Corning Incorporated (GLW) Q4 2014 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. Welcome to the Corning Incorporated Fourth Quarter 2014 Earnings Results Conference Call. At this time all participants are in a listen-only mode. Later we’ll conduct a question-and-answer session. Instructions will be given at that time. [Operator Instructions] As a reminder this conference is being recorded. I’d now like to turn the conference over to your host, Division Vice President of Investor Relations, Ms. Ann Nicholson. Please go ahead.

Thank you, Greg and good morning everyone. Welcome to Corning’s fourth quarter conference call. With me today is Jim Flaws, Vice Chairman and Chief Financial Officer. Before we begin our formal comments, 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 financial reports. You should also note that this presentation contains a number of non-GAAP measures. Reconciliations can be found on our website. Now I'll turn the call over to Jim.

Thanks, Ann. Good morning, everyone. I am delighted to share our fourth quarter and full year results with you this morning. Corning had an outstanding quarter that wrapped up two consecutive calendar years of quarterly earnings growth. We entered 2014 with a goal to grow sales and earnings significantly. We delivered on this goal with year-over-year earnings growth in every quarter. For the full year sales grew 29% and earnings per share grew 24%. The integration of CPM and Korea was a significant driver of the earnings increase and additionally in our four other non-display segments, we achieved excellent growth, which of course has been a longstanding goal. In aggregate, they grew sales and net income approximately 10%. We also delivered on our commitment to return cash to shareholders with our recent December announcement of a 20% increase in the dividend and a new share repurchase program of 1.5 billion. We feel great about our momentum entering 2015 and expect to deliver continued sales and earnings growth in the New Year. So now I’d like to turn to our quarter four results beginning with some highlights. We had a fantastic quarter, that was better than we originally expected. Earnings per share were up 55% versus last year, led by the consolidation of CPM, Optical Communications, Environmental, Dow Corning’s equity earnings and slightly lower tax rate also contributing to growth. LCD glass volume was better than expected, driven by strong demand for larger LCD televisions, the volume up in the mid teams year-over-year and mid single digit sequentially. Display set a quarterly record for sales volume. LCD glass price declines were moderate again as expected and declined less than Q3. LCD glass demand continues to be good entering Q1 and we believe this is due to strong retail demand in Q4 for larger televisions, replenishing supply for Q1, which is also a typically good quarter for retail television sales. We launched our next generation of Gorilla Glass during the quarter and it is receiving very favorable reviews by customers and at the recent Consumer Electronics show. Specialty material sales in the quarter exceeded our expectations, driven by demand for Gorilla Glass for new product launches. CPM integration activities are going very well and we have exceeded our synergy goal for the year. Equity earnings from Dow Corning were also ahead of expectations in Q4 driven mainly by higher sales of polysilicon. So now let’s delve into the fourth quarter details. Fourth quarter sales were $2.6 billion, up 30% versus last year. Gross margin was 45%. We improved year-over-year gross margin every quarter this year. Gross equity earnings of $116 million were more than expected by Dow Corning and I’ll cover that in more detail in few moments. Other income includes the payment for the settlement of dispute over the use of fusion technology in China. This was the final payment to Corning. Please recall we had a similar payment in 2013 in the same quarter. So it had no impact on our year-over-year gains in the quarter. EPS was $0.45, up $0.16 versus the year ago and completes two calendar years of quarter year-over-year earnings growth. During the quarter we spent approximately $183 million to repurchase shares. We completed the October 2013 repurchase program in quarter four and have now begun repurchasing shares under our new program in January. For the year sales were $10.2 billion, up 29% over 2013. Corporate gross margin was up 2.4 points. The integration of CPM and display cost reduction drove a large portion of the year-over-year improvement. Optical Communications, Environmental also improve their profitability this year. S&A and R&D were up year-over-year in dollars due to the consolidation of CPM. As a percentage of sales we lowered S&A in our D&E. The year-over-year decline in gross equity earnings reflects the elimination of SCP equity earnings following the acquisition and its consolidation. Our effective tax rate for the year was 16.8%, slightly lower than our original expectations, this helped by regional mix and the extenders bill, which passed in December. Earnings per share for the year were $1.53, up 24%. This year-over-year improvement is the result of additional earnings from Corning Precision Materials, earnings growth in Environmental and Optical Communications, earnings growth in Dow Corning, as well as the impact of share repurchases. So now I'll turn to our detail segments and I’d like to start with Display. Display sales were $1.1 billion in Q4, 69% increase versus last year. Overall our market share remains stable and LCD glass price declines were again moderate. Sequentially our LCD glass volume was up in the mid-single digits. Let me provide you more detail about LCD glass demand and retail. In Q4 we believe television retail sell through earnings were up high single-digits year-to-date. TV area growth measured in square feet of glass sold was up approximately mid-teens, representing a strong holiday season at retail. Panel makers ran at high utilizations to meet strong demand for large televisions over the holiday and to restart the supply chain for Q1. Supply chain inventory remained healthy exiting the quarter with forward looking weeks of inventory at approximately 17.5 weeks. Gross equity