康寧 (GLW) 2011 Q4 法說會逐字稿

Ladies and gentlemen, welcome to the Corning Incorporated fourth-quarter results.

It's my pleasure to turn the call over to Ken Sofio, Vice President of Investor Relations.

Please go ahead.

Good morning and welcome to Corning's fourth-quarter conference call.

This morning we have Jim Flaws, our Vice Chairman, Chief Financial Officer to read some prepared remarks before we move to the Q&A.

And those remarks do contain forward-looking statements under the meaning of the Private Securities Litigation Reform Act of 1995.

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

And these risks are detailed in the Company's SEC reports.

Jim?

Thanks, Ken, good morning, everyone.

Hopefully you had a chance to read the press release we issued this morning on our fourth-quarter and full-year results.

If you haven't, a copy can be found on our investor relations website.

Looking back at 2011, it was a year when the Company achieved many milestones, but encountered significant headwinds.

From a financial standpoint, Corning had an outstanding year.

In 2011, the Company set records for sales, gross margin, and operating income without specials.

All of our businesses in achieved increased sales year-over-year.

Sales of Corning Gorilla Glass almost tripled.

We achieved our eighth year in a row of positive free cash flow.

We maintained our very strong balance sheet, raised our dividend, and initiated a sizable share repurchase program.

We also brought significant new innovations to the market, as our patient investments in research are paying off.

Newer products, such as Lotus Glass for OLEDs and now a new, much thinner cover glass in Gorilla Glass 2, have been very well received by customers.

We believe this is an outstanding list of achievements despite less than robust growth from the developed economies around the world.

However, it does not tell the entire story.

We also encountered significant challenges in the second half of the year.

In the third quarter, the display supply industry begin a significant contraction, ultimately resulting in the first year in LCDs history where the supply-chain inventory at the end of the year was lower than the amount at the beginning of the year.

Our customers, panel makers, continue to operate at unhealthy financial levels.

In the fourth quarter, we experienced significant pricing pressure, and a dispute at one of SCP's largest customers.

Lastly, we witnessed significant upheaval in the solar industry, which impacted demand and price for polysilicon at Dow Corning.

So while we are proud of our accomplishments, we face, and continue to face, significant challenges.

We're taking action to mitigate the impact these challenges by reducing costs, and adjusting capacity.

Nevertheless, our profitability will be lower.

This reset in the display industry, as well as the pressure at Dow Corning, have us feeling like the Company is approaching a new floor in terms of profitability.

It is our plan to grow profits from this level.

In short, we expect strong growth in sales and profits from Telecom, Environmental, Specialty Materials and Life Science segments over the next several years.

Our confidence is high for these businesses based on their achievements in 2011, with their collective sales up 31% and earnings before special items up 136%, and also due to our market leadership in these businesses.

Now, our display segment is likely not to grow, but will generate strong profits and cash flow.

In fact, investors should anticipate significant cash flow generation over the next several years.

We anticipate using this free cash flow to fund acquisitions to supplement organic growth, for dividends, and for share repurchases.

We'll discuss some of those plans this morning in our outlook for Q1 of 2012 and at our annual investor meeting next Friday in New York City, we'll share our growth plans for the next several years.

So with that intro I'd like to walk you through our Q4 results and our Q1 outlook.

Fourth-quarter sales were $1.9 billion, a 9% decrease sequentially, in line with our expectations.

Compared to last year, sales were up 7%.

Gross margin was 43.7%, down from the third quarter of 47.1% and in line with our expectations.

The lower gross margin was due to higher price declines in display, lower volumes in Gorilla Glass product line and seasonally lower volume in Telecom.

SG&A and R&D were higher sequentially but in line with our expectations.

As a reminder, operating expenses in Q3 were materially lower due to us lowering compensation accruals and also one-time credit.

Equity earnings were $321 million, but that included a significant one-time gain at Dow Corning.

Excluding that gain, equity earnings were $241 million or 26% lower sequentially, which was slightly better than our guidance.

Equity earnings also included a $12 million charge for an asset write-off, which we did not count as a special item.

Earnings per share, excluding special items, was $0.33 and substantially lower versus Q3 and a year ago.

Both equity earnings and EPS as stated here are non-GAAP measures and a reconciliation to GAAP can be found on our website.

For the year, sales grew 19% and reached $7.9 billion, the highest level in our 160-year history.

All segments grew year-over-year.

Gross margin dollars achieved an all-time high, reaching $3.6 billion, an increase of 17% over the prior year.

Operating margin, excluding special, items was also an all-time record of $1.8 billion.

So from a consolidated standpoint we achieved significant financial milestones.

Below the operating margin line however, lower equity earnings and the higher tax rate reduced our earnings.

Our tax rate increased, as expected, from 3% to almost 15%.

Equity earnings fell 25%.

A combination of higher taxes and lower equity earnings shaved more than $0.5 billion from our bottom line.

EPS for the year, excluding special items, was $1.76 and that compares to $2.07 in 2010.

Again, these are non-GAAP measures; please see our GAAP reconciliation on our website.

It is also important to note that our sales and EPS benefited significantly from the stronger yen this past year.

Now I'd like to turn to our segment results for quarter four, and I'll start with Display.

Display sales were $780 million in Q4, a decrease of 4% sequentially, but 4% higher compared to a year ago.

Volume was in line with our expectations; Q4 results also benefited slightly from a stronger yen, which averaged JPYf77 for the quarter.

Volume at SCP was higher than our revised guidance.

As we disclosed, pricing at our wholly-owned business and at SCP was down significantly.

Because the timing varies customer to customer and we're still in the first quarter, I'll discuss pricing more in the outlook section.

Regarding the customer who SCP is in the dispute with, while we did ship them a significant amount of glass in the quarter, volumes were significantly lower than the original commitment from the customer.

Equity earnings from SCP's LCD glass business were $192 million in Q4, a decrease of 14% from the third quarter.

