康寧 (GLW) 2013 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the Corning Incorporated quarter one 2013 earnings results.

It is 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 first quarter conference call.

With me today are Wendell Weeks, Chairman and Chief Executive Officer and Jim Flaws, Vice Chairman and Chief Financial Officer.

Before Wendell and Jim begin their formal comments, 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.

We should also note that this presentation contains a number of non-GAAP measures.

A reconciliation can be found on our website.

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

Thanks, Ann.

Good morning, everyone.

At our Investor Day in February, we explained to investors why we believe Corning is a strong investment.

We highlighted growth in our existing businesses, our expectations for solid cash generation, and a rich R&D portfolio with the potential to create entirely new businesses.

We reminded investors of our goal to return to earnings growth.

We outlined the progress we made in 2012, and we noted that our fourth quarter results provided evidence that our strategy was working.

I am very pleased to say that we started off 2013 with a strong quarter, exceeding analyst consensus.

Our first quarter core earnings per share were up 15% year-over-year, and up double digits year-over-year for the second quarter in a row.

You may recall that early in 2012 we identified two priorities for returning to earnings growth.

Reestablish positive momentum in Display and grow our other businesses.

In Display, our number one priority was to moderate LCD glass price declines.

As expected, quarter one 2013 price declines for LCD glass were more moderate sequentially.

And we expect price declines to moderate further in quarter two.

Going forward, we believe price declines will continue to be moderate, as a result of the customer agreements we entered into last year, as well as the weakening yen.

This improved price outlook, the stabilization of our share, and new product introductions are creating positive momentum again for Display.

Now for the second priority, to grow our other businesses.

We believe that we are on the right track here too.

Our other businesses had solid operational results, combining to contribute 70% higher net income on a year-over-year basis.

Jim will give you more color on our financial results, but I just want to summarize by saying that t combination of moderating LCD glass price declines, improved operational performance, and two consecutive quarters of double digit year-over-year earnings per share growth demonstrate that Corning has begun the march up in earnings.

I would also like to take a moment to talk about our other announcement this morning.

We previously told investors that we were entering a period where our strong operating cash flow and lower capital spending would allow us to devote more cash to shareholder returns.

We are delivering on this commitment with a new $2 billion share repurchase.

This comes on top of the $1.5 billion buyback that we completed in the fourth quarter of 2012.

This reflects our belief that the Company is undervalued at the current stock price.

We are also increasing the quarterly dividend to $0.10 per quarter.

This 11% increase means that we have doubled our dividend level in the last 18 months.

Finally, I would like to comment on the yen-to-US-dollar exchange rate, which affects the translation of our Display and Specialty segments' results.

We moved decisively in the first quarter to hedge Corning's exposure to changes in the yen exchange rate.

Investors should be aware that Corning's risk exposure to changes in the yen-to-US-dollar exchange rate is capped at JPY93.

And now, I will turn the call over to Jim.

Thanks Wendell, and good morning.

I hope you've had a chance to read our quarter one earnings press release this morning.

In it you will see our results reported as core earnings.

I'd like to begin my comments by explaining to you our rationale for changing to core earnings and its major components.

In February, we said that we wanted to clearly show you our performance so you could directly assess the status of our plan to return to earnings growth.

Core earnings excludes nonperformance-related items from our results, so you are better able to see operating results.

Similar to our prior reporting, it also excludes special items, like nonoperating charges and certain accruals.

Core earnings measures performance of the Company without two significant external factors.

First, the yen exchange rate fluctuations; and second, the solar industry upheaval.

Let me say a little more about each.

Sales of our Display products are currently priced in yen, so we must translate these sales back to US dollars furnished for our financial statements.

Additionally, our glass manufacturing cost in both Display and Gorilla Glass are primarily denominated in Asian currencies, including the yen.

But again, we must report our cost of goods sold in US dollars.

As a results, movements in the yen-to-US-dollar exchange rate can impact our results in Display and Gorilla, as we report them in US dollars.

Now, we've experienced changes in the yen-to-US-dollars exchange rate before, but typically these changes have been more gradual.

Since November of 2012, the rate of change has been dramatic, with the yen weakening by more than 20% since that time.

So while we remain focused on managing reducing our vulnerability to foreign exchange rate changes, we've decided to report our results with a constant yen.

This reporting will allow you as investors to see the operating results without the impact of yen-to-US-dollar exchange rate changes.

The use of constant exchange rate reporting is not uncommon for US companies, and is an accepted practice.

The exchange rate that we will use, called out as a management rate, is JPY93 per US dollar.

Now, as Wendell explained in his remarks, the Company moved decisively to hedge exposure to further weakening in the yen exchange rate.

Our hedges protect the Company from any further weakening above JPY93.

Because we have this economic protection at the JPY93 level, we chose this rate for the constant yen core performance reporting.

Now, in an attachment to this morning's press release, we provided you our 2012 results, restated with this exchange rate, so you can update your models and compare apples to apples.

We will also provide history for 2011 in the near future.

