Welcome to the Corning Incorporated October 22 Conference Call. It is my pleasure to turn the call over to Ann Nicholson, Division Vice President of Investor Relations. Please go ahead.
Thank you, Rich. Good afternoon and thank you for calling in on such short notice. Purpose of today's call is to discuss new agreements we're entering with Samsung. With me today is Wendell Week, Chairman and Chief Executive Officer and Jim Floss, Vice Chairman and Chief Financial Officer. Wendell will provide you with an overview of the strategic and financial agreements with Samsung and their benefits to Corning.
We will then conduct a Q and A session. Although we release preliminary Q3 results today, we will only take questions that are specifically related to these agreements with Samsung. Before Wendell begins, I'd like to remind you that today's remarks contain forward looking statements that fall within the meaning of the Private Securities Litigation Reform Act of 1995. These remarks involve a number of risks, uncertainties and other factors that could cause actual results to differ materially. These factors are detailed in the company's SEC reports.
Now, I'd like to turn the call over to Wendell.
Thanks, Ann. Good afternoon, everyone. I am genuinely excited to discuss a series of agreements that launch a new chapter in our 40 year relationship with Samsung and deliver important financial and strategic benefits to Corning. 1st, we are strengthening our Glass Technologies business by obtaining full control of our global Fusion assets. 2nd, we're broadening our relationship with 1 of the world's leading electronics companies as we expand our technology collaboration and they invest in Corning's future.
And third, we are gaining significant financial benefits that deliver attractive returns to shareholders including immediate accretion and a long term source of cash flow. Let's review the agreements. 1st, Corning is acquiring full ownership of Samsung Corning Precision Materials Company. Upon completion of this transaction, we will integrate SCP's Fusion assets into our existing capacity. This creates a greater flexibility in asset use as well as improved operational efficiencies.
2nd, we are establishing a 10 year supply agreement with Samsung for LCD glass taking us through the year 2023. 3rd, we're extending our joint development efforts in both advanced glass and non glass technologies, expanding our collaboration across a broader scope of Samsung's products and initiatives. 4th, Samsung is taking a direct investment in Corning, which we believe demonstrates their confidence in our technologies and future opportunities. Finally, Corning will launch an incremental $2,000,000,000 share repurchase already approved by our Board of Directors and effective PON transaction close. Now we realize this is a complex announcement.
So here's a look at how it all works. 1, Corning obtains the 50% of SCP we do not already own in exchange for issuing convertible preferred shares valued at $1,900,000,000 to Samsung and about $300,000,000 cash to minority shareholders. 23, Corning and Samsung have new strategic agreements building on our long standing very productive joint efforts. I'll talk more about these in a moment. 4, Samsung purchases additional convertible preferred shares in Corning for $400,000,000 cash.
At closing, Samsung's total preferred shares will give That said, Samsung's ownership interest in Corning is capped at 9% and the shares come with limited rights. 5, the cash flows from this series of transactions enable Corning to launch an incremental $2,000,000,000 share repurchase program. Now before I talk about all the benefits, I think it's helpful to share some history on our relationship with Samsung. In 1973, we formed our 1st equity venture to manufacture and sell glass for black and white CRTs in Korea. This initial collaboration with a relative newcomer in the consumer electronics field turned out very well for both of us.
The venture allowed us to bring our technology to a new market and enabled Samsung to become the world's largest producer of black and white televisions. In the subsequent 4 decades, we worked together to bring color CRTs and LCDs to the Korean market, forming SCP in 1995 to make LCD glass. We launched our latest venture in 2012 to co develop OLEDs. In addition to these commercial initiatives, we formed CorSM in 1989. This equity venture for glass technology research has led to many co development efforts during the last 25 years.
To date, our work together has resulted in sales of approximately $50,000,000,000 net income of $15,000,000,000 and 100 of patents. For over 4 decades, we demonstrated a consistent track record of technology innovation and market leadership in the display industry. Today, we begin a new chapter that we believe will continue to drive our mutual success and deliver outstanding benefits to stakeholders. I'll drill down into the financial benefits in a minute, but first let's talk about the strategic value of the collaboration. Corning and Samsung are sharing in the risk reward of the LCD business by including a repricing mechanism in the terms of the SCP transaction.
