, it's going to be 40% lower cost, right. So if all we were going to just try to do is make displays the way we would normally just think about it, then what we would be able to do is make much thinner displays, right, and lower the cost for our customers. Now that's thinking in the box. The reason I say that is have you ever been in an LCD manufacturing plant?

Suraj Chopra

Yes, yours.

Wendell P. Weeks

That's making the glass, right. Have you ever been to one of our customers'?

Suraj Chopra

Yes, like a panel maker? Yes.

Wendell P. Weeks

Okay. So what it looks like is almost a glass-handling facility, big pieces of glass going into big boxes. The reason all those processes are designed that way is because if you want flat glass, it comes in big squares or rectangles, and all the process is designed around that. Now what I want you to think about is if I can make glasses so thin, it can go on a roll, right. You have the opportunity to totally rethink how displays are manufactured or a lot of other things. Let's come back and talk about it. So basically, what we have here is the opportunity to reduce cost as well up to 50% from roll-to-roll manufacturing, and let me give you a quick video on what that looks like.

[Presentation]

Wendell P. Weeks

So we're going to take our rolls of glass, right. This would be our customer's process, and you see the glass moving with roll-to-roll manufacturing, being able to add different product features, all while not damaging the glass. And we'll show you in a second how we're handling that, right. Proprietary technology that allows us to grip and grab and move that through the roll-to-roll manufacturing. And then when you're done, you have this ultrathin glass manufactured on rolls that we can make out of any of our compositions, right. So once again, still, though, thinking in the box, right. I'll move on in a moment. And let's talk about glass versus plastic because that is the way in which you manufacture plastic films and plastic films gets used. One of the main reasons that, that happens is because of reduced cost that comes from roll-to-roll. But actually, glass versus plastic, if you want to do a high-temperature plastic, has a number of problems, first being glass has 7% higher transmission. And what you see is plastic here and glass there, just on a simple piece of type paper, you can see the difference...

Suraj Chopra

Scratches, yes.

Wendell P. Weeks

Right. To overcome that, if we were driving a display, you'd need more light. If you need more light, you're going to use more power, blah, blah, blah, right. Okay. Also, you're getting all the other characteristics of glass which you can create a purely hermetic seal, perfectly hermetic means water can't get in or anything else, as well as you're going to have superior thermo-mechanical stability. A fancy word for explaining what you already know, which is if you're going to heat up leftovers at your house. Go in the refrigerator, you grab your plastic thing and you put it in your 350-degree preheated oven to heat it up, right.

Suraj Chopra

That idea, yes.

Wendell P. Weeks

That's thermo-mechanical stability. All right. Now that means we can use this to make displays that are superthin, and there's an example, right. You have an oxide TFT right there manufactured on it. But once again, we're still thinking inside the box here, right. So we've changed the way we manufacture. We're still talking about displays. What I want you to think about is all the other applications in the world that could be served by a roll-to-roll basically perfect coating, impervious to chemicals, impervious to water or water vapor, damage resistant, perfect for electronics. You begin to think about, man, this is market opportunities well beyond to the ones that we have been addressing. Okay. So let's move from thin to big. We're going to talk about large-format displays. Did you get a chance to see the perceptive pixel display?

Suraj Chopra

I did.

Wendell P. Weeks

That's out there. Did everybody here get a chance to play with that at all? What did you guys think of that? All right. Now when we first came out with our A Day Made of Glass video, one of the top things we heard from people was, gosh, that's so far away. You're not going to -- you can't do a capacitive touch that large, et cetera, et cetera. Now we have the advantage of already working on these things with our partners. And what you saw, there's an 82-inch display, the largest capacitive touch display in the world, right. And it was great, right.

Suraj Chopra

Fantastic.

Wendell P. Weeks

It was like something just out of the video. Now there's another reason we really like that display. Can you guess?

Suraj Chopra

It has your Gorilla Glass in it.

Wendell P. Weeks

That's one of my favorite things. It's exactly why we love it. Now it isn't just because of our charming personality that they chose it, it's because it's 60% thinner and lighter. It's going to be 3x low to failure, so much stronger, right. 40% more touch sensitive. And then also, tremendously reduces parallax, which is a sort of an optical term, which has to do with transparent materials if they're thicker, right. Basically, if you try to point and touch, you can actually see a shifting. So you may be touching in the wrong place. If I go thinner with something like Gorilla with its optical transparency as well, you're going to touch in the right place.

Suraj Chopra

So Gorilla Glass actually improves touch transmission as well?

Wendell P. Weeks

Exactly right. Now weight really adds up. This is what the competitive offering was. And what we've done is we've cut it up into pieces and created 1 square foot weighs light for you [ph], right. This is Gorilla.

Suraj Chopra

[Indiscernible]

Wendell P. Weeks

See the tremendous difference? Now imagine that across displays that are 10 square feet. And you can start to think that you can afford to pay us a little bit more just for the freight savings alone, let alone what it's going to do to walls you hang them...

Suraj Chopra

How they'll look, right.

Wendell P. Weeks

Now this is really a journey. Those highly interactive displays that you see are aimed at things like classrooms, conference rooms, but we also feel it's on a journey to your home. Let's talk a little bit about that journey and the evolution of TV and what's going to happen. First, this is a TV the way you would normally see it, and interact with it, right. And you see that's got a classic bezel. This one's got a metal bezel. Quite often, they have plastic, right. And if you step back over here. What you're seeing when it's on is basically, I'm looking at a picture in a frame, which is you're used to and it's kind of normal, right. Well, when it's off, if you'd just take a look at that, it looks like a picture frame without a picture. Do you have a lot of picture frames without a picture in your apartment?

Suraj Chopra

Not on display.

Wendell P. Weeks

Not on display. That's good, man. Because if you did, we'd start to figure well, you didn't get hugged enough as a child, something like that, and no one loves you, right.

Suraj Chopra

Long story.

Wendell P. Weeks

It's a long story. Okay. Well, Sony realized this, and they said, "Listen, I don't TVs just to look good when they're on. I want them to look good when they're off. I want them to blend right into the background." And that's why they did the Sony Bravia monolith series. Now what you can see, just touch that, right, is they've gotten rid of that bezel, right. And when you step away from it, it doesn't look you have developmental mental issues and are taking sort of pictures without pictures of anybody who loves in them, right? They were looking a sculptural look, right? Now the problem is, is that when you turn it on, you still have a frame, okay? And so you go and you look at this virtual world in a box. Now if you walk around here or you walk outside, that isn't the way you see the world. You don't run around the world with a little picture frame in sort of move through it. Well, what we believe is that there's no reason to do that in the virtual world as well, and we want to move seamlessly between the information you see on the screen and the world around you. So for that, I want to show you a prototype, one of the latest things out of our labs. Once you give me that third piece of glass, I can do more than just protect the device. Why don't you stand right here? Okay. And we can play optical tricks with it. So behind there, it's just that same standard LCD. It's like that's over there on the far left, right? But what do you notice? I don't know if people in the audience can see it. But the picture falls right off the frame.

