Ladies and gentlemen, thank you for standing by, and welcome to the Corning Incorporated 4th Quarter 2010 Results Conference. At this time, all participants are in a listen only mode. Later, there will be an opportunity for questions. Instructions will be given at that time. As a reminder, this conference is being recorded.
It is my pleasure to turn the call over to Mr. Ken Solfio, Vice President of Investor Relations. Please go ahead, sir.
Good morning. Welcome to Corning's Q4 conference call. This morning we have Jim Flawns, Vice Chairman and Chief Financial Officer, for recent prepared remarks for the Q and A. Those remarks do contain forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Those statements involve a number of risks, uncertainties and other factors that could cause actual results to differ materially and these risks are detailed in the company's SEC reports.
Jim? Thanks, Ken. Good morning, everyone. Hopefully, you had a chance to read the press release we issued this morning on our Q4 results. If you haven't, a copy can be found on our IR website.
This morning, I'll cover our 4th quarter results and Q1 outlook. But I would be remiss if I did not start the call with some thoughts on the past year. I think I speak for most of us when I say we often don't spend enough time reflecting on the past and what we've accomplished. We often turn quickly to the page to focus on the challenges that lay ahead of us. But after completing such a tremendous year in terms of both financial performance and product development, I think it's worth taking a moment to reflect.
We told you last February that our goal was to emerge from the recession as a stronger, more profitable company. I believe this is clear from our financial results, cash position and emergence of a new business. 2010 represented one of the most successful periods in the company's 159 year history. Our sales grew 23% with each segment posting solid year over year improvement. Display was up 24%, environmental 38%, life sciences 39% and specialty materials led by Gorilla Glass up 75% and telecom which we had been forecasting to be down was up 2%.
In fact, 4 of our 5 segments reached record sales in 2010. Our gross margin dollars increased with a 23% increase in sales. Our gross margin in percentage term expanded significantly from 39% in 2,009 to 46% in 2010. Every segment with the exception of 1 saw a year over year increase in gross margin dollars and gross margin percent. Display gross margins rebounded to their historical average.
Telecom increased 5 points, environmental 5 points, specialty materials 7 points and the one exception which was Life Sciences, where gross margin was flat. Our operating income excluding special items was $1,400,000,000 an all time record. Equity earnings grew 36% and reached nearly $2,000,000,000 again an all time record. Earnings per share excluding special items were $2.07 up 53% versus last year and another all time record. Free cash flow was an astonishing $2,800,000,000 another all time record.
We ended the year with $6,300,000,000 in cash, which provides us with the financial flexibility to not only continue to fund our R and D and capital expansion needs, but also supplement our organic growth through selective M and A. And beyond the financials, we strengthened our market position with new products and global expansions. This was an extremely fruitful year for the company in terms of new products and the advancement of our existing product lines. I won't spend time this morning walking through our new product offering. We're going to do that next week at our Annual Investor Meeting.
But out of all of our technical advances, I believe 2010 will best be remembered as the year one of our newest breakthrough products Gorilla Glass emerged as the cover glass of choice for handheld and IT industry and was identified by investors as a significant contributor to the future growth of the company. All in all, 2010 was an incredible year for Corning and I hope you'll all agree. Now let me take a few moments to discuss the 4th quarter results and update you on our businesses. 4th quarter sales for the company were $1,770,000,000 an increase of 10% sequentially and 15% over last year. Each segment grew sequentially and year over year, with the exception of telecom, which is down slightly sequentially as expected.
Our 4th quarter sales benefited by about $38,000,000 sequentially due to changes in exchange rates. Gross margin was 43.5 percent, slightly lower than quarter 3, but in line with our expectations. Gross margin included $16,000,000 in gorilla related project costs related to TV cover and another $8,000,000 in charges from the discontinuation of our green laser program. Neither of these was counted as a special item. For modeling purposes, we expect Rillow related project costs in Q1 to be minimal.
SG and A was $284,000,000 or 16 percent of sales, in line with our expectations. As a reminder, SG and A dollars are typically highest in our Q4. Typically, about 28% of our SG and A spending falls in the Q4 and this year was no exception. R and D was $166,000,000 or 9% of sales, also in line with our expectations. You should note that R and D included $7,000,000 charge related to the discontinuation of certain R and D programs.
In the Q4, we also recorded a $326,000,000 credit related primarily to the settlement of business interruption and property claims stemming from the earthquake and power disruption suffered by our Display business in 2,009. The credit was recorded in our Display segment and can be seen on our corporate P and L and restructuring impairment and other line. Insurance items were treated as a special item. The amount net of taxes was $206,000,000 Moving down the income statement, other income increased from 2 3rd quarter to $54,000,000 in quarter 4. As a reminder, Q3 included a $30,000,000 loss on retirement of debt and about $24,000,000 in pretax foreign exchange hedging losses.
Equity earnings were $511,000,000 in the 4th quarter and consistent with the 3rd quarter. However, Q4 included several one time gains that were treated as special items. Excluding the special items, equity earnings would have been down $408,000,000 down 19%. SCP recorded a tax credit in quarter 4, which our share was 61,000,000. Equity earnings from Dow Corning included about $42,000,000 in one time gains, including the release of deferred tax allowances and a tax credit on cash repatriated.