earnings from our equity venture in Korea SCG were immaterial. Net income was up 26% over the year, reflecting the impact of additional sales earnings and synergies from CPM. I can’t emphasize enough the outstanding job the Display Organization has done with cost reduction and successfully integrating CPM. Now for the full year display segment sales were $4.4 billion, up 63% driven by the addition of CPM sales. Full year net income was up 11%. When looking at sales and net income growth rates remember we consolidated a 100% of CPM sales in our reporting for 2014, but only the other half of the net income. Our full year volume was up slightly more than 10%, in line with the glass industry. Our volume growth was offset by price declines, which were larger in the first of the year. We did achieve more moderate price declines in the second half, and this is continuing into Q1. As we track the heartbeat of pricing without the impact of thick to thin and customer mix, we feel very good about the level of declines we've experienced for the last three quarters. Volume and synergies and cost reductions help the business to improve gross margin percent for the full year. Actual synergies for the year were greater than our expectation of $100 million. Now we estimate the glass market at retail for 2014 was approximately 4.4 billion square feet, approximately 10%. Our preliminary estimates of TV unit sell through indicate year-over-year unit sales were up in the mid-single digits. All regions except Japan grew unit sales year-over-year. Average television size increased again in 2014 and drove glass market growth. The estimated TV area growth was up in the mid-teens. 15 inch plus televisions grew greater than 50% in 2014 and the average screen size increased more than an inch. Non-optical communications Q4 sales were $676 million, up 12% versus last year and better than expected. Area sales in North America drove most of the increase versus expectations, but enterprise exceeded as well. Net income was up 64% over last year’s fourth quarter. The higher volume and improved cost structure led to another strong quarter for Optical Communications. And for the full year sales were nearly $2.7 billion, up 14%. Sales in all businesses were up year-over-year and all regions except China contributed to growth. Optical Communication’s annual net income of 2014 was up 18%. We are very pleased with the results and have great momentum in the Optical entering 2015. Our Environmental sales grew 5% year-over-year, driven by heavy duty diesel sales in the United States. It’s a slightly less forecast due to some changes in customer end of year inventory management plans. Environmental’s net income in quarter four was $40 million, also up 5% year-over-year. For the year Environmental sales were up 19%, driven primarily by a healthier U.S. Class A truck market and higher sales of heavy duty diesel products for new regulations in Europe and in China. Environmental expanded gross margins and grew net income 44% for the year due to additional volume, significant manufacturing efficiency improvements. We were also delighted by the performance in Environmental technologies in 2014. Specialty Material sales in the fourth quarter were up 12% versus Q4 of 2013 and better than expected due to strong Gorilla Glass volume from device manufacture and new product launches. Now net income in quarter four was down year-over-year by 13%. However these results included an account receivable write off. Without that write off net income would have been up 8%. For the year Specialty sales were up 3%, net income was down 17%. Without the Q4 accounts receivable write off net income for the year would have been down 13%. Advanced Optic sales and earnings which is embedded in Specialty grew while the 20% growth of Gorilla Glass volume was largely offset by the price declines that incurred mostly in Q1. The cover glass market did not grow as much as we originally expected in 2014. The most significant disappointment to us was branded tablets not growing at all versus 2013. However we did have some accomplishments there, setting us up for a more successful 2015 in Specialty. First we maintained our share against the aluminum-silicate [ph] glass competitors on devices. Second, this year we made progress on increasing our share of smartphones in China and of course we launched Gorilla Glass 4. Drop performance of Gorilla Glass 4 is beneficial to device manufacturers and we expect to be able to price for that added value. In Life Sciences, Q4 sales were up 2% year-over-year. Net income was consistent with last year. And for the year Life Sciences sales were $862 million, slightly, and as I mentioned throughout 2014, the market did not grow as much, with one reason being the low level of NIH spend. Net income for the year was down 5%. Now moving to Dow Corning, gross equity earnings from both silicones and polysilicon segments were up versus Q4 2013. Volume for polysilicon [indiscernible] was up -- polysilicon [indiscernible] customers who ought to fulfill their annual contract commitments. Additional manufacturing efficiency improved over last year. The silicon’s business sales were consistent with Q4 of last year, and a lower tax rate and lower operating expense helped profitability. Dow Corning exceeded our expectations for the quarter by 30 million with higher sales of polysilicon and improved operational expenses. Now for the Dow Corning’s equity earnings were up a $142 million while silicon and polysilicon sales were up. Silicon sales were up in the low single-digits as expected. Raw material pricing negatively impacted profitability slightly, but this was offset by a lower tax rate. Hemlock sales were up 32%, driven by higher polysilicon sales to [indiscernible] customers and cost controls helped Hemlock improved profitability over 2013. Hemlock sales and profitability overall were more stable in 2014. Now I'd like to take a minute to discuss Hemlock’s impact on our results. Investors will recall we had excluded Hemlock in our 2013 from our core operating results as we had expected extreme volatility due to the trade issues. That volatility did not occur. So in 2014 we included Hemlock in core. In retrospect my decision to exclude core in 