康寧 (GLW) 2012 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Corning Incorporated quarter four 2012 earnings results.

It's my pleasure to turn the call over to Ms. Ann Nicholson, Director of Investor Relations.

Please go ahead.

Thank you, John, and good morning.

Welcome to Corning's fourth quarter conference call.

Jim Flaws, Vice Chairman and Chief Financial Officer, will start the call with some prepared remarks.

But before Jim begins, I'd like to remind you that today's remarks contain forward-looking statements that fall within the meaning of the Private Securities Litigation Reform Act of 1995.

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

These factors are detailed in the Company's SEC reports.

Now I'd like to turn the call over to Jim.

Thanks, Ann.

Good morning, everyone.

I'd like to begin today by looking back at 2012.

This time last year, we knew we were facing some external headwinds.

First, in our display business, second in the solar business at our equity venture Dow Corning, and third in the macroeconomic environment.

In our LCD glass segment, we had experienced significant pricing step down in Q4 of 2011 that would continue into Q1 of 2012.

Those price declines unfortunately reset the corporation's profitability to a lower level.

So we laid out a plan to first stabilize the Company's earnings and second to grow earnings again.

We call this plan Form Bottom March Up.

The key element of earnings stabilization was to moderate our price declines in LCD glass and also to regain positive momentum in the Display segment.

And our plan to grow earnings again would be driven by our Telecom, Environmental, Specialty Materials and Life Sciences segments.

I'm very pleased to say now one year later we've made great progress against both components over the course of 2012.

Now let me share some highlights from the year.

Coming into 2012, we quickly brought our LCD glass supply in balance with our demand.

We successfully moderated our price declines in Q2 and Q3, and late in the third quarter we entered new agreements with some LCD customers.

Now these agreements cause Q4 price declines to be slightly above Q3 levels in our wholly owned business, but we believe these agreements are an integral part of our plan to stabilize our Display business.

And now our Q1 price guidance is that we expect price declines to moderate from what we experienced in Q4.

We achieved record sales and expanded gross margins of our non-display businesses.

We feel particularly good about achieving these results despite the worldwide economy's significant negative impact in all our segments.

And when the economic malaise affected our business in the second half, we quickly took actions to control costs, manufacturing groups responded with great performance, and commercial groups captured every opportunity.

We also retained our strong balance sheet while returning cash to shareholders in the form of an increased dividend and completion of a major stock buyback.

We closed a significant acquisition in Life Sciences, positioning it to become a $1 billion dollar business.

And lastly, our young, fast growing, Gorilla Glass business achieved $1 billion in sales, a 44% increase over 2011, so something we take tremendous pride in, it's a great example of how we bring life changing innovations to market, and demonstrates our ability to generate big revenue streams quickly.

Now I'd like to turn to quarter four with some highlights.

Quarter four was a record sales quarter in our 161-year history, accompanying our new full year record sales.

I think more importantly, we returned to year-over-year EPS growth in the quarter before special items.

This demonstrates progress against our plan to Form Bottom March Up, and this improvement would have been even better if not for the sudden weakening of the yen to the US dollar exchange rate or Hemlock's business conditions, and I'll talk more about these later.

Both our Display and Specialty Materials segment sales exceeded our initial expectations for the quarter.

We believe Display demand was driven by retail expectations for Q1, especially for Chinese New Year, and I'll comment more on that in a minute.

Specialty Materials' Gorilla Glass business grew almost 15% sequentially as the supply chain dealt with surging smartphone growth and new product launches.

On the other hand, Environmental Technologies sales were lower than expected as the light duty auto industry took longer year-end shut downs and adjusted inventory in a continued softer demand environment.

In light of the current situation, the market for solar grade polysilicon, Hemlock Semiconductor has seen steep declines in volume and pricing in 2012.

This negatively impacted our equity earnings in the fourth quarter.

And lastly, the yen/dollar exchange rate moved very sharply and significantly in December, negatively impacting our earnings in Q4, both sequentially and year-over-year and something we are watching closely as we enter 2013.

Now let me delve into the fourth quarter details.

In quarter four, we had a number of special items.

I had previewed these for you on our Q3 call.

We took a corporate-wide restructuring charge to reduce our fixed cost.

We actually realized translation gains from the liquidation of an internal entity.

And we also took asset impairment charges in Specialty Materials for our large cover glass operations, and at our major equity ventures Dow Corning Corporation and Samsung Corning Precision.

I'll report our results today ex-specials which is a non-GAAP financial measure.

Please refer to GAAP reconciliations on our website.

I'm pleased to announce our results, both sales and earnings per share were above consensus for the quarter.

Fourth quarter sales were $2.15 billion, up 5% versus Q3 and 14% from a year ago.

Gross margins ex-specials were 43%, consistent sequentially as we had expected.

SG&A and R&D were flat on a dollar basis sequentially versus a year ago, they were also flat on a dollar basis and down as a percentage of sales reflecting our efforts at cost control.

Gross equity earnings of $198 million excluding specials were down about 14% sequentially and worse than our expectations, driven by even further volume declines at Dow Corning's subsidiary, Hemlock Semiconductor Corporation.

I'll expand my comments on Hemlock later in the call.

And as I previewed, EPS excluding special items was $0.34, even with Q3 and up $0.01 from versus a year ago.

EPS as stated here is a non-GAAP measure and reconciliation GAAP can be found on our website.

Foreign exchange rates negatively impacted our sales by $21 million and net income by $16 million sequentially in the quarter.

Now for the year, sales were $8 billion, slightly up from 2011.

