康寧 (GLW) 2014 Q1 法說會逐字稿

Ladies and gentlemen, good morning.

Thank you for standing by.

And welcome to the Corning Incorporated quarter one 2014 earnings results conference call.

(Operator Instructions)

As a reminder, today's conference is being recorded.

At this time it is my pleasure to turn the conference over to our host, Division Vice President of Investor Relations, Ms. Ann Nicholson.

Please go ahead.

Thank you, Tom, and good morning.

Welcome to Corning's first-quarter conference call.

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

Before we begin our 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 2013 10-K report.

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

A reconciliation can be found on our website.

Now I'll turn the call over to Jim.

Thanks, Ann.

Good morning, everyone.

I'd like to begin today by looking back at what we said at our annual investor meeting in February regarding our plan for 2014.

We said we wanted to continue the positive momentum in Display, work to quickly integrate CPM in Korea in order to realize synergies, gain further cost advantages, and increase our flexibility of glass supply.

We want to grow sales and profits in optical communication, specialty environmental and life sciences, driven by the growth in their end markets and their operational improvements.

And, finally, we wanted to execute $2.5 billion of share repurchases.

I'm very pleased to say we are off to a great start in delivering this plan.

In the first quarter, we closed on the CPM acquisition and launched integration activities.

This, in combination with improved manufacturing efficiencies, resulted in improved gross margin performance and the realization of synergies in Display.

We executed customer negotiations for lower-priced declines on LCD glass for the second quarter.

We grew the Company's core sales, with optical, communication and environmental exceeding expectations.

We continued our strong control of operational expenses.

We grew our core NPAT and EPS by 7% year over year.

And we executed a $1.25 billion accelerated repurchase program, and also repurchased shares in the open market, to retire a total of nearly 99 million shares during the first quarter.

In summary, we had broad-based contributions to our first-quarter performance.

And we look forward to gaining momentum as the synergies from CPM build and as Gorilla grows, allowing us to get greater year-over-year gains.

Now let's delve into the first-quarter details.

As a reminder, we're providing core performance results in order to exclude non performance-related items and increase the transparency of our operating results.

Core financial measures are non-GAAP financial measures and we continue to report our GAAP results.

You'll find detailed reconciliations on our website outlining the differences between these non-GAAP measures and the most directly comparable GAAP measure.

First-quarter sales were $2.4 billion, up 32% versus last year, the increase driven largely by the consolidation of CPM sales.

Gross margin was 44%, up year over year and sequentially, but slightly lower than our original expectation of almost 45%.

This was due namely to lower sequential volume growth at LCD glass versus our expectations.

LCD glass volume was down mid-single digits sequentially, more than our original forecasted due to a technical issue at one customer.

We'll have more on that in a minute.

SG&A and R&D spending were higher year over year in absolute dollars, driven by the consolidation of CPM, but lower as a percentage of sales.

Gross equity earnings of $61 million were down 66% year over year, driven by no longer having the equity earnings from SCP after completing the acquisition.

Dow Corning equity earnings were up 40% year over year.

And I'll walk through that in more detail shortly.

Our effective tax rate was 20% which is now what we expect our rate to be for the full year.

EPS was $0.31, up $0.02 over a year ago and $0.01 better than consensus.

During the quarter, we completed our $2 billion share repurchase program that we had announced in April of 2013, and started repurchasing under a new $2 billion share repurchase program associated with the CPM acquisition.

As part of the new repurchase program, we launched a $1.25 billion accelerated stock repurchase program.

Since the announcement of the SCP transaction, we've repurchase enough shares to offset the impact on fully diluted EPS of the shares embedded in the convertible preferred stock issued to Samsung.

Now let's look at the detailed segment results.

And I'll begin with Display.

Display sales were $1 billion in quarter one, a 58% increase over last year, driven by the additional sales from our now consolidated operations in Korea, Corning Precision Materials.

Q1 price declines were higher than Q4, as we had expected, driven by a specific situation that we described in our January earnings call.

Sequentially, volume was down mid-single digits, a little softer than we had expected driven mainly by a technical issue at one customer in Korea.

Our volume growth was lower in the quarter than the overall LCD glass market due to this issue, but we expect to reverse in Q2 as glass volumes return to previous levels at this customer.

For the full year we expect our volume growth to be in line with the worldwide market growth.

And, thus, we expect our worldwide share will remain stable compared to last year on a full-year basis.

Gross equity earnings from our equity venture in Korea, SCG, were immaterial.

Gross margins improved in Display driven by the CPM consolidation.

Net income was down 4% year over year, reflecting the impact of the larger price declines and the delayed volume due to the technical issue at a Korean customer.

On the supply chain front, we estimate the inventory end of the quarter at approximately 17 weeks, and is spread fairly evenly along the supply chain.

This is an arrange we consider healthy and reasonable.

And I'll talk more about the industry in our outlook section shortly.