2013 was one of my less brilliant ideas as CFO. So I wanted to make sure you understood how much Hemlock contributed to our core earnings if we had been reporting it consistently. As you can see even, if we had included Hemlock in 2013, our 2014 results for Dow Corning would have shown significant improvement. Now moving on to the balance sheet, we ended the fourth quarter with $6.1 billion in cash and short-term investments, strong free cash flow for the year of nearly $4 billion including the dividends from CPM as we did that transaction. As a reminder, free cash flow is a non-GAAP measure. Reconciliation to GAAP can be found on our Web site. Capital spending for the year was $1.1 billion. Now before I move on to our outlook, I'd like to update you on our core performance reporting. I'll begin with the brief retrospective on core performance measures as we may have some new investors on the call. As a reminder, our display sales are priced in the end. We report in U.S. dollars. So the earnings from display sales translate into our GAAP income statement in dollars at the actual exchange rate during the quarter. Now following the election of new Japanese Prime Minister in December of 2012, yen began to weaken against the U.S. dollar. We saw the yen weaken from 82 yen to the dollar in November of 2012, below 90 yen level in early 2013. You may recall we took immediate action in early 2013 to limit the adverse economic impact on Corning, by entering into hedges. Our hedging contract for 2013 to 2014 had an average exchange rate of 93 yen to the dollar. We also gave some thought as to how the potential reporting of those hedges would inform our investors. GAAP is our official reporting for the company. In GAAP reporting, we record the quarterly settlement of our yen contracts into other income, other expense on our GAAP statements. So you’d see the weakening of the yen in sales and gross margin but the gain on their hedges in other income, other expense. However, GAAP also requires us to report the fair value of all of our contracts, including those outstanding beyond the current quarter in our results. The mark-to-market of our entire hedge portfolio would also show up in other income, other expense. The result is investors would be unable to discern how much of that line item was attributable to hedges for the current period versus hedges for the future periods. With the recent volatility that began, our GAAP results might be confusing to investors. So we felt this accounting, while definitely appropriate, would not help investors see the operational impact of volume and prices easily. Our recent quarterly results show how confusing this has become. Our quarter four GAAP results include marking-to-market, accumulative hedges for 2015 to 2017. When the rate moved from 110 at the end of quarter three to 120 at the end of Q4, we had a mark-to-market gain of $398 million. We also had a realized gain of $112 million for the hedge contracts settled in Q4. There is this later gain that is important and is the one that makes us feel comfortable using constant yen reporting at 93. I know this example is long but I hope it helps you see our hedges are protecting the economics for the Company. They are complicated as you look at the operational performance in the quarter. So in February of 2013 we announced that in addition to our GAAP results, we would also provide our results using core performance measures, allowing investors a more clear view of the Company’s core operating results. Our core performance results were stated at constant yen to U.S. dollar exchange rate of 93. Primary purposes of the core performance measures are to allow investors to see operating results without the volatility of the yen and hedges masking operational performance. So to summarize, beginning in 2013 we became economically protected at the yen, weaker than 93 with hedges and move to core reporting to provide investors additional transparency on our operating results at a constant exchange rate of 93. So now let me fast forward to January 2015. As you know the yens continue to weaken from its early 2013 level, the low 90s to the upper 90s at the beginning of 2014. We made the decision to extend our economic hedge protection beyond 2014. We entered into hedges for 2015 to ’17 at an average rate of 99 yen to a dollar. Our earnings are now economically 100% hedged against the yen in 2015, approximately 80% hedged in 2016 and 70% hedged in 2017. These new hedges show up in GAAP with the impact of mark-to-market each quarter. So now what about our core reporting? With our existing hedges for 2015 to 2017 now at 99, we will move to a new constant yen rate of 99 yen to the dollar. This adjustment to core maintains the alignment with the intent of the hedges that limit the economic impact of the yen weakening. We expect to keep this core yen rate over the next three years. About 75% of the analysts covering us have already modeled 2015 at this yen exchange rate of 99. Going forward, we’ll talk about our core results at the new constant yen rate of 99. Now comparisons to 2014 will also be done at 99 yen and we will be providing you our 2014 results recast with the exchange rate so you can update your models and compare apples-to-apples. We’ll be releasing this recast 2014 and also 2013 numbers later this morning in an 8-K filing. Now I’ll be repeating some of this in our outlook section, but I wanted to remind investors that we’ve been giving guidance on the value of one yen move in our NPAT for several years. Our most recent guidance has been that a one yen move impacts NPAT by $25 million for the year. The simple example is accurate and easy to use. However, when we recast every line in our P&L, the calculations impact certain line items differently. Clearly our sales are effected by the interchange. However not all our cost moves within the yen exchange rates. We have some yen based costs, but also have manufacturing cost in other currencies that do not move. As a result, in our recast, our gross margin percent is affected. The impact on display gross margin is 2% points. The impact from the total company gross margin is 1%. I want to be clear we have always had the impact of this change on gross margin embedded in our