Corning Inc (GLW) — Q2 2015 Earnings Call Transcript

Thank you, Brad, and good morning. Welcome to Corning's Second Quarter Conference Call. With me today is Wendell Weeks, Chairman and Chief Executive Officer; Jim Flaws, Vice Chairman and Chief Financial Officer; and Tony Tripeny, Corporate Controller. Before we begin our formal comments, 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. These remarks involve a number of 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 this presentation contains a number of non-GAAP measures. A reconciliation can be found on our website. We have slides posted with our webcast today live that go with the formal comments. Now I'll turn the call over to Jim.

Thanks, Ann. Good morning, everyone. I'm pleased to share with you our second quarter results, but before I dive into earnings, I’d like to take a minute to highlight our July 21 organizational announcement. In case you missed it, I announced my retirement effective at the end of November. After 42 years with one of the world's most enduring and successful companies, and with the company in a very strong financial and operational position, I believe it's a good time to hand the reins over to the next generation of leaders. I'm very pleased today to introduce you to Tony Tripeny, our current Corporate Controller, who many of you have met and who will become Corning's Chief Financial Officer in September. Tony has 30 years of finance experience at Corning, including playing a key role in numerous acquisitions. In the last 10 years as Corporate Controller, Tony has been integral in forming and executing our current strategic framework and most recently delivering more than two years of earnings growth. Tony has worked very closely with me, and more importantly, he and Wendell have worked together for many years, including time in our telecom business. I'm delighted that Tony is succeeding me. I'll be taking some time to introduce Tony to our investors over the next few months. For today, Tony will be joining Wendell and me for the Q&A portion of the call. So now let's turn to our performance. Our results clearly demonstrate we're executing to our 2015 plan, which we laid out for our investors in early February at our Investor Day. Our businesses are delivering strong results, our acquisitions are delivering synergies and opportunities for new growth, and we're returning even more cash to shareholders. So let's start with a quick look at our overall first half performance. Core sales were up 2.3%, and without the impact of foreign exchange, that increase would have been 4.7%. We are delighted with this increase, especially knowing we are not counting on sales growth from the Display segment. Our earnings and EPS growth were even more impressive over the first half. Earnings were up 10.5% and would have been up 13.4% without the impact of FX. And we leveraged those earnings growth into higher EPS growth through our share repurchase program. EPS was up 15.9%, and without the impact of FX, it was up 19%. We’re delighted by these strong performance numbers, particularly given this period of low economic growth, and we hope you are also. Now I'd like to highlight some specifics. In our Optical Communications business, we've been strategically positioning ourselves over the last several years by focusing on product innovations and acquisitions to capture growing demand in optical networks. And we are winning. Customers are increasingly turning to our innovative solutions to solve their speed, capacity, and cost challenges. While the overall telecom CapEx market grows by 2%, the optical portion is more than double that at 5%, and we're growing faster than the optical portion, particularly with our advantage solutions in fiber-to-the-home data centers. We're growing at twice the pace in the optical portion of the telecom market. This strong performance began several years ago, and we think it will continue. Now let's focus again on the first half of 2015 and compare it to the first half of 2013. Sales over this period are up 40%, and NPAT is up 72% over the last two years. We had strong results again in Q2 which I'll cover in more detail in a minute. I want to emphasize the strong performances driven by both organic and inorganic sales growth. Before the impact of FX, our Q2 organic sales were up 10%. We grew 21% before FX, including the sales from acquisitions. We expect this outperformance in our Optical Communications business to continue over the next several years, assuming continued adoption of both fiber-to-the-home and larger, more efficient data centers. Now turning to Gorilla Glass, Gorilla Glass remains the cover glass of choice for branded devices and is gaining share. Additionally, we have new products that are gaining traction and even more in the pipeline. First, Gorilla Glass 4 is now designed into 43 models as OEMs embrace its superior drop performance. Its penetration is the fastest yet of any of our new Gorilla Glass introductions. Even better, it has a price premium. Second, our sales of Gorilla Glass in China are up 45% year-to-date. Third, we just announced our first smartphone customer using Gorilla Antimicrobial Glass. Finally, our overall efforts to drive volume, reduce costs, and innovate with price premiums for the cover glass market have contributed to performance. Specialty Materials gross margin is up 170 basis points year-to-date. Now turning to Display, the pricing environment for LCD glass continues to improve. Prices declined moderately in Q2 as expected. I spent some time on the April call explaining the difference between our overall price declines and what I called the heartbeat of glass price declines. As a reminder, we are in the midst of a significant move from thick to thin glass. Because we've incentivized customers with price to make the switch, it makes our overall price declines look larger. As a reminder, we did this incentivizing because our margin dollars on thin remain neutral to thick, and we gain free capacity. The heartbeat price decline focuses on price decline without the thick-to-thin impact and without customer mix impact. We've been making very steady progress with the lower heartbeat declines as this graph shows. As we near the end of the big thick-to-thin conversion at some of our major customers, our overall price declines and the heartbeat decline should converge. Prices for Q3 under most of our LCD glass contracts have now been set. I'm pleased to say we expect to see moderate price declines again in Q3. You may recall that some of these contracts contain price mechanisms that establish defined relationships between our prices and the average prices offered by comparable glass