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Edited Transcript of GLW earnings conference call or presentation 23-Oct-18 12:30pm GMT

Q3 2018 Corning Inc Earnings Call

Corning Nov 6, 2018 (Thomson StreetEvents) -- Edited Transcript of Corning Inc earnings conference call or presentation Tuesday, October 23, 2018 at 12:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Ann H. S. Nicholson

Corning Incorporated - Division VP of IR

* R. Tony Tripeny

Corning Incorporated - Senior VP & CFO

* Wendell P. Weeks

Corning Incorporated - Chairman, CEO & President

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Conference Call Participants

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* Asiya Merchant

Citigroup Inc, Research Division - Research Analyst

* James Eugene Faucette

Morgan Stanley, Research Division - Executive Director

* Joseph Eric Wolf

Barclays Bank PLC, Research Division - MD & Head of Equity Research

* Robert George Cihra

Guggenheim Securities, LLC, Research Division - MD and Senior Analyst

* Roderick B. Hall

Goldman Sachs Group Inc., Research Division - MD

* Samik Chatterjee

JP Morgan Chase & Co, Research Division - Analyst

* Steven Bryant Fox

Cross Research LLC - MD

* Thejeswi Banavathi Venkatesh

UBS Investment Bank, Research Division - Associate Director and Analyst

* Vijay Krishna Bhagavath

Deutsche Bank AG, Research Division - VP and Research Analyst

* Wamsi Mohan

BofA Merrill Lynch, Research Division - Director

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Presentation

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Operator [1]

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Welcome to the Corning Incorporated Quarter 3 2018 Earnings Call.

It is my pleasure to turn the call over to Ann Nicholson, Division Vice President of Investor Relations.

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Ann H. S. Nicholson, Corning Incorporated - Division VP of IR [2]

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Thank you, Haley, and good morning, everyone, and welcome to our third quarter 2018 earnings call.

With me today are Wendell Weeks, Chairman and Chief Executive Officer; Tony Tripeny, Senior Vice President and Chief Financial Officer; and Jeff Evenson, Senior Vice President and Chief Strategy Officer.

I'd like to remind you that today's remarks contain forward-looking statements that fall within the meaning of the Private Securities Litigation Reform Act of 1995. Those statements involve risks, uncertainties and other factors that could cause actual results to differ materially. These factors are detailed in the company's financial reports.

You should also note that we will be discussing our consolidated results using core performance measures, unless we specifically indicate our comments relate to GAAP data. Our core performance measures are non-GAAP measures used by management to analyze the business. A reconciliation of core results to the comparable GAAP value can be found in the Investor Relations section of our website at corning.com. You may also access core results on our website with downloadable financials in the interactive analyst center. Supporting slides are being shown live on our webcast, and we encourage you to follow along. They're also available on our website to download.

Now I'll turn the call over to Wendell.

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Wendell P. Weeks, Corning Incorporated - Chairman, CEO & President [3]

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Thank you, Ann, and good morning, everyone. This morning, we reported excellent sales and earnings growth for the third quarter, and we are increasing our full year 2018 outlook.

In total, for the quarter, sales were $3 billion, up 16% year-over-year. Net income was $476 million, up 18% year-over-year. And EPS was $0.51, up 28% year-over-year.

We also delivered on our goal to improve gross margin to 42%, a significant increase over last year and the first half of 2018.

All businesses delivered year-over-year sales and NPAT growth. Highlights include: Optical sales, up 22% year-over-year; Environmental sales, up 19% year-over-year; Specialty Materials sales, up 23% year-over-year, better than unexpected, driven by strong pull for new innovations, such as Gorilla Glass 6. In Display, as expected, sales and net income grew year-over-year, and annual price declines continued to improve, reaching the important milestone of mid-single digits. As we said we would, we grew sales and profitability significantly by leveraging our recent phase of intense operating and capital investments to capture substantial benefits.

Third quarter results demonstrate a step change in our earnings power. Underpinning our success, our climbing production and efficiency rates at several of the largest expansion projects plus strong customer adoption of our innovations.

Our annualized sales run rate now exceeds $12 billion. Growth is accelerating, and our margins are expanding. Execution across the company is outstanding.

We expect to exceed $11.3 billion in full year sales, up more than 10% year-over-year, and we expect to build on this strength as we address the rich set of opportunities ahead of us. So we feel great about both the back half of 2018 and our future opportunities, as Tony will describe in just a few moments.

Now let's turn to the Strategy and Capital Allocation Framework, which outlines our leadership priorities. Under the framework, we target generating $26 billion to $30 billion in cash through 2019. We plan to return more than $12.5 billion to our shareholders through repurchases and dividends and to invest $10 billion to extend our leadership and deliver growth. We've continued to make great progress toward the framework goals we announced in October of 2015.

Our cash generation is on target. And through the end of the third quarter, we have returned $11.4 billion to shareholders. Dividends per share have increased 50% since the framework began. Investments in RD&E, capital expenditures and acquisitions also remain on track to our 4-year plan, totaling $7.3 billion through September 30.

