Ladies and gentlemen, thank you for standing by. Welcome to the Corning Incorporated Quarter Three 2012 Results Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Instructions will be given at that time. If you should require assistance during the call, please press star then zero. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Director of Investor Relations, Ann Nicholson. Please go ahead.
Thank you, Greg, and good morning. Welcome to Corning's third quarter conference call. Jim Flaws, Vice Chairman and Chief Financial Officer, will start the call with some prepared remarks. Wendell Weeks, Chairman and Chief Executive Officer, will join us for the Q&A. Before Jim 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. I'd like to turn the call over to Jim.
Thanks, Ann. Good morning, everyone. As we enter the fourth quarter, I'd like to step back a little to reflect on the past 12 months for Corning before I cover the Q3 details and the Q4 outlook. Corning's identity and strategy have been in place for a number of years and remain unchanged. We are the world leader in specialty glass and ceramics. We grow primarily through internal innovation led by our R&D in material science and process engineering. This focus allows us to innovate and create keystone components that establish market-leading positions in a variety of industries. We pursue this vision by adhering to a strategic framework, which guides our decisions and helps us navigate good times and their opportunities, as well as the potential volatility of our industries in the macro environment. We emphasize different parts of the strategic framework in response to changes in our environment.
The best current example of the framework helping us is our ability to push forward on innovation and develop new businesses like Gorilla, and also fund shareholder-positive actions despite a weak macro environment and turmoil in the LCD and photovoltaic industries. One year ago, we entered the fourth quarter of 2011. We were experiencing significant changes. On the positive side, our financial health and declining need for capital expenditures led the board to act to return more money to shareholders with a 50% increase in the dividend and starting a $1.5 billion share repurchase. We were also experiencing positive momentum in our Telecom, Environmental, Specialty Materials segments, led by increasing sales and improving margins.
However, on the negative side, we had experienced a significant share loss at a large LCD customer in Korea, and also were entering into what turned out to be a 2-quarter period of significant price declines for LCD glass. At Dow Corning, our equity venture, we began to experience a collapse in the pricing of polysilicon for the solar market. These events led us to announce to investors at the beginning of 2012, the company would experience a reset to a lower level of profitability. We laid out a plan for 2012 of forming bottoms, primarily by stabilizing display performance and returning positive momentum to this segment, and also by marching up, improving our earnings by growing sales and improving margins in our other segments. We felt and continue to feel this plan will result in a return to earnings growth for Corning.
Now I'd like to give you a brief summary of our progress against this plan before I turn to the Q3 results. I'm pleased to say we've made good progress against these goals, especially in light of the current global economy. We've held LCD glass pricing to moderate declines in Q2 and Q3, and we now have new agreements with key customers that we believe will stabilize our share, all the while diligently managing our LCD glass capacity to the level of demand. I'll discuss the new agreements in more detail later. We've also had some positive revenue and earnings momentum in our other segments. While telecom will likely not meet our internal growth goals for the year, it remains well-positioned in key growth markets for when the economy picks up.
As of Q3 year to date, Specialty Materials sales are up 13% and even more in gross margins. With the pending close of Discovery Labware acquisition in Life Sciences, it will become nearly a $1 billion business. Our Environmental business is feeling the effects of slowdowns in the auto business in Europe and now the Class 8 truck industry. I'd like to remind you that earlier this year, we secured long-term agreements with key diesel customers, positioning us for future growth driven by diesel engine regulations. We have several innovation programs with the potential for explosive growth. We continue to feel good about the growth prospects of the non-LCD businesses, our innovation portfolio, and the expected free cash generation of display in the company as a whole.
These strengths, coupled with our continuing financial strength, led the board to increase the dividend by 20% earlier this month. We've also expressed some worries about the economy on both our Q1 and Q2 calls, and unfortunately, some of these are now coming true. We're now at the point where the macroeconomy is weakening, affecting sales across most of our businesses, with several not achieving the growth we had laid out at the beginning of the year. We believe this weakness will continue into next year. Therefore, as part of our plan to grow earnings, must be to contain costs. We're currently thinking through several cost-cutting measures, including slowing project spending. Trimming fixed costs through restructuring, which will likely include headcount reductions and slowing capital spending.
We've not made a final decision yet, but we anticipate taking a pre-tax charge of up to $50 million in the fourth quarter. Now I'll turn to the third quarter details. I'm pleased to announce that our results, both sales and earnings per share, were above consensus for the quarter. Third quarter sales were $2.04 billion, up 7% versus Q2 and down 2% from a year ago. Having sales above consensus has been a feat this quarter, and I'm very pleased that we did it. Gross margin was 43%, up about one percentage point as expected. Higher volumes in Display Technologies and Gorilla Glass drove the improvement. SG&A and R&D were flat on a dollar basis. Versus a year ago, SG&A was up as a percentage of sales due to the non-repeat of two events that occurred in Q3 2011.
We had credits then resulting from a reduction in contingent liability associated with an acquisition in telecom, and we also had reversed an accrual for performance-based compensation. Equity earnings were $230 million, excluding specials, and were down about 11% sequentially and in line with expectations. EPS, excluding special items, were $0.34. That's 10% higher than Q2, but obviously a material decline from a year ago. EPS stated here is a non-GAAP measure, and a reconciliation to GAAP can be found on our website. I'll turn to our Q3 segment results, and I'll start with Display Technologies. Display Technologies sales were $763 million in Q3, an increase of 19% sequentially and down 6% versus last year. The yen exchange rate was not a factor comparing Q2 to Q3. Equity earnings from our joint venture in Korea, SCP, were $187 million in Q3, an increase of 2% versus Q2.
