康寧 (GLW) 2015 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the Corning Incorporated quarter one 2015 earning results.

It's my pleasure to turn the call over to Ann Nicholson, Division Vice President of Investor Relations.

Please go ahead.

Thank you, John, 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 risk, uncertainties and other factors that could cause actual results to differ materially.

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

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 meaning in February regarding our plan for 2015.

We said we'll have positive momentum in all our businesses and we expect this momentum to continue.

We're leveraging our innovation engine to drive growth in today's businesses while also creating entirely new ones.

We expect to grow sales and earnings this year and we are executing on a commitment to return cash to shareholders.

So we're now three months into the year and I am very pleased to say we're off to a great start towards these goals, exceeding our plan and consensus for quarter one.

In the first quarter, we grew the Company's core sales with Optical Communications exceeding expectations and Gorilla Glass volume up more than 20%.

We enjoyed moderate sequential price declines for LCD glass in the first quarter and we now expect prices to decline even less in the second quarter.

We closed three acquisitions in Optical Communications which will extend our leadership in this segment.

We grew our core NPAT by 14% year over year and EPS by 21%.

And we executed $502 million in share repurchases to retire a total of 21 million shares during the quarter.

In summary, we had broad-based contributions to our first-quarter results and we look forward to this momentum continuing through Q2 and delivering a full year of strong performance.

Now the euro weakening is affecting us somewhat as it is many companies.

The Q1 year-over-year impact for us was approximately $50 million in sales and $10 million in net income, or about 2% on each line.

However, it's impact did not prevent us from delivering excellent results.

With the euro exchange rate now approximately 20% lower versus 2014, it is offsetting the growth in some of our businesses.

So I walk through some additional detail on this impact as I walk through our results and outlook.

Now one other note on FX, for those who are looking at our comparison against sales consensus, FX was the only reason that we missed sales consensus.

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

As a reminder these are core results.

First-quarter sales were $2.4 billion, up 4% versus last year driven largely by Optical Communications with help from Specialties, Gorilla Glass and Environmental.

Excluding the impact of a weaker euro exchange rate, sales would have been up an additional $49 million, or 7% versus Q1 of 2014.

Our gross margin was 44% up year over year and better than we had expected.

Gross margins improved in every business except Life Science.

Improve manufacturing efficiency in Gorilla Glass was a big help.

SG&A spending was flat year over year, R&D spending was lower year over year driven by lower project spending compared to quarter one of 2014.

Our gross equity earnings of $53 million were down 13% year over year and lower than we had expected driven by lower equity earnings from Dow Corning.

Net income was up 14% versus last year despite the impact of the weaker euro which was a negative $10 million.

The weaker euro impacted our Q1 results versus last year by approximately $0.01 a share.

EPS was $0.35, up $0.06 or $0.21 -- 21% versus last year and better than street consensus by $0.01.

I'm delighted with this strong start to the year.

So now let's look at our detailed segment results and we'll begin with Display.

Display sales were $1 billion, slightly better than last year.

Sequentially, quarter one price declines were moderate and volume was down slightly, both as expected.

However, versus quarter one of 2014, volume was up in the high teens.

Gross margins in Display were up versus last year driven by the additional volume in synergies offsetting price declines.

Net income was up 4% year over year.

There's no question that cost reduction efforts boosted by the CPM synergies and the moderate pricing environment have enabled us to maintain profitability in this business.

We are very pleased with these results.

Now looking at the supply chain, we estimate forward-looking weeks of inventory ended quarter one at about 18.5 weeks.

While this is at the high end of the range we consider healthy, this was not unexpected since we are entering the lowest quarter for retail sales.

Our model indicates this level will be the same at the end of Q2.

Now let me turn to Optical Communications where sales were $697 million, up 18% versus last year and much better than our forecast.

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

Both carrier and enterprise networks and the acquisition of TRM contributed to the year-over-year growth.

Now the impact of the week euro lowered sales in this segment by $22 million.

Net income in this segment was up 85%.

Now Optical Communications has some euro denominated costs, so the weaker euro impacted profitability only slightly.

The additional volume in all parts of the business and the acquisition of TRM drove the higher net income.

Our commercial and manufacturing organizations are the driving force behind these strong year-over-year results.

Now turning to Environmental, Q1 sales were $282 million, up 3% versus last year despite the weaker euro trimming sales by $16 million.

Environmental sales were slightly better than expected with strong heavy duty sales in the United States driving growth.

While we have some manufacturing in Europe, the majority of our cost in the segments are dollar-based.

So the weaker euro was a drag on year-over-year profitability in this segment and impacted net income in this segment by $6 million versus last year.

Net income was still up $5 million, or 12% mainly due to the higher volume of heavy duty products and manufacturing efficiencies.

Now in Specialty Materials sales for the quarter were up 4% year over year.