Now, turning to Optical Communications, Q1 sales were $593 million, up 26% versus last year and better than we had expected.

Sales for carrier networks were stronger than expected in North America and EMEA.

Sales of fiber to the home and data center products were very strong in North America.

All businesses and regions contributed to the year-over-year growth with the exception of fiber sales in China.

Net income was up 11%, a little lower than sales growth due to price and mix and lower fiber production levels this quarter versus the quarter one of 2013.

In Environmental, Q1 sales were $275 million, up 21% versus last year, and better than we had expected.

New regulations in China and Europe, as well as a pick up in US orders, drove strong heavy-duty diesel sales.

Light-duty diesel and auto sales were also up versus last year.

Net income was up 59% on the higher volumes.

Our focus on manufacturing and costs over the last few years allowed us to convert the sales volume into strong incremental profits.

We are delighted with this strong financial performance in Environmental.

Specialty Materials sales for the quarter were up slightly year over year, as expected.

While Gorilla Glass volume grew high single digits year over year, we experienced larger than usual price declines in Q1 in order to renew key annual supply agreements, maintaining our market position.

Pricing is expected to return to moderate declines in Q2.

Net income in Q1 was down year over year by 18%, driven by the year-over-year Gorilla Glass price declines and the lower production levels this year compared to quarter one of 2013.

If you recall, in quarter one last year we were manufacturing at a high level to replenish inventory after the huge Q4 2012 sales.

In Life Sciences, Q1 sales were up slightly year over year.

Net income was down 13% due to the non repeat of favorable one-time items that occurred in Q1 of 2013.

Now turning to Dow Corning, our core performance measures now include Hemlock Semiconductor operating results.

We had excluded the operating results of Hemlock Semiconductor in 2013 to remove the potential impact of severe unpredictability and instability in the polysilicon market.

We've seen stabilization of the polysilicon market and very positive behavior by Hemlock's customers with respect to the long-term contracts.

These facts, combined with the rulings on trade disputes, have led us to include Hemlock operating results in core equity earnings for 2014.

Hemlock equity earnings were positive in Q1.

Hemlock's customers are purchasing further contractual obligations, drove increased sales and profits in both Q4 of last year and Q1.

Now, we do expect lumpy quarters this year due to the likely timing of these customers taking their volume commitments more towards the end of the year.

And I'll walk through this in more detail in the outlook.

Gross equity earnings from the silicon segment were down slightly in Q1 versus last year.

Sales and gross margin improved year over year.

Earnings there were impacted negatively by the net impact of one-time items and unfavorable exchange rates.

Now moving to the balance sheet, we ended the first quarter with $5.6 billion in cash and short-term investments.

We had strong operating cash flow in the quarter.

The receipt of Corning's share of the existing cash on CPM's balance sheet of approximately $1.5 billion drove this.

Strong operating cash flow also resulted in strong free cash flow for the quarter of $1.5 billion.

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

And the reconciliation to GAAP can be found on our website.

We ended the quarter with approximately $1.4 billion of cash in the United States.

Capital spending for the quarter was $246 million and we are on track to reach $1.5 billion for the full year.

Now that we've entered 2014, and with the Japanese yen spending most of the quarter in the range of JPY101 to JPY103 compared to the US dollar, investors have been asking about our strategy for hedging the yen exposure in 2015 and beyond, especially with the risk that the Yen could weaken significantly in the future.

As a reminder, we had hedged all our expected translation exposure for 2013 and 2014 back in February of last year.

Those hedges only covered the 50% of SCP that we owned at that time.

We added hedges for a portion of 2015 later last year.

So we're approaching the end translation risk with two strategies.

Number one, we have a plan to execute hedges during any period of the yen strengthening.

Although it's tempting to say that events will not bring the yen below 100, it's very possible the situation could occur in the world.

And we will be ready to add to hedges to match any residual underlying exposure if we see such an opportunity.

Our second strategy, we recognized there's some risk that the yen weakens further from the current trading range of JPY101 to JPY103.

We have taken action to protect Corning from that potential adverse translation impact.

During the first quarter, we entered into a series of additional average rate forwards at approximately JPY99, which will partially hedge the impact of the Japanese yen translation on our projected 2015, 2016, and 2017 net income.

These forwards have no premium.

You'll find additional details on this on our Form 10-Q filing, which should be filed at the end of the day today.

We have not yet made any decisions on the core reporting rate for 2015 and beyond.

We have some of 2015 hedged at 93 and some at 99.

We'll keep investors updated on our activities and thinking as the year unfolds.

Obviously we'd love an event to cause some yen strengthening, even if it's short-lived, as we would step in to hedge.

Now I'll turn to our Outlook and I'll start with Display.

We have no changes to our expectations for the overall LCD retail end glass markets for the year.

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

We think LCD TV units will grow low to mid single-digits, but area growth will likely be higher.