Now, our second adjustment for core reporting relates to our equity venture, Dow Corning Corporation, that has a subsidiary Hemlock Semiconductor Corporation.

Hemlock makes polysilicone for the solar industry.

I went into great detail on February 8 about the dire situation in the solar market, driven by the macro environment, and the investigation by the Chinese government regarding dumping of polysilicone.

Driven by these events, Hemlock's earnings over the last 18 months have been unpredictable, and we expect that to continue.

Pending the outcome of the investigation in the instability of the solar market, Hemlock may have to take actions to write off assets and call in their take-or-pay contracts.

These potential actions, to whatever extent required, are unrelated to its core operations.

Therefore, our core earnings also exclude equity earnings from Hemlock.

This was a relatively minor impact in quarter one.

Our core earnings are a non-GAAP financial measure, and of course, we will continue to report GAAP results.

And you can refer to the GAAP reconciliations on our website.

As always, Ann Nicholson in Investor Relations will be available after the call today to answer any questions you may have about the financial reconciliations as you update your models.

So now I'd like to turn to our quarter one core earnings results.

First quarter sales for the Corporation were $1.8 billion, consistent with a year ago.

Gross margin was 43%, up one point year-over-year, and better than our original expectation of 41%.

Telecom and Specialty Material had very good gross margin growth versus last year.

Gross equity earnings of $180 million, and as a reminder, this is also at constant yen, were consistent with a year ago.

I'll provides some more color on this in a few minutes.

Our core effective tax rate for Q1 was 16%.

Note, we did have a special item, a $54 million tax benefit to record the impact of the American Taxpayer Relief Act, which was enacted on June 3, which are excluded from our core earnings.

Now, investors may recall, we actually excluded a loss from this same item in Q4.

It was the unusual timing of Congress approving this bill on January 3 that caused these two entries.

The most important impact of that bill was to allow us to have lower ongoing tax expense this year, and we expect this benefit to continue into 2014.

Core earnings per share were $0.30, up $0.04 over a year ago, and well above analyst consensus.

Now, it is important to note that moving to core performance did not impact quarter one of this year's results, because the actual rate in the quarter was JPY93, and the same as our management reporting rate.

Better operating performance drove the core EPS improvement over analyst consensus, and EPS as stated here is a non-GAAP measure, and as always a reconciliation to GAAP can be found on our website.

As a reference versus a year ago, SG&A and R&D were consistent as a percentage of sales.

Now, I'd like to go through our quarter one segment results, and I will start with Display.

Core sales for Display, which exclude the impact of changes in the yen exchange rate, or at a constant yen, were $650 million in Q1, an increase of 7% versus last year.

LCD glass buying was up significantly, more than offsetting price declines.

Gross equity earnings, also measured at a constant yen, from our equity venture in Korea, SCP, were at $133 million quarter one, a decrease of 8% year-over-year.

LCD glass volume at SCP was up slightly versus quarter one of 2012.

For your modeling purposes, Display equity company's first quarter LCD sales in constant yen were about $608 million, a decrease of 4% from last year.

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

Our public filings will reported SCP's total sales, which include various other products.

As we expected, our total LCD glass volumes were down mid-single digits sequentially, and up mid-teens year-over-year.

SCP's volume versus last year was up slightly, reflecting the Korean panel maker's relatively consistent utilizations.

Our wholly-owned business volume was up significantly versus the prior year, reflecting the growing Chinese television market.

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 with new agreements.

I'm very pleased to report that our share remains stable in Q1, and our price declines in Q1 were less than Q4.

Core net income was up slightly versus Q1 of 2012, which is a good sign that we are stabilizing Display.

We were able to have volume increases offset lower glass price declines.

Now, on the supply chain front, we estimate that weeks of inventory grew in quarter one.

That's likely the result of several things in combination, a healthier cash position, a need to carry more inventory for growing emerging markets, and the proliferation of television screen sizes, and preparation for China's May holliday.

We continue to monitor the supply chain inventory closely, and I will comment more on the supply chain in our outlook section.

Now, in Telecom, quarter one sales were $470 million, down 7% year-over-year.

Fiber and cable sales in North America were down, due to the decline in the US government stimulus spending versus the prior year.

Sales were also down versus our expectations, primarily driven by a slower NBN ramp-up, and a slower start than we expected in China for fiber and cable.

We are seeing China fiber and cable market pick-up in Q2.

Despite the sales decline, net income in Telecom was up almost 70%.

Lower volume was offset by improved manufacturing performance and the implementation of strong spending controls.

In our Environmental segment, sales were down 13% year-over-year, but actually slightly higher than our expectations.

Now, you may recall in Q1 of 2012, it was an unusually robust quarter for the auto and heavy-duty truck demand.

Since then, the European auto market and the US Class A truck build rate have softened.

We do expect sales growth throughout 2013 with demand picking up in the coming quarters.

I will talk more about that in our outlook section.

Net income was down 34% in the segment, driven by lower sales and production volumes.

Specialty Materials quarter one sales were down 10% versus a year ago, driven primarily by advanced optics.