As outlined in our framework, Corning is best in the world in 3 core technologies, 4 manufacturing and engineering platforms and 5 market access platforms. Our capabilities are interrelated and reinforcing. We focus 80% of our resources on opportunities that use capabilities in at least 2 of these 3 categories. This increases our probability of success, reduces the cost of innovation and creates stronger competitive advantages and delights our customers.

Now I'll turn to our progress in each of our market access platforms, starting with Optical Communications. Our performance in Optical Communications continues to be outstanding. We remain the world leader in passive optical solutions and the only true end-to-end supplier of integrated solutions.

First, I want to note the team's response to the September hurricane in North Carolina, home to most of our fiber and cable manufacturing. Our people pulled together and did an outstanding job working through the challenges of Hurricane Florence. They showed the highest level of commitment to safety and to supporting each other. Despite this powerful storm, their efforts kept us on track with our expectation for high-teen sales growth this year.

Next, recognition of the value created by our solutions, and our unique co-innovation approach continues to grow. We continue to secure contracts with industry leaders in the carrier and data center segments that will add significant sales in 2019 and beyond. These multi-year commitments support additional manufacturing capacity and drive profitable growth.

We continue to reach milestones that demonstrate our long track record of innovation and industry expertise. Less than 1 year ago, we announced that we have sold over 1 billion kilometers of optical fiber. And in August, we announced that our pre-connectorized fiber to the home solutions have passed more than 45 million homes around the world. We're also proud to have reduced energy intensity in our fiber and cable plants by 50% as part of our commitment to protecting the environment through continuous improvement to processes, products and services.

Stepping back, we have positioned our optical communications market access platform to deliver advantaged optical fiber, cable and connectivity solutions for access networks, cloud data centers and the network densification necessary for 5G. This year, we've run fiber and cable capacity in North Carolina. And during the quarter, we announced the opening of a manufacturing facility in Strykow, Poland. Our investments in innovation and capacity are clearly paying off in the second half of the year. We're excited about our excellent performance, our current growth and, especially, our future opportunities.

Now let's turn to Mobile Consumer Electronics, where we are the world leader in glass for smartphones, tablets and emerging categories, like wearables and augmented reality devices. Our goal is to double Mobile Consumer Electronics sales over the next several years. We continue to make significant progress in adding more sales dollars per device through our innovations, while also expanding our share in developing regions and entering new product categories. Corning Gorilla Glass has been designed into more than 6 billion devices worldwide, and it is increasingly being adopted for glass backs. We introduced Gorilla Glass 6 in the third quarter and have additional exciting innovations on the roadmap, so much, much more to come.

We're also innovating in new device categories. Gorilla Glass continues to be the most widely used cover material on smartwatches. And in July, we launched Gorilla Glass DX and Corning Gorilla Glass DX+, which offer enhanced antireflective optics and scratch resistance for wearables. As announced in August, you'll find DX+ on the Samsung Galaxy Watch, in addition to the Fitbit Charge 3 launched in August featuring Gorilla Glass.

Corning also partners with leading consumer electronics makers on augmented reality devices and precise 3D sensing technology. The glass we supply, coupled with our laser processing and characterization tools, enables optimized image quality, compact form factors and more accurate facial recognition. Overall, we continue to be excited about bringing our innovations to market to drive our sales and profit growth and to enhance the way we all benefit from our personal devices.

Turning to the automotive market access platform. Our expertise focuses on helping customers build cleaner, safer and more connected vehicles. Our leadership in gasoline particulate filter technology puts us at the forefront of the next wave of emissions control. European regulations took full effect in September, and GPF sales are ramping as we partner with most major automakers to equip their European vehicles with the technology necessary for compliance. China will be next to introduce GPFs with initial filter sales in 2019, as OEMs prepare for the first phase of China 6 regulations in mid-2020.

Last week, we announced that Changan Automobile selected Corning as its supplier for gasoline particulate filters. This agreement is based on our strong long-term partnership with one of the largest Chinese automakers. Once regulations are fully implemented in Europe and China, we expect gasoline particulate filters to add $0.5 billion in annual sales for Corning.

Next, excitement about Gorilla Glass for auto continues to develop industry trends towards greater connectivity. Economy, sharing and electrification are driving demand for technical glass. Call for a collaboration from more than 20 leading OEMs is increasing. And we have been awarded more than 50 platforms to date. One customer, Porsche, described the benefits of using Gorilla Glass as "ideal visual characteristics, low weight and very high strength." Another customer, Harley Davidson, launched its 2019 line of touring and trike motorcycles featuring an entertainment system with Gorilla Glass. It uses our advanced surface treatment for exceptional visibility in bright sunlight.

Overall, we have several hundred million dollars in our auto glass business pipeline. These customer commitments require the creation of a dedicated factory for Gorilla Glass for auto interiors, which we announced in July. We expect it to be operational in 2019.

