Corning - Earnings Call - Q1 2011

Transcript

Speaker 4

Ladies and gentlemen, thank you for standing by and welcome to the Corning Incorporated first quarter call for the conference. All the participant lines are in a listen-only mode. There will be an opportunity for your questions. Instructions will be given at that time. If you need any assistance during the call, please press star, then zero. As a reminder, today's call is being recorded. It's now my pleasure to turn the call over to Mr. Ken Sofio, Vice President of Investor Relations. Please go ahead, sir.

Speaker 6

Thank you. Good morning. Welcome to Corning's first quarter call. This is Corning's Jim Flaws, Vice Chairman and Chief Financial Officer, to lead the discussion with prepared remarks, then move to the Q&A. Those remarks do contain forward-looking statements under the Private Securities Litigation Reform Act of 1995. Those remarks involve a number of risks, uncertainties, and other factors that could cause our actual results to differ materially, and those risks are detailed in the company's SEC reports. Jim?

Speaker 5

Thanks, Ken. Good morning, everyone. Hopefully, you had a chance to read the first release we issued this morning on our first quarter results. If you haven't, a copy can be found on our Investor Relations website. I'm going to start by highlighting our terrific first quarter and then provide some color and clarity on the impact of the earthquake in Japan and also Sharp's recent utilization reductions on Corning. Let's start with the first quarter. Our first quarter results demonstrate Corning's growth opportunities are real, and we are succeeding at building a bigger, more balanced company. Each and every one of our segments grew sequentially and year over year. Our consolidated sales in Q1 were $1.9 billion, an increase of 9% over Q4. Even more impressively was the 24% increase over the first quarter of last year.

As we highlighted during our February investor meeting, we strongly believe that every one of our segments will have significant growth this year and over the next several years. For investors looking for evidence of that, look at our first quarter. Our first quarter gross margin also increased, reflecting good operational performance, reaching 45%, an increase over the fourth quarter gross margin of 43%. Earnings per share were excellent at $0.47 and well ahead of most expectations. In summary, our first quarter results are a great example of our growth and earnings potential going forward. In fact, there have been no changes to the megatrends and growth drivers that our businesses participate in. The vision of the future we showed you in our Day Made of Glass video is still well intact, and Corning remains in position to capture these significant growth trends.

For investors, the most frequent questions over the last six weeks have been, how have the events in Japan, including Sharp's announcement, impacted Corning? Let me start with events in Japan. First, we are so very pleased that all our employees were safe and accounted for. Corning is a company of strong values, and valuing the individual is the most important value we have as a company. Second, none of our operations were impacted by the earthquake, the tsunami, or the rolling power outages. Third, we've experienced no issues either obtaining raw materials to make glass or shipping finished product around or out of Japan. Fourth, we've done our own review of the component supply chain in Japan.

As a result of this review, which includes many conversations with key component suppliers and our customers, it's our opinion that the potential shortage of components is unlikely to cause any material disruption. While there are component makers who are still in the process of repairing their manufacturing operations or resuming production, many of the impacted companies have now made the necessary repairs and are bringing production back online. In the meantime, the panel makers have had inventory of key components as well as finished panels. In some cases, they already qualified secondary supply sources. We no longer view this as a potential threat to the production panel making. I'd like to talk about Sharp. They have been an important strategic partner and customer of ours for a very long time.

For those who know their history, you may remember we collaborated with Sharp back in the 1980s on the first color TFT LCD panel. It is based on this mutual history and respect that we continue to work closely with them as they adjust their production plans. Here's what I can tell you today, and some of this you may have heard directly from them. Sharp has decided to significantly reduce production at their Gen 8 and Gen 10 fab to lower their inventory levels. We view this as a temporary reduction and one that we do not believe will last beyond the second quarter. Looking ahead, we expect to see a significant increase in glass demand in Q3 as both production at Sharp resumes and the worldwide supply chain prepares for the seasonally stronger fourth quarter.

I will have some more on our second quarter expectations and some early thoughts on Q3 and the outlook. Now that I've addressed some of the more important topics from the past few weeks, I'd like to return to quarter one and recap our results in more detail. Moving down the income statement, as I mentioned a moment ago, gross margin increased from 43% in Q4 to 45% in Q1, reflecting strong display volume and good manufacturing performance in display, as well as telecom and environmental. Included in our quarter one gross margin was $12 million in startup and conversion costs and project costs related to conversion of additional capacity from LCD to Gorilla. As a reminder, our Q4 gross margin included $24 million in project-related costs and other write-offs. SG&A was $250 million, or 13% of sales, and significantly lower than Q4, as expected.