Corporate gross margins ex-specials were down 2 percentage points, driven by the significant year-over-year price declines in our LCD glass business that I mentioned in my opening.

Specialty Materials improved their gross margin by double-digits in 2012 driven by higher volumes in Gorilla Glass.

We improved Gorilla manufacturing performance, and reduced the losses on our large scale covered glass for the Sony televisions.

Now moving down the income statement, gross equity earnings ex-specials fell 35%.

Our effective tax rate increased for the year from 13% to 18%.

The larger increase in Q4 reflects the accounting treatment that caught us up on the full year rate.

Our full year tax rate was 18.4%.

I'll have more to say about taxes later and also at our upcoming investor relations day, as the recent activity in Washington DC has actually benefited Corning.

EPS for the year, excluding special items, was $1.29 versus $1.76 in 2011.

The primary driver of the earnings decline year-over-year was the significant impact of LCD glass price declines in our wholly owned business at SCP and reductions in Dow Corning's equity earnings.

Again, EPS as stated here, is a non-GAAP measure and a reconciliation can be found on our website.

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

Display sales were $800 million in Q4, an increase of 5% sequentially and 3% versus last year.

The yen exchange rate negatively impacted sales by $27 million.

Gross equity earnings ex-specials from our equity venture in Korea were $157 million in Q4, a decrease of 16% versus the third quarter.

The results included Corning's share of non-recurring charges, approximately $12 million including pension expense.

During Q4, SCP also took some restructuring actions totaling $18 million in charges to our equity earnings, mainly for some asset write-offs.

For your modeling purposes, Display equity companies fourth quarter LCD sales were about $749 million, an increase of 1% versus the third quarter.

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

Our public filings report SCP total sales, which include various other products such as CRT, glass, and ITO targets.

As we expected, our wholly owned LCD glass volumes were up in the mid-teens sequentially and more than a third year-over-year, driven by customer utilization increases and our new agreements.

Volumes at SCP were up slightly sequentially and year-over-year.

Volume increases were in line with their customer utilization rates.

Now recall in Q3 of 2012, we signed new agreements with some key customers.

These agreements stabilized Corning's share at each and maintained a fixed relationship between Corning's pricing and competitive pricing at that customer.

So far, these new agreements have had their intended effect of keeping our share of these customers stable as required by the terms of the agreement.

This share stability has allowed us to better forecast our capacity needs and, thus, to maintain high levels of capacity utilization at our plants and improve our cost performance.

We also explained that initially we expected those new agreements would result in slightly higher price declines in Q4 than in the prior two quarters due to some initial adjustments to line up our prices with the requirements of the new agreements.

In quarter four, we did in fact see middle-single-digit price declines in our wholly owned business, however, SCP sales saw prices declines remained more moderate in Q4.

Net income ex-specials were down 8% sequentially driven primarily by the lower equity earnings at SCP.

For the full year, Display sales were $2.9 billion, down 8%.

Higher volumes were more than offset by price declines.

Sales for the full year were not impacted by changes in the yen exchange rate.

Turning to industry data, the glass market for 2012 was about 3.7 billion square feet, up about 15%.

On the supply chain front, we estimate that inventory grew, measured in weeks, the trunk in absolute square feet during the quarter.

Because Q1 is seasonally lower at retail, we're watching inventories closely, but I will comment more on the supply chain in the outlook section.

As retail data for quarter four begins to come in, we estimate retail glass demand was approximately 3.5 billion square feet in 2012, as expected.

LCD television unit demand was essentially flat year-over-year on a worldwide basis.

However, if you take out Japan, where the absence of the Echo Point tax credit caused TV sales to be down 60%, the worldwide television unit demand last year was up 3%.

We believe the weak macro economy dampened demand during the year.

However, very importantly for us, large size televisions continued to sell well all year, driving the average screen size higher by two inches in 2012, and 50-inch plus televisions grew by more than 50% in 2012.

And based upon what we saw at the Consumer Electronics Show we have expectations of this trend continuing next year.

Now turning to Telecom, quarter four sales were $540 million, up 3% sequentially and 10% year-over-year.

The ramp of Australia's NBN project and reconstruction efforts followed by Hurricane Sandy drove the sequential increase.

The year-over-year increase was also driven by the NBN project and increased sales of fiber to China.

Net income ex-specials was up 23% sequentially.

The primary driver of improvement in earnings from Q3 were the higher sales and improved manufacturing efficiencies.

Q4 net income ex-specials was up year-over-year by 105% or $22 million.

Improvement in net income was driven by the 10% sales increase and manufacturing efficiencies.

For the full year, sales were $2.1 billion.

Cable, Fiber-to-the-Home and wireless sales were up double-digit percents.

We were quite pleased with these results given the weakening economy in the second half, and demand for fiber in China was strong in every quarter.

Now Telecom's annual net income ex-specials, $135 million, was down 20%.

This earnings decline for the full year was due mainly to weaker product mix in the first half of the year and non-repeat of compensation bonuses versus 2011 which were very low and 2012 which we intend to pay bonuses in Telecom.

In Environmental, Q4 sales were $219 million, down 6% sequentially versus our expectation of flat to down slightly.

European demand for light duty diesel products fell further in the fourth quarter and the impact of year-end supply chain shut downs was greater than anticipated.

Net income ex-specials was down 35% sequentially and 39% year-over-year, driven by these lower sales and lower production volumes.

For the year, Environmental sales were down 3%, driven primarily by lower sales of light duty diesel products in Europe.

Heavy duty sales were up in 2012, but were impacted by, in the second half, by the slowing economy as Class A truck manufacturers adjusted production and their inventories.