In our Life Sciences Vessels platform, we continue to make strong progress on the path to a new long-term multibillion dollar franchise. Valor Glass substantially reduces particle contamination, breaks and cracks, while significantly increasing throughput. Valor helps protect patients and improve pharmaceutical manufacturing. Key customers are advancing toward the FDA certification required for the use of Valor. Our development partners, Merck and Pfizer, are at the forefront.

To support individual drug regulatory filings by our customers, we increased our shipments of Valor Glass by threefold versus this time last year, indicating growing progress towards certification across more pharmaceutical companies. In parallel, we are supporting customers by scaling up production. We brought new capacity online in the third quarter and expanded our range of products. We're also progressing with the construction of the new high-volume manufacturing facility in North Carolina that we announced in April.

Finally, industry pull remains favorable. In September, more than 40 leaders in the pharmaceutical industry visited Corning for the annual Drug and Pharmaceutical Packaging Committee meeting, which we hosted. They learned about the patient safety and manufacturing benefits of Valor Glass. We continue to believe Valor Glass has the potential to power Corning's growth for the next decade and beyond. And we remain closely engaged with the FDA and support its efforts to address this important public health issue. We look forward to being able to share additional updates soon.

In Display, we're delivering stable returns. TV retail demand and screen size growth supported strong volume growth in the Display glass market. Corning is exceeding this growth due to the ramp of our Gen 10.5 plant in tandem with BOE's panel production, further extending our global industry leadership. As the benefits of our investments in fleet optimization in Gen 10.5 take hold, profitability is improving substantially in the second half as we planned.

In the third quarter, as expected, pricing continued to improve. We reached the important milestone of annual mid-single-digit percentage price declines and expect the improvement trend to continue in the fourth quarter. We also expect our full year 2019 price declines to further improve from 2018.

So we continue to make significant progress across all our market access platforms. Ultimately, we remain on track to fully achieve our Strategy and Capital Allocation Framework goals. We've leveraged our investments to meet increased demand from our customers, grow sales and significantly improve profitability in the third quarter. We will continue to reap the benefit of those investments in the future and are very well positioned to deliver strong growth for the remainder of the year and beyond.

Now let me turn the call over to Tony for a review of our results and outlook.

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R. Tony Tripeny, Corning Incorporated - Senior VP & CFO [4]

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Thank you, Wendell, and good morning. We had an outstanding quarter. Each one of our businesses delivered excellent results with year-over-year sales and profit growth across the board. We expect very strong performance again for the fourth quarter and full year and now expect to exceed $11.3 billion in sales for 2018. We have passed an inflection point. Our significant investments over the last few quarters are now delivering greater sales and profitability. We are gaining momentum and we plan to build on that going forward.

Before I get into the details of our performance and results, I want to note that the primary difference between our GAAP and core results is, again, a noncash, mark-to-market adjustment for our currency hedged contracts. As we've discussed before, GAAP accounting requires earning translation hedge contracts settling in future periods to be marked-to-market and recorded at current value at the end of each quarter, even though those contracts will not be settled in the current quarter. For us, this resulted in an after-tax GAAP gain of $151 million for the third quarter.

To be clear, this mark-to-market accounting has no impact on our cash flow. Our currency hedges protect us economically from foreign exchange rate fluctuations and provide higher certainty for our earnings and cash flow, our ability to invest for growth and our future shareholder distributions. Our non-GAAP or core results provide additional transparency into operations by using a constant currency rate aligned with the economics of our underlying transactions. We're very pleased with our hedging program and the economic certainty it provides. We've received $1.6 billion in cash under our hedge contracts since their inception slightly over 5 years ago.

That brings me to our results and outlook. Third quarter sales increased 16% year-over-year. Net income was up 18%, and EPS was $0.51, up 28%. As Wendell noted, this strong growth results from customers adopting our innovation and realizing the benefits from our capacity investments. As a reminder, our capacity expansion projects support strong and committed customer demand across all businesses. These investments include capacity expansions for optical fiber and cable, our Gen 10.5 display glass plant, capacity for gasoline particulate filters and multiple development projects, including Gorilla Glass for mobile devices and for automotive. As our new capacity continues to ramp towards full production levels, our sales run rate is climbing and our gross margin is going up. Gross margin in the third quarter expanded to 42%, and we expect to sustain that level in the fourth quarter.

Turning to the balance sheet. We ended the quarter with $1.9 billion of cash, and adjusted operating cash flow for the quarter was $956 million.

Now let's look at the detailed segment results and outlook. In Display Technologies, we're delivering stable returns. Third quarter sales were $852 million and net income was $218 million, both up sequentially and year-over-year. As we explained in July, the gross margin in our Display business is improving because of 2 factors: the Gen 10.5 startup; and fleet optimization. Our investment and successful capacity ramp are extending our industry leadership and contributing significantly to the stable profits we're now seeing.