For modeling purposes, SCP's Q3 LCD sales were about $745 million, an increase of 1% from Q2. As a reminder, this represents SCP's LCD sales only. Our public filings report SCP's total sales, which include CRT glass and other products. As we expected, LCD glass price declines in Display Technologies were moderate in Q3 at both our wholly owned business and SCP. LCD glass volumes also met expectations. Our wholly owned business volumes were up about 20% sequentially, driven by customer utilization increases. Volumes at SCP were up in the mid-single digits sequentially in line with their customer utilization rates. The combination of moderate price declines, high capacity utilization from the higher volumes, solid manufacturing execution led to an increase in gross margin and net income sequentially. On the supply chain front, we've come through Q3 inventories about 15 and a half weeks on a forward-looking basis.
Because Q4 is seasonally larger, these weeks of supply are actually misleading. We believe the supply chain built a little over 350 million sq ft of inventory through the first three quarters in preparation for this seasonally strong Q4. I'll comment more on the outlook and risks in the supply chain in my outlook session. As final retail data for Q2 has come in and Q3 begins to come in, we are now lowering our view of retail glass demand to be approximately 3.5 billion sq ft. The reduction is from the continuing sluggish worldwide demand for monitors. We now believe monitor demand will decline year-over-year versus our previous view of flat, and the reduced demand for television units. TV units are tracking to about 208 million units into retail, a slight year-over-year increase.
The good news in the television market is that large size televisions continue to sell well, driving the average screen size higher. If we compare our forecast to TV units at the beginning of this year and now, the increase in size has made up for 60% of the unit shortfall as measured in area. As I said in July, we believe the China region is our biggest risk. China's been tracking below our forecast overall in the first half. However, the new stimulus program implemented in August seems to be driving demand. Preliminary August units were up 14%, and early indicators on their Golden Week holiday sales appear in line with their expectations. We'll have some additional data on retail and our 2012 expectations in the appendix section of our slides, and you'll find them posted on our investor relations website later.
Now in telecom, sales were $523 million, down 6% sequentially and lower than our expectations. The sequential decline in this versus expectations was largely driven by lower sales in North America and Europe, offsetting growth in China. Europe's miss is mostly due to the softer economy. North America was down due to project delays and a second half decline in stimulus spending on optical cable in support of infrastructure projects. Compared to last year, Q3 telecom sales were down almost 7%, with strength in China offset by the lower sales across most product lines in North America and Europe. Net income for the quarter was consistent with Q2. Sales was offset by improvement in manufacturing performance and a reduction in operating expense spending.
However, net income was down year-over-year by 57%, or $47 million, due to the non-repeat of the contingent liability reversal from M&A of $22 million in Q3 2011. In addition, the compensation adjustment I already mentioned. Environmental sales were $233 million, down 6% sequentially versus our expectation of flat to up slightly. While we did see some sales increase in light-duty diesel after summer shutdowns, our orders for heavy-duty truck products declined substantially as our customers reacted to their negative net orders over the past six months and also began to manage inventory in lieu of slowing sales. Q3 sales were down year-over-year due to lower sales in light-duty diesel. Net income was down sequentially in line with the lower volume in heavy-duty diesel. Year-over-year, net income was consistent on the lower sales due to the improving heavy-duty diesel gross margin.
We had another very good quarter in Specialty Materials, with sales up 23% sequentially and higher than our expectations. Gorilla Glass sales hit a new quarterly record. Net income was up 74% sequentially, 55% year-over-year, driven by the continued improvement in Gorilla Glass gross margin. I'm delighted to say there are now more than 1 billion devices worldwide containing Gorilla Glass. It continues to be the cover glass of choice, with more than 33 brands as our customers. We believe the increased Q3 volume beyond our expectations was driven by new device introductions in IT and handheld. In Life Sciences, Q3 sales were down sequentially and worse than our expectations of flat to up slightly, but they were consistent year-over-year. The lower sequential sales were due to softening economy impacting end market demand and also distributor inventory carrying levels.
Net income was $9 million, down from Q2 on lower sales and higher M&A expenses, and also down versus a year ago due to these M&A expenses and foreign exchange rates. We are working with the government to get antitrust approval for the BD acquisition. We expect we will get this approval very soon. More importantly, we remain excited by this transaction. After we close the deal, provide more details on our plans. Moving to Dow Corning. Equity earnings were down 38% ex specials in Q3, mainly due to the lack of two non-recurring gains from Q2 and also a higher effective tax rate in the United Kingdom based on tax law change. Sales in polysilicon were down on exports of solar to China. Our speculation, this is due to the trade disputes.