Environmental improved their gross margins 3 percentage points in 2012 due to strong manufacturing efficiency improvements despite the lower volumes.

In Specialty Materials, we had another record quarter with sales up 10% sequentially and 68% year-over-year.

Gorilla Glass demand was up significantly in the quarter, driven by IT and handheld customers ramping for new product introductions.

Net income ex-specials was up slightly sequentially with improvements in Gorilla Glass gross margins.

However, this was partially offset by increased research spending on some new innovations in glass.

For the full year, sales were up 25% on an unprecedented demand for Gorilla Glass.

Net income ex-specials for the full year improved primarily on expanding gross margins in Gorilla Glass business.

Gorilla Glass gross margins, already above the corporate average in 2011, improved in 2012 on higher volumes.

For those of you who were new to Corning's manufacturing processes, glass melting is a high fixed cost business, so when we get more glass volume, we get good variable margins, assuming we run efficiently, and this was the case in 2012.

And we expect further gains in 2013 for Gorilla Glass.

In Life Sciences, our Q4 sales were up sequentially and year-over-year due to the additional sales from our large acquisition, which actually closed on October 31.

The acquisition integration is just underway.

It's going smoothly, and we expect this deal to be accretive to this segment.

Net income ex-specials were up on the additional sales.

For the year, Life Sciences sales were $657 million, up primarily due to the Discovery Labware acquisition.

Now net income was down year-over-year, but this was due to the acquisition expenses, deal integration costs and some specials related to it.

Now turning to Dow Corning, gross equity earnings ex-specials were down 13% in Q4 due to lower sales of polysilicon.

Versus a year ago, silicone sales were up slightly, but polysilicon sales are much lower driven by dramatic lowering prices and lower volume due to the continuing softness of the solar market.

This is reflected in the year-over-year gross equity earnings decline of 33%.

Now during the fourth quarter, Dow Corning took special charges of $175 million for workforce reductions in both silicones and polysilicon, and also for the write-offs of some polysilicon assets.

Our share of these charges was $87 million.

For 2012, Dow Corning sales, net income and our equity earnings were all down, driven primarily by the lower sales of polysilicon.

The impact of lower polysilicon volume and pricing impacted 2012 equity earnings by approximately $150 million, with about $24 million of it happening in the fourth quarter.

Now turning to the balance sheet, we ended the fourth quarter with $6.1 billion in cash, short-term investments.

Capital spending for the quarter was $526 million.

Free cash flow for the quarter was zero, but that's due to the closing of the Discovery Labware acquisition.

As a reminder, free cash flow is actually a non-GAAP measure.

The reconciliation to GAAP can be found on our website.

We completed our share repurchase program during the quarter and also acted to increase the dividend by 20% in the fourth quarter.

We ended the quarter with approximately $1.5 billion in cash in the United States.

Our capital spending for the year was $1.8 billion, about $100 million lower than our forecast and our current expectation remains that cap spending in 2013 will fall year-over-year to about $1.3 billion.

And now to our outlook and I'll start with Display.

Let me start with our view of the end market.

We expect the retail market, as measured in square feet of glass, to be up mid- to high-single-digits.

For reference, 2012 was 3.5 billion square feet.

We think LCD television units will grow in the mid-single-digits, but area growth will be higher.

We believe the trend of consumers buying larger televisions will continue.

We're not as bullish on the PC market growth, expecting 10% year-over-year unit growth, nearly all of it due to tablets, and monitor units are expected to be down slightly.

Now for quarter one.

As we near the end of January, we see the quarter one LCD glass market declining mid-single-digits sequentially.

This reflects the normal seasonality that we have seen in Display.

Our wholly owned Display business and SCP combined are expected to be down as mid-single-digits.

Recall, Q2 is actually the slowest season at retail, so the supply chain should be moderating Q1 to manage inventory.

Now some of you may recall we expected the supply chain inventory to shrink in 2012 as measured in weeks.

In fact, it actually expanded.

Looking at 2013, however, we continue to believe it should shrink by about a half a week, but we admit it's a little bit of an unknown this early in the year.

You should also note that the LCD glass market and volumes in Q1 will be up year-over-year reflecting a larger market.

As for glass prices, recall again, that our new agreements with key customers.

Last October, we explained that going forward after Q4 with our share stabilized and the industry maturing we expected price declines to moderate at all of our customers including those of the new agreements.

The price decline that we expect in Q1 is less than Q4 in our wholly owned business.

Now at SCP, price declines did not increase with Q4, so they're expected to be about the same as our wholly owned business in Q1.

As for our glass capacity, I want to reiterate we intend to diligently manage our capacity to supply as LCD enters its mature phase of growth.

These new agreements actually help us better forecast our demand in 2013.

Now in Q1, we continue to run at high utilizations to support demand and actually to rebuild some inventory for both our Gorilla and LCD glass businesses, both of which have inventories for us well below what we consider healthy.

Doing so will provide us added flexibility for the growth later in the year.

Now moving to Telecom, we expect Q1 sales to be consistent with the strong Q4, this puts them up 5% year-over-year driven primarily by the NBN ramp.

In Environmental, we expect Q1 sales to be consistent sequentially, down 15% year-over-year across both light and heavy duty businesses.

And that's comparing to a very strong market in Q1 of 2012 when we had record auto production, very high volumes in heavy duty diesel and a healthier light duty diesel market in Europe.

For the full year, we believe auto production will grow driven by strength in North America and Asia.

We also believe tighter regulations in Europe and China will lead to growth in demand for our heavy duty diesel products.