suppliers. Customer input to date indicates the average price for LCD glass will result in moderate price declines in Q3. When you look at the heartbeat of pricing under our contracts, without the impact of product mix, declines have been in the 2% range for four consecutive quarters, and we expect this to continue in Q3. During the quarter, we also reached an agreement with Gerresheimer AG to acquire their pharmaceutical glass tubing business that has operations in Vineland, New Jersey, and Pisa, Italy. With this acquisition, we expect to accelerate our innovations for the pharmaceutical glass packaging market. As part of the transaction, the two companies will enter into a 10-year supply agreement for pharmaceutical glass tubing and also form an equity venture, 75% owned by Corning, focused on accelerating Corning's innovations for the pharmaceutical glass packaging market. The transaction enables Corning to bring its revolutionary new technologies to the pharmaceutical glass packaging market with Gerresheimer, a long-standing leader in the industry. We've now formed a new internal division called Corning Pharmaceutical Technologies with the new assets and an equity venture to drive our innovations into the marketplace at a faster pace. It may take a while, but we believe the size of the prize here for Corning is $1 billion in sales. Let me turn to our second quarter details. As a reminder, these are core results. Second quarter sales, gross margin, operational expenses, and equity earnings were all in line with our expectations coming into the quarter. The stronger dollar did reduce core sales in the second quarter by $61 million versus a year ago. Primary currency exposure here is the euro. Gross margin was 45%, up year-over-year, driven by gross margin improvements in Optical, Environmental, Specialty, and Life Sciences. SG&A and R&D spending were down in absolute dollars versus Q2 last year, driven by cost controls and the synergies from the CPM acquisition. Net income was up 7% versus last year, despite the impact of a strong dollar, which had an impact of $18 million on our profit. This impact on Q2 results last year is approximately $0.01 per share, similar to what we outlined coming into the quarter. Earnings per share was $0.38, up $0.04, or 12%, versus last year and better than the Street consensus by $0.01. I'm delighted with these results. Now let's go through the segments, starting with Display. Display sales were $963 million in Q2. Sequentially, price declines were moderate and volume was up in the low single digits, both as expected. Year-over-year volume was up nearly 10%. Gross margins in Display were consistent with last year, driven by the additional volume and synergies, offsetting price declines. Net income was down just slightly year-over-year. Our continued cost reductions, boosted by the CPM synergies, and moderate pricing environment have positioned us to maintain stability in this business and continue with strong cash flow generation. We're delighted with the results. Now looking at the supply chain, we estimate forward-looking weeks of inventory ended quarter two slightly better than Q1, which is a positive indicator. Our model indicates that forward-looking weeks of inventory will also shrink in the back half, and I'll discuss that more in the outlook segment. Now turning to Optical Communications, Q2 sales were $800 million, up 17% versus last year and better than our forecast. Organic growth was 10% before the impact of foreign exchange, and acquisitions made up the balance. Fiber-to-the-home and data center sales in North America drove sales growth. The stronger dollar also impacted sales here by $27 million. Net income was up 44%. Optical Communications has some euro-denominated costs, so the FX impacted profitability here only slightly. Additional volume in all parts of the business and acquisitions drove the higher net income. In Environmental, Q2 sales were $260 million, down 9% versus last year, primarily driven by foreign exchange trimming sales by approximately $17 million. We have some euro-denominated costs, but most of the costs in Environmental are dollar-based. The stronger dollar was a drag on year-over-year profitability, impacting net income by $6 million versus last year. Continued execution on costs helped the segment maintain net income year-over-year, delivering $46 million. In Specialty Materials, Gorilla Glass volume was up mid-teens year-over-year. Versus last year, segment sales were down 9%, driven by the lower sales of advanced optic products, experiencing a cyclical downturn as part of the semiconductor industry and a strong dollar. Continued cost reductions, growth of the Gorilla Glass volume, and the Gorilla Glass 4 price premium helped improve profitability, allowing the segment to maintain year-over-year net income despite the sales decline. In Life Sciences, Q2 sales were down 5% year-over-year, and net income was consistent. FX was the primary cause of the year-over-year decline. Net income would have increased 9% without the impact of foreign exchange rates. Equity earnings from Dow Corning were $63 million, in line with expectations. The stronger dollar impacted Dow Corning sales and earnings, reducing Corning's equity earnings by $4 million versus last year. Earnings were helped by a one-time IP settlement which was embedded in our original guidance. Now let's turn to the balance sheet. We delivered free cash flow of $380 million in the quarter. Our capital spending forecast remains at $1.3 billion to $1.4 billion for the full year. During the quarter, we increased the rate of our share repurchases by about 25% compared to Q1. We spent $626 million on share repurchases in the quarter. This increase reflects our view that with the company's current performance and future prospects, our stock is undervalued. We expect the company's cash generation to remain strong, and we want to put that cash to work for shareholders. As a result, the Board of Directors authorized a new $2 billion share repurchase program on July 15. Since October 2011, the board has authorized $9 billion of share repurchases. Our balance sheet cash is healthy at $5.5 billion, and we ended the quarter with approximately $2 billion of cash in the United States. Now I'd like to swing to the outlook. First of all, we expect the Q3 impact of foreign exchange rates to be similar to Q2, or approximately a negative $15 million of impact and $0.01 of EPS compared to quarter three a year ago. Let's start with Display. After analyzing demand at retail, talking with our customers and reviewing external research reports, we're updating our expectations for the LCD glass market. We now expect the