Versus a year ago, silicone sales are up slightly, but polysilicon sales are much lower, driven by dramatically lower pricing due to the continued softness of the solar market. This is reflected in the year-over-year equity earnings decline of 57% ex specials. In Q3, Dow Corning also recorded a $20 million NPAT credit for a contract settlement. Corning chose to not reflect our share of this gain in our non-GAAP earnings for the quarter. Dow Corning did resume paying dividends in Q3. Corning received $50 million in dividends Q3 from Dow Corning. Moving to the balance sheet. We ended the third quarter with $6.4 billion in cash and short-term investments. Capital spending was $422 million. Free cash flow for the quarter was a positive $214 million. As a reminder, free cash flow is a non-GAAP measure, and a reconciliation to GAAP can be found on our website.
We also continued our share repurchase program during the third quarter. We repurchased 187 million shares in the quarter, leaving us with about 125 million left on the authorization entering Q4. We entered the quarter with approximately $2.36 billion of cash in the U.S. As I mentioned in the Life Sciences section, we have not received FTC approval for the BD transaction yet. BD transaction will be primarily a U.S. cash acquisition. If the transaction closes this year, as we expect, our U.S. cash should end the year about $1.4 billion. We expect capital spending for the year to be approximately $1.9 billion. Our current expectation, capital spending in 2013 will be $1.3 billion. I'll turn to our outlook, and I'll start with Display.
As we near the end of October, input from panel makers indicates continued strong utilization levels that, if maintained, would result in a Q4 glass market sequentially of flat to down low single digits. However, our top-down look based on retail demand trends and the level of inventory leads us to a view that the Q4 glass market could decline sequentially between the low single digits and the mid-single digits or slightly worse than the panel maker's input to us. We're basing the guidance for Corning on this top-down look at the market. Based on this view, we expect volume of our wholly owned Display business in SCP to be flat to down low single digits. Our new agreements with key customers stabilize share at specified levels will help achieve this volume performance.
For glass pricing, the new agreements we have entered into mechanisms that establish a relationship between Corning's price and the market price. These new customer agreements will assist us in maintaining Corning's market position at specified levels. We believe these new agreements will allow us to manage our capacity more efficiently and enable us to continue to improve on our cost position. However, as a result of the agreements, we do expect slightly higher price declines in Q4 than the prior two quarters. We expect to maintain high levels of utilization at our wholly-owned manufacturing sites as a result of these new agreements and have no plans to expand LCD production capacity beyond our committed supply. Our new LCD facility in Beijing is now melting glass, and we are shipping into Q4.
This facility provide our Beijing customer with outstanding local service while allowing us to direct capacity in Taiwan and Japan to the very rapidly growing Gorilla Glass business. To close on display, and I'm sure just until the Q&A portion of this call, as the LCD industry continues to mature, we believe going forward, we'll enter a new era marked by more stable share and slowing price declines. We believe our customers will benefit from our recent actions as it stabilizes supply, allows us to invest in innovation for their current and future technologies. Now moving to telecom, we expect Q4 sales to be consistent versus Q3, with normal seasonal declines offset by realization of some of those delayed projects from the third quarter.
We believe our telecom sales will be up in the low single digits for the year, obviously less than our original expectations established in February, but solid nevertheless, given the European economy and slowdowns in some projects. Environmental, we expect sales to be consistent to down slightly sequentially with some seasonal decline from auto customer holiday shutdowns. Specialty Materials should have another strong quarter led by Gorilla Glass. Expect sales to remain at the high level of Q3, led by growth in IT and handheld Gorilla sales, offsetting slowing sales of our semiconductor products. Life Sciences, we expect sales to be down about 5% on normal seasonality. At Dow Corning, we expect equity earnings to be up about 25%, driven primarily by tax rate decline.
Continuing on with the rest of our Q4 forecast, we expect gross margin to decrease by almost a percentage point, driven mainly by pricing and display. SG&A and R&D will be consistent as a percentage of sales in the fourth quarter. Equity earnings excluding special items should be down about 5% sequentially. Our tax rate for the year will be about 19%. For FX, the yen has been relatively stable for most of the year. We're hopeful there'll be no weakening. As a reminder, our results move with changes in the yen to US dollar exchange rate. A weaker yen lowers our results. A stronger yen helps. If the yen averages one point higher and lower in Q4, we estimate our sales and net income would increase or decrease by approximately $6 million. That concludes my opening comments. I'll turn it back to Ann.
Thank you, Jim. Operator, we'd now like to open the lines for questions.
Okay. Ladies and gentlemen, if you wish to ask a question, please press star then one on your touch-tone phone. You will hear a tone indicating you have been placed in queue. You may remove yourself from queue at any time by pressing the pound key. If you're using a speakerphone, please pick up the handset before pressing the numbers. Once again, if you have a question, please press star one at this time. One moment please for the first question. Your first question comes from the line of Mark Hsu from RBC Capital. Please go ahead.
Thank you. Jim, if we consider LCD TV penetration rates, it appears future LCD demand will be increasingly driven by replacement. More and more, it does seem the macro can extend replacement rates for LCD. If we add to this the concerns on monitor demand, which is tied to PC units, which has turned negative, I'm wondering if glass volumes may not grow next year unless the environment gets better. Maybe just your preliminary thoughts on just volume growth as we move forward, that would be helpful.