If there are unexpected moves in LCD glass prices, volume or foreign exchange rates, we will adjust the purchase price to more accurately reflect the value of SCP. We've also agreed to a 10 year supply agreement for LCD Glass. This agreement ensures demand for our product, while ensuring Samsung's supply from the world's leading producer of LCD glass. Next, our deeper technology collaboration enhances our own ability to innovate. The existing Samsung Corning Advanced Glass Equity Venture will continue.
And CoreSam will explore expanding into programs like Willow Glass for conformable displays as well as other Corning technologies that address new markets. Direct leadership engagement by both Corning and Samsung increases our ability to make decisions quickly and respond to new market opportunities. Finally, Samsung's investment in Corning indicates their confidence in our technologies, our industry leadership, our ability to collaborate successfully and our opportunities for future revenue and net income growth. Now let's take a closer look at how full ownership of SCP strengthens our Glass Technologies business. Now there are many advantages to owning these assets, including greater flexibility in meeting the needs of our customers.
SCP is currently restricted to supplying LCD glass in Korea. Through this transaction, we are unlocking this low cost underutilized fusion capacity for any specialty glass product in any geography. This improves our ability to supply and collaborate with all of our customers regardless of where they are located in the world. We also expect lower capital spending as a result of this additional capacity and our ability to better manage all Fusion assets. Thus, we will reevaluate the previously announced joint investment for a new LCD glass plant in China.
Also these assets reduce the capital investment required to enter entirely new market for Specialty Glass. I'll now turn to the financial returns this series of agreements provides for Corning and our shareholders. This chart shows our estimated cost savings from synergies over the next 4 years. These synergies come from manufacturing optimization as well as fixed and operating cost savings. As you can see, we expect savings beginning in the 1st year and increasing to more than $100,000,000 annually.
Pretax, we expect synergies to total $460,000,000 through 2017. So why do we use equity to fund this transaction? We believe that the preferred share approach best meets each company's objectives, while also honoring our commitment to create value for shareholders. We will issue convertible preferred shares valued at $2,300,000,000 that equate to 115,000,000 common shares if converted. They have very favorable terms with a low 4.25 percent coupon and a high conversion premium of approximately 35%.
Now they do add to our fully diluted share count. However, the incremental $2,000,000,000 share repurchase more than offsets these additional convertible preferred shares. So overall, we believe the terms are extremely attractive for shareholders. This chart summarizes the payment terms and related agreements. Now I just want to call out some key components.
The preferred shares are not convertible for 7 years. After that, they can be converted at a ratio based on a price of $20 per common share. They pay a dividend of $98,000,000 annually. The shares have no voting rights and no Board seat for Samsung. Upon conversion, Samsung will vote its common shares with the Board.
As I already noted, their ownership interest is capped at 9% for 20 years. We believe this is an exceptional use of Corning's capital, providing immediate accretion and significant shareholder value. There are 2 main drivers of the financial returns, net income and cash. Corning's net income increases with the consolidation of SEP's net income and the synergies I've already outlined. We expect to add approximately $2,000,000,000 in sales $350,000,000 of net income annually.
The additional cash unlocked from SCP's balance sheet plus the expected future free cash flows enables Corning to repurchase additional shares. The combination of additional income and share repurchases provides accretion of about 20% in 20142015 on a fully diluted basis. Now I'd like to remind you that the $1,500,000,000 remains on the share repurchase program that we announced last April and we intend to complete this program. Now there are some moving parts on the cash component. So let's spend another minute here.
Corning will gain $1,300,000,000 on our balance sheet when the transaction closes. This slide shows the cash we gained from SEP's balance sheet, adds the cash received from Samsung for their additional convertible preferred shares and subtracts our payment to SEP's minority shareholders. And we expect additional future cash flows. Instead of the dividend payment we received today, we received 100% of SCP's future free cash flows plus cash from the synergies. We expect this to total about $2,000,000,000 over the next 4 years.
This strong free cash flow affords us numerous opportunities to create value for investors including additional share buybacks, dividends as well as strategic investments in growth opportunities. I'll end by summarizing the impact of today's We believe this is terrific news for Corning, Samsung and our shareholders. The $2,200,000,000 investment to take full ownership of SEP has an attractive payback period and is protected with the repricing mechanism. The transaction unlocks cash and enables an additional share repurchase of $2,000,000,000 more than offsetting dilution. We expect immediate accretion of about 20% in 2014 and 2015.
