康寧 (GLW) 2015 Q4 法說會逐字稿

Welcome to the Corning Incorporated quarter four 2015 earnings results.

It is my pleasure to turn the conference over to Ann Nicholson, Division Vice President of Investor Relations.

Please go ahead.

Thank you, Lois, and good morning, everyone.

Welcome to Corning's fourth quarter conference call.

With me today is Wendell Weeks, Chairman and Chief Executive Officer; Tony Tripeny, Senior Vice President and Chief Financial Officer; and Jeff Evenson, Senior Vice President and Chief Strategy Officer.

Before we begin our formal comments, I would 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 financial reports.

You should also note that this presentation contains a number of non-GAAP measures, and our results are presented in core performance measures.

A reconciliation can be found on our website.

We have slides posting live on our website to accompany our formal comments, and they will be available on our website later this morning.

Now I'll turn the call over to Wendell.

Thank you, Ann.

Good morning, everyone.

As we reported in this morning's press release we met, and in a few places exceeded our expectations in quarter four, and also the consensus.

That said, year-over-year results in most of our businesses were impacted by the weak global economy, the stronger dollar versus other currencies, and continued softness in the TV and IT retail markets.

We expect these headwinds to continue in quarter one.

Despite the macroeconomic challenges we faced in quarter four, we had several major successes executing against the strategy and capital allocation framework that we introduced in October.

The framework which describes our leadership priorities for the next four years is simple.

We will focus our portfolio, and utilize our financial strength to grow, create significant value, and return cash to our shareholders.

As we told you in October, over the course of the next four years, we expect to generate and deploy more than $20 billion through 2019.

We will distribute more than $10 billion to our shareholders, which is by the way, roughly half of our current market cap, and we will invest $10 billion in our growth and to sustain our industry leadership.

We are confident this new framework will drive the Company forward, and guide our value creation in 2016 and beyond.

So let me just take a few minutes to highlight our recent successes under this framework.

We generated more than $3 billion in adjusted operating cash flow in 2015, despite significant macroeconomic headwinds.

This is good evidence of our ability to generate the cash flow that underpins our capital allocation plan.

We're off to a good start on our commitment to return more than $10 billion to our shareholders, with a $1.25 billion accelerated stock repurchase program that we completed last week.

We continue to focus our portfolio with the recent announcement of the strategic realignment of our interest in Dow Corning Corporation.

As we indicated when we announced the transaction, we are very proud of Dow Corning's success over the last 72 years.

However, Dow Corning's silicones business lies outside our three core technologies, four manufacturing and engineering platforms, and five market access platforms.

Given Dow's strong synergies with the silicones business, we believe the transaction unlocks the value of Dow Corning for our shareholders.

When we close this transaction, Corning will exchange it's 50% interest in Dow Corning for 100% of the stock of a newly-formed Dow Corning entity that will become a wholly-owned subsidiary of Corning.

The new entity will own approximately 40% interest in Hemlock Semiconductor, and approximately $4.8 billion of cash.

We believe that our ownership interest in Hemlock, and the additional $4.8 billion of cash on our balance sheet creates significant value.

$4.8 billion is approximately a 30 times multiple on the equity earnings from Dow Corning's silicones business.

And it's important to remember that we expect the realignment to be essentially tax-free.

This additional cash increases the amount of funds available for deployment from the $22 billion to $26 billion we discussed in October, to $26 billion to $30 billion through 2019.

We will provide more details on how we intend to deploy this cash when we close the transaction.

In support of our commitment to utilize our market access platforms and financial strength to grow, we leveraged our competitive advantages, and strengthened customer relationships in display to stabilize returns.

First, we established a long-term supply agreement, and a low cash investment in a Gen 10.5 glass manufacturing facility adjacent to BOE.

By utilizing other's fundings, we significantly derisked this transaction, and we expect outstanding returns.

The investment total is $1.3 billion.

Our cash investment, however, is one-fourth of that, at $290 million.

And at that level, exceeds our target of obtaining $2 of every $3 from others when we invest in new melting capacity.

And second, we obtained favorable pricing for LCD glass in quarter four.

It is no secret to any of you that the display industry is experiencing significant challenges.

The retail market for TV and IT softened in the back half of 2015, and supply chain weeks of inventory grew.

Despite these market dynamics, our fourth quarter sequential price declines were the lowest of the year.

Stepping back, and looking at 2015 as a whole, the display industry had it's most challenging year in the last five years, on a number of dimensions.

First, it was the lowest end market growth in area terms over the last five years.

Second, panel price declines were the highest they have been in five years.

And finally, the year ended with the highest level of inventory in the supply chain over the past five years.

Now, even in this environment, we had the smallest annual price decline for glass in five years.

This is important evidence that we are making significant progress on stabilizing our returns in display.

And as you will hear in a moment from Tony, that trend continues in quarter one of this year.

And finally, evidence continues to build that we will successfully leverage our automotive market access platform to disrupt the 6 billion square foot auto glazing market to drive growth for Corning.

We made two significant announcements.

First, in December, we announced that Ford will use Corning Gorilla Glass in the iconic Ford GT.

This is the first production vehicle to use Gorilla Glass for multiple glazing applications, including the windshield, rear engine cover, and acoustic separator.

It's a great example of leveraging our market access with the world's leading automakers to pursue disruptive opportunities while utilizing our existing fusion assets.

This collaboration demonstrates what Corning does best, applying expertise in glass and material science to help industry leaders solve tough challenges, unleash new capabilities, and enhance experiences for their customers.