Gorilla Glass is off to a terrific start this year with our volume growing more than 20% compared to last year.

Gorilla Glass 4 sales are going very well as its value is being embraced by our OEM customers.

Segment possibility improved sequentially and year over year driven by gross margin improvements in Gorilla Glass.

Unfortunately our Advanced Optics business sales declined versus last year and that's the reason we missed our original segment sales forecast.

We felt the impact of weaker demand at our semiconductor customers, and the weaker euro also decreased sales by approximately $4 million.

Never the less net income in Q1 was up year over year by 44% driven by Gorilla's higher volumes and improved manufacturing efficiencies.

The impact to the Advanced Optic lower sales on net income is small because it's margins are lower than Gorilla Glass.

Now Life Sciences' Q1 sales were down 6% year over year.

Net income was down 10%.

Foreign exchange was the primary cause of the year-over-year weakness in both sales and profits.

Equity earnings from Dow Corning were $51 million and short of our expectations driven by the lower-than-expected sales of polysilicon.

Recall Hemlock sales of polysilicon to solar customers exceeded our expectations in Q4 of 2014.

We believe customers have pulled some demand into Q4 in order to meet contractual obligations.

Sales fell off more than expected in Q1.

Stronger dollar also impacted Dow Corning sales and earnings and reduced Corning's equity earnings by about $4 million versus last year.

So now turning to the balance sheet, we delivered strong operation cash flow in the quarter of $600 million.

Our capital spending forecast remains at the $1.3 billion to $1.4 billion for the full year.

During the quarter we spent $531 million on four acquisitions and $502 million on share repurchases.

Leaves our balance sheet cash at a very healthy $5.1 billion and we entered the quarter with approximately $2 billion of cash in the United States.

So my last Q1 update is regarding our FX hedges.

During the first quarter we further reduced our risk to the weaker yen in 2016 and 2017.

Investors may recall we previously had protected approximately 80% of our 2016 profits and about 70% of 2017.

I'm now pleased to say we mitigated almost 100% of our estimated exposure through 2016 and 80% of 2017's exposure.

As a reminder our core rate on the yen is 99.

Our yen translation hedges protect our earnings from fluctuation exchange rates and allow us to do constant currency better known as core performance on sales in NPAT for Display and some with Specialty Materials.

Now also during the quarter, we hedged against further euro weakness in 2015 and 2016.

With these hedges we projected -- protected the majority of our estimated euro NPAT exposure for Environmental, Life Sciences for this year and next.

We don't do constant currency for the euro, so you'll see sales reflect the impact of the translation.

New euro hedge contract gains are recorded in other income and other expense and obviously protect NPAT.

So now for outlook, we expect the Q2 impact of the euro to be roughly the same amount as Q1 or approximately a negative $12 million of NPAT, or $0.01 of EPS compared to a year ago.

We expect similar the impact in the back half of 2015 as well if the euro stays at its current level.

Now let's begin with a Display outlook for business.

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

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

We think LCD television units will grow mid-single digits with area grow higher driven by increasing screen sizes.

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

We are monitoring the effect of currency devaluations to the dollar on TV prices and TV market demand.

Historically, currency depreciation has not had significant impact on television demand.

While we only have two months of data for the year, TV's area sell through is in fact ahead of our expectations.

Many investors asked us about our expectations for ultra-high definition television for 4K.

We believe ultra-high def has the opportunity to be a major driver of area demand in the near future.

We're expecting approximately 25 million sets to be shipped in 2015, up from 10 million in 2014 and these ultra-high def sets have higher average screen sizes.

So we continue to feel good about the retail market.

Inventory levels are at the high end of our estimate of the healthy range and reached this level a quarter earlier than recent history.

Glass supply actually remains quite tight to demand especially in large gen sizes.

Corning's running its online capacity at full utilization while keeping some capacity idle in order to maintain the right balance between supply and demand.

Other major glass makers have publicly stated that they're keeping some capacity idle as well and we believe they're also running their online capacity at full utilization.

Like many investors, we watch key indicators in the supply chain.

One key indicator to supply chain health is the direction of panel prices.

Another is the level of supply chain inventory.

As I pointed out earlier, supply chain inventory has moved to the upper end of healthy range as retail enters its slow quarter.

So it is not a surprise to see moderate declines in panel prices at this point in the year.

We have not seen a negative impact from these indicators yet, but obviously remain very alert.

We expect the Q2 LCD glass market to be up low-single digits sequentially.

Expect our glass volume to be up in line with the market.

Now we expect LCD glass prices to decline even less than in Q1.

When we look at the heartbeat of pricing without the impact of thin -- thick to thin conversions, we feel very good about the level of declines, and especially the decline trend over the last four quarters as the decline rate has moderated in each consecutive quarter.

We believe we can maintain moderately quarterly cost declines for LCD glass in the back half as well for several reasons.