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

Many investors ask us about our expectations for ultra high-definition televisions, known as 4K.

While we still expect ultra high-definition televisions to be a high-end category in 2014 and beyond, we believe ultra high-def has the opportunity to be a major driver of the area demand in the near future.

We expect about 10 million sets to be shipped in 2014, up from 1.5 million in 2013.

And all these ultra high-def sets have higher average screen size.

Now, we expect the monitor, desktop and notebook portions of the IT market to be flat.

However, we do expect very strong growth in tablets this year.

We continue to feel good about the glass market.

Inventory levels appear healthy and glass supply seems aligned with demand.

As I mentioned earlier, we did have a technical customer issue in the first quarter that led to some lower volume.

But we expect to return to previous share levels with this customer in Q2, and also to offset the Q1 volume loss of this customer in the second half.

So, for the full year we still expect stable share compared to last year.

We see the Q2 LCD glass market up mid single-digits sequentially, reflecting normal seasonality.

We expect our glass volume to be up high single-digits sequentially, slightly higher than the market, driven by the share recovery at the customer in Korea.

We expect LCD glass price declines in Q2 to be significantly less than Q1.

Recall from our January earnings call we believe that a higher Q1 decline was driven by a specific situation that would not be repeating in Q2.

While the Q2 price declines are not quite as moderate as in most of the quarters of 2013, they are a significant step in the right direction.

We expect further price decline moderation in the back half of 2014.

We are off to a strong start on the integration of CPM, and we expect additional synergies from CPM in Q2, driven by the relocation of production from Japan to these lower-cost assets and other integration activities.

Consolidated earnings synergies and additional LCD glass volume are expected to drive higher profitability for Corning.

Now, moving to Optical Communications, we expect Q2 sales to be up mid to high single-digits versus Q2 of 2013.

We expect strong growth in carrier networks and enterprise networks, led again by the sales of fiber to the home and data center products, as well as strong sales of our wireless products.

These will be partially offset by lower China fiber sales.

Contributing slightly to revenue growth is also the consolidation of an equity affiliate and an acquisition in Brazil that occurred in mid Q2 of 2013.

In Environmental we expect Q2 sales to be up in the low to mid teens year over year, driven by continued stronger heavy-duty diesel sales for the new regulations in Europe and China.

I'd like to pause here after giving Optical Communications and Environmental guidance.

We think each of these two segments is poised for a very strong year.

In Optical Communications, the market continues to move towards optical products, our strength.

We're seeing strong fiber demand earlier than we expected.

We are confident we can deliver on the 2X times the industry capital spending rate Clark Kinlin discussed at our IR day.

In Environmental, we've made significant improvements to our cost and capability position over the last three years.

With the improved sales outlook in heavy-duty diesel and continued strong car demand worldwide, we think Environmental could have a very strong year.

Now, turning to Specialty Materials, we expect sales to be up 20% to 25% versus the first quarter, driven mainly by higher Gorilla Glass volume off the seasonally slow strong start to the year.

The supply chain's preparation for upcoming new product launches will be driving the volume growth of Gorilla Glass.

I want to take a moment to discuss Gorilla volume relative to the end market and supply chain.

We've been working hard to improve our models of the Gorilla market.

It is not as strong as our understanding of LCD but it has improved.

First, at the level of shipments of devices into retail, we expect covered glass growth, as measured in square feet, to be up approximately 14%.

We expect to grow Gorilla at a higher rate at this level.

Second, at the level of Gorilla Glass going into finishers, we expect to see consumption rise by 24% this year.

Corning's shipments of Gorilla will exceed this level because of the inventory work-off last year.

In Life Sciences, we expect sales to be consistent with last year's second quarter.

We expect Dow Corning core equity earnings to grow 20% to 30% in 2014, driven by single-digit silicone sales growth and improved margins in silicones, and the addition of earnings from Hemlock.

Hemlock sales are expected to grow 20% over 2013.

We expect Q2 equity earnings from Dow Corning to be approximately $40 million.

This is down from Q1 driven by the lower sequential sales of polysilicon.

We don't expect polysilicon sales to pick up until Q4 when customers fulfill their annual contractual obligations.

Now, continuing to the rest of our Q2 forecast, we expect gross margin to be 46%, driven by display.

Display's gross margins improved versus last year due to the volume and consolidation of CPM.

SG&A and R&D spending should be lower year over year as a percentage of sales.

Our effective tax rate for 2014 is now expected to be approximately 20%.

The projected rate is higher than 2013, driven by the addition of CPM's income, which is taxed at the Korean tax rate of 24%.

That concludes my opening comments.

Ann?

Thank you, Jim.

We'll now open the lines for questions.

Tom?

(Operator Instructions)

Mehdi Hosseini, SIG.

Yes, thanks for taking my question.