worldwide LCD glass market at retail to grow approximately 6% to 7% year-over-year in square feet. This forecast is down from our April view as we've reduced demand outlook for IT applications and television units in certain geographic markets. This lowers our retail outlook by approximately 94 million square feet, or approximately 200 basis points. With monthly data available through May year-to-date, worldwide television unit sell-through is now behind our expectations, and we've revised our view to flat year-over-year unit growth. However, screen size growth is tracking better than our expectations, and we're raising our forecast for the average size of televisions, which helps offset a portion of the weaker unit growth. We still expect television glass at retail to grow 8% and small format devices to grow 16% at retail this year. I know small format devices may not excite you, but the 16% growth in this area is a 63 million square foot increase for the overall market for the year. We don't believe these minor adjustments in television demand reflect any fundamental change to the longer-term drivers of TV demand, and continue to expect excellent long-term demand for televisions, driven by the replacement of older sets and technological innovations such as 4K television. We believe the supply chain will work down some inventory in the second half, bringing down weeks of inventory by approximately two weeks by year-end. We view this drop as a mild inventory adjustment. For the LCD glass industry in the third quarter, we expect the LCD glass market to be up by low single digits sequentially, and our sales volume to also be up in line with the market growth. We expect our share to remain stable. We continue to see balanced supply and demand for Corning's Display Glass. We're running our online capacity at full utilization, keeping some of our capacity idle to maintain good balance. We believe that other glass makers are also running their online capacity at full utilization, and they have publicly stated that they are keeping some capacity idle. Now let me turn to pricing. As I mentioned, we expect to see moderate pricing declines again for our glass in Q3. The question on many people's minds is whether the interaction between the softening demand and the reduction of two weeks of inventory will cause more severe price drops in Q4. Our conclusion is no, for various reasons which I’ll outline in a minute. First, let me outline our expectations on market volumes for Q3 and Q4. We're forecasting a low single-digit percentage sequential increase for Q3 and a corresponding decrease in Q4. These volumes, combined with the large normal seasonality of television retail demand in Q4, should bring inventories down a couple of weeks. This calculation includes the softer television outlook mentioned earlier. We do not believe the sequence of volume shifts and inventory moves will trigger a more severe price event. The industry is in a much stronger position than during past inventory adjustments. We believe price declines in our contracts will remain moderate for several reasons. Panel makers are profitable, benefiting from the weaker yen. There's a balance of supply and demand in the LCD glass industry. The operating margins of our competitors, based on publicly available information, suggest they can't afford large price declines if they hope to remain profitable. The rapid thick to thin conversions we've seen in recent quarters are nearing completion. Our future quarter-over-quarter ASP comparisons should no longer reflect as much those thin discounts associated with the conversions. Corning has several levers to pull to navigate slight market weakness and inventory adjustments, including idling capacity, especially at normal tank repairs. We think industry conditions and those levers will help, and we believe other glass makers have similar options. Now let me turn to Optical Communications. In Q3, we expect sales to be up mid-teens year-over-year, driven by continued strength in fiber-to-the-home and data centers in North America. Also contributing to revenue growth will be the impact of our three previously announced acquisitions. Our sales have been better than expected in the first half, and our outlook for the back half is for more growth, so we have upgraded our full-year outlook here. Expect Optical Communication sales will grow mid-teens for the full year. In Environmental, we expect continued strength in the end market in Q3. Heavy-duty diesel and light-duty substrate sales are up versus last year, reflecting healthy end markets. However, we expect year-over-year Q3 sales for us to be down mid-single digits due to the impact of the euro and other foreign exchange. Now turning to Specialty Materials. We expect Gorilla volume to be up high single digits sequentially but flat with last year's very strong Q3. The mix effect of Gorilla Glass 4 will help somewhat, but the continued weakness in the advanced optics market, driven by softness at our semiconductor customers, will more than offset this, leading Q3 sales to be down by high single digits versus last year. In Life Sciences, we expect sales to be down slightly compared to last year's third quarter, driven by a weaker euro. Without the foreign exchange impact, sales would have been up low single digits. Continuing the rest of our Q3 forecast, we expect Q3 equity earnings from Dow Corning to be approximately $65 million, in line with Q2 and last year. Sales are impacted by exchange rates, but equity earnings are flat due to volume and cost benefits. We expect our gross margin to be approximately 44%, consistent with last year. SG&A and R&D spending will be 13% and 8% of sales, respectively, and consistent with 2014. Other income/other expense is expected to be a net expense of approximately $50 million. Our effective tax rate for 2015 is expected to be approximately 18%. To summarize before we go to Q&A, we remain well-positioned in each of our segments and are outperforming our competition. We're prepared to weather disruptions through our advanced products and lower cost position. We are the best in the world at specialty glass, ceramics, and optical physics, and these capabilities are becoming more relevant to a broad range of industries. When you put it all together, it's clear our strategy is working. We're growing earnings today, leveraging our innovation for future growth, and delivering significant value for investors. Before I proceed to Q&A, I’d just like to thank investors for the opportunity I've had to engage with you as Corning's Chief Financial Officer. I've always enjoyed the opportunity to meet and discuss Corning with you. Now I'll turn it over to Ann.