Retail demand is expected to grow, helping to keep inventories from veering into unhealthy levels.

Panel makers are profitable and they're getting the benefit of the weaker yen.

LCD glass industry supply is balanced to demand.

And the operating margins of our competitors are such they can't afford large price declines if they hope to remain profitable.

Now moving to Optical Communications, we expect Q2 sales to be up mid teens versus Q2 of 2014.

Fiber-to-the-home and data center sales in North America remain strong.

Also contributing to growth will be the impact of the three previously announced acquisitions, TRM, Samsung Fiber and Cable, and iBwave.

In Environmental, we expect continued strength in the end market in Q2, and for our sales volume to be consistent with a strong Q2 of 2014.

However, year-over-year Q2 sales are expected to be down mid-single digits due to the impact of the weaker euro.

We've made significant improvements to our cost and capability position in Environmental and we expect to maintain these operational efficiencies in Q2.

So now turn to Specialty Materials, we expect another quarter of double-digit volume growth of Gorilla Glass versus last year.

Offsetting this growth is continued weakness in our Advanced Optics business driven by continued softness at our semiconductor customers and a weak euro.

So expect total sales in this segment to be down mid-single digits versus last year.

Now we expect to win more models with Gorilla Glass 4 during the quarter, and are on track for another year of volume growth for this business.

Expect the market for cover glass to be up mid-teens in volume terms, driven by smart phones and touch-enabled notebooks.

We are expecting fewer tablets to be sold this year, which does impact our Gorilla Glass business.

But this is mitigated by larger smartphone screen sizes and new hand-held devices, including some with Gorilla on the back and continued share gains at Chinese OEMs.

In Life Sciences, we expect sales to be down slightly with last year's second quarter driven by the weaker euro.

Continuing the rest of our Q2 forecast, we expect Q2 equity earnings from Dow Corning to be approximately $60 million, this us up from Q1 in last year driven by operational performance of silicone's business.

Versus last year, sales for silicones are consistent, sales for polysilicone are down.

We expect gross margin to be approximately 45%, up 1 percentage point over last year, driven mainly by the additional volume in Optical Communications and improved Gorilla Glass margins.

SG&A and R&D spending will be 13% and 8% of sales respectively and consistent with 2014.

Other income, other expense is expected to be a net expense of approximately $40 million.

Our effective tax rate for the full year of 2015 is expected to be approximately 18%.

So in summary, we're coming off a strong quarter, and that momentum is expected to deliver growth again this quarter.

That concludes my opening comments.

Ann?

Thank you, Jim.

I'll open the lines for questions.

John?

(Operator Instructions)

Rod Hall, JPMorgan.

Jim, I wanted to dig into the euro exposure a little bit more.

We've got some pretty good regional disclosure from you guys, but I had two questions for you.

One is by segment are you able to let us know what the euro revenue exposure is so that we can mark to market over time as the exchange rates continue to fluctuate?

And then secondly, or alternatively, could you also let us know what the effective euro change was that you're using to calculate these euro impacts in the revenues that you called out to us?

I think we can give you some help on that, Rod, I'm not prepared to do it on the phone call.

But I'm sure we can work with Ann and give you some help on that.

Okay.

And then the other thing I wanted to ask you, Jim, was on 4K elasticity, I know I keep asking this question every quarter, but what you are guys observing on price elasticity and where do you think we are on pricing right now?

I know that you thought that pricing will continue to come down pretty significantly through the year, but just wonder if you could give us a little bit of an update on that?

I don't have a lot of new information on 4K pricing.

We did see good promotions during the period of time, obviously at Christmas and for Super Bowl.

But we continue to feel that the pricing is coming down.

A lot of the set makers have just announced their new models.

You've probably been seeing a lot of announcements, and they'll be available at retail starting late May, I believe.

We continue to believe it's approaching a level that will drive demand there.

And we talked before about hitting the 1.5 comparison to a good quality regular high def set.

I think we're making progress on that.

I think you know that we've been feeling that 2016 is going to be the breakthrough year for ultra-high def.

But we think 2015 will be a good year.

There are some people who think we're being a little conservative on that, and we'll find out in the back half of the year.

I think one thing I'd add for you Rod, too, is really intriguing that's happening, is that on top of the 2K, 4K, now we're seeing the introduction of a higher end version with quantum dot technology, which they look terrific by the way.

And once again it helps make OLED TV a more distant future possibility.

But what I think to your question that offers up is you have now a new entry at the highest end and they'll also carry pure ultra underneath, which ought to give them some good flex on being able to have ultra get closer and closer to standard def.

Great, okay.

Thanks, Wendell.

Mark Sue, RBC Capital Markets.

Gentlemen, if I look at the sequential growth in Display, are we starting to see some diminishing larger utility for larger TVs, how long can we see this upgrade cycle for larger TVs before we see the 4K cycle start later this year?