Suraj Chopra

Right.

Wendell P. Weeks

That's truly what we call an infinity edge display, and we can create the same effect on the top. Still a prototype, right? But pretty cool, isn't it?

Suraj Chopra

Pretty cool.

Wendell P. Weeks

So not to make you feel bad because you just bought a brand-new TV.

Suraj Chopra

I know.

Wendell P. Weeks

But then...

Suraj Chopra

The good news is I'll have to replace it.

Wendell P. Weeks

Say that again.

Suraj Chopra

The good news is I'll have to replace it.

Wendell P. Weeks

Man, you're a man after my own heart. Okay. Now we're going to go big -- from big back to small, if you go back to way. I'm sorry to keep moving you around. Okay. All we've been talking about so far is glass as a tool, glass as a tool. You may actually think I'm actually a tool.

Suraj Chopra

Not at all.

Wendell P. Weeks

Okay, right. We've been talking about being highly engineered, extreme process control, RF transparent, stronger, more precise. Right? What that fails to actually acknowledge is that glass was first an art. When man was first able to manufacture glass, what did he do with it? He created art. Actually, up on the screen here, what you'll see is an ancient piece of glass, one of the oldest in the world. Actually come visit it at the Corning Museum of Glass. And one of the first times man could make glass, he made this beautiful art because of its cool and authentic feel, its ability to do forms and shapes, and its light-handling properties. Now that actually is still on a mummy. We've got to show you it in a mummy, so when you bury me, bury me in a piece of glass, okay, man?

Suraj Chopra

I'll be sure to put in that request.

Wendell P. Weeks

You'll put in that request? Good. So let's first deal with the cool and authentic feel. So that's piece of plastic.

Suraj Chopra

Right.

Wendell P. Weeks

How's that feel to you?

Suraj Chopra

Nothing special.

Wendell P. Weeks

Well, describe it.

Suraj Chopra

It feels cheap.

Wendell P. Weeks

It feels cheap, right? It feels sticky and warm.

Suraj Chopra

Yes.

Wendell P. Weeks

Right? Now let me give you a piece of glass. How does that feel?

Suraj Chopra

Cool. Smooth.

Wendell P. Weeks

Right, right. Now what you're experiencing, actually, to go back to being a tool for a moment is that glass has much higher thermal capacity and thermal conductivity, and what's happening is it's literally sucking the heat out of your body and putting it into the body of the glass, right? And you can feel, even the way you're handling it, still that feels good in your hand, right?

Suraj Chopra

Right, definitely.

Wendell P. Weeks

Okay. So if you show it to the camera, really, what some of our customers want to do is create devices that look and feel like that, like a river stone that you would pick up. And what they want to have happen is that as you pick it up, right, it has that great touch and feel. It looks like something you'd put in your pocket anyway. But then, it comes to life. And when it comes to life, you can turn it into a productivity tool. Okay. So that's feel and touch. Right, if you'd put those back there. So to give you some of that feel and touch, what we got to do is move from the two-dimensional glass that we've been talking about into the third dimension, right. We've got to give you shape. And here is a good example of that. This is a piece of glass on the front that you see curved, right, and sealing perfectly to a metal back. Now how does that feel to you?

Suraj Chopra

Smooth. Also feels cool.

Wendell P. Weeks

Touch, all those good things. Right. Metal's actually a very, very neat material, right. And so you're seeing that combination of glass and metal, which is great. Now still, we're thinking in very traditional ways here, right, because I've got the glass because I have the display, and all I've done here is curve of that display around the side. But if I really want to create that river stone feeling, maybe instead, what I'd do is something like this. I'd take 2 pieces of glass, right. We would create a shape, right, build the phone or tablet or whatever inside there, and seal those together. So if you put that in your hand, right. You can play with those, those are Gorilla, and you're okay, right. So you can begin to imagine that we can try to create that feeling of that river stone....

Suraj Chopra

All around it.

Wendell P. Weeks

It comes alive. Now if I am now on the back, now I don't have to worry about transparency and I can use glass as art once again, which is now we can introduce color, right. If you've ever toured any of the cathedrals through Europe or even here in our fair city, right, one of the first things you'll notice is stained glass, right. Now the reason is, is because one of the ways people have always tried to represent the divine, right, is light coming through beautifully colored glass. It does something to you. It affects you at an emotional level, right. We can do that same thing in some of our highly engineered glasses by changing what we do in the composition. It will strip off different wavelengths of light and give you color. So here's a great example. That's all Gorilla, right, but now in color. Do you have any color in there that you like in particular? Blue. It's a great, great choice. Blue glass is neat, right? That's yours. Put that in your pocket. Now -- that was quick. Now but all these glasses are designed to have light pass through them. Now, which can be cool potentially, if you think about it on the back of a phone or back of a tablet, things I could do and play with light, I'll show that to you in a second. But we can also make glass that light can't pass through and do colors like that. But that same touch and feel. Now that I'm on the back, I don't have to look at a display. So what am I playing with you? We're playing with color, we're playing with shape, right, and we're playing with that authentic feel. Okay. All right? Now you've had the opportunity to touch and feel the plastic, the glass, see the color, feel the forms. Our friends in the audience haven't necessarily done that, but I think I can relate it in a way. Have you ever gone walking on the beach?

Suraj Chopra

Yes.

Wendell P. Weeks

Yes? Okay. Have you ever heard of sea glass?

Suraj Chopra

Yes.

Wendell P. Weeks

Okay. Sea glass is basically just broken glass that is in the ocean and has ended up being smooth and impacted by the action of waves and the sand in the glass, right? Now when you come across sea glass, what do you do?

Suraj Chopra

Usually pick it up.

Wendell P. Weeks

You usually pick it up, right? But if you're with children, they almost always pick it up. Matter of fact, people collect that, right. This is actually a piece of sea glass from someone's collection, right. They actually take that collection and make it into jewelry a lot of times or art. Okay. Now let's go back to that same beach, waves, laughing, we're walking along and you see a piece of plastic. What do you do?

Suraj Chopra

I mean, you just walk right by it.

Wendell P. Weeks

Okay. Well, that shows some insight into your character. But...

Suraj Chopra

Oh, no, no. I find the nearest garbage can, I pick it up and throw it in there.

Wendell P. Weeks

Right. You interact with it like it's trash, right? And you're either the type of person who walks by trash or picks up trash.