For your modeling purposes, SCP's fourth quarter LCD sales were about $790 million, a decline of 7% from the third quarter.

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

Our public filings report SCP's total sales, which includes CRT and other product sales.

For the year, Display sales were $3.1 billion, a 4% increase over last year.

Volume growth was in was more than offset by price declines, sales benefited from a strong yen.

Now, moving to retail, on this slide you can see unit growth rates by region by month.

Based on some final retail data for November-December, it appears our forecast for LCD television growth is still on track for 2011.

Demand for LCD televisions at retail in Q4, including Black Friday, were in line with our expectations.

In the interest of time I'm not going to go through the data region by region.

This slide will become available on our website before the Q&A ends and I would be happy to answer any questions than.

Now, as a reminder, the fastest-growing segment of televisions recently has been those 40 inches or larger.

On this chart, you can see the growth rates.

And we're seeing these higher growth rates across all regions including developing ones.

For a glassmaker, size matters.

We love to see these larger televisions are doing so well at retail, and the area growth rates are actually a lot more meaningful metrics since we sell glass by the square foot.

Now, turning to this chart you'll see a comparison growth rates by quarter for units versus area.

This is a trend we expect to continue in 2012 as well.

Based on our preliminary Q4 retail data, we believe the worldwide LCD glass market was roughly 3.2 billion square feet in 2011, up only slightly from 2010.

I also have some updates this morning on the Display supply chain inventory model.

In the fourth quarter we set out to understand how low inventory levels could theoretically reach.

I'd like to share with you some of the learnings from that study, which was done with the help of McKinsey consulting firm.

One of the more important learnings from the study was that the efficiency levels within the Display supply chain have been modestly better than we estimated.

While we always model efficiency improvements each year, we had underestimated this metric in 2011.

As a result, the revised model indicates the supply chain built inventory in the first half of 2011, peaking in midyear above 18 weeks.

This is slightly higher than our original estimate of 17 weeks.

Supply chain correction in the third quarter did result in a reduction of about three weeks of inventory.

We believe there about 15 weeks of inventory entering fourth quarter versus our prior estimate of 14.

McKinsey also indicated supply chain levels entering 2012 at the low end of what is considered to be a normal range, but they could trend lower.

The study indicated supply-chain inventories could fall another half a week this year.

Over the longer stretch of time, it's possible to imagine the average weeks inventory could continue to decline.

Of course, this can change both higher and lower depending on supply chain sentiment.

For example, if supply chain believes retail demand will be stronger, expect that there could be a short-term build up of inventory, and if there's concerns about the economy, less inventory could be carried.

This chart outlines the fluctuation of weeks of inventory since 2007 on the yellow line with the average on that time shown as a dotted blue line.

As you see, the average level of inventory has been decreasing for the past four years.

This is due to a number of factors that are consistent with a maturing industry, including lower growth rates, more experience leading to better forecasts of retail demand and of course, financial pressures across the value chain.

I'll have some more comments about our expectations for 2012 in the outlook.

Now, on the innovation front we're very pleased with the market acceptance of our new Lotus Glass since its introduction in the Fall.

As a reminder, Lotus is an environmentally friendly, high-performance display glass developed to enable such new technologies such as OLED displays.

While I'm on the topic of OLED, we were pleased to see a number of new large-size OLED TV prototypes on display at CES.

And while these prototypes were quite expensive, as much as $10,000, we believe they showed consumers how beautiful a large OLED display can be.

We, here at Corning, are excited about the potential for OLEDs.

At our core, we believe we are a display glass company, not an LCD company.

So while the industry does not anticipate a significant number of OLED televisions until later in the decade, for example, DisplaySearch is estimated just 3 million sold in 2014, we have been actively engaged with customers on delivering a unique glass solution.

Today, some of our customers are working on OLEDs two pieces of glass, given the low yields and higher cost when using plastics and metal.

And even those customers who are pursuing a one-glass solution are also working with us on developing a two-glass solution.

The reasons for this are clear to us.

Other materials sets are not as inexpensive, and result in lower yields.

If the past year has taught us anything about consumers, it is this -- consumers are not willing to pay for high-priced televisions.

We believe it will be very difficult for OLEDs to reach mass adoption if they're not priced appropriately.

And to achieve lower price points, you need to lower costs.

And we at Corning believe the two-glass solution will actually be the preferred path to this goal.

We're going to have a lot more details on our OLED TV forecast and our unique position in the OLED market at our annual investor meeting next Friday.

Now let's turn to Telecommunications.

Telecom sales were $490 million, down 13% sequentially, in line with our expectations.

Compared to fourth quarter last year, sales were up 11%.

For the full year, telecom sales were $2.1 billion, an increase of 21% over 2010.

This segment experienced significant growth across all product lines.

Our fiber-to-the-home sales were up 39%, and our enterprise network sales were up 10%.

Even more impressive was the strong bottom-line performance of the segment.

Net income, excluding special items, was up over 70% this year.

In Environmental, sales were down $234 million, down 5% and in line with our expectations.

When compared to the prior year, sales were basically even.

For the year, Environmental sales reached $1 billion, the highest in the segment history, increasing 22% and driven by the surge in demand for diesel filters.

And we're very pleased that our diesel business exceeded $500 million in sales for the first time.

Net margins Environmental jumped from 5% to 11% in 2011, and net income almost tripled from $43 million to $121 million.

We are delighted by the performance in Environmental and very pleased that we're improving in manufacturing and that our products are doing well with our customers.

In Specialty Materials, sales were $238 million, down 20% sequentially, which is actually slightly better than our expectations.

Compared to the prior year, sales were up 21%.

The segment posted a net loss of $105 million in Q4, versus an income of $38 million in the previous quarter.

The loss was due, primarily, to three events.

First, we took an $83 million after-tax charge related to impairment of assets.

These assets were used to make large sized cover glass.

Due to low demand, we impaired a portion of these assets.

We treated this as a special item.

Second, there was an after-tax charge of $12 million, related to the write-off of Gorilla tanks at SCP.