I'll have some additional comments on both equity companies in a moment. Our Q4 tax rate was only 2%, lower than the expected 5%. This was the result of $28,000,000 withholding tax credit on the SEP dividend. Net income excluding special items was $733,000,000 in Q4 compared to $808,000,000 in Q3. Net income benefited by about $40,000,000 from the translation from foreign currencies to U.
S. Dollars. EPS excluding special items was $0.46 Please note that both net income and EPS excluding special items are non GAAP measures. A reconciliation from these measures to GAAP can be found attached to our press release this morning and also on our website. Including these special items, net income was $1,000,000,000 and EPS 0.66 dollars Our share count for the Q4 was 1,580,000,000 shares and consistent with the 3rd quarter.
Now I'll turn to our segment results and I'll start with Display. Our Display segment results in Q4 were influenced by a change in regional customer utilization rates between Korea to Taiwan. This change resulted in stronger demand growth at our wholly owned business and weaker demand at SCP. I'll start with our consolidated results. 4th quarter sales were $750,000,000 an increase of 16% over Q3 and 5% up over last year.
Volume in our wholly owned business was up almost 20%, which is higher than our revised guidance in early December. Glass pricing was down in the mid single digits sequentially, in line with our expectations. Sales benefited from a change in the yen to U. S. Dollar exchange rate, which averaged 86% in Q3 and 83% in Q4.
Display gross margins were down just slightly quarter to quarter as the price declines were largely offset by the benefit of stronger demand and another excellent quarter of cost reductions. The higher than expected glass demand at our wholly owned business was the direct result of Taiwanese panel makers increasing their utilization rates in November December. We believe this was in response to strong demand for TV panels from China, anticipation of Chinese New Year, which starts in early February. As a reminder, the Taiwanese have strong strategic alliance with the Chinese television brands, which is likely why we did not see a similar trend to Korean panel makers. Regarding TV inventory levels in China, its parent that supply chain is gearing up for robust holiday season there.
If that occurs, then the current inventory levels are appropriate. The stronger glass demand at our wholly owned business prohibited us from building much, if any, additional inventory in Q4. As a result, we ended the year with healthy glass inventory levels at our own wholly owned business. SCP was a different story in Q4. The Korean panel makers lowered their utilization rates from the mid-90s in September to around 80% in November and lower in December.
We believe this was done to control inventory. In the past, we've seen Korean panel makers lower panel prices versus lowering panel production to spur demand and maintain healthy inventory levels. This time, they made the decision to keep panel pricing stable and lower their production instead. SEP's volume were down almost 15% sequentially. SEP did continue to run their operations at full capacity and as a result built some glass inventory in the quarter.
Regarding pricing, glass price declines at SEP were similar to our wholly owned business. For your modeling purposes, SCP's 4th quarter LCD sales were $1,000,000,000 a decrease of 15% from the 3rd quarter. As a reminder, this represents SCP's LCD sales only. Our public filings report SCP total sales, which include CRT glass and other product sales. Equity earnings from SEP LCD Glass business were $369,000,000 in the 4th quarter, a decrease from 4% in the 3rd quarter.
However, as I mentioned earlier, equity earnings included a tax credit of $61,000,000 Excluding this special item, equity earnings at SCP were down were $308,000,000 down 16%. I'd like to spend a few minutes discussing the current supply chain starting with retail. Retail demand in Q4 came in as expected or slightly better across all major product lines for which we have data notebooks, monitors and televisions. I'll start with the television retail data. Worldwide, LCD TV unit sales in retail were up 38% in October and 59% in November year over year.
We do not have complete data to provide worldwide growth figure for December. But the 1st 2 months of Q4 were much higher than anticipated due primarily to Japan. Japan had unprecedented year over year growth rates to start the Q4. In October, the Japanese government announced the Echo Point program subsidies associated with LCD purchases would be cut in half by December 1.
The
result, consumers purchased LCD televisions in droves in October November. October unit sales were up 2 21% year over year and November was up 4 35%. So in December, unit sales were down 31%. For the year, Japan was up 102%, far ahead of our expectations from the beginning of the year. And looking ahead to 2011, we do expect unit sales in Japan to be down versus 2010.
In the United States, LCD TV unit sales rebounded in November December. Each month was up 6% versus last year. So for the year, the U. S. Market ended flat.
As a reminder, our source for this data is primarily NPD, which does not include certain discount retailers such as Walmart or Costco. There is some belief that these discount retailers may have experienced higher demand for TVs in Q4. In China, LCD TV unit sales were up 18% in October and 25% in November. We do not have December data yet. So for the 1st 11 months of the year, China was up 37%, which was slightly higher than our forecast.
In Europe, LCD TV unit sales were up 5% in October 10% in November. Again, we don't have final data for December, but our preliminary estimate indicates it was up about 11%. For the year, then Europe would be up 15%, which was in line with our forecast. In the developing regions, emerging Asia sales were up 55% in October and 96% in November. South America sales were up 89% in October and 83% in November.
Again, we don't have December data for these regions yet. In summary, we believe total LCD TV sales shipped in December in 2010 will be close to 190,000,000 slightly higher than our expectation of $185,000,000 This would be an increase of 31% over 2,009. Turning to monitors. Sales continuing to track with our forecast. Our data here is based on shipment top 9 monitor brands, which make up about 70 percent of the worldwide monitor market.
Year to date through November, sales were up 6%.