Going back to your commentary about the retail and inventories, can you provide more qualitative or quantitative assessment where glass inventories are in Q1 compared to Q4?

And how do you see the inventory changing in Q2?

And I have a follow-up.

The inventories versus the end of Q4 are about the same at the panel makers.

Set makers, also about the same.

And down at retail, which is what we would normally expect.

Relative to Q2, we expect overall inventory in the supply chain to build slightly.

And that's normally what happens because Q2 is actually the lowest quarter of glass used at retail.

But that normally happens as we see a slight uptick in Q2.

What's your follow-up?

My follow-up has to do with, you talked about the hedging strategy and longer term how you're dealing with it.

What about the cash offshore?

Is there any update there?

Our US cash, which I talked about, is $1.4 billion.

We have some cash strategies to bring more back to the United States, which we believe will happen later on this year.

But we haven't detailed the exact amount yet.

Thank you.

Amitabh Passi, UBS.

Hi, thank you.

Jim, my first question for you was, I think there's a little bit of a confusion in some of us trying to back into what the LCD ASP declines were.

And I was wondering if you could give us a pro forma sales figure for last year relative to the $1.029 billion you reported this year.

No, we're not giving out pro forma for that number.

You're not.

Okay.

Are you able to give us some sense -- I think the expectation is maybe about 6% ASP declines sequentially.

Are you able to give us any sense of whether it came in slightly higher?

It was slightly higher than that level.

Okay.

And then just a quick follow-up.

On the telecom segment, can you provide any clarity or greater insight in terms of the source of strength.

It was significantly above, I think, what many were forecasting, and you cited strength in North America.

Any incremental color would be helpful.

Sure, I'd love to, but I'll let Wendell take that one.

As you note, we were up 26% versus last year.

What's behind that is strong demand for fiber to the home solutions in North America and EMEA and by continued strong growth in our data center products, of course, supporting data center builds.

Those are the primary drivers.

Is the fiber to the home from your tier 1 customers or is it broader-based in North America?

All our customers our tier 1 customers.

(laughter) Yes, we're positively surprised by both the breadth and depth of fiber to the home demand.

It's nice because Australia has been through some fits and starts, and now we're seeing activity really across the base, with major players committing more and more to fiber to the home.

Okay.

Thank you.

Mark Sue, RBC Capital Markets.

Thank you.

Jim, the issue with the one Korean customer, the thought is that they will return pretty quickly, and they'll also recover the amount that they didn't purchase.

Maybe if you could give us some additional color there.

And then maybe on Gorilla, your outlook is pointing to a reacceleration aided by some inventory fill this year.

Yet, if I look at the near-term growth rate it's slow to the high single digits.

Is there some accelerated pricing that should linger?

And just conceptually how are we now thinking about pricing of Gorilla?

Is it similar to market share?

Is it by customer base?

How should we think of the framework for pricing for Gorilla Glass this year?

I'll let Wendell talk about the technical problem in the Korean customer and then I will take Gorilla.

We had a specific technical issue as one customer began to shift its manufacturing process.

And it led to an interaction with our product that has led to this delayed volume.

We're addressing the issue.

We are already experiencing increased demand in Q2.

We still have some more progress to make, but we're on it and we are making that progress.

And we feel pretty good we will get this behind us.

Also, relative to Gorilla, as the business has matured, we have experienced more price declines than we did in the first few years.

But the ones in Q1 related to ringing up our annual agreements, and we don't expect that to carry over, as you indicated in your question.

More importantly for us, we expect to see a significant volume increase in Q2 that will be both sequentially and year over year.

Year over year we are just beginning to get a benefit.

And not having to compare it to last year when we were not shipping as much because the supply chain was working off of inventory.

Sequentially we get the benefit of both seasonality -- Q1 has always been the lowest quarter for Gorilla -- but also as our customers prepare for new model launches.

In this business, new model launches have always driven some of the lumpiness, depending on the timing when customers do that.

But we're expecting to see very good Gorilla growth in Q2 and actually in Q3 and Q4.

And just on the Gorilla application in terms of what might be better as we look into 2014 and 2015, would it be the touch notebooks?

Would it be the tablets?

Or how would you rank order relative to a year ago where you see more promise in Gorilla Glass applications?

We're expecting touch-on notebooks to grow this year.

It's obviously a small number but I think the growth of touch-on notebooks will be 50%.

And we're gaining share on touch-on notebooks this year, so that's important for us.

Tablets continue to be an excellent market.

And obviously tablets are a whole lot bigger than smartphones.

So we feel good about both of those.

Thank you.

Good luck, gentlemen.

Wamsi Mohan, Bank of America Merrill Lynch.

Yes, thank you.

Good morning.

Jim, it sounds like glass pricing is improving significantly here in Q2 but not quite at the level where you want it yet.

Any color that you can share why that's the case?

Is it a continuation of the pricing issue that you had highlighted last quarter or is it a different issue?