The cyclically down semiconductor market impacted advanced optics sales.

Now, core net income in this segment was up 39%, with very significant improvement in Gorilla Glass gross margins versus the prior year.

We are very pleased with Gorilla's improvement in gross margins over the last several quarters.

In Life Sciences, Q1 sales were up 34%, due to the additional sales from our Discovery Labware acquisition, which closed on October 31 of last year.

The acquisition integration is just underway, but it is going very smoothly, and it was accretive to this segment this quarter.

Year-over-year core net income doubled on the additional sales.

Now, I will turn to Dow Corning, and as a reminder, we excluded Hemlock.

Gross equity earnings were up 31%.

On the balance sheet, we ended the first quarter with $5.8 billion in cash and short-term investments, with about $1.2 billion in the United States.

We did repay a loan in China during the quarter, using about $500 million of cash.

Our net cash position is $2.8 billion.

Capital spending for the quarter was $194 million, and we remain on track to spend approximately $1.3 billion for the year.

Free cash flow for the quarter was $323 million.

As a reminder, free cash flow is actually a non-GAAP measure, and a reconciliation to GAAP on this measure can be found on our website.

So, now let me turn to the outlook.

As I mentioned that the beginning of my commentary, we have begun showing our results as core earnings, which exclude the impact of fluctuations in foreign exchange rates.

But we've also told you we want to mitigate the negative impact to the weakening yen.

In February, management obtained authorization from the Board of Directors to execute a series of foreign exchange contracts over a two-year period to hedge our exposure to movements in the Japanese yen and its impact on our earnings.

We completed the execution to purchase collar options in late February.

These will settle quarterly for a total of eight quarters.

The simplest way to think about these transactions is they protect our P&L from the yen moving higher than JPY93, which is good, given that the current yen exchange rate is JPY99.

The protection above JPY93 is the reason that we chose JPY93 for our management rate for constant yen reporting.

Now, we've kept the cost of this hedge low by implementing a collar structure.

If the yen averages above JPY93, we get a hedge benefit, and it offsets the negative translation impact.

If the yen exchange rate is between JPY87 and JPY93, we currently will not have any hedge settlements in those quarters.

If the yen is below JPY87, Corning will owe on the hedges.

But of course, our Display segment would be experiencing favorable translation results to offset these hedge payments.

In summary, we think we've moved aggressively to protect the Company and investors from the unprecedented sudden weakening yen driven by the new Japanese government.

Now let me turn to the Display outlook.

Let's start with the current view of the end market in 2013.

We still 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 TV units will grow in the mid- to high single digits, with area growth higher.

Large-size televisions continued to sell well in many regions.

Through February, 50-inch-plus television sales were actually up 107%.

You've probably seen reports regarding weakness in the PC market.

We are not bullish on the PC market, either, expecting only 10% year-over-year growth, with more than all of that is attributable to tablets.

Monitor units are actually expected to be down about 5%.

Now, let's talk about quarter two.

As we near the end of April, we see Q2 LCD glass market at a consistent level sequentially.

Our wholly-owned business and SCD are combined to expect to be consistent with Q1 volumes, as well.

While Q2 is the seasonally slowest quarter at retail, glass volumes are actually up year-over-year in a slightly bigger market.

We believe inventory will grow again in absolute square feet and as measured in weeks during Q2, before beginning to deplete in the back half of the year, when demand at retail peaks.

Quarter two, we expect our share will remain stable, and that our price declines will further moderate.

We expect LCD glass price declines will decline by only and 2% to 3% sequentially.

Going forward, we believe price declines will continue to be moderate as a result of customer agreements we entered into last year, as well as the weakening yen.

The change in yen-dollar exchange rate actually helps most of our customers, as they sell their LCD panels and dollars and buy our glass in yen.

So the change in the yen-dollar rate actually increases their profits on our glass, which we believe should decrease their pressure on us for price declines.

Now, turning to the Telecom outlook, we expect Q2 sales to be up slightly versus Q2 of 2012.

This will be driven by the NBN ramp.

Sequentially, we expect Q2 sales to be up approximately 20% coming off the slower than expected start to the year.

In Environmental, we expect Q2 sales to be up slightly sequentially.

This is flat to down slightly year-over-year across the Light and Heavy-duty business, compared to a stronger market in Q2 of 2012, which had much higher levels of US Class A Truck business.

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

We believe tighter regulations in Europe and China will be leading to growth in demand for our heavy-duty diesel products.

Specialty Materials sales are expected to increase sequentially about 15% to 20% in Q2, which is about 5% up year-over-year.

Advanced optic sales are expected to be down year-over-year, given the continued end market softness.

Gorilla glass volumes are up significantly year-over-year in quarter two.

For the year, we believe there will be double digit market growth for Gorilla Glass, driven by the penetration of touch on notebooks and the continued growth of smartphones.

We will likely see most of this impact in the second half.

In Life Sciences, we expect sales to be up about 35% to 40% year-over-year, mostly due to added sales from our acquisition.