Now Specialty Materials sales are expected to decline about 30% in Q1 off the very high growth of Gorilla in Q3 and Q4.

Now for comparative purposes, I want to remind you that Gorilla sales have always been weakest in the first quarter.

This is due to the industry seasonality.

I think supply chain may be adjusting some inventory in Q1 after some build up in Q4.

For the year, we expect double-digit market growth and it should be very strong driven by the penetration of touch in notebooks.

We expect to see the impact on this in the second half of the year.

Life Sciences, we expect sales to be up about 15% due to the added sales from our acquisition.

Now turning to Dow Corning, we expect equity earnings from Dow Corning to be down in the quarter.

Silicone sales are expected to be about flat, but the demand for polysilicone at Dow Corning's consolidated subsidiary, Hemlock Semiconductor, is down severely, to about half of what we had in Q4.

This will significantly impact the profitability of Dow Corning and, therefore, we expect equity earnings from Dow Corning to be only a few million dollars for quarter one.

Now I'm going to take some extra time on the Hemlock situation this morning and I'll reference them again during our investor day.

I'm going to comment mostly on the polysilicon portion of the solar industry.

And I believe you know there is been significant impacts to other portions of the solar industry, wafer cells, installation, government subsidies, that are related and in some cases causing the impact to our poly market.

I'll just pause to remind you that Hemlock also makes polysilicon for the semiconductor market and that part of our business remains fine, with prices strong and demand good.

Now there have been two primary step downs that have affected Hemlock's business.

First, the market for solar poly began to suffer in 2011 as growth in the solar market was less than expected in the true end market, and by the impact of new poly capacity brought on line worldwide.

The solar poly industry moved to a significant over capacity position and this resulted in steep declines in the spot price of poly.

The drop in the spot price was so severe in quarter four of 2011 that long-term contractual customers of poly producers, such as Hemlock and others, strongly requested negotiations on price.

Now long-term followers of Corning will recall that Hemlock prepared for this eventuality by requiring customer prepayments against the contracts.

The theory was that even if the spot price went down lower than contract, customers would not attempt to walk away from these contracts and their prepayments.

However, by Q4 of 2011 the spot price had fallen so far -- actually into the mid-$20 level -- that contractual customers were requesting contract modifications.

Now Hemlock responded by making some temporary adjustments to the contracts.

The price was lowered substantially and done quarter-by-quarter.

However, in return for this change, customers were not allowed to earn back their prepays.

These temporary adjustments did not change the firm commitment of customers to the take-or-pay nature of the poly over the life of the contract.

Hemlock made these modifications with the expectations, and perhaps I should say hope, that the industry would sort itself out by shutting down excess capacity and the price would climb back over time.

The second big step down here relates to trade disputes on solar.

In the United States, there was a dumping complaint against Chinese solar cells being imported.

The initial ruling in spring of 2012 called for duties to be imposed.

Last summer, in July, China announced a dumping investigation into polysilicon imports for solar into China, first, against the US sellers of poly and later expanded the case to include Korea and European makers of poly.

China's Ministry of Commerce, known as MOFCOM, is investigating and has announced that they will have a preliminary ruling due in late February of 2013.

The Chinese market has been very important for Hemlock sales of solar poly.

As the MOFCOM investigation became known, Hemlock began experiencing declining solar sales into China.

This started in August and then reached dire levels in the fourth quarter.

It's our belief that no importer of solar poly wants to be subject to potential retroactive duties, and given the excess of poly capacity inventories why would they take a chance.

It's this second step that impacted Hemlock so much in Q4 and will in Q1.

Now, obviously, we don't know what MOFCOM will rule, if they will even stick to their February date.

We also don't know how the industry will react to whatever the ruling is, however, I can tell you is Hemlock is preparing for a variety of different scenarios, including difficult ones.

The market for solar grade polysilicon is almost non-existent now as the industry deals with excess inventories and awaits resolution of these various trade disputes.

We believe solar customers are just not buying polysilicon until they have more certainty regarding the MOFCOM investigation in China.

As I mentioned earlier in the call, Hemlock Semiconductor impaired some assets in Q4.

These brutal conditions in the solar polysilicon market are impacting our equity earnings, but we believe the Hemlock Board will actually take appropriate action to minimize these losses, even if it requires further impairments and layoffs.

Now we'll communicate with you as we learn more regarding the MOFCOM investigation and any implications for Hemlock.

I'd like to remind you that at Hemlock they prepared for negative volatility in the solar polysilicon industry.

Hemlock had built additional capacity based on the long-term contracts with these customers.

These contracts have actually very firm language about customer obligations to fulfill their commitments, and Hemlock reinforced these contracts by mandating customer prepays.

We believe Hemlock is in a strong position to mitigate against severe issues.

If necessary, the management team will move to enforce the take-or-pay nature of the contracts.

These contracts actually held up last year in resolution with one customer and Hemlock believes they will again in the future if needed.

Potential timing and restructure impairments and contract resolutions may make the individual quarters for Hemlock bumpy, however, Corning believes that Hemlock has the ability to reset operations to a lower level if that's what the market is and reduce the negative drag on earnings.

Corning also believes the strength of the contract should allow Hemlock to offset the impact of any possible asset impairments or restructuring.

The upheaval in the solar industry is very disappointing.

We actually continue to believe that polycrystalline solar technology does have a future, however, it may be a bumpy road.

In the meantime, we believe Corning investors should judge Corning's earnings per share without the ups and downs of Hemlock, and we'll begin helping you to evaluate Corning on this basis.