And as it relates to pricing, the price decline is definitely less than you had expected, with this current supply demand balance and rational behavior likely to continue, can pricing actually go up or maybe not go down?

I'll let Wendell take the price question.

Thank you.

(laughter)

Obviously in our dreams, pricing goes up.

But the first step is for it to continue to diminish.

And we've been delighted as I said in the call to have this happen four quarters in a row.

So we think we got good momentum there.

In term of large sizes, we don't see a change statement coming in the continued growth of large-sized televisions.

In fact every year for the last three, we've mid-year raised our size estimates.

And that's continuing in the first couple months of retail, the [weak] data we have so far this year, it's continuing to grow.

So we don't think we've come to the end of that cycle on standard high def, and clearly ultra-high def will make it be even better because those are sold in larger sizes primarily, and also look much better in larger sizes.

And on price, as you heard Jim comment in his opening comments, we have a number of elements aligning that are helping us reduce the level of price decline quarter over quarter.

And we really like the trend.

And we expect those factors to continue to be in place.

However at this time, we're not anticipating being able to raise prices.

That would be a fabulous problem to have in total.

However, what we are looking very closely at is the move to ultra thin televisions and ultra thin glass.

There may be the opportunity there for us to introduce that product as a price premium.

But we're doing that currently, whether or not that can sustain will really depend on both our competitors' capabilities and their mindset.

That's helpful.

And Wendell, can I ask a broader question, you have balance across business segments, four out of the five growing, some of the business segments are at various life cycles, Display mature and generating cash, Optical seeing a resurgence in growth, any inclination to think about separating business units or potentially splitting out segments considering the different business segments do you have?

Well, the way we think about our portfolio is that to continue to be in our portfolio, you have to do three things as a business unit.

First, you have to be able to beat your competition.

In other words you have to grow sales and earnings faster than all your competition and your industry you're in overall.

That's a very harsh metric, right?

That's very hard to do.

All of our segments are doing it.

Second, that as a segment, you have to have a set of assets that can potentially help other segments.

Or three, you have to have a market access point that we can use the assets from our other segments or the corporation to create entirely new businesses.

So great example of that would be our Environmental business.

So Environmental is basically an automotive-driven business.

We have a significant asset, which is of course our R&D, as well as significant glass assets that we use to make LCD and Gorilla.

What we're using that position in Environmental to do in those strong customer relationships is to introduce Gorilla Glass to the automotive segment and be able to do it through the front end that we have in that segment.

And we have a number of those examples.

So we're seeing a lot of that interaction with Glass, with Environmental, with Specialty, of course, and in Opto as well with being able to take into consumer electronics some of our Opto capabilities.

Life Sciences is the one where we have yet to prove that we can bring a significant new innovation to fundamentally turn that business into a more -- a stronger grower that makes use of our R&D investment.

We anticipate to be able to answer that question shortly.

If the answer ends up being no, then that's a candidate.

But we think the answer is going to end up being yes.

That's helpful.

Thank you.

Is that helpful or is that too much?

That's helpful, that's never enough.

Thank you.

Amitabh Passi, UBS.

Jim, my question for you is on the Display segment.

Seems like the first calendar quarter, volumes came in maybe below expectations, down 5% sequentially.

And then also the fact that inventories are now at 18.5 weeks, they seem to be up quite a bit from 3Q 2014 at 15.5 and I think even last year you were around 17 weeks in 1Q and 16.5 in 2Q, so wanted to understand the inventory trends in the supply chain.

Well, I think the volume sequentially was in line with what we were thinking about.

So I don't think it was a -- something that was different from what we expected.

Inventory is something we're very alert to.

The last few years, the peak that we have seen in the supply chain has been about 18.5 weeks.

The fact that we're at that at the end of Q1 as opposed to the end of Q2 is something we're very alert to.

And -- but we are still within what we regard as the healthy range on inventory.

Okay.

And then a quick follow up, your gross margin appears to be trending about 100 bps higher than last year, is that a trend you expect to sustain through the rest of the year?

Yes, we feel quite good about our gross margin trends.

As you know, I often answer this by saying it depends somewhat on the mix of our businesses.

But in four of our five segments, gross margin percent is going up in each one of them.

And so it -- the absolute balance of them has an impact because obviously some segments had a lower gross margin, for example, Optical is lower.

But we're improving gross margins in almost all of our businesses.

Especially delighted by the performance in Gorilla.

So I would say it's sustainable as long as the markets remain at the level of volume we're seeing today.

Okay, excellent.

I'll jump back in queue.

Thank you.

Brian White, Cantor Fitzgerald.

Yes Jim, I'm wondering if you could just take us around the world and highlight what you're seeing in the TV market, in terms of Europe, Asia and US and maybe compare PC market softened, so I'd be curious on what's happening in the TV market.

