康寧 (GLW) 2009 Q4 法說會逐字稿

Ladies and Gentlemen, thank you for standing by.

Welcome to the Corning Incorporated fourth quarter results conference call.

For the conference today all participants are in a listen only mode, however there will be an opportunity for your questions and instructions will be given at that time.

(Operator Instructions) As a reminder today's call is being recorded.

With that being said I'll turn the conference over to the division Vice President of Investor Relations, Mr Ken Sofio.

Please go ahead, sir.

Thank you, good morning, welcome to Corning's fourth quarter conference call.

Jim Flaws, Vice Chairman and CFO, will lead discussion, Wendell Weeks, Chairman and CEO will join us for the Q & A, and [marks] do contain forward-looking statement under the private security Litigation Reform Act of 1995.

These statements involve a number of risks uncertainties and other factors that could cause our actual results to differ materially.

These risks are detailed in our SEC reports.

Jim?

Thanks, Ken, good morning, everyone.

This morning we released our results for the fourth quarter which can be found on our Investor Relations website.

We have posted the Company's slides online as well.

In summary we're very pleased with our fourth quarter results.

Before I get into the details I want to walk you through the key points we'll be covering this morning.

First our fourth quarter sales, gross margin and profitability were all higher in the third quarter.

A stronger Yen helped, but we also benefited from higher volumes in Display and Environmental.

In fact, Q4 was our most profitable quarter all year.

In addition, equity earnings, free cash flow were both all-time records for the Company.

Second, based on our models, we believe the LCD supply chain inventories at the end of the fourth quarter are in good shape heading into quarter one.

Third, retail sales of LCD televisions remain strong worldwide throughout the fourth quarter.

Based on the strength of Q4 glass demand we believe the 2009 glass market reached 2.4 billion square feet versus our most recent estimate of 2.3 billion square feet.

Demand was driven by LCD television sales which were also stronger than we had forecasted.

We now estimate the total number of LCD TVs sold in 2009 was 141 million versus our most recent estimate of 132 million.

Lastly, looking ahead to the first quarter, we expect glass volume at our wholly owned business to be up between 8% and 12% sequentially.

SCP glass volume will be flat to up slightly quarter to quarter.

In total, we expect the glass market to be up in Q1 versus our original expectations of slightly lower seasonal demand.

We believe the supply chain will need to expand in the first quarter, to back fill for the stronger Q1 demand and to support a much larger end market this year.

We're still finalizing our end market and glass market forecast for 2010, but they will both likely be higher than our previous estimates.

We'll discuss both and our thoughts about Q2 at the investor meeting next week.

So let's turn to the details.

Fourth quarter sales were $1.53 billion, a 4% increase from the third quarter.

Our Q4 sales benefited by changes in the exchange rates by about $33 million.

Moving down the income statement, gross margin was 42.4% in Q4 compared to 40.5% in Q3.

We were very pleased with our gross margin performance in the quarter.

Part of the improvement was the result of better manufacturing and higher volumes in our environmental business.

Gross margin also benefited from the non-repeat of $22 million in one-time accelerated depreciation charges taken in the third quarter due to Shizuoka's earthquake.

We did have one-time charges in Q4 from the Taichung power outage, but they were much less.

SG&A was $244 million or 16% of sales in Q4 as expected.

R&D was $145 million in Q4 or about 9% of sales.

Other income was $64 million in Q4 compared to $48 million in Q3.

Equity earnings were $461 million in the fourth quarter compared to $418 million in Q3.

Equity earnings included a special item totaling $29 million, rated primarily to a tax valuation gain at Dow Corning.

Our Q4 tax rate was 5% and consistent with the last quarter, but higher than we had expected.

The primary reason it was higher is actually a good thing.

We made more money in the United States than we thought we would during the quarter.

Net income excluding special items was $696 million in Q4 compared to $654 million in Q3.

About $40 million of the increase was due to favorable exchange rates.

EPS excluding special items was $0.44 compared to $0.42 in Q3.

You should note that EPS and net income excluding special items are non-GAAP measures.

The reconciliation to GAAP can be found on our website.

Our GAAP net income includes $44 million in special items.

Including these special items, our Q4 EPS was $0.47.

Our share count for the fourth quarter was 1.58 billion shares and consistent with the third quarter.

Now I'm going to turn to the segment results for the fourth quarter and I'll start with Display.

Fourth quarter sales were $717 million and about 6% higher in Q3.

Volume was up 2% and pricing was flat.

Sales benefited by the change in the Yen to US dollar exchange rate which averaged 90 in Q4 versus 94 in Q3.

Display gross margin was higher in Q4 due mainly to the non-repeat issues of Celcor accelerated depreciation charges.

In addition the fixed cost drag from GEN-10 was less than we thought it would be as we ran at higher volumes than planned.

Equity earnings from SCP LCD glass business were $321 million in the fourth quarter, a slight increase from the third quarter.