Second, just last week we announced a joint venture with Saint-Gobain Sekurit to develop, manufacture, and sell lightweight automotive glazing solutions.

Saint-Gobain is a leading global producer of automotive glazing.

Corning will continue to produce and market Gorilla Glass to this JV and other glaziers, retaining 100% ownership of the glass business.

This venture allows us to more forward in the value chain beyond glass, to manufacture and sell glazing solutions with a leading producer.

This provides a low cost path for us to scale Gorilla Glass glazing solutions across the globe.

So to summarize, we are making solid progress, delivering on our new framework.

We are generating a strong and sustainable operating cash, unlocking significant value for shareholders, and focusing our portfolio by removing assets outside our core capabilities, leveraging our three core technologies, four manufacturing engineering platforms, and five market access platforms to deliver strong financial performance.

And we're returning cash to shareholders.

Though we will clearly face economic headwinds in the first half of 2016, our confidence continues to build in our ability to deliver on our commitments to our shareholders.

Now I'll turn the call over to Tony, who will review our fourth quarter results, and first quarter outlook.

Thank you, Wendell, and good morning.

Before I get into the details, there are two hot topics with investors where I want to provide an update, LCD pricing and yen hedging after 2017.

Starting with LCD glass pricing, I'll spend a few minutes giving you our perspective on the display industry dynamics, and explain why we are increasingly confident that our strategy to stabilize returns will work.

Let's start with the end market.

To recap 2015, it was a challenging year for the industry, driven by the fall off in demand at retail.

TV unit demand was actually down in several regions.

Specifically, TV demand in Europe and Latin America was weaker due to the effect of the stronger dollar on retail prices, and continued economic uncertainty.

Taken as a whole, worldwide TV unit sell-through was down low single-digits.

On an area basis, the unit decline was more than offset by an average screen size growth of more than 1 inch.

In addition, IT and mobile demand was weak, driven by a lack of replacement drivers, the strong dollar, and continued economic uncertainty.

We estimate the worldwide IT market was down 6% in area in 2015.

In total, the glass market at retail was up about [28]% in 2015 as measured in area.

As a result of the lower end market demand, supply chain inventory grew.

Panel price decline began to accelerate, and panel makers began lowering utilizations in Q3, and lowered them again in Q4.

Panel prices fell 30% to 40% for the year, with most sizes approaching cash costs.

While inventories decreased in Q4, they are still at a high level.

All of that said, coming into 2016, we expect end market demand to recover in units, and for average TV screen size to continue to grow.

Specifically, we expect sell-through units to be up low single-digits, and for average screen size to grow at least 1.5 inches.

We think demand for IT in units will be consistent with the 2015, and screen sizes will grow slightly.

As you can see on this slide, the biggest contributor to glass area growth is screen size.

TV screen size grow annually driven by affordability.

As TV prices decline, consumers can buy a bigger TV for the same price.

For example, today you can purchase a 50 inch TV for the same price as a 42-inch TV in 2013.

Now for TV units.

TV units were down low single-digits last year.

History tell us that when you have a year with compressed TV consumption, you typically get a rebound the following year.

Other drivers supporting growth in 2016 are, lower panel prices will have a positive effect on TV retail prices and will therefore increase demand, the US dollar appreciation is less likely to continue, and we expect an improved economy in Western Europe.

As a result, we expect worldwide TV unit sell-through to be up about 2%.

So for the full-year, we expect demand for LCD glass at retail to grow in the high single-digits.

We will share more details on our market outlook for LCD in the February -- in February at our Investor meeting.

Now let's turn to the display supply chain, and look how the end market, in terms of glass sell-through interacts with glass demand.

On this chart, the green line is end market demand, and the blue line is glass market demand.

When the green line is below the blue, panel makers are running at higher utilizations to build inventory to support an upcoming retail season.

When it's below, inventory is being depleted by pull-through at retail.

You can see in the time frame of Q1 to Q3 of 2015, the glass market was flat because panel makers were maintaining utilizations in anticipation of the retail season, and it resulted in a significant inventory build.

Beginning in the third quarter of 2015 for Q1 of 2016, glass market demand is lower as panel maker utilization -- as panel makers lower utilizations in reaction to falling panel prices, and a weaker end market.

Panel maker utilizations in the glass market are expected to be down sequentially in Q1, allowing the supply chain to reduce inventory.

The combination of a healthier supply chain and end market growth will lead to panel maker utilizations increasing, and our glass volume growing as the year progresses.

We expect this to start in the second quarter.

Now to sum up the year for glass demand.

In Q1, we expect the glass market and our volume to be down mid to high single-digits.

The good news is that lower panel maker utilizations will help draw down inventory.

We expect glass demand to resume strongly in the second half, and we expect glass demand for the full year to grow in the mid single-digits.

Now let's turn to the bright spot, glass pricing.

Pricing in 2015 was the best in five years.

Q4 price declines were less than any other quarter last year, and we expect glass prices in Q1 to decline moderately sequentially.

The price decline in Q1 is typically the highest quarterly decline of every year, because Q1 is when annual supply agreements are finalized.

Our moderate Q1 price decline this year equals the best Q1 decline we've seen in five years, despite this very tough environment.

We think our display strategy passed a significant test, and that Q1 pricing is a strong indicator that we can maintain favorable pricing going forward, and deliver on stabilizing returns.

Now moving to the yen.

As a quick refresher, we sell our display glass in yen.