Now let me turn to the rest of our Q1 forecast.

We expect gross margin to decrease by two points driven mainly by lower sales during the quarter, SG&A and R&D spending will be consistent with the fourth quarter.

Equity earnings, excluding special items, will be down 35%.

Our effective tax rate for 2013 will be about 19%.

This projected rate is only slightly higher than 2012 as we expect a higher mix of our income from our wholly owned business which are taxed at a higher rate than equity earnings.

However, it's much lower than what we had previously told you because the new US tax law, signed in effect on January 3, included tax extenders which are very favorable to Corning.

Now as investors know, we currently price our LCD glass in Japanese yen.

We have highlighted the impact of the yen to US dollar moves for investors for many years versus the foreign exchange rate moves.

We do believe that the strengthening yen put more price pressure on the LCD business in the period from 2008 to 2012.

The current weakening yen has the potential to help us moderate price declines.

As you know, the yen has depreciated very suddenly, actually more than 10% since the beginning of December.

Of course, we're hopeful there will be no further weakening.

At the same time, we are considering various actions to minimize its impact if it weakens further.

As a reminder, our results move with these changes in the yen to the US dollar exchange rate.

All our LCD glass is sold in yen.

When the yen weakens, it lowers our Display results.

On the other hand, it improves panel makers' results because the panel industry sells into hopes.

When the yen strengthens the opposite happens.

Specific to Corning, if the yen moves one point higher or lower in Q1, we estimate our sales would decrease or increase by $8 million.

Now similar to panel makers, we also have some Gorilla Glass manufacturing costs in the yen, but all of our Gorilla Glass is sold in dollars.

So the net impact of a one-point move on our net income is only $6 million.

Now that concludes my opening comments and I'll turn it back to Ann.

Thank you, Jim.

John, we would now like to open it up for questions.

Certainly.

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

Please go ahead.

Thank you.

Jim, we understand your focus on share stability for display glass to better forecast capacity and so far so good.

What do the predicted indicators on pricing change foretell about the market share intentions from your competitors?

I ask since every action has a reaction, and I'm wondering if rationality may prevail in the industry, or do you feel that competitors are still considering what they should do at this point?

And do external factors such as currency actually imply some share shifts in the forthcoming quarters?

Well, Mark, I'll have to let you speak directly to our competition about their intentions.

We believe what we seen in quarter one, both in terms of how the contracts are working on our share and on more moderate price declines, indicates that we believe the industry is moving to more moderate price declines for LCD glass, so that's the only initial indicator I can give you.

I believe our competition is announcing the results today and next week, so we'll look forward to hearing what they have to say about guidance.

But it is our strong belief that we can see moderation in price declines in the LCD business.

Okay.

And then maybe if I touch on Gorilla Glass where you're focusing on moving up more capacity there.

Gorilla Glass is just so highly differentiated, are we at a point where prices for Gorilla Glass can actually start stabilizing or not decline, since it is a premium product that's going to a lot of premium end markets such as smartphones and tablets, what should we kind of assume for pricing for the Gorilla Glass segment for the balance of the year?

We expect prices to decline in Gorilla, this remains a new product, it's in the consumer electronics industry.

However, we think we can keep up with any price declines.

The price declines in Gorilla tend to happen in the first quarter of the year.

So you should expect some price declines this year, but we're very confident we can keep up with that in terms of our cost reduction and experience the great growth that we expect from this market going forward.

And we continue to do very well with all customers, and our recent announcement of our Gorilla 3 went over very well at the Consumer Electronics Show, and we're expecting a strong conversion rate of new customers to this improved damage-resistant glass.

That's helpful.

Thank you, good luck, Jim.

Thanks, Mark.

Our next question is from Rod Hall with JPMorgan.

Please go ahead.

Good morning, Jim, good morning, guys.

Thanks for taking my question.

Jim, I wanted to clarify one thing you said which is, I think I heard you say that Specialty Materials is expected to be down 30% sequentially.

I just want to make sure that we heard that right, and then if that is correct, just get you to give us a little more color on that.

Is that a demand driven decline, because that's a little bit more decline than we would have anticipated or is there something else going on?

Are there structural changes in the use of Gorilla Glass and certain form factors coming up, that sort of thing, so it would be good to get some color on that.

And then, the other thing, more on the positive side, I wanted to ask you about is the panel industry, just if you could comment on 2013 about the supply capacity of the panel industry, whether you think supply gets short as we move through 2013?

Or just what you think the situation is there, and how that might come back and impact glass pricing?

Thank you.

Sure, Rod.

So on Gorilla, I did say 30%, and we think it's probably slightly higher than what the normal seasonality that we experienced in Gorilla to be, probably because there was a little inventory built in Q4.

But we now are, six-year Gorilla, and what we've determined is Q1 is always the quarter where we see the weaker demand.

So, it is demand driven but that demand in us may be partially affected by inventory.

We seen no change in market share for Gorilla and, in fact, we think Gorilla 3 will actually improve our position.

It's a much better product.

So we're not worried about the slight down in Q1 and, actually, are anticipating very strong growth in the remainder of the year.

In the back half of the year, we think touch will begin emerging on notebooks and, as you know, notebooks are about twice as big as a tablet and many times bigger than a smartphone, so we think that will be good for us.

So, we're not worried about a slight down in Q1.

Relative to panel industry, you know it's a little hard for us to judge.

Clearly, the panel capacity has been moderated in terms of the growth over the past year.

And the new panel capacity in China by LG and Samsung is not coming on fast.