We're planning on volume growth next year in the business. Obviously, that's somewhat dependent on where the supply chain ends this year and amount of inventory, because I indicated they built quite a bit. We believe that we'll see growth in the glass market next year. We think televisions will grow. We have to keep reminding everybody that size matters here. The fastest-growing segment is the 50 inch and above, and obviously that's a lot more glass for us. Actually, one thing that's very interesting about the television market this year, sales of televisions below 30 inches, the units are actually negative year-over-year. That's making it look like the television unit growth is not as great. Obviously, could be influenced by tablets. When you look at the 30 to 40 to 50, and 50 and above, we're seeing good growth rates.
If you take out the small size, you are seeing good unit growth, obviously the area is really helping us. We are planning on the glass market growing next year, we'll give out a number in January after we see how the supply chain finished the year.
Can I add to that? I think if you take a look at this year, which certainly hasn't been the easiest economic environment ever, it's easy to forget that with the price moves down in LCD, that you're not seeing the revenue growth. Volume growth is actually quite robust. There's nothing about that dynamic other than you can have, in a given quarter or 2, supply chain moves one way or the other that we think change is going forward. There's going to be more displays sold in the future than there are now, it's going to continue to be robust. The key thing is getting pricing stable and continuing to drive new apps.
The pricing, the changes that you just made early on in the year, we made some price changes, we saw moderate price declines. I'm going to see a dip in the near term with the new price agreements. How does that revert once we start to the year? Does that kind of normalize? The net of it for the full year is still a lower moderate rate of declines for overall pricing.
Well, we certainly hope so. Perhaps it'd help if we explained in a little more detail how it is our agreements with customers are working and what's changed. Let's start with the way our previous agreements worked. We would set a price. We would go out with a price, then usually competition would have to price under us to get share. Over time, our premium would build up with this approach, leading to share volume and price volatility, usually in times where supply and demand got a little bit off-kilter. Let's talk about our approach now. What we've done with these new agreements is to set our market share and set a fixed relationship between our price and the market price.
With the agreements that are starting in quarter four, there'll be an initial correction to take into account the premium that had built up under the old agreements. That is captured within the guidance you heard from James. Let's talk about going forward. If you just think through the game theory and think through how these things actually work, logic would lead you to conclude that this new approach should give us steady share at the customer and allow us to smooth our operations as well as reducing price volatility. Of course, the underlying foundation for all of this is always managing glass supply to demand. As we look forward, barring supply chain motions in any given quarter, we expect very high utilization, and we're not planning to expand our capacity beyond committed supply.
On the supply and demand, also, I think something people don't always think through is what we have done to create more balance. First, we're getting the increased capacity to serve the growth in the display industry from increased productivity, a combination of thin as well as running better. That has continued to improve the supply level, right? Our costs tend to be by the pound, and we sell by the square foot. As we increase our output, what we're doing is we're freeing up capacity to serve the high-growth Gorilla Glass market, which we're also taking thinner. This combination does a couple of things. First, it makes it possible for us to more closely match supply and demand, which aids in the pricing of LCD.
Second, quite importantly, it enables us to grow our revenues without having to invest as much capital, which increases the cash returns for our shareholders and improves our ROI. As I describe the totality here, you see what we're trying to do is set the table to be able to have an environment of better price stability as well as better cash returns for our shareholders.
I see. It does cap your market share near term, but improves profitability longer term.
Well, I think cap is an interesting word. What we seek to do. Let's take a look at what's happened over the last year. Basically, as Jim said in the opening, we had a series of motions at a particular customer where one of our competitors tried to significantly increase their share. Here we are a year later. Worldwide market shares are basically where they started before all that. Okay? What has happened is just a lot of motion underneath the water, but we're back to pretty much where we were before this whole thing started. We're not seeking to gain share overall as a company. We're happy in the leadership position that we're in. What we're seeking to do is have better stability of our volumes, and to have a less volatile environment. We think that's good for our customers. We think it's good for the industry.
That's helpful. Thank you, gentlemen, and good luck.
Thank you.
Your next question comes from the line of Amir Rozwadowski from Barclays. Please go ahead.
Thank you very much, good morning, folks.
Good morning, Amir.
Just to follow up on Wendell, on some of the commentary around this sort of set relationship and pricing versus market pricing. Does it still involve a premium to competitors? Does the mechanism adjust intra-quarter? Specifically, is there some sort of ban for market share or if a customer underperforms in a certain quarter, can they have any sort of outlet for the extra glass supply? Just trying to understand the dynamics of the pricing structure.
Well, I'm not going to comment on the exact relationship between our price and the market price for obvious competitive reasons, right? Now, to the will we see intra-quarter motion? The idea behind the agreements is that the share is set, as well as the fixed relationship. In any given quarter, even for the year, we should not see motion in the share figure. You can see motion in the price figure, and then, of course, overall market demand can move up or down. Our share figure locks down. What that would mean is that most of the dynamic in our customer's supply chain would be played out with the other glass suppliers as opposed to us. That make sense?
That's very helpful. Switching gears a bit away from pricing. You folks have been very proactive in terms of returning cash to shareholders with the number of dividend increases. Obviously, getting towards the tail end of your buyback allocation. I was just wondering in terms of strategically, you mentioned CapEx is coming lower, cash flow generation seems to be improving. Is share buybacks part of a longer-term strategy for the company at this point? Should we expect some sort of additional announcement post the completion of the current allocation? I would love to hear some color from that standpoint.