We have hedged through 2017 at an average rate of [99].

With the stability our hedging program gives to our display cash flows, investors naturally ask what happens in 2018 and beyond?

Our response is that we will consider extending our hedge position, as we gain certainty on our future yen flows, and when the currency market offers an attractive yen/dollar rate opportunity.

We are happy to announce progress on this front.

Late last year, we extended our long-term supply agreements with our two largest customers.

We extended our agreement with Samsung and BOE through 2025 and 2028, respectively.

This greatly increases our confidence in future yen flows.

On the rate front, I am sure you all noted the recent volatility in the currency markets, and the brief strengthening of the yen.

We took advantage of this opportunity to add to our hedge position.

At this point, we are hedged for approximately 70% of our anticipated yen flow from the time period of 2016 to 2022, at an average rate of [106].

For those investors who were concerned about our yen exposure beyond 2017, this action will greatly mitigate those concerns.

Because our capital allocation framework factored in weak yen scenarios, the additional hedges give us -- give upside to our expected operating cash flow in our four-year plan.

So while the yen will always be an important topic, we significantly reduced the downside risk, and increased the certainty in our ability to return greater than $10 billion to shareholders over the next four years.

Now let's get into fourth quarter financials.

For the quarter, we met, and a few places exceeded our expectations, and we also beat consensus.

As a reminder, these are core results.

Sales in the quarter were $2.4 billion, and higher than consensus.

This was down 5% versus last year's strong fourth quarter.

Corporate gross margin was 42% as expected.

This is consistent with Q3, but lower than last year.

Most of our businesses have a relatively high fixed cost structure, therefore the decreased sales lower our gross margin as a percentage of sales versus last year.

S&A and RD&E were down versus last year in absolute dollars.

S&A was a bit higher than we expected, due to external fees associated with our external transactions.

These expenses are one-time in nature, and we do not expect them to repeat.

Our effective tax rate for the quarter was lower than expected.

Congress passed the Extenders bill in December, and this reduced our tax expense by approximately $20 million.

Net income was $429 million and lower than last year.

The lower earnings reflect the lower volumes, mainly in display, and the impact of foreign-exchange rates.

Additionally, last year we received payment regarding an IP dispute that did not repeat.

The EPS was $0.34, and exceeded consensus.

For the full-year, our sales and earnings reflected the macroeconomic headwinds in the back half of the year.

Now let's look at detailed segment results, beginning with display technologies.

Display performance in Q4 was in line with our guidance.

Volume was down slightly, price declines were moderate as expected, and the lowest sequential decline in 2015.

Display sales were $903 million, and net income was $234 million.

As a reminder, in Q4 last year we received a payment regarding an IP dispute that did not repeat.

As anticipated in the fourth quarter, panel makers again lowered utilizations in response to the softer end market I already mentioned, which resulted in volumes down low single-digits for the glass market.

Our volume was down slightly sequentially, a bit better than market declines due to the favorable resolution of a customer dispute leading to recovery of the missed volume at that customer.

Sequentially, fourth quarter price declines were moderate as expected, and declined less than in Q3.

During the quarter, we secured the majority of our 2016 volume under customer agreements, helping us maintain stable share, which in turn enables us to be more efficient in planning, manufacturing, and reducing costs.

Display sales were down 8% for the full-year, and net income was down 14%.

The reduction in net income is the result of a slower growth of the LCD glass market at retail in 2015 that I already spoke to.

We had many accomplishments in display in 2015.

I already talked about the favorable pricing.

We extended long-term supply agreements with two major customers that go to the middle of the next decade.

The integration of the CPM continues to go well, and we exceeded our synergy targets.

And finally, we reduced costs by more than 10%, and we continued to maintain our significant cost leadership.

Now moving to optical communications which performed better than our guidance.

Q4 sales were $736 million and up 9% versus last year, driven by acquisitions and growth in fiber to the home.

This was better than expected, driven by stronger carrier network sales.

Net income was $47 million in Q4.

Net income was down 2% versus last year, which is not what you would expect with sales growth.

This is mostly about mix.

We had less of our sales in our higher margin data center integrated solutions, and more of our sales in lower margin products, like cable from our newly acquired Korean operation.

We also experienced higher cost in our fiber business.

We are addressing the cost issue, and we expect overall profitability to improve in 2016.

For the full-year, we are very pleased with optical communications performance which well exceeded our goal of growing more than 2 times the telecom industry CapEx rate.

Sales were up 12% to $3 billion, driven by growth in nearly all parts of our business.

Sales would have been up 16% without the impact of FX.

Net income was up 28%, and significantly more than sales growth.

The improved profitability was driven by the additional volume in fiber to the home, and data center solutions, and strong manufacturing performance.

In environmental, Q4 performance was also better than expectations.

Q4 sales were $254 million, up 2% versus last year.

Without the impact of FX, sales would have been up 5%.

During the quarter, China implemented a stimulus program for car sales, and that drove demand for our light-duty products higher than expected.

Soft demand in China for heavy-duty products continue.

Year-over-year profitability was down as expected, and similar to Q3.

It was driven mostly by the weaker euro, and lower volume in the heavy-duty China market.

For the full-year, sales were down 4%, and net income was down 12%.

Sales would have been up 2% without the impact of FX, and profitability would have been consistent with record 2014 performance.

In 2015, we expected growth in the global auto market, and we expected another year of growth in North America and China heavy-duty truck production.

We invested capacity to support this growth.

We grew as expected in all markets except for China, where heavy-duty truck builds were down 30%.