I would say there's not necessarily specific issue.

We are delighted by the dramatic reduction that we got in Q2 from what we had in Q1.

We're not quite yet at the level that we define as moderate.

But there's no specific issue that's hanging over that.

And we hope to get there.

Wendell, anything you'd like to add?

No, I think you characterized it well.

It's not an issue.

It's improved a lot.

It's just not as good as we would like.

And so we'll continue to try to optimize and do better.

Okay.

And, Jim, is the expectation for CapEx for 2014 still the same given that you came in a little bit lower than what we thought in Q1?

Q1 CapEx is always our lowest quarter seasonally.

So, even though it annualizes to be $1 billion, our official forecast is $1.5 billion.

My guess is we'll probably for the year come in slightly under that.

But, generally, Q1 does not represent a full quarter's worth.

It has to do with how capital flows at year end.

But I think we're forecasting $1.5 billion.

Could come in a little under that.

Okay, thanks.

And last one from me, was the technical issue at your Korean customer, was that related to Lotus or EAGLE XG, if you could share that?

It's in the base A side business.

It's relatively typical that if you are not the lead supplier in a given line, that what can happen is, as the customer shifts its process, that they'll first optimize who's ever lead on that given line.

And then the person who's not in the lead on that given line has to play catch-up.

And that's where we are.

So, it's nothing dramatic.

It's a pretty typical type of issue in A side.

You are just not used to us talking about it because we're usually the primary supplier.

Okay.

Thanks for the color.

Patrick Newton, Stifel.

Yes, thank you.

Good morning.

Thank you for taking my questions.

Just first on Gorilla Glass, I want to make sure I understood this.

I think entering the year you discussed volumes growing in excess of 30% year over year.

And during this call you put a finer point on that expectation and I wanted to make sure I got that right.

I believe you said that volumes should increase about 24% year over year for the cover glass industry as a whole, and that Gorilla Glass should grow faster than that.

So, if I understood that correctly, I'm curious if we should see this as a moderation of prior guidance.

No, there's no moderation.

The 24% that I was talking about is what's happening going into the finishers.

But from our shipments, we are expecting to be over 30%.

Okay, great.

And then just on the synergies side of CPM relative to your original guidance, can you give us an expectation or some details on what was achieved in the quarter?

And then perhaps something to quantify some of the synergies to give us a baseline for analysis, perhaps utilization?

The synergies from utilization are not really occurring until starting in quarter two.

We are beginning to make the shift.

We announced that we were going to be shutting down some Japanese capacity actually on Gorilla first, and getting that.

We continue -- we had tanks offline in Korea at SCP that's really related to 2011 when we lost share at one of our customers in Korea.

And we are not bringing the capacity back up until it's needed.

So, we are beginning to see the utilization shifts, starting in Q2.

They'll be the first happening with Gorilla.

Wendell, would you like to add anything?

Sure.

We are off to a great start on the integration.

But, as you would expect, we'll be building momentum in the coming quarters.

So, that'll be part of our strengthening of our earnings per share year over year as the year goes on, as we gain more and more progress on our integration plans.

But we're delighted.

We're delighted with the start.

This is going really well.

Great.

And just one more, if I may.

I just want to, Jim, take maybe an intermediate term look at gross margins as we think about maturation of the Display business.

You have lower margin segments that are driving some of your fastest growth, with the Optical Communications and also Environmental.

You have benefits that are coming on from CPM and perhaps a margin tailwind from Gorilla Glass that's somewhat slowing as that business matures.

How should we think about your gross margin profile over the intermediate term when weighing all those different variables?

As you know, our corporate gross margin is obviously the add-up of the mix of all those businesses.

From Display, assuming that we get back to moderate price declines in the back half of the year, which we believe we will, heading into next year also, you're going to see the benefit of the synergies flow, primarily in the gross margin.

There's some in OpEx.

So, that's good news for Display's margins.

In Gorilla, as you noted, Gorilla margins are actually higher than the corporate average today.

As that business grows that will help the corporate average.

We expect continued growth in Gorilla.

Obviously strong this year and again, we believe, for next year.

The good news in Environmental right now is that actually gross margins are pretty strong.

We've done a great job in manufacturing there.

We've been waiting for a little wind at our back from the heavy-duty market, which goes through some fits and starts in the US.

But now that we have heavy-duty showing up in Europe and China with the new regulations, that should be a good contributor to our corporate gross margin.

Telecom is the place where it's lower.

And obviously Life Science is lower.

In Life Sciences we think it will creep up a little within that segment over the next couple of years.

And telecom, the good news is that, even though it's lower than the corporate average, the fastest selling products of fiber to the home and enterprise actually are higher gross margins within that segment than the overall corporate.

So, generally I believe that the corporate gross margin has the ability to go up because every segment has the ability to improve their gross margins.

The ultimate number will be dependent on the mix in the quarter.

