Corning Q117 Results
May 01, 2017

Corning reported strong Q417 results, driven by display, optical, and specialty materials.  To put the display side in perspective, the 1H 2016 was characterized by very weak panel pricing and slowing display volumes, while the 2H 2016 saw increasing panel pricing and moderate volumes, which makes GLW’s display results all the more significant, but the key last year, and likely again this year is glass price declines.  The company has indicated that they expect glass price declines to be ~10% this year, and possibly increased reductions, which implying 2017 glass price declines of 12% to 13% (~1%/month).  We note that during other industry cycles price declines have peaked at ~2%, so GLW has been seeing very moderate pricing pressure for the last year or so. Corning, Asahi Glass, and NEG dominate the glass market with around a combined 90% share. There are other suppliers, such as AvanStrate, St. Gobain, Schott AG, and a few small Chinese producers, but the display glass business is allocated primarily among the top three, particularly for large panel display production.    In previous display cycles the three primaries were focused on gaining market share, which meant discounting to attract new customers or increasing penetration at existing ones.  While sometimes successful on a short-term basis, inevitably share changed little long-term, and took a big chunk out of profitability.  After the last display downturn cycle, glass manufacturers changed their focus from share to profitability and reduced capacity expansion to match demand.  This philosophy has changed the display glass supply/demand picture since then, and while Corning still maintains better profitability and a higher share than the others, glass-pricing declines have moderated. This glass price moderation comes during periods when capacity demands have been relatively modest, with average display size increases keeping overall glass demand positive, again particularly on large panel (TV) displays.  With only three major players, a more rational approach to glass capacity expansion has led to glass price declines of less than 1%/month, coupled with the need for display producers to be guaranteed a percentage of total capacity from their chosen glass supplier, especially when display utilization rates are high, as they are currently, leads to a strong glass pricing environment, as we see now.
 
According to most glass producers, better glass pricing is endemic to the industry, but even Corning, the market leader, while optimistic for the year, understands that things change, and the industry has been operating under a positive panel price scenario for the last three quarters, while panel producers are more interested in keeping utilization rates near 100% to capture that positive panel pricing than they are about material cost.  They need glass to keep their lines moving and price is less of an object than guaranteed volume.  Corning’s display glass business is profitable, with display margins topping 30%, but competitor’s with broader glass businesses have lower display glass margins, close enough to breakeven that a return to more aggressive price declines could push results to or near loss levels.  While this is not the case currently, it does put into question any potential glass production capacity increases that might be needed over the next few years.  Corning has glass producing assets that can be converted to or from display glass, a portion of which came from its purchase of the Samsung/Corning JV, but others are less flexible, particularly as float glass melters are built out on a larger scale than the Corning more modular tanks, giving Corning a competitive advantage. 

Display 
4Q – GLW glass volume down slightly q/q – up low teens y/y
          4Q – glass prices declined less than 3Q
          2016 – Glass demand up mid-single digits (in line w. expectations)
          2016 – GLW glass demand up mid-single digits (in line w. industry)
          2016 – TV screen size up 1.5”+
          2016 – Supply chain inventory lean
                      1Q – Expect GLW glass volume up mid-teens y/y – in line w.                                          market          
                           – Down q/q on lower capacity and shorter quarter
                      1Q – Q/Q price declines moderate (usually the biggest declines                                     yearly)
          2017 – Retail glass market up mid-single digits
          2017 – TV units flat to up 1%
          2017 – TV screen size up 1.5”
          2017 – Glass demand up 4% to 5%
          2017 – IT (monitors, NB) down in units, up in screen size – Net flat
          2017 – Supply chain inventory lean
          2017 – Overall glass demand up mid-single digits
          2017 – GLW glass demand up mid-single digits
          2017 – Panel capacity will increase during the year
          2017 – Glass price declines less than 2016 (smallest in last 5 yrs.)
          2017 – Price declines (yearly) could be 10% or better
 
Specialty Materials
 
                         4Q – Sales up 22% (above expectations of high teens)
                         4Q – Record GG volume (rapid GG5 adoption)
                         4Q – GG5 premium pricing
                         1Q – GG5 Premium pricing to continue
                         1Q – Expect high teens growth y/y
              2017 – Secondary supply chain driven by new products not calendar
              2017 – Expect Specialty Material growth in 2017 but adoption (GG5) will                           be key

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