And China's auto growth, while stronger in Q4 was less than expected for the full-year.

As we start 2016, we see continued strength in the auto market, but are being impacted in our heavy-duty segment in China, and now in North America which is coming off a two-year peak.

As a result, we are incurring costs associated with capacity that is currently underutilized, but is ready and will deliver expanding margins, when market volumes resume.

We have taken action on cost which continues through the first half, and we expect gross margin percentages to improve year over year, beginning in the second half of 2016.

Moving on to specialty materials, which performed in line with guidance.

Gorilla Glass volume was down sequentially and versus a strong Q4 of 2014 as we expected.

This reflected the reduction of supply chain builds compared to a very strong build in Q4 of 2014.

Sales were $275 million and net income was $44 million.

Segment net income was up 40% in Q4, mainly due to improved gross margins in Gorilla versus last year, aided by Gorilla Glass 4 prices, improved cost, and the non-repeat of a one-time unfavorable item last year.

For the full-year, specialty materials sales were down 8%, driven by lower sales of advanced optics.

Sales in advanced optics were down related to the completion of a large aerospace and defense program, softer demand in the semiconductor industry, and the weaker euro.

Net income on the other hand was up 11%, driven by Gorilla Glass volume growth, adoption of Gorilla Glass 4, and cost reductions.

We are pleased with our Gorilla Glass business.

The market demand for cover glass was up approximately 10% in 2015, and we gained share with the big China OEMs and on touch notebooks.

Additionally, the successful introduction and adoption of higher-priced Gorilla Glass 4 had a very favorable impact on our profitability.

In life sciences, Q4 sales were $202 million.

Both sales and net income were down year over year, driven by foreign-exchange.

For the full-year, sales were down 5% and net income was down 12%, but both would have been up, excluding the impact of foreign-exchange.

Q4 gross equity earnings from Dow Corning were $78 million as expected.

Hemlock contributed $39 million of the total, up from Q3 driven by customers fulfilling their annual contracts.

For the full-year, Dow Corning's equity earnings were $245 million.

Now let's turn to our balance sheet and cash flow.

We delivered free cash flow in the quarter of $628 million, and over $1 billion of adjusted operating cash flow.

For the full-year, we generated $3.2 billion in adjusted operating cash flow, and spent $1.25 billion on CapEx, and had free cash flow of $1.5 billion.

As Wendell indicated, more than $3 billion in adjusted operating cash flow for the full-year really gives us confidence in our ability to deliver our capital allocation plan.

During the quarter, we spent $1.3 billion on share repurchases.

This reflects our accelerated stock repurchase program.

For the full year, we spent $3.2 billion on repurchases, and lowered outstanding shares by 151 million shares.

We ended the year with $4.6 billion of cash, with approximately $1 billion in the US.

Now for the outlook.

We expect the global economic headwinds to persist in the first quarter and to impact our business, all of our businesses year over year.

We expect the first quarter to be the weakest of 2016, and we anticipate growth will recover in subsequent quarters.

Let's begin by looking at each of our businesses.

This morning I will provide our Q1 expectations with some additional color on the full-year.

You can expect to hear more about our business outlooks at our upcoming IR day.

Beginning with display.

To repeat what I said earlier in the call, in Q1 we expect the glass market and our volume to be down mid to high single-digits, driven by lower panel maker utilizations that I already mentioned.

Once the supply chain returns to normal, we expect panel maker utilizations and our glass volumes to grow.

We expect this growth to start in Q2.

We expect our LCD glass prices to decline moderately sequentially.

Given how our contracts work, we are confident that the price declines will be moderate in the quarter.

As we have previously explained, we expect this more favorable pricing environment to continue, and maybe even improve for two primary reasons.

First, the financial situation of our competitors indicate that they cannot continue historical price declines and remain profitable.

And second, as we've said before, we believe that glass supply and demand will remain balanced throughout the recent weakening in panel demand.

We are keeping capacity offline to match our supply to our demand.

Other glass suppliers have said publicly that they have levers to take similar actions.

For these and other reasons, we continue to believe that our quarter- over- quarter price comparisons will be better for us going forward, than they have been overall in the past.

So to summarize display, we expect our volume in Q1 to reflect the weaker retail market and lower panel maker utilizations, and we will manage supply to demand.

We do not believe that the current economic environment reflects any fundamental change to our longer-term drivers of TV demand, and that the end market will recover in 2016.

Moving to optical communications.

For the first quarter, we expect sales to be up low to mid single-digits versus last year.

For the full-year, we expect our sales to be up mid single-digits, and exceed our goal of at least 2 times the overall industry CapEx growth rate.

Turning to environmental, the US heavy-duty truck market is forecasted to be down about 20% in 2016 after a two-year peak, and we also expect China's heavy-duty market to remain weak.

This will impact our heavy-duty volume and segment sales in Q1.

We expect sales to be down approximately 10% versus last year.

We do expect auto production to increase this year, but we do not expect it to offset the lower heavy-duty demand and continued FX drag.

So our outlook for the full-year is for environmental sales to be down slightly from 2015.

In specialty materials, we expect Gorilla Glass volume to grow in the high single-digits this year.

However, in Q1 segment sales are expected to decline mid teens year over year, due primarily to absence of a ramp for new product launches by mobile device manufacturers like we had in Q1 of 2015.

For the full year, we anticipate double-digit sales and net income growth in specialty materials driven by Gorilla Glass.