The consolidation of SGP shows the full economic impact of our display business with total sales, net income and cash on our financial statements. And our deeper collaboration with Samsung reduces our risks, enhances our product development efforts and increases our market opportunities. With that, I'd like to turn the call over to Anne for the Q and A. Anne? Thank you, Wendell.
We'll now open the lines for questions for about the next 30 minutes. As a reminder, we're only taking questions regarding our agreements with Samsung. Rich?
We'll first go to the line of Steven Fox with Cross Research. Please go ahead. Thanks. Good afternoon and congratulations on a truly excellent acquisition that you guys are embarking on. There's a lot of numbers that you gave.
It sounds like you provided a lot of numbers for us to dig into. I guess I would want to start off maybe just by understanding a little bit more of the rationale behind the deal. Specifically, Wendell, you mentioned synergies that you could realize between the two companies from the standpoint of Samsung and Corning combining sort of assets. Can you talk about how that would work? And then secondly, anything else that sort of drove this deal to happen now versus maybe something you could have done a year ago or 3 years ago?
Thank you very much. Thanks, Stephen. So let's start with the synergies and where they come from. So what we have in SCP is some of our lowest cost production assets in our system. And what we're going to be able to do is combine these with our overall Fusion platform to drive down cost.
It will also save operational cost because we'll have a much simpler go to market strategy. And then finally, we'll have a lot lower fixed cost. So we haven't really counted any of this any of the potential revenue enhancements that also come. The numbers we've just gave you are straight up what we can do in cost reduction by having access to this asset set and incorporating it in our fully owned system. Great.
And I guess sorry to interrupt, but I guess what I was interested in maybe a little bit of an expansion on those you mentioned new markets that you could enter because of this agreement and the new relationship with Samsung or the changed relationship with Samsung. Can you sort of give us a clue as to what that could mean for Corning over the next few years? Sure. I can touch on it. First, one of the things that enables us to do I think important to remember is, SCP was a regional joint venture.
We had 100% of our Fusion assets outside of Korea and 50% inside Korea. And its history is that it was built when the world was more regional. Now we're really part of a global platform. So what we're enabled to do here with this transaction is take a landlocked asset which could only serve Korea and also an asset set that could only serve liquid crystal display technology and instead transform it to be able to serve any market with any specialty glass products. So that's where we start with the base manufacturing asset.
In addition, we're announcing a series of collaborations with Samsung across a broader base and you'll hear more about those as we go forward. At the core of Samsung's interest in this is they believe that our technologies and our innovations will become increasingly important to the consumer electronics industry and they want to have the ability to collaborate with us in those spaces. Great. That's all very helpful. And then just sort of the impetus for the transaction now versus other times that you couldn't possibly done this?
Well, I think what happened is that with the success of Gorilla, with the strong progress that we've made in high performance displays, with new product sets like Willow, AR Easy Clean, Antimicrobial and a bunch of other things that we haven't announced yet, but that Samsung has deep insight to in our roadmap. Samsung became very interested in making sure that they would have an opportunity to participate in the growth of those innovations and had an assured supply of their ability to get access to them. And so what they wanted to do was to be able to participate in that growth and benefit from it as an investor at $20 a share. And we also committed to becoming a development partner with broader tech collaboration. And of course, we assured our supply to them for the next 10 years.
Great. Thank you very much. Congratulations again. And we'll now go to the line of Jim Suva with Citi. Please go ahead.
Well, thank you and congratulations. Can you elaborate or give a little bit of example on you mentioned if the price of future glass or demand characteristics in the industry change that there'll be some pricing adjustments. Can you just help us better understand that maybe by an example or what you mean? Sure. I'll start and then maybe Jim can add.
So obviously we had a valuation case that led to our ability to value this business. And today we start out with both Corning and Samsung owning 50% of it. Now there are factors that could impact that valuation. And we pulled out 3 of them that are most important. First was the price at which we sell LCD glass.
2nd is the volume of LCD Glass sales to Samsung. And then 3rd, the exchange rate. As you know, we sell in yen. The manufacturing costs here are in yuan and we report in dollars. So the way this works is to the extent that any of those 3 are different than what we assume within the valuation case, we will adjust the price of the transaction after a period of time.