RD&E was $156 million and also lower than Q4. Equity earnings were $398 million and slightly lower sequentially compared to equity earnings without specials from Q4. Other income was $27 million in Q1 versus $54 million in Q4. Approximately $10 million of this swing was due to the non-repeat of balance sheet hedge gains in Q4, as well as approximately $17 million in one-time corporate contributions this quarter. Net profit before taxes, excluding special items, was $867 million and 15% higher than Q4, and the result of the 9% growth in sales, higher gross margin, and lower operating expenses. Our tax rate increased, as expected, from 3% to 13% in Q1. Net profit after tax, excluding special items, was $751 million, up slightly versus the fourth quarter. The impact of movements in exchange rates from Q4 to Q1 was not material to our results.

Now I'd like to turn to the first quarter with Display. Display sales were $790 million, an increase of 5% over Q4. Volume was up in the upper single digits, which was higher than we had expected. The strong volume was the result of Taiwanese and Japanese panel makers running at higher than expected utilization rates, which led to additional glass demand for us, but higher panel inventory levels for them. The stronger glass demand at our wholly owned business kept us from building any additional inventory in Q1. As a result, we ended the quarter with healthy glass inventory levels. As expected, first quarter price declines were more moderate than the fourth quarter, and the benefit of movements in the yen was negligible. Display gross margins increased quarter over quarter, reflecting strong manufacturing performance and the strong volume.

At SEP, volume was up modestly but slightly lower than our expectations. The lower volume reflects the Korean panel makers' decision to keep lower production levels in Q1 to maintain healthy inventory levels heading into Q2. Price declines at SEP were similar to our wholly owned business. For your modeling purposes, SEP's first quarter LCD sales were about $1 billion, consistent with the fourth quarter. As always, a reminder, this represents SEP's LCD sales only. Our public filings report their total sales, which includes CRT glass and other product sales. Equity earnings from SEP's LCD glass business were slightly lower sequentially, reflecting an increase in their tax rate. As we had disclosed at our annual investor meeting, SEP's tax rate this year will be between 18% and 19% versus a 15% rate in 2010. All in, our total glass volume, including SEP, was up 5% in the quarter.

This is a comparison to a worldwide glass market that grew about 2% and reflects good progress against our goal to regain some of the market share we lost in 2009. I'd like to spend a couple of minutes on the display supply chain. We continue to be very encouraged about the level of inventory in the supply chain heading into Q2. We believe the amount of inventory in terms of square feet actually shrank slightly in Q1. This is a comparison to a buildup of inventory in the first quarter of last year, up roughly 60 million square feet. If we recall, that buildup was the beginning of an overbuild that continued in Q2 before the mild correction in Q3. We see no evidence of that repeating this year.

Our models indicate the supply chain exited Q1 with roughly 17 weeks of inventory versus 17.5 at the same time a year ago. Now, regarding retail, the data we have so far suggests demand for televisions and monitors is well in line with our expectations. However, demand for notebooks has been a little softer. Worldwide, LCD television unit sales at retail were up 28% in January and 12% in February, year over year. Both are slightly higher than we had expected. We do not have complete worldwide data for March. In the U.S., the retail market has gotten off to a good start for the first quarter. January is up 4%, February down 5%, and March up 9%. In fact, demand has been up year over year for the last eight weeks in a row, including the first two weeks of April. As a reminder, we're forecasting the U.S.

market to grow just a couple million sets this year. In China, LCD television unit sales were up 28% in January and down 26% in February. This reflects the shift in timing of the Chinese New Year holiday sales. This year, there was only one week of holiday sales in February versus three weeks last year. Chinese New Year demand in total was up slightly more than 25% and right in line with our expectations. As a result, there did not appear to be any excess TV inventory following the holiday. Very importantly, in March, LCD television units in China grew 22%. In Europe, LCD television unit growth was up 16% in January and 9% in February, both in line with our expectations. We do not have the final data for March. In the developing regions, the growth rates were very robust.

Emerging Asian sales were up 97% in January and 82% in February. In South America, sales were up 90% in January and in February. Again, we don't have March data here either. In Japan, we continue to forecast 12 million units this year, about half of last year's total. This is the forecast from our annual investor meeting and reflects the end of the Echo Point program in March. There has been some discussion about whether the program will be brought back, but that does not appear to be happening. LCD television unit sales in Japan were down about 9% in January and up 16% in February, possibly reflecting the rush prior to the expiration of the program. They were down 6% in March, which was actually better than we had expected.

March results did not appear to reflect any additional consumer weakness following the earthquake, but obviously, we'll keep an eye on the April data when it comes out in a few weeks. For those who are modeling a softer Japan market following the earthquake, remember there are approximately 10 square feet of glass in the average-sized television. If the market, for example, was 3 million televisions less, that would equate to about 30 million square feet of glass. Based on what we've seen so far in the first quarter, we have no reason to adjust our forecast for 2011 worldwide LCD television demand. Now, turning to monitors, demand also continues to be on track for our forecast. Our data is based on shipments of the top nine monitor brands, which make up about 75% of the worldwide monitor market.