simple metric of one yen move equals 25 million. However, it’s important you make your out models reflect the line item changes accurately. Our Investor Relations group will be ready to explain the recasting from 93 to 99. There are nuances there are important to understand. With that I’d like to turn to Display’s outlook. We feel very good about the glass market as we enter 2015. Supply chain inventory levels remain healthy, glass supply is tight relative to demand and we expect another year of glass volume grow at retail. The finalized contracts with our customers will substantiate all our volume in 2015, which we believe is the reflection of our customers' desire to lock in glass supply to the strong market and relatively tight supply demand situation. We expect our share to be stable in quarter one and throughout the year. Now for the end market in 2015 we believe TV retail demand is strong. Our preliminary forecast for 2015 is for good growth of LCD glass at retail and our glass demand, driven primarily by TV unit and average screen size growth. We believe the glass market at retail could be up in high single-digits in 2015, expect ultra-high definition sales to at least double to approximately 25 million units in 2015. And of course we’re going to be saying a lot more about our outlook on February 6, at our Investor Relations event in New York City. As we near the end of January, we expect our glass volume outlook in quarter one to be flat to down slightly sequentially. We see quarter one LCD glass market declining sequentially, reflecting normal seasonality and of course fewer shipping days in February. Now recall Q2 is the slowest retail season. So the supply chain should do some moderation in late Q1 to manage inventory. You should note the LCD glass market and our volumes in Q1 are up year-over-year reflecting the larger market. Now we expect price declines in Q1 to again moderate and similar in Q4. We are especially delighted to not have a repeat of last year’s Q1 pricing event. We remain optimistic, the glass industry can continue to moderate quarterly price declines for the full year for several reasons. First, retail demand is expected to grow, helping to maintain a healthy supply chain inventory. Second, panel makers are profitable and they are getting the benefit of the weaker yen. Third, glass supply's tight demand; and fourth, the operating margins of our competitors are such they can’t afford large price declines if they hope to remain profitable. As for our glass capacity, I want to reiterate that we intend to diligently manage our capacity to supply, customer agreements that stabilize our share our health manufacturing organization to manage capacity and demand, and we look forward to renewed agreements and maintaining that stability in 2015. Now turning to the Optical Communications segment, we expect Q1 sales to be up more than 10% versus Q1 of last year. Enterprise and fiber-to-home sales are up in North America. And of course adding to Optical Communications organic growth will be sales from the recent acquisition of TR Manufacturing. Environmental, we expect Q1 sales to be consistent year-over-year. Volume is up versus last year in most products, but is offset by now the much weaker euro versus last year. Without this FX impact, environmental sales would have been up approximately 5%. We expect Specialty Material sales to be up approximately 10% year-over-year in Q1. The retail market for touch devices is strong in Q4 and our Gorilla Glass shipments in quarter four and quarter one are up driven by this retail demand. Specialty sales are down sequentially due to normal seasonality of Gorilla Glass. For the full year we expect the volume growth at Gorilla Glass to be in line with IT handheld market and price declines to be more moderate than in 2014 due to Gorilla Glass 4. In Life Sciences, we expect sales to be consistent with last year’s first quarter. Our Life Science business is now also being impacted by the weaker euro. We expect sales would have been up low single digits without the FX impact. Equity earnings Dow Corning are expect to be approximately $69 million, up 10% year-over-year, driven by polysilicon sales. Now continuing on with rest of our quarter one forecast, we expect gross margin to be approximately 43%, which compares to 43% in Q1 last year with a yen and U.S. dollar exchange rate at 99. The move to constant yet rate of 99 doesn’t affect our LCD glass reporting as I outlined earlier. As a reminder we’ve given the guidance of one yen move change to NPAT for a long time. Embedded with that metric is this nuance on gross margin. SG&A and R&D spending will be 13% and 8% of sales respectively and consistent with 2014. Other income and other expense is expected to be a net expense of $40 million in Q1. Our effective tax rate for 2015 should be around 18%. Projected range is higher than 2014, driven by the regional mix of sales and assumes that no renewal of the tax extenders bill. We expect full year capital spending to be $1.3 billion, maybe $1.4 billion. As we sum up outlook for Q1, you see we expect another quarter of year-over-year earnings growth. We will be providing the recast of Q1 2014 in a few minutes for you to do your year-over-year calculation. Now for those investors who also like to do sequential comparisons, please remember to use the quarter four 99 yen recast. If you are concentrating on sequential comparisons other than the recasting of the yen, please remember that in Q4 we received the final payment related to the settlement technology dispute. It doesn’t show up again in Q1. Q4 equity earnings in Dow Corning were very large driven by the strong end of year contract fulfillment orders for polysilicon. Expect polysilicon sales to be down seasonally in Q1 and Dow Corning’s tax rate will rebound to be higher in 2015. Corning's effective tax rate in 2015 will be one to two points higher than 2014. Now please remember, the low rate in quarter four is not indicative of the full year tax rate. Ann and Steven are available to help you as you update your models. So in summary, we're coming off a great quarter and a great year and we expect that momentum to deliver growth again this quarter. That concludes my opening remarks. Ann?