So as we continue to see the LCD market grow, and I'd emphasize again the large scale televisions, and I mentioned the growth of 50-inch this past year and the average size going up.

I don't know if you had a chance to go to the Consumer Electronics Show, but clearly very large size and increasing focus on higher definition for those, I think we'll use up panel capacity.

Whether it actually gets to a shortage position or not, it's hard for me to judge from my position.

But I would say there's good signs in the panel industry, as well as in our LCD Glass business.

And Jim, could you just to follow-up your first part of that question?

Thank you for that.

But I wanted to see, could you make a more general comment then on your view of the consumer demand situation right now?

Do you feel that demand here starting off the year is a little weaker than you would have anticipated, or just generally any color you can give us on what you're thinking on consumer demand would be interesting?

You're asking for Gorilla demand at retail?

No, just more general consumer demand, because you made some commentary on TV demand maybe being a little bit weaker here.

Do you feel like consumer demand in general, at least the parts of consumer demand you're exposed to, is a little bit weaker than normal seasonality here heading into Q1 or, just curious what you think is going on with the consumer?

I would say, I have to break it down by geographies, but in the US, I think television demand is fine heading into the Super Bowl.

People forget that people buy televisions after Christmas.

In China, we've had good contact with our customers who buy the glass there and Chinese television sellers, remember the Chinese brands are about 70% there.

Their expectations are for a good Chinese New Year and demand, I think, it remains mediocre in Europe, that's really no surprise.

In our Car business, which is the other consumer phenomenon that we experience, Car demand, I think, in the United States remains strong, very weak in Europe.

I think car demand in China looks fine.

We do not feel like we've seen this big downdraft from -- in the United States -- from the payroll tax rolling back on.

Obviously, the fiscal cliff negotiations helped a lot of Americans except for the very wealthy, so we are not seeing a big downdraft in consumer demand.

Okay, thank you very much.

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

Please go ahead.

Yes, thank you, good morning.

Jim, you mentioned mid-single-digit growth for the LCD glass industry, that equates to about 3.7 billion square feet.

Where are we with glass supply now, and where do you think we will be exiting this year?

So, it's a little harder question to answer, Wamsi, than it used to because of how the mix for us of Gorilla versus LCD, but we would say right now supply/demand balance seems healthy.

It was probably very tight in Q4 but it's healthy.

We remain very full right now.

The place where we have capacity down is in Korea.

There is really no new footprint of being built with the one exception, I believe, of NEG's one new tank in Korea, and so we're not really seeing new capacity come on line.

Obviously, everybody is continuing to progress to more thin glass, but that is a more gradual.

So we expect the supply/demand balance to remain in pretty good shape as we continue to grow, assuming we got it right in terms of the fact that glass demand will grow again this year.

Okay, thanks, Jim.

And can you talk about what assets are getting written off at SCP?

I think you had previously spoken about repurposing some of these assets in China.

Is that still happening and is this write-off incremental to that?

So, what we did at SCP, they had bought some assets for expansion that we never implemented there, and some of the assets were moved to their new project in China, but some of the assets actually couldn't be moved, they are more fixed in nature, so that's what we impaired there.

We're really not expecting to add capacity again in Korea with what we know right now for LCD.

So it was really around the plans they had.

In 2011, they had capacity that we put on hold and then now we're moving equipment that can be moved to China and that they can't we're writing off.

Okay, thanks, and last one for me.

Can you talk about what options you're looking at to mitigate the impact of the yen?

Is this more along the lines of hedging or is it actually changing the underlying denomination in which glass would be priced?

Thanks.

We're looking at both alternatives.

One alternative would be to go to US dollar pricing.

I think you're probably aware that the majority of our supply chain, both our customers get paid in dollars and most other components are priced in dollars.

And then, we are also looking at whether we should hedge to protect ourselves further from weakening in the yen.

And when would you make that determination, Jim?

I will tell you it's one of my top topics that I'm working on.

Okay, thank you.

Our next question is from Amitabh Passi with UBS.

Please go ahead.

Hi, thank you, Jim.

First question for you.

Any update on where we are with Gorilla Glass penetration in markets such as automotive?

And then, with respect to Gorilla Glass 3, how do we think about the potential benefit to Corning?

Is there any sort of pricing premium you garner, or is it simply just a higher, or a better value that you provide to your customers at existing pricing?

So on the latter, it's a better value that we provide to our customers.

That's fundamentally what we do, actually in all of our products, is we go through generation shifts.

We try to provide better value to them and I think it's getting very good reception.

On Gorilla for automotive, as I think I said on an interview fairly recently, we are very confident that we will have an order this year for Gorilla Glass to be put on a car.

Don't think big volumes, but the first order is the most important.

So, I think we remain very confident that that could occur this year.

And just maybe as a quick follow-up, Jim, you've taken quite a bit of charges related to workforce reductions, as well.

How do we think about potential benefits flowing through your P&L through 2013?

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

In OpEx or COGS?

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

Okay, thank you.

Our next question is from Amir Rozwadowski with Barclays.

Please go ahead.

Thank you very much, and good morning, folks.

Good morning, Amir.

Jim, just touching on Gorilla Glass, it seems like you continue to have very strong end market demand there.

In thinking about sort of the addressable market, I know you just touched upon the automotive opportunity, but how should we think about sort of what your expectations are for touch enabled devices outside of what have now been the traditional markets such as smartphones and tablets?

Could we find ourselves in a position where there's incremental growth in the end market that you guys are looking at to put Gorilla Glass into by this time next year?