For the first two months of the year, unit shipments are consistent with last year. The notebook market has been weaker during the first quarter, and we have lowered our 2011 forecast from 212 million units to roughly 196 million. Our Q1 data is based on the top five ODMs, which make up about 80% of the worldwide notebook market. As a result, we have adjusted our worldwide glass forecast by roughly 100 million square feet, or less than 3% of the total, from our previous range of 3.6 to 3.8 billion square feet to 3.5 to 3.7 billion square feet. I'd like to give you a brief update on Eagle XG Slim. We're very pleased with the pull we're getting from our customers. Investors, however, should not view Slim as a significant advantage over our existing competitors.

Although we see no one else in the market with any significant volume, our assumption is they will eventually be able to make thinner glass, although it may be more difficult and costly for them. We do believe any potential new entrants would have difficulty duplicating Slim. The way we think about it, if your competitor has been trying for the last few years to produce and sell your first piece of LCD glass at the standard size of 0.7 millimeters and you have not been able to meet customer specifications, now your customers would want glass that's 30% thinner. Think about how high the bar has moved. I would like to turn to telecom, which is really hitting on all cylinders. Sales were $474 million, up 7% for Q4 and significantly higher than our expectations. Compared to last year, telecom sales were up 30%.

The year-over-year growth was driven by the two areas Clark Kinlin highlighted during our annual investor meeting: fiber-to-the-home, which was up 70% from last year, and enterprise networks, which were up 20%. We also saw very strong demand for optical fiber as well as hardware equipment in the first quarter. In fact, in the month of March, we sold more kilometers of optical fiber than any other month in our entire history. Our bottom line performance was more impressive. Telecom net income was $41 million in Q1, which is significantly up from Q4's $18 million and the $8 million reported last year. We're seeing more of the sales fall to the bottom line as the mix of higher margin products increases. For those who model our telecom segment, you will see this in the segment's gross margin performance.

As Clark said in February, we feel very bullish about our telecom business and the wealth of market opportunities that are in front of us, not only this year but over the next several years. Now, in our environmental segment, first quarter sales were also higher than we expected and actually an all-time record. Sales were $259 million, up 12% sequentially, and up 35% over last year, led primarily by diesel. Diesel sales were up 18% sequentially and up 81% year over year, driven primarily by the recovery in heavy-duty diesel filter demand. In fact, the business had record quarterly sales in Q1 for both heavy-duty and light-duty filters. This is another segment that's posted significant strong gross margin improvement and significant net profit gains. Net income was about $29 million in the first quarter compared to $15 million in Q4 and just the $11 million we made last year.

Environmental is also poised to capture significant growth over the next several years while expanding its gross margins and profits. In specialty materials, Q1 sales were $254 million, increased to 29% over Q4 and two and a half times larger than Q1 of last year. The significant growth was primarily due to Gorilla Glass, which continues to be the industry's cover glass technology of choice. Segment net income grew from $2 million to $8 million in Q1. The segment's Q1 results include the first material sales of TV cover glass, which are currently not a significant contributor to segment profits. Gorilla Glass sales were roughly $150 million in Q1 and increased to 50% over Q4. We continue to believe Gorilla Glass sales could approach $1 billion this year. In fact, since we launched Gorilla Glass four years ago, the first quarter has represented about 15% of the full-year demand.

We feel we're on track with our sales goals. We do need TV cover glass to contribute to our sales goal this year. We have begun significant shipments of the cover glass in Q1, and we're now awaiting market feedback as consumers have a chance to see this innovative new product. While TV cover glass will not be contributing to profits this year, we are very anxious to see how well it sells. We're continuing to learn how to make large-scale strengthened glass with this product, which will help us in other business opportunities. Our first mover advantage continues to pay significant dividends. We're currently designed in over 370 different models since the product was introduced. That includes 217 in the market today, plus another 30 that are being released in three months.

We continue to make progress extending Gorilla Glass into new markets, including an exciting collaboration with Hyundai on a futuristic concept car. In addition, a major architectural firm announced Gorilla Glass is designed into a prototype prefab apartment unit. The firm exhibited Gorilla Glass just last week at an industry show in Seattle. In life sciences, sales in the first quarter were $144 million, up slightly over the fourth quarter. At Dow Corning, Q1 sales were $1.6 billion, consistent with the fourth quarter but up 17% over the prior year. Equity earnings were $91 million in Q1. That's versus $124 million in Q4. As a reminder, Q4 had included $42 million in one-time gains. Without those one-time gains, equity earnings were up 11% sequentially. Shifting to the balance sheet, we ended Q1 with $6.3 billion in cash and short-term investments versus current long-term debt of just $2.3 billion.