Suraj Chopra

I'm just not judgmental. That's why I don't want to characterize it as trash just because I don't know...

Wendell P. Weeks

Okay. So now why is this a big deal for us? Because if out into the audience, you reach into your pocket and grab your cellphone, right? The back of that, that's trash, man, right. What do people want to have? What do our customers want to do? They want you to emotionally connect to your device. They want you to feel like this is something I value. And if they can create that powerful attachment, that is going to be a profitable model for them and thankfully, a profitable model for us. Now this may sound like it's part of the future. It's not. We're working on this right now. And here actually, you can see a good example of this. This is the new HP Envy. This is their new ultrabook, their top-of-the-line. When they want to explain where they're going with computers, this is what they use. First thing, that's a piece of Gorilla Glass on the back, okay. Note how they're similar. They're playing with its ability to play with light. They also have a piece of Gorilla Glass here on the front. Note that same monolithic design that you see here on the Sony, they want it to fall off the edge, right. Gorilla here, Gorilla there. Now look, down here. Touch the touchpad. That's glass. Now this here, the handrest, what are they trying to do? They're trying to get at that touch and feel that you had before. So let's count the pieces of glass. You got one here, one here, one here, one here. Okay that's 4. But let's not forget, you got 2 pieces of display glass in there that are creating that image, so 5 or 6 pieces of glass here, right. We believe that we're going to see this type of device more and more and more as people try to increase the connection between you and their device. All right.

Speaking of connections between devices, let's move from devices to networks. Come on back here. Now in that world that we described, it's all about mobility, as I said, right. And people know that we invented the first low-loss optical fiber, and so they always think about us as wireline, long-haul, metro, fiber to the home, et cetera, right. What people don't realize is we have a rapidly growing, increasingly powerful position in mobility in RF. And the reason why is simple. If you go into any building. Well, let's step back -- first of all, 80% of all phone calls are from -- on a mobile device, aren't made from outside, they're made from inside. If I want to get inside, I got to put my antennas inside. If I'm going to put antennas inside, I got to connect those antennas one way or the other. That's called a distributed antenna system, right. This is what our competitors do with their distributed antenna system. They got to pull hundreds of meters of that. You can try to pull that apart, right? That's coax. This is what we use. We believe the future of mobility is fiber optics directly to low-power antennas. That allows us to have much, much higher bandwidth, get it off to wireless, onto the wireline as fast as possible, right?

Suraj Chopra

And the components are the same there or they're totally different?

Wendell P. Weeks

The components are somewhat different, but you can use the same antenna sets, right. We actually -- in ours, it's a little bit better one. Now you're going to the Super Bowl this weekend?

Suraj Chopra

I'm not going to the Super Bowl, unfortunately, [indiscernible] watch it.

Wendell P. Weeks

No, is anybody here going to the Super Bowl? No hands. Right. Okay. So you're all are too boring to go to the Super Bowl. I'm not going either, back to me being a tool. But when we're all watching the Super Bowl, you see all those people in the audience having like a better time and they're taking pictures and writing text, "Hey, Mom, here I am at the Super Bowl," right. What they're going to be connecting on is our network, right. That's going to be our network at the Lucas Stadium. It's got 5-bar coverage, it's got flexible capacity allocation and plus because you don't have to jerk around with stuff like this, you're going to have 50% less installation time, so it goes much quicker and much cheaper.

Suraj Chopra

So they're installing you just for the Super Bowl?

Wendell P. Weeks

No. That's in there permanently. That's a good idea, we should talk to them about install this network, buy our product and then throw it away.

Suraj Chopra

Then strip it out and then do it again.

Wendell P. Weeks

That's right. Think about it like plastic. I like that. All right. So now you guys have an added reason to watch the Super Bowl. Don't you think that's cool that, that's our wireless network in there? Okay. Now let's talk about a product that we introduced a couple of years ago, a few years ago, now, called ClearCurve. Remember that? That's the fiber that you bend and you still get light through it. If you turn this on, we're going to recreate that. Okay. This is the industry-standard pinch test. You see all those little pinches. You can actually squeeze that, right, pinch it off and you see that red light that's going off?

Suraj Chopra

Right.

Wendell P. Weeks

That's showing you light is still getting through. Now when we developed this, what we had in our mind was fiber-to-the-home networks. You can do them a lot faster...

Suraj Chopra

More stable or something [ph].

Wendell P. Weeks

Really powerful data centers where you could save space, save energy, right. But you can also do something else with it, not only get to the home, not only through data centers, also, we're starting to think about this as a product for inside the home, especially when we link it to some of our pretty cool and proprietary cable and connector technology. This is a piece of HDMI cable, right. To your new TV, when you connect it to your Blu-ray or your cable box, right? That's what it's connected with. That's what -- how you get a high-definition signal, right? That's about 25 feet of that, right. To give people an idea who don't install their own televisions, why don't you give that a toss over there so people have a idea how much it weighs. Right. This is our version of the next-generation HDMI cable. Right. It's going to be 10x faster speeds, 10x greater length, 70% lighter, 50% smaller, 80% less energy. Why don't you give that one a toss? Okay. That's the future of connectivity in the home. But it's not just about HDMI, right? If you think about it, where devices are going, think about all the USB cables you have. If you search [indiscernible] one more cool thing from our labs, right. Even though we got tons of great feedback from our Day Made of Glass video, we also got a lot of comments from germaphobes, right? You're like "Ooh, I'm touching all of these surfaces now" and somebody else touched them and ooh, right? Let's go buy stock in Windex, right. Our observation was you do realize that you touch all kinds of surfaces in your daily life, right, that other people touch and you do realize that problem already exists, which by the way, did nothing to sort of help their mood, right. So instead, we got another way to solve this problem.

[Presentation]

If you roll the video, we have got a glass that kills drug-resistant bacteria and viruses. And what we're going to show you is standard glass on the left, antimicrobial glass from Corning on the right. We put E. coli with fluorescent there and you see on standard glass over time its continuous expansion, and you see on our new antimicrobial glass greater than 10^6 reduction of bacteria, drug-resistant bacteria, right. So you can begin to think of some of the applications here. This is one of the first things hospitals brought up to us because, a little-known fact, about 20% of the time, when you check into a hospital for -- to be treated for something, you get infected with something else that you didn't have when you went in, right. So with -- and some of those things, they can't kill the drugs. This type of material gets very, very interesting to them. But not just hospitals. You can begin to imagine what we can do with surfaces to make the world cleaner and safer for all of us.