In life sciences, we expect Q1 sales to be up low single-digits versus last year, with underlying growth offset by the weaker euro.

For the full-year, we expect to grow sales faster than the market, which is expected to be up low single-digits.

Continuing with the rest of our Q1 forecast.

We expect gross margin to be approximately 41%.

This is a 1 point decline sequentially, due to the expected lower display and lower Gorilla Glass volume.

We expect gross margin to improve with volumes in our businesses, starting in the second quarter.

SG&A and RD&E spending will be approximately 14% and 8% of sales, respectively.

We expect other income other expense to be a net expense of approximately $50 million.

We expect Q1 equity earnings from Dow Corning to be approximately $45 million.

This is down from Q4, where polysilicon customers met annual contract obligations.

For the full-year, we expect slight growth in both silicones and polysilicone sales.

We expect effective tax rate for 2016 to be in the 16% to 17% range.

That concludes our outlook for the first quarter.

Now I will hand the call back to Wendell to summarize, before we go to Q&A.

Thank you, Tony.

Well, no surprise, the global economy is impacting our Company.

Nonetheless, we continue to make solid progress on many critical fronts.

Despite the worst display industry environment in five years, glass price declines are the smallest they have been in five years.

This provides us a good foundation for stabilizing returns of this business.

We are generating excellent operating cash flow, and we are returning cash to our shareholders.

We are beating the competition, and we have a great opportunity set ahead of us, as exemplified by our recent progress on attacking the automotive glazing market with Gorilla Glass.

Now we look forward to sharing many more details of our strategy and capital allocation framework at our annual and investor meeting next week.

Ann?

Thank you, Wendell and Tony.

I will now open up the lines for questions.

Lois?

(Operator Instructions)

Vijay Bhagavath from Deutsche Bank.

Yes, hey, good morning to you.

Great call, and you guys are doing an amazing job at -- keeping your display business steady, with all these [directions] going on.

The question for you is -- it's no surprise that China consumer demand is starting to weaken, especially in terms of sentiment, with all the drama we are seeing in the China market there.

Do you anticipate, heading forward into the rest of the year, further weakness in TV demand from the Chinese consumers?

And my guess, is roughly 40% of HDTV sales will be to the China market.

So that's where I am coming from.

I'd like to some qualitative commentary for you -- from you, through for the rest of the year.

If China consumer demand for TV sets would deteriorate, how that'd impact your display business?

Thanks.

So I think from an overall standpoint, actually last year China was one region that had strong growth on a year-over-year basis.

And that includes, in the fourth quarter where there were strong sales on things like the Singles Day on November 11, and also the sales starting in the early part of December for the Chinese New Year.

I think that there is -- I think the important thing to keep in mind, when we look at our growth on sales on a year-over-year basis, at glass at retail, what really drives a lot of that growth, of course, is what happens with the screen size.

As you saw on the chart that we presented, that's the biggest single driver of our growth on a year-over-year basis.

We think sales are going to be up 2% TV unit sales on a year-over-year basis.

It could be a little bit weaker than that.

But we think our range of being up in the high single-digits, we feel pretty good about that.

And a lot of that actually has to do with the screen size growth.

And a quick follow-up if I may, the Summer Olympics would mostly be broadcast in 4K.

Do you anticipate any mid-year spike in 4K TV demand, because a lot of us would like to watch Summer Olympics in 4K?

Thanks.

And we would love for you to watch the Summer Olympics in 4K.

I think, when we look at 4K demand in general, it did increase in 2015 to about 28 million units.

We hope to -- we expect it to probably come close to doubling in 2016, that price points are getting closer to 1.5, and which we think will really increase the adoption from a demand standpoint.

But it's always hard to tell on sporting events.

Often it does give us a little bit of a pick up right before, but from a whole year standpoint, it's kind of hard to distinguish them.

Okay.

Thank you.

Rod Hall from JPMorgan.

Yes, hi, guys.

Thanks for the questions.

So I've got a couple for you.

The first one, I wanted to just dive into macro more broadly.

You are indicating a weaker Q1 than we expected, but a pretty strong full-year guide.

And I am just wondering behind that, what you are assuming macro through the year?

You said that the first half of the year, you expect it to be weak.

But it looks like heavy-duty trucks are slow.

That's usually a pretty good leading indicator of macro.

We see a lot of other indicators that the US is weakening.

So just curious, to hear what your views of macro through the year are that inform that full-year guidance?

Second question I wanted to ask, Tony was on the hedging.

Can you talk about the fade of the hedging?

So you said 70% coverage, I assume that's higher in the early years, and then fades through that period.

But can you give us a little bit more color on that?

And then finally, was optical was very strong.

Any color on regional strength or project strength there?

Thanks a lot.

Well, first, starting from a macroeconomic standpoint, we're not expecting a whole lot of change relative to the macroeconomics in 2016.

I think, as we look at each of our business units and what's driving the growth there, a lot of it is continuations of what we have seen in 2015.

I mean, the one area that we do think will be down on a year-over-year basis, is the one that you mentioned, which is in heavy-duty trucks in North America.

We expect to see continued weakness in heavy-duty trucks in China, and that's why environmental in total, we think will be down low single-digits.

From a yen standpoint, actually we are covered, really throughout that -- we're covered very significantly in 2016 and 2017.

And then, as we go out after that, we're covered at a lower percentage from that.

So you are correct on that.

And then, Wendell, do you want to talk about what's happening in optical?

I mean, it's mostly in North America.

Sure.

I'll hit on all three of Rod's questions.