Thank you Jim. Greg, we'll now open the lines for question.

Thank you. (Operator Instructions). One moment please for your first question. Your first question comes from the line of Mehdi Hosseini from SIG. Please go ahead.

Jim, you are talking about in the display segment, volumes -- glass volumes are beginning to firm up. Can you just elaborate more, and how should we think about the ASP component as volumes are getting firm, especially as your customers are beginning to worry about supply? And that’s what I heard from you.

So, we believe our price declines will be moderate again in Q1, have most of that done now and we're delighted by that, and we think all the trends in the industry are positive for ASP and we expect moderate price declines every quarter this year.

And your comment that volumes are beginning to firm up, is that more of a quarterly firming up? Is that for the whole year? How should we think about the timing part of it?

I don’t think I used the word firm up, I believe. Volumes are very strong, actually all of last year. They were stronger than we expected in quarter four and we think they will be good in quarter one. So -- and if you come there are events, we will be giving you lot more details and full guidance for the Display market.

And then one follow-up on the Specialty Material. If I were to exclude the receivable write off, how did margins trend and how should we think about the margin trend into 2015?

Earnings would have been up in quarter four without the receivable write off. I think the number is 8%. And in terms of gross margins in Specialty and Gorilla, we expect them to improve this year.

Your next question comes from the line of Ehud Gelblum from Citi. Please go ahead.

A couple of questions, just a quick clarification. The gross margin this quarter was below guidance. Was that due to the write-off?

No, the gross margins were three minor items that made it be -- I think it rounded about 1% lower. There is nothing significant there.

Okay. And is that going to stay back -- stay at the 44% level instead of going back up next quarter. So it just continue, kind of how we read into that?

As you know, our gross margin is always a mix of the various business, but our expected gross margin to be 43% with the yen at 99.

At this moment [ph] go get into that. On Gorilla, can you give us an update as to what is happening with notebooks and laptops? Are you seeing any more penetration there or is it still primarily the tablet and smartphone market. And on Gorilla Glass 4, it sounds like you are getting a premium on it versus a Gorilla Glass 3. Where does that premium though the price point set versus where Gorilla Glass was prior to the large beginning of 2014? Is it around same level or is it doubled?

I don’t actually have that comparison in my head, of what it was before the cut. So I'll think about how much we're going to disclose on that. In terms of the touch and notebook market, actually there was some progress this past year versus 2013 and we expect some continued progress of the share of it grows as a part of notebook market and we actually have improved our own share of that in ’14 and we expect to improve it again in 2015. It’s just not a fast growing change.

Okay, on the hedges, on a prior conference call, I believe you may have said that you did have some hedges at 93 that extended into 2015. A, is that correct and B, if that’s the case I think you said at one point that around two thirds of your 2015 may have been hedged at 93. How do you handle the 93 hedges when you're doing -- when you’re showing Corning at 99? So is part of the game reflected into core revenue and the rest still sit in other income?

Incorrect. We never said we had two thirds of 2015 at 93. We had a small proportion of 2015 at 93. And what we had done is chosen from accounting point of view a selective blended rate of 99 that carries over the three years. In any given quarter the rate maybe slightly different but we are allowed to choose a blended rate and we’ve done that for the three years. But we never have that higher proportion of 2015 hedged at 93.

Okay, also [indiscernible] reference again. So again in any given quarter you’ll pick to 99 up to the current spot? You won't reflect that in revenue but any gains that would have come from it, a different actual number -- let's say you're hedged at 97 for a given quarter, the difference between 97 to 99, that still shows up [ph] in other income. Is that the right way to look at it?

We don’t -- the movement in our hedge rate around this blended rate is very, very tiny. So in our core reporting numbers you see it’s all done at the constant 99. In our GAAP you will see the settlement of hedges in the current quarter and then the mark-to-market for the entire portfolio of hedges.

Helpful. And finally, can you give update on what Dow is doing in the optical department? I didn’t see -- in the optical segment I didn’t hear that that was necessarily a driver but it had been in the past. Is it still strong as it had been?

It’s never been a big driver. It’s kind of a growing business, and you're going to hear more about it at our IR day in a week.

Your next question comes from the line of Wamsi Mohan from Bank of America Merrill Lynch. Please go ahead.

Yes, thank you, good morning Jim. We've not seen your 8-K yet, but directionally can you help us think about where the 2014 Q1 gross margin was on a 99 yen basis? So operationally if the gross margin is flat, up or down year-on-year? And I have a follow up.

Directionally it’s 43%.

So it's flat year-on-year. Okay thanks. And then in equity earnings, were there any take or pay enforcement that helped in the quarter and how should we think about equity earnings in ’15, again if you think it should be flat, up or down in ’15? Thanks.

So the take or pay contracts are -- there was no enforcement action in quarter four, meaning that no one stopped taking and didn’t fulfil their contract and therefore we booked the overall revenue that was outstanding on the contract. What you saw was primarily the impact of people. In order to keep the contracts current, they have to buy a certain amount within a calendar year. But we see people delay that until the fourth quarter. Then you recall actually in the fourth quarter of 2013, we had the sudden rush. We actually couldn’t fulfill it all and some spilled into quarter one of 2014. We're prepared for that this year, but people are living up to their contracts. But there is no enforcement of a take or pay where we recognize the revenue in quarter four.

