Samsung, LG Display Scaled Back Production to Offset Growing LCD Panel Inventory

Samsung and LG Display lowered LCD factory utilization rates to mid-80 percent in late 2010, from 90 percent in November, to stave off growing inventory, Corning Vice Chairman James Flaws said in a conference call.

While Samsung and LG have typically lowered prices to offset a building inventory, the companies chose to cut production instead, said Flaws, whose company operates the Samsung Corning Precision (SCP) joint venture. SCP’s Q4 revenue declined 15 percent from the previous quarter to $1 billion. Corning’s SCP-related equity earnings declined 4 percent to $368 million, which included a one-time $61 million tax credit in Korea. Minus the tax credit, Corning’s Q4 equity earnings from SCP fell 16 percent to $308 million, Flaws said. SCP supplies glass to Samsung and LG, while Corning’s wholly-owned business, which has plants in Japan and Taiwan, includes AU Optronics, ChimeiInnolux and Sharp among its customers.

"The throttle back” in LCD production among Korean suppliers “surprised us” and was “unusual behavior” for companies that typically don’t allow inventory to build, Flaws said. The lowering of manufacturing capacity in Korea was offset by increased production in Taiwan where Corning customers like AU Optronics built panels in anticipation of “robust” TV business during Chinese New Year sales, Flaws said.

Samsung and LG had been running their LCD plants at 85 percent and 84 percent of capacity in September, but increased that 91 percent and 94 percent in November, Avian Securities analyst Andrew Abrams said. Samsung and LG dropped back to 85 percent in December, he said. At the same time, AU Optronics and ChimeiInnolux, which were at 68 percent and 71 percent of capacity in September, boosted manufacturing capacity to 75 percent and 86 percent in December, Abrams said. Samsung and LG have likely cleared the inventory buildup and will keep production around 85 percent of capacity in Q1, Abrams said. Global LCD inventories were at 16 weeks at the end of Q4, down from 17 weeks the previous quarter, Flaws said. With Q1 inventory in line, quarterly glass price declines are expected to return to 1-2 percent from mid-single digits in Q4, Corning officials said.

"The question is where is the demand in Q1 going to be coming from,” Abrams said. “If the expectation is that there will be good Chinese New Year sales then you may see more impact in Taiwan” because AU Optronics and Chimei are major suppliers to Chinese manufacturers.

Meanwhile, Corning expects to post “several hundred million” dollars of sales of its Gorilla cover glass for TVs this year, Flaws said. Sony signed on as the first customer for Gorilla glass for 40-inch and up sets, but Corning must add another one or two CE companies if the technology is to hit a target of $1 billion in sales this year, analysts said. Corning, has supplied Gorilla glass for 29 brands and 350 models, including Apple’s iPad tablet PC that features a 9.7 inch display. Corning spent $16 million in Q4 on gearing up Gorilla glass production at its 6th-generation line in Shizuoka, Japan. It’s also retrofitting production lines at plants in Taiwan to make Gorilla glass, Flaws said. Corning’s specialty materials, which include Gorilla glass, carry gross margins better than the 44 percent corporate average in Q4, said Flaws, who declined further comment. Corning is shifting some engineering work to Gorilla glass while “throttling back” on other projects, Flaws said. Corning is weighing introducing Gorilla glass for major appliances and automotive applications, Flaws said. Corning took a $7 million R&D charge in Q4 for projects that were discontinued, said Flaws, who didn’t disclose details.

"We've had overwhelming demand by a number of (TV) brands and the $1 billion in “potential” Gorilla glass sales this year will “depend of how well the Sony TVs do” in the market, Flaws said.

Corning is sampling with customers Eagle XG Slim 0.4mm-thick LCD substrate glass and it will be a “considerable portion of our” display sales volume this year, Flaws said. Standard LCD glass is 0.7mm thick and Corning also fields 0.5mm versions. The 0.4mm glass is designed for 5G LCD panel production, company officials said. Corning also is developing a 0.3mm version of the glass, but timing for its release hasn’t been set, Corning officials said. Corning’s Eagle XG “green” glass is free of antimony, arsenic and barium and has accounted for 100 percent of the company’s substrate production since 2008.

Meanwhile, Corning said Q4 net income improved to $1 billion from $740 million as it benefited from a $206 million after-tax insurance settlement stemming from an earthquake near its Shizuoka, Japan, operation and power outage at the Taichung, Taiwan, factory. Revenue rose to $1.77 billion from $1.53 billion. Q4 earnings included an $8 million charge for the shut down of Corning’s green laser development for micro-projectors. Many engineers involved in green laser development have been shifted to Gorilla glass and environmental products, Corning Display Chief Technology Officer Peter Bocko told us. Corning development focused on frequency-doubled synthetic green lasers and the company will consider developing native green lasers in the future, Bocko said.

"We went down the road with these synthetic green lasers which turned out wasn’t sustainable, but it gave us a very good understanding of micro-projectors and engine design so there may be other opportunities in native green lasers,” Bocko said. Corning supplied synthetic green lasers for Microvision’s micro-projectors.

Corning’s overall Q4 equity earnings increased to $511 million from $461 million, benefiting from several one-time gains, including $42 million from its Dow Corning investment and a $61 million tax credit in Korea. Q4 equity earnings from SCP also increased to $369 million from $324 million. Corning’s display division’s Q4 net income grew to $883 million from $619 million a year earlier as sales jumped to $750 million from $717 million. Its speciality materials group, which includes Gorilla glass, swung to a $2 million Q4 profit from a $6 million loss a year earlier as sales rose to $197 million from $110 million.

The telecommunications segment posted an $18 million Q4 profit, reversing a year earlier $19 million loss that included a $27 million restructuring charge. Telecommunications sales increased to $443 million from $405 million. A decline in sales of fiber and cable to $229 million from $231 million year earlier was offset by a gain in hardware and equipment to $214 million from $174 million. Corning’s telecommunication division received a 5-year, $1.2 billion contract earlier this month to supply optical cable and hardware for Australia’s National Broadband Network program to build out high-speed Internet service in that country. The program initially will generate $400 million in revenue for Corning, the first of which is expected to be recognized in the second half, with the bulk arriving in 2012, Corning officials said.