For the
notebook segment, which includes traditional notebooks, netbooks, slates and tablets, our data is based on the 5 top ODMs, which make up about 75% of the worldwide notebook market. Year to date through November, shipments were up 21% and slightly higher than our forecast. So in summary, based on the data we have today, it appears that retail was in line with our expectations for Q4. Now regarding the supply chain in total, we believe there are about 16 weeks of inventory exiting the 4th quarter, which is right in line with our expectations and considered a healthy level heading into Q1. I'd like to close out my remarks on display with some summary comments.
We could not have been more pleased with our performance of our display business and how it met the needs of a much larger end market than we anticipated. If you recall back at our investor meeting, we forecasted the LCD glass market to be about $2,800,000,000 to $3,000,000,000 Based on our December estimates, we believe the total LCD glass market was roughly 3,150,000,000 square feet, an increase of 28% over 2,009. Our display business delivered both in terms of financial performance and product development. Biman, our wholly owned business, grew at the same rate as the overall glass market. Our 2010 display sales were over 3,000,000,000 dollars a 24% increase over 2,009 and an all time record.
Gross margins increased with the higher volume and ongoing cost reduction efforts. At SCP, display sales were almost $4,500,000,000 an increase of 17% over 2,009 led by significant volume growth. The total Display segment net income including SCP was up 50%. On the product development front, we introduced Eagle XG Slim, the first commercially available thin glass substrate. Today, most panel makers start with thicker substrates for portable devices and then use chemicals to reduce the thickness of the glass.
Eagle XGSlim is ready to use right out of the box. The benefit to our customers are substantial. Eagle XGSlim is currently available at 0.4 millimeters thin in sizes Gen 5 and smaller to address the portable device market. For larger gen sizes geared towards television and large monitor market like Gen 7 and Gen 8, it's available in 0.5 millimeters. Until now, those gen sizes have traditionally been 0.7 millimeters thick, so a move to 0.5 millimeters will provide a tangible benefit in the efforts to reduce the thickness and weight of television.
The market reception has been very good to date. Eagle XGSlim continues to ramp and we expect it to become a considerable portion of our volume this year. We're currently in the process of developing an even thinner glass down to 0.3 millimeters and we'll be demonstrating our award winning glass at our investor meeting next week. Now I'll turn to the Environmental segment where sales in the 4th quarter were $232,000,000 an increase of 12% sequentially, slightly higher than our expectations. Sales of light duty and heavy duty diesel filters drove our Q4 results.
As a reminder, the light duty filter market is driven by the Euro 5 filter forcing regulation. In 2010, this forcing regulation. In 2010, this regulation required emission control systems on all new model platforms. As more new models come to market, it generated additional demand for light duty filters. This year, 2011, Euro 5 tightens even further requiring mission control systems on all new auto production, not just new models.
In heavy duty, Q4 sales were also up nicely driven primarily by Class 8 engine production. In total, the quarter 4 diesel sales were $115,000,000 up 29% over the 3rd quarter. We were also pleased with the improved manufacturing performance of our diesel business during the quarter. We continue to be encouraged by the recovery in the truck engine industry. Industry reports indicate the monthly truck order rate hit a 4 year high in November.
While we haven't seen the final December data yet, we believe heavy duty truck engines will end the year up 16% and medium heavy duty and bus engines will end the year up 18%. Now while this is nice growth, it's still far below the number of engines produced prior to the 2,007 pre buy. We believe there is more growth to come in 2011, 2012 and that gives us confidence that our business will continue to improve. In automobile, quarter 4 sales were $117,000,000 and consistent with the 3rd quarter. The 4th quarter caps off an excellent year for our environmental segment both in terms of sales and manufacturing performance.
Environmental segment sales were $816,000,000 in 20.10, an increase of 38% and an all time record. Our auto ceramic substrate sales were $462,000,000 up 28%. Diesel sales surpassed $350,000,000 and were up 54%. We believe diesel is well on its way to hitting $500,000,000 in sales in the next 2 years. And in terms of manufacturing performance, the segment made significant progress in 2010, proving gross margin by 5 percentage points.
In summary, a very good year for the segment and one where we will see additional sales and gross margin expansion this year. I'll move to telecom, which had a strong year and started off 2011 with a bang. First, the 4th quarter numbers sales were $443,000,000 down just 5% sequentially, which was better than our expectations. Normal seasonal declines were less than we anticipated as we experienced stronger than expected demand across all our product lines in North America and Europe. Compared to last year, 4th quarter sales were up 9% driven by the excellent demand for our Prenti Image products for enterprise networks as well as demand for fiber to the home products.
For the year, telecom sales were up 2% for 2,009, which is better than we expected when entering 2010. We saw higher than expected demand across all product lines in North America and Europe and that helped offset the slowdown in China's 3 gs build out. Excluding divestitures, telecom sales were up 4%. Our bottom line performance was even more impressive. Telecom net income was $97,000,000 this year, up significantly from last year's 19,000,000 dollars This was the highest level of net income in the telecom segment since 2000.
Segment's bottom line performance was the direct result of cost reductions implemented 2 years ago as well as a significant increase in the mix of higher margin product sales, including our Perentium Edge suite of products. I can tell you that the market acceptance of Perentium has been nothing short of spectacular. We set out to establish ourselves as the technology leader of choice in the enterprise network space and I believe we have succeeded. Enterprise networks are one of the fastest growing segments in the telecom space and we are there to lead it. We are very excited about this growth opportunity.