Volume was up 3% and pricing was flat.

Benefit from changes in foreign exchange here was about $20 million.

For your modeling purposes, SCP fourth quarter LCD sales were $1.1 billion, up 10% versus the third quarter.

As a reminder this represents SCP's LCD sales only.

Our public filings will report SCP total sales which includes CRT glass and other products.

Net income in the Display segment which includes equity earnings, was $619 million fourth quarter versus $600 million in the prior quarter.

As a reminder, Display's fourth quarter results included $8 million incremental accelerated depreciation.

Regarding our issues of [Wocon] and Taichung facilities, operations have recovered as planned and remaining unlit capacity will be brought online over the next several weeks.

I'd now like to spend a few minutes discussing the current supply chain starting with retail.

Strong demand for LCD televisions continued throughout the fourth quarter.

Worldwide LCD TV unit sales at retail were up 45% in October, 28% in November.

We do not have complete data for December to provide a worldwide growth figure for that month, but for those regions that we do have data, it continues to be positive.

As a reminder, worldwide retail sell-through is an aggregate of data provided by different vendors in each of the primary TV sales regions, China, Europe, Japan, and the United States.

Most significant growth regions were Japan and China.

In Japan, LCD TV unit sales were up about 73% in October, 64% in November, and 70% in December.

For the year, LCD television sales in Japan were up 50%.

In China, unit sales were up 115% in October, thanks to Golden Week and 69% in November.

In December, sales were up 47%.

For the year, LCD TV sales in China were up 72%.

In Europe, television unit sales were also strong.

In October and November sales were up 20% and 19% respectively.

We do not have December data yet for Europe.

In the United States, LCD TV unit sales were up 28% in October, 22% in November and 14% in December.

For the year, LCD television sales in the United States were up 21%.

We do have the first two weeks of January data for the US.

Television sales were down 12% versus last year.

We were expecting this lower growth rates since last January sales were up 34% for the same two week period due to the digital conversion.

This is a good time for me to make an important point.

A significant portion of the growth in LCD televisions this year will be outside the United States and Europe.

We will continue to monitor the week to week and month to month data provided by NPD, but the region we will monitor most closely is China.

In fact we're expecting over 70% of the LCD television growth this year will come from China and other developing regions.

This is also a reason we were so pleased by the recent decision by the Chinese Government to double the subsidy limit in 2010.

This will effectively cover 40-inch and larger television market and could drive sales of those sizes further.

We'll be sharing our 2010 television forecast by region next week.

Regarding the display supply chain, we believe total inventory in terms of equivalent square feet of glass was approximately 760 million square feet exiting Q4.

This would be inventory at the panel makers, set assemblies and at retail.

Given the overall market last year was 2.4 billion square feet and given our expectations for a strong Q1, we would say this level of inventory is appropriate.

In terms of total panel maker inventory as measured in square feet, the amount at the end of Q4 was equivalent to the end of Q3.

So even though panel makers ran at higher utilizations throughout Q4, we believe the pull from set assembly and retail was strong enough to keep panel inventory levels from increasing.

At the set assembly level inventories measured a square feet of glass increased only slightly and at retail we believe inventories fell significantly in Q4 down about 10%.

This makes sense given the strong seasonal demand.

So overall, inventory levels in the supply chain appear to be okay heading into Q1.

I have a few more comments on Q1 and the outlook.

Moving to Environmental, sales in the fourth quarter were $181 million, an increase of 8% over the third quarter and much higher than we had expected.

Auto product sales were $108 million, up slightly versus Q3 of $103 million.

The auto industry normally experiences seasonal declines in Q4.

In fact our original guidance for this segment were for sales to decline 10% to 15%.

That's now apparent the Cash for Clunkers and other incentive programs to lead inventories far more than we estimated.

The question is how long will this rebuild continue.

Right now the demand for our products suggest the supply chain is preparing for $75 million auto build level.

That's not realistic.

Looking ahead we believe the rebuild of auto inventories will near completion some time in Q1.

I'll update this in the outlook.

Diesel sales in the fourth quarter were $73 million and up 14% sequentially.

The increase was due to light duty filter sales as we continue to reap benefits from previous platform wins.

Segment net income was $15 million in Q4, a significant increase from the $4 million loss in Q3.

The higher auto and diesel volumes benefit of cost reduction proved gross margin lead to strong earnings performance in the quarter for this segment.

In Telecom, fourth quarter sales were $405 million down 10% from Q3.

The decline was primarily due to lower fiber home sales and normal seasonal declines in cable and hardware equipment in North America.

This decline was slightly offset by better than expected demand for private network products in North America and fiber demand in China.

Sales in our fiber and cable products in the fourth quarter were $231 million, a decrease of 8% sequentially.

Seasonally lower volume in North America was offset by strong demand in China.

Sales of hardware and equipment overall were $174 million in Q4 down 13% sequentially.