This charge was not treated as a special item.

And lastly, due to the lower demand for Gorilla Glass in the fourth quarter, we ran our assets at lower utilization rates, resulting in lower margins.

Gorilla Glass sales in the fourth quarter were $161 million down about 25% sequentially.

The sequential decline, we believe, was due to improved yields at our customers and higher inventory levels within the supply chain.

As we've mentioned over the past few months, our visibility into this supply chain is not nearly as robust as it is in Display.

To help you illustrate the chain, I've got a simple chart to show you.

These are the steps it takes for our Gorilla Glass to make its way into a finished product.

Even though our customer wins are actually with the original equipment manufacturer, such names as Samsung, Motorola or Acer, the glass gets shipped first to a finisher.

At the finisher, glass is cut into parts and then chemically strengthened.

The majority of our glass is shipped to only a handful of finishers, which is why you see in our public filings, there are only two to three material customers in Specialty Materials.

It's also the reason why investors will not see the name of the list of any of our OEM component suppliers.

The strengthened glass is then shipped to a touch panel assembler who assembles the glass in the touch-panel module.

There the touch panel ships to an ODM, assembles the entire consumer device, and lastly, it's shipped to retail under the OEM brand name.

A lot more steps here in the LCD business.

And for that reason, we need to get a better understanding of how much inventory is at each step.

Our goal is to create a model similar to Display, but we have a long way to go.

Now on the right-hand side of this chart you can see our estimates for glass efficiency throughout the supply chain.

And while the efficiency levels may not be that bad at any individual step in the supply chain, when you add up the low end of the cumulative losses, there's potential for significant inefficiency.

For example, at the finishers, there is some glass that is lost in the process of cutting glass in device-sized pieces before chemically strengthening them.

We've actually been working directly with the finishers and the touch panel assemblers to help them better understand how to handle and process their glass.

We hope it leads to improved yields at our customers over time, and even though those improved yields will reduce demand glass for us, will lower the cost of device.

And in the long run in consumer electronics, that's very important.

For the year, Gorilla Glass sales were $710 million, almost triple a year ago.

Gorilla Glass is one of our fastest-growing products in history, and the glass itself is our second-highest gross margin product today.

For those of you who were at the Consumer Electronics Show, hopefully you had a chance to stop by our booth and to see the next generation of Gorilla Glass.

We're calling it Gorilla Glass 2.

Gorilla Glass 2 enables up to a 20% reduction in glass thickness, while maintaining industry-leading damage resistant toughness, optical transmission and scratch resistance.

This newest innovation was in direct response to our customers drive towards ever thinner form factors.

And to put it mildly, we have a lot of interested customers.

Gorilla Glass is now used by more than 30 major brands and designed into more than 600 product models spanning more than 600 million units worldwide.

And we're going to have some very cool demos of the new glass at our annual investor meeting next week.

So I'm going to have some more of this topic in the outlook.

In Life Sciences, Q4 sales were $143 million, 7% less than Q3 and flat compared to last year, in line with our guidance.

For the year, Life Sciences sales were about $600 million, an increase of 17% over 2010.

Excluding acquisitions, Life Sciences' sales were up 7%.

Now at Dow Corning, equity earnings were $129 million in Q4 compared to $89 million in Q3.

Q4 included a one-time gain of approximately $80 million.

Dow Corning had brought legal action against one of its polysilicon customers, which stopped taking product to enforce certain long-term sales agreements.

The resolution resulted in a significant cash payment.

Excluding this gain, equity earnings at Dow Corning were $49 million, down 45%.

Now, in response to falling poly prices, Hemlock has modified a number of its sales agreements to provide temporary pricing relief while preserving the long-term favorable relationships with its customers.

In addition, Hemlock has decided to delay certain plant expansion activities until market conditions for polysilicon improve.

It is in difficult times like this where being the lowest cost producer provides a key advantage.

Today, Hemlock is the world's lowest cost producer of poly and it costs are still well below spot prices.

Although reported spot pricing has actually ticked up in recent weeks, we still believe it's below production cost of our some of our competitors.

Regarding the current poly supply and demand balance, we believe there continues to be a significant amount of excess capacity which will continue to put pressure on poly price.

Now, let's switch to the balance sheet.

We ended the year with $5.8 billion in cash and short-term investments, declined from $6.4 billion in cash we had on hand entering fourth quarter.

Of course, one of the major cash outflows during the quarter was our capital spending.

The other was the cash we used to repurchase shares.

We told investors we would be aggressive when the stock price is significantly lower than what we deem to be fair value, and we were.

We began repurchasing stock in late October under the $1.5 billion share repurchase program approved by the Board earlier that month.

In roughly a two-month period of time the Company spent about $780 million to repurchase approximately 55 million shares.

Looking ahead, we expect to continue to be active in repurchasing our stock if it remains at levels below our estimate of appropriate value.

I will not speculate on how fast we'll go through the remainder of the approved amount or what the Board will decide to do next.

I can tell you, given our cash flow expectations over the next several years, we expect to have ample financial flexibility to fund additional share repurchases, M&A to supplement growth, or to increase the dividend.

Capital spending for the year totaled $2.4 billion and was in line with our previous guidance.

I'm delighted to say we finished our eighth year in a row of positive free cash flow with $544 million.

Very pleased with our ability to generate over $0.5 billion in the year when our capital spending was higher than usual.

Now onto our outlook.

This morning, we will be providing first quarter as well as some full-year guidance by business.

I'm going to start with Display in the retail market.

In the first quarter, we're not expecting much sequential change in the overall glass market.

Volume at our wholly-owned business should be in line with the glass market.

Volumes at SCP are expected to be flat or down double digits, depending on the outcome of negotiations with that key customers.

Now, looking ahead to the full year, we expect the retail market in terms of square feet to grow about 10% in 2012 from roughly 3.25 billion square feet to about 3.6 billion square feet Let me be clear.