The board will consider returns to shareholders probably on a regular basis. As you saw in October, Amir, they moved the dividend up by 20%. It's now up 80% over a 12-month period of time. I'm sure they'll consider also our cash position and where the cash is and think about share purchases again. I would not anticipate an immediate announcement. The board will continue to monitor this on a regular basis.
Great. Thank you very much for the incremental color, folks.
Your next question comes from the line of Amitabh Passi from UBS. Please go ahead.
Hi, thank you. Just maybe a big picture question, Jim, Wendell, for either of you. I was curious, how did the quarter progress? Did you think trends got worse through the quarter? I'm just trying to get a sense. It looks like your year-over-year trends have improved, yet your tone extremely cautious. I was just trying to get a sense for whether you think the environment's worsening, or do you think we're seeing some level of stability at these levels?
Well, clearly as quarter three unfolded, we saw some step downs in two of our businesses. That really occurred primarily in August in telecom and environmental, where environmental, we saw cutbacks in orders from heavy duty truck makers. In telecom, we just saw business not materializing that we expected. I would say environmental is continuing to get worse. Telecom has been relatively stable since that step down in August.
I think the reason that you see the mix is, on the other hand, display as the quarter moved its way through, both display and Gorilla were good. Gorilla got extraordinarily good and continuing really strong momentum. I think when you step back and look at the total, the strength in our glass side more than offset any issues on telecom and environmental. Why you hear the mix in tone is that we want to make sure that we're cautious in the economic environment that we face. At the same time, we're happy with the way in which we're playing out our hand in display. In those areas where we've got big innovations, you're seeing them behave like big innovations, which is no matter what the wind, you tend to sail pretty fast.
Maybe just as a quick follow-up, Jim, the $50 million in restructuring you're taking in the fourth quarter, how should we think about the associated savings related to those cost restructuring plans?
I'm not prepared to give you the number yet, it clearly will be more than what the charge of the restructuring is. By the way, that $50 million we expect to be mostly cash. There's no asset write-offs in it.
Okay. Thank you.
Your next question comes from the line of Jagadish Iyer from Piper Jaffray. Please go ahead.
Yeah, thanks for taking my question. Two questions, Jim. First, I'm trying to reconcile, you had made a commentary that panel makers utilizations are improving. Why should pricing decline in such a scenario in Q4? I just want to make sure that I understand it correctly. Is that for a single customer, or is it across the board?
I think I made the comment that customer utilizations improved in Q3. We expect them at best to be similar in Q4, maybe slightly down. From price point of view, our perspective is that we are in a consumer electronics industry. Price is going to come down over time. Our goal is to have price declines every quarter to be moderate, if we can. The increase in Q4 versus Q3 on price is, as Wendell indicated, related to the new contracts and some catch-up. Our price declines are not just at one customer.
If you take sort of at the base heartbeat of what we are seeing on the pricing in quarter four, as Jim described, it is that moderate price down that we seek, and that we think is going to continue going forward. Then it is just a matter of that switch in approach ends up with us having to overcome sort of that premium that just builds up over time under the old way.
Just as a follow-up, Jim, you had talked about that six- to seven-year timeframe where the product gets refreshed. Given the macro situation in terms of how we see the uncertainty, how much conviction do you have that this is likely to materialize going forward into O13? Thanks.
You are talking about the six- to seven-year replacement rate?
Exactly.
We remain pretty confident about the replacement rate. Sometimes we see events like in Japan, where through the echo point, they kind of pulled forward all their replacement rate into a concentrated period of time. Our evidence says that the replacement rate is continuing to be along with our expectations. Obviously, you have some places in the world where macro events can overwhelm that. If your economy is really terrible, and clearly in some of the Southern European countries, that's obviously occurring. In terms of the fundamental of people replacing LCDs, we're now starting to get to the point where in some markets, LCDs are crossing over that five-year age, and that's where we start to see it, and we are closely monitoring it, but we still think it's going to happen.
I think the other place you've got to look to for replacement rate is the new technologies that are coming. Now, it's really hard to tell what year they'll have an impact. Whether it's 2013, 2014, that's hard to tell. However, what's easy to tell is that they will. In very large size displays, you have a tremendous amount of innovation that you're not quite seeing yet, but we are because we're working with folks on it, that are going to change the way the customers experience flat panel displays, and that will help spur it. Then the other is take a look at notebooks, is one thing we know with high degree of confidence is touch is going to come to notebooks. I've seen a lot of the new product sets that people are working on to do that, and they're quite exciting.
What we don't know is when the combination of Windows 8, the brands who are designing these new types of notebooks, and Intel with some of the processing piece, that it all comes together in a compelling package. Is that 2013? Is it 2014? It's hard to tell. What is pretty easy to tell is that is going to lead to both a strong refresh cycle as well as a nice new demand for us on both the touch and the monitor side.
Thank you.
Your next question comes from the line of Ehud Gelblum from Morgan Stanley. Please go ahead.
Hey, thanks. It's Ehud. A couple quick things. I apologize for this. Going back to the new contracts on display. Are all the glass providers, so your competitors in Japan, and other, have they agreed to similar contracts? Is this kind of an industry-wide thing, or is this something that Corning initiated separately? Does this go across all of your customers, including BOE and Samsung's new China business that you're supporting? I know it was asked about inter-quarter pricing, but just to understand the mechanism, you're guaranteed a certain percentage, I assume, or share of each one of these customers' requirements each quarter, and they decide what the price is? Does it change from quarter to quarter? Just a little bit of flavor around that would be helpful, and then I have a follow-up on Gorilla.