Yes, Amir, I hope you come to our IR day on February 8 because Jim Clappin will be addressing our outlook for both, but we continue to expect smartphones to grow as a percentage of overall phones.

We think we're the product of choice for that.

We think tablets will continue to grow in all formats, both small and normal size that we've gotten used to.

I think the big upside for us in consumer electronics for Gorilla will be touch moving into the notebook market.

I think you may have heard Wendell talk about this longer range, we think this doubles the size of the potential opportunity for Gorilla.

And we think PC manufacturers are going to drive to put touch on that.

Obviously, the cost of incremental touch on a computer has to be not too extreme, but we think people are working on that, and obviously working around products that will help them do that at a lower cost.

So I think the future is very bright, but Jim Clappin is going to be walking through our detailed forecast in both areas.

Great.

And then also, Jim, if I may, a clarification on sort of your LCD outlook.

Given your expectations for moderate price decline, does that factor in any adjustments related to the recent move in the yen or how should we think about that?

So, my comment on the pricing, as always, I speak only in the yen-to-yen price declines.

We, obviously, believe that the recent weakening in the yen, which has benefited panel makers, should help us in trying to maintain low price declines.

Remember that they took pain from the yen strengthening over that period of time and that increased the pressure on us.

That's to be realized, but when I gave you the moderate, it's yen-to-yen.

Great, thank you very much for the incremental color.

Next we'll go to Jim Suva with Citi.

Please go ahead.

Thank you, and congratulations there to you and your team there at Corning.

It looks like you're really putting down a nice foundation.

When we look at your comments around Q1 seasonally being softer for glass, can you just help us understand a little bit the context of that, because as I look back factually it looks like Q1 glass has been going up sequentially every year.

Now maybe it has to do with kind of the volatility of what has happened in the supply chain, and changes to contracts, and things like that, but it just looks like historically Q1 has been up from Q4, and I think if I'm correct that actually China represents more TV sales than the US.

I would expect that, wonder if the normal seasonality doesn't necessarily historically play forth going forward.

And then the follow-up is if you can just talk about what is kind of the normal seasonal for each of the quarters of your year now when you look at seasonality for glass?

Thank you.

So, you are correct that we have seen quarter ones be greater than quarter four by a slight amount.

It really, however, is very dependent on what the inventory positions are at the end of Q4.

So, we actually expected Q4 inventory work off to be a little bit greater, so we factor in that as we think about what we call the normal seasonality.

I think you know in our model, obviously, we model our own glass, the panel makers, the set assembly and at retail.

But I'd be happy, maybe at our IR day, to spend some time with you on the seasonalities by quarter.

I think a couple years ago, we actually laid it all out in a graph.

But it is the combination of what we would normally see as seasonality as we're talking about and the fact that the supply chain is coming out a little bit heavier on inventory than what we originally expected.

If they hadn't done that we probably would have been saying it's a year-over-year increase.

Thank you very much.

We'll go to Brian White with Topeka.

Please go ahead.

Jim, I'm wondering if you could talk a little bit about the Gorilla market, obviously, it's still focused on tablets and smartphones, but a couple years ago you announced a TV customer.

Where are we in that market?

And also if you could talk about maybe the opportunity in notebook and auto?

Thank you.

So, Brian, the opportunity in auto, I think, still exists.

We believe that, as I said earlier in a question, we'll have a customer this year, and so we're still hopeful.

The auto industry, I think, moves at a slower pace than consumer electronics.

In terms of Gorilla, clearly, the strength has been in smartphones and tablets.

We're believers that tablets will continue to grow very nicely.

We think there's no question that smartphones continue to become a higher and higher percentage of phones sold.

But I think the big upside opportunity is touch being extended to notebooks as we go through the course of this year into next and I think those are where the big opportunities are.

Okay, great.

Thank you.

We'll go to Steven Fox with Cross Research.

Please go ahead.

Thanks, good morning.

Just two questions.

First of all, Jim, what exactly is the yen rate that you're factoring into your Q1 guidance?

And then secondly, with regards to Hemlock, is there any way -- this is a pretty difficult question -- but is there any way to sort of gauge the downside from here in terms of the risk to Corning's balance sheet or results going forward?

Any help would be appreciated, thanks.

Sure.

So on the yen, we don't actually, as you know, give sales guidance, but we always, as we think about the yen, we think about what the rate is at the time that we put together our forecast.

So we would have been thinking in the 89 kind of range.

We're not the world's best predictors of exchange rates so we don't try to predict where it's going to go.

On HSC, yes, we can help you.

I'm going to do that at the IR day and when we file our 10-K, we'll walk you through it in more detail.

You should not consider that any kind of risk or restructuring there has any impact on Corning's cash position.

It would have, obviously, an impact on Dow Corning's earnings and, therefore, would flow through to us as a special, but it's not a cash issue.

But we will actually outline all of those risks for you on February 8 and in our 10-K filing.

Great, that's helpful.

Thanks so much.

Our next question is from Patrick Newton with Stifel Nicolaus.

Please go ahead.

Yes, thanks, good morning, Jim.

Just to beat a dead horse on Gorilla, in this expectation of a second half rebound largely driven by notebooks, is this based on notebook and Ultrabook SKUs that are currently ramping with OEMs?

And I'm trying to get a sense of the risk to your numbers of how the sell-through of these products goes and whether or not we could potentially have a similar issue to the Gorilla Glass story that we did in 2011 based on the TV being somewhat of a flop?

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

I mean on the questions, the number of questions on the topic.

(laughter)

I would say, the Sony television experience was, obviously, very disappointing for us, probably for Sony too.

