Corning Incorporated (GLW) Q4 2012 Earnings Report, Transcript and Summary

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

Thank you, John and good morning. Welcome to Corning's fourth quarter conference call. Jim Flaws, Vice Chairman and Chief Financial Officer will start the call with some prepared remarks. Before Jim begins, I would like to remind you that today's remarks contain forward-looking statements that fall within the meaning of the Private Securities Litigation Reform Act of 1995. These remarks involve a number of risks, uncertainties and other factors that could cause actual results to differ materially. These factors are detailed in the company's SEC reports. Now, I would like to turn the call over to Jim.

Thanks, Ann. Good morning, everyone. I would like to begin today by looking back at 2012. This time last year, we knew we were facing some external headwinds. First in our display business, second in the solar business that are equity venture Dow Corning and third, in the macroeconomic environment. In our LCD Glass segment, we had experienced significant pricing step down in Q4 2011 that would continue into Q1 of 2012. Those price declines unfortunately reset the corporation's profitability to a lower level. So, we laid out a plan to first stabilize the company's earnings and second to grow earnings again. Call this plan for modern workshop the key element of earnings stabilization was to moderate our price declines in LCD glass and also to regain positive momentum in the display segment and our plan to grow earnings again would be driven by a telecom environmental, specialty materials and Life Sciences segment. I am very pleased to say now one year later, we have made great progress against both components over the course of 2012. Now, let me share some highlights from the year. Coming into 2012, we quickly brought our LCD glass supply in balance with our demand. We successfully moderated our price declines in Q2 and Q3. And late in the third quarter, we entered into new agreements with some LCD customers. Now these agreements caused Q4 price declines to be slightly above Q2, Q3 levels in our wholly-owned business, but we believe these agreements are integral part of our plan to stabilize our display business. And now, our Q1 price guidance is that we expect price declines to moderate from what experienced in Q4. We achieved record sales and expanded gross margins of our non-display businesses and feel particularly good about achieving these results despite the…

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

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

Thank you. Jim, we understand your focus on share stability for display glass to better forecast capacity and so far so good. What do the predictive indicators on pricing change foretell about the market share intentions from your competitors? I asked since every action has a reaction, and I am wondering if rationality maybe prevail in the industry or do you feel that competitors are still considering what they should do at this time and due to external factors such as currency that should imply some share shift in the forthcoming quarters.

Mark, after what you speak direct to our competition about their intentions, we believe what we've seen in quarter one both, in terms of how the contracts are working on our share and on more moderate price declines indicates that now we believe the industry is moving to more moderate price declines for LCD glass, so that's the only initial indicator I can give you. I believe our competition is announcing the results today next week, so we look forward to hearing what they have to say about guidance, but that's our strong belief that we can see moderation the price declines in the LCD business.

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

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

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

Jim, I wanted to clarify one thing you said, which is, I know that you said that specialty materials is expected to be down 30% sequentially. Just wanted to make sure that we heard that right. Then if that is correct, Jim, can you give a little more color on that, is that then to due demand driven decline that are a little bit more decline than you would have anticipated or is there something else going on? Are there other structural changes in the use of Gorilla Glass and some factors coming up? That sort of thing? So, if you maybe could give some color on that. Then, the other thing, maybe more on the positive side, I wanted to ask you about is the panel industry, just maybe if you could comment, in 2013, about the supply capacity of the panel industry. Whether you think the supply gets short as we move through 2013 or just what you think the situation there is and how that might come back and impact glass pricing?

Sure, Rod. So, on gorilla, I did say 30% and we think it is probably slightly higher than what the normal seasonality that we have experienced in Gorilla to be, probably because there was a little inventory build in Q4 but we now are six-year Gorilla and what we determined is Q1 is always the quarter where we see the weaker demand. So it is demand driven but that demand maybe partially affected by inventory. We see no change in market share for Gorilla. In fact, we think Gorilla 3 will actually improve our position. It’s a much better product. So we are not worried about the slight down in Q1 and actually anticipating very strong growth in the remainder of the year. In the back half of the year, we think touch will begin emerging on notebooks and as you know, notebooks are about twice as big as a tablet and many times bigger than the smartphones. So we think that will be good for us. So we are not worried about the slight down in Q1. Relative to the panel industry, it is a little hard for us to judge. Clearly the panel capacity has been moderated in terms of the growth over the past year and the new panel capacity in China by LG and Samsung is not coming on fast. So, as we continue to see the LCD market grow and I would emphasize again the large scale televisions and I mentioned the growth of 50 inches in the last year and average size going up. I don’t know if you had a chance to go to Consumer Electronic Show but clearly very large size and increasing focus on high-definition for those, I think, we will use up panel capacity whether it actually gets to its shortest or not, it is hard for me to judge from my position. But I would say there are good signs in the panel industry as well as in the LCD glass business.

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

You are asking for Gorilla demand at retail?

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

I would say. I have to break it down by geographies, but in the U.S. I think television demand is fine heading in the Super Bowl. People forget that people buy televisions after Christmas. In China, we've had good contact with our customers who by the glass there, and Chinese television sellers, remember the Chinese brands are about 70% there. Their expectations are for a good Chinese New Year. And, demand, I think it remains mediocre in Europe. That's really no surprise. In our car business, which is the other consumer phenomenon that we experienced. Car demand, I think, in the United States remain strong, very weak in Europe. I think car demand in China looks fine. We do not feel like we've seen this big downdraft from the United States, from the payroll tax rolling back on and obviously the fiscal cliff negotiations, no help. A lot of the American accept they very welcome, so we were not seeing the big downdraft in consumer demand.