Free cash flow was negative $104 million in Q1. The largest outflow of cash during the quarter was for capital spending, which was $532 million, in line with our expectations. We also completed our acquisition of MobileAccess during the quarter. As a reminder, free cash flow is a non-GAAP measure, and the GAAP reconciliation is on our website. Moving further down the balance sheet, inventory increased from $738 million at the end of Q4 to about $841 million at the end of Q1. This increase was almost entirely in just two segments: Gorilla and telecom. For Gorilla, the business is gearing up for the significant step up in demand in the second half. In telecom, most of the increase was related to the acquisition of MobileAccess. Now, let me turn to our outlook, starting with display.

In Q2, we expect the worldwide glass demand to be consistent quarter to quarter, with the Korean glass market demand up substantially and the rest of the world down substantially. It's a reflection of the Korean panel makers increasing their utilization rates following more modest production levels the last two quarters. In Taiwan, we expect panel makers to run at a lower utilization rate in an effort to reduce panel inventory. In Japan, obviously, glass demand will be significantly lower due to Sharp's capacity decision. This will result in our total glass buying, which includes SEP, to be consistent quarter to quarter. At our wholly-owned business, buying will be down in the low to mid-teens sequentially, reflecting a lower utilization rate in Taiwan as well as Sharp's capacity reductions. At SEP, we expect the volume to be up in the low to mid-teens sequentially.

Regarding the glass market in total, we view the amount of shipments in Q2 to be good news for the overall supply chain. Typically, the second quarter is the hardest to forecast given the traditional slower seasonal retail environment and the supply chain's desire to build inventory heading into the second half. The fact that glass shipments are consistent is viewed as a positive by us. We do expect the supply chain to build some inventory in Q2 preparing for the second half. The amount of inventory that's expected to be built based on our models is about half the amount that was built in Q2 of last year. We again view this as a positive. Although absolute inventory will increase on a forward-looking basis, the number of weeks in inventory in the supply chain will remain about 17.5 exiting Q2.

Glass prices at both wholly-owned business and SEP are expected to moderate even further in the second quarter. We usually do not provide guidance beyond a quarter, but we thought it's important to note that we believe the worldwide glass demand is going to increase significantly across all geographic regions in the third quarter. In our telecom segment, we expect second quarter sales to be up 20% sequentially, and compared to last year, telecom sales would be up about 30%. We expect sequential and year-over-year growth across all our telecom product lines. We expect sales in Environmental Technologies to be down just slightly sequentially compared to the stronger than expected first quarter, but up 35% year over year. In Life Sciences, we expect sales to be up slightly sequentially and almost 20% year over year. Specialty Materials sales are expected to grow about 20% sequentially, driven primarily by Gorilla Glass.

In the income statement, Q2 corporate gross margin should be down two to three points, primarily due to the lower volume of sales in Display Technologies. SG&A's percentage of sales on a dollar basis will tick up slightly in Q2, reflecting the company's annual merit increases, which occur in April. RD&E will be roughly 9% of sales. We expect equity earnings to be up about 10% sequentially, reflecting a strong volume in SEP. Investors should note that the movements in the yen to the U.S. dollar exchange rate influence our results. For your modeling purposes, every one point move in yen, our sales and net income lose by about $9 million. The net income impact includes SEP, where a stronger yen also improves their results. Finally, moving to taxes, we expect our Q2 2011 tax rate to be about 15%. That concludes our formal comments this morning. Ken?

Speaker 6

All right. Thank you, Jim. John, we're ready to take some calls right now.

Speaker 4

Certainly. Ladies and gentlemen, if you would like to ask a question, please press the star, then one on your touch-tone phone. You'll hear a tone indicating you've been placed in the queue. If your question gets answered and you wish to remove yourself from the queue, please press the pound key. Once again, star one if you have a question. First, with a line of Wamsi Mohan with Bank of America, please go ahead.

Speaker 5

Yes. Thank you. Good morning. Jim, can you comment on the inventory increase in your balance sheet? What are the key elements that are driving that increase, and how much of that increase is raw materials versus finished goods?

The increase in the balance sheet inventories would be mostly finished product or WIP. It's not raw materials. There were two drivers of it. It was roughly split half between telecom and half between Gorilla. In telecom, mostly it was the acquisition of MobileAccess. In Gorilla, we are building inventory as we get ready for the increase in the quarters each quarter as we go along over the course of the year. We were very comfortable with the inventory build.