As expected, third quarter sequential price declines were very moderate, and we reached the important milestone of annual price declines improving to a mid-single-digit percentage. For the fourth quarter, we expect sequential price declines to be even more moderate than the third quarter. We expect our full year 2019 price declines to further improve from 2018.

3 factors drive our view that this favorable pricing environment will continue. First, we expect glass supply to continue to be balanced or even tight. Our new Gen 10.5 plant supports the expected growth of large-sized TVs. It is collocated with and dedicated to our customer BOE. We pace and align capacity in tandem with BOE to ensure our Gen 10.5 glass supply is balanced to demand. The ramp is on schedule. We expect the glass supply-demand balance below Gen 10.5 to tighten further because demand continues to grow, while public information indicates there is little capacity growth planned in this segment by glassmakers.

Second, our competitors continue to face profitability challenges at current pricing levels. Therefore, we expect their price declines will slow further as they try to remain profitable. And third, Display glass manufacturing requires ongoing investments in current capacity to maintain operations. To generate acceptable returns on investments, glass pricing will need to improve even further. For Corning, we will only add capacity if we can get an attractive return for our shareholders.

Moving to retail. TV demand has been strong year-to-date, and we expect it to remain robust for the rest of the year. We continue to expect TV screen size to grow 1.5 inches this year. We also continue to expect Display glass market volume growth in the mid-single digits for the full year. Third quarter Display glass market volume grew mid-single digits sequentially. And our volume grew faster as we ramped production in our Gen 10.5 plant, in line with our July guidance.

In the fourth quarter of 2018, we expect the Display glass market volume to grow low single digits sequentially and our volume to grow faster as we continue ramping Gen 10.5 production in tandem with BOE's Gen 10.5 demand. In summary, we remain very pleased with the current dynamics in our Display business. Our ability to capture higher productivity and margin through fleet optimization and the Gen 10.5 ramp and, most importantly, the fact that we are now delivering stable returns.

Let's move to this year's fastest-growing segment, Optical Communications. Third quarter sales were up 22% year-over-year and exceeded $1 billion for the second quarter in a row. Sales growth was driven by both our data center and carrier customers and sales from 3M's Communications Markets Division, which we acquired in June. Net income was $168 million, up 27% year-over-year. Our capital investments are yielding clear benefits. Fourth quarter sales are expected to remain strong and be up low single digits sequentially. Capacity continues to ramp, which will enable us to meet additional demand from large projects underway at multiple customers in both the carrier and data center businesses. On a year-over-year basis, sales growth is expected to exceed 22%.

Overall, we are growing Optical Communications much faster than the market. Our growth is driven by preference for our advantaged solutions in the data center and carrier market and enabled by increased fiber and cable output from our new capacity expansions. We continue to expect high-teens growth for the full year with organic growth in the low teens. Our mid-year acquisitions of 3M's Communications Markets Division contributes about $200 million of the 2018 sales growth. We are pleased with our progress on integrating this acquisition and continue to expect it to be accretive to EPS in 2019.

Environmental Technologies third quarter sales were $331 million, up 19% year-over-year. Third quarter net income grew faster than sales. Our results in this business benefit from volume growth in all product categories as well as strong performance in our manufacturing operations. The North America heavy-duty market continued to drive strong demand, resulting in year-over-year diesel sales growth of 30% for the third quarter.

In auto, we are growing our sales faster than the market due to winning additional business and a shift to premium products. Sales were up 12% year-over-year. Additionally, gas particulate filters contributed to growth, as OEMs ramp for full adoption of Euro 6 regulations, which began in September. We are making progress on capacity and engineering investments to support the ramp of the GPF business. We expect growth to continue in the fourth quarter with sales up high single digits year-over-year. We expect our full year sales to be at mid-teens year-over-year with continued strength in sales of all products, including ramping GPF sales.

In Specialty Materials, third quarter performance was exceptionally strong with sales of $459 million, up 23% year-over-year and ahead of our expectations. This outstanding growth was driven by a strong pull for Gorilla Glass innovations to support second-half new product releases. Net income was $116 million, up 35% year-over-year.

The third quarter demonstrates our ability to innovate and deliver value-added products at a premium price. For example, the use of glass on the backs of phones has doubled over the past year. We delivered another breakthrough innovation in July with Gorilla Glass 6 and broadened our portfolio to capture more value in multiple applications. Innovations like these increase the value of our glass, extend our differentiation and support using more glass in more places. For the fourth quarter, we expect sales to remain strong and be comparable with the fourth quarter of 2017, which was Specialty's highest sales quarter. For the full year, we expect mid-single-digit sales growth after an exceptionally strong year of 25% growth in 2017.

In Life Sciences, third quarter sales were $231 million, up 4% year-over-year. And net income grew 20%, driven by improved manufacturing performance. Fourth quarter sales are expected to grow by a low- to mid-single-digit percentage year-over-year. We remain on track to deliver full year sales growth of a mid- to high single-digit percentage over last year, which outpaces overall market growth.

So for 2018, all of our businesses have positive momentum. We now expect full year sales to exceed $11.3 billion, which is up slightly more than 10%.

