Corning Inc (GLW) — Q3 2018 Earnings Call Transcript

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 are also available on our website to download. Now, I’ll turn the call over to Wendell.

Thank you, Ann, and good morning, everyone. This morning, we reported excellent sales and earnings growth for the third quarter, and we’re 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 expected, 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 decline continues 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 are 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 $10 billion to extend our leadership and deliver growth. We continue 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 R&D, capital expenditures, and acquisitions also remain on track to our four-year plan, totaling $7.3 billion through September 30th. As outlined in our framework, Corning is best in the world in three core technologies, four manufacturing and engineering platforms, and five market access platforms. Capabilities are interrelated and reinforcing. We focus 80% of our resources on opportunities that use capabilities in at least two of these three categories. This increases our probability of success, reduces the cost of innovation and creates stronger competitive advantages, and delights our customers. Now, 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 a year ago we announced that we had 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 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 ramped fiber and 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 electronic 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 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 will find DX+ on the Samsung Galaxy Watch; in addition 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 grow, industry trends for greater connectivity, economy, sharing, and electrification are driving demand for technical glass; polls for collaboration from more than 20 leading OEMs is increasing; and we’ve been awarded more than 50 platforms to date. One customer, Porsche, describes the benefits of using Gorilla Glass as “ideal visual characteristics, low weight, and very high strength.” Another customer, Harley Davidson launched its 2019 line touring and trike motorcycle featuring an infotainment 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, multi-billion 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 toward 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 expanding our global industry leadership. As the benefits of our investment in fleet optimization and 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 decline, 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 in 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 benefits 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.

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 non-cash mark-to-market adjustment for our currency hedge contracts. As we discussed before, GAAP accounting requires earning translation hedge contract settling in future periods to be mark-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 servicing 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 are 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 our inception, slightly over five 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 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 two factors, the Gen 10.5 startup and fleet optimization. Our investments in successful capacity ramp are expanding our 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. Three 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 co-located 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 glass makers. 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 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-digit sequentially and our volume grew faster as we ramp production in 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 digit 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 plant, 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 Communication 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 digit sequentially. Capacity continues to ramp, which will enable us to meet additional demand from large projects under way of 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 Communication Markets Division contribute to that $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 the 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 margins at 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 R&D 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 the 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 underscore that we are well-positioned and on track for the remainder of our full-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 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 four-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.

Great. Thank you, and 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 demand elasticity and how that plays out for Corning, not just for this year but also into next year?

As I mentioned earlier, we have incorporated conservative guidance for the China end markets. For instance, the demand for TVs has actually been strong this year, with retail up about 9% year-over-year year-to-date. However, we project it will only increase by 2% in the fourth quarter due to a slowdown in the market. Similarly, in the vehicle sector, the market has seen an increase of about 3% year-to-date, but we anticipate a decrease of 3% year-over-year in the fourth quarter. Regarding our optical business, most of our largest operations are outside of China, particularly in North America, where the market has been very strong, which is reflected in our optical results.

You have completed nearly 11.5 billion of your planned 12.5 billion in capital return. I'm curious about your willingness to take on additional debt in order to keep returning cash to shareholders, especially when economic indicators suggest a potential peak in the near future. Additionally, how should we interpret your gross margins as we head into next year? You are finishing strong at 42%, as you anticipated at the start of the year, and it seems that with your record growth as you approach 2019, gross margins should also see a significant improvement. Is my understanding correct?

From a gross margin perspective, we are pleased to see that the investments made over the past couple of years are yielding positive results, contributing to additional growth and expanding our margins to 42%. While we are not providing specific guidance for gross margins next year, I anticipate they will remain around this level. We expect similar performance in Q4 and I foresee this trend continuing into 2019. Regarding leveraging, our capital allocation framework indicates that we would introduce $3 billion to $4 billion in debt, though we have not reached that amount yet. We expect to continue leveraging our strong operating cash flow, as we look ahead to completing the capital allocation framework.

I have a question regarding the optical and carrier aspects. There's been excitement about 5G and its connection to optical technology. It seems that Verizon has temporarily slowed down. I'm curious about your perspective on the 5G deployments and whether we have momentum as we head into 2019, specifically regarding optical solutions outside of the data center.

I would characterize 5G as being in the beginning. We’re just really at the early stages of the deployments of infrastructure needed to have a 5G service level. And some of the first ones you see at 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 for mobility for 5G. That’s also going to take phones being upgraded to 5G. So, we’re just right in the beginning and long, long way to go get that much glass in the ground.

Thank you for the detailed information on Valor. Could you clarify what these programs indicate in terms of current sales? It seems that nothing has been approved yet. What are customers purchasing, if anything? Have you set a specific target for the volume of a particular drug as you initiate these programs? Will we expect a significant win if you secure an FDA approval?