We expect equity earnings from Dow Corning Silicone segment to be up about 20% year-over-year.

Now, continuing down the rest of our Q2 forecast on the P&L, we expect core gross margin percent to be similar to Q1.

This is up year-over-year, driven by manufacturing efficiencies and increased sales.

SG&A is expected to be down versus last year as a percentage of sales, while R&D spending should be consistent.

And core equity earnings should be down about 15% versus last year.

Our core effective tax rate for 2013 should stay around 16%.

That concludes my opening remarks.

Ann?

Thank you, Jim.

John, now we're ready to take questions.

Certainly.

(Operator Instructions)

First we will go to Jim Suva with Citi.

Please go ahead.

Thank you very much.

If we just take a step back and look at the big picture of how you kind of see the macro supply/demand balance shaking out kind of currently, as well as looking forward, say, to the rest of the year.

Can you help us understand the supply/demand dynamics?

We know Corning, I believe, has in the past year or so opened up a couple of plants, and there's some more efficiency gains, not only from Corning, but also competitors to improve or increase the supply.

But then on the demand front, we are seeing TV unit growth, which I think is kind of in the mid- to -- mid-single to upper mid-single digit growth, and then surface area's increasing in TVs.

Can you just maybe take a step back and let us know the supply/demand equilibrium today, and looking forward, how you see it there at Corning?

Thank you.

Sure, Jim.

Basically, things look relatively in balance right now.

It is just that simple.

There's, of course, going forward, there's always dynamics on both the supply and demand side, but our opinion right now is things look relatively in balance, which helps in addition to our contracts that we've entered into and the weakening yen with our view of a relatively more benign price environment.

I'd like to add onto that, if I could, and that is, I think that the market is in balance, partially because of the disappointment Corning Incorporated is doing, and some of the other manufacturers are.

As you know, we continue to keep capacity offline in Korea, and we will do that to make sure that we stay in balance.

Great.

Thank you very much.

We will next go to Wamsi Mohan with Bank of America.

Please go at.

Yes, thank you.

Good morning.

Jim, I think you said the yen is hedged out for two years and settled quarterly.

Can you talk about the cost to implement this collar?

And I have a follow-up.

Yes.

The cost was about $100 million for the two years.

And that would be realized all as the hedge continues to sort of be implemented over the course of the two years?

It's spread of the two years.

Okay, great.

Thanks.

And then can you talk a little bit of some of the new capacity that's anticipated to come online this year, and if LG Chem early shipments are changing anything at all from a pricing dynamic or share dynamic?

In terms of new capacity coming online for us?

For the market.

So any NEG has some capacity coming online, and LG Chem, too.

So NEG has capacity coming online.

They've announced that they are building a tank in Korea, and I believe their expectations are that for the back half of the year.

They have said in the original announcement that they will be shutting down capacity in Japan when that occurs, and we are taking that at their stated announcement.

Their second tank is not until sometime late next year, per their statements.

LG Chem has one tank running in [satch] have been running almost two years now.

And the second tank, as far as our surveillance is, consists only a few steel pilings in the ground.

We are not feeling LG Chem is a significant supplier in the industry.

Thanks a lot.

I will get back in queue.

Next we go to Patrick Newton with Stifel.

Please go ahead.

Thank you, Jim, Wendell, and Ann for taking my questions.

I guess sticking to the hedge questions.

You talk about taking care of translation exposure between JPY87 and JPY93 on the yen exchange rate, but you still have transaction exposure.

So I guess if we look at your 10-K and take that as a base.

I think previously and prior to these hedges, a 10% move in the yen-dollar FX rate would impact net income by about 6%.

So using that metric, where would that stand post your hedge?

Well, you have no further impact.

I mean, that amount between JPY93 and JPY87, you would see that impact of about, I think it is about $5 million per yen for -- on an annualized basis.

So you could calculate that between JPY93 and JPY87, if you want.

But we are reporting basically at JPY93.

The key element to what we sought to accomplish with the yen hedge is to basically take the risk off the table for the next couple of years.

Right.

So that capping the exposure at JPY93 puts us in the spot where it gives us much more stable earnings pattern going forward.

The relative degree of gain on that hedge or not will depend on what the and actually performs like.

One of the reasons we did it, why we moved to core earnings in Q1, was because it really didn't impact quarter one earnings per share, because our hedge rate and the actual yen in quarter one are close to the same thing.

So then no matter how you looked at our earnings, GAAP, our normal way of ex-specials, or core earnings, were significantly better than consensus.

As we go forward, if the yen stays where it is right now for quarter two, and it is closer to JPY100 to the dollar, we'd experience some significant gains on the hedge, which would offset any of the translation loss of bringing our yen-based pricing deterioration in the yen factor back into dollars.

That make sense?

Yes, that make sense.

So in essence, though, no transaction exposure at the yen-dollar level?

That's what you should be -- that's what you will see in our results.

Right.

Perfect.

Then I guess something, Jim.

It seemed like in your prepared remarks you kind of inflected in your voice that LCD prices are currently priced in yen.