But we feel pretty good about our gross margin outlook.

Obviously where the biggest watch out is, as always, Display prices.

Great.

Thank you for taking my questions.

George Notter, Jefferies.

Hi.

Thanks very much, guys.

I wanted to ask about -- does the efficacy of your contracts that you put in place on pricing in the Display business in Taiwan, obviously did that, I think, a little bit more than a year ago.

And if I look at the 10-K, pricing came down, I think mid teens in Taiwan, and then obviously some more price erosion here in Q1 that was pretty significant.

Can you talk a little bit about what the experience has been?

Have you been able to maintain share as laid out in those contracts?

And, then, certainly you'd think in an oligopoly environment your competitors would react to those types of contracts pretty well.

But it seems like, again, pricing is still coming down a bit more than maybe you had anticipated.

I'm trying to understand your perspective as you're looking back on those contracts a year later.

Thanks.

We're delighted by the contracts that were entered into in, I guess, quarter four, really, the month of October of 2012.

Customers renewed them.

We believe that they are providing benefit to both us and our customer.

For us it led to stable share, which is what the contracts were focused on.

Stable share really helps us because it allows us to run our manufacturing very stable.

And when that occurs we get good cost performance.

What we talked about, which is what shows up when you view the comparison over the last 12 months with the Q1, is in Q1 we had this spike upward that we've talked about before, where we believe a competitor had to normalize pricing between a customer in Taiwan and what they had elsewhere.

And that, because of the contracts, drove back on us.

But as you can see with our guidance for Q2 that situation is not repeating.

So, we feel very good about how those contracts have contributed.

Relative to our competition, we've obviously commented that we believe over time that the lower margin at our competitors will drive to lower pricing.

But that's obviously up to them.

But we feel good about the contracts overall.

Great.

Thank you very much.

Simona Jankowski, Goldman Sachs.

Hi.

Thanks very much.

This is also a question on pricing.

I think you, when we commented about gross margins coming in a little bit below your expectations, you had cited the lower glass volumes than expected.

But since it looks like ASPs were down in the low double digits, which I think was also worse than initially expected, was that an impact on your margins, as well?

And since those were locked up contractually, I was just curious what drove that delta versus the original pricing expectations.

Our prices sequentially were not down double digits.

Clearly year over year our pricing was down double digits but they were not down sequentially.

The weakness in our performance, from our perspective, because pricing, we had talked about it being declines being greater in Q1.

The disappointment for us was the volume that we didn't get due to the technical issue.

If we had gotten the volume that we originally expected, we believe we would have seen year-over-year profitability increase in Display.

Okay.

And then the second question was on the competitive environment in Gorilla Glass.

It looks like from the volumes you are expecting that you're certainly looking to gain some share there.

But you also talked about having some price declines as you are locking up some of these contracts.

So, can you just give us a sense a little bit of how the competitive environment looks like right now?

And what type of price declines should we be thinking about for this year for Gorilla Glass?

Is it something on the order of 20% or not quite that high?

I'll start at the end and then work my way up.

We would expect that Gorilla price declines to moderate very significantly as we go forward into Q2.

Specifically on price, we had a much larger than normal price declines in Q1 in Gorilla due to us wrapping up full-year contracts to maintain our market position.

And what led to that really is just competitors being more aggressive on price than they have been.

They've always been pretty aggressive but they've found a new level of aggression for this round.

Now, what's important to note is that our significant price premium versus the competition is continuing -- or actually it's even increasing.

But they just made a big move.

So, even though our premium is in place, the baseline that it moves from moved downward.

We would expect that type of premium for the performance segments, any time you have a product that you care about its performance, to continue.

Because we are going to launch a new Gorilla that's even better than our current Gorilla this year.

So, we feel good about that.

I think the next area of opportunity and challenge is the ultra-low performance segments that we're seeing now emerge in China.

Another example is low but not ultra-low, we touch on notebook.

And for that, what we're looking to do is create a real soda lime glass spider that can be really competitive with those offerings for the lower performance segments.

More on that as the year goes on.

We've got some innovation and market work ahead of us to make that happen, as well.

Great.

Thank you.

Ehud Gelblum, Citigroup.

Hello, guys.

Good morning.

Appreciate it, thank you.

A couple questions.

Jim, could we just start on Hemlock, and help me normalize it a little bit.

Hemlock, if I understood correctly, was that in already in Q2 but was not in in Q1?

Or is it only going to be included going forward in -- I'm sorry, was it included in Q1 but not included in Q4 or is only going to be included in Q2 going forward?

Hemlock was in none of our results last year.

We included it in Q1.

If we had had it last year in Q1, it was just a tiny loss.

And so it really would've only made the numbers increasing a little slightly greater.

But for the year last year, the only time it had any significance was in Q4 of last year.

And that's when the contracts were fulfilled a lot by our customers.