And do you expect overall equity earnings to be flat, up or down in ’15?

I guess more comment on equity earnings when we get to the IR Day.

Okay, thanks and then last question from me is on -- from a gross margin perspective, you should be seeing the benefit of CPM and the increased synergies flow through on a constant like 99 yen basis. So as we look through the trend in 2014 shouldn't we expect the ’15 trend in gross margins to continue to trend up through the course of the year?

So assuming that we get moderate price declines every quarter, which is what our expectation is, we expect excellent cost reduction and that will contribute to improve gross margins.

Your next question comes from the line of Mark Sue from RBC Capital Markets. Please go ahead.

Jim, you seem to be recognizing the benefit of the price strategy change made a few years ago with stable share and moderate price declines and structurally, the thought before was that your primary competitors were focused less on margins than Corning is. That seems to all have changed. Are we at a point where we can predict industry profit growth considering most of the -- all of the players there are actually focused on market share at this point?

I can’t comment specifically on what our competition is going to do. I can tell you that we certainly hope that the industry has moderate price declines, but I cannot predict what they’re going to do?

Would you get the sense that everyone has seen, predicted [indiscernible] benefit of stated decline so that the rationality is likely to prevail, at least for Corning's point of view?

Again Mark I can’t comment on what are our competitors are seeing and doing and what their outlook is. You can read their public statements. I can only comment that for quarter three of last year, quarter four of last year, quarter one of this year we have seen a moderating price decline and we expect that to continue.

That’s helpful, Jim. And then on oil prices, I know it might be a stretch, but just wondering if you have some data, which correlates lower gas prices and higher TV demand and does actually lower oil prices help with input cost as well for Corning, just how we should think about the moving dynamics of this large variable for Corning?

No, I have no correlations between energy prices at retail and sale televisions. We clearly believe that consumers are getting in their pocket quite a bit of benefit from the lower gas prices if you use oil. And so we think that could potentially show up in a rush [ph] in terms of strength in consumer electronics and strength in the car business. Relative to our own cost structure, energy is a very small component of our build materials. Actually as I think you know, in Display our largest component by far is depreciation. But generally we're a natural gas user, not an oil user. The days we fired our tanks with oil are long gone. But it will be a slight benefit. We do have some hedges. So we don’t get the immediate benefit of that.

Your next question comes from the line of Amitabh Passi from UBS. Please go ahead.

Jim, I apologize if you touched on this. You’re starting the year at 43% gross margin. Just curious, from here on out, should we expect gross margin to ebb and flow as volumes in display and your other segments trend or are there other underlying structural enhancements that could meaningfully drive gross margin higher.

I think that as always our gross margin is the add up of all our various segments. If we get moderate price declines on Display all year along, other than Q2 which is generally the lower volume quarter, I think we have the ability to slightly improve Display’s gross margins with a accommodation of cost reduction and moderate price decline. As you’re thinking now Gorilla is actually our highest gross margin product. And so if there is a strong market growth in phones and tablets and it flows to us, that will help us from a mix point of view. In telecom, things that are selling well and have slightly higher gross margin compared to the average segment. So that could help. And finally in Environmental, we have made dramatic improvements in manufacturing. So our gross margins are improving there. So I think you could see a slight increase in gross margins as we go through the year.

Okay, that’s very helpful. And I wanted to clarify -- on the telecom segment you talked about the benefit of TR Manufacturing, but I presume in Q1 you will also include the Samsung fiber optics business that you acquired in December.

The Samsung deal has not closed. So that probably won't close until the end of February or the end of March. So you probably won’t see much impact of that until Q2.

Got it. And then just one final question. What are your expectations for the adoptions of Iris, which you unveiled that CES? Theoretically that gives you a third sheet of glass in TVs, but I’m just curious how you’re thinking about adoption rates?

I’m going to have to ask you to hold that question till our Investor Day on February 6, because Iris will be talked about by both Wendell Weeks and Jim Clappin.

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I guess number one is pertaining to Gorilla Glass. I think you stated that volume growth should be in line with IT handheld and that price declines would be more moderate than 2014 due to Gorilla Glass 4. I would love your view on what Corning’s outlook is for IT handheld in 2015. And then the pricing decline commentary, 2014 was relatively aggressive. Could you help us kind of narrow the range a little bit?

I’m not going to give the specific numbers on price but the reduction for the full year of 2015 should be quite a bit lower than what it was in 2014. In terms of market growth, I think we have handheld square feet growing 15%. We’re thinking media tablets could grow in the upper single digits. And then of course we will have some growth from touch on notebook. And just a reminder, we hope that all flows to us, but we have to always manage the supply chain [indiscernible] but we would do think that those are the kind of growth rates we'll see at retail.

All right. Just one more from me. You seem pretty confident on display demand for the industry in 2015. And so I want to focus on industry capacity. I know you’re not going to talk about competitor plans, but there have been some public announcements about new plants that will be operational exiting 2015. So as we look at the industry, do you believe that new capacity additions in areas like China are going to be matched by reductions in other geographies which is similar to what we saw the industry do in 2014, or do you think that the situation with tighter capacity, healthy panel prices, growth in large TVs could result in the industry actually adding net capacity in 2015?