So what this does is it sort of derisks the investment for both sides. On the rewards side, if it turns out that the price of the glass is significantly higher than what we had in the valuation case and Samsung would benefit from that with the repricing mechanism, but also vice versa is true. Jim, would you want to add anything to this? No, that's great. Thank you and congratulations.
And we'll now go to the line of Simona Jankowski with Goldman Sachs. Please go ahead.
Hi. Thanks very much. I just wanted to understand how this might affect your relationship with LG Display, which I think has been historically a customer for SCP?
Well, we think overall this is going to benefit all of our customers, because it enhances our ability to act independently across the globe. So now we can serve all of our customers directly and in lower cost. And we maintain our independence is absolutely critical to innovation. Now as pertains to LG, we think they would benefit from this as a customer directly of Corning. That being said, we're happy with our share at LG as it stands and we look forward to serving them directly.
And related to that, how will glass pricing to Samsung be determined? Will that be contract driven as opposed to spot? And how will it relate to the pricing that your other customers get?
So we're not sharing the details of our long term supply agreement today, but we are happy with the pricing mechanism. And also remember that it links closely to the repricing mechanism that Jim Suva just asked about. So this allows us to derisk the pricing aspect of the long term supply agreement as far as it relates to the transaction itself.
And then just last one for me is you mentioned that you're rethinking the China investment. I think you had preliminarily guided for CapEx of about $1,300,000,000 for next year. Do you have a sense of how that might change now?
The $1,300,000,000 was our the company as you knew it before. It never included obviously the China plant because that would have been an SCP spend. And but we're not expecting to spend that money in 2014 at all. We're rethinking how much capacity is going to be needed now that we can operate this entire fleet of tanks to maximize the business. So we certainly don't expect to have to spend money in China in the near term.
But as far as the $1,300,000,000 does that go up because you're now also absorbing the SEP CapEx or does that go down because you now have excess capacity?
We would absorb whatever SEP's normal maintenance spending would be. They were doing no expansion spending. So we will give you a guidance on that, but their maintenance spending is now fairly low.
Okay. Thanks very much.
And we'll now go to the line of Rod Hall with JPMorgan. Please go ahead. Yes. Hi, guys. I just had a couple of clarification questions.
I just wonder, maybe Jim, you're the right guy to address this. Could you you guys may have addressed it already, but could you talk about the Samsung's inclination as far as the holding? I mean, it looks like they're limited to a 9% holding. Do Do you expect them over time to exit from the 7.4% they have? Or just how do you believe that they're likely to behave over the course of the future?
I mean should we be thinking about the 7.4% I guess as an overhang? And then Wendell, I just wanted to circle back to one thing you said. You said that they see the technology as more critical to them going forward. Could you is there any way to elaborate on that? I we understand how glass fits into the technology we think, but are there other things we should be thinking about here in terms of what you guys can do technologically versus competitors?
Thanks. Bharat, let me start. First of all, a reminder that Samsung can't convert these into common shares for 7 years. And second of all, in terms of an overhang, you ought to remember that we'll be reporting as if on a fully diluted basis. So those shares in effect are in our share count right away.
You're not waiting for them to fall later. And then we're going ahead with a share repurchase that effectively will offset that on our fully diluted earnings. So our immediate expectation is that they're holding this preferred for at least 7 years. Wendell, do you want to add something? Yes.
I'll just touch on a couple of items on that and then get to the Part B of your question. So just to elaborate with what Jim just said, the 20% accretion number that we gave you is on a fully diluted basis, right? So there is no overhang. If you wanted to count on a basic EPS that accretion level would be higher. Just before you answer the second question, could you talk about I didn't understand the conversion limitation on the 7 years.
I missed that. But could you talk about do they have an option to put the shares back to you guys? Or how do they exit prior to 7 years if they want to? They don't. So Samsung's interest here is they want to be a long term holder, right?
So from their perspective, this investment that's capped at 9% at least as far as the strategic intent is right now is a forever investment. I mean that's what's in their mind. They have a strong belief that our innovations will continue to have value. That being said, for the next 7 years, they can't convert these shares into common. Now to Part B of your question.