We're also very excited about the fiber to the home market. We believe this market has the potential to be a significant driver of future sales and profits. Hopefully, you all saw the announcement last week from Australia's National Broadband Network, better known as NBN. NBN awarded $1,600,000,000 equipment contracts to 3 companies including Corning. Our initial award was for $1,200,000,000 over a 5 year period with the initial purchase commitment of 400,000,000 dollars NBN plans to connect up to 8000000 to 10000000 homes, which is over 90% of the country, with a network designed to provide download speeds of 100 megabits per second.
We'll be supplying much of NBN's fiber to the home product needs, such as aerial cable and pre connectorized outside plant hardware, including FlexSnap. FlexSnap is our state of the art fiber optic cabling system. We are absolutely thrilled to play a significant role in this historical project. In addition to NBN, we are a leading supplier to several other large scale fiber to the home projects, including 2 in Canada and another in Europe. Looking ahead to 2011, we believe we can significantly grow our fiber to the home sales.
Going forward, we expect fiber to the home market to look very different than in years past. Over the last several years, large scale projects by American carriers have dominated this industry. What we began to see in 2010 and what we'll continue to see in 2011 beyond is the emergence of a significant fiber to the home projects outside the United States. In fact, we believe fiber to home market this year has the potential to be the largest in history, which is meaningful when you think back how significant Verizon build out was as peak. In summary, our Telecom segment performed very well.
We remain very excited about the future growth opportunities in this industry. Now I'll turn to Specialty Materials segment, one of our fastest growing segments. 4th quarter sales were $197,000,000 increase of $38,000,000 or 24% sequentially. The increase is primarily due to the tremendous demand for Gorilla Glass for handheld and IT products. I'll talk more about Gorilla in a minute.
Segment gross margin also increased nicely due to the increased mix of Gorilla Glass. As a reminder, the gross margin included $16,000,000 in project costs. For the year, specialty material sales were $578,000,000 an increase of $247,000,000 or 75% ahead of the prior year. This is another segment with all time record sales. Gross margin increased by 7 percentage points over last year, again due to Gorilla.
Gorilla reached nearly $250,000,000 in sales in 2010 and exited the year on a run rate that was over $400,000,000 dollars It's hard to put in words how tremendous the interest level right now for Gorilla Glass from both our customers and retail consumers. For those who attended the Consumer Electronics Show, you have an idea of what we're talking about. For those who are unable to come to CES, I highly encourage you to come to our Annual Investor Meeting week at Cipriani in New York City. Attendees will have the opportunity to participate in several hands on demonstrations and see firsthand how durable and beautiful Gorilla Glass is up close. These are not just videos of how durable our glass is.
This is an opportunity for you to try to stretch it and break it yourself. In fact, these are the same some of the same demonstrations we do for our customers. And for those investors not seeing our online commercials for Gorilla Glass, go to corning.com to view the latest. I think they're worth it. I have some updated figures for you this morning on how well Gorilla Glass is doing.
As you will see, we're on our way on a lot more than just a handful devices. Gorilla Glass is now being used by 29 major brands around the world as cover material for handhelds, laptops, tablets and TVs. Our glass has now been designed in more than 350 different models, more than 190 of those in the market today, equating to approximately 200,000,000 devices. There are more than 35 other models to be released in the current quarter, which is why we continue to be excited about our sales growth this year. Additionally, at the Consumer Electronics Show this year, Sony announced the inclusion of Gorilla Glass on their large sized televisions as a means to eliminate the bezel and create a beautifully designed edge to edge effect.
These will be available at retail within a few months. Now for those investors who are worrying about competition, we have always told you there would be competition in this market. In fact, Asahi has been shipping covered glass and competing with us for some time. We believe Gorilla Glass is a superior product and the most durable cover glass in the market today. How do we know this?
Because the market has spoken. Gorilla Glass has become the cover glass of choice by all those different brands who put our glass on hundreds of their devices. You should never underestimate the importance of 1st mover advantage. Corning was the 1st to market with the best product and our product is still the best. Asahi has recently claimed their new glass is 6 times stronger than soda lime.
I'll tell you how you came up with that figure. There are multiple industry tests and many more tests at our customers. In the end, what our customers really care about is how durable your glass is after it has been abraded. That's the key, not relative strength because even soda lime is very strong until it becomes abraded. This is where Gorilla excels.
Gorilla is extremely damage resistant. We actually posted the results of these tests on our website months ago. In one of the tests, we have proven that Gorilla can be up to 10 times more damage resistant than soda lime after it's abraded. And that's the product we have on the market today, which is actually the 4th generation of Gorilla Glass. The Gorilla Glass we sell today is much more advanced than our last versions.
And as with all of our innovative creations, we continue to work to improve the technical advantages of Gorilla Glass. At Turning to Life Sciences, sales were $140,000,000 in the quarter, up 12% over the Q3. And for the year, sales hit $508,000,000 up 142 or 39% versus 2,009, an all time record. The increase was primarily due to our 2 recent acquisitions, but we had organic growth as well. Turning to Dow Corning, quarter 4 sales were $1,600,000,000 up 5% over Q3.
Primary driver was Hemlock, where sales were up 12% sequentially. Equity earnings were $124,000,000 in Q4 versus $97,000,000 in Q3. As I mentioned, quarter 4 equity earnings included $42,000,000 in one time gains. Without these one time gains, equity earnings would have been materially lower despite the higher sales. Results were impacted negatively by start up costs for the new facility in China as well as higher year end spending.