Maybe I'm reading too much into that, but I'd love you to discuss the likelihood of changing to pricing the US dollars, the thoughts on could that happen within kind of this two-year hedge window, and the pros and cons of what has kept you from changing in the past, and perhaps with the change in the FX rate, what makes it more attractive in the future?

So it is clearly is a possibility, as we talked about at our IR day in February, that we could convert over to US dollar pricing, and clearly it could occur during this two-year hedge period of time.

It is obviously a complex shift, because you have to figure out what rate you are going to do it at, and you've got to get your customers to agree, and of course, we also have to think about what our competition will do.

But I didn't mean to anything with my inflection, but clearly I will state to you that the possibility of us going to US dollar pricing for our Display business is very real.

I will add to it that I would agree with James' statements.

When we told you at the beginning of the year that our time and attention was going to the yen, and making sure that we would be taking the appropriate action, we look both at commercial changes, like shipping to the dollar in the near-term, as well as doing what we did in the hedge.

What we did is cover this next two years.

It will give us time to figure out what the appropriate commercial change is, as well as opportunities to reach very considered opinions on how we should handle the yen going forward.

All right.

Thank you for taking my questions.

Next we will go to Mark Sue with RBC Capital Markets.

Please go ahead.

Thank you.

Gentlemen, the pricing change as a relates to market share, it is good to see that things are stabilizing on price.

What's the staying power, and what's been the competitive response, if any, and are getting indications that rationality for the Display industry can prevail on a going-forward basis, just as we look through the back half of the year and into next year?

Well, clearly what we are seeking to accomplish is just that.

All we really control are our actions, and what we've done with the series of agreements we put in place is to stabilize our share, develop a fixed relationship between our price and market price, which should make for economic decision-making by all the players involved.

We are encouraged by the progress that we've made in quarter one, as well as quarter two.

Only time will tell how this all turns out, but we are encouraged.

Will it be a quarter or so while you could kind of call it a success (inaudible) change in pricing, or is this a ongoing thing that we have to kind of monitor?

Clearly, getting another quarter under our belt with this continued moderation, we'd feel even better.

But at the core of it, pricing and pricing strategy's always going to be important in this business.

So we think we can reduce the volatility, and we are making some progress towards just that, but it will continue to take a good amount of time and attention.

Okay, understood.

Then separately, if the regional demand for Display continues to change around the world, does that make you reconsider your CapEx by region?

I understand the plan's for this year at $1.3 billion.

Just thinking about if things move around in 2014 and beyond?

Not quite sure I follow your question, Mark, about regionally.

Are you asking about spending in glass business?

Yes, in Display as you try to move closer to your end customers.

So we understand the plans that you are making for this year, in China for example.

Do you things change the following (inaudible) do you concentrate your production and capacity in certain regions, and does that require changes in CapEx longer term?

No, I don't think in 2014 you should expect to see much change in the Company's capital spending for our glass business.

We are really what we would call more of a maintenance level in the Display area now.

Because of the result of thin, we think we are in good shape there.

And we feel that we can regionally supply very effectively between Taiwan, Japan, and Korea.

And so we don't feel that this fact that China is growing very rapidly causes us problem.

I mean, we've been shipping glass to China for a long time.

So the capital spending should feel pretty good about the $1.3 billion this year, and right now, as I think we've told you, we think it is $1.3 billion again next year.

And Display is not a big portion of that.

It really is driven by some spending in our other businesses, including Environmental.

Yes, we're pretty happy with our asset platform in China as well.

It is all been previously announced, what we are doing, and productivity there looks really good.

All right.

Thank you, gentlemen.

Good luck.

Our next question is from Amitabh Passi with UBS.

Please go ahead.

Hi, thank you.

I just had a couple questions.

Jim, on the $2 billion buyback plan you announced.

From a funding perspective, will you need to repatriate any cash, or do you think you can fund that based on what you have onshore?

And I just wanted to clarify, your gross margin of 42.4% came in about 200 basis points above, I think, your expectations.

Again, I think given all the restatements, can you just help me understand, is that, quote unquote, a clean number?

How does it compared to last year's gross margin?

It seems like it was flattish, and then I had one other follow-up.

On gross margin, 200 basis point improvement was driven by very strong manufacturing within particularly Telecom and Gorilla.

Really drove the improvement in expectations, and I cannot remember what last year's number is.

Maybe Ann can look it up in the script.

I just cannot remember off the top of my head.

Your first question was on?

Just the funding mechanism of the $2 billion buyback plan, would you need to repatriate any cash, or do you think you have enough onshore to fund the $2 billion buyback, if you chose to go through the entire amount?

We don't have a need to repatriate the cash.

We are not changing our assertion that it's permanently invested during the time frame that we are talking about.

Okay, and then just as a quick follow-up, Maybe one for you, Wendell.

The sequential growth in telecom and Gorilla Glass.

Can you give us any insight in terms of what the drivers are, where you are seeing that sequential growth coming from?

Definitely, and I will add briefly to Jim's previous comment.