Thank you, Jim. Brad, we'll open the lines for questions now, please.

Yeah, good morning, guys, and thank you for the question. Congratulations on retirement, Jim. Good working with you over these last few years. So congrats on that. And welcome, Tony, as well. I wanted to start off with, I guess, Jim, a little bit of discussion on the trajectory of demand through H2. Clearly, you guys are reducing guidance for Q3 a little bit or at least missing our expectations a little as demand weakens here, but then the overall LCD glass demand picture you're painting actually causes us to think that our numbers are maybe a little low in Q4. So I guess I'd like to get some commentary on how you see trajectory yourself. And maybe if you could tie into that a little bit of commentary on 4K. Panel pricing keeps dropping faster than we expected. Do you guys think that elasticity on 4K could be now more accentuated in Q4 if consumers hang in there and prices are a little bit lower? So just wanted to get a comment on that. And then lastly, I guess, just some demand color. All of us are trying to figure out what's going on with global demand generally, so any further color you can give us on what you see regionally, how – are you seeing any signs of stabilization, etc.? Sorry, a bunch of questions there, but thanks.

Thanks, Rod. Well, I enjoyed working with you also, and I think you just set the record for six questions in one. Let me start with comments on the trajectory. Our July glass pulling from our customers, panel makers, is equal to what we've seen in June. We're not actually seeing any slowdown from our customers at this point in time. So I hope that helps on the trajectory. We believe, as I said in my outlook, that we will expect to see that there is some impact as customers recognize the inventory, the slowdown in the end market. What we're showing is that we'll see a glass market demand go down in Q4 versus Q3. We could get that wrong a little. I mean it could be a little higher in Q3 and decline a little more in Q4. It's tough to tell. Right now, as I said, we haven't seen panel makers pull back. Relative to ultra-high definition, we clearly think it will be important in the coming years. As you know, our forecast of sell-in is 27 million units – our sell-through is 27 million. Our forecast of sell-in is higher than that. We believe that pricing points are approaching the inflection point. We don't know if we'll get there in Q4. I suspect, given the overall weaker economic news, that maybe people will be driving that price premium down to the 1.5, in which case that should be very good for demand for us. I think I got most of your questions.

Yeah.

If I could just add a little bit of color for you, Rod. I can see how you can get to your numbers. I do. What makes it hard to do, just purely quantitatively, is that you have some real behavioral dynamics here. In the first part of the year, the set makers were quite worried that they could get enough panels to support demand in the back half. So they were building inventory. Panel makers' inventory levels are very healthy, and they're profitable. They can support continued price declines in panels and still may decide to run with higher utilization than is currently in our forecast for Q3. Therefore, you could run hotter in Q3 like you are anticipating. What we're saying is if you're going to come back to the same total year, that would mean that Q4 would be less than what we're coming to. I can see how you can get your cycle. It’s perfectly reasonable. The key thing for us is what's the dynamic in glass. In glass, we have inventory levels at the low end of healthy. That gives us and our competitors a lot of levers to adjust to whatever Q4 is, assuming we're in the range of the total end market demand that we're discussing. Either we have product development we can do, or we've got glass tank repairs that we can pull ahead, right. So we have all the levers that we need to sort of keep demand and supply, whether your cycle's right or the one that we're currently basing our forecast is right. Does that make sense?