And I'd like to shift to the balance sheet where we ended the year with $6,300,000,000 in cash and short term investments, which is up $2,800,000,000 from where we entered the year. We're very pleased with the financial strength this level of cash provides us. We believe it gives us interesting options to supplement our organic growth. Free cash flow was $1,600,000,000 in Q4 included the the The biggest outflow of cash during the quarter was for CapEx. Biggest outflow of cash during the quarter was for CapEx.
CapEx was $473,000,000 in the 4th quarter and for the year it was 1,000,000,000 We're providing more details about our capital spending plans for this year at our meeting next week. Moving further down the balance sheet, inventory increased slightly from $712,000,000 at the end of Q3 to about $738,000,000 at the end of Q4. The increase was primarily in specialty materials, which was preparing for a significant increase in Gorilla Glass sales in the Q1. I'll talk more about this in our outlook section. I'll start the outlook with display.
We expect volumes at both our wholly owned business and SEP to be up in the mid single digits sequentially. To be clear, volume in our wholly owned business will be up in this range and so will the volume at SEP. We expect utilization rates at Taiwanese and Korean panel makers to be modestly higher in Q1 than Q4. And regarding the overall glass market, we expect market volume to be up slightly quarter to quarter. Glass price declines at both our wholly owned business and SEP are expected to be more moderate than in the 4th quarter.
In our Telecom segment, we expect Q1 sales to be consistent with our very strong 4th quarter. This is much different than the usual sequential declines we see in the Q1 over the last 3 years. We expect to see very robust fiber to the home product demand to offset slight seasonal declines in other product areas. Fiber to the home demand will be driven by increased project activity in Canada and Europe. In comparison to the Q1 of 2010, telecom sales will be up 20%.
We expect sales in our environmental segment to be consistent quarter to quarter and up 20% year over year. In Life Sciences, we expect sales to be up slightly sequentially and also 20% up year over year. In Specialty Materials, sales are expected to grow 20% to 25% sequentially, driven primarily by Gorilla Glass. Q1 segment sales will be more than double a year ago. Moving down the income statement, expect our quarter 1 corporate gross margin to be up slightly as a percentage basis.
SG and A as a percentage of sales and on a dollar basis will be materially lower in quarter 1 compared to quarter 4. R and D will be slightly lower. We expect equity earnings to be down about 5% sequentially. For modeling purposes, our guidance here is based on the quarter 4 equity earnings of $408,000,000 which included special items. At Dow Corning, we expect equity earnings to be up about 5% to 10 percent excluding the one time gains last quarter.
At SCP, we expect equity earnings to be down in the upper single digits as a result of the higher tax rate. As we discussed at the Barclays Conference last month, a portion of SEP's earnings have been exempt in the past from corporate income tax under the Korean Tax Preference Control Law. This 100% exemption falls to 50% in 2011. As a result, SEP's effective tax rate will increase from about 14% last year to be between 18% 19% in 2011. Investors should note that movements in the yen to U.
S. Dollar exchange rate can also influence our results. For modeling purposes, every 1 point new in the yen for the quarter, our sales and net income moves by about $9,000,000 The net income impact includes SEP where stronger yen helps. And moving to taxes, as we've discussed many times, we expect our Q1 2011 tax rate to be about 15%. This is likely the reason why our EPS will be lower despite the higher sales this quarter.
Ken? Thank you, Jim. Rochelle, we're ready to take some calls
now.
First question from the line of Mark Hsu, RBC Capital Markets. Please go ahead.
Thank you. Jim, is the $1,000,000,000 ending Gorilla Glass mostly spoken for, for 20 11? Are we at a point where we can increase production if required to do so? Or do we have to actually wait till next year? And then if you just can talk about also the interest from TV makers also for Gorilla Glass in addition to the tablets and smartphones and IT?
I'm not quite sure how to define spoken for, but I'll take my shot at it. We have overwhelming demand by a series of brands that we think will actually drive our expectation of IT and handheld sales to be higher. In terms of Gorilla Cover, Sony has made their announcement. So I think that qualifies under spoken for and we do have a contract with them. So we feel that we have the potential to get to the $1,000,000,000 that will be mostly driven by how well the Sony product and television sells.
And this is the hardest for us to predict because no consumers had an opportunity to buy a single one yet. We still expect to have several $100,000,000 of sales TV cover, but that's where the most variability could probably occur. We are increasing our capacity for Gorilla Glass this year and we have the opportunity to allocate more to it, but not a tremendous amount more. We are spending in our capital to add Gorilla capacity and we expect to have significant capacity coming on as
we enter
2012. We then have had interest, people talking to us after the Sony product was displayed, other television manufacturers, but as we have yet to have another customer.
I see. So should we assume that there might be another TV maker to follow Sony? Is that the discussion going in the right direction? And then separately, Jim, since Gorilla Glass is a high value differentiated product, can Gorilla Glass gross margins ultimately end up higher than traditional display glass margins
over the longer term?
I won't make any forecast about the timing of another customer for TV cover. I think we all have to see how well Sony does in the marketplace, which we should be able to do very shortly. Gorilla, as we've talked about for IT and handheld, has a gross margin higher than our corporate average and that's the only disclosure we're prepared to make at this time.
Okay. That's helpful. Thank you, Jim. We'll see you next week.
Thank you. Next question from the line of C. J. Muse, Barclays Capital. Please go ahead.