Segment incurred a net loss of $19 million in the fourth quarter compared to net income of $21 million in Q3.

You should note that Q4 results include $21 million in restructuring charges after-tax.

Excluding those charges the segment would have shown a small profit.

Sales in our Specialty Materials segment were $110 million in Q4, up 22% versus Q3, much higher than we expected.

Increase in sales was due primarily to strong demand for Gorilla Glass and Advanced Optics.

We are quite thrilled with the industry interest in Gorilla.

We ended the year with a sales run rate of $120 million annualized.

Gorilla Glass is currently contained in over 65 different models, handheld and notebook products and we have great expectations for this product going forward.

Pete Volanakis, our Chief Operating Officer, will outline our expectations for Gorilla Glass at our investor meeting next week.

In Life Sciences, sales in the fourth quarter were $117 million compared to $92 million in the third quarter.

Increases due to full quarter sales at Axygen which was acquired in September.

Turning to Dow Corning, equity earnings were $132 million including the previously mentioned $29 million tax one-time gain.

Excluding the special Dow Corning, equity earnings were up slightly from Q3.

Dow Corning sales were $1.47 billion in Q4 compared to $1.41 billion in Q3.

Sequential increase was driven by Hemlock.

Hemlock had strong solar spot sales within the quarter.

We feel the demand in the solar market has improved, but new capacity will continue to hold down spot prices.

Hemlock met the increased sales load by reducing inventory which will not repeat in Q1.

Sales of silicones in Q4 were consistent with a very strong Q3.

Sales of silicones in Q3 and Q4 are actually very close to the pre-recession level of early 2008.

This improvement reflects economic recovery, stronger in Asia than North America or Europe and some market share gains.

Now, turning to the balance sheet, we ended the fourth quarter with about $3.6 billion in cash and short-term investments up significantly from $2.9 billion last quarter.

Increase is primarily due to free cash flow which was $756 million, an all-time record for Corning.

Free cash flow is a non-GAAP measure and the GAAP reconciliation is on our website.

We were successful in reducing inventories again from $618 million at the end of Q3 to $579 million in Q4.

The biggest declines were from Telecom and Specialty Materials.

For the year we reduced inventories by more than $200 million.

Now let me go to the outlook and I'll start with Display.

Glass volume in our wholly owned business is forecasted to be up between 8% to 12% sequentially.

We expect the remaining capacity from the manufacturing upsets to be back online this quarter providing the production volume to meet demand.

At SCP, glass volume is expected to be flat to up slightly and as a reminder, the Korean panel makers have basically been running full for some time now.

In total, we expect glass market to be up in Q1 versus our original expectations of slightly lower seasonal demand.

We believe the supply chain will need to expand in the first quarter to backfill for the strong Q4 sell-through and in preparation for a much larger end market this year.

Recent panel price data supports our belief that demand throughout the supply chain continues to be strong.

First half of January panel pricing for LCD televisions were up slightly.

Monitor prices were up even more.

In general, we expect supply chain inventories to build slightly in Q1.

As I expected, as I mentioned at the beginning of the call we're still finalizing our end market and glass market forecasts for 2010, but you should expect they will likely be higher than our previous estimates.

We anticipate glass pricing in Q1 at both our wholly owned business and SCP to be down only slightly sequentially in line with historical declines and gross margin in our Display business will expand in the first quarter due primarily to the higher volume and of course non-repeat of the Taichung costs.

All tanks that were impacted by one-time events will be up and running during the quarter.

In our Telecom segment we expect quarter one sales to be down about 10% to 15% sequentially.

There are two main drivers in the sequential decline.

First, we expect fiber and cable demand in China to be lower in Q1 compared to Q4 when demand had been stronger than we had expected.

Second, we expect private network demand to be lower in North America.

We believe the softness is due to capital project timing.

Investors should also note we divested several non-strategic businesses last year.

2009 sales related to those businesses were about $40 million.

Q4 sales in them were about $7 million.

Compared to last year, Q1 sales will be about 10% lower.

As a reminder we expect spending in the Telecom market to be lower in 2010 versus 2009 as the Telecom industry usually takes longer to recover following an economic slowdown.

Our Environmental segment we expect Q1 sales to be down about 10% sequentially as the rebuild of auto inventories nears completion.

In Life Sciences we expect Q1 sales to be flat to up 4% compared to Q4.

In Specialty Materials we expect Q1 sales to be down about 10% to 15% sequentially due to lower advanced optic sales and at Dow Corning we expect equity earnings excluding specials to be down about 20%.

Decrease reflects lower Hemlock sales.

There will be no repeat of the sale out of inventory and slightly lower prices on contracts.

Also Dow Corning will have higher expenses due to new capacity in China.

Moving down the income statement, we expect our corporate gross margin will expand in Q1 as the increase in Display will offset lower volumes in Environmental and Telecom.