First, good to hear from you, Rod.

Hey, on the macro front, bottom line is, we're planning on a -- not that exciting economy in this coming year.

Where you see us recovering as the year goes on, mainly has to do with the supply chain correction in display, and some pickup in some very specific areas, where we have very high margin product sets, like in Gorilla, and some particular market segments in [opto] that have less to do with the economy, and more to do with just the cycle of product introductions, or where they are in their build cycles.

But in general, we're with you.

We don't see that much good news in the economy here, in the near-term.

On the yen though, yes, it fades.

What Tony and his team have managed to do here, is the coverage is still quite high, all the way out for a lot of years.

So in many ways, this has just lopped off the downside risk of the yen.

And the compliment I would make to him and his team is, once we got in place, the long-term supply agreements, they gave us confidence, we are going to have the yen flows.

Then we just bided our time, and we're disciplined, waiting for what we knew there would be a [volatile] moment in the markets.

The yen would sink, and then we had in place all the trades that would make it close, at a rate that we think is attractive, and gives our shareholders a good shot.

So in opto, actually, though opto was really strong throughout the year, we think it can get stronger.

Because we had two areas that are sort of in low cycle in quarter four, and somewhat in quarter one, which is the ultra data center market, and we're in between big builds in fiber to home, right?

We're sort of wrapping up in Australia.

We've got new ones onboard, that they are going to be coming on stream.

So right now, opto continues to feel strong, mainly because of how superior our product set is, and the extent that we are really beating the competition in all of our core high value add systems.

Great.

Thanks a lot, guys, and congrats on the hedging.

Thanks, buddy.

Medhi Hosseini from SIG.

Yes, thanks for taking my question.

It's Medhi Hosseini from SIG.

Just as a follow-up to the previous question, and focusing on your display, what is it in the supply chain that you see that gives you the confidence, with your year end unit volume up 5%?

And I ask that because, this would suggest a very strong sequential growth in Q2 and Q3 off of your Q1 guide.

And I ask that, because this would suggest a very strong sequential growth in Q2, Q3 off of a your Q1 guide?

So anything company-specific or supply chain-specific, that you can offer gives us confidence will be great.

And then, I have a follow-up.

Sure.

I think when you will go back and take look at that chart on the demand that happens from a glass market standpoint, and then from the retail market.

What happens when panel makers lower their utilizations, it gives an opportunity for there to be a significant reduction in inventory.

Some of that happened in Q4, and we expect more of that to happen in Q1.

Once that happens, then you're much more aligned with where panel maker utilizations will increase their utilizations, and our glass volume will grow.

We do expect that to happen more in the second half, but we do think there will be growth in the second quarter.

Got you.

And Medhi, all I would add is that I think to get a handle on this, if you go back to that slide you saw from Tony -- it's that slide that says, expect 2016 retail market growth of high single-digits.

What that is -- the first thing to get comfortable with is, where do you see TV units?

It's not a big part of the overall growth story, but that is up 2% we think, right?

Then it's about size, and we will share more about this in the IR day.

But television size has been -- television screen size has been one of the surest bets in display, and we expect that to contribute a lot.

And then, of course, IT and [small] is -- adds a little.

So the first thing to get comfortable about is, what do you think about total LCD glass area growth?

And we are sort of in line with what we see out of the most trusted external sources, and we have some specific thoughts on TV screen size.

Then we go from that 8% to 10%, to then we're going to -- we're going to see the supply chain decline, right, and use up some of that growth.

And that 's what will take us to up mid single-digits.

So I think, Medhi, the first thing to get comfortable about is, what do you think is really happening at demand?

And we will try and give you some of those details, so you can make a good judgment.

Okay?

Great, thanks for the detailed color.

And then moving on to the specialty materials, especially with the diversification of application into auto.

It is great that you have customer diversification, but can you help us understand how the margin profile is going to play out, especially in the past, one particular customer may have pressured you on the prices?

Now that you have diversification of application and customer, should we expect the recent improvement in operating margin were to sustain?

Now when you say auto, are you speaking about glazing, or are you speaking about our environmental approach?

Glazing, the Gorilla application -- the Gorilla, using auto application.

I think the way you should think about -- the way we are going to price this, right, is you should think about it sort of in the range of what we sell LCD glass for.

So it's not going to be as profitable as some of our consumer electronics Gorilla stuff is, but it's still going to be quite profitable, as you can take a look at our display business.

The key thing here isn't going to be how profitable it will be.

The key thing is going to be here is, how successful can we be about turning that market up on it's head with our new light-weight solutions.

If we can do that, and get the volume, we're all going to love the profitability because we already have the capital in place really.

So the first $400 million of revenue we get in that business, is going to be like a free shot on goal.

Because we will be able to create that capacity, rather than through capital spending, but rather through productivity in our LCD and Gorilla businesses.

So the key thing to watch there is, can we get that volume closed, Mehdi.

Yes, and this is Jeff.

And as we move from the glazing market to the interior of the car, we see strong potential there for actual -- selling for more than we do even in the consumer electronics space, because managing reflections and durability is so much more important in a car, than it is even in on your phone.

So Jeff, from your mouth to God's ear, that would be great.

(laughter)

Thank you.

So if you had 16% net margin for specialty materials in 2015, is this a bogey?

Is that something we could model for, going forward?

I think for auto, what we ought to do, is reflect a little, and let's see what we can do to help you in thinking -- if you mean for auto?