Thanks.

We don't have a tremendous amount of detail yet.

I don't have full March results, unfortunately.

But we've seen very good demand in North America.

China, when you combine the first two months of the year because remember of the movement of the lunar holiday was January last year, and this year it was in February, has been good.

Large sizes have been good.

The place where we're expecting some weakness at retail is around the comparisons on the World Cup last year which will affect Europe and Latin America primarily.

I'd say the one place that we might be seeing slight weakness is Europe so far this year, and that's a slight disappointment to us.

But clearly the economies over there have seen some turbulence.

So good in the United States, good in China through the lunar holiday.

Weak in Europe, and average size continuing to grow.

And Jim on Gorilla Glass, I just want to be clear, you're what volume targeting growth, I heard a 15% number.

Is that for Gorilla or the market or both?

That was for the market.

We didn't give out a number for our own growth.

As you know it somewhat depends on the launch of models and also what the supply chain is doing, but we are expecting the market to grow in the mid-double digits.

We expect the market's use of our glass to be higher than that as we're gaining share and we are obviously growing nicely with larger sizes.

But our absolute number will be in the end dependent on what the ending inventory is in the supply chain.

And that will be dependent on what people's outlook are as they head into the next year.

And if I could build on that a little, so when we talk about the market growth, what we're really talking about is the sell-in to the retail piece from our big OEM brand.

And as Jim laid out, in the market growth outlook, that's the level we're looking at.

Got it, thank you.

If you take a look at that same level on Gorilla, we would expect Gorilla to grow faster because we're building on an already very strong position.

We're actually gaining ground both in the high end and the low end.

And then when Jim's talking about that then depends on launches, is now when you step back to how much glass we ship in any given quarter, that gets impacted by how our brand customers decide to build their supply chains.

There is one thing they never want to do, which is run out of glass at the beginning of their launches.

So you can get big supply chain builds and then you can get corrections.

So that makes it a little hard to call in any given year in total where our shipments end up being.

However, what we know is as long as our end market position continues to grow and continues to be strong, that's just a question of what quarter we get the demand in.

So that's the real heartbeat we look at for demand.

Great.

Thank you.

Joseph Wolf, Barclays.

I wanted to follow up briefly on the inventory.

If you could give us a little more granularity, is there a percentage breakdown or the way we can look at the difference between inventory geared towards the television market and inventory geared towards the IT panel market?

I do not have that level of granularity.

I can tell you where the inventory is high is at the set assembly level.

It's not at retail, it's not at panel makers.

But I do not have the granularity on the television versus IT.

Okay.

And then there have been a couple of announcements including the OLED lighting development with the Willow glass, I'm wondering is there any volumes we can start to think of over there, and how that impacts your overall supply demand in glass volumes and margins?

So on Willow glass, we have now a number of significant near-term opportunities.

And that we would hope are going to turn into significant revenues in the near future.

It's too early to spike the ball, but we are now working on three or four significant opportunities that have the opportunity to take Willow from being a commercially available product to a product that we start to make some good revenues on.

So we're right at the beginning of that, more to come, more to come.

Okay.

And then finally you mentioned this briefly about the advances at the low end of the market in Gorilla Glass in China, could you talk about how that market is developing, how the strategy is developing for Corning and where you're seeing the most success?

Well the two areas for the low end that we tend to look at are in Chinese OEMs, the Chinese brands, as well as touch on notebook.

And in both of those areas, we're seeing growing share for us.

Part of it has to do with changes in our strategy.

Part of it has to do with some excellent execution by our people on the ground.

Also, part of it has to do with in the competition in China, what we're seeing is the emergence of players who want to use the highest quality components, and that is also helping us.

So I'd like to attribute it all to changes in our strategy and better execution, and that's part of the story.

But also part of the story is that the Chinese brands are trying to lift themselves up to world-class levels of quality and performance, and we're one of their first stops on that journey.

Excellent, thank you.

Ehud Gelblum, Citigroup.

A couple of things.

First of all, Jim, how about clarifications on some larger questions, just making sure on the P&L, you didn't give a core R&D number, I'm assuming that was equal to a GAAP RD&E number of $189 million, I just want to confirm that.

And if you can also give us a sense as to how large the acquisitions to TRM, Samsung, et cetera, were this quarter so we have a -- peg the model hat would be helpful.

On Gorilla is my larger question.

Certainly doing very well on the volume side, can you give us a sense in terms of pricing.

Last year obviously this time there was a big price step down, can you give us some sort of sense as to what the pricing did this quarter?

And you mentioned that the margin in Advanced Optics is much lower than in Gorilla, can you give us a sense is it half the margin of Gorilla?

Is it a third?

Some way that we can correlate between the two because the two seem to be going in opposite directs right now.

Thanks.

So on the latter question, I think Optical in the Specially Materials, the margin is -- gross margins are about half.

