Corning Inc (GLW) — Q4 2018 Earnings Call Transcript

Thank you, Tanya, and good morning. Welcome to Corning’s fourth quarter 2018 earnings call. With me today are Wendell Weeks, Chairman and Chief Executive Officer; Tony Tripeny, Executive Vice President and Chief Financial Officer; and Jeff Evenson, Executive Vice President and Chief Strategy Officer. I would 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. We encourage you to follow along. They are also available on our website for downloading. And now, I will turn the call over to Wendell.

Thank you, Ann, and good morning everyone. This morning, we reported a very strong finish to an excellent 2018. For the fourth quarter, sales were $3.1 billion, up 15% year-over-year; net income was $539 million, up 18% year-over-year; and EPS was $0.59, up 28% year-over-year. For the full year, sales were $11.4 billion and EPS was $1.78, both up 11% from 2017. We also delivered on our goal to improve gross margin to 42% in the second half, a significant increase over last year and the first half of 2018. All of our businesses produced year-over-year sales growth in 2018. Highlights include Optical Communications sales up 18% for the second consecutive year; Environmental sales up 17% as the adoption of gasoline particulate filters accelerated; Specialty Materials sales up 5% following an exceptional 2017 growth of 25%; Display sales, up 4% as we ramp our new Gen 10.5 facility and the annual price declines reached the important milestone of mid-single-digits in the second half, with full-year pricing being the best in more than a decade; Life Science sales, up 8% as we continue to outpace market growth. For the past three years, we have invested for growth through our strategy in capital allocation framework. The significant benefits of these investments are evident in our financial performance. In 2018, we built new capacity, launched new products, grew sales by more than $1 billion, and extended our leadership position in all businesses. We exited the year with strong execution, expanded margins, and great momentum. We expect our momentum to continue into 2019 and beyond. We anticipate strong year-over-year growth in Q1 and additional growth in subsequent quarters. In total, we expect another strong year for Corning. We also feel confident that we are well positioned for long-term growth. Important trends such as 5G, smart cards, connected homes, and augmented reality are converging around Corning’s unique capabilities. These interconnected ecosystems require technologies that have been our fundamental strengths for decades. Our proprietary manufacturing processes and deep expertise in glass, ceramics, and optical physics are more relevant than ever. Overall, we are excited about 2019 and our future opportunities as Tony will describe in more detail in just a few minutes. Now let’s turn to the strategy and capital allocation framework. Under the framework, we targeted 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. As we have discussed with you numerous times, we have continued to make great progress towards the framework goals we announced in October 2015. As we enter the final year of our plan, we expect to meet our stated goals. Our cash generation is on target and through the end of 2018, we have returned $11.8 billion to shareholders. We increased dividends per share by 50% since the framework began. Investments in R&D, capital expenditures, and acquisitions also remain on track to our 4-year plan, totaling $8.2 billion through the end of 2018. As outlined in our framework, Corning is the best in the world in three core technologies, four manufacturing and engineering platforms, and five market access platforms. Our capabilities are interrelated and reinforcing. We focused 80% of our resources on opportunities that utilize capabilities in at least two of those three categories. This increases our probability of success, reduces the cost of innovation, creates stronger competitive advantages, and most importantly delights our customers. Now, I will turn to progress in each of our market access platforms, starting with Optical Communications. Our performance in Optical Communications continues to be outstanding, and we expect to surpass our goal of $5 billion in 2020 sales with further growth beyond. We remain the world leader in passive optical solutions and the only true end-to-end supplier of integrated solutions. 2018 was an excellent year for our Optical Communications business. Recognition of the value created by our solutions and co-innovation approach continues to grow. We secured additional multi-year contracts with industry leaders in the carrier and data center segments, which will add significant sales and profits in 2019 and beyond. This committed demand supports our additional investments in manufacturing capacity. Another highlight of the year was completing the acquisition of 3M’s Communications Markets division. In addition to bringing us a talented group of employees, it extends our market reach and access to global customers while expanding our portfolio in rapidly growing optical solutions markets. Next, we achieved product milestones. We demonstrated our long track record of innovation and industry expertise. Our pre-connectorized fiber-to-the-home solutions have passed more than 45 million homes around the world. We introduced products in 2018, such as extreme density cable tailored for next generation hyperscale data center architectures, as well as a fiber that offers significant advantages for higher throughput transmission. All products continue to reduce network costs and increase the speed of installations, and we earned industry accolades in multiple customer segments, including data centers and access networks. Interestingly, beyond the hardware solutions, we have also developed software tools that expedite installation. For example, FiberPass helps to accelerate typical installations from weeks to just days. Bruce Furlong, Bell’s Vice President of Deployment and Access, described the benefits this way: 'The efficiency and accuracy of the FiberPass solution has contributed to the rapid expansion of Bell’s broadband network in our fast-growing 5G and internet services.' Our investments in capacity clearly paid off in the second half of 2018 with strong sales growth and even greater growth in profitability. As we move into 2019, committed demand supports additional investments and