All right, well, that's just a little snapshot as to what our customers and development partners are feeling. So you know, everything that I have just shown you is actively in development with our customers aimed over this next few years. I didn't show you any of the really long-term stuff, right, which is even cooler. This is stuff that's going to make a difference in our company's performance over the near term, which takes me back to our company's performance. The way we think about the company we're trying to build and the stock that we're trying to build is back to what Jim has talked about. We want to think about it like we think about some of our terrific products. We want it to be stable. That's why we have the balance sheet that we have. That's why we have these diversified market positions. We want to make sure that when bad things happen, that the company remains stable and secure as well as the stock.

Also, we want to be a strong cash flow generator so that we can provide a continuous flow of value to our shareholders, either in the form of dividends, potentially buybacks and that we have that constant earnings strength to be able to give a good solid base going forward. But also, what we want to provide is some of the optionality for explosive growth that you can see in some of these products. It does not take much more than 1 or 2 of these to really take off to dramatically change the growth profile of the company.

So speaking of optionality, I hope we gave you a good idea of some of those explosive growth opportunities, and we wanted to come back and engage not only you but potentially new customers and development partners around the world with the sequel to Day Made of Glass, Day Made of Glass, Day 2, please.

[Presentation]

Kenneth Sofio

Great. I also want to also recognize Wendell. That was a fantastic overview before. I just want to have a round of applause. Thank you so much. That was great. So a lot of you are probably wondering, what did I really see in all that future technology in that video? So we've done something a little different this year as well. We've created what we call the unpacked version of what you just saw, and basically it's a narrated version that goes into the details behind the technologies, how they're created, how far in the future they are from actually happening. Both this version you saw and that unpacked version have just now been posted to our website at corning.com and also to YouTube. So I encourage you all to go out now and look at the unpacked version.

We're now going to move to the Q&A. What I'm going to ask is for both Jim and Wendell to please come up. And for the Q&A session, what we have are 3 roving microphone handlers. They got to spread themselves out around the [indiscernible], raise microphones. We're going to put the lights up just a little bit so we could see a little better the audience. If you have a question, raise your hand, one of the handlers will come seek you out, hand you the microphone, as well as your name, give us your name, where you're from, so we can address you personally, and then we can answer questions and move on. Is that good for a process? Okay. We got a question over here. Patrick, good.

Question-and-Answer Session

Mark Sue - RBC Capital Markets, LLC, Research Division

It's Mark Sue from RBC. Maybe a question for you, Jim. As we look longer term to see if you can grow earnings ahead of your 8% top line growth, some of that is -- you're offset by the higher taxes, but also we need some normalization in pricing as it relates to the display glass post the reset. So the question is, when will we know, how will we know, and if Corning is proactively reducing capacity, how do we assume that the others will act likewise? It does seem that we have still a irrational player and we're just trying to see how the events play out.

James B. Flaws

Well, I think that was a lot of questions rolled into one, but -- so first, let me talk about the -- what you opened with, was growing EPS faster than the 8.5% sales. So what we think we've got the opportunity to do is have margin expansion in several of our businesses. That would be principally Telecom and Environmental. And also, those businesses are going to be growing, whereas Display will actually be holding relatively flat, and therefore, it's going to be a smaller part of our mix going forward. We're also going to control our SG&A and R&D. As I mentioned, we'll see a lower percentage of sales for both over time, so that'll improve operating profits. I wish I had a magic wand for the taxes. Actually, Wendell wishes I had that magic wand also. But I can't control Congress, so that could be a drag. But I think gross margin improvement, controlling operating expense and then, combined with the use of our cash to reduce share count, which we obviously have taken a step in the fourth quarter and are going to continue to do that, could be things that help lead to EPS growth being stronger. Relative to pricing, what we're obviously in is a reset here. We've talked about over a 2-quarter period of time significant price down. What we think is going to lead to this price going back to a moderate level is when glass capacity gets closer to the end market. Actually, if you look over a 5-year period of time, for the most part, the glass industry capacity wasn't that much more than retail, probably around 10%. And what that enabled is a condition where it was more difficult for situations for particularly our customers to trade off a glass maker against another one. So we've taken a significant step with 25% capacity offline. I'll let you talk to our competition about what they're doing. We can't guarantee you what quarter this ends. Obviously, the sooner the better for us. But we think that, that will become obvious to you when these conditions take place, and therefore, you'll move back to a moderate price decline. So hopefully, that will show up very quickly. I think the obvious time to see that happening would be in quarter 2 when we start negotiating quarter 2 price declines. Anything you'd like to add?

Wendell P. Weeks

I think that was a very complete answer, sir.

Kenneth Sofio

Great. Mr. Lucas right here in the middle.

Ehud Gelblum - Morgan Stanley, Research Division

It's Ehud Gelblum, Morgan Stanley. Originally from Philadelphia since, Ken, you asked where we come from. Questions for each of you. On the -- when you were talking about potential acquisitions in telecom, I think Jim you mentioned that there were other areas that you might potentially look to get into. Can you be a little bit more definitive or just -- not definitive, but just give a little more overview of the types of other potential acquisitions you might be looking at, the types of other areas aside from your fiber, Wendell, that you might be looking to get into Telecom -- to expand the Telecom business. There's obviously a lot of different directions you can go in there. And then again, just following up on the Display question. Given that you've got a good sense as to what the industry supply looks like right now, forgetting about pricing for a moment and assuming your low double-digit volume growth that you're looking at, at what point do you think supply kind of starts equaling demand? And where you think the gross -- the clearing margin price kind of ends up?

Wendell P. Weeks

Why don't you let me take the first one, and then you take the second. So part one, if I understood the question correctly, was what areas in Telecom do we see augmenting ourselves with acquisition. Did I understand that correctly? Very good. So the first way we think about it is one of the things we bring is some pretty unique technical insight as to what's going to happen when and what we try to do and will try to do is augment that with other capabilities that go in that direction. A great example was the Corning MobileAccess acquisition, where we knew we had in our labs what was going to be the next gen and we needed those capabilities plus that market access to be able to expand into what's going to be a super fast growing area. Similar way to think about what I've showed you, you see all the different places fiber optics are going, and it doesn't take much imagination to think about what other targets we might have in those areas. As well, you see our core technology moving rapidly around the world, right, as more and more of the growth is now finding us through [ph] developed countries, and that's also going to be an area that we can augment with external development. The main thing will be anything we do will make sort of perfect market and technical sense, and you'll see that connection to our core capabilities that make us be an advantage buyer.

James B. Flaws

So regarding the second part of your question, what we feel is going to happen this year is that demand in glass capacity will be moving closer towards balance. You remember what I said before? Generally, we thought it's a favorable environment when it's no more than about a 10% overage. We think retail will continue to grow this year, provide a lot of that. And we think also that we're not likely to see the same dramatic move down in inventories this upcoming year. So those 2 things have to happen. If they do, combined with the fact that nobody's adding new capacity and people will have capacity off-line, we think as we move through the course of this year, we get closer to that balance structure. And we think retail is going relatively well. We got an e-mail yesterday for the China for the month of December, and the results were fabulous there. So we think retail is continuing to do quite well.