Thank you. As a follow-up, you mentioned you expect a ramp back up in Sharp's production in the third quarter. Do you anticipate that your shipments to Sharp in Q3 will be back at the levels pre the capacity reductions, or are you expecting a slower ramp back up in the third quarter? Thank you.

I don't have any specific guidance yet about both of their fabs. We definitely expect that their Gen 10 to be back. What we don't know is how much their Gen 8 will be back. I think they made some announcements this morning and talked about it, but we definitely feel their Gen 10 will be back up with substantial operations.

Okay. Thanks a lot, Jim.

Speaker 4

Next, we're going to see Jay Muse with Barclays. Please go ahead.

Speaker 2

Good morning. Thank you for taking my question. I guess first question on your display gross margins. Clearly, you benefited a little bit there by running, I don't want to say full out, but were running at a nice utilization and building a little inventory. Curious on what your thoughts are for the second half of 2011. As you think about Slim Eagle XG in the mix, you think about the expected pickup at a core customer, Sharp. Would love to hear your thoughts on how we should see that progress into the second half of the year.

Speaker 5

The gross margin in Q1 benefited from us running full, but I remind you, we were at full in quarter four also. We expect to run all our operations full in Q2. We will build some inventory as a result of that, but obviously, without the sales, it lowers the gross margin display in Q2 by itself. Assuming that in Q3 and Q4 we have continued to run all our operations and that our sales go back up, which is what we're expecting, you should see gross margin go back up from the Q2 levels. I'm not going to give an exact number, but we definitely expect display gross margins to bounce back from Q2.

Speaker 2

Okay. That's helpful. In terms of revenue mix, clearly, the other businesses are really starting to contribute in a more meaningful way. How should we think about that contribution to the gross profit line through the year? Any programs there to drive improvement other than just a pickup in utilization? How should we think about that?

Speaker 5

I would say, focused on Gorilla, the margins should continue to improve. They're being held back a little by the conversion cost of our tanks as we convert from display to Gorilla, but as we told you before, on just the glass alone, you know, for IT and handheld, we expect that to be above our corporate average. You should see that improve as we go through the course of the year. Environmental should improve, based on improved manufacturing performance. We think we're making progress on some of the problems that have caused us pain over the last year. We did show that in Q1, and I think we'll continue to improve there. Telecom is running at a very good gross margin, obviously lower than the corporate average, but well into the 30%.

Even though it feels like it's a downer versus the corporate average, we view it as a very good gross margin given the assets we have invested in this business and very good return on invested capital. We feel very good about our margin portfolio, the businesses, and the potential for improvement, assuming we're right on the sales.

Speaker 2

Thanks, Jim.

Speaker 4

Next, go to Simona Jankowski with Goldman Sachs. Please go ahead.

Speaker 0

Hi. Thank you so much. Just a clarification on your Q2 commentary in the display business. I think you mentioned that you're going to be keeping the tanks full, even though your shipments are going to be down quite a bit, and you'll be building up some inventory. Can you just give us a little more color on why you think prices can moderate in the context of higher inventory at the glass level in Q2? In particular, do you think that is partly in preparation for Q3, and are you still thinking of converting some of your glass tanks over to Gorilla in Q3? Is that Q2 buildup in anticipation for that potential diminished supply on your part in Q3?

Speaker 5

That's a lot of questions rolled into one. First, on the price for Q2, since we've already agreed with most of our customers now, we feel comfortable that that price moderation will, in fact, be what we see. In terms of the amount of inventory we're building in display, because of the lower sales, we actually built no inventory in the display business in Q1. The amount we're building is not a substantial amount, and it will help us as we see the ramp up in Q3 and Q4. As you mentioned, obviously, it gives us some flexibility if we want to convert another tank to Gorilla Glass versus display. We're very comfortable with continuing to run and build that inventory.

Speaker 0

As of now, there is no plan that is certain as far as whether we'll be converting that capacity. It's just more contingent on how the end market dynamics develop.

Speaker 5

We do have a plan for a conversion of our capacity on various tanks over to Gorilla, but we obviously have the flexibility as the market shifts to potentially do more.

Speaker 0

Okay, thank you.

Speaker 4

Our next question is from Rod Hall with JPMorgan. Please go ahead.

Speaker 7

Yeah. Hi, guys. Thanks for taking my question. I just had a couple. One quick one is on Sharp. I wonder, would you guys be able to quantify how much production was lost or give us any kind of quantification of what the impact there might be so that we can think about how much production might come back to us in Q3? I've got one follow-up to that as well.

Speaker 5

I'm sorry. We won't give specific numbers on a customer.