For specialty, I think, what we would hope -- what we're trying to done in Gorilla is we are introducing ever more advanced product sets, that in terms of pure glass, that our revenue per device will go up, and with that our margin.

As well as, we are going to add some other features, to increase our revenue even further and those may be at a little lower margins.

But in auto, I think we owe you -- once we get a little bit more momentum going, we owe you how to think about that business.

Got it.

Very helpful.

Thank you.

Joseph Wolf from Barclays.

Thank you.

Just two follow-up questions.

I guess, I will start with auto.

I just want -- as you look at the selling proposition right now, it sounds like the assets are in place.

But when you go to these auto guys, now that you have the glazing relationship, are you selling weight reduction, and does oil pricing matter?

Or are you selling visibility, optics, and clarity, and how is that being -- or how is that resonating with the customer base right now?

So great questions, Joseph.

We are hitting on really three things, that are in the value prop.

The first is light-weight.

Now despite the low gas prices, all of the car companies have -- by regs, have a target, for what they have to increase miles per gallon for their fleet.

So they are all very interested in light-weighting the vehicle, and they have specific numbers in mind that they pay for every pound or kilo that they save.

And with us being able to serve, greater than 30% of -- reduce weight by greater than 30% of glazing, at a price point that looks attractive in terms of those weight buys, that gets traction.

But what we are also able to do is actually increase the safety of the vehicle.

Because even though we are going lighter weight, basically what happens is when you have something like a rock strike, it can penetrate the outer layer of the soda-lime glass, but then it doesn't penetrate Gorilla.

As well to the safety component is what we have been able to show, is dramatically reduced windshield replacements, is that with something like a sharp rock strike.

Basically we could save almost half of windshield replacements, because once again, the glass reacts in a much stronger, tougher way.

So you don't end up with those classic cracks that can happen from thermal shock, after you have damage introduced to the glass from something sharp.

Or blunt, for that matter.

And then finally, it's the enhanced experience for the driver, because here you're looking at a purely optical piece of glass, right?

We make this on same asset sets that we make display, right?

So this piece of glass, and because it's thinner it allows you to have [HUD] displays that are 70% or more bigger, and tremendously clearer.

I mean, one of the things, Jeff did out at Consumer Electronics Show -- and you will get a chance to see it at IR day, is take a look at the HUD that we built in conjunction with Conti, who is one of the -- who is the biggest HUD manufacturer in the world.

And what they said was that we have never seen a HUD display like this.

It is incredible, far and away.

So it's all of those three things.

Are we getting pull?

Without a doubt, people are really excited about it.

Now to calm us all down, damn, this industry moves slow.

Okay?

So this is just a very conservative industry for a good reason, right?

So man, it's going to take time for us to build, which is why we keep pointing to, there's proof points along the way.

We'll know where we are, long before the volume shows up.

So that's probably more than you wanted to know, Joseph.

No, that's great.

And the, just as a follow-up on optical, you started to address this.

But what are the levers, that you think about the opportunities in between product cycles in the fiber business, or builds in different geographies, and kind of a seasonal, it sounds like ultra data center environment?

What are the levers to get the margins up in 2016, and should we expect any of that throughout the year?

I think that the two major levers are -- you're onto the first one, which you heard Tony talk about, which is about mix, right?

So we make more money, when we sell these highly integrated solutions, that we are the only guy in the world that does.

So it's a classic example of capitalism working, right?

And for those, we certainly don't expect there to be less data centers built in the coming year.

The main thing that has happened with the hyperscale data centers is there was like an adjustment from just a couple of key customers, that are adjusting their inventory.

We expect them to come back online.

We're going to look to expand our presence there, right?

So that's one way we do it.

And then the other is more like you say, we've got to wait for the right cycles and builds on fiber to the home, and how that works.

Meanwhile, we will do the things, we always do on margins, we relentlessly drive our cost down every year.

And you can expect that to happen, in Opto as well.

That's exactly right.

And one of the things that happened in the fourth quarter, will continue a little bit into Q1.

But will certainly be resolved by end of Q1, or just some production issues that we run into, that we will get ourselves worked through.

We are already well into that, and you will start seeing margins improve there.

All right.

Thank you.

Patrick Newton from Stifel Nicolaus.

Good morning, Wendell and Tony.

Thank you for taking my question.

I guess, a two-part question on specialty materials.

On the near-term front, you talked about not having some new product releases from customers.

But I am curious, typically you don't see a sequential step down of this level in Gorilla, or I guess in specialty materials, barring a meaningful price reduction you saw in 1Q 2013.

So near-term, can you talk a little bit about the pricing and volumes that are impacting your 1Q guide?

And then, guiding to the very strong remainder of the year, can you touch on what is driving this?

Is this the beginning of some automotive benefits entering the model?

Is touch accelerating in new applications, or is the largest demand driver from large customer and new product launches?

Sure.

So first, starting with the Q1, and I think there are two things that are going on in Q1.

I mean, one is clearly the volume, as we don't see that launch like we did a year go.

And I think there is lots of people out there in the overall mobile device supply chain that have announced the similar type things.

And we are seeing that in Q1 also.

Q1 is where we do see some price declines, but that's -- this is not like what you saw in 2013.

This is mostly related, from a volume standpoint.

In terms of what's going to drive the rest of the year, that is not about automotive, and getting a win there.

This is all about consumer electronic devices.

And as Wendell said, our ability to add value onto those devices.

Yes.

I think you've got it -- you've got it Patrick, that it's going to primarily get driven by major new launches.