Kenneth Sofio

Right. We have a question up here from Matt up on the left here, left.

Jim Suva - Citigroup Inc, Research Division

It's Jim Suva from Citigroup, out of our San Francisco, California, office. I realize a lot of people are going to talk about Display in the Q&A, so a question on the fiber telecom side. For many of us who's been doing this for many years, we remember the telecom boom days and then the following extreme pricing and profitability decline. You talk about telecom being a big area of growth for you. Can you maybe just get us up to speed since it's been about a decade since a lot of us have really focused on this area, about where the competitive landscape sits, maybe capacity, utilization, pricing views about is this industry potentially also going to enter into a big downturn with excess capacity? Or in the past decade has a lot of this capacity been absorbed?

Wendell P. Weeks

So the competitive dynamic and the capacity demand thing I think is best addressed this way, which is we can't make enough. And we don't see that really changing for a while. One of the beauties, it was painful, but one of the beauties of the strong dip in telecom was that it shook out everybody who wasn't hard core. And our tremendous cost advantage saw us through that valley, and now we've emerged at the other end of that stronger. But also the business has changed dramatically. It isn't just about doing fiber now. These are about complicated passive systems that have tremendous market power to them. So for instance, we talk about fiber-to-the-home, our big business in fiber-to-the-home isn't just selling cable. We have a complete advantage proprietary system that has way lower cost than our competition. And that ability to serve our customers adds a degree of competitive advantage and containment. Same thing in data centers. You got a good look at this in our new EDGE or also the next-generation LAN product back there. If you haven't, you should go see it. What we're doing is we're taking advantage of what we very deliberately over a long period of time built, which is we want to combine our strength in fiber optics with tremendous strength in cable, with tremendous strength in connectivity, protection and management to develop products that pull from all of those areas to create unique innovations that can just kick the butt of our competition. That's what we've been about for over a decade. And that's what we've got and put it together with a tremendous market pathway and reputation that just won't quit in the telecommunications space. And I think we really got something special. Took time, took some pain, but that effort's paid off.

Kenneth Sofio

Patrick, all the way in the back of the audience has a question.

Amir Rozwadowski - Barclays Capital, Research Division

Yes. Amir Rozwadowski from Barclays Capital. Jim, this is a question probably geared towards you. It seems like an underlying theme over the last several quarters has been focused on improved cash generation. And with the buyback and the increase of the dividend, it seems like you're very much focused on shareholder returns. How should we think about that going forward in terms of the size and scope for further actions? It seems like you folks are amenable towards taking additional steps in that direction. Can you give us some level of comfort or perhaps some idea in terms of timing and when that could materialize?

James B. Flaws

Well, sure, I don't want to front run our board because they have the ultimate decision on those. But I think the best way to think about this is our operating cash flow, which has been very strong last year, and it's actually going to get stronger because the operating performance of the company will be good, plus we're going to get higher dividends from Samsung Corning Precision. That's going to be coupled with a dramatic reduction in capital spending over a 2-year period of time. So you should see stronger free cash flow starting this year than what we had last year, and growing again in the future, assuming we're right about our various businesses. And so what we've done with our Board of Directors is talk them through -- we felt that the stability of the company was achieved in our strategic framework with our strong balance sheet. We don't want to ever give that up because sometimes things don't turn out the way we expect. And we're not going to, but we had clearly had excess cash. And so we talked to them starting last year about raising the dividend yield. We think that's a way to provide investors with some guarantee on performance in an uncertain world. And then we also talked to them about looking at the projections of the company over the next 5 years and what we think will happen under the most likely case. And the cash that'll be generated, and how that compares to what the stock is selling for today, and as long as we think that it's trading at a discount, we're willing to put the money to work. So we asked for $1.5 billion. The board granted that. We used approximately 1/2 of that in the fourth quarter. It's our goal to begin using that up again as the first quarter moves on, now that we've gotten through earnings and investor conference. And then assuming the same conditions exist, cash flow generation, the stock not being where we want it, I'm sure that we'll talk to the board about it again. So I'm not going to give you an exact quarter, and obviously, ultimately, both the dividend and the repurchase are the board's decision.

Kenneth Sofio

Great. Dan, someone in the back of the room in the center.

Unknown Analyst

Okay. Brian Bamberger [ph], regarding the $130 million asset impairment on long-lived asset in the special material section. I know it helped cash flow, but what was the reason for that? How old was the material? Because it was a very big amount.

Wendell P. Weeks

So that asset impairment actually came from exactly what I was showing you. We built a relatively large asset to meet a particular customer's super-aggressive ramp. That was the plan, and what they requested for us was much, much larger than what it is they actually ended up being able to sell themselves. And what we did was just good accounting. The sale came well through [ph] starting weak like that, let's take that valuation out and what is the right way to adjust. We're keeping all those assets. We think those assets are going to absolutely get used, maybe not for exactly the same app or exactly the same customer, but for things like that perceptive pixel device that you saw back there, we make that right in that asset. So we feel really good about the long-term capability of it. But we're also pretty conservative from an accounting standpoint which I think is good.

Kenneth Sofio

Great. We have another question on this side of the audience here. To our left.

Edward George Shufro - Shufro, Rose & Co., LLC

Edward Shufro, Shufro, Rose New York. What you've shown us today is truly marvelous, but it doesn't seem as though you much -- have much of a pricing mode around your current product line. And I'm just wondering what's going to happen with these new products. Let's take the new Gorilla Glass, for example. It's a terrific product. How long is it going to take for your competitors to catch up with something comparable to it?

Wendell P. Weeks

So that's a great question. Now 4 years into the mission of Gorilla, we continue to have an incredibly powerful position, so much so, as Jim says, it's actually hard to name a device that has our competitors' glass. And so they had a good amount of time, and what we just did with Gorilla Glass 2 was just change the game to a whole other level. One of the interesting things about Gorilla is that it's evolved so quickly. It's actually evolved ahead of when all of our patents will start to be granted. That's just starting, because it takes about 3, 4 years to get patents out of the patent office. So we actually take a look at this and we think our strength is going to get better, competitively. Going forward, of course, this is a huge market and everybody who thinks they have a shot at it is going to be coming for us. But we feel pretty darn good about where we are right now. Do you agree?

James B. Flaws

I agree.

Kenneth Sofio

Great. I think Patrick has another question. All the way in the back on our right.