This is the amount of glass contained in LCD products sold to consumers, not the amount of glass that we're shipping to panel makers.

The amount of glass shipped above and below the retail number will obviously be dependent upon panel maker utilization rates and the supply chain dynamics.

At this time, our most likely case is that supply chain could actually add about 100 million square feet of inventory during the year.

As the retail market grows, so does the amount of inventory and supply chain.

In terms of weeks of inventory we actually expect supply-chain to contract by about a half a week.

This is because we believe the supply chain will build inventory and square foot, both slower pace than the retail demand growth.

I've outlined our point estimates for retail demand and supply-chain inventory.

Now, for your planning purposes we also have a downside case, with inventory being flat in terms of square feet rather than growing 100 million.

And for retail demand, we have a variety of cases for demand being above or below the point estimate of 3.6 billion square feet, obviously driven by different economic scenarios.

For modeling purposes we now expect LCD television units to be about 230 million this year, up about 10% versus 2011 and consistent with most industry forecasts.

Again, we expect area growth to be higher.

PC units, which include monitors, notebooks, tablets are expected to grow 10% this year, the strongest demand in tablet area.

With regards to glass capacity, we believe the actions we've taken to reduce capacity has brought glass supply closer to end demand.

If we've correctly estimated retail demand and supply chain dynamics, then we believe worldwide glass supply could move into balance with glass demand at some point during the year.

We will, of course, then decide on the pace and timing of bringing capacity back online, but we are likely to be very cautious about restarting tanks.

This brings me to the topic of what happened in the fourth quarter.

We believe there are a set of circumstances within the LCD industry factually leading to a reset of our LCD business.

Circumstances have caused a period of more significant glass price declines.

Glass price declines will be significant in the first quarter of 2012 as they were in quarter four.

We expect significant double-digit price declines cumulative over the two quarter period of time.

Now, the circumstance driving this are the following.

First, as you know, the rate of growth at retail has been slowing for many years, as the technology penetration phase is ending for television.

This growth slowdown into maturity has actually been expected by the industry for some time.

However, while the growth rate was still in the low double digits this past year, this decline in maturity may have been hastened this past year by the worldwide economic malaise.

Second, the panel capacity has had a far more capacity than retail demand.

This excess capacity leads to low operating utilization, continued price pressure on panels, and ultimately, terrible financial results including significant losses.

This situation was aggravated in the back half of 2010 when the industry tried to fix its profitability by aiming high-feature and high-priced televisions to consumers.

Consumers did not want the higher priced TVs, which led to lower growth and excess inventory.

This is actually a good lesson learned to those who believe in high-priced OLEDs will be an immediate hit with consumers.

Now, these issues exacerbated the utilization problem, putting further pressures on panel prices, and effectively pushing pricing to levels that were either at or lower than cash costs.

The third element is likely related to the first two.

Display supply chain decided to reduce the amount of inventory carry.

With the industry maturity and lack of profitability, this decision is very understandable.

However, it caused lower utilization for panel makers and for glass makers.

Glass industry has historically kept capacity closer to the retail level than the panel industry.

This year, the inventory drawdown, combined with lower retail growth, pushed glass into a more significant over capacity situation.

This circumstance, combined with panel industry profitability, has led to the pricing pressure on glass.

So what does this mean for Corning?

We have recognized this untenable financial situation in our customers; many posted record losses last year.

We obviously have been working with them to reduce glass prices now to help their financial strains.

We have proposed advancing our normal 2012 glass price declines versus more normal product price declines each quarter throughout the year.

This will provide our customers more immediate financial relief.

However, this cumulative two quarter of higher price declines will cause a reset of the profitability in our Display business.

We're hopeful that our pricing actions, combined with capacity decisions, will lead us to get back to more stable price declines after quarter one.

Display business continues to be extraordinarily profitable for us and will generate significant cash flow, even more so as the combination of our innovations and retail maturity cause our capital spending to slow in this segment.

The changes in the Display business often mask from investors the growth in sales and profits of our other segments.

Other segments represent about 60% of the sales, and each of them had great sales growth in 2011.

In fact, the sales of our non-display segments grew 31% in 2011; profits grew 136%.

One of our fastest growing businesses is Telecom, where demand is forecasted to be strong worldwide in the key markets we play in; fiber-to-the-home, enterprise networks, optical fiber and wireless.

We expect another year of very strong growth in Telecom; we expect further gross margin expansion in telecom driven by the mix of higher margin products.

In the first quarter, sales will increase 5% to 10% sequentially, as well as year-over-year.

In Environmental, we expect another very strong year of growth due primarily to our surging diesel business.

First-quarter sales will be up slightly.

Specialty Materials sales will be led by Gorilla Glass.

We anticipate the cover glass market could grow as much as 20% this year, driven primarily by tablets and handheld devices.

However, we do expect further improvements in customer yields as the year progresses as well as some price declines.

Right now it's hard to forecast the impact of each, and the impact they will have on 2012.

The first quarter, we expect the segment sales to be up slightly, driven solely by Gorilla.

In Life Sciences, we expect another strong year of sales growth through a combination of organic growth and a full year of sales from recent acquisitions.

In first quarter, sales are expected to increase 10%.

We will be providing more longer-term forecasts for each of these businesses next week at our investor meeting.

At Dow Corning, we expect equity earnings to be lower in 2012.

In the silicone business, it will be due to a combination of higher raw material costs and softer worldwide silicone demand impacting prices and margins.

At Hemlock, we are anticipating the challenging price conditions in poly continue.

Pricing is not expected to improve until supply demand levels return to balance and the current over capacity situation subsides.

We will provide additional color on Dow Corning at the investor meeting next week.

Now, continuing on with our outlook for Q1, we expect gross margin to drop a percentage point, primarily due to lower pricing in display.

SG&A, and R&D will be consistent on a dollar basis with the fourth quarter.

Equity earnings, excluding special items, will be down between 5% to 20%, depending on that potential of lower volumes at SCP and the lower earnings at Dow Corning.