As those new product sets come out, we see that natural surge up in supply chain.

And the profitability is going to continue to come at us, as Gorilla 4 continues to penetrate more.

That's a product that we make more money on, than we did on Gorilla 3. And hopefully, we can keep that trend going, Patrick.

Great.

And then, just as a follow-up, Wendell, in your prepared remarks, you said that weeks of display inventory grew at the highest level -- or is that the highest level in five years?

And then you said that area growth in display was at the lowest level in five years, while still adding in several times -- in both the prepared remarks and Q&A, that area growth or larger screen size is the key driver for display.

So I guess, first, can you quantify where weeks of inventory currently stands in the display business?

And then, on the growth of TVs, you did guide for an increase of at least 1.5 inches.

But given that we probably saw that much or more on 2015, do you anticipate that area growth will reaccelerate year-over-year?

Or have we passed that inflection point, and should actually start to see area growth rates slow?

So first on the supply chain, we aren't going to give the number of weeks.

We've stopped doing that.

But I think it's safe to say, that it was very high.

At the end of the year, it did come down versus Q3, but it still ended up very high.

In -- and all of our remarks and thoughts about what's happening in Q1 is definitely based on that.

From a screen size standpoint, I think, screen size, we think was up about 1.2, 1.3 inches.

It was depressed a little bit because there was a big Mexico incentive program.

And we expect to, as we said in 2016, for it to be more than an 1.5 inch.

How much more than 1.5 inch it is, is we don't know.

We have certainly done some work and some analysis on that and if it ends up being more than that then, of course, the market will be a little higher.

Yes, Patrick.

I'd just add to that.

So last year, it wasn't so much that the screen size (inaudible), it did.

It grew, right and as Tony, said the Mexican subsidy was about specifically like 24-inch TV, something like that.

Some ridiculously small TV.

But what happened in the dynamic was the units went down, right?

And that is, I think the key that is different between this coming year and last year.

So we expect units to pop back, as well as a little bit more oomph, coming out of screen size.

It is debatable, right.

It's debatable.

I mean, it's hard to see for sure into the future, but at every other time, we've seen a little dip like this, a compression in television demand, the year after, is usually bounce back a lot stronger than what we're guiding at right now.

And there is a lot of other qualitative factors we can add up.

But hey, man, it's a legitimate question, Patrick.

Thank you.

And Tony, in case I missed it, did you give a CapEx guidance for 2016?

No, we needed you to come to the IR meeting next week.

All right, I'll be there.

Thank you.

You are going to want to see the displays any way.

(laughter) (multiple speakers).

They will be worth coming to.

(laughter) (multiple speakers).That will not be the highlight of the meeting.

All right.

Thank you for taking my question.

Lois, we'll do one more quick question.

Doug Clark from Goldman Sachs.

Great.

Thanks for sneaking in my question here.

Something that wasn't touched on during the call.

I am just curious about the transition to even thinner glass, 0.3 millimeter and below, are we seeing that in any real material volumes at this point?

Or is it still kind of lapping through the transition to 0.5 and 0.4?

Not yet.

Not yet.

That's a good question for Mr. Clappin, when he shows up at our IR meeting, but not yet.

We've certainly got a number of folks talking to us about it It's certainly something that we can do, but we haven't seen the big shift start as of yet.

Okay, great.

And then, my one additional follow up was, just on the inventory situation throughout the supply chain.

I was just wondering if the utilization cuts are a global phenomenon?

In other words, are you also seeing utilizations come down in China as well?

Or is it more developed market dynamics that are responding to panel price declines?

That is a really clever, insightful question, right, very clever.

So we've seen something a little different in the supply chain in 2015, than we have in other years.

Typically, the panel makers have gotten a -- not typically, but the panel makers have gotten a lot sharper.

When panel prices are falling, and they start to approach their cash costs, they have not been keeping any inventory, and they have been rapidly adjusting their utilization.

And we saw that, from most of the highly established, developed panel makers.

We saw less of a reaction out of the major Chinese panel makers, some of whom are our really big customers, who continued to run their panel fabs, probably longer than they should have.

We've seen a build up of some very small sized TVs in that set.

However, we are seeing them adjust now.

But that's a very clever question.

It's something that we are going to have to keep an eye on, to get an understanding of, will the emergence of these strong Chinese players mean, that the supply chain is going to run a little fatter than it used to?

Or is it just a matter of where they are in their own cycle of learning?

We need a little more data to know.

Very well.

I appreciate that color.

Thank you.

Thanks, Doug.

Thanks, guys.

I think we will end the call now.

We have a few announcements first.

As Wendell said, our annual Investor meeting is on Friday, February 5, at Cipriani Wall Street in New York City.

You can register for the event on our website.

Wendell, Tony, Jeff and our business leaders will be present.

And you will have a hands-on opportunity to step into the Glass Age with Corning.

We will be sharing our very popular exhibits from the recent Consumer Electronics Show.

We will also be at the Goldman Sachs conference on February 9 in San Francisco, and Morgan Stanley on March 1, also in San Francisco.

Thank you all for joining us today.

A playback of the call is available beginning at 11:00 AM, and will run until 5:00 PM on Tuesday, February 9. The phone number is 800-475-6701, and the access code is 382853.

The audiocast is available also on our website during that time.

Lois, that concludes our call.

Please disconnect all lines.

Thank you.

And, ladies and gentlemen, that does conclude the conference for today.

Thank you for using AT&T executive teleconference.

You may now disconnect.

Thank you very much.

You are welcome.