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

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

So, it's a little harder question to answer, Wamsi, than it used to, because how the mix for or Gorilla versus LCD, but we would say right now supply demand balance seems healthy. It was probably very tight in Q4, but healthy. We remain very full right now. The place where we have capacity down is in Korea. There really is no new footprint being built with one exception, I believe, of any duties one new tank in Korea, and so we are not really seeing new capacity come online. Obviously, everybody is continuing to progress to more thin glass, but that is a more gradual, so we expect the supply demand balance to remain in pretty good shape as we continue to grow so and we got it right in terms of fact the glass demand will grow again this year.

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

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

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

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

And when would you make the determination.

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

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

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

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

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

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

In OpEx or at COGS?

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

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

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

Yes, Amir I hope you come to our IR Day on February 8, because Jim Clappin will be addressing our outlook for both but we continue to expect smartphones to grow as a percentage of overall phones. We think we are the product of choice for that. We think tablets will continue to grow in all formats, both small and the normal size that we have got used to. I think the big upside, for us, in consumer electronics for Gorilla will be touch moving into the notebook market. I think you may have heard Wendell talk about this longer range. We think this doubles the size of the potential opportunity for Gorilla. We think PC manufacturers are going to drive to put touch on that. Obviously the cost of incremental touch on a computer has to be not too extreme but we think that people are working on that and obviously work around products that will help them to do that at a lower cost. So I think the future is very bright but Jim Clappin is going to be walking through our detailed forecast in both areas.

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

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

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

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

So you are correct that we have seen quarter ones be greater than quarter four by slight amount. It really however was very dependent on what inventory positions are at the end of Q4, so we actually expected Q4 inventory work off to be a little bit greater, so you we factor in that as we think about we call the normal seasonality. I think you in our model, obviously model our own glass, the panel makers, the set assembly and at retail, but I would be happy to maybe our IR Day to spend some time with you on the seasonalities by quarter. I think a couple years ago, we actually laid it all out in a graph, but it is the combination of what we would normally see seasonality that's were talking about in fact that the supply chain is coming out little bit heavier on inventory than what we originally expected. They haven't done that. We probably would have been saying it's a year-over-year increase.

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

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

So, Brian, the opportunity in auto I think still exists. We believe that as I said earlier in the question will have a customer this year, and so we are still hopeful the auto industry I think moves at a slower pace than consumer electronics. In terms of Gorilla, clearly, the strength has been in smartphones and tablets. We are believers to tablets will continue to grow very nicely. We think there is no question that smartphones continue to come on the higher and higher percentage of phones sold, but I think the big upside opportunity is touch being extended to notebooks as we go through the course of this year and into next. I think those are where the big opportunities are.

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

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

Sure. On the yen, we don't actually as you know give sales guidance, but as we think about the yen, we think about what the rate is at the time that we put together our forecast, so we would have been thinking in the $80 million kind of range. We are not the world's best predictors of exchange rate, so we don't try to predict where it's going to go. On HSC, yes, we can help you. I am going to do that at the IR Day, and when we file our 10-K, we'll walk you through it in more detail. You should not consider that any kind of risk in restructuring there has any impact on Corning's cash position. It would have, obviously, an impact on Dow Corning's earnings and therefore would flow through to us as a special, but it's not a cash issue but we will actually outline all those risks for you on February 8th and in our 10-K filing.

That's helpful. Thanks so much.

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

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

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

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

I would say that the Sony television experience was obviously very disappointing for us, probably for Sony too. In the beginning of 2010, Sony told us what they were going to do and put it on a broad part of their line, including moderate priced televisions and then one year later, they didn't do that. That was very disappointing to us because we actually invested to do that for them. I don't regard that to be a sign for touch on notebooks. I guess you have the opportunity to talk to all the notebook manufacturers and software manufacturers about what they believe and where touch is going to go. I guess we could be wrong. I think the wrong here would be, maybe that the upside isn't as great as what we expected I don't see any potential disappointment coming in smartphones or tablets. So I think the question is whether touch on notebooks is a more moderate introduction or becomes a very strong introduction. We will have to see how that plays out. But we don't think the Sony television experience is a good forecast of that.

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

That would be all upside.

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

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

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

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

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

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

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

It's around the fact that Gorilla is a larger proportion of our business and Gorilla is priced in dollars. Okay. I would like to finish with a few comments. We have a few IR announcements. We will be holding our Investor Day in New York City on February 8 at Cipriani. This year, in addition to the normal crowd favorite hands-on demonstrations that our business exhibits we are going to give a detailed overview of our growth expectations for 2013. In addition to our CEO, Wendell Weeks and myself, three of our business group leaders will be speaking to you about their plans to march up our earnings. It's going to be very informative and hands-on, and I hope you will consider attending in person. To summarize, the highlights of our call, we think we made great progress on our plan to stabilize display and grow earnings on our other businesses during 2012, and while the economy did impact some of our plans, we took actions to control costs and achieve new sales and business profitability milestones. I think most importantly, we grew earnings per share ex-specials year-over-year in quarter four and this is the first time we have done this since 2010. We see this as an indication we began our return to earnings growth. Our Gorilla glass business attained $1 billion in sales after only six years. We made a key acquisition of Life Sciences, we finished $1.5 billion share buyback and also increased our dividend by 20%. And although deep downturn in the solar market is impacting Dow Corning and our equity earnings in the short-term, we believe we have ways to mitigate it. We are coming into 2013 with the expectations in growth in several businesses. We do have some caution about the yen, but we intend to maintain stable Display earnings with moderate price declines, manage our glass capacity well. And with glass reductions and telecom, specialty materials, and life science environmental are poised for growth in 2013, so we look forward to seeing you at our Annual Investor Meeting on February 8th. Ann?

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