Well, the glass industry is adding capacity because of the continued drive to more Fin. As I think you know that for us in Korea we were quite a bit lower amount of Fin. So the glass industry overall is benefitting from the move to Fin. Corning's benefiting from it quite a bit in Korea right now. In terms of new glass tank construction, there have been an announcement by one of our competitors. I don’t think that has much impact on 2015 and they did say they would do the same thing as they did in the past and shutdown capacity in Japan. I just have to rely on their public statements as you do. So I think -- I don’t think you will see any surge of glass capacity coming on. And I would say the industry continues to manage their tanks in an appropriate manner. As an example we have tanks that remained closed that we're not lighting up.

Your next question comes from the line of Rod Hall from JPMorgan. Please go ahead.

I guess I got a couple. One Jim, I wonder if you could comment a little bit on UHD 4K price elasticity. I know your comments in Q3 were that, you've seen a little bit more elasticity at that point anyway than you thought and I think you have made positive comments on through the quarter. But just wanted to know what you think is happening with price elasticity there? And whether this 1.5 times price ratio between UHD and HD still holds, or do you think it’s a higher ratio than that where we see demand acceleration?

Rod it’s probably a little premature, because I don’t have the final numbers for December but directionally I continue support what you said. I think that we felt, first all prices came down more than we originally expected. And that particularly a large size of consumers are choosing 4K overwhelmingly. But I just don’t have final numbers. But I think in 10 days I'd ask you to direct that question at our display market team which will be in New York. We may have better data there. Just speaking personally, but the CFO’s spin on it, I think 4K will be better than our official numbers.

And then I also wanted to just clarify you -- I think you guys are -- you are saying that pricing for glass -- TV glass moderate in Q1 further. On our calculations that puts it at moving toward a 2% quarterly decline rate. Do you think that’s kind of the bottom for the decline rate? Or do you believe that we bottom out on the decline rates than we're in the middle of 2015. Just trying to get some idea on what the 2015 decline rate might look like in terms of trajectory?

Well, we haven’t given a specific number for Q1. It’s again very moderate and continuing the trend we had. I don’t think there has to be bottom on this. We'd love to continue to have price declines edge slightly lower every quarter. I'd like to see if we can make that happen. But clearly we have high hopes of a low number.

Okay, and then just one final question is on your comments on Optical. You talked about North American fiber to the home FTTH deployments. Title 2 regulations seems like it might affect that. I just wondered if you could give us any thoughts you've got in terms of what the SEC regulatory changes might mean for the trajectory of those revenues in 2015, if they mean anything at all.

Rod, I think it would be all speculation on my part, because I don’t know exactly what the regulations would be and how they would enforce them. I think our policy statement is pretty firm. We think that the regulation exists today, has been very beneficial for the industry and we think people ought to be very careful about that. But as to exactly what it looks like and what our customers may do, it'd just be speculation on my part. I do think all of this comes against the obvious trend of bandwidth demand continues to grow very rapidly, driven by video in particular and I think everybody has to keep thinking about what consumers want. And so -- but when you come to New York for our IR Day, I urge you to talk to Clark Kinlin and give -- our telecom guys there might have stronger point of view about it.

Your next question comes from the line of Steven Fox from Cross Research. Please go ahead.

Just circling back on the CPM improvements. You mentioned that again it was greater than you anticipated, the $100 million Jim, can you sort of talk about what drove that in the quarter and for the year? How much of it was just circumstances around the volume growth? And then what can we expect for this year and what kind of projects at CPM are driving the incremental savings that you can get in 2015? Thanks.

Overall for CPM, we had the reduction in cost from reducing the number of people. We had increasing utilization. We had standardization between what we call our wholly owned business and CPM in terms of best practices. And then of course as you mentioned actually volume did help us. So I have to say it’s more the same for 2015. I can tell you that Jim Clappin will be giving a presentation and will actually unveil a new number for 2015 there. I’ll give you a tease that it will be better.

Great. That's very helpful. And then just a quick follow up on the optical. How much -- when you look at 2015 or just in Q1 rather, how much is enterprise versus say carrier growth? Where do you see the better opportunity for the quarter and then for the year?

I just don’t have those details with me. Steve so I’d ask you to ask Clark Kinlin about it. I just don’t have him with me.

Your next question comes from the line of Joseph Wolf from Barclays. Please go ahead.

Thank you. Just a couple of questions. On the new side we’re seeing I guess Japan, some of the large TV assembly guys cutting their capacity significantly. Our take has been that’s helpful for I guess the other regions in the world and I’m wondering if you give some perspective there. And also if there is any chance that that means anything with regard to yen pricing and the panel business going forward?

We obviously have seen the reports of cutbacks in Japan. I don’t have any information as to whether it has anything to do with the yen or maybe very customer specific to that panel maker. I really don’t have much detail on it. Obviously for us we continue to think that worldwide demand is strong. Regionally China has been very good for us. So I think some of those statements attributed that cutback to less demand for China, but overall our Chinese demand has been very strong.