Simona Jankowski - Goldman Sachs Group Inc., Research Division

It's Simona Jankowski from Goldman Sachs. Just 2 questions for you. Number one, I think you mentioned, Jim, that you thought that the move to thin glass is not going to be a significant factor in terms of capacity this year. But at the same time, you also said that 50% of your own volume is going to be moving to thin glass by the second half of this year. And so if you just kind of do the math on reducing thickness by 20% and that affects 50% of your volume, it would imply perhaps about a 10% increase in capacity. So can you just walk through that math a little bit and why you don't see it that way? And then just second question on gross margins. You talked about keeping margins flat after the reset. What is your best estimate at this point of where that reset is going to take us to? Is it the low 60s? Or what level do you think would be the most likely outcome there?

James B. Flaws

So what I was saying about the thin glass is that it's not going to provide an instant big slug of new capacity. Actually, we've been selling thin for a number of years. I think initially many investors assumed it'd be like a light switch. You flip it on and everything would go thin, like we did when we did a composition change with Eagle XG. In fact, what we've been doing is converting very slowly, and it's a much smoother curve. We actually hadn't given out the number. We thought it'd be helpful to you to say that we're going to reach the 50% level. So it's not really adding that much pressure in any given quarter on our capacity, but it's important over a period of time for us. And remember, the market is growing. If we hadn't had this downward pressure in inventory last year, actually, glass market would've been closer to capacity last year. If you look at the 4 prior years, prior to 2011, every year, the industry built at least 100 million square feet, sometimes 200 million in inventory. Last year, it actually went down almost 100 million. So what I was trying to say is thin isn't going to -- isn't going to overwhelm us in a sudden period of time. But it is very important. And it's -- we're going to keep marching up and of course, we're doing it again in the environment where we expect another 1 billion square feet of glass coming from retail over the next 3-year period of time. And your second question on gross margins, I'm not going to give an exact forecast. Obviously, quarter 1 is going to be a lower gross margin than what we had in quarter 4. The key is to get price declines back to be at that more moderate level and as soon as we can get that, we think, combined with our cost reduction, we reach -- achieve stability.

Wendell P. Weeks

If I could just add to that, because embedded, I think, in the question is a -- how does this relate to the capacity demand balance. And you should know that when we thought through how much capacity to take off line, we knew where we were going to be in terms of thin. So we've got all that math worked out in our head and on paper and how that will match to market demand. So we've accounted for that in all of our long-term capacity plans. And we're planning on using that capacity to do some of the product sets that you saw here today without having to spend additional capital.

Kenneth Sofio

Great. We have a question right here in the center. A couple rows up.

Nikos Theodosopoulos - UBS Investment Bank, Research Division

It's Nikos Theodosopoulos with UBS. Two questions related to cash. The first is, in Dow Corning and Display, given the pressure that those businesses are in, do you anticipate any restructuring efforts this year or next year that might impact cash? That's question number one. And number two, given the dramatic decline in CapEx and yet the high confidence in profitability, why not have the board discuss raising debt at the low interest rates and using that to buy back a bigger percentage of the company and use your cash flow projections to pay higher dividend than M&A. It would seem that the stocks have book value. Why aren't you taking action, even more aggressively, given the confidence you have in the reduction of CapEx.

Wendell P. Weeks

Which one do you want to start with? The Dow Corning SCP?

James B. Flaws

So at Dow Corning, we're not expecting a sudden restructuring charge. What Dow Corning has been doing in the silicones business is actually they reduced fixed costs, they have started this about the middle of the year, but there's not a big cash charge or accounting charge we think likely to come out of that. They really just put the brakes on all spending sometime in the third quarter. At Hemlock, we're doing the opposite, is what we're trying to do is we have these customer contracts, the big customer deposits. Many of our customers are fairly well known to you. And what we're trying to do is have them continue to buy the poly just at a reduced price until we get through this period of time when some of the -- it was -- it excess inventory in the fourth quarter in the system. And now we're seeing some competitors take their capacity off-line. So again, we're not expecting a restructuring charge either cash-wise or accounting-wise at Hemlock either.

Wendell P. Weeks

And given the significant cash generation that we foresee for the company going forward, our board'll consider all sorts of different options as they think their way through to what is the best way to augment shareholder returns over time.

Kenneth Sofio

[Operator Instructions] I know we have one. We'll go right here on my side, up from the podium here.

Harlord Edward Shill - QCI Asset Management Inc

It's Ed Shill from QCI Asset Management. Could we talk a little bit about the OLED market? On a comparable TV size, are you going to see more or less square footage per TV? And is your ramp of OLED -- from everything we heard at CES, is it going to be faster than what you guys were are looking at? Are you doing anything different inside the Display department to kind of break that up a little bit, OLED versus LCD?

Wendell P. Weeks

So why don't you start with the market, and then I'll do a little bit on the technology and how we're approaching it and the different technology nodes that could happen.

James B. Flaws

Well, so right now, the OLED market is basically soft, small form size. A number of you are probably carrying around a phone today that has an OLED Display. The real question is its movement to television. At CES we saw a number of large customers demonstrate this but generally it was a not-for-sale-immediately product. We expect the price points on it to be very high initially, it's still very expensive to make, the yields were low. But what we think is this technology is going to come, probably more in the back half of this decade than the front part of it. And we want to be part of that mix of that. So right now, we're capable of making a glass for OLEDs. We're working on additional glasses. It can be made in the conventional fusion process that we have today. Our new venture will effectively use existing capacity to do that. So we intend to be ready for it as OLEDs emerge. But we're not expecting to suddenly go from no OLEDs to like 20% of the market in a couple of years. I think it builds more gradually.

Wendell P. Weeks

Great. So the first -- at the very tail end of your question, you made quite a accurate assessment in a way of how do you have to approach new technologies when you said are you going to restructure it all inside of Display. So that's exactly what we're doing. We're forming another division called High-Performance Displays. And the reason is, the OLED market in and of itself is a piece of high-performance displays, and as Jim said, high-performance displays, though growing very rapidly, aren't really big market today. And so what we want to avoid is the innovator's dilemma, where we have a great big market and the one right next to it, which ultimately could be important, is quite small and doesn't get enough attention. So we're going to put a dedicated organization on it. It'll use the same asset base, but a dedicated commercial development organization to make it work. People are focused on OLEDs, and I think that's good because OLEDs are really cool devices and I think have the opportunity to reignite that feeling of obsolescence. But also in this quiet revolution that is going on that I talked about, there are other forms of display, especially when you think through Oxide TFT as a backplane. I think it'll be really important if OLEDs are ever going to get big, and get cost effective, they'll lead Oxide TFT, but Oxide TFT also improves LCD. So we need to attack that market as well. Both of these need new types of glass. And what we're looking at this as is a much smaller, of course, but incredibly high-growing segment and we want to win at each technology node. In case we get surprised on the upside, we got it covered. And if we don't, we also have it covered. That's the way we think about it, if that helps.