J. Muse:] Yes, good morning. Thank you for taking my question. I guess, Jim, first question on the gross margin for Q1. I may have missed your comments.
Did you guide slightly higher? Was that what you said?
Yes, we did, C. J.
Okay. And I guess relative to pro form a and I know you don't use that number, but it would have been about 44.8%. Do you think you're in line with that or could even be higher than that?
I'm not going to give you any further details other than to say it will improve.
Okay. I guess following same train of thought, but a little different. Your non LCD businesses seem to be coming on real strong here. And I guess I was hoping to get an idea of what the trajectory for the gross margin would look like for all of those businesses in aggregate as we move through 2011? How should we model that?
I won't give you an aggregate for them because that's not how we think about it. But I will tell you we expect the gross margins in every one of our segments to improve in 2011.
Okay. And I guess final question for me. Clearly embedded in your volume glass volume guide for Q1 relative to what you think the industry will do, you think you're taking some share there. So I guess if you could comment on what is happening in the glass industry to give you that confidence and how we should think about that share trending through 2011?
I'll just comment about the glass industry itself. We've had some difficulty predicting exactly what happens in Q1 and Q2, but we believe the glass industry itself will grow in Q1 and we're not expecting significant inventory in terms of absolute square footage gains in just quarter 1. So that's our current modeling. We'll talk more about it next week. We do believe we gained a little share back and that obviously was our goal coming out of our severe supply constraints.
And we did that in quarter 4 and that's the only share comment I'll make. Great.
Thank you, Jerry.
Jim. Thanks, C. J.
Your next question is from the line of Steven Fox, CLSA. Please go ahead.
Hi, good morning. First of all, can you talk a little bit more about the Australia win and what it can mean for financials in 2011? You mentioned the 400,000,000 dollars initial order, but how does that sort of roll through the year?
So the NBN order will be relatively small in 2011. It clearly will be in the back half of the year. I think you'll see much more significant volume in 2012. But we're delighted by the position we got there and think it will be a contributor in the back half of the year. But in terms of significant new dollars, it's really 2012 where it really starts to ramp.
And then secondly, just on the Specialty Materials business, Jim, I think you said the gross margins improved by about 7 points. I'm assuming that was related to Gorilla Glass. Can you sort of talk about the contributing factors to that improvement?
The primary factor was Gorilla. I mean Gorilla tripled over the course of the year. We started to edge out of this being kind of a startup product and we also are beginning to get out of the cost drags that we've had from changing tanks back and forth because we now can have tanks just dedicated to this. So that was the primary driver for this segment and you'll see further improvement this upcoming year because as the business continues to expand in IT and handheld, we're going to have large tanks dedicated to this product all year round and that should have excellent margin.
And then just lastly related to that, the Gen 6 tanks in Japan that you've been ramping, could you just give an update on where that is relative to plans to ramp it, efficiencies, yield, etcetera?
They're going great. Those were primarily aimed at TV cover, but we are making some Gorilla for IT and handheld here. And our new ion exchange facility is doing great. Our manufacturing folks have really come on strong. Basically this facility went from demolition of an older building to making glass and the product in 6 months.
So, we're feeling very good about it.
Great. Thank you very much.
Thank you. And the next question comes from the line of Wamsi Mohan of Bank of America Merrill Lynch. Please go ahead.
Yes. Thanks for taking my question. Jim,
you said that there is potential for you to convert some more LCD tanks to produce Guerrilla this year. Should we take that as a statement that the overall LCD business does not need incremental capacity in 2011? And should we also expect price trends that are improving in 1Q relative to 4Q to sustain through the course of the year?
The first question on the capacity, what we're doing is converting some of the older tanks that we had in Taiwan from display to gorilla. But display is adding capacity because we are at there will be some new tanks coming up at our Taichung facility that we'll be operating for display. Remember, we also get capacity gains in the display business as we go thinner and I made a few comments on that in my comments. I didn't catch your second question. Wamsi, could you repeat it?
Yes. It's about pricing. So you're saying pricing in 1Q will be slightly better relative to 4Q glass pricing. Should we expect a reversal back to sort of the 1% to 2% sequential declines in 2011?
Well, clearly, that's been our goal is to try and get back to our moderate price decline strategy. And obviously, quarter 1 is a good step on that way.
Okay. Thanks a lot.
Okay. Thank you. And the next question comes from the line of Jeff Evanson of Sanford Bernstein. Please go ahead.
Hi. Two questions. First, as we look forward, how much of your $1,000,000,000 in Gorilla sales depends on actually the uptake of Eagle XG Slim so that you do get that extra capacity? And then unrelated to that, I'm interested in the next 1 to 2 years of LCD TV demand, how you think about the lower price segments of emerging markets moving over to LCDs?
We're not going to give out specific amount of capacity due to the SLIM. I can tell you it will be a substantial portion of our volume this upcoming year. Relative to the emerging markets, I would urge you, Jeff, to come to our investor conference next week and Mr. Clappin will be talking great detail about our expectations for all the markets around the world. Thanks.
I'll look forward to it. Thanks, Jeff.
Thank you. The next question is from the line of Jim Suva of Citi. Please go ahead.
Thank you and congratulations to you and your team for good results and coming out stronger.
Thank you, Jim.