Now I'll share some additional outlook details. First, let's turn to gross margin. We delivered on our goal to expand our gross margin to 42%. As we said we would, we accomplished this goal by ramping the new capacity in Optical, ramping the new capacity in Display and completing the Display fleet optimization. We expect to sustain this gross margin percentage in the fourth quarter. This is a significant improvement over the first half and versus last year.

Annual operating expenses should remain consistent with last year as a percentage of sales. For the fourth quarter, SG&A is expected to be about 14% of sales, and RD&E about 8%. We expect other income, other expense in Q4 to remain at our third quarter run rate or about $55 million to $65 million. For the full year, we expect a net expense of approximately $210 million to $220 million.

Full year gross equity earnings are expected to be similar to 2017 at just over $200 million, predominantly from Hemlock Semiconductor, with fourth quarter at approximately $120 million, consistent with typical seasonality. Recall that the timing of contracts typically makes Hemlock's fourth quarter its strongest.

In the third quarter, our year-to-date tax rate is 20.8%. We expect our effective tax rate in Q4 to remain at this level.

The slides we posted give you additional modeling related details for the fourth quarter and the full year. In 2018, we expect to spend slightly more than $2 billion on capital expenditures with programs in every market access platform.

Finally, I'd like to make a couple of comments on China. First, as we said in July, we do not expect a material impact from the enacted tariffs. Second, we have incorporated conservative estimates for China end market demand for TVs and autos in our strong guidance and outlook for 2019. If Chinese demand is better, there is an opportunity for upside.

In closing, our very strong third quarter results underscores that we're well positioned and on track for the remainder of our 4-year Strategy and Capital Allocation Framework. We met our goal to expand margins and now expect to exceed $11.3 billion in full year sales. Strength is expected to continue across Optical Communications, Specialty Materials, Environmental Technologies and Life Sciences, and we are delivering stable returns in Display. Other progress on the framework included returning $542 million to shareholders in the third quarter of 2018 for a total of $11.4 billion since the framework's introduction.

Putting it all together, we have moved beyond the inflection point. We are now seeing our 4-year $10 billion investment drive growth and extend our leadership. We are rewarding investors by returning more than $12.5 billion, which compounds the benefit of our future growth for long-term shareholders.

With that, let's move to Q&A. Ann?

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Ann H. S. Nicholson, Corning Incorporated - Division VP of IR [5]

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Thanks, Tony. Haley, we're ready for our first question.

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Questions and Answers

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Operator [1]

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And that will come from Asiya Merchant with Citigroup.

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Asiya Merchant, Citigroup Inc, Research Division - Research Analyst [2]

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Congratulations on the strong quarter. If you can just humor me on China. I know it's a very conservative guidance that you guys have baked already in, but if you can just talk about how you're thinking about the macro demand environment there. And not just as it relates to TV, but as it relates to optical as well, I think that will diffuse a lot of investors who've been very nervous about China, the demand elasticity and how that plays out for Corning not just for this year, but also into next year.

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Wendell P. Weeks, Corning Incorporated - Chairman, CEO & President [3]

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So as I said in my comments, I mean, what we've tried to do or what we have done is incorporate conservative guidance for the China end markets. For example, on TVs, the TV demand unit has actually been strong this year. Retail has been up about 9% on a year-over-year basis, year to date. But we're forecasting it to be up only 2% in the fourth quarter as a reflection of a slowdown in the end market.

And, you know, very similar from a vehicle standpoint, where the market has been up about 3% on a year-to-date basis, and we're expecting it to actually be down 3% year-over-year in the fourth quarter. From an Optical standpoint, of course, most of our -- biggest part of our business in Optical is actually outside of China and, in particular, in the North America market, and that market has been very strong and you can see that in our Optical results.

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Operator [4]

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Next, we'll go to the line of Wamsi Mohan of Bank of America Merrill Lynch.

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Wamsi Mohan, BofA Merrill Lynch, Research Division - Director [5]

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So you've completed almost $11.5 billion out of your, at least, $12.5 billion in capital return. And I was wondering if you can give us some sense on how willing you might be to take on incremental debt to continue to return to cash to shareholders at a time when it seems like a lot of economic indicators are pointing towards somewhat of a peak in the near term. And how should people think about your gross margins heading into next year? You're obviously exiting with a lot of momentum over here, 42%. As you had thought at the beginning of the year, you're delivering on that. And it seems as though, with all the growth vectors you have heading into 2019, that gross margin should commensurately see a pretty decent step-up. Am I thinking about that right?

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Wendell P. Weeks, Corning Incorporated - Chairman, CEO & President [6]

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Yes. I think from a gross margin standpoint, I mean, we're obviously pleased that all the investments we made in the first -- over the last couple of years are paying off. We're seeing additional growth, and we've expanded our margins to 42%. And although we're not giving gross margin guidance for next year, I mean, I would expect to stay somewhere at this level. And that's what we expect in Q4 and that's roughly what I'd expect in 2019.

