Corning First Quarter Results: Up and Down

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Corning announced first quarter results on April 27, 2009. The largest supplier of LCD glass experienced some ups and downs.

  • Down: Net sales declined 9% Q/Q to US$989 million.
  • Down: Net income collapsed 94% Q/Q to US$14 million.
  • Down: EPS were down 23% Q/Q to $0.01.
  • Up & Down: SCP (Samsung Corning Precision Glass) volumes were up 7% Q/Q. Volumes for wholly-owned business were down 1% Q/Q. Combined volume increased 4% Q/Q.
  • Down: Gross margin was 27%, down from 28% in Q4’08.

SCP As we can see every performance metric for Corning was down in Q1’09. But there was one bright spot: Samsung Corning Precision Glass, the company’s LCD glass joint venture with Samsung. LCD glass volumes for SCP increased 7% Q/Q. The results are not surprising as Samsung has continued to increase its brand market share in US retail. Overall performance was bad but at least there is a sign that maybe the LCD industry is turning around. Here is what Wendell P. Weeks, Corning’s CEO stated during the earnings announcement:

We were very pleased with our first-quarter performance given the high level of economic uncertainty we were facing. The biggest questions we had coming into the first quarter were first, would the strong LCD TV sales rate continue in this tough environment, and second, when would the display supply chain contraction end? It was satisfying to see the continued strength of LCD TV sales at retail worldwide throughout the frst quarter. We were also pleased to see demand for our glass pick up sooner than we anticipated, an indication that the display supply chain contraction was ending. These contributed to stronger-than-expected sales and earnings performance this quarter.

Pleased? Weeks was pleased that the company didn’t do as bad as they thought they would. I don’t think Weeks should be pleased since all performance metrics indicate that there’s a lot of work ahead for Corning to get toward positive territory. So what did Corning expect in Q1’09 that such poor performance could please the CEO and the company? Back on January 27, 2009, James B. Flaws, vice chairman and CFO shared his expectations for Q1’09 during the company’s Q3’08 earnings announcement:

We anticipate a slow start to 2009 with first-quarter combined display volume down 20% to 25% as the supply chain continues to reduce inventory during the seasonally weaker retail sales quarter. As we announced last December, we will also have high-single-digit price declines in the first quarter. As a result, sales, gross margin and net income will be sequentially lower. We expect earnings per share, before special items, to be about break-even in the first quarter.

On the other hand, recent news about the display supply chain and end end market is encouraging. Retail sales of LCD TV were stronger in December than we anticipated and this trend is continuing into early January. We estimate that the display supply chain has reduced total inventory levels to be close to year-end 2007 levels. This reduction, while painful for us in the fourth quarter, moves us closer to the day that glass demand rebounds. We are currently anticipating a significant increase in glass demand in the second quarter.

During these tough times, our three priorities are preserving cash, restructuring the company to be profitable at a lower sales level, and accelerating new products while maintaining our focus on long-term growth opportunities.

Corning was expecting a 20% to 25% Q/Q decrease in combined display volume in Q1’09. The results were an increase of combined display volume of 4% Q/Q. Wonderful! Now let’s be pleased!?! Let’s dig into the results a bit. Net sales for the Display Technologies segment decreased 8% Q/Q to US$357 million. Although volumes increased, pricing decreased at a more rapid rate mostly due to foreign exchange rate movements. The reason for this is that Corning denominates LCD glass sales in Asia in Japanese yen.

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JPY vs USD The chart above shows the value of the US dollar against the yen as US$ per JPY. Since Corning is calculating LCD glass sales in JPY, the more US$ per JPY you get the better it is for Corning. Unfortunately, US$ per JPY has been declining since January. Another way to put it is that the US$ has been growing stronger against the JPY. On January 1, 2009 the exchange rate was US$0.0111 per one Japanese yen. At the end of Q1’09 the exchange rate was US$0.0103 per one Japanese yen. Will the US$ continue growing stronger against the JPY? I am not certain but recent indicators show a possible reverse trend: the JPY gaining strength against the US$. See the chart below:

jpy_to_usd_exchange_rate_ytd_2009_05_04

If you look at how the US dollar fared against the Japanese yen after Q1’09, you can see that US$ per JPY increased for most of April and then dropped suddenly at the end of the month. We’ll need to keep a close watch on exchange rates and if you are bullish on Corning you will want the graph to turn upward in May and June.

Q2’09 Expectation Let’s get straigth to the point: Corning’s Flaws is expecting LCD glass volumes at its wholly-owned businesses to increase 50% or more on a Q/Q basis. He also expects SCP’s volume to grow more than 25% Q/Q.  Up through the end of Q1’09 Corning used exiting inventory to fill demand. Q2’09 demand will come primarily from LCD glass that is manufactured and not from built-up inventory. I wouldn’t be too optimistic since Q2’09 is generally a weak quarter and has been for many years but the trend is definitely upwards.

2009 Corning increased its estimate for the 2009 LCD glass market from 2 billion square feet to 2.1 to 2.2 billion square feet. The reason for this increase was a stronger-than-anticipated demand for LCD TVs. Corning now expects LCD TV units to grow 18% Y/Y, which is double of its previous estimate 9% Y/Y. I think we need to be cautious here. LCD TV demand was partly higher than expected due to the analog-to-digital transition. That will no longer be a major factor in Q2’09 though there will be proscratinating consumers or consumers who are waiting for LCD TV prices to come down even further. I would expect LCD TV unit sales to increase 10% to 15% Y/Y. Will that translate into huge increases in glass demand? Yes, I think so. The average size of LCD TVs has increased and the most popular size according to the latest Monthly Flat Panel Display Tracker is 52″ in the US, displacing 46″. With growing unit sales and larger LCD TVs becoming more popular overall LCD glass demand from the US will grow much faster than unit sales growth.

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