Okay. Jim will probably help me through it because you have a lot of questions buried in there. First one was, what are our competitors doing? I don't know. You should ask them. The second one on sort of what customers have we reached these type of agreements with, the ones that we consider to be significant from a volume standpoint, as well as how that particular dynamic is playing out in the customer on what they want to do and how they want to work their way through it, and each customer is a little bit different.
The final one is asking on the mechanics basically of it is what we would expect in any given quarter, that once the market share already is set guidance across that year, then in any given quarter, our price is set with a fixed relationship to the market price, which we would expect to stay for a given quarter, so there should not be significant inter-quarter moves, assuming that it all works the way we're planning for it to work. If that is the way the mechanics work. That make sense?
A little fuzzy. Who decides the market price and how does that determine? Does that change from each quarter to each quarter?
There'll be a level of detail underneath that I'm not going to want to go into. It is, what is the actual market price? Then there'll be a fixed relationship between that and our price, which should account for any sort of noise that may be in differential perception.
Okay. Helpful. Jim, CapEx guidance, basically in line for 2013, but a little bit on the higher side of your previous guidance. With macro getting worse, could we see CapEx actually perhaps come down from that $1.9 billion for 2013? Then kind of a big picture question, I guess, back to you, Wendell, is Gorilla Glass and autos. That's always gotten me excited. How far away is that? You talked about that at the Analyst Day earlier in the year, but is that something we can look at in the next couple of years, or is that more like five or six years away?
Also, Ehud, on the capital, you may have misspoken, but the $1.9 is this year. Our number for next year is $1.3. That was our number that we've had for a while. In the July call, we said we had some risk that it might climb. We now think it won't climb, so we're very confident about the $1.3. It's possible it could be lower, but it's $1.3 for next year.
To automotive, we're getting some really nice pull and engagement, actually, as recently as this last month. That's the good news. I think you just got to keep in mind that the automotive industry does not move like tech and consumer electronics. Even once you have a platform win, it's a while before that platform win turns into commercialization. It's got a little bit slower heartbeat, as much as both us and our customers probably wish it went a little faster.
Great. Appreciate it. Thank you.
Your next question comes from the line of Patrick Newton from Stifel Nicolaus. Please go ahead.
Good morning, James and Wendell. Thank you for taking my questions. I guess the first one, I'm trying to understand the variance in Display Technologies results from your very strong wholly-owned business and somewhat weaker SCP results. I was hoping you could discuss share at the problematic customer earlier this year and I guess later last year, whether that stabilized, grew, or contracted sequentially. Also thoughts on share at that customer on a go-forward basis. Additionally, Samsung announced, I believe it was on Monday this week, that they're terminating their LCD contract with Apple, and I wanted to get your thoughts around how this announcement perhaps impacted SCP's 3Q results and how this could impact your wholly-owned business on a go-forward basis, given your exposure to Apple's other qualified suppliers. I have a follow-up.
Okay, I'll try and take some of these, maybe Wendell will take the Apple question. Our wholly-owned business was quite strong as we expected when we entered the quarter. That was driven primarily by increased utilization in Japan. You may recall in Q2, our primary customer there had lowered their utilization quite a bit. We expected it to come back, and it did in Q3, and that really drove the larger increase because of that. We had good demand at our other wholly-owned customers, especially in China. For Samsung Corning Precision, basically they have two customers. The utilization rate at those two customers didn't change very much during the quarter, so we didn't really expect to see much change in demand there. Relative to the one customer, we announced that we had a deal with them for the entire year.
I think we made that announcement in the spring, there really hasn't been any change with that customer since the spring. We obviously expect to continue to supply them and have not yet entered into negotiations for next year, but will and hope to be a supplier with them and continuing what we've done for the latter part of the nine months of this year. Wendell, I'll turn it to you to talk about Samsung and Apple.
For mental and physical health, we try never to talk much about anybody who lives in Cupertino or Seoul. I don't want to comment on any of that dynamic. What I will do, though, is at the core of your question, sort of gets into very high-performance displays, do we have really nice channel to market, either through a direct relationship with the brands or through the appropriate players in the panel display chain. I'd say we feel good about that. Actually, with what's going on for us right now in high-performance displays or those very high pixel count displays, as well as creating back plane engines for things like OLEDs, we are feeling stronger and stronger with every passing month rather than vice versa.
All right. Well, I guess it was worth a try, Wendell. I guess for my follow on, Jim, I kind of want to ask the same kind of display pricing but in a different way, just looking at the P&L and on gross margin. If we look at gross margin, I understand that the guidance for sequential decline, I think you said it pertains to a pricing reset in display in 4Q. If I take your comments about, I guess, the preliminary expectation of volume growth in the display business in 2013, should we expect to see an improving gross margin trajectory as we move through the year, given that preliminary thought?