In terms of leverage, we said in the capital allocation framework that we would add $3 billion to $4 billion of debt. And we haven't added that much up to now. And so we'd expect to continue to be able to lever because we have such strong operating cash flow. And that's certainly what we will continue to look forward doing over the next -- as we finish up the capital allocation framework.

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Operator [7]

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Next, we'll go to the line of Joseph Wolf with Barclays.

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Joseph Eric Wolf, Barclays Bank PLC, Research Division - MD & Head of Equity Research [8]

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Question on just optical and the carrier side of the equation. There's been some enthusiasm about 5G and how that will be related to Optical. Verizon seems to have slowed momentarily. I'm just wondering your sense of the 5G deployments and how that's -- whether we've got momentum going into 2019, how you're looking at Optical outside of the data center.

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Wendell P. Weeks, Corning Incorporated - Chairman, CEO & President [9]

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Joseph, I would characterize 5G as being in the beginning. We're just really at the early stages of the deployments of the infrastructure needed to have a 5G service level. And some of the first ones you see out of different carriers are some of the easier ones. You're really going to see the demand for our products get stronger and stronger as you have to support full mobility for 5G. That's also going to take phones being upgraded to 5G. So we're just right in the beginning. And we've got a long, long way to go to get that much glass in the ground.

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Joseph Eric Wolf, Barclays Bank PLC, Research Division - MD & Head of Equity Research [10]

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And if I could just ask a follow-up on Valor, and you gave a lot of details, which was helpful. Could you just help us understand how -- what these programs mean in terms of -- are you selling right now? None of this seems to be approved yet. So what are the customers taking? Are they buying? And have you targeted a specific volume of specific drug as you start these programs, I mean, will we see a first win, which is pretty big if you get an FDA approval?

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Wendell P. Weeks, Corning Incorporated - Chairman, CEO & President [11]

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Great question. The way this works is you keep going through stages even before you file with the FDA. And because the change is taken so seriously inside of pharmaceutical production unit, so we go through numbers of trials and then collect stability data and analyze what happened to the active pharmaceutical ingredient after those trials. So that's the stage that we have been in as we have sampled Valor across the industry.

The phase we're entering into now will be that our customers will bring a full file with all the data that they've collected to the FDA and state their intent to use this package when they produce this drug. At that point, they will begin to take Valor really across that entire drug that they have submitted because you -- one of the things that Valor does is enable you to increase throughput as well as guarantee patient safety. And so what the pharmaceutical companies will want to do is get both of those benefits every time someone is injected with that particular active pharmaceutical ingredient. Does that answer your question, Joseph?

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Joseph Eric Wolf, Barclays Bank PLC, Research Division - MD & Head of Equity Research [12]

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I guess, just from a selection perspective at the customers, are they targeting small things to see how this works? Or are they targeting a large kind of active ingredient where you could see a very large win early on with an early approval?

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Wendell P. Weeks, Corning Incorporated - Chairman, CEO & President [13]

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You see different approaches from different pharmaceutical companies. Some people are aiming at their pipeline. Other people are aiming at transferring over current drugs. But everyone is looking at doing across it across their large scale of pharmaceutical product sets because the benefits are they want to accrue to their patients and their production facilities where they actually do volume. So very few are saying let's just try a little. They -- that's part of the overall process, but what they are really looking at is to take their mainline commercial production over to Valor.

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Operator [14]

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We'll go next to the line of James Faucette with Morgan Stanley.

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James Eugene Faucette, Morgan Stanley, Research Division - Executive Director [15]

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I wanted to just ask a quick follow-up to the question that's already been asked. Tony, you said that you're taking a conservative view, particularly on Chinese demand. I'm wondering is -- as you've formulated your guidance and outlook for the December quarter, are the growth rates that you're looking for now, have you reduced those from what maybe you would have been looking for earlier in the year? And are you actually seeing any change in demand that is causing you to be conservative? Or are you just being conservative given the headlines?

And I guess, a similar follow-up question is, as we come to the end of the capital allocation program, is there a time frame that we should be looking at for update as to what comes after that? And what are the kind of the key elements that we should be thinking about as to -- that you'll be weighing as you think about future capital allocation?

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R. Tony Tripeny, Corning Incorporated - Senior VP & CFO [16]

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Sure, James. I think, first, on the answer on China, we are being conservative based on the headlines what we see. The demand has been strong in China, both in terms of our TV business and also the vehicle business up to now but we see the headlines and that's why we're being conservative. And if that demand turns out to be better, there's opportunity there for upside.

In terms of the framework, I mean, clearly, our focus remains on delivering the first 4 years of that framework. We have more than 1 year to go. And operationally, we like to deliver on what we say we're going to do and that really continues to be our focus. So at some point next year, I'm sure we'll talk about what's beyond 2019. I think the things to keep in mind is that our businesses, especially Display, are generating very strong operating cash flow, and we expect that to continue. And we expect to continue to have multiple large opportunities for growth in all of our market access platforms. And any cash that's in excess of that, we'll continue our practice of returning them to shareholders. But in terms of the specifics of that, that we'll cover some time in 2019.