Equity earnings from Dow Corning are expected to be down 35%, due primarily to lower poly pricing.

Other income is expected to fall by more than half, primarily due to lower royalty income.

Our tax rate, as expected, will move from 15% to 20% in the first quarter.

The main drivers of the increase will be the expiration of certain tax holidays in Asia, a failure of Congress to pass [PEAK standards] bill and more profits in higher rate jurisdictions.

As a reminder, this is a non-GAAP measure as it excludes special items.

The share count will likely be lower as we have a full quarter's benefit from the share repurchases we did last quarter.

For FX, as a reminder, our results move with changes in the yen to the US dollar exchange rate.

The average rate in Q4 was JPY77, so if the yen averages one point higher or lower in Q1, estimate our sales and net income would decrease or increase by about $9 million.

Now, before I move to Q&A, I want to remind everyone that our annual investor meeting will be next Friday, February 3, at Cipriani's in New York City.

I can tell you, we're going to actually have a much different event than last year.

This year we will actually be demonstrating live on stage many of our next-generation innovations that we're most excited about, obviously including Gorilla Glass 2, but as well, our ultra-thin glass.

It's shaping up to be a very informative and actually hands-on event.

For those of you considering staying in your office or home and listening to the webcast, please don't.

I highly encourage you to attend.

Many of the demos can only be experienced live.

Plus, this will be one of your rare opportunities to interact with all of our key business leaders in one setting.

We hope you will attend.

Ken?

Thank you, Jim.

John, we're ready to take some calls now.

Certainly.

(Operator Instructions)

Wamsi Mohan, BofA Merrill Lynch.

Jim, clearly you're communicating that the LCD business growth and profit profile is different.

How should we think about the CapEx profile for LCD glass without any new capacity additions?

And could you also talk about plans for the Beijing BOE related glass melting facility?

Thanks.

So we are going to finish our Beijing facility, so you'll see that in capital spending.

We believe our primary customer, the BOE will be a very successful panel maker as the Chinese market grows.

We obviously are going to pace the startup of that factory and we will plan to do that.

We're expecting to start up to occur in the second half.

In terms of capital spending for Display, we are finishing up our earthquake preparedness capital spending, we've outlined to you before.

But in terms of any additional capacity in Display, either in our wholly-owned or SCP you should not see us initiating anything new.

Thanks, Jim.

And I have a follow-up.

Is there a level of price decline on the LCD glass quarter after quarter after which you would rather walk away from the incremental volumes?

I could just tell you, Wamsi, the LCD business remains extraordinarily profitable despite this two-quarter price declines we have and the incremental margins are very high.

So we definitely intend to maintain our position in the business.

And we'll obviously respond to situations as they come along.

But beyond that, I won't speculate.

Okay.

Thanks, Jim.

And if I could just squeeze one last one in here, you noted Gorilla Glass pricing could decline in 2012.

Did it decline in 2011 and can you talk about some of the drivers or these competitive reasons, excess inventory or is it just incremental pressure from customers?

Thank you.

We really haven't seen much in the way of price changes in this business in its early years.

We always expected that this would be the year we would begin to see some.

It is not excessive price declines.

I think some people are speculating that.

That is not the case.

In fact we haven't even reached agreement with all our customers yet.

But we're just assuming that in the consumer electronics business that we will feel the fact that our customers always want to be lowering the price of their end-product.

And so we are highlighting to you that this is the year we might see some price declines.

We have not agreed yet with the most customers.

We are not feeling any competitive pressure.

And if the excitement that we heard from customers on Gorilla Glass 2 at Consumer Electronics Show continues, we don't expect to feel any competitive pressure.

Okay.

Thanks, Jim.

Mark Sue, RBC Capital Markets.

Jim, you're doing the necessary things with pricing concessions in the near term, but how do we know that your actions don't create a change in future behaviors for your customers, creating a new priced tier and undoing some of the pricing strategy changes that you implemented three to four years ago?

Well, I can never guarantee what the future is going to be, Mark.

But I can tell you what we did coming out of 2006 is we adopted a strategy and communicated it very broadly that we thought the best thing for our customers and for the industry was to have consistent price declines every quarter, keeping up with the fact that consumer electronics prices are going down.

And we intended to do that.

There have been several times since then when we had price declines above that.

But I would say in general, what has led to that strategy working for us in the industry was for the glass makers to not have capacity substantially above what the real demand was.

The biggest problem that occurred this past year in my opinion -- take this as a Jim Flaws opinion, please -- is that the glass industry, which has to shoot ahead of the duck in terms of thinking about capacity, expected retail demand to grow in 2011 by a certain level.

And then it didn't grow quite that strongly.

I think ultimately, retail glass grew about 12%, and -- maybe a little bit more than that.

But we had assumed originally that the retail demand would grow 18%, so we had capacity in place for that.

Second, in our models, the prior four years, this would be 2010, '09, '08 and '07, the aggregate amount of square footage in the supply chain in any one of those years, either grew 100 million square feet at a minimum or over 200 million square feet.

We had anticipated the industry would build inventory again.

It didn't.

Not only did not build, it actually declined.

Those two things lead to over capacity in the glass industry by above 20%.

That leaves the opportunity for our customers who are always putting price pressure on us to have a more effective way to do it when demand and supply imbalance for glass gets out of whack by that greater amount.

What I believe -- Jim Flaws opinion -- what's going to happen is that we will not see the same precipitous drop in inventories going forward.

Retail demand will grow, may not be as great as what we would all like, but we are going to be bringing the glass capacity in line closer to end demand and that becomes a recipe for more moderate price declines.

I cannot guarantee you that.

That's our strategy; that's why we announced the 25% capacity off line in the fourth quarter.

Hey, Jim, as we look toward stable able pricing declines after quarter one, is there a promise or maybe a gentlemen's agreement from your customers that once their margins improve, that subsequently there's more rational and less inclination for discounts from Corning?

We have no promises or gentlemen's agreements with pricing with our customers.