SG&a and R&D as a percentage of sales will be consistent quarter to quarter.

Regarding our tax rate, our estimate right now is 10%.

This could change significantly based on whether the tax extender bill will pass by Congress later this quarter.

If that happens our tax rate for Q1 would be a few percentage points lower, passing of the extender bill would also lower a full year tax rate.

I'll be providing more detail look at our tax rate going forward next week.

Investors should also note our results can be materially influenced by the Yen to US dollar exchange rate.

For Q4 the Yen averaged 90 and is around that today.

For every one point move in the Yen our net income moves by about 9 million so if the Yen were to average 92 in quarter one our net income would be impacted by about 18 million or roughly $0.01 of EPS.

Now, before we go to Q & A, I'd like to offer a few observations about 2009.

In the fourth quarter of 2008, the global business environment had changed dramatically, close the Lehman bankruptcy financial crisis and with the depth of a global recession becoming apparent to all of us.

For Corning, our sales fell suddenly with the panel industry shutting down to cut inventories and the car industry collapsing.

Our sales in Q4 fell to $1 billion or about a $4 billion run rate.

At Corning, we have learned to move through the denial phase quickly.

We began a series of difficult but necessary actions, which Peter Volanakis outlined for you last year as the rings of defense.

We were confident supply chain correction would end and that people would buy televisions.

Nevertheless we needed to size our business for lower revenues.

It shows $5 billion obviously above the current $4 billion run rate.

We closed factories, laid off people, froze salaries, trimmed hours, cut capital and drove inventory down, et cetera.

I'm very proud of our speed and most importantly by how our people reacted to the challenge.

12 months later our sales were $5.4 billion, above our goal and well above the $4 billion run rate, but that comparison is a little misleading.

FX helped and obviously LCD at retail helped, but car sales and semiconductor sales were also far worse than we originally thought.

Our actions mattered and they produced very strong results for you our shareholders.

We had very strong profitability in Q3 and Q4 and we had record free cash flow for the year and we made outstanding progress on new products such as Gen-10, new diesel products and platform wins, Gorilla Glass and strong new products in Telecom.

I've been at Corning 36 years now and have been through six recessions.

They have all ended, but they've all been painful.

I think our response in performance to this recession was the best I've ever seen and I hope you appreciate the results.

Ken?

Thank you, Jim.

With that, Operator, we're ready to take some questions now.

Certainly.

(Operator Instructions) First we'll go to the line of Mark Sue with RBC Capital Markets.

Please go ahead.

Thank you.

Jim, can you give us some comments on the sustainability of retail strength as we start 2010 and perhaps your thoughts on why it's not just catch up spend and we're not front loading the year and what I'm trying to get to is your comfort level on sell-through, overall penetration, and that it's not just channel refill in China for example, ahead of the New Year, if you could give us your thoughts.

Our confidence is very high for the demand for LCD televisions.

Retail price points are at a very attractive level.

We saw very good retail demand in China in the month of December being up 47% year-over-year.

In terms of refilling inventory around the world, we exited the year at a very nice level.

It's not too lean nor do we think there was too much there.

Clearly, people anticipate for Chinese New Year, which by the way falls in February this year, not January, but we see signs of good demand worldwide.

China was -- Japan was strong in December, so we have the echo point program continuing in Japan.

We have the increased subsidy in China.

So we feel quite good about the sustainability of retail demand around the world.

And Jim, since the first half maybe less seasonal, does that imply that the second half is more seasonal or should we rather see a more gradual growth as we play out 2010?

We're going to talk to you at our Investor Day next week about our cycle for the year, but we think this year we may be seeing a flatter overall cycle than what we have seen in the last couple years.

Jim Clappin will be walking through that for you next Friday.

Okay, thank you.

Our next question is from Brian White with Ticonderoga.

Yes, good morning.

Wondering if you could talk a little bit about the Gen-10 plant.

How far are we in ramping that and when do you think it will not be a drag on margins?

So we have all of the tanks now lit in the facility for the current phase.

They are not all making good glass yet.

Sharp is ramping, but we still have a long way to go in their ramp and our own ramp as we go through the course of the year.

This will probably actually be the last time I'll talk about the drag on gross margin.

It's relatively small and we expect it to diminish as we go through the course of the year, but we're quite excited about Gen-10 and if you happen to come to our investor meeting next week, you'll actually see a piece of Gen-10 glass.

Okay, and maybe just comment a little, the panel makers in Korea are approved to set up panel plants in China, Taiwan is probably quickly or shortly thereafter to follow, and I'm curious how Corning thinks about China on the glass production.

Well I believe the Korean government has approved the panel makers to go to China, but I do not believe the Chinese government has yet approved the Korean panel makers to go there, but nevertheless as we've said for a while now, we expect the Chinese market to be the largest for LCD televisions.

We expect the local industry to be built.