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Operator [17]

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We'll go next to the line of Samik Chatterjee with JPMorgan.

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Samik Chatterjee, JP Morgan Chase & Co, Research Division - Analyst [18]

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I just wanted to ask on Display glass pricing where things have been improving on the lines of how you've kind of talked about it or guided to it. Just thinking about kind of the upside risk and the downside risk here, are you now thinking of a scenario in 2019 where prices could eventually be to, like, flat year-on-year or even kind of increase year-on-year? And what are kind of the developments that could drive faster progress on that front? And then similarly, on the downside, is kind of capacity additions by your competitors things that we need to watch out for as we track or monitor kind of the progress on this front?

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Wendell P. Weeks, Corning Incorporated - Chairman, CEO & President [19]

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Sure. And I think, in terms of the pricing, the important thing here is that we expect our 2019 price declines to further improve from 2018. Certainly, over a time period, we'd like to see them to continue to improve even more than that. But the important thing here is, and I think the news and something that's different than we said before, is we do expect that to improve in 2019.

In terms of the downside variables, and I explained why I don't think there's much risk there, and that has to do with glass supply and demand being balanced, the competitors' profitability challenges and the need to get returns on ongoing investments. So I think we feel pretty good about our pricing environment right now. It is the best environment in more than a decade.

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Operator [20]

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We'll go next to the line of Vijay Bhagavath with Deutsche Bank.

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Vijay Krishna Bhagavath, Deutsche Bank AG, Research Division - VP and Research Analyst [21]

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Wendell, question for you. Just bigger picture on the 3M asset, in my view, it's a strategic asset for the Optical business. How is it going in terms of top line synergies and also on OpEx? And I also have a follow-on for Tony.

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Wendell P. Weeks, Corning Incorporated - Chairman, CEO & President [22]

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Thanks for the question. We're delighted with the acquisition and done even better on revenue synergies probably than we originally thought. It's still early on the operations integration, so we've got a lot of work ahead of us on that piece. But we're really delighted with both the customer access and the product attributes that we've been able to bring into our overall market access platform. So it's still early days, but so far, so good.

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Vijay Krishna Bhagavath, Deutsche Bank AG, Research Division - VP and Research Analyst [23]

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A quick follow-on for Tony on how should we think of gross margins heading into next year. You have many manufacturing capacities getting into the production line, so any thoughts on how we should think of gross margins would be very helpful.

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R. Tony Tripeny, Corning Incorporated - Senior VP & CFO [24]

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Yes. And I think that we're very happy that we've reached the 42% gross margins in the back half of this year. And why we're not giving 2019 guidance, to think about gross margins in that range, I think, is appropriate.

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Operator [25]

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Next, we'll go to the line of Steven Fox of Cross Research.

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Steven Bryant Fox, Cross Research LLC - MD [26]

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Two questions for me. First, following up on that last question. Tony, can you just maybe give us a rough time line of when some of these expansions sort of hit optimal levels from a utilization rate, et cetera? It sounds like the fleet optimization is complete, but what about the others? And then secondly, Wendell, can you just talk about maybe round out the fiber discussion and talk about the data center success a little bit more and maybe where your advancements are having the most impact with those customers?

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R. Tony Tripeny, Corning Incorporated - Senior VP & CFO [27]

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I think, in terms of the capacity ramps, I mean, obviously, we've been ramping in the third and the fourth quarter. And we continue to expect that to ramp throughout next year. And the good news is that we have committed demand for those capacity ramps, so we feel good about that.

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Wendell P. Weeks, Corning Incorporated - Chairman, CEO & President [28]

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And on data center, the places where we're most excited at this moment tend to be as more and more of the operators are adopting some very high fiber count systems. And then glass, much like the way you're used to thinking about it for the public networks is also breaking into the next layer of those data centers. So think about it a little like when you went in the public networks from long haul to regional to metro to home, right, following that line, we're seeing that same thing begin to happen in this great big mesh networks that are getting built inside these data centers.

So more and more of that architecture is falling to glass. And the amount of glass required is also going up in terms of fiber count as people try to separate storage from the different processing techniques. And so you end up with these big meshes built and that tends to be really good for glass demand. So that's what's going on. To make that happen, we need a lot of innovations in our connectivity products and how do you manage all that glass, and that's when we get really excited about our product roadmap going forward.

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Steven Bryant Fox, Cross Research LLC - MD [29]

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That's helpful. And just to be clear, Wendell, that's -- what you just described is sort of in the here and now happening into next year, you're benefiting from those trends.

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Wendell P. Weeks, Corning Incorporated - Chairman, CEO & President [30]

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Yes, we are. The roadmap set still is product that we're going to have to develop to handle this ongoing trend, to make it even more cost efficient. As optics gets closer and closer to those ASICs that are driving the processing, we're going to have to activate stuff like our glass knowledge, our ability to handle the optical physics of that and the thermal challenges of that, that's out in the future. What we're dealing with right now is the main line of how do we connect up at the current levels with the architectures are going to.