Okay, and then just in terms of the cash position, could you just review for us how much of that cash is outside of the United States and in what currency that’s denominated in you’re thinking about repatriation versus potential losses on holding things in Euro right now.

So, we will be giving our U.S. cash position in our 10-K, which should be filed in the second week of February. It has been improving. We don’t hold Euros. So we’re not losing. Our treasurer is quite proud of himself this morning for having not been holding Euros. So we don’t have that situation and we do have repatriation plans and strategies as we talked about before and when you see our 10-K, I think you’ll be delighted.

Your next question comes from the line of Simona Jankowski from Goldman Sachs. Please go ahead.

Recognizing that you’re going to hold off on most Iris comments to the Analyst Day, but just wanted to clarify if any potential ramp into the back half of the year is included or not in the outlook you gave for high single digit growth for the glass market this year?

It was not included.

Okay, and then Jim, could you expand a little bit on the three items you referenced that drove the one point delta in gross margins versus expectations?

They really were pretty minor things. I think we made an adjustment to one sales contract that would have been amortized over a three years and we took it all in one quarter because of the change in terms, and it was a little bit of customer mix in one of our businesses for lower gross margin customer. So as I said, it was nothing that was of any significance and it was not an alarming trend or anything to us.

Got you. The first one you referenced, was that in the display segment in terms of the contractual pricing adjustment?

Yes.

Okay, got you. And then just last question on specialty materials where you talked about your expectation of more moderate pricing this year versus last year, is that entirely due to the mix of the Gorilla Glass 4 or is that also the case on a like-for-like basis? And then I just wanted to confirm that you’ve had your price negotiations for this year or is that still ahead?

Well, the majority of the impact is due to the mix shift with Gorilla 4 and the higher pricing of Gorilla 4. We do hope to have smaller price declines on Gorilla Glass 3. There is still big customers who are buying that. I think we have completed a lot of our Gorilla price negotiations. I don’t think we’ve done them all at this stage.

Operator, we’ve got time for one more quick question.

Okay, that question comes from the line of James Fawcett from Morgan Stanley. Please go ahead.

I just had one quick follow up question and a little bit higher level question. As you look at the growth in capacity coming from China, particularly new Chinese entrants into the glass market and put that together with the increase in demand out of the Chinese OEMs et cetera. Where are you seeing those new glass entrants come into the market? Are they coming in at the low end and not really having much of an impact or are you starting to amend to them on a day-to-day basis? And I’m just wondering how you’re thinking about from a long term there I’m sure they have ambitions to move up, like where you think you need to meet them and compete with them directly going forward?

Sure. So short term new entrants have not have much impact on market price. We’ve seen them in smaller generations in China and somewhat in Taiwan. But they really have not had much of an impact on the market at all. They clearly have higher aspirations as to everybody who is in business and so we recognize over the longer time, and I emphasize longer term, we know we have to compete with it. Many of these are state owned enterprises, but in the short to medium horizon I don’t think this is an issue for our display business and our results.

Jim, you have some closing comments.

Sure, thanks Ann. Just a couple of Investor Relations comments. As I've been mentioning throughout my comments and hoping you will attend, we have our annual Investor Day in New York City on February 6. It's at a new location. It’s again at Cipriani, but at Cipriani Wall Street, so Downtown. We’re going to have numerous hands on demonstrations at our business exhibits and we’ll be giving you growth expectations for 2015 and talking about lot of the new products. So in addition to our CEO, Wendell Weeks and myself, our three business group leaders will be speaking to you about their plans to continue their sales and earnings growth. It will be very informative hands on event, and I really hope you will consider attending in person. Just to summarize on the call, we finished 2014 with an outstanding quarter and achieved our goal of year-over-year earnings growth in every quarter this past year. We did an outstanding job with the CPM acquisitions, brought the Company and our shareholders numerous benefits including media accretion and excellent free cash flow. We’re making great progress on improving manufacturing efficiencies and controlling our costs in our businesses. Ultimately this all resulted in a 24% earnings per share growth last year. I think very important for investors, we returned significant cash to shareholders when we completed our $2 billion share buyback program last year and also announcing a 1.5 billion share buyback program for the beginning of this year, and finally increasing our dividend with a 20% increase its effective in the first quarter. We’re coming into 2015 with expectations for growth in sales and even more in earnings. We tend to maintain stable display earnings with moderate price declines. We’re going to diligently manage our glass capacity and continue to reduce cost. And we have prospects we believe for growth in Optical Communications, Specialty Materials, Environmental and Life Sciences. So stay tuned for more details at our Annual Investor Meeting. Thank you again for listening. Ann?

Thank you, Jim and thank you all for joining us today. Playback of the call is available beginning at 11 AM Eastern today and will run until 5 PM Eastern on Tuesday, February 10. To listen in, dial 800-475-6701. The access code is 349651. The audio cast of course is available on our website during that time. Operator that concludes our call. Please disconnect all lines.