Speaker 7

Okay. The follow-up question is, when we look at the Gorilla Glass situation, you guys are saying that you had TV cover glass included in the numbers this time around. Yet we look out in the market, we don't see very many Gorilla Glass products out there, TV products. I'm just wondering what your expectation generally is for H2. Do you think that the number of products is going to multiply quite a bit? I'm not asking you about specific producers or anything like that, but do you think as we get into H2, we're going to see a lot more TV products with that Gorilla Glass incorporated?

Speaker 5

I would be surprised right now because we only have one customer, and that's Sony. I think we'll have to see how their models sell. Right now, we have no other customers who are working with us to be that would be imminent for coming up in the second half. As I've said before, I think that if these televisions are well accepted by consumers, we might see other people thinking about it. Right now, we basically, our plans are that it's Sony, in their various models, and that's what you'll see in the second half.

Speaker 7

Okay. Just one last thing. The revenues in the telecom business were pretty strong this quarter, quite a bit stronger than we thought they were going to be. Could you guys give us any color on where the fiber's going? You talk about fiber demand being strong. Any information you could give us on regionally, what's happening, or what's developing in the market that's driven that big demand for fiber and whether you think that'll continue?

Speaker 5

The fiber demand regionally is strongest in the United States and Europe. It's not long-haul, it's just fiber that is going into local networks and access. We're actually down slightly in China, which we had expected with their, you know, having finished the builds. That's where the strength we're seeing from a fiber point of view. I will point out it's more in fiber. I mean, every one of our product areas in telecom is actually up.

Speaker 7

Okay. Great. Thanks a lot, guys. Thank you.

Speaker 4

Next, we're going to Nikos Theodosopoulos with UBS. Please go ahead.

Speaker 3

Thank you. A couple of questions. Jim, you might have mentioned it, but if so, I didn't pick it up. Is, at the current run rate and mix, is Gorilla still near corporate average given TVs are a very small contribution in terms of gross margin?

Speaker 5

We have always said that we talk about Gorilla Glass for IT and handheld, obviously excluding the TV cover. The number would be about our corporate average. Maybe it would be above it, but including the conversion cost, it's not above it right now. It's for the glass for IT and handheld. If you include TV cover, it's obviously below, but we've known that for a long time as we have not been expecting to make much money on TV cover in the first year.

Speaker 3

Okay. In the first quarter, you know, excluding this startup cost, we're looking at something close to corporate average rent.

Speaker 5

That's correct.

Speaker 3

Okay. If I look at your revised outlook for the LCD market for the year, quick calculation would suggest volume growth expectation around 11% to 17.5%. You know, just looking at the first quarter and then the second quarter guidance, it would suggest a very strong second half to get into that range. Assuming no share loss, is that pretty much your expectation then when we look at the full year?

Speaker 5

Yeah. We're expecting a strong Q3 and Q4 for the glass market. Part of it is that we're seeing what we would regard as very good supply chain behavior relative to what in the first quarter and the second quarter. I'll remind you, every time in the last five years that there's been a problem on inventories in the supply chain, it's because the industry got too excited and built too much in Q2. We don't see that happening right now. Our assumption is that they will run much stronger in Q3 and continue to run strong in Q4. That's our belief. That's how we're structuring. That's what plays into our glass market forecast.

Speaker 3

Okay. Just one clarification on that. For the first quarter, do you have, just I'm looking at the numbers. It looked like your combined volume growth year over year was in the mid to upper single digits. Is that reasonable?

Speaker 5

Yes.

Speaker 3

Okay. All right. Thank you.

Speaker 4

Our next question is from George Notter with Jefferies. Please go ahead.

Speaker 1

Hi. Thanks very much, guys. I guess I had a question about China. I get the sense that we've seen some softening of panel makers' desires to move into China with panel making facilities. Do you agree with that? Why or why not? How would that impact your CapEx plans going forward in terms of adding glass capacity in China? Thanks.

Speaker 5

I think the pace of the additional fabs beyond the first two, BOE and ChinaStar, I think the other one, those are moving. Those two fabs are moving ahead very crisply, and that's where our capacity is aimed at BOE right now. I think the question is really for Samsung and LG what the pace of their facilities will be. There, I think there's some feeling that they might be slower, but we don't have any specific start dates from either one of those. Clearly, once we have an understanding of those two, that could influence our capital. I don't think it will have much impact at all this year, and the impact would be next year, assuming that we're building it and Samsung Corning is not.

Speaker 3

Got it. Great. Thank you.

Speaker 4

Next, we're going to Jim Suva with Citi. Please go ahead.

Speaker 3

Thank you. Congratulations to you and your team on great results.

Speaker 7

Thanks, Jim.