I think your question was right on, on are these results clean, and given our move to core earnings.

It is a great question, and they are.

It is one of the reasons we are doing it this quarter.

And to try to match going forward, the economic reality of being hedged out at JPY93 ought to be able to help us and help you all be able to get a nice, clean forward-looking forecast as well.

So now onto that forecast and sequentials.

In Telecom, we would expect the sequential ups to be driven by season out of normal to a little bit above normal seasonality increases out of China, especially, as well as some uptick in our enterprise business.

In Specialty and in Gorilla, we will see that uptick be linked more to new product launches, and we would expect that to ramp through the year.

For example, something like the Galaxy S4, which is just going to start really ramping up their supply chain in quarter two with Gorilla Glass 3.

Just to follow up on your gross margin question, Ann tells me quarter one of a year ago was 42%.

Okay, perfect.

Thank you.

Next question is from Steven Fox with Cross Research.

Please go ahead.

Thanks, good morning.

A couple questions from me, just following up on the last question.

Could you -- can we talk about SG&A in a similar manner?

It looks like you came in, by my count, $30 million, $35 million less than you guys were originally guided to.

I was curious if that is sustainable?

Then secondly, Jim, just on the equity earnings line, that came in greater than expected.

How much was that related to not including the solar polysilicon results in the numbers, and by not including it, is that sort of an admission that we are definitely going to see a write-down of those assets?

Thanks.

On the latter, I think it was $5 million.

So Hemlock was not a significant exclusion, and no, it is not an admission.

It really was our choice on taking Hemlock out is we really feel it is got -- it so much influenced by what's happening in the trade war between China and the United States and Europe that you really run the risk of the results being effected by that rather than really what we focus on, which is making and selling product.

We do not have a ruling from MOFCOM, they delayed it again.

We now think it is going to be in June.

We don't know what is going to be.

So we are not predicting that, but we just decided it would easier for you to not have the potential swings in Hemlock in our results, but in quarter one it was a very tiny amount.

I think some of the SG&A gain is sustainable from quarter one, but not all of it.

Then just one quick follow-up on the equity earnings line.

So just a little bit more color around Dow Corning.

It looks like, I guess, the core silicone's business is improving more.

Is that -- can you talk about your outlook now for that business recovering as the year goes on?

Yes, we are expecting it to improve again in quarter two.

Silicones does go through a cycle.

The cycle is driven somewhat by capacity adds in the industry.

Dow Corning did that, as well as some of our competition.

There has been raw material pressure, but -- so 2012 probably was our low point, if you look at silicone margins.

And we think we are getting, as the industry goes into some of that new capacity, and with moderation in some raw material pricing, we think that we are starting to move up on the margin cycle.

So we are expecting improvement in silicones in quarter two, and as of now, I have no reason to not expect that the back half of the year to be good year-over-year also.

Thanks very much.

And Next we go to Simona Jankowski with Goldman Sachs, please go ahead.

Hi, thanks very much.

I just wanted to ask first, what the EPS would have been in the quarter under the old accounting, or maybe kind of put another the way, I just wanted to understand in terms of the FX impact that was included, clearly the cost of the hedges excluded, but what about the move of the yen up to JPY93?

Was that included in the quarterly results, or if not, what would that have looked like if it had not been excluded?

Well, the yen, there really is no change.

I mean, because the yen was JPY93.

So there really was no impact, and the cost of the hedge for the quarter after tax was a very small amount.

Okay.

I think the answer to your question is, no difference.

Got you.

One of the reasons we wanted to do it this quarter, core earnings are about going forward on the volatility standpoint and to be able to link to our actual hedge.

Okay, that's helpful.

Then the other question is on your guidance for a relatively volume into the second quarter.

That seemed a bit weaker than I would have expected, given that you had some correction in the first quarter and seasonality, and even some of your customers like LG Display had guided for something a bit higher.

So can you just go into the drivers of that view, and then what you see in terms of inventory downstream?

What goes into that view is our reflection on the fact that inventories grew again in quarter one, and are likely to grow a little in quarter two.

And we think that level will temper a little the potential volume that the panel makers will take.

We recognize we could be wrong in that, and I would say if we had to say where the error would come, it might be stronger.

Clearly demand right now from our panel maker customers is quite strong.

We are actually airshipping in order to meet their demand.

So it could be that it is -- that we will actually see it go up.

It is just that our caution, as we measure the amount of inventory in the supply chain north of where the panel makers are, is we are worried that it is built up quite a bit, and therefore that's what lead us to our flat guidance.

I think it is on the high side of healthy, but to your point, we would like to see the May sales in China, and then it could be that we are underestimating where the market's going to be.

In your view, what explains that disconnect between your customers requiring it to airship while at the same time having excess levels in inventory?

I don't think they are in excess.

We'd say that they're just on the high side of healthy, right?

Okay.

And I think what it really comes down to is how big a sales cycle do they see, especially in China, as the retailers and the get ready for the May Day sales.

I just want to make sure you understand that the inventories we are talking about are not at the panel makers.