So, it's really not a big shift year over year.

But on an absolute basis can we know what the Hemlock contribution was to equity earnings in Q4 and Q1, and where you are thinking about it in Q2, just with normalization, at least for a couple quarters sequentially?

Yes.

I think that we could outline that to you.

We'll have Ann get that prepared for you, if you want.

That would be awesome.

It's not very much money.

Don't get too excited about this.

I'm not.

Just want to make sure that all the I's are dotted.

Wendell, I believe you mentioned that LCD pricing is going to be significantly better in Q2 than it was in Q1, but not quite back to moderate levels.

Is that still related to the same issue that brought pricing down in Q1 or is that a different issue?

I think that it's moderate, they are definitely moderate.

It's just not as moderate as our favorite quarters from last year.

So there's no real issue.

They moderated.

I'd just like to do better by a point or two.

That's all.

So we can't have any particular thing to point out.

As you know very well, you have all sorts of dynamics working out at the competitors.

But we've got no issue to point at.

It's got a lot better in Q2 from Q1.

We just like to do better still.

Does that make sense?

That's awesome.

I wish you the best of luck in that.

As you go through the different generations of Gorilla, I'm assuming that what's going to be growing a lot this year might be NBT.

Does that change the margin profile or the pricing profile of Gorilla as you go through the different generations of Gorilla, specifically this year versus what you had in Q4 and Q1?

And is it NBT that really will be providing a lot of this 30%-plus growth?

No.

Actually, NBT, though it's growing fast, as Jim pointed out, it's off a small number.

So, the primary drivers for us is that mainline Gorilla product, Gorilla Glass 3. And hopefully this year a new and improved version.

So, that will be the lion's share of the growth in those places where you're used to us being.

We're after some of these lower performance areas, not so much about this year and what it can do, but because over time, as touch technology now proliferates, like every price point, we need to make sure we've got the right offering to go after those real value segments.

And that's still a work in process.

Appreciate it.

Lastly, on the balance sheet, $3.3 billion in debt, $5.6 billion in cash.

I think you said at one point $4 billion was in North America.

What are your thoughts going forward with respect to continued -- where would you feel comfortable with that balance sheet?

Could you get to a -- would you be comfortable with a net -- you generate a lot of cash, but would you be comfortable increasing the debt or lowering the cash to a point where you're at net cash zero?

Or do you like having basically a couple billion in net cash?

How do you look at that, Jim?

First of all, we have $1.4 billion in the United States not $4 billion.

Maybe I misheard you.

I meant $1.4 billion.

I'm sorry.

We are going to be doing substantial repurchasing.

We still have about $600 million left.

So, obviously that will come out of US cash.

We have metrics around cash greater than debt.

Doesn't have to be as great as $2 billion.

I don't think we're likely to add to the leverage of the Company.

But I think the Board has demonstrated they're prepared to commit to shareholder returns through dividends and repurchase.

And I sure that they will continue to focus on that after the current program ends.

And just one other comment., I just wanted to remind you we do put the numbers on Hemlock in our Q every quarter.

Okay.

I'll make sure to have that.

Thank you.

Brian White, Cantor.

Yes.

Jim, I'm wondering if you could talk a little bit about the weakness in China fiber.

Is that more a market situation?

Obviously 4G is benefiting base stations but it doesn't sound like it's benefiting fiber.

Or is this a competitive situation?

And also, with the ramp of some of these Chinese panel makers, I'd be curious just how you feel Corning's positioned.

And what are some of the trends you're seeing with the specific Chinese panel makers?

Thanks.

On China fiber, on the volume side it is basically market-driven.

Because that market took a step down, we've also seen, in terms of competitive dynamic, a lot more action around price.

But from a volume standpoint, this is largely a market-based piece.

As you point out, predicting the China markets, it's much more a command-driven rather than market-driven play in telecom CapEx.

It is a little hard to figure out.

But as it becomes clearer as we go through the tenders for the year, I think our ability to predict is going to increase.

The second question?

Relative to the panel makers in China, we have a very strong position with one of the large Chinese panel makers.

We don't have much position with the second largest.

But we think we're doing quite well with the Chinese panel makers, and continue to have discussions with them as they think about new capacity.

I think the right way to think about China is our position there is superior to our position even in Taiwan.

So, we really like our hand in China and we have a broad-based play, really across the industry, with the leading positions in most of the players.

So, we feel really good.

And just as a follow-up, we are not seeing China-based LCD glass makers yet.

Is that correct?

We do have LCD glass players who are China-based.

Just had a significant IP settlement with one of them.

So we would anticipate, like you always expect in China, to have some local players enter, as well.

But so far they are struggling as everybody else who's tried to enter this business struggles.

Great.

Thank you.

Steven Fox, Cross Research.

Thanks.

Good morning.

Just two quick questions from me.