Yeah, that's helpful, Wendell. Thank you very much.

Hi, guys. Good morning. I just had a couple of questions. Jim, I just wanted to clarify your comments on Gorilla Glass. I think you mentioned volumes flat year-over-year. I just wanted to confirm, how should we be thinking about ASP declines, and how should we be thinking about revenue trends for Gorilla Glass year-over-year? And then just a quick question on LCD display. I think part of your assumption set assumes that the panel makers remain relatively healthy. I was just wondering, what happens if things were to deteriorate and if they were to become unprofitable in the back half of the year, how should we think about the potential ramifications for you, especially with respect to glass pricing?

What I mentioned on Gorilla Glass in Q3 is that the volume would be flat versus Q3 a year ago. Just as a reminder, Q3 a year ago was extremely high because of some of our customers' big model launches. So we're actually delighted that we're holding it flat with that. Price declines, we have price declines on Q3 and a price premium on Gorilla Glass 4. As we see more Gorilla Glass 4 showing up in the mix, particularly as we head into Q4, you should see a very stable price effect. We're looking for a very good Q4 in Gorilla, also. On panel makers, I just won't speculate. Their profitability is much higher right now than it has ever been in any softening period or inventory correction. It would take a massive drop in panel prices, and we are not forecasting that. We're expecting panel prices to drop about 9% going forward, and they'll still remain profitable if we're right on that.

Okay. And then if I just...

Let me just add one quick thing for you on Gorilla just for fun, right. Through Q2, we just passed cumulative $4 billion in revenue in Gorilla, and over 1 billion square feet of glass. The nice thing about the price piece here is we anticipate overall for Specialty, CSM, to take a double-digit profit growth here, including Gorilla, for the year. What Gorilla 4 will allow us to do is basically flatten price declines, and that's going to be terrific.

And then I guess a quick follow-up probably for you, Wendell, just on telecom. Can you just give us maybe some color on the demand? You've mentioned fiber-to-the-home in your commentary. Would love to get just kind of incremental insight in terms of the geographic trends you're seeing. And then just sequentially, you're guiding to sales kind of flattish. Just wondering, is that just seasonality or are you seeing some sort of maybe moderation in demand?

For Optical, I think Jim used this, probably the most fun statistic, which is we normally say our long-term goal in Optical is to grow at twice the rate of telecom CapEx. What we've been seeing now for quite a while, excluding acquisitions, we're growing at four times telecom CapEx, and including acquisitions, over 10 times telecom CapEx. What's driving that is a combination of the right products, but also our strength in the right regions to get to your second question. So we're seeing very strong North America, fiber-to-the-home, and data center work. That combination of our strong position in data centers and our strong position in fiber-to-the-home is what's behind this powerful growth story.

Just one other comment, you mentioned sequential. Ordinarily, Q3 and Q2 sequentials are pretty flat. We’re delighted by the year-over-year in both of those quarters being up the mid-single digits in sales. So if you look at telecom's cycle, absent anything strange, low first quarter, higher second and third quarters, the fourth quarter is where the most variability shows up historically.

Again, thanks, guys, and congrats, Jim.

Thank you.

I was just going to add, I think that that growth in the third quarter is in the mid-teens.

Year-over-year, right?

Yeah, that's correct. Year-over-year.

Yeah, I was talking sequentially.

Okay. Cool. Thank you.

Yeah, thank you for taking my questions. Tony, congrats on the new position, and Jim, congratulations on the retirement.

Thank you.

Thank you.

I guess, Jim, I want to focus on what you touched on with the move from thick to thin glass nearing completion. I think previously, you discussed thin as being 0.7 mm or less. I'm trying to help get some clarity on how thin can the industry actually go. When you make the comment that it's nearing completion, does that mean we're nearing getting the industry below 0.7 mm, or are we approaching a lower thickness like 0.4 mm?

What I'm talking about is the move where we start from 0.7 mm and now I'm talking about getting to 0.5 mm. Clearly, in some formats, we have some customers at 0.4 mm and smaller generations, but what I was talking about as the big move was what we started in 2008 when almost everybody was at 0.7 mm and getting most people to 0.5 mm.

Okay. If we think about that move in going to 0.5 mm and the capacity that it naturally builds for you, are there any CapEx implications on the horizon, where as this move to thin starts to near completion, Corning will have to start investing in glass capacity?

No, I think we still think we have productivity increases coming. As some customers go below 0.5 mm, we don't expect to offer price discounts for that, but we should still get capacity from it. The only CapEx that is on the horizon for us is if someone were to build a Gen 10 operation in China, which we've discussed for over a year. We don't expect that to be on the horizon until late 2016, early 2017.