Okay.

Thanks and good luck, Jim.

Rod Hall, JPMorgan.

I just got two.

One is on the pricing declines.

If you could just elaborate Jim, on where we are in the process of renegotiating pricing among the panel makers for glass.

We're halfway through that process, are we a quarter of the way through?

Where are we in the process?

Is there price levels resetting?

Because that kind of thing likely is happening beginning in Q4?

And then my second question is on inventory, could you just talk about -- you said, your central theme is for half a week of inventory compression this year.

Do you expect that to be more toward the first half of the year or do you think that's going to be spread across the whole year?

I'm kind of trying to get a feel for whether you think inventory stabilizes earlier in the year, or not until later this year?

Thanks.

So I don't have a perspective on the half a week of inventory.

We have done that saying, as that chart we showed, we believe over time, inventory efficiency will continue to improve.

We haven't gotten so specific to say we know that's exactly occurring in which quarter.

In terms of pricing, we're basically done on price agreements with our customers with the exception of the one customer in Korea, so we're very far along.

Okay.

And, Jim, do you think that that one customer --you think you'll finish that in Q1, or do you have a feel for when that completes?

I just won't speculate.

It's obviously been a different very difficult situation and my ability to forecast how quickly we can do it has obviously been proven wrong, so I won't speculate anymore on them.

Okay.

All right.

Thanks a lot.

Amir Rozwadowski, Barclays Capital.

Jim, in talking about that one Korean customer, obviously your guidance here has a decent amount of variability for shipments out of SCP dependent on a what happens with that customer.

Can you give us a little bit of color as to what's on the flat side versus the down 10% side?

Is it sort of a share recovery expectation on one side?

Or is it that share would remain the same at sort of new levels with that customer?

I think I have to decline to be too specific on it.

If this customer remains taking quite a bit of glass from SCP, they're just well below the original agreement that we had with them.

And as you know, the dynamics that I walked through with you, unfortunately in November and December, is we thought we'd reached agreement with them, and then they took the share back up and took it back down, and so I think it's inappropriate for me to comment on the exact numbers in it.

But depending on the outcome, because the quarter four had so much variability in the months of October, November, and December, there's a situation that we can see where the aggregate amount obviously is good, or it could get worse.

And I just won't forecast it.

That's why I wanted to give you a range there.

Okay.

That's helpful.

And lastly on the pricing front, obviously you're working with the panel makers, given their challenged profitability here, are you still looking to maintain a premium in terms of pricing in the marketplace versus competitors dependent on sort of your pricing actions?

I'm just trying to get a sense of in terms of what you're seeing for yourself and also your competitors in the market?

Sure.

We expect to have a slight premium.

As you know, the premium is fairly small.

But we expect to get it.

From our eyes, we expect to get the premium because we think our product performs best.

On the other hand, from our competition size, they probably always want to be below us as a mechanism to try and do well with our customers.

So we in general expect to always have a slight price premium versus our competition.

Thank you very much.

Nikos Theodosopoulos, UBS.

Thank you.

I had some hopefully some simple numeric questions and then a general question.

Jim, I did not actually hear a CapEx outlook for 2012.

Can you give us an expectation there?

Nikos, it's Ken.

We gave it out a couple months ago.

It's around $1.8 billion.

Okay.

So that didn't change?

I guess that was my question.

No change in that.

It did not change, no.

Okay.

And then the second question is, do you have for the full year of 2011, the LCD price declines in SCP and the wholly-consolidated business?

Nikos, for both SCP and the wholly-owned business, they were around 15%, maybe a little north of there for the full year 2011.

Okay.

And then my question here is when you idle capacity in LCD, can you elaborate what in fact that means?

In other words, how long does it stay idle?

What's the process -- more importantly, what's the duration to get it back when in fact you want to get it back?

And as part of that question, is there any commitment Corning has made regarding the Beijing plant in terms of a completion date or minimum capacity there?

Thank you.

Lot of questions.

So on Beijing, we do have a commitment to operate the factory.

The pace of when it starts and how much it does in a given quarter is not a commitment, but obviously we have a very important customer there located right next to us.

So we expect to supply glass to them from that facility.

We are now forecasting the start up to be in the second half of 2012; we're actually shipping the customer from capacity in our other locations today, as they have begun their ramp-up of their gen 8.5.

In terms of the overall capacity situation, I think as you know, we have smaller tanks than our competition, and a lot of them.

And what we basically do when we talk about capacity going off-line, is we try to get -- unless we think we're going to need it again in a very short period of time, we let the tank go cold.

The tank goes cold, we have a choice.

Do we repair it immediately or do we delay the repair?

And that will depend on our outlook.

In general, we by and large, usually repair fairly quickly.

You should think about the repair not being very expensive.

It's just primarily rebuilding the refractory, swapping out the precious metals and putting in a new one and taking the old one to be reformed.

Neither of -- that situation does not take a lot of time.

And then once we decide to relight it, we have heat up the tank.

You can't go from basically you know, the ambient air temperature to 2300 degrees instantaneously.

It takes a while because you don't want everything to crack.

So it takes a period of time to bring it up.

But we can do that.

It's not a significant issue in terms of timing.

But I do want to emphasize -- what we have done is said, we've taken this capacity off line.

We don't have plans to bring a lot of this capacity back, based on our outlook for the market.

And we're intending to stick to that for now.

Would there be a write-down if that capacity never got turned up?

How would we measure with the potential write-down on something like that?

So if the capacity was never used again, ever, then yes, there could be a potential write-off.

There are two write-offs that occur.

If a tank has not finished its life, there's a small amount of capital that has to be written off, because once you take it cold, it's useless.

You've seen that happen to us before, for example in quarter four of 2008.

I think you're asking more about a longer-term issue, is if we never need some of this capacity again, yes, there would be a write-off.

I can't estimate it for you because I don't know which tanks we would do.

I will remind you that these tanks are very flexible tanks.

Not only can we make LCD glass, we'll be able to make the OLED the glass.

