Thinner Glass Production Will Help Corning Reduce Costs

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Corning’s (NYSE:GLW) Display segment accounts for a third of the company’s revenues and is also a high margin business. As per our calculations, Corning’s Display segment’s EBITDA margin (Earnings before Interest, Depreciation and Amortization) was 60% in 2013. [1] Corning is able to generate a high margin due to its proprietary fusion-based manufacturing process. With its ability to make thin and high quality glass, Corning has estimated a decline in annual costs at its Display segment by 12% to 14% by 2017. [2] This compares to its previous estimate of a decline of 10% to 12%.

See our complete analysis of Corning here

Increasing Demand For Thin Display Glass Will Help Corning Reduce Costs

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Consumer electronics such as TVs, notebooks, mobiles and tablets drive the demand for display glass. Manufacturers tend to use thinner and lighter glass to fulfill the consumers demands for lighter and thinner devices. This bodes well for Corning since its Display segment’s costs are roughly correlated to volume of production.

If the glass is thick, its manufacturing process involves higher costs, whereas a thinner glass costs less. A major portion of the estimated 12%to 14% decrease in costs will be contributed by the increased production of thin glass. Corning has yet to see a major shift towards thin glass production since one of its large customers has not made the transition yet. [2] Therefore, Corning still has significant opportunity to reduce its costs.

When speaking about thin glass, the general thickness is that of 2 to 3 sheets of paper. Corning has the ability to meet any thickness or “thinness” requirement of its customers. In June 2012, Corning launched Willow glass, a flexible glass which is 8% thinner than a dollar bill.

Corning Precision Material’s Assets Will Add To Production Capacity And Lead To Cost Savings

Corning’s acquisition of Samsung Corning Precision Materials, now known as Corning Precision Materials, gives it access to unutilized assets in Korea. Corning believes that these assets are one of the most efficient assets in the world. As a consequence of the joint venture structure, Corning was unable to access these assets before acquisition. However, the company now has free access to these assets and will be able to utilize them for production and catering to the demand of customers across the globe and not just limited to Korea.

In its 2014 annual investors meet, Corning announced its expectation of approximately $170 million from cost savings attributable to the synergistic effect of the acquisition, which will be realized over the next four years. [3] The acquisition is also expected to reduce capital expenditures by $350 million over the same period. These cost savings combined with reduced production costs for thin glass will together lead to a decline in costs for Corning’s Display segment over the next few years.

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Notes:
  1. Corning’s 10-K SEC Filing, www.corning.com []
  2. Corning (GLW) Bank of America Merrill Lynch 2014 Global Technology Conference (Transcript), June 3 2014, www.seekingalpha.com [] []
  3. Corning’s CEO Hosts Annual Investor Meeting Conference Transcript, February 7 2014, www.seekingalpha.com []