On the comment about Gorilla Glass in the past, you've talked about some additional efforts beyond handhelds and the Sony TV efforts. And in your prepared remarks, you talked about some additional costs for winding down some businesses. Do those winding down of businesses, is that mostly related to the green laser efforts and winding that down? Or are any of those related to Gorilla Glass not going into those other business potential opportunities? And what is the status if it doesn't result in those costs going to winding down some of those efforts?
What's the status update of going into those other businesses, whether it be automotive, solar for Corning and if you could update us on the Gorilla part of that?
It's a lot of questions all in one there. I'll do my best. So the one time costs that were incurred in gross margin were primarily around green laser. In R and D, it wasn't green laser. It was some other projects.
It definitely is not anything related to glass in terms of AAA or photovoltaics, it was some other programs. So we are not discontinuing any efforts. In fact, we're actually expanding our efforts to move strength in Glass into other segments. It's actually led us to throttle back on some of the other new business efforts, so we can have more scientists to work on the glass opportunities. I think we're making good progress on the other areas.
Joe Miller, our CTO, will be at our conference next week. He just returned from some meetings with customers in the appliance area and we also continue to have good interest in automotive. So I think at our meeting next week, you could ask any questions, but we're feeling very good about that opportunity. Regarding photovoltaics, we're also feeling pretty good about that. We hope to have sales this upcoming year.
And I would urge you again to come and talk to the people who are working on the program next week. Thank
you and congratulations
again to you and your team.
Thank you very much, Jim.
Thank you. The next question is from the line of Simona Jankowski of Goldman Sachs. Please go ahead. Hi. Thank you.
Two questions. The first one is on
the display business. It seems that the strength coming out of the quarter and into the Q1 has been driven more by China. And at least our checks will suggest that from the Korea side, there's been more a little bit more weakness and a little more inventories coming out of the holidays. So it just seems surprising to me that you're expecting similar volumes in both the wholly owned and the SEP parts of the business. Can you just expand on that?
Well, I think in Korea, one of the things that was very unusual for us is was an inventory correction. In general, the Korean panel makers don't carry much inventory. But clearly, LG, as you saw in their announcement, talked about driving down their inventory and they remain a very big customer of ours. So we saw inventory corrections and the throttle back, which surprised us really was in the month of December in Korea. And that's unusual first of all, it's unusual behavior that the Koreans allowed inventories to build.
They generally haven't done that in the past and then they made a correction. So, we have looked at what we think their inventory levels are and obviously get input from customers and we're comfortable with the mid single digit increase in Korea.
And that also comprehends any inventory that's in retail in terms of some of the more mature markets?
Yes. When we look at our we do this supply chain that we model the entire inventory post us, post the panels, the broad set area and then at retail and then look at that overall inventory. And our modeling would say the absolute amount of inventory at the end of 2010 relative to the end of 2,009 as an example was exactly in line with the growth of what the business was over the course of that. We were actually pleased that the inventory at the end of quarter 4 came down as much as it did. It's actually a little ahead of
our expectations. Great.
And then my question on cover glasses. I heard your comments on the difference in terms of strength of Gorilla and some of the competitive products out there such as the Assai one. But I just was hoping you can help me reconcile that with some of the feedback we've picked up in the channel in that several of the products, including some of the TVs and tablets actually dual source Gorilla and the Sahis cover glass. So are we to assume that even there are even if there are some differences in their performance, they're perhaps not meaningful enough to actually prevent dual sourcing?
I would say exact opposite. The biggest problem that some of our customers have had is that we can't make enough. So, they might have chosen to use Assai's products in some cases because we couldn't give them 100% share. But we believe our product, as I said in our comments, is superior to that and that brands turn to us first to get product. And the only place that any competitors have made any headway would be when frankly we just haven't been able to make enough.
And that's why we're working so fast to try and raise the amount of capacity there. But we do not feel that we lose are losing share as a result of any kind of strength issue. It's only because we just haven't been able to make enough.
That's very helpful. Thanks. Okay. Thank you. And the next question comes from the line of Nikos Theodosopoulos of UBS.
Please go ahead.
Hi. Thank you. This is Amitav Patna on behalf of Nikos. Jim, just wanted to clarify the $24,000,000 in one time charges you called out that affected gross profit this quarter. Should we assume that most of that would be behind you and should not impact the Q1 outlook?
That's right. All the one time charges in terms of one time and on Gorilla project cost as well as the wind down of certain R and D programs is all behind us.
Got it. Okay, great. And I might have missed this, but any thoughts on what your expectations are for the overall LCD market to grow in 2011 over 2010?
No, you got to wait for next week in New York City.
Okay. And then just one final one for me. It sounds like one of your competitors, Assai, is also coming up with a competitive product to Gorilla Glass. I think you touched on this, but again would love to get any additional insights in terms of your initial thoughts on the glass from your competitor.
We believe our glass is much stronger than our competitor's product today. I don't think we've actually talked about this in the past until today, but we are actually on the 4th generation of Gorilla Glass, so the product continues to get better. And if you go back and look at some of the comments in my earlier speech, you'll see what I talked about the relative strength of what we feel we and our customers focus on, which is the ability of this product to withstand damage once it's been abraded or scratched. That's the most important test and we believe we're 10 times better than soda lime.
Got it. Okay. Thanks.
Thank you. The next question comes from the line of Carter Shoop of Deutsche Bank. Please go ahead.
Good morning. First question for you is just a clarification. When you guys talk about the wholly owned business being up by almost 20%, should we read that as kind of 19.5% to 20% or is that more like a 17% to 20% comment? I think 19%. 19%.