We think eventually a series of large size fabs will be built and we had a finishing factory there for two years and we plan on taking melting there.

We haven't made a final decision, but we expect to be a big supplier to the Chinese panel industry going forward.

Great, thank you.

Next we'll go to Simona Jankowski with Goldman Sachs.

Hi, thank you very much.

Just first on your guidance for prices to decline slightly in the first quarter.

Can you just give us a little more color why you would expect prices to be down slightly as opposed to flat considering panel prices are moving up and in fact you did have prices stay flattish last quarter.

Well unfortunately, we never get to tie our prices exactly to panel prices.

They've moved up quite a bit this past year and we didn't get a chance to raise our prices.

So we've said many times we're in a consumer electronics industry.

We expect over the course of time our prices to come down and we're planning on very minor price declines in Q1 as consistent with that philosophy.

We talked about for ourselves, we think that we can keep up with very minor price declines with our cost reduction.

We now have the ability to do that with having most of our operations back and running.

So we're not concerned at all about the very moderate price declines you're talking about in Q1.

And then the second question was you mentioned, Jim, that you're probably not going to talk much going forward about the drag from the Sharp plant.

I think in the past you had talked about a 350 basis point improvement once that drag is out of the way.

Is it fair to assume that the vast majority of that 350 basis point improvement has now been realized or can you just quantify a little bit for us how much of that is still ahead?

So one-time it was five points and now it's considerably less than that.

So it's rapidly falling and if, and this is the big if, if the demand continues to grow there, it will disappear as the year goes along.

Thank you.

We'll go to Steven Fox with CLSA.

Please go ahead.

Thanks, good morning.

Not to pre-empt next weeks meeting, but is there anything you can talk about with Gorilla Glass in terms of the momentum it has into Q1 specifically what would be driving that and secondly, Jim any update on CapEx thoughts versus what you said last quarter?

Well momentum for Gorilla is very strong.

We have a little bit of a war going on between the Division Manager who is in charge of Gorilla and the Division Manager in charge of display is who gets which tank.

So the demand is quite strong and I think last time I talked about Gorilla, we were in 45 products and now we're in 65.

So Wendell was right all the way along.

This is going to be a home run for us and so we just see the influence of touch expanding very rapidly.

In terms of CapEx for this upcoming year, I'm really not expecting much change from what I've said before.

We don't really need much right now.

I think the obvious question is if we take melting to China when we start spending on it, but I really believe that's 2011.

If we need to spend more capital in the $6 million to $700 million I talked about before it would be a high class problem and it would be because Gorilla and Display are doing better than we expected, but I really don't expect much movement from that number.

Thank you very much.

We'll go to Jim Suva with Citigroup.

Thanks very much.

On the pricing front, just a quick clarification.

Have you already locked in pricing for calendar Q1 because my history or memory reminds me of sometimes you lock in stuff very late in the quarter, other times earlier in the quarter and just trying to see where you're at in the negotiation process.

Our customers all know our pricing now for Q1.

Okay, great, and then finally last question.

When you talked about the gross margin impact no longer being a drag from the glass production in 2010 as the year progresses, can you maybe just help us understand the exit point of this year, how much of a drag quantitatively there was still, and was it still 350 basis points or are we down too much less and we're trying to figure out how much upside room there is in the gross margins from things like earthquake, power outages, and Gen-10?

So Gen-10 was less than 3% in Q4 and the power outage was about $8 million in Q4, so the Gen-10 drag is all dependent on Sharp ramping, which we think they will and that will diminish and that's why I don't intend to actually have to talk about it as we go forward, and we've got our fingers crossed that we don't have anymore earthquakes or power outages.

Great.

Thank you very much and congratulations.

Thank you.

We'll go to CJ Muse with Barclays Capital.

Please go ahead.

Yes, good morning.

Thank you for taking my question.

I guess first question, can you talk a little bit about what your outlook is for glass supply demand in 2010 and I guess within that context, whether you're discussing pricing with the panel makers for all of 2010 today?

We expect by and large that glass supply and demand relationship to be pretty tight throughout the course of the year, and we have not really moved into pricing beyond what we've done in quarter one right now.

And then in terms of your core glass volume guide of up 8% to 12%, do you expect that that will track what panel makers are seeing or are they looking to build glass inventory?

So our own math for our entire supply chain model for Q1 is a slight increase in Q1 in terms of inventory, and we'll walk you through the details of that next week.

Perfect, and then last question, can you provide a context in terms of the magnitude of the uptick for gross margins for Display we should expect in March versus December or maybe a construct so how we can model that out?

No, I think you'll have to do the work on that one yourself.

All right, Jim, thank you.

We'll go to Jeff Evanson with Sanford Bernstein.

Please go ahead.

Thanks, two notable features of the LCD market for me in 2009 were the sharp growth in China and Japan sales even though that's an area where LCDs are already fairly highly penetrated and second in China, the rapid migration away from CRTs during the year.