Speaker 3

The question I have is, you know, Gorilla Glass is, you know, definitely attractive to the market, and you put out a goal of about $1 billion for the year. Can you help us understand a little bit about is that assumption, you know, primarily or almost all of it on the tablet smartphone side, or how should we think about it as it relates to, say, versus the other things like LCD TVs, automotive, architectural? How does the pie kind of split up when you see the future there for this year and maybe even going further down the road?

Speaker 5

For this year, we're not expecting anything of architectural and automotive. I mean, we'd love to ship a few pieces, but, you know, it's not going to be meaningful. It really is all around the IT handheld market and then TV cover. We have TV cover in our forecast originally for several hundred million dollars. We're prepared for the fact it might be less than that, in which case we believe we could use some of that capacity to sell more IT and handheld. That's where all the action is.

Speaker 3

Great. A quick follow-up back to the gross margins. Can I just clarify a little bit for the way the accounting goes? I believe, if I'm correct, you have a little bit of a headwind in Q2 for the gross margins because the operations will be higher than the sell-through. In Q3 and four, that should revert to be more favorable for the company. Is that the way the accounting works? Even though I'm a CPA, it's been an awfully, awfully long time since I've actually run the numbers.

Speaker 5

I think I need you to be very specific about which business you're talking about.

Speaker 3

Sorry for the display.

Speaker 5

In display, what's happening is from the accounting perspective is that, even though our demand is our sales are down in Q2, we're continuing to run and build inventory. Therefore, we absorb the fixed cost on that end inventory, but obviously, we miss the benefit of the sales, if you will, the standard gross margin of sales, which is quite high for display. Assuming that we then sell that inventory out in the back half of the year, we get that sales and standard gross margin, but obviously, we've already gotten the fixed cost absorption on.

Speaker 3

Great. Thank you very much. Congratulations to you and your team.

Speaker 5

Thank you, Jim.

Speaker 4

We will go to Mark Sue with RBC Capital. Please go ahead.

Speaker 3

Thank you. Jim, recognizing that TV applications are still very early for Gorilla Glass, is there any early feedback from some of the consumers? Is the price premium something that's resonating? Is there something that Corning might do to kind of stimulate the TV application, or do you think it just kind of takes a little bit of time?

Speaker 5

I have no retail feedback. I don't expect these televisions actually to be in big box retailers until the month of May. You can see them on some online services, but I have no retail information. In terms of what we can do, we're looking to see what we can do to help promote these when they finally get to retail and support it with our Gorilla campaign. Beyond that, that's all we're doing.

Speaker 3

In terms of framing it for next year, should we kind of take the several hundred million that we thought this year and might think about that as an opportunity for next year?

Speaker 5

It's just so hard for us to judge right now. I mean, we're at this stage where we got to find out whether consumers like the TVs. They're really beautiful. They obviously are more expensive, and we'll have to see. It's just too early for us to judge what the impact is going to be next year. We're hopeful, but I think we'll all have some information by the time we get to the July call to see how well they're selling.

Speaker 3

Helpful. Jim, separately, the strength in telecom, is some of that related to catch-up from delayed projects, particularly maybe in Europe? Do you think the strength is related to the beginning of new carrier projects, which points to sustainability?

Speaker 5

Catch-up may not be the right word. It may be that there were projects that we had previously expected in Europe that, as we went through the financial crisis, didn't start when we thought they were going to, and we're now seeing that. Some people view that as catch-up. We just view it as it's great that people are finally doing the fiber-to-the-home projects, and they feel confident enough about it.

Speaker 3

That's helpful. Thank you and good luck, gentlemen.

Speaker 5

Thank you.

Speaker 4

Next, we're going to Yair Reiner with Oppenheimer. Please go ahead.

Speaker 2

Yeah. Just a question on competition first. Has the earthquake in Japan at all changed the competitive dynamics? Have you seen your competitors, perhaps, hobbled in ways that you haven't been? Kind of related to that, can you talk about what the factors have been behind your apparent significant share gains in the market, in the display market over the last, I would say, two or three quarters?

Speaker 5

On the latter on share, this was clearly our strategy once we had enough capacity again to try and get back with our large customers what we had lost when we had the problems from the original earthquake and the original power outage. We've always thought that we would be able to gain some share points back once we had capacity, and that's what we were able to do. Relative to competition, in Japan, we have not seen any material disruption as a result of either of our competitors having any problems. I think both have announced they had minor issues. We did provide some small Gen Glass to one of our customers to make up for something that one of our competitors couldn't supply. These were very tiny amounts.

Basically, I think that our competitors are continuing to operate, and we're not seeing any advantage given to us as a result of that. Frankly, I just have to say, I mean, we don't wish damage on anybody as a result of natural disasters.

Speaker 2

Yeah, thank you. In terms of FX, can you clarify what you're assuming in terms of FX, Japanese yen to the U.S. dollar for your second quarter guidance, please?