Great. And then as a second question here on Gorilla Glass, you mentioned $16,000,000 related to the TV cover glass in the Q4. How should we think about costs like that going into 2011 for Gorilla Glass?
We're not really expecting much in the way of project cost. The project costs on Gorilla that we've been calling to your attention in Q3 and Q4 were really related specifically around the conversion of our Shizuoka facility to make the large size cover glass for television. There may be some minor changes as we convert expenses, we convert some of the tanks in Taiwan to make Gorilla, but basically the big project cost is behind you.
And why do we have I mean, I'm sorry, why do we have the larger costs for this particular facility versus other facilities converting?
I mean fundamentally this facility, I mean the melting tanks were there, but we actually had to create large scale ion exchange facilities because no one has ever done ion exchange at this size before. It's not something that could be contracted out to somebody else. So we actually had to build a facility to exchange these very large sheets of glass, whereas in the past for most of Gorilla, it can be done in existing small things. So it was just project costs related to doing that.
Okay. Last question. Can you discuss your comments about M and A here? Obviously, very strong free cash flow in the year. It sounds like you're looking based on your comments, you may be looking at supplementing organic growth maybe a little bit more so than in the past.
Can you discuss any changes in the outlook for M and A going forward?
Yes, I'd be happy to. Our strategic framework that we've been operating to for many years always included M and A, but basically we were spending all of our money around the organic growth opportunities. We now feel we have enough cash flow and cash to expand our opportunities in Life Sciences and Telecom. We really dipped our toe in Life Sciences last 2 years as you've seen. We've looked at in telecom.
We believe it's an area where we can expand and we think we have very strong position. So we are looking in telecom also. So I'm not forecasting anything imminent, but we do clearly now believe that we can supplement our growth rate by using some of our very strong cash flow and cash position to acquire hopefully at a very appropriate rates of return.
Great. Thank you very much.
Thank you. The next question comes from the line of Brendan Furlong of Miller Tabak. Please go ahead.
Good morning. Thank you very much. Three quick questions. One, you alluded to in your opening statement about a slowdown in China 3 gs, which I'm trying to get some color on, if you could. Secondly, on the XGSlim, I don't know if you've talked about any gross margin implications of the introduction of that product.
And then lastly, there's a lot of pre build here on tablets into Q1 with all the announcements at CES, if there's kind of a pre build for Gorilla and then we kind of pause a little bit in June and then accelerate in the back half? Thank you.
So in reverse order, we are not expecting any pauses in Gorilla. We're basically I mean the timing of certain launches could be moved by various manufacturers, but basically we're not looking for any pauses due to someone building inventory launching and then slowing down. On Eagle, on XGSlim, it's a positive for the gross margin. The product itself has good gross margins and obviously because we can then convert to use the glass that we're not putting into the thicker product to sell other products, it's overall healthy for the business. So it's overall a good gross margin statement.
The China 3 gs was really related to 2,009 where China had extraordinarily high fiber sales. It was actually the world's largest fiber market and bigger than the peak back in 2000 and that 3 gs build out has come has wound down and was therefore we saw lower fiber sales in 2010 versus 2,009 in fiber in China.
Excellent. Thank you very much.
Rochelle, this is Ken Soper. We're approaching 9:30. We have time for just one more call.
Okay. And the final question comes from the line of Yair Reiner of Oppenheimer. Please go ahead.
Great. Thank you. So one quick follow-up on the SUN product. Is the main impact then your ability to price at a premium or is it more the opportunity to spend less in making it? And then should we expect it to have any kind of impact on your share in the market?
I'm not sure it will have a material impact on share. It's clearly an offering that's beneficial to our customers because today on certain products where they do a secondary benefit to them and it's obviously a benefit to us also in terms of our own cost position. So, it is the proverbial win win we think for us and our customers.
And then in terms of building up capacity for the display business in China, where are we in that process? And how is that going to translate into CapEx over the course of 2011? Thank you.
You asked for the display business in China? Yes. Yes. So we announced a factory being built in Beijing and that project is underway and production will start in the first half of twenty twelve for capacity for the display industry.
Thank you.
Okay. Thank you. And back to you Ken.
Great. I'll pass it back to Jim. Just want to close with a couple of quick comments about investor events. First of all, that I mentioned several times today, our Annual Investor Meeting is next Friday, February 4 at Cipriani on 42nd Street, New York City. We're planning a very dynamic set of product presentations and demonstrations.
For those of you who are considering trying to stay in your office or home listening to the webcast, I highly encourage you to attend. This will be one of your rare opportunities to interact with all of our business leaders and see all of our current products and future technologies. If that wasn't exciting enough to get you to attend, those in attendance will also be receiving a nice giveaway. So please come to corning.com and register. Lastly, we'll also be appearing at 2 upcoming conferences, the Goldman Sachs Technology Conference on February 15th and the Morgan Stanley Media and Telecom Conference on March 1st and both of those are in San Francisco.
So we're looking forward to seeing all of you at one of these or several of these events. Thank you. Thank you, Jim, and thank you all for joining us this morning. A playback of the call will be available beginning at 10:30 a. M.
Eastern Time today or run till 5 p. M. Eastern Time on Tuesday, February 8. To listen dial 800-475-6701, the access code is 188,589. And the audio cast is also available on our website during that time period.
Rochelle, that concludes our