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Operator [31]

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We'll go next to the line of Rod Hall of Goldman Sachs.

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Roderick B. Hall, Goldman Sachs Group Inc., Research Division - MD [32]

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I've got a couple of questions. I wanted to start with Specialty Materials. The -- like, if I look at the second half of the year, the numbers are pretty much in line with what we were modeling, but the seasonality is a lot different than what we were modeling a lot more weighted back into Q3 than Q4. So I just wanted to see if you could comment on whether that seasonality is what you would have expected back earlier in the year. Is it a little bit different? Just kind of how that flowed versus what you had been expecting earlier in the year, if it's just our model is not quite being on track with what actual -- actually what's going to happen.

And then my second question is on the Chinese automotive glass plant. I know you'd said it will be operational in 2019. Do you have any idea when? I mean, could give us an idea on whether that's earlier or later in the year? And do you anticipate any tariff impacts for the products coming out of that plant?

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R. Tony Tripeny, Corning Incorporated - Senior VP & CFO [33]

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So in terms of the Specialty Materials, we're very happy with the results in the third quarter. We said in first -- for the full year, we were going to grow after a very strong 2017, where we were up 25% and how much that growth was going to be dependent on the adoption of our innovations. And I think it's very clear now that that adoption has been incredibly strong. The issue always is the timing of that adoptions is up to our customers. And it's hard for us to know at the beginning of the year how much those adoptions are going to have and what quarter they're going to happen. So from a full year standpoint, they were in line with what we expected at the beginning of the year. And from a quarterly standpoint, it just always depends on where the customer orders.

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Wendell P. Weeks, Corning Incorporated - Chairman, CEO & President [34]

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So much like you Rod, we have a hard time getting the seasonality right as well. So on the automotive interiors piece, that production is in the midst of getting built right now. That ramp is going. We'll start putting production through that in 2019. I don't want to call exactly the timing at this point in time because it is a pretty complicated project. And we also are managing, as well, a supply chain beyond the factory that we're building. So if you just give us a little more time when we start making that public of commercial production through that facility, we'll be back to you.

On tariffs, the products that we're making and that our customers will incorporate at this time are not on any tariff list, so we don't anticipate that being an issue if the trade arrangements continue as we understand them at this time, sir.

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Operator [35]

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We'll go next to the line of Thejeswi Venkatesh of UBS.

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Thejeswi Banavathi Venkatesh, UBS Investment Bank, Research Division - Associate Director and Analyst [36]

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Given the panel oversupply, there's some concern out there that some of your customers could convert or perhaps shut down older plants. How should investors think about the impact of this panel supply on Corning?

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R. Tony Tripeny, Corning Incorporated - Senior VP & CFO [37]

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I think, at the end of day, what really drives our demand is the end market and how many people -- how many TVs are sold and what size those TVs are. And so from -- as we look at this year, we thought we would be up mid-single digits driven both in terms of the -- where the TV unit growth is, but, most importantly, the screen size growth. And as we look forward, we -- that screen size growth has continued for a number of years and we expect that to continue going forward. So I think the way people should think about our demand is really driven by the TV market.

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Ann H. S. Nicholson, Corning Incorporated - Division VP of IR [38]

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Haley, we still have time -- we've got time for one more question.

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Operator [39]

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And that will come from the line of Rob Cihra with Guggenheim Partners.

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Robert George Cihra, Guggenheim Securities, LLC, Research Division - MD and Senior Analyst [40]

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Just a question on CapEx model from here. With this year tracking slightly more than $2 billion that's driven by a lot of unit capacity expansion, which is great because it's driven by demand, I mean, any -- I guess, you probably don't want to give us an outlook for 2019 budget yet, but, I mean, what are you thinking in terms of the puts and takes? And is that $2 billion kind of a new baseline or demand-dependent? Just anything you can give us for 2019 as a model.

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R. Tony Tripeny, Corning Incorporated - Senior VP & CFO [41]

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As we -- you're right. We don't want to give guidance for 2019. But recall that our Strategy and Capital Allocation Framework said that we would spend between $6 billion and $7 billion over the 4-year period. And we still expect to be in that range -- that area.

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Ann H. S. Nicholson, Corning Incorporated - Division VP of IR [42]

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Thanks, Rob, and thank you all for joining us. Before we close today, I wanted to let everyone know that we'll be at the Crédit Suisse Technology, Media and Telecom Conference on November 27 and the Barclays Global Technology, Media and Telecommunications Conference on December 6. We'll be posting some virtual presentations and webcasts on business topics through the quarter. And finally, the web replay of today's call will be available on our site starting later this morning. Once again, thank you all for joining us. Haley, that concludes the call, please disconnect all lines.

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Operator [43]

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And ladies and gentlemen, you may now disconnect.