Speaker 5

We basically assume, where we exit the quarter, that's what we assume for the going forth quarter. We're not the greatest at predicting the yen exchange rate, so we just use the average for the most recent quarter and predict that again for the second quarter.

Speaker 2

You're not really reflecting the recent strengthening of the Japanese yen over the last couple of weeks?

Speaker 5

The yen has, you know, if you look over the month of March, after the earthquake, the yen went from basically 82 down to 76, then up to 85, and now it's back to 82. Basically, it's been average. The average in quarter one was 82. It's 82 today. That's what we used.

Speaker 2

Great. Thank you.

Speaker 4

We will go to Ajit Pai with Stefan Niklas. Please go ahead.

Speaker 3

Good morning.

Speaker 4

Morning.

Speaker 3

A couple of quick questions. The first one is just looking at your Specialty Materials segment. You know, before the slowdown and before Gorilla Glass, the revenue run rate of that business was, I think, close to about $400 million. Right now, just looking at the semiconductor capital equipment market and the other sort of end markets that are served outside of Gorilla Glass by that business, do we expect that business to come back to those prior levels of 2006, 2007, and then the $1 billion of potential Gorilla Glass on top of that? You're looking at about a possible $1.4 billion. Whether that's in 2011 or 2012, can you give us some color as to how to think about the non-Gorilla Glass side of that business?

Speaker 5

The non-Gorilla part of Specialty Materials is very much driven by the cycle of semi-equipment, is what you've talked about. Clearly, that potential does exist. You know, we're not quite as bullish as some people are on the semiconductor cycle, but definitely, that potential could exist.

Speaker 3

Got it. The second question is, just looking at a very solid balance sheet and the two sort of mid-size or small acquisitions as to the overall operations that you have as a company have made in telecom and then in life sciences. Could you give us some color as to whether that's going to continue to be an active part of Corning's strategy going forward and whether the size, relative scale of operations is going to be similar and what's going to drive the kind of companies you'd be looking at?

Speaker 5

We expect to be very active from an acquisition point of view, but the size could vary. The two places that we are looking primarily are Life Sciences and telecom, and the size could vary. There's nothing imminent, but we're working very hard to see whether we can improve the growth of the sales and profits of the company by adding acquisitions to our innovation.

Speaker 3

The last question would be looking at your emerging technologies, both the reactor technology side as well as your photovoltaic technologies. These are areas that you've been, we've been discussing now for a while. Could you give us a progress report over there, if any kind of milestone over the next 12 to 24 months that we can expect from these businesses?

Speaker 5

I don't have any update on the reactor business, but in the photovoltaics area, I think we'll be able to give you an update in the quarter two call.

Speaker 3

Okay. Thank you so much, and congratulations on a great quarter.

Speaker 5

Thank you.

Speaker 6

Thanks, Raj. Hey, John, we've got time for one more caller.

Speaker 4

That'll be a follow-up from Wamsi Mohan with Bank of America. Please go ahead.

Speaker 5

Yes. Thanks for taking the follow-up. Jim, could you comment on what % of your LCD glass output is now XG Slim and where you expect that to be at the end of this year?

Oh, I'm sorry, Wamsi. We're not giving out the %, but it definitely has been moving up each quarter.

Would you say it's the majority of your shipments now?

No, it definitely is not.

Okay, thank you.

Speaker 2

Jim, just a couple of closing comments for me. First of all, from an investor relations perspective, we'll be presenting at three conferences in the next few weeks. On May 16th, we'll be at the JPMorgan Technology Conference in Boston. On May 23rd, we'll be at the Barclays Americas Select Conference in London. On June 2nd, we'll be at the Bernstein Strategic Decisions Conference in New York City. Just a couple of quick follow-up comments. We are absolutely delighted with our position in entering Q2. We had a great first quarter based on broad-based strength. Over my 38 years with the company, it's very rare for us to have all of our segments pulling in the same upward direction. We are very pleased about the display industry in total being cautious about inventory building in Q2.

In the last five years, whenever the industry overbuilt inventory, it always started in Q2. We are very happy about our environmental segment making progress in improving gross margin. We believe this segment will be a big contributor to Corning. Gorilla demand remains very strong. We're making excellent progress in building our new businesses such as photovoltaics, and we plan on discussing our progress in this area in the summer. Ken?

Speaker 6

Thank you, Jim, and thank you all for joining us today. A playback of the call will be available starting at 10:30 A.M. Eastern time today. It'll run till 5:00 P.M. Eastern time on Wednesday, April 27, 2023. To listen, dial 800-475-6701. The access code is 199-110. Audiocast also available on our website during that time. John, that concludes our call. Please disconnect all.