We can make Gorilla Glass, and we can make photovoltaic glass in these.

So in terms of saying that there will be a write-off of this capacity, it will be permanently never needed ever again, I'm just not sure that that's an imminent decision that we're facing.

Okay.

Thank you.

Steven Fox, Cross Research.

Just one question from me on the gross margin outlook.

Jim, you're talking about gross margins being down about one full percentage point, but it's in the quarter where your wholly-owned business isn't growing, Gorilla Glass isn't growing and you have price pressures.

I'm just trying to see why the margin shouldn't be down a little bit more.

What else is going down within the gross margin line?

Thanks.

It's Ken.

At the corporate gross margin forecast clearly we do expect some good margin performance in our other segments during the quarter.

And that's going to help offset some of the things you mentioned in your question in display.

In particular I draw your attention to Gorilla, where we had very low utilization in this quarter, where we were -- basically, we expect Gorilla demand to grow so we didn't turn the tanks off.

Great.

Thank you very much.

Thanks, Steve.

Jim Suva, Citigroup.

Thank you very much.

Can you quickly touch upon -- I believe the licensing agreement between SCP and Corning expired the end of last year.

And maybe just by the end of 2011 and let us know what the outcome of that was?

And then on the second note can you just kind of revisit one more time your commentary about the hope for improved pricing or more stable pricing in 2012?

Because if we're thinking about the supply chain and connecting the dots at the panel makers, and also the OEMs are not profitable, I would assume that they're hoping for these panels or these glass prices to significantly continue to decline in the future.

So what's the indications that's giving you that give you that hope?

Okay.

On the former, on the Samsung agreement, as we talked about before, the Samsung agreement expired I think, at the end of November last year.

Embedded in that is a step-down in the royalty rate.

And we'll be talking some more about it at the IR day, so I'll ask you to hold until that day, because we do intend to address it then.

So what leads to our belief around the potential to get back to more moderate price declines?

It is all based on the fact that we believe the industry is correcting to get glass capacity more in line with what will be the demand.

And when that occurs, we believe there's an opportunity for more moderate price declines.

That has been the primary strength of why we had moderate price declines during those periods over the last five years.

It is very obvious from our customers perspective they would love to have price declines at this higher rate continue in perpetuity.

And the tension is whether they have enough strength to force that upon the glassmaking industry or not.

We believe that the capacity/balance situation in competitive dynamics will ultimately lead to more moderate price declines.

And our hope is that occurs as soon as quarter two.

Thank you.

And we'll see you next Friday.

Looking forward to seeing you, Jim.

George Notter, Jefferies.

I guess I was trying to better understand the relationship between price erosion on LCD TVs at retail and the size of the glass market.

If I look back at 2011, it looks like pricing at retail came down around 6%.

I think that was actually quite a bit below what you guys originally were thinking about coming into the year.

And looking forward 2012, kind of feels like price erosion is going to be around the same place, 5% I think if you look at the DisplaySearch numbers.

I think if you look at the glass market you guys are talking about 11% kind of growth this year in volume terms.

How do you feel about how those two numbers correlate?

Is it possible that you guys could be overestimating the growth in the market if you only get 5% price erosion on TVs at retail?

Thanks.

So I don't think we actually agree with your TV pricing data down.

I think we think it was higher than that 5%.

And we have never seen an exact correlation between pricing in retail and our pricing to us.

But we think we've got right the end market growth for televisions.

Obviously, we do realize that even though consumer television is a fairly resistant purchase in tough times, there is the possibility of weakened economic fence.

If Europe goes into a serious recession, then maybe we could be wrong.

But we think we've got it right.

In fact, if anything, I think we got surprised a little bit on the upside in terms of units of television in the back half of this past year.

So we remain comfortable with our estimate.

Obviously, we could be wrong.

Got it.

Thanks.

Simona Jankowski, Goldman Sachs.

Just wanted to clarify, Jim, some of the comments you made at the very beginning of your prepared remarks where you talked about approaching a bottom in profitability but not expecting the Display segment to grow.

Was that a comment looking out beyond Q1?

If you can just talk a little bit about your longer-term expectations in the Display segment.

And also since you termed the margin decline this quarter as the reset, as opposed to a decline, that implies some level of permanence.

And so just wanted to see if you can address how much of your gross margins you think you can recover beyond Q1 and also your thinking about offsetting some of that decline with the actions at the R&D and SG&A line?

That was a lot of questions in one.

So our comment about Display was a long-term comment.

We think we're reaching the point where the unit growth and the volume growth, even with moderate price declines, will give us periods of time when there basically is no net sales growth for Display.

This may have come a little earlier than what we expected.

I think we have been expecting it may be, this occurring in 2014 or 2015 rather than 2012 and beyond.

But basically, it appears that we may be at that point now.

That was a longer-term comment, that wasn't a quarter-by-quarter comment.

Your second question was?

Yes.

Just along the same lines when you talk about a reset in profitability, does that imply that you view your gross margin permanently coming down to a lower level even beyond the issues in Q1?

So I would say with what we know today, we believe that the gross margin has come down in Display, and we don't see the set of factors that would drive it back up.

To drive it back up, what would have to occur is that we would have to have a period of time where price declines were very, very minor and that we ran our tanks full and then cost reduction exceeded price declines.

Right now, I can't -- in all candor, tell you that I see a set of conditions that will allow that to occur.

That's what's leading us to say with this double quarter down of double-digit significant cumulative, we think we have driven the margin of Display down.

I will point out, it remains extraordinarily profitable.

It's still our most probable business, but that's why we're calling it a reset.

I'd love to have the situation outlined that occurred that we get to a few quarters of no price declines.

If that happens, then I can reverse my comment.

Yes.

And then just the last part of that was, would you consider offsetting some of that with lower OpEx investments in the business given that the growth in margin profile there has changed?

Yes.

In the Display business itself, you will see actions taken to reduce the OpEx.

Okay.