Obviously, it'll be a combination of what the volume is for next year and what pricing is for next year. If we achieve what we hope to on moderate pricing and have that carry for the entire year, and with the volume that we think it's possible, you might see a slight increase in Display gross margins. Clearly, relative to the corporation, it will depend on what the other businesses are doing. The good news for us right now is Gorilla is well above the corporate average, and therefore, like we've experienced in years past with Display, when it's pulling strong, it actually is helping drive our corporate number up. In the future, when I talk about our corporate gross margins, hopefully they'll be less all about Display margins and about the impact of Gorilla helping out.
All right. Thank you for taking my question.
Your next question comes from the line of Steven Fox from Cross Research. Please go ahead.
Thanks. Good morning. Two questions, please. First of all, with return to forward technology trends, I think Apple was highlighting on their new product introduction yesterday, the use of thinner glass, and I was curious if that announcement in any way is accelerating the use of thin glass, and if you could tie that into sort of where we are with Willow developments, whether you've had any progress during the quarter. Secondly, if we could just talk a little bit about diesel and Gorilla Glass gross margins. Putting aside the volumes for a second, can you talk about where operationally the gross margins are, whether there's more room to improve or you have them at optimal levels? That'd be helpful. Thanks.
Great. On the forward tech, once again, we're going to follow our general rule of never talking about anybody who lives in Cupertino or Seoul. I will now generalize. We're continuing to see, really, a trend that we started in glass, which is to push towards thinner, to gain more and more momentum. You see that in a variety of different product offerings, and it's really validating our strategy, from a technical standpoint and from a productivity standpoint. That's great. On Willow. Willow is a really big idea that we continue to make good progress on, both in our ability to do it in commercial levels of production, as well as market development.
That being said, because it's a big idea, in any given quarter, it ain't going to feel like there's a lot of progress on the outside, because until the fundamental supply chain, it changes so much that you're going to take a while for a really strong, obvious market pull to arrive. Then when it does, it will scale very rapidly. It'll be one of our classic innovations where everybody will go, "What's going on? I haven't heard a lot about Willow." Then it'll turn on like a light switch and be really big. Which exact market it's going to hit first in is hard for us to tell. We certainly feel good about our progress so far on that. Jim, do you want to touch on margins, and then I'll build on diesel?
I would say on Gorilla, we still feel the potential for margins to improve. Okay. They're really quite good right now. We're delighted by them, we think they have potential to improve. On diesel, one comment, my own take is that we made quite a bit of improvement in diesel margins, I think we still have manufacturing projects that when we have the volume, will allow our gross margins to improve in diesel also. Okay. Without doubt, that's the case. We got a lot of momentum there. Now we just need the volume to come on back, which I'm certain that it will. When is hard to tell, people are going to buy heavy duty trucks again.
Great. Thank you very much.
Your next question comes from the line of Simona Jankowski from Goldman Sachs. Please go ahead.
Hi. Thanks very much. A couple of questions. First, when you talked about exiting the quarter with 15 and a half weeks of inventory, can you just remind us how that compares to what would be a normal level of inventory heading into Q4? Put another way, if you can just try to quantify the amount of exit inventory that you see right now and where those pockets are.
We would say, normal is hard to judge in this business because of all the cycles we've seen. I would say it's definitely more than what we expected to have to be there. I would say that from our perspective, we would say it's probably 50 million sq ft, 50 million-70 million more than what we would have expected at this stage. The thing that's harder for us to judge is as the LCD business has grown rapidly in what I'll call the more emerging markets, and in China as it's expanded in the more rural regions, is whether the supply chain is more inefficient, and therefore, that's a reason why we may be seeing more. I would say that's my characterization of the risk of too much inventory right now heading into the fourth quarter.
Implicit in your guidance for Q4 is that you think some of that may get reduced, which is why you're taking a more conservative stance than what the panel guys are saying. Why do you think that you have that different view than the panel makers? Why are they not seeing the same dynamics as you are? Why are they still planning to run at equal, if not slightly higher utilization levels into Q4?
This comes down to something we've been debating with ourselves, is we could fundamentally be wrong, and there may be stronger demand that they're seeing that we're not, and therefore, they have good judgment why they should keep running, and they're not going to end with that much inventory. That obviously would be a good news story for us. That they don't end up with inventory and retail is stronger. We may be subject to our particular modeling and our experience with the volatility of the supply chain in the past. They may be right, and if they are, we'll be happy to ship it to them, and we'd be delighted if they ended with less inventory and better retail.
Okay. Just to follow up on the whole contract pricing discussion. You mentioned that you have done these contracts now with a number of your larger volume customers, but that some customers like one of your SCP customers, you have yet to renegotiate a contract into next year. Can you just give us a sense of roughly, are you done with the majority of these at this point, or do we have another sizable chunk ahead? The reason I ask is just trying to anticipate if we may see another pricing reset next quarter as kind of the next chunk of customers get into these kind of pricing readjustments.
We wouldn't expect the sort of correction of a premium to be a recurring theme, because at the core of what we're doing is to have this set relationship. That being said, I think the key thing to watch for as we go forward is going to be supply and demand and balance, what's happening overall with the market. I think that will be more of the leading theme, as well as, is the table that we have tried to set here, is that end up playing out the way that we would hope that it would? The logic would say it ought to.
Just to be clear on why you would not expect the correction of a premium to occur for one more quarter. Is that because the amount of volume that at this point has been renegotiated is much larger than what remains to be negotiated? Or is it just because the one that remains, the potential adjustment is much smaller?