Okay. Just one cash question, Jim, since that's your favorite topic. You've announced a $2 billion buyback. That expires at the end of 2016. In that timeframe, I think you should pay out about $1 billion in dividends. Given that kind of $3 billion and returning capital to shareholders, I think you've mentioned you have $2 billion in cash in the U.S. So I'm curious if just cash from operations will allow you to fund the total $3 billion and return on value to shareholders, or is there a need to repatriate cash or find another way to finance those returns?

We're always looking for ways to bring cash back from offshore, and as I think you've seen, we've been successful doing that. We did raise some debt in the second quarter. We're very comfortable with our ability to continue to do this without giving you the exact specifics about repatriation.

Thank you. Good luck.

Thank you. Thank you, Jim. It's been a pleasure, and welcome, Tony. I have a question on FX. Hedging will eventually roll off, so perhaps your thoughts on your plan of action, considering additional hedging at the moment seems cost prohibitive. Do we think about passing the increased costs down to your customers, or do we revisit U.S.-based pricing, which is in effect a price hike for your customers? What are you thinking there?

We’re continuing to look for innovative ways to deal with what I'll remind everybody is in 2018, it's quite a way away. The possibility is whether we can do a unique hedging structure that might allow us to not have the impact of the yen going from essentially ¥99 to the low ¥120s right now. We're also evaluating whether we could return to U.S. dollar pricing and perhaps ways of doing that by pricing some of our new products in U.S. dollars. We fundamentally think that the glass industry will continue to reduce price declines to a lower level and maybe could even flatten them out or raise them at some point. We're hard at work at that, but we're not panic-stricken, either as we go along. It's only the middle of 2015.

Okay. Sounds fair. Jim, a question on screen sizes. We are moving to larger screens, and 4K will come initially in larger sizes. Are we getting to a point of diminishing marginal utility reaching optimal screen sizes? You're getting the benefit of size offsetting slowing units, so the question that we get is how long can that last?

We don't see it slowing down. I think you've heard me say that every year, I have a bet with our team that we're going to exceed their forecast, and we just raised it again. The average screen size – I use the 30-inch and above metric because I think it's more useful – is growing very nicely again this year. What’s going to be helpful for us in the future is that as 4K becomes a bigger proportion of demand, it drives you to getting a bigger television. Right now, the average 4K television is over 50 inches. If you think about that compared to the average television, the 30-inch and above category, which is only 41 inches right now, as that grows, we think we'll continue to see average screen size grow. Televisions are getting thinner, which opens up that opportunity for us. We’ll see who wins and who loses in that space.

Helpful. Last thing, Wendell, if we took a look at telecom, how about your thoughts on accelerating M&A for telecom and Clark and his team. It is a segment growing very fast. Can we add velocity to deal-making, considering this positive outlook? How about a blank check for Clark?

No such thing as blank checks. But the core of your idea is that given the strength of our position and how much win there is in our category, we would like to accelerate that further with continued acquisitions. That's clearly our strong intent. It’s just a matter of getting the ones that are the right fit at the right price.

That's helpful. Thank you, and our pleasure, Jim.

Thanks, Mark.

Yes. Thank you. Congrats, Tony; and Jim, we will miss you. My first question's on Display profitability expectations. Previously, you had expected that to be flat on a year-on-year basis. Now given the slowdown you've alluded to, can you talk about the magnitude of potential profit decline for the full year on Display? I have a gross margin follow-up.

With less volume, we would expect not to have the ability to hit the flatness we were hoping for in Display. Probably, we’ll have a little bit down. I won't categorize how much that is at this point in time, but it could be slightly down. If you saw, it was slightly down in Q3 when our volumes weren't as strong as they had been in Q1. We continue to feel like we've got excellent cost reduction ideas, and the Display team is working on how they can do even better in cost reduction in this period of slightly lower demand.

Thanks, Jim. Your gross margin guidance indicates a step down from 45% to 44% in the third quarter, but you're guiding shipments up quarter-on-quarter for LCD glass. Should we conclude that your LCD utilization rate is going to be down quarter-on-quarter in Q3? Should we expect gross margins to also contract sequentially from Q3 to Q4?

I think we have a little bit of an impact in Q3 from inventory changes, but that's just slight. I'm not expecting our gross margin in Q4 to be materially different.

And last one from me if I could. Jim, you noted that the heartbeat pricing and true pricing to converge over time here, but can you help us with what the magnitude of the delta that exists now between the heartbeat of LCD glass pricing and true pricing over this quarter and maybe over the last couple of quarters? Thank you.