So the off margin impact you would think would be more muted but still some relative to the gross margin impact?

I'll just comment, Simona, operating expense of this business is pretty tiny to start with.

The moves that we can make in OpEx here are not going to overcome the gross margin declines from pricing.

Okay.

Very clear.

Thank you.

Ehud Gelblum, Morgan Stanley.

Couple things.

From your study that you did with McKinsey, did they give a sense as to as you go forward, how low inventories can sustainably get by looking -- I'm sure they looked at other industries and where they went to.

Could we be looking at eventually down the line and 10-, 11-, 12-week cycle?

Or do you think it stays somewhere around 13,14?

And then in negotiations with this major customer out of SCP, what are the points of negotiation?

What can you actually work with them aside from price?

Or is it really just hitting a price point and that's it?

I understand there's still a premium to be had for the level of quality of glass that you have versus your competitors, but what else can you provide to them besides price?

I'm just wondering -- or is it a matter of just who decides to finally give in?

And then the commentary on the significant price declines over the next two quarters or actually over Q4 and Q1 can you give us a sense as to significant double-digit decline?

Can you bracket that?

Is that 15% to 20%?

10% to 15%?

13% to 18%?

Something that we can just make sure we're all sort of on the same page?

So I'll go in reverse order.

I'm not going to be more specific on the numbers.

Cumulatively, it's a significant double-digit decline and we're not giving out a more specific number.

Relative to the customer in Korea, the thing we can always offer is that we believe we are a extraordinarily reliable supplier.

We believe our glass actually runs the best in their process, and those are the things that we would think would lead them to want us to have at some share level.

And from their perspective, obviously price is probably the preeminent one.

Beyond that, we hope to reach agreement with them and have them as a customer.

And, your first question was?

Inventory, how low can it go?

McKinsey said was over -- they can't forecast in perpetuity here, but they did say they believed over the next four years, that we could see going down a half a week per year.

Obviously with the potential always that the economy is much different, that could change.

So if you think over four years, that knocks another two weeks off.

That's helpful.

I noticed you didn't mention the $10 billion revenue target that you have in the past.

You also didn't mention the CapEx, though you said that was the same.

But wondering if that $10 billion revenue target is still out there for you?

And then finally you mentioned that there is an imbalance right now with too much glass out there.

We know you're taking capacity out of the market; Asahi's taking a similar amount of capacity out of the market.

That leaves only one player that doesn't seem to be doing that.

If that one player doesn't actively take glass out of the market, do you think you can still get to a supply balance?

Or would they constantly be acting as a spoiler?

I'll have to let you talk to that competitor and see what their plans are in terms of running capacity or not building capacity.

I'm just not going to comment on them.

On the $10 billion, yes, I think the $10 billion is still possible.

Obviously, Display will not be as strong as it was before.

The flip side, Telecom is actually stronger than we originally expected.

And Environmental is stronger than we expected, so I still think it's possible.

We'll probably talk some more about that next week.

The mix will probably be different.

But we certainly haven't given up on the goal.

We do need some help.

I think everybody forgot one of the assumptions we said on getting on our way to $10 billion is we can't have a global economic malaise.

If Europe goes into recession, then I get more worried.

Let's hope it doesn't.

Thanks so much.

John.

It's Ken.

I want to recognize that we're past the market opened, and be respectful of folks time.

We will take one more call but for those who are in the queue, [Ann] and I will be in our offices right after the call.

We can help answer your questions.

John, we'll take one more caller.

Ajit Pai, Stifel Nicolaus.

Couple of quick questions.

I think the first one is just to the same point on the pricing side, you talked about in the fourth quarter and the first quarter, working with your customers and trying to help them get to better profitability.

Could you give us some indication as to the competitive dynamics and from a -- is some of the price reduction being driven by what your competitors are doing?

Was it primarily customer driven?

And then the second question is, you've talked about M&A and also bolstering your businesses outside of Display and potentially even Display.

But could you give us some color as to whether in 2012 you can expect great activity there?

I think you've highlighted Life Sciences and Telecom as the two focus areas, whether that's still the case or it's broader than that?

So in terms of M&A, you should expect greater activity in 2012 than 2011.

The primary segments we're looking on remain Life Sciences and Telecom.

But we definitely are moving to be more active.

We're going to see more free cash flow and we think we can put it to work appropriately in M&A.

In terms of the pricing dynamic, to be sure competitive price dynamics play into this also.

Obviously, that's driven a lot of what happened in Korea in Q3 and Q4.

So I don't mean to imply that is just us being nice guys with our customers.

Clearly the competition has something to do with this, too.

But I think we clearly went to our customers acting to help them in this situation.

In Korea obviously, we're feeling the competitive pressure.

Ken?

Great.

Jim, any closing comments?

Just a couple.

I think that I want to emphasize again overall the strength of Corning in this past year, we had a very great year.

I mentioned the records and sales, gross margin and operating margin, eighth year in a row of free cash flow, raised the dividend and share repurchase.

And the great performance in our businesses outside Display.

I think that right now the conversation is obviously dominated by pricing in Display.

We recognize this reset has occurred.

But we definitely intend to get the Company at a new level of profitability, and then Wendell and I are committed to get the Company to grow off of that level, so we think that's going to happen.

Just one more reminder, obviously we'd love to see you in New York City.

I promise you a very exciting event.

Wendell is going to do some very creative work.

And so we'd like to see you in person.

And also, we of course will be presenting in February at the Goldman Sachs Technology and Internet Conference on February 14 and on February 28 at the Morgan Stanley Technology and Media Conference.

Hope to see you there if not in New York.

Ken?

Thank you, Jim, and thank you all for joining us this morning.

A playback of this call will be available beginning at 10.30 AM Eastern time today.

It's going to run until 5 PM Eastern time on Wednesday, February 8.

To listen, dial 800-475-6701.

The access code is 233477.

Audiocast obviously is also available on the website during this time.

And John, that concludes our call this morning.

Please disconnect all lines.