So I think one thing you need to understand is that someone like a Samsung or some of our other major customers end up having a much deeper insight into our road map and our inventions than we share publicly. So they are really experts in what it is we're doing and how it fits with what they're trying to do. And they also get a really good view from what our competitors are trying to do. As they work through all that knowledge that they came forward with this decision for this investment. I can't fully explain all the different elements within it because many of those products we are not public about at this time.
Okay. Thank you, guys. We'll next go to the line of Amitabh Posey with UBS. Please go ahead. Hi, thank you.
Jim, sorry to beat up on this, but I just wanted to clarify the 20% accretion that you're talking about, does that include the incremental $350,000,000 in net profits after tax plus synergies? And is that 20% above the consensus level of about $1,990,000,000 for next year? I just want to make sure we've got the baselines correct. We don't give guidance for next year. So we're estimating about against our plans what we thought the amount would be.
Okay. So that's relative to your plans? Yes. And then Wendell, maybe just a follow-up question for you. There's been some concern around the maturing of the LCD market and it seems like you're now sort of double downing on the strategy on the LCD display segment.
Just curious how you would sort of ask for any concerns that Fierce people have in terms of the maturation of the market, the supply demand imbalances that we see from to time and the pricing discontinuities that we see? Well, here's the way we think about it. Today, we own 75% of the economic interest in our LCT business. So this does add another 25%. At the same time, what we're enabled to do here is significantly reduce our cost.
Plus, these are fusion assets and these are terrific fusion assets. And we can use this, these same assets to do Gorilla Glass, to do Willow, to enter architectural, automotive all the different initiatives that you see us have around flat glass all can use these assets. So yes, we pick up another portion of our LCD business, But at the same time, we unlock these assets to be able to use them to serve a number of different growth opportunities as well. Okay. Got it.
Thank you. We'll next go to the line of Wamsi Mohan with Bank of America. Please go ahead. Yes. Hi, Randall.
This is Ruplu filling in for Wamsi today. Just wanted to ask a little bit on the SP assets. You talked about them being underutilized. Just kind of wanted to get your sense on how much of those assets is actually offline? And you talked about potentially converting some of this into Gorilla.
So do you have an estimate for how much you'll keep as LCD and how much you'll convert to Gorilla? Any thoughts on that? This is Jim. Let me start by saying the reason there are assets offline at SEP relates to 2011 when we had the significant step down in share at LG. We've not disclosed the amount that's offline, but I think most people are aware of the share went down significantly that SCP had with LG and that generated quite a bit of excess capacity.
SCP, these tanks are capable of being switched into making Gorilla today. We don't have any immediate plans. SCP has actually made Gorilla for us in the past on a contract basis. So we think we've got some great assets that are low cost that are underutilized that we can make glass at the lowest cost facility for a worldwide market now for LCD, for Gorilla and other for future products. Okay.
Thanks, Jim. That was helpful. Just another clarification. The cash that's on SCP's balance sheet, would you be able to bring that to the U. S?
So overall as a result of this transaction, the combination of we're getting immediate cash because we'll be able to access that cash and the transaction actually is structured to get us incremental cash in the United States. So our cash balances in the U. S. At the end of at the time of closing will actually go up substantially. We'll talk more about that when the transaction is complete.
Okay. Thank you. We'll now go to the line of Mark Hsu with RBC Capital Markets. Please go ahead. Thank you, Jin.
Just a quick one, tax implications, if any, and also how quickly does the buyback how quickly can that start? And then, a larger question on the effect of pricing to other non Samsung customers, does this require renegotiation with the other customers do you think? Or does that just steady state at this moment? Thank you, gentlemen. Well, Wendell will handle the price one.
On the tax perspective, SCP has a tax rate of about 24% approximately. So as you do your modeling model in there net profit before tax, you can put that tax rate in that will be added to our tax. And I remind you to take out the equity earnings when you do that for the modeling. In terms of the buyback, we have about $1,500,000,000 outstanding on the $2,000,000,000 announcement that we made in April. We continue to work on using that money.
And then the incremental $2,000,000,000 the Board has approved, assuming the transaction will close. When it closes, that will be free for us to use. We haven't decided on the pace of that yet, but as soon as we do, we will let you know about that. We don't anticipate this to have any impact on our agreements with our other customers. As you know, we've made a lot of progress in how we work with our other customers and we're happy with those contracts and there's no need to renegotiate them as a result of this transaction.