So it is our estimation what exists at set assembly and at retail, and the panel makers are continuing to run strong in order to keep up with them, we are doing some airshipping, which regretfully is costing us a little bit in gross margin.

But if China, the May holidays perform as well as what we saw in the New Year's holidays, we could be surprised on the upside and do a little bit better than what our guidance has been.

Okay, that's very clear.

Thank you.

Our next question is from Ehud Gelblum with Morgan Stanley.

Please go ahead.

Hey, guys.

Thanks, I appreciate it.

A couple of clarifications first.

Jim, $100 million hedge expenses.

Where does that show up and where are we going to see that in the P&L?

And also the change in pension accounting that you made, did that have an impact on EPS this quarter?

And what do you expect that to be for the year, and that I have some fundamental follow-ups.

On the pension, it basically was $0.01, and it's both this year and last year.

So it really isn't making a change statement.

The cost of the hedge we exclude from core performance, but as you divide the $100 million by eight quarters and tax effect it, it is a very small amount.

Okay.

That is helpful.

Digging a little bit deeper into the equity earnings, the $173 million versus we had about $120 million.

Count that SEP was probably around $17 million of that.

The rest, does that came basically from silicones, and can you give more color on what is driving that?

Can you make some comments that you think it's sustainable and it comes back.

Just what are the drivers there, and sort of understand kind of moving pieces?

And then on cash, someone asked before, and I'm not sure I quite got the answer, what is your US cash balance right now?

I think it was $1.5 billion at the end of last year.

Cash balance was $1.2 billion right now

In the US?

In the US.

Okay.

And in terms of equity earnings, we believe that silicone business is doing quite well in the current quarter, and it is going to continue to do well in the second quarter.

Any drivers behind that?

I mean, what's creating that?

Something we can track?

So we'd say demand is good, pricing has been okay.

Raw materials, costs have been improving versus where they were.

So those of the primary things.

Demand is good in China, good in the United States, weak in Europe.

I've always thought of silicones as more being somewhat of a GDP-related thing because they go into a lot of different areas.

So is that a comment on macro in general looking better from the perspective of products that silicones go into?

Well, it's definitely -- they have a very high correlation with GDP or industrial production.

It depends on which segment usage of it, but I think the thing that you have to remember as emerging economies start to move up the scale, if you will, of the development, they actually use more silicone per population.

So you actually get a multiplier effect, even though, say, China's GDP is 7.7%, as the example, the growth in silicones would be higher because they -- we consistently see in developing economies is most silicones per person, if you will, as they move up the scale of life.

So that's where we think we are seeing some of the strength.

But China's GDP was even stronger last year, and yet it wasn't really helping you then.

So I'm just trying to find out what was the turning point, or what's happening now that wasn't happening previously that seems to be bringing that category back up again?

Is there anything you can pinpoint?

Because last year we were -- you were seeing the effect of more price competition, and we are not seeing that right now.

So overlaying the GDP pieces and those factors, Ehud, you also have just sort of the supply demand cycles that you get in silicones over time, and feel like it bottomed out last year and starting its walk up as an industry as they get better and better balance between demand and supply.

And from your experience, is this a one-, two-, three-year cycle?

So this is the beginning of a multiyear upswing, or is this -- does it happen every year, it goes up and down?

No, we think silicones is coming off a low point in terms of margin performance.

And assuming the world's economies behave, sales should grow.

The unknown for us is really going to be Europe.

It's really hard to tell what's going to happen in the European economies.

And that's clearly been a drag on Dow Corning, but I think if we are starting to stabilize a little, even though it is at a lower level, that's helpful for Dow Corning.

Helpful, thank you.

And next go to Rod Hall with JPMorgan.

Please go ahead.

Hi, guys, good morning.

Thanks for taking my question.

First of all, congrats on the hedging.

That's a pretty cheap price, Jim, to get for all that, for $5.2 billion worth of hedges.

Couple of questions on the rest of the business.

I wanted to just check in on the inventory again and to see -- you've been talking about the structural reduction in inventory over time, and I wonder, based on what we're seeing now, do you think that we're coming to an end of that, and the inventory is actually kind of reaching a stability point, or do you think that it is just kind of a short term fluctuation in inventory we are observing?

Then I also wanted to talk a little bit about the -- or get you to talk a little bit about the panel supply demand situation as we head into the back end of the year.

I mean, we see some of these, well, a lot of these panel manufacturers running pretty high utilization rates now, and we are not at the peak season.

So I wonder, do you think that -- you think there's going to be enough supply in the second half of the year to meet demand, even in a more cautious economic scenario?

And then I have a follow-up to that as well.

That's A lot of questions.

So the structural reduction in inventory that we talked about in December of 2011, we still believe that that can occur.

What has surprised us is the willingness of the supply chain to carry more inventory than what we expected, and we continue to struggle a little bit as to the reasons.

As outlined in my prepared remarks, we clearly think that there could be some impact from the fact that panel prices have been relatively stable, and what has often driven supply chain fluctuations has been when, particularly when people think there is about to be a big reduction in panel prices no one wants to look dumb and buy when they are seeing that.