Kenneth Sofio

Great. There's a question all the way in the back to our right.

Chang-Jae Yoo

My name is Chang-Jae Yoo. I'm from Korea Economic Daily. Could you elaborate the plan to build another joint venture with Samsung to manufacture OLED. Is it 50-50 joint venture without any other party like program [ph]? And how much do you plan to invest and as timeline and rationale of investments?

James B. Flaws

So the things that we want to disclose about the joint venture, we've disclosed in the press release. And over time, it will become more and more clear. The key thing to take away is this is a new venture, much like we talked about for innovator's dilemma. Same basic thing here, which is we're going to form a new venture with a new partner in Samsung. On Samsung's side, the partner is going to be SMD, and that is the company within Samsung that is carrying the ball for OLEDs. And as we shift our partners and shift to the development partner is going to be, we thought it was really important to have alignment. And that's what's the story behind that new joint venture.

Kenneth Sofio

Great. There's a question again, I think, right here in the center. A couple rows up.

Unknown Attendee

I'm Joe Levinson [ph]. I'm a shareholder from Manhattan. Wanted to ask about your penetration into China, where you hope to do more and more business. Working there, are you confronted with laws and regulations that make it more difficult to control your business and also to make a fair return on your investment?

Wendell P. Weeks

So basically, the question is as China continues to grow for us, how do we feel about the evolving regulatory environment as -- and the legal system and where does that put us in terms of our thoughts on can we profitably grow there and generate returns that will benefit our shareholders and the like to be able to get our money out, that sort of thing? So our feeling about that is it's still an evolving situation. So far, we see a lot of moves in the right direction. Like always, in an evolving situation, there's going to be some fits and starts in the relationship. But what we have experienced so far is tremendous benefits from being able to work productively with customers there, as well as government officials. So, so far, so good. I think you're right to raise the question, and it's something we're going to have to continue to watch as we evolve. But so far, so good.

Kenneth Sofio

Great. There's a question all the way here to our left in the back.

Jagadish K. Iyer - Piper Jaffray Companies, Research Division

Yes. Jagadish Iyer, Piper Jaffray. Two questions. I wanted to find out given your $10 billion target, Jim, do you expect earnings from other segments to kind of cross over in 2014 that can offset any -- [indiscernible] to temper growth of Display segment. And I have a follow-up.

James B. Flaws

So really, expect the majority of growth in earnings to come from the other segments. That being said, we expect Display to remain incredibly profitable. But we're unlikely to see margin expansion in Display and unlikely to see sales growth. So the majority of growth and profitability will come from the other segments over the next 3 years.

Jagadish K. Iyer - Piper Jaffray Companies, Research Division

Second question is you've always had a premium in your glass. How do you see that trending going forward over the next 2 or 3 years? Can you give us what kind of market share you ended up in calendar '11? And where do you think your market share is going to trend over the next 2 to 3 years?

James B. Flaws

So we continue to get a premium for our glass. We think there are 2 reasons for this. The one we like the best is we think our glass performs well in our customers' process. The one we like the least is because our competition never likes to price above us. So we definitely still get a price premium. In terms of market share, we obviously have lost a little share in Korea in the fourth quarter. Actually have gained share in our wholly owned business. And we're not expecting any significant share shifts in the Display business going forward from where we are now.

Kenneth Sofio

Great. We'll take a question to our right, close to the front. John?

John E. Roberts - Buckingham Research Group, Inc.

John Roberts, Buckingham Research. Do you expect Dow Corning to bottom in the same sort of time frame as the Display business, a couple quarters of renegotiation on poly and price increases to recover raw materials?

James B. Flaws

So with Hemlock, I -- we expect Hemlock to be bottoming. I mean, we think that the volume is actually going to increase this quarter from the fourth quarter. Obviously, prices are way down. But at Hemlock, that's our expectation. Now obviously, one of the things that's very tricky in the solar industry right now is what's happening in Europe. Remember, Europe is a big market for solar products and I'm not going to -- I don't know exactly where all the economies are going to end up in Europe. But definitely, we think we've taken -- are taking a step down in pricing now. And it's our plan that, that does achieve bottom and our volume doesn't go down at Hemlock.

John E. Roberts - Buckingham Research Group, Inc.

And secondly, as a follow-up, do you need to build a new fiber plant sometime in the next few years? It's clearly not in the 2014 window you've got here with the capital spending numbers you got. But there are big increments when they come.

Wendell P. Weeks

So we feel really good about the tremendous increase in productivity of our assets, and the capital efficiency. So I don't think you should think about it in the terms that you would've thought about fiber asset additions in the past. But we will be adding capacity, but it's in much smaller increments in terms of capital dollars even though it creates pretty nice flow-through in terms of product.

Kenneth Sofio

Great. A question right here in the center, in front of us.

Unknown Attendee

I'm [indiscernible] Business Newspaper. My questions are related to the joint venture with Samsung you announced yesterday. So when do you start to use some [ph] of it and what is the initial capital amount of this joint venture? And the last question is what amount of the product do you estimate per year?

Wendell P. Weeks

So I can totally understand the fascination with this new venture. It's really exciting. It shows a commitment between Samsung, a world leader in OLED Display, and Corning, the world's leader in glass for displays, to actually create, develop and make some of the cool displays that are going to drive growth in the future. Given that, we've disclosed about the venture exactly what we want to disclose. And this will be a evolving story, and as it evolves, we'll be sure to be clear with you about it.

Kenneth Sofio

Great. We'll take 2 or 3 more. I think, the next one is coming to our left, towards the back.

Unknown Analyst

[Indiscernible] Miller Tabak. Question for you on the gross margins on the LCD. The chart that you have showing 12% ASP declines over the last 8 years along with the cost-downs of 12%. And I think Jim said earlier in the presentation that you're on the path to get cost-downs of roughly 10% going forward. But with ASPs taking a step function down, how do you square the circle in keeping your gross margins flat in LCD under those scenarios? And a second question is, if you could just add a little bit more color on the photovoltaic opportunity. What subsegment of the PV market are you guys addressing?

James B. Flaws

So I'll take the gross margin question. What I said is we intend to maintain the margins after we go through the price reset. So there is a significant step-down that's occurring in pricing in this -- combination of the fourth and the first quarter. And then, we hope to get back to moderate price declines and that's what we're doing. We're not saying that we're going to keep up with where we were in 2010 as an example. Photovoltaics?

Wendell P. Weeks

In photovoltaics, the initial effort that we have had has been named Thin-film photovoltaics, and that's why we're happy to get our first order in that space. Continue to watch the space, more to come. But what has happened is as we've taken our original ideas to go after the space, we've created dialogues that have led us to create even more ideas with our customers. So I would anticipate that as the photovoltaic industry and technology evolves, that our opportunity set will increase beyond its current relatively focused targeted effort.