First of all, on the yen, Jim, is there a way to sum up how much you've hedged versus, say, 2015 Yen-based revenues at this point?

And then, secondly, with regard to thinning your glass further, as it works into the integration plan, either looking at the total business or just the Korea-based assets versus the previously wholly-owned assets, can you just give us an update on where you are in the process, whether it could accelerate this year or what kind of time line you are up for improving the average amount of thin glass in production?

Thanks.

On 2015, we are approaching having it fully hedged.

I think we have about 30% at 93 and the remainder probably at 99.

And then we have significant portions of 2016 to 2017 now hedged at 99.

On the thickness of the glass, do you want to comment, Wendell?

I can, or do you want to do it?

We're continuing to work with customers to go thinner.

As I've mentioned in the past, some customers are on their second or third round of going thinner on glass.

In Korea in particular, we have seen our largest customer there who really has not done much with thin, beginning to convert some of their capacity to thin.

So, we expect to see more capacity additions to ourselves benefit, and obviously cost reductions as they choose to go thinner.

Yes, we like thin and we like to see it continue.

And we always do our best to try to enable that.

Because, if you look at us broadly, what we would like to do is use that to continue to drive our costs, lower our customers' costs, but also open up the opportunity for us to exploit new markets with assets that we've created purely through our own productivity.

And it's just great for shareholders and great for our ability to develop new markets.

Rod Hall, JPMorgan.

Yes.

Thanks for getting me in there.

Just a couple of questions.

I wondered, Wendell, could you comment on the linearity of that technical glass volume coming back on stream in Q2?

How does that flow over the quarter?

Is all of it back by the end of the quarter or the middle of the quarter?

I'm not sure if you qualified that in earlier comments.

And then, I don't know if you could -- could you tell us whether (inaudible) of SCP is not hedged?

Have you done anything with that yet?

Or is that still an open issue that you're considering what to do with it?

And then, lastly, bonus question, I don't know if I'll get Jim to comment on this, or Wendell, but could you guys talk about the -- it just feels like there's not been a lot of capacity added to the industry.

And yet volume demand just keeps creeping up and up and up.

And I wonder if you could just talk a little bit about capacity utilization at this point in the industry.

Thanks.

On the SCP unhedged portion for 2014, there's really nothing that we have done and likely to be able to do anything of any significance.

So, that just is flowing through to us.

Ann can walk you through that and the impact on our results.

But it falls outside of core.

Relative capacity in the industry -- we believe the industry is continuing to be relatively disciplined in keeping capacity off-line.

Obviously what is occurring is, as you note, that the market continues to grow, as it does at retail and flows through to the glass makers.

And therefore capacity utilization has climbed a little.

On the other hand, we're continuing, and our competitors, are also seeing some benefit from thin.

So there continues to be excess capacity.

But we continue to see discipline by the entire industry of keeping that unneeded capacity off-line.

Any comments on linearity?

Sure.

I wouldn't count on linearity.

When you're working through one of these type of issues, then you get this complicated fishbone chart, both our product, what's going on in their process.

So, as a result, these things are notoriously difficult to schedule.

I think you're right in that our expectation is that we are already feeling it coming back in Q2, as we speak.

But there's always room for the unknown as we work our way through these type of issues.

Wendell, are you pretty sure by Q3 you've got all that volume onboard -- pretty sure, being greater than 80%?

Or do you still feel like there's quite a bit of risk that there's still a good chunk?

I feel pretty sure.

My ops guys and [seth] guys, they're really sharp.

I think we'll get this behind us pretty quickly.

So, I'm pretty sure.

Okay, great.

Thanks a lot.

Thank you, Rod.

Jim?

Just a couple wrap-up comments.

First of all, from investor relations we're going to be appearing at quite a few places in the month of May.

We'll be at the Jefferies conference on May 7, the JPMorgan conference on May 20, the Bernstein Annual Strategic Decisions Conference on May 29, and, finally, the Bank of America conference at the beginning of June on June 3.

Just to summarize the highlights of the call, we think we're entering 2014 with a very strong start.

The integration of CPM is underway and delivering results.

And we look forward to achieving the synergies which will be part of the $350 million we expect in additional NPAT for the full year.

We grew sales in every business in Q1 and are on track to deliver sales and earnings growth in every business for the full year.

We think our Optical Communications and Environmental segments are poised for a very strong year.

We continue to improve manufacturing efficiencies and control operating costs.

And we are going to continue to return cash to shareholders with our share repurchases.

So, we feel really good about our first quarter and are confident we can deliver no our 2014 plan.

Ann?

Thank you, Jim.

And thank you all for joining us today.

A playback of the call is available beginning at 11 AM Eastern time today, and will run until 5 PM Eastern, Monday, May 12.

To listen, dial 800-475-6701.

The access code is 323571.

The audiocast is available on our website during that time, as well.

Tom, that concludes our call.

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Thank you.

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