So we think that stability may be playing into effect.

The second thing, again hard to prove, is that LCD television market basically gets to full penetration, and we are capturing the more emerging parts of China, as an example, and other parts around the world.

It may be that the supply chains are just less efficient.

The third factor that we are seeing is that the panel industry has chosen to improve their own efficiencies and also position themselves better, and seeing a proliferation of new sizes.

So at one time life was pretty simple.

It was either a 32, a 37, 40, or 42, or 46.

Now you see these new sizes, like 39 coming in.

And the more models you have, the more inventory you have.

So we still believe over time that the supply chain will become efficient and will go down, but it is definitely carrying more than what we originally expected.

Do you have any comment on the panel supply, Wendell, in terms of we know there's more capacity coming on in China as the year progresses.

So we're hopeful that that is enough to supply the demand.

But I don't have a lot of current data on panel supply.

It is hard to tell at this point in time.

I'd say but boy, we would really be good if you were right.

(Laughter).

Yes, exactly.

Okay.

I mean, my follow-up.

Jim, I don't know if you could make any comment on your cash return policy going forward, particularly the dividend that you're thinking about metrics there.

You have PAL ratio in mine, or a yield in mind, or can you just give us any feeling for how you are thinking about that looking forward?

We have not yet set a firm policy with the Board as either yield or percentage of our free cash flow.

I can tell you that the Board's deliberations went into the announcement today is that we are really dedicating our free cash flow over this year and next year to shareholder returns through a combination of dividend and share repurchase.

And I think, as always, I think we love to continue to increase the dividend as our earnings go up.

We want to be cautious not to get too strong on the dividend, because you never want to have to lower it, and we lived through that once before, but I think you can expect to see the dividend continue to go up as our earnings go up.

And us dedicated the free cash flow, the remainder of free cash flow against share repurchases as long as we feel the Company is undervalued, which we clearly do.

Thank you.

John, we have time for one more question, I think.

That'll be from the line of Jagadish Iyer with Piper Jaffray.

Please go ahead.

Thanks for taking my question.

Two questions.

First.

Wendell, if the yen continues to weaken further, the prognosis being much closer to like JPY115 to JPY125, or something like that over the next 12 months, how do think that that your competitors are likely to respond in terms of pricing?

Given that you've hedged, do you think that it doesn't matter anymore?

So I would like to have your thoughts on that, based on the qualitative perspective, and then I have a follow-up.

Well, what economically you would believe, if they were microeconomic decision-makers, is that it ought to have a very moderating effect on pricing.

Because customers are getting the benefits from that, and actually the weakening yen hurts their financials, because of the way their cost structures are built and the way their P&L works.

So that ought to give strong motivation to them to be more moderate in their pricing behavior, if indeed they're microeconomic decision-makers.

Okay.

Just as a follow-up, Jim, just you alluded in your prepared remarks that the gross margins on Gorilla Glass was getting better.

Just wanted to get your thoughts on the puts and takes in terms of how the ASP declines were in Gorilla Glass, and how your cost production initiatives have become?

Thank you.

Our cost reductions is exceeding our ASP declines on Gorilla.

So just a reminder on Gorilla, this remains a relatively new business and new product, and we are making improvements in our cost structure as we are making that glass thinner and improving our yields.

So we are moving up the gross margins of that, and the profitability remains well above the corporate average, and it is improving.

Jim, do have any closing statements?

Yes, I do.

A couple quick wrap-up comments from me.

First of all, we do have one Investor Relations announcement.

We will be attending the JPMorgan T&T Conference on May 14 in Boston, and we hope to see a number of you there.

I'd like to just summarize the call this morning.

First, we think we've made great progress on stabilizing Display, and then turning that business to positive momentum.

We didn't talk a lot this morning, but we continue to do well with new products for various usages.

Second, we executing our goal to grow our earnings in our other businesses.

You saw a very strong aggregate growth in profitability from our other businesses.

Third, we grew core earnings per share year-over-year by double digits, both in quarter four and quarter one, and we think this is very strong evidence that we are marching up on our earnings.

We think we've moved very assertively and appropriately to protect the Company investors with our yen hedges.

And we remain very committed to shareholder returns, and we've acted on that commitment by increasing our dividend for the third in 18 months, effectively doubling it, and announcing a $2 billion share repurchase.

We should consider these new actions as approximately a $3.2 billion commitment over the next two years, essentially putting our free cash flow work for shareholders, in line with our belief the Company is undervalued at its current price.

And finally, look ahead to Q2, we are very confident that we will have a third consecutive quarter of year-over-year core earnings growth, driven by moderate LCD glass price declines and excellent growth in Telecom, Gorilla Glass, and Life Sciences.

Ann?

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

The playback of the call is available beginning at 10.30 AM Eastern today, and will run until 5.00 PM Eastern on Wednesday, May 8. To listen, dial (800)475-6701.

The access code is 287833.

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

John, that concludes our call.

Please disconnect all lines.