In the beginning of 2010, Sony told us what they were going to do and put it on a broad part of their line, including moderate priced televisions, and then one year later they didn't do that.

And that was very disappointing to us because we actually invested to do that for them.

I don't regard that to be a sign for touch on notebooks.

I guess -- you have the opportunity to talk to all the notebook manufacturers and software manufacturers about what they believe and where touch is going to go.

I guess we could be wrong.

I think the wrong here would be maybe that the upside isn't as great as what we expected.

I don't see any potential disappointment coming in smartphones or tablets, and so I think the question is whether touch on notebooks is a more moderate introduction or becomes a very strong introduction, and we'll have to see how that plays out.

But we don't think the Sony television experience is a good forecaster of that.

Okay, that's good to hear.

And then for your full year outlook for Gorilla and the double-digit market growth, does this include any of the high probability auto win or would that all be upside your expectations should that actually occur in 2013?

That would be all upside.

Okay, perfect.

And then I guess just last one, given that you've utilized your $1.5 billion share repurchase, with your CapEx expectations declining in 2013, and solid free cash flow, should we anticipate any type of repurchase allotment or is that something that you're looking at carefully?

I think the Board is very focused on -- obviously, they would like to try to improve the performance of the stock.

I won't, as I've said many times, pre-judge what their actions are.

I think that they will continue to look at it as we go through the course of the year but I'm not going to say exactly what they would do.

I think that you seen over the last 15 months the Board be very active in trying to return money to shareholders through two dividends increase and a large repurchase, so I think that they will remain focused on that.

All right, thank you, good luck.

John, we've got time for one more question.

And that will be from the line of Ehud Gelblum with Morgan Stanley.

Please go ahead.

Hi, thank you very much, Jim.

I appreciate it.

Thanks, Ann.

Couple things.

First of all, for the year, can you give us a sense as to how you look at volumes for wholly owned versus SCP and how we should be thinking about volume growth at the two of them?

And then I just want to see if the share contracts that you're in right now, do they set the pricing at the beginning of each quarter as you negotiate?

I guess there's not much negotiating going on.

Or do they change, because you promised, from what I understand, a match in market price?

Can they change over the course of the quarter if the market price changes?

The reason I ask is NEG reported last night, and they said that they were sort of unclear on what pricing was going to be like in Q1 because they hadn't finished their price negotiations.

And so I wonder if their price negotiations, when they are finished over the next few weeks, change whatever the market price is?

Does that change what you have to match, as well or are you set and anything that NEG might do would only impact you for the June quarter?

Thanks.

So, I won't comment on NEG.

I'll just say that we're set for Quarter One.

These contracts work at the beginning of the quarter and we're done, so we're not expecting an any change from that.

Relative to wholly owned and SCP forecast, I have to admit we're not the best forecasters of getting it right, the split there.

Right now I think we would expect to see slightly greater growth in our Wholly Owned business than at SCP.

We're not really seeing an expansion of capacity at our Korean customers, whereas we have seen that in our Wholly Owned business, particularly in China.

So, I would say we tend to think it will be slightly in favor of our Wholly Owned business, but, again, I offer you we're not the best forecasters of how it splits.

If I could just follow-up.

The comment that was made that you made in the conference call in the preamble that a one-point change in the yen impacts your revenue by $8.

Last quarter it was $6 and I've noticed it kind of bounces around between $6 and $9.

What are the main elements to how that changes?

What changed from last quarter to this quarter to make a $6 versus an $8 change?

I don't know if it's too technical, but just trying to gauge where that sensitivity comes from?

It's around the fact that Gorilla is a larger proportion of our Business and Gorilla is priced in dollars.

Very helpful.

Thanks so much.

Okay, I'd like to finish with a few comments.

We have a few IR announcements.

We'll be holding our investor day in New York City on February 8 at Cipriani.

This year, in addition to the normal crowd favorite hands-on demonstrations at our business exhibits, we're going to give a detailed overview of our growth expectations for 2013.

In addition to our CEO, Wendell Weeks, and myself, three of our business group leaders will be speaking to you about their plans to March Up our earnings.

It's going to be very informative and hands-on, and I hope you'll consider attending in person.

To summarize the highlights of our call, we think we made great progress on our plan to stabilize the Display and grow earnings in our other businesses during 2012.

And although the economy did impact some of our plans we took actions to control costs and achieve new sales and business profitability milestones.

I think most importantly, we grew earnings per share, ex-specials, year-over-year in quarter four, and this is the first time we've done this since 2010.

We see this as an indication we've begun our return to earnings growth.

Our Gorilla Glass business attained $1 billion dollars in sales after only six years.

We made a key acquisition in Life Sciences.

We finished a $1.5 billion share buyback and also increased our dividend by 20%.

And though a deep downturn in the solar market is impacting Dow Corning and our equity earnings in the short term we believe we have ways to mitigate it.

We're coming into 2013 with expectations in growth in several businesses.

We do have some caution about the yen, but we intend to maintain stable Display earnings with moderate price declines, manage our glass capacity well, and with cost reductions, and Telecom, Specialty Materials, Life Sciences and Environmental are poised for growth in 2013.

So, we'll look forward to seeing you at our annual investor meeting on February 8.

Ann?

Thank you, Jim, and thank you all for joining us today.

A playback of the call is available beginning at 10.30 AM Eastern Standard time this morning and will run until 5 PM, Tuesday, February 12.

To listen dial 1-800-475-6701.

The access code is 276093.

The audiocast, of course, is available on our website during that time.

John, that concludes our call.

Please disconnect all lines.