Yes. That's an invaluable move. Thank you, gentlemen. We'll now go to the line of George Notter with Jefferies. Please go ahead.
Hi. Thanks very much, guys. Congratulations. I wanted to ask about the mechanism that adjusts the deal price given changes in volumes or price or exchange rate. How long does that mechanism stay in place?
It stays in place for the 1st 4 years of the transaction. Got it. Okay. Great. That's all I had.
Thank you very much. And we'll now go to the line of Jagadish Iyer with Piper. Please go ahead. Thanks for taking my question.
So Wendell you had addressed that you didn't want to comment on the pricing. But I just wanted to understand how should we be thinking about the share of Corning pre transaction and post transaction as we go along for the next couple of years? And then I have a follow-up.
So question for clarification. How we should think about the market share of Corning pre and post? Yes. Yes. So I think you should think about it as if you were to take Corning and SEP's market share together today, that's what we would anticipate in the future.
We are not viewing this in any way as being a share enhancement for the stabilizing transaction.
As a follow-up, I just wanted to understand how should we be thinking about the intellectual property post this transaction? Would if any development takes place would Samsung have any rights to the IP that is being developed there? Thank you.
So what we do with this acquisition is there's some intellectual property that is in existence in SEP. And a lot of the core of that comes from us because we are the technology partner in that venture. But there is additional IP. We now take 100 percent ownership of that IP and Samsung does not have any residual IP rights. Of course, if we do some unique development in the future, we'll probably keep the rights to the material set.
And when we enable a customer to do something unique in their products, quite often we allow them to have the rights for use in the product. That being said, you heard me talk about something called core SAM. What core SAM represents is an ability for the partners to share in real breakthrough ideas where they can see a tremendous benefit in their product and we can see a really unique product set. We're going to continue to work together in products like those. The example I gave for instance is we'll explore whether or not we want to work together on conformable displays in this format and the like.
Thanks so much.
Okay. Operator, Rich, we have time for one more question.
And that question will come from the line of Patrick Newton with Stifel. Please go ahead. Yes. Thank you for taking my questions. I guess, Wendell, first pertaining to your volume agreements with Samsung, you discussed some variables that adjust price based on volume, FX, etcetera.
I'm curious, do you have any minimum share guarantee with Samsung associated with this agreement? Yes. Care to elaborate? No. All right.
And I mean is the duration in line with the 10 year or is it similar to that a prior question where there's about a 4 year cap to that? It's 10 years. So what the benefit is to both of us is they need a short supply. We need a short demand. So it is a fixed share contract for those 10 years.
Okay. And given your earlier comment about stabilization or that this is a stabilizing transaction, is it fair to say that this share level is kind of at approximately where it currently stands? I think that's a fair characterization. All right, great. And then I guess for Jim, for the current buyback, will the remaining $100,000,000 or $1,500,000,000 be accelerated at all as a result of this downturn?
We're evaluating that as we speak. And as soon if we decide to do that, we'll let you know immediately. Great. And I guess just one last one. This has been asked I think a bunch of different ways.
I mean clearly this transaction makes sense financially for Corning and your core competencies. But put bluntly, do you have any comments on what is driving Samsung to exit their SCP position? Yes. So let's look at what SCP was. So what Samsung's interest in SCP is they had 50% of a Korea only and LCD glass only venture.
Samsung is becoming increasingly global and increasingly dependent on many other products beyond display. So from their perspective, they're able to swap that LCD only Korea only joint venture for an investment in Corning at an if converted basis of $20 a share. And they like the potential growth profile of that because of what they see as the relevance of our innovations beyond LCD display, if that makes any sense to you. Yes, absolutely. I appreciate the detail and congratulations.
Thanks.
Thank you, Wendell and thank you, Jim. Thanks everyone for joining us today. A playback of the call is available beginning at 6:30 p. M. Eastern today and will run until midnight Tuesday, November 12.
To listen dial 800-475 6701. The access code is 306, 287. The audio cast of course is available on our website during that time. Rich, that concludes our call. Please disconnect all lines.
Ladies and gentlemen, that does conclude your conference for today. Thank you for your participation and for using AT and T Executive Teleconference Service. You may now disconnect.