I'll give you a rough CFO math. We're in the 2%s, and the overall pricing is in the 3%s. We believe we'll drive that overall pricing down and start converging.

This ties to an earlier question and answer you heard from Jim. I want to make sure we have portrayed this accurately. We believe the market will continue to move to thinner glass. We have requests from customers, of course, at 0.4 mm and down to 0.3 mm. We believe that competitively, it gets harder to do. There isn't as much cost improvement as you begin to move to those thicknesses because of the relative difficulty of handling that much glass flow and doing it in a stable way. The way you have to think about going thinner is to go faster. The faster you pull glass, the more unstable the sheet becomes when you're doing something like fusion. When you're doing something like float, you've got a fundamental problem in the relative weight in the physics of the glass on top of a tin bath. Those things combine, we think, to give us an opportunity to differentiate ourselves on thin. 0.4 mm is more within the range of our competitor's capabilities than 0.3 mm is. Our plan is to stabilize Display long-term and ultimately grow profitability. Like I said, remains to be seen. However, that is our approach.

Hi. Thanks very much. I wanted to add my congratulations to Jim and Tony as well. Wendell, if I can follow up on the point you just made. Were you saying that you no longer expect to be pricing at a discount starting with thicknesses of 0.4 mm and below? I wanted to understand the premise behind that. Is it that you don't expect your competitors to be able to achieve those kinds of thicknesses or maybe not at the same cost structure as Corning?

Yes. The second is that while we would – 0.4 mm is one level, 0.3 mm is another, right? We believe that competitively, it gets harder to do. There isn’t as much cost improvement as you begin to move to those thicknesses because of the difficulty in handling that much glass flow and doing it in a stable way. The way you have to think about going thinner is to go faster. The faster you pull glass, the more unstable the sheet becomes when you're doing something like fusion. We think we can keep this price trajectory as we keep moving thinner.

That's helpful and just to bracket that a little bit in terms of how far are we from the transition to 0.5 mm being done? Or what percent of volume remains to be converted? Any guidepost you can put around other transitions you've talked about over the next two years or three years would be helpful.

We don't give out specific numbers, but I’d say over the past three quarters, you've been seeing very big moves in the average amount of glass going thick to thin, and these upcoming quarters, two quarters should be much smaller.

Okay. And then, Jim, just one more near-term question for you, which is that you talked about channel inventories coming down for the industry in the second half of the year. But the guidance for the third quarter volumes to be up in the low single digits still implies normal seasonal or even slightly above seasonal growth for the industry. This seems to place more of the onus for the correction on the fourth quarter. I was curious why you wouldn't expect that to happen earlier, possibly in the third quarter, especially given the guidance by the panel makers.

Normally, we do see a slight increase in absolute inventory in Q3. We expect a little bit of build in absolute square footage, based on what the panel makers are running right now. We always see a significant downdraft in absolute square footage in Q4, with the large seasonality of television. If we see a slight correction from panel makers in September, the last month of the quarter, that could be slightly different. Right now, however, what the panel makers are providing to us is not showing that way.

I would prefer your approach. I mean I would prefer you to be right and to correct more in Q3 and make it even slighter in Q4. Past behavior tells us it'll probably run the way it is, as described earlier on the call. You heard Rod; it could even be a little hotter in Q3.

Great. Thank you.

Hi. Can you guys hear me?

Okay. Thank you. Again, congratulations to Jim and Tony. Thanks a lot for all your help. I guess I wanted to focus on cash for a second. I don't think this was answered. Can you just give us where we are on the balance of the original share buyback? You mentioned the $626 million in the quarter. How much is left from the $1.5 billion along with the $2 billion? Are there points at which you would think about accelerating? Is that share price driven or market-driven?

For Q1 and Q2, we were a little over $1.1 billion. We continued to buy in July, which isn’t finished. We have not completed the $1.5 billion, but we will complete it shortly and then start spending on the $2 billion. That’s our process, finishing one and opening up the other one. Clearly, at these lower stock prices for Corning, which we think are below appropriate value, we buy more.

Great. Thank you. And then a question on telecom. I don’t know if you’ve given out – can you give us a split right now of the difference between the traditional telecom spend and the data center spend? You mentioned focusing on the acquisitions; will there be a focus to stay within that enterprise or the data center side of the business, or do you see opportunities across telecom right now?

From an M&A standpoint, we wouldn't be just in the data center spend. I mean we'd be across telecom. If you go back to Wendell's earlier answer to the question, we've seen quite a bit of growth in the fiber-to-the-home in the carrier area, and that is certainly something that we're very strong at. It's easy to see where we could generate value in terms of synergies there, terms of different products or different geographies. We look at it as telecom in total, not just data centers.

Can you give any directional on the sizes of this business? Is data center business measurable right now? Is it 10% of the business, or is it still just a growing smaller business?