Wondering if you can draw any conclusions about the dynamics of these markets, how people are using TVs, how CRTs might be shut down in other parts of the world and how we might think about that going forward in other markets.

The CRT industry is collapsing.

I think China is the first stage of that and you're going to see it collapse elsewhere and Jim Clappin will talk a little about that particularly relative to the Indian market next week.

So we think that that's accelerating for many reasons, just as an example we've talked about before through our Samsung Corning we're still making a small amount of CRT glass and as soon as the tanks hit the end of their life, in some cases sooner, we shut them down because it's not economic.

So that capacity is going away and I think consumers in China have also voted with their feet helped by the tax subsidy which continues that they prefer LCDs.

I believe we got up to 68% of all televisions sold in the current year in China were LCD, so we think CRT is going away and it will go away in other merging developing economies soon.

And Japan, there was a subsidy, but why the strong growth given the already high share?

So it's an interesting question.

We did some consumer research on this about 18 months ago and you remember Japan is obviously the country where this took off first and we think that we may be seeing a replacement phenomenon starting with LCDs.

So an early adopter five years ago and you bought a 32-inch television, it's not a very good one compared to what you can get today at a much lower price.

So that's one hypothesis along with the echo point program and obviously people expanding to have more than one, but it's hard to know for sure unless you go out and do direct consumer research, but those are some of our hypothesis.

Thanks.

Our next question is from Carter Shoop with Deutsche Bank.

Please go ahead.

Good morning.

Was hoping to get a little bit of color on your outlook for the US market.

I know you don't want to provide too much in regards to detail today, but given the fact that the resale is down 12% for LCD TVs in the first two weeks of the year, how confident are you that you will see the US market grow in aggregate in 2010 for LCD TVs?

We're very confident we'll see growth.

I think the distortion in the first part of the year comparison to last year was clearly traceable to the digital transition which happened in early February and you may recall there was a second transition in June of last year, but we're looking for unit growth in the United States again this year.

It clearly will be the lowest unit growth place geographically around the world, but we're definitely thinking there will be unit growth again this year.

And then with a strong balance sheet and an encouraging outlook for 2010 free cash flow, can you highlight your plans for use of excess cash in 2010?

Well I love the strong balance sheet an Wendell does too, but clearly our priorities are the same as what we have outlined before that the Board has agreed to, first is our financial health which we feel pretty confident about.

Second is to make sure we have the money to invest in growth and that would include consideration of acquisitions, and then third it would be return to the shareholders which I'm sure our Board will turn to discuss again this year.

Great.

Thank you very much.

Our next question is from Nikos Theodosopoulos with UBS.

Please go ahead.

Your line is open, please go ahead.

Possibly take yourself off mute.

Can you hear me?

We can hear you now.

Okay, great.

On the Gorilla Glass business, do you have any data on your current business, what the average kind of screen size that the product is being used and I think for most of the year the manufacturing was all US based.

Is that still the case?

Can you comment on what you plan on doing as the business goes in terms of using additional capacity elsewhere?

So on the latter point, our plans are to keep the production in the United States at our Kentucky factory, but what will be happening is we will take another tank away from Display in Kentucky and give it to the Gorilla Glass.

So basically, Gorilla is -- Kentucky is on its way to becoming a Gorilla or Photovoltaic trial place.

We have not yet moved to take Gorilla outside this country, but that could easily happen this year.

I don't have handy the mix of product between handheld.

Wendell, do you have any comments?

Right now, firing away.

The majority of the glass demand is being driven by handhelds.

We're at the very, very beginning of the demand for IT.

What makes it exciting is the larger diagonal needs a lot more surface area of glass, but the bulk of our volume to date is handheld.

Okay, thank you.

We'll go to Brendan Furlong with Miller Tabak.

Good morning thanks a lot.

A couple of quick questions, not sure if I missed this.

The R&D and SG&A in Q4 in dollar terms were higher than expected.

Have you offered any color on Q1 and is there any seasonal bump in Q1 in terms of compensation and what have you?

No.

Actually our compensation goes down in Q1 versus Q4, so we did give guidance, but you should expect no bump.

Okay, great, and a couple of minor questions on the other segments.

On the Environmental segment with the being down sequentially, do you hope to keep the gross margins and profitability in the segment similar to Q4 or is there going to be some headwind there?

It depends on the down in terms of the level, but gross margins for the auto business could be down just a little bit, but you shouldn't expect a big drag from that.

Okay, and then on the Specialty Materials, your comment on the optical, specialty optical, what's driving that?

Do you just have like a very high Q4 and it's just a give back from that or why is it down in Q1?

It would be, we did Q4 was higher than what we expected and really demand on that business is not very smooth and predictable, but definitely Q4 turned out to be greater than we expected.

My last question is on the Photovoltaic you alluded to a second ago.

Is there any color there or are you going to do that at the analyst day?