Kenneth Sofio

Great. We have a question all the way to our right.

Sid Parakh - McAdams Wright Ragen, Inc., Research Division

Sid Parakh from McAdams Wright Ragen in Seattle. Question I have is on capacity. How much do you have in capacity in place with the CapEx you'll do, say by the end of 2012? What kind of end-retail TV unit market growth can it support and to what time frame? And I have a follow-up.

James B. Flaws

Well, so what we've taken is about 25% of our combined glass capacity between us and Samsung Corning in all technologies off-line. So that, plus the combination of thin over time, we think gives us the opportunity to handle the retail growth where we talked about fundamentally growing about 10% or over 300 million square feet per year over these next few years, as a market opportunity. So we're really not planning on having to add new footprint with the exception of our Beijing facility, which will be starting up in the middle of 2012, but on a very controlled basis. So we've got the capacity in place to meet the market growth over the next few years, and don't think were going to have to spend capital to meet it.

Sid Parakh - McAdams Wright Ragen, Inc., Research Division

And the follow-up I have is on what kind of dividend growth should we expect from the company?

James B. Flaws

I'm sorry, I couldn't hear you. What kind of?

Unknown Analyst

I'm saying what kind of dividend growth. So should we expect it to be in line with operating income growth or a different metric over time?

James B. Flaws

I'm sorry, I'm not going to front run our board on that. I think we'll leave it to them to talk about the pace of the dividend increases. Clearly, we'd always want the dividend to be something we can sustain so that will go into their thinking. Just raised it 50% in the fourth quarter, but I think the cash flow generation of the company is strong and I think there's ability to raise it again in the future, but we'll let you know when the board decides.

Kenneth Sofio

Great. Our next question is right in the center.

Steven B. Fox - Cross Research LLC

Steve Fox from Cross Research. Jim, can you do a little bit more of a postmortem on what happened with Gorilla Glass, not so much the revenue side but the efficiency surprising you. That seems like something that would have been in your roadmap. And then, could you tie that in longer term, Wendell, maybe to how you become more predictable along what you -- all these opportunities that you talked about? Because historically you've been surprised both positively and negatively by what really gets adopted in the end markets.

James B. Flaws

Well, you have to remember Gorilla is a pretty new product, and so -- with pretty explosive growth. Obviously, we're really disappointed that cover glass didn't turn out the way we hoped. But beyond that, with our Handheld and Tablet business, it was very good growth. What we're expecting is to see continued growth there. The difficult we've had sometimes predicting this, unlike the Display business, although I've been criticized for not being able to forecast that one either, is that the supply chain's very different. The case of the panel makers, there is great information on exactly how much inventory exists, and there's great information on exactly how many televisions are being sold and laptops, et cetera. For us, the difficulty is even though we may contract with the device manufacturer to be designed in, we're actually shipping that to somebody else who is then finishing it, cutting it and then they ship it to somebody that's putting in the device. And we really don't have any -- up to now, not had any reporting on the inventory levels through there. So what we're working hard on is to try and figure out a way to get a better handle on the amount of inventory in the supply chain. The yields actually have surprised us by some of our customers and the glass that they've wasted. And frankly, in the long run, it's good for them to improve their yields even though for the short term, it's less glass, because that will drive the cost of them putting this on a phone, for example, lower, and therefore, we hope to move into lower-price phones going forward. So it's a tough one to -- for us right now to forecast. I know it's led to some disappointments. I think in quarter 3 I was at an investor conference and we had to change the forecast. And I think the same thing happened in quarter 4. It's still a very new business, but we are working to try and get a better handle on our ability to forecast it.

Wendell P. Weeks

And Steve, I think it's a great question on, as we also take a look at some of these new opportunities on, how we do we think through the capacity versus the demand. See one of our general managers, he's with us today, one of our Vice Presidents, Marty Curran, gave a speech the other day, when he said, "I can explain all of life in terms of capacity. I either don't have enough or I have too much." I never get it just right. There's some truth to that. Don't know how he spun this into a theology, but you should talk to him directly about that. As we -- I think one of the dilemmas we have as we do some of these new opportunities and it plays itself out and Gorilla which tripled and instead of quadrupling. And what the problem is, is our share in position is so high, as it will be in a lot of these other products, that when you're engaged in that, reaching an agreement with your customer, and they're saying, listen, you are the 100% source for this product that I think is going to change the profile of my company, there's some real motivation in the system, perhaps for them to over ask and then for us, because we take that reliability of supply so seriously that it gets a little bit tougher to get the discount rate right between that. And so, I think we're going to continue to wrestle with this, get better. What I can say in terms of our models is, we improve them with each turn. Right? And now, we're going to get a better supply chain model to be able to track increases in productivities for what was a brand new value chain and brand new customers. That'll get better. But I do think it is totally worth thinking about more, as we do something new, how do we get that right balance? And I think that's a fair criticism and something we got to work on.

Kenneth Sofio

Great. We're going to take one more question here in the formal session. But as a reminder, unlike prior years, management, Jim and Wendell, all of our business leaders, product managers, research experts are all going to be around afterwards in the product booth to help answer your questions in a more intimate and informal setting. So let's just grab one more for now, and I think we're going to go way in the back somewhere. No? How about right in the back center.

Unknown Analyst

In the marketing campaign to Zurich you talked about the new opportunities and you said that these are going to be near term. In your roadmap to 2014, what contribution you're expecting from these new market opportunities? And the second question is on the Display back there, when you look at the Gorilla Glass, you have Samsung, LG, Motorola, Asus, Acer, but I don't see the leading manufacturer of tablets and the smartphone. What are the -- what is the opportunity for Gorilla 1 or Gorilla 2 with that leading manufacturer?

Wendell P. Weeks

Well, I can -- I'll take your question in sort of reverse order. As to the second one, which I think you're asking about some other manufacturer than the one that we've named, right? You're asking about Apple, I don't know who Apple is. I -- we don't talk about what we do with our customers unless they first ask us to. And that's all I have to say about that one. The first one, which is what sort of contribution, do you want to tackle that or...

James B. Flaws

So the contribution from a lot of this stuff here is not the biggest portion of us getting to the $10 billion. It certainly is going to start contributing, but a lot of the products you see in the back are the things that are driving the growth. Telecom, next-generation LAN, our EDGE products, they're driving a lot of the growth that you're seeing right here. We will get sales from some of this, but it'll be small initially.

Kenneth Sofio

Great. And with that, I want to draw the formal meeting to a close. I want to thank you, all, for coming, especially want to thank Jim and Wendell for their time today. I really appreciate it. Thank you very much, everyone.

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