It's clearly greater than 10% of our business.

We give enterprise totals. Enterprise is running about 25% of all of our sales in Optical.

Great. Thank you, Ann.

Thanks. Good morning. Jim, congratulations. I'm looking forward to seeing the book that comes out of your retirement.

Thanks, Steve. You'll be in it.

Thanks.

I'll be talking about the Mets.

I'm not sure if that's a good thing. In terms of looking at some of the new product development, I know you touched a lot on thinner glass and hopefully the positive impact there. Can you sort of round out the status on some of the other innovations you're working on? It sounds like we're still a while away from seeing like 0.4 mm into the mix, but what about things like Lotus NXT and Project Phire and then especially the Iris product that you rolled out, how are those things factoring into the rest of the year or maybe where the timeline stands on those? Thanks.

NXT is out there now and beginning its qualification cycle. We look to that area as a spot where we'll be able to improve our profitability in high-performance displays over the coming quarters. Early returns are pretty good for customers. Our share traditionally in that piece of the market tends to be a little bit lower, and so we're replacing our competitor, and that's just going to take some cycle time. Most of those products go into these smaller mobile devices, and they're spec'd all the way through by the brand, so you've got to go through two quals. We're encouraged by our opportunity to improve profitability there. On Phire, we've got our first order; the first products are going to start on wearables. More to come. This is a brand-new process and a brand-new product, so its ramp cycle's going to be a little slower. What we like about it is it offers the opportunity to significantly increase our revenue and profit per device sold. Iris, which adds the third piece of glass in a television for the backlight, is getting early adopters. Some people are trying the new plastic set, and some people are trying the new glass. This will take time to sort out the winners in that technology node. The good news is televisions are getting thinner, opening an opportunity for us. We'll see who wins and who loses in that space. The final one I’d touch on is the announcement on Gerresheimer, the formation of Corning Pharmaceutical Technologies. We've been on this for several years. This is an industry that moves slowly because it’s highly regulated. That said, we have a good product idea here that is a Gorilla-sized opportunity. It’s going to take time and effort, but we believe that one is going to be significant.

Great. That's all very helpful, and good luck to everyone going forward.

All right.

Thanks, Steve.

Thank you, Steve. We have time for one more quick question.

Hey, Jim, I'm wondering if you could talk a little bit about TV demand in China, what you're seeing there. Also, I see you made an announcement around a new Gen 0.5 LCD glass substrate finishing facility. Maybe talk a little bit about Corning's strategy in terms of fab in China.

So the announcement was a finishing factory in China. I think it was Gen 8.5. We have melting in China in Beijing. We have room to grow that bigger if we need to. We’re capable of building finishing factories next to our customers and shipping glass to them. That’s been our strategy to date in China. Your first question was on China demand?

China demand.

China demand has been mixed so far. The May holidays were weaker, and we're anxiously awaiting the June numbers. We're seeing that in China, where traditionally a lot of the demand was driven in these big holiday periods, like Chinese New Year, May Day, and National Day in October, there’s now an increased number of online sales. Our tracking looks like that’s more consistent during the year, and we think June will actually be a very strong month. That said, we did lower our China unit forecast based on what we think is a slowing economy, slightly from what we’d seen before.

To clarify the glass capacity, people often miss this when thinking about thin. When we move to thin, you get more glass out of the melting side, but you still have to finish it by piece. We invest in finishing capacity to be able to place the higher flow out of melting tanks. In terms of melting tank type CapEx, that’s more about new Gen size and big regional moves, as discussed earlier.

Okay. Great. It's been a pleasure, Jim. Congrats.

Thanks, Brian. Let me just wrap up quickly. Our first half results were outstanding. Very importantly, over the last four quarters, the heartbeat of price declines in our LCD business have been trending favorably, and we expect this to continue in Q3 and Q4. We think the industry conditions will prevent more severe price drops. Long-term demand for television remains strong, driven by replacement rates and innovations such as 4K. Our sales and earnings growth in Optical has been outstanding, and demand in fiber-to-the-home and enterprise solutions is strong. We're capturing a disproportionate share of market profits, thanks to our advantage products. Acquisitions in Optical are delivering synergies and creating more opportunities for growth. Finally, very important, we're delivering our commitment to return cash to shareholders. We have a strong balance sheet and cash flow, and we plan to continue to return excess free cash flow. So in summary, we had a great second quarter and feel our market positions remain strong. Ann?

Thank you, Jim, and thank you all for joining us today. A playback on the call is available beginning at 11:00 a.m. Eastern today and will run until 5:00 p.m. Eastern on Tuesday, August 11. To listen, dial 800-475-6701. The access code is 363576. The audio cast is available on our website during that time. Operator, that concludes our call. Please disconnect all lines.