You get to see it at the Analyst day.

You have a special presentation.

Okay, great.

Thanks a lot.

We'll go to George Notter with Jefferies & Company.

Hi thanks very much.

I wanted to ask about the gross margins and the wholly owned business.

If I go back and look for example, at the first half of 2008 and obviously you don't break out gross margins explicitly, but we can kind of back into those numbers and get a rough sense of where they were and if I think about your wholly owned display business right now from a gross margin perspective relative to where it was in the first half of 2008 it seems like there's still a pretty good gap.

And I guess I'd like to better understand is it possible to get back to those kinds of gross margin levels and if so how do you see that kind of playing out?

So our gross margins back in the early 2008 were in the upper 60s the in our wholly owned business and then we suffered enormous price decline at the beginning of this past year coupled with having a lot of capacity down.

We still have some capacity down basically as part of our Japanese capacity that was built to serve Sharp Gen-6 so that's down and a little bit of a drag coupled with our Gen-10 I've talked about previously.

But we believe our gross margin is moving back up into the 60s, but we're not as I've said before, we don't think it will get back to the high point unless there's unusual circumstances which occurs which we have very strong demand and no price declines, but we would be delighted by the improvement back into the 60s which we're expecting.

Just as a follow-up on that, historically you have talked about high single digit price erosion in the LCD wholly owned business.

Is that still glass substrate business rather, is that still a logical kind of number for 2010?

What we've said is that our idea of a good time right now would be price declines between 1% and 2% sequentially.

We think we can keep up with that in terms of our cost reduction.

We're not giving full year price guidance, but that's obviously a business model that we're comfortable with.

Great.

Thank you.

We'll go to John Roberts with Buckingham Research.

Please go ahead.

Good morning.

Jim, I think you said silicone sales were at pre-recession levels?

Close to.

How do you explain that?

The global economy is not at pre-recession levels and some sectors like construction are well off pre-recession levels.

So silicones continue to gain in emerging areas, as they move up in terms of average kilograms per person and second, as I mentioned on the call we think we gained a little market share from some of our competitors.

You think higher oil prices which push up acrylics and other things are allowing some of that share gain?

I would say it's superior performance by our team versus some of our competitors.

Okay, thank you.

We'll go to Yair Reiner with Oppenheimer.

Please go ahead.

My first question is about SCP.

Can you talk about what the capacity situation is there and whether you think SCP can keep up with the growth in capacity from this main customers of Samsung and LG over in Korea?

Well SCP is running relatively full right now, but they clearly are very closely connected to their two large customers and we'll be able to keep up as appropriate.

They have a great relationship with both of them and intend to have capacity in place for whatever is needed.

I will point out that neither of the large Koreans are ramping that much right now, but clearly SCP has got in their plans their ability to keep up with them.

Great.

And then in terms of the US going back to the question of digital conversion, obviously there was an uptick of just ahead when that went live, but do you see this as an ongoing process.

In other words a lot of people went out and got boxes, do you think a lot of those people are still wanting to go out and buy new TVs that kind of upside from digital conversion could potentially last a year or two or three?

Well we know the digital conversion I was referring to was that some people went out and bought televisions last year rather than buying converters and that's when we saw these little spikes in the small size television.

Our theory was those who still get their signal by rabbit ear probably are also people with small televisions and they went out and bought them.

Our opinion is, but you have to admit we're bias, we think everybody hankers after an LCD television so we would expect that people will gradually, even though they've just converted, will gradually over time replace those CRTs with small size televisions and frankly the price points of small televisions are phenomenal.

With this past Christmas we saw an interesting pricing phenomenon whereas Christmas 2008, the 26 television was really hot.

That same price point bought you a 32 this past Christmas.

So we think that those people will eventually convert.

Great, and then one final question.

Do you expect -- when you look at the upside to your expectations for all of 2009, do you think that upside in LCD TV sales came primarily from stronger than expected TV sales in general or from a faster than expected migration from CRT to LCD?

I think there was both going on.

We actually, the total television market was better than what our original expectations were.

We clearly saw CRTs dropping faster.

We saw the benefit of people getting subsidies.

We think we're also beginning to get a little bit of effect from people recognizing that LCDs are more energy efficient than CRTs.

So we think all of those things contributed and basically we think all of those same drivers exist for us in this upcoming year.

Okay, thank you.

Our next question is from Paul Bonenfant with Morgan Keegan.

Please go ahead.

Hi good morning, thank you.

I was wondering if you could talk qualitatively, not to preempt your February 5 commentary.

On the long term implications for LCD glass seasonality now that emerging markets increased prominence in demand and the refresh rate on LCD TV sales suggest high penetration rates are possible, or even likely, and I think along the lines of mobile phones and near to greater than 100% penetration in some areas, should we be thinking about a new pattern of seasonality both within and beyond 2010?

Possibly.

What we have to do is first of all we have to break the market into two pieces.