In terms of Optical, TRM, we're not giving out exact numbers but for the quarter organic growth was greater than half of our increase.

So that will help you at least get a line on it.

I think R&D at core, I think we -- it is the same?

And then Wendell, do you want to talk about Gorilla pricing?

Sure.

Of course in terms of year over year, we're lapping the decreases from last year so those are going to be embedded.

As we think right now about Gorilla price, and then I'll switch to margin, what we're seeing is more and more moderation.

Part of that is helped by the fact that we've introduced Gorilla Glass 4 as a price premium product to Gorilla Glass 3, and Gorilla Glass 4's take up has been outstanding.

People really want it, and they're willing to pay up for it.

So Gorilla Glass 4 compared to Gorilla Glass 3 is a margin enhancer for us overall, even though it cost us a little bit more.

The pricing is more than overcoming that increase in cost.

That put together with our continued improvements in productivity and efficiency is what creates the type of net income up that you saw in this quarter.

So we continue to be feeling quite positively about Gorilla gross margin enhancements as we work our way through this year.

Great.

When [Fire] comes into play, you announced it earlier this year, do you expect that to come in later this year or next year, and does that eat in a little bit to Gorilla?

Should we look at Fire and Gorilla combined?

And when Fire comes in, does it have its own manufacturing issues that we'll have to deal with at that point?

Lower gross margin until that manufacturing cycle proves in, or when Fire comes in, will it come in at the new Gorilla margins that you're creating now?

So great questions.

First, on Fire let's do timing.

Fire is still relatively early in its creation cycle.

And there are some products that would have the potential to launch this year in smaller volume.

That would be our desire, to allow us to work through exactly the manufacturing question that you raised.

However, we're getting very strong pull on Fire.

So it could be that we will get at least requests to go earlier than what we would like.

How to close the delta between desire and reality is one of life's great problems.

So we're still in the midst of trying to figure that one out.

Now as far as business model goes, it is our intent that we will make more money when we introduce Fire as opposed to less money.

Now, how that plays out on gross margin percent, versus do we get other types of income flows from this, will all depend on the business models that we ultimately set up with our customers.

Like I said, this is still a product that is in its elementary school time.

So we don't exactly have the business model we need to with our customers.

What we do have is strong desire expressed for what the product does.

So more to come.

I'm sorry I don't have a little more right now.

Maybe ask me again next time I'm online and I should be able to have more information for you, sir.

I will, I appreciate it.

If I could sneak one last in about the price declines in Q2, that Jim, you're saying are going to be better than Q1, what is that based on?

Is it based on a move to larger screen sizes where you naturally charge more because the glass is thicker or are there some other dynamics giving you that confidence?

Thank you.

It's based on the fact that we've closed almost all of our Q2 pricing.

So we know we're going to have it.

Right, but what was that based on that allowed to you do that?

It's not based on generation size anymore.

So it's based on what we've concluded with our customers compared to what Q1 pricing was.

I appreciate the time.

Thanks, guys.

Avi Silver, CLSA.

Couple of questions on Display.

So first of all, Jim, at what rate did you hedge the remaining 20% of volume?

Is it also at 99 compared to the core for 2016?

And then on Display pricing, the press release says that the volume grew high teens year on year, if I were to assume 18%, that would imply a 4% ASP decline.

I think on the call you said it was down slightly.

In that case, ASP would have been down more than the 2% to 3% decline.

So I just want to understand whether the ASP, not like-for-like pricing was down within the 2% to 3% band in the March quarter, or was it maybe slightly below that band?

And then I have a follow up.

So we don't give out specific price numbers.

I can tell you that the price declines in quarter one were less than the price declines in quarter four.

So we're not going to give exact numbers, what we're focused on is the trend.

The only thing you have to keep remembering when you look at our total numbers is the thick to thin conversion.

Remember, that's why I talked in the script about my -- the heartbeat when you take that out.

Remember we do give more of a lower price on thin to our product -- to our customers, so as they go from a higher percent on thick to a higher percent on thin, it makes our price declines look greater.

But remember from a cost point of view, that's a benefit to us and also gives us more ability to sell more glass.

So just by doing it on the total business, you sometimes get a misleading answer.

But the heart beat is definitely going down when you take out that thinness difference.

Got it.

On the hedge -- the remaining 20% that you hedged on 2016, was that also at 99?

And then I have a follow up.

No it was slightly higher than 99, but we're not giving out the exact number.

We're going to continue to report the core at 99, and then in GAAP, you'll see the difference between the actual hedges and the core rate.

But we think we did quite well.

Okay, great.

And then a follow-up question for Wendell, a longer term question on TVs.

Can you talk about the potential for experiences on TVs to improve?

So you're making replacements like (inaudible) aging install base, but the flip side of that is consumers are spending time staring at smaller screens and less time staring at larger screens anecdotally.