I'd say the first is a more correct statement than the second.
Got you. All right. Well, thank you very much.
Your next question comes from the line of John Roberts from Buckingham Research. Please go ahead.
Thank you. Does Dow Corning have its own restructuring plan in addition to what Corning's talking about here?
Dow Corning does have their own restructuring plan. They've been reducing people ever since the second quarter. We're not anticipating any special charge. They've been doing it on a consistent basis.
Scope it out for us at all? Will it turn their earnings, do you think? Do they exit the quarter still declining in terms of earnings?
It all depends, John, on Hemlock, that's the wild card there. As you know, going into the polysilicon crisis that occurred actually about this time a year ago. This was an extraordinarily profitable business, pricing has plummeted, now we've seen demand in China plummet with the trade wars. That overwhelms. I think the silicone margins are likely to grow slightly.
We have time for one more question, Greg. Okay. That question comes from the line of Mehdi Hosseini from Susquehanna Financial Group. Please go ahead.
Thanks for taking my question. Going back to earlier questions about the industry. How should I think about penetration of LEDs into the overall TV market? I'm asking that because it seems to me that we're exiting 2012 with like a 70% penetration. Yes, there's growth for the larger size LED TVs. Does that not imply that despite inventories that are coming under control, there could be below average growth until the next catalyst for the replacement appears? Any thoughts you have will be great. I have a follow-up.
Sure. On LED penetration, I'll just give you some statistics. Actually, the place where LED penetration is really low is the U.S. It's only achieved slightly over 50%. Japan is the highest. That's probably no surprise. It's in the eighties. Europe has been moving up, but it's still only getting 70%. We think LED is an important part of the replacement factor. It makes what used to be a thin television super thin. As you see the ads for this upcoming holiday season, people are emphasizing thin. I think LED is still a driver along with other improvements in the technology.
What is the overall penetration? We're exiting 2012 with like a 70% penetration. Yes, there's growth for the larger size LED TVs. Does that not imply that despite inventories that are coming under control, there could be below average growth until the next catalyst for the replacement appears? Any thoughts you have will be great. I have a follow-up.
Sure. On LED penetration, I'll just give you some statistics. Actually, the place where LED penetration is really low is the U.S.
We're exiting 2012 with a 70% penetration. Yes, there's growth for the larger size LED TVs, does that not imply that despite inventories that are coming under control, there could be below average growth until the next catalyst for the replacement appears? Any thoughts you have will be great. I have a follow-up.
Sure. On LED penetration, I'll just give you some statistics. Actually the place where LED penetration is really low is the U.S. It's only achieved slightly over 50%. Japan is the highest. That's probably no surprise. It's in the 80s. Europe has been moving up, but it's still only getting 70%. We think LED is an important part of the replacement factor. It makes what used to be a thin television super thin. As you see the ads for this upcoming holiday season, people are emphasizing thin. I think LED is still a driver along with other improvements in the technology.
What is the overall penetration worldwide as we exit 2012? Are you implying that it's actually well below 70%?
Yes, I do believe it's well below 70%, yeah.
Got it. Then on the Gorilla and more on the mobile market, should we expect typical seasonality into early next year, especially with some of the OEM partners that are already out with their new products? They may take a pause until the next refresh comes in.
We don't have, unfortunately, a typical seasonality with Gorilla that we've been able to prove. Part of this is that the supply chain is actually far longer in the Gorilla cover glass business than it is in the LCD business. Obviously, there can be some large customers who can have an influence when they do a big rollout. We've seen customers do more frequent rollouts of models, so it's always possible we have a pause, but right now we're having a hard time keeping up with our customer demand for Gorilla.
Got it. Thank you.
Okay. I'd like to wrap up. I just have a couple of comments here. First, from an IR point of view, we will be speaking at the UBS Global Technology Conference in New York on November 14th, also we will be at the Credit Suisse Technology Conference in Scottsdale on November 27th, we're delighted to see our investors there. In terms of summarizing some of the things we've talked about today, we think we've made excellent progress on our plan to stabilize display and grow our earnings potential in the other businesses. In display, we're delighted with our new agreements with key customers, and we think they will give us strong benefits in 2013. Demand for Gorilla is very strong, we expect it to continue into Q4. We've got very good operating cash flow.
The board reacted by increasing the dividend 20%, increasing our 12-month increase in dividends to 80%. We obviously are feeling some effects of the macroeconomy, but management is reacting quickly to control costs through the restructuring and will offset some of those impacts and hopefully allow us to grow earnings in 2013. Lastly, I'd like to make one comment. First of all, on Ken Sofio. Ken continues to progress and appreciates very much people who email him. Second of all, I'd like to thank Ann, Linda, and Kelly for stepping in and doing a great job with IR over these past few months. With that, I'll turn it back to you, Ann.
Thank you, Jim. Thank you all for joining us today. A playback of this call is available beginning at 10:30 A.M. today and will run until 5:00 P.M., both Eastern Standard Time on Wednesday, November 7th. To listen, dial 800-475-6701. The access code is 266618. The audiocast, of course, is available on our website during that time. Operator, that concludes our call. Please disconnect all lines.
Thank you. Ladies and gentlemen, that does conclude your conference for today. Thank you for your participation and for using AT&T executive.