One would be IT, which I don't think has gotten enough attention lately.

IT was particularly weak this past year and we and many other people are looking for IT growth, but then you have the television market which has very unusual seasonality, but it varies throughout the world.

So we look at China which we expect very shortly to be the largest market for televisions.

The seasonality is much flatter throughout the course of the year with these big spikes from holidays.

There are a number of holidays there and we got the United States which is very strong at the beginning of the year, very strong at the end of the year.

Europe is similar to the United States, but a little more muted and then Japan is relatively flat all year long so it will be a balance of those, but we'll be seeing a shift.

What we don't know enough about is the seasonality of televisions in other emerging markets that we don't have, it's hard to get good data on that.

But we clearly expect to see the seasonality of the business shifting from what its been and then of course the biggest factor of seasonality as we see it is also relating to what happens on inventory in the supply chain, but I think maybe one of our upcoming conferences we'll try to give you more help on seasonality going forward.

That's helpful and just a quick question or clarification.

You mentioned during the call your expectations for LCD glass industry in 2010 are likely higher than your previous expectations.

Are you referring to your previous call for 2.7 billion to 2.8 billion square feet in 2010?

Yes.

Thank you for taking my questions.

Next we'll go to Ajit Pai with Thomas Weisel.

Please go ahead.

Good morning.

Good morning.

A couple of quick questions.

I think the first one is looking at the recent interest from PC makers and tablets.

Could you better discuss what kind of design wins you have, how much content that you can get in that product category and what your expectations of this year are for both your Display as well as Specialty Materials segment?

So we're doing very well in the IT space.

We're not going to talk about specific design wins especially in the tablet area.

So we'll have to see how this market develops, but we feel really good about the strength of our value prop and the strength of our product.

But would you say that at least in the tablets that are out there that you have the majority share in some of the wins in terms of value-added products?

Well it's real early in things like tablets.

So and I think we've yet to see really the definitive product sets in the tablet area.

So we're going to be pretty shy about talking about which customers we're in with and exactly how that market is evolving.

I think suffice it to say that glass area matters to glass makers and one of the things that we're encouraged about is our opportunities as touch technology moves beyond the handheld now into bigger and bigger devices, augmented by among other things Windows 7.

Got it, and then the second question would be just looking at 10 G, could you give us some indication as to outside of Japan whether this year you expect any significant announcements from your customers on adopting 10 G?

Number of our customers are looking very closely at 10 G, but we don't want to steal their thunder one way or the other.

Okay, thank you.

We've got time for one more caller.

That will be from Wamsi Mohan from Banc of America Merrill Lynch.

Please go ahead.

Thanks for taking my question.

Jim you mentioned all of the tax affects by outages will be back online by Q1, but can you perhaps comment on your current expectations on the progression of additional capacity to be brought online through the course of the year?

So we have by the end of quarter one basically all of the tanks will be up and running that we had down and so clearly as you go into Q2 you get even more effect from that and then of course the Gen-10 operation will provide a lot of glass for us and that is not running at full output yet.

So that will give us a lot of opportunity and then lastly, we have some decisions to make about some of the capacity that's shut down in the original part of our Japanese factory actually hasn't been running since the end of 2008 and whether that would be needed.

So we haven't made any decisions there, but clearly there's opportunity if we need it.

Thank you.

Jim?

So I have a couple investor related announcements before we wrap up.

First of all as you heard many times throughout the script, we will beholding our investor meeting next Friday, February 5 at the Time Center in New York City.

If you're interested in attending I strongly advise you to register in advance on our website.

We will begin that day at 7:45 in the morning when we open the doors for our product and research review.

That will be your opportunity to speak informally with business Managers and researchers about our latest products and emerging technologies.

I think you'll all enjoy the Gorilla Glass demonstration we're planning as well as some of the solar glass testing we've set up.

There should be interest in our new Pretium Edge network demo which we unveiled at an industry conference recently and lastly we will have a full size piece of Gen-10 glass.

I would like to remind you the product booth closes at 9:00 and will not reopen so we urge you to get there at 7:45.

At 9:00, formal presentations will kickoff and you'll be hearing from many members of our Management team discussing outlook for 2010 and we will have a spirited Q & A session.

The event is scheduled to end around noon and we hope to see you all there.

Lastly, a couple upcoming events.

On February 11, we'll be in Dallas holding a luncheon.

If you're interested attending please let our IR group know, and then on February 23rd we'll be presenting at the Goldman Sachs Technology Internet Conference in San Francisco.

Ken?

Thank you, Jim.

Thank you, Wendell, thank you all for joining us today.

A replay of the call will be available beginning at 10:30 am Eastern Time today and it will run through 5 pm Eastern Time on Tuesday, February 9.

To listen dial 800-475-6701, the access code is 140609.

Audiocast also available on our website during this time and that concludes our call today.

Please disconnect all lines.