So I'm wondering whether there's something on the software services side that you see over the next couple years that can change experiences and ultimately stimulate long-term demands for LCD TV?

Thank you.

I think that's a great question.

And it's something that I work on with other opinion leaders and innovators in the space a lot.

I'd say that we see really, really encouraging work exactly in the area that you are discussing.

And I think that the key blocker to bring in some of this to market is that access to the living room and some way to integrate the physical devices of like the TVs as well as your small screens with the software capability to be able to start to do some really interesting things, especially on cloud-based services, to really enhance the experience a lot.

And we're starting to see really strong progress, and really new entrance to that space that you see the beginning of when you see these additions of the boxes or the sticks, or things like that to your physical device.

That is the foot in the door that's going to create I think better experiences going forward.

Because the one thing the small screen can't do is allow us to have a shared experience, which is really important to human behavior.

And the best innovations I'm seeing in this space on software and use are all about that piece.

It's not just about making a bigger screen, it's not just about having a more dramatic experience.

It's about how do I enhance the shared nature of that larger screen?

And there's some encouraging things happening.

But you need to see some business models really slide into place before it happens.

Got it, thank you very much.

Patrick Newton, Stifel.

First a clarification, Wendell, I think when you were talking about the low end of covered glass especially in China, did I understand you correctly that recent share gains were more a function of the market coming to you or has Corning shifted its strategy or product portfolio to better address that well into the market?

Both.

Both we had yet to introduce a true low-end product.

We have them on the shelf.

We're still just working through is it worth that market confusion or not?

So we're going to measure twice, cut once.

But we did shift our strategy in other ways.

What it is we actually -- how do we work with those Chinese brands, what do we sell them?

Do we sell them parts versus pure glass into the supply chain?

As well as how do we work the actual Gorilla brand in China?

So that is part of the story.

But the other part of the story is, yes, the markets coming toward us as well.

I don't know how to split which is our change strategy, our improved execution, and what's that the market is moving towards us.

I don't know how to split those two in effect.

But together what they're playing out in is climbing share for us.

Great, thank you for the details.

And then Jim, you talked about supply, demand in the LCD market for Corning with your capacity running at near full utilization and some idle capacity.

Could you help us understand the relative size of the idle capacity perhaps compared to a year ago or to when you brought SCP in-house?

Or perhaps asked in a different way, in what timeframe should we expect LCD-related CapEx to increase from the current maintenance levels?

So relative to CapEx, LCD CapEx is up this year versus last year, but it's driven by this heavy cycle of tank repairs, and we are completing two tanks that we had never turned on, there's a little bit of capital to that.

But in terms of a big cycle for LCD capital, I don't anticipate that.

In fact, after the heavy rebuild schedule this year, I expect it to go down.

I think our utilization is up compared to when we did the CPM deal.

We don't give out absolute percentages, and remember we did shut down some of our older Japanese capacity as part of this from a cost move.

But we still have some capacity offline that we'll bring up at the appropriate time.

And so you said CapEx down next year, and then should we think of 2017 as potentially a year of increased LCD CapEx?

It's a little early for me to comment on 2017 capital.

But relative to our basic footprint, I'm not expecting big surges in capital for the generations of 8.5 and below.

But ask me again in July, and I'll give you an update on 2017.

Great, thank you for taking my questions.

Steven Fox, Cross Research.

One question for me, one more on Gorilla Glass.

I think you said in the press release that your volumes went up about 20%, and if I look back at 10-K, you guys were up 23% in growth last fall of last year.

So my understanding is this year's Q1 was an easier comp, and the comps get harder as the year goes on.

Can you talk about how those year-over-year growth rates could compare to Q1 going forward and whether there's any cannibalization we have to think about within your good, better, best product strategy for the year?

Thanks a lot.

So let me start on it and then Jim will try to pick up some (inaudible) help.

So I think first we got to establish which level are we at.

So in the sell in, what our brands sell in the retail, that tends to have a seasonal cycle to it that carries through the smart phone market and to their launches.

In that we expect to have strong growth in for the market, and to have strong -- even stronger Gorilla growth into that part.

Then Steven we go down to the what our shipments are level in any given quarter.

For that, it gets much harder to predict.

Because now we're at beginning end of a pretty large supply chain.

And the behavior we see out of our big brands is they will build a lot in a quarter.

We had some of that happen late last year, an undisclosed customer building a lot for a launch.

And they want to make sure they've got enough glass to be able to make the phones and tablets or that type of equipment they want.

When they do that, we can have shipments that are much higher than the sell-in level.

Vice versa on what we can also have is that as we get into a cycle where they will do a correction and reduce that in any given quarter.

I think that we can anticipate that to continue.

And that will impact our performance on any given quarter, and any given year over year for our shipment level.