Great question. The way this works is you keep going through stages, even before you file with the FDA. And because change is taken so seriously inside of pharmaceutical production units, we go through numbers of trials and then collect stability data and analyze what happened, to be 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 are 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 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?

I guess, just from a selection perspective that’s 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 the early approval?

Different pharmaceutical companies are taking various approaches. Some focus on their pipeline, while others concentrate on transferring existing drugs. However, all are aiming to leverage their extensive range of pharmaceutical products because the benefits are intended for their patients and their production facilities where high volumes are processed. Few companies are suggesting a minimal trial; instead, they are mainly interested in transferring their mainline commercial production to Valor.

I would like to follow up on a previously asked question. Tony, you mentioned taking a conservative approach, especially regarding Chinese demand. As you've developed your guidance and outlook for the December quarter, have you lowered the growth rates you're expecting compared to earlier in the year? Are you observing any changes in demand that are prompting this conservatism, or is it mainly a reaction to current headlines? Additionally, as we near the end of the capital allocation program, is there a timeline we should anticipate for updates on what follows? What key factors should we consider as you evaluate future capital allocation?

Sure, James. I think, first on the answer on China, we are being conservative based on the headlines that we see. And 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 an opportunity there for upside. In terms of the framework, I mean clearly, our focus remains on delivering the first four years of that framework. We have more than a year to go. And operationally, we like to deliver on what we say we’re going to do. And that’s 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 are 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. Any cash that’s in excess of that, we will continue with our practice of returning it to shareholders. But in terms of the specifics of that, that we’ll cover sometime in 2019.

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

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 is 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 investment. So, I think we feel pretty good about our pricing environment right now. It is the best environment in more than a decade.

Good morning, Wendell. Question for you, just bigger picture on the 3M asset, in my view, it’s a strategic asset for optical business. How is it going in terms of topline, synergies, and also on OpEx? And I have a follow-on for Tony.

Thanks for the question. We’re delighted with the acquisition and done even better on revenue synergies 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, still early days, but so far so good.

Thanks, Wendell. 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 lines. So, any products and how we should think of gross margins, very helpful.

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

Two questions for me. First, following up on that last question. Tony, can you just maybe give us a rough timeline of when some of these expansions should hit optimal levels from a utilization rate etc. It sounds like the fleet optimization is complete. But, what about the others? And then, secondly, Wendell, can you just talk about, maybe round up 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?

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.

And on data centers, 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 used to be thinking about it for the public networks, is also breaking into the next layer of those data centers. So, to think about a little like when you went to the public networks, long-haul, to regional, to trail to home, following that line. We’re seeing that same thing to happen in these great big mesh networks that are getting built inside these data centers. So, more and more of that architecture is flowing to glass. And the amount of glass required is also going up in terms of fiber accounts 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 we manage all that glass. And that’s when we really excited about our product roadmap going forward.

I’ve got a couple of questions. I wanted to start with Specialty Materials. 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 expected back earlier in the year, is a little bit different? How that flowed versus what you’ve been expecting earlier in the year? If it’s just our model is not quite being on track with what actually was going to happen? And then, my second question is, on Chinese automotive glass plant, I know you said it will be operational in 2019. Do you have any idea when and if you can give us an idea on whether that’s earlier or later in the year? And do you anticipate any tariff impact for the product coming out of that plan? Thanks.

So, in terms of the Specialty Materials, we’re very happy with the results in the third quarter. We said, 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, is the timing of those 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 are going to happen. So, from a full-year standpoint, we’re 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.

We also find it challenging to get the seasonality right. Regarding the automotive interiors segment, that production is currently being built, and we will begin production in 2019. I want to avoid specifying the exact timing because it’s a complex project, and we are also managing the supply chain beyond the factory we’re constructing. Please allow us a bit more time, and once we start publicizing the commercial production for that facility, we will update you. As for tariffs, the products we are producing and that our customers will use are not currently on any tariff list, so we do not foresee this being an issue if the trade arrangements remain stable.

Given the panel oversupply, there is 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?

At the end of the day, our demand is primarily driven by the market and the number and size of TVs sold. For this year, we anticipated a mid-single-digit increase based on TV unit growth and particularly on the growth in screen sizes. Looking ahead, we expect the trend of increasing screen sizes to continue, as it has for several years. Therefore, our demand should be viewed as strongly influenced by the TV market.

Haley, we’re ready for our first question.

Thanks, Rob. And thank you all for joining us. Before we close today, I wanted to let everyone know that we will be at the Credit Suisse Technology Media and Telecom Conference on November 27th, and the Barclays Global Technology and Media and Telecommunications Conference on December 6th. We’ll be posting some virtual presentations and webcasts on business topics through the quarter. And finally, 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.