But in the end, it doesn't matter so much do we get it in one quarter or the next quarter, as long as the sell-in continues to be strong and our position continues to strength there.

All we're really talking about is whether we get it in the next couple quarters or the couple quarters after that assuming we continue to win other platforms as they turn over.

Does that make sense?

Yes, it does.

And then within that context though, Wendell, are you -- would we expect cannibalization, or are you able to shift down enough grow that street volume into some of these other markets that it wouldn't be noticeable to us?

So we're not seeing a lot of cannibalization, right now we're seeing the two product strategy that we have done to be basically in the direction of switching to GG4.

But what we're saying to our customers is hey, if you want a real price competitive product or closer in price competitive product, then you-- here is GG3.

And if you want the superior performance of GG4, this is the price you choose.

And we're having customers actually choose a mix.

But now -- for now, at least, the penetration rate of GG4 is higher than what we expected.

We originally expected it to only flow in on the highest end and that they'd stay with GG3 on some of their lower end.

Right now, and this could change, right now, we're seeing a shift towards GG4.

And then of course Fire, when that comes is going to add yet another layer of complication to this.

But overall I think it's all good.

Yes, that makes sense.

Thank you very much.

Jim, did you have anything to add?

No, just a reminder, we did say our volume growth was up 20% in quarter one.

Year over year it's going to be up in the mid-teens is what our guidance is.

But when you look at consumption of our glass going into sell in, the percent is very similar in each quarter.

Right.

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

Simona Jankowski, Goldman Sachs.

I had a clarification first, and then a couple of questions.

On the clarification, I think you maintained your full-year demand expectation, but data points in PCs have been a little weakener in Q1.

I was curious if you factor that in and if you see an offset on the TV side or something else?

So we did factor it in, but television size has been a little bit better.

And also for us, as customer make our product, they're using a little bit more glass per end device, which helps us out there.

Their own efficiencies, particularly as they make ultra-high def.

So we did factor in the lower IT into our forecast.

But other factors allowed us to maintain it.

And then two longer term questions, one of them is we're seeing a bit of a shift of panel demand into China.

Can you comment on how you expect that transition to affect Corning, especially with some of our competitors moving some of their manufacturing base to China?

And then the second question is if you can update us on the Iris opportunity to your end, and if particular if there are any TVs at this point that you've been designed in to be on those announced at CES?

And if you can guesstimate what percent of high end volumes you think will be able to adopt Iris.

So I'll start with China then let Wendell chime in.

Just as a reminder, you're seeing our competitors make announcements.

We are already on the ground with glass melting in China and have the capability of supplying from that as well as shipping in from Taiwan and Korea.

So we think we're well positioned to meet the demand from new China facilities.

Anything you want to add to that, Wendell?

Well I build on JIm's answer or earlier, too.

In our gen 8.5 and below platform, our existing platforms, we feel really good about where we stand for the amount of capacity that we have.

You may have finishing lines here and there in China, as you point out.

But those tend not to have a big build to it.

I think that the only regional play that is worth us always keeping an eye on, is do we see any significant new generations come in China?

And if that were to happen, we would of course be anybody's first port of call on the very large size pieces.

And we'd have to work our way through to find, do we have an advantaged way to do that that would be good for our shareholders?

Now to Iris, I think you are -- you portrayed in very well.

This is a high end ultra thin to start as a business.

It's still once again very early days for this product.

We're engaged across all the brands.

There is interest in using glass.

In that function of a guide plate.

But it is still too early to call penetration.

And then how does the battle play out between glass and the two alternative materials that we're battling against?

They have different pros and cons.

But we're just in the middle of that fight, actually in the beginning steps of that fight.

So it's too early to call at what round we win at.

Great, thank you.

Jim?

Thanks, Ann.

Just a couple of investor announcements.

First of all, our annual shareholder meeting is this Thursday, and investors can listen to Wendell's speech on the web.

And additionally, we'll be hosting investors in Corning, New York, on May 7, and I promise no snow.

And then we'll be at the JPMorgan Conference in Boston on May 19.

Quick summary of the call, we entered 2015 with great momentum.

Over the last couple of quarters, the heartbeat of price declines in our LCD business have been trending favorably, and we do expect this to continue.

Our Optical Communications quarter one results were outstanding, and they are on track to deliver double-digit sales in earnings growth this year.

The end market for Gorilla Glass, Environmental Technologies is growing, and we expect to continue to grow with those markets.

And finally, we're returning cash to shareholders at a crisp pace with our share repurchases.

We feel really good about our terrific first-quarter results and are confident we can deliver another year of earnings per share growth in 2015.

Ann?

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

A playback of the call is available at 11:00 AM Eastern and will run until 5:00 PM Eastern on Tuesday, May 12.

To listen dial 800-475-6701.

The access code is 357164, the audio cast is available on our website during that time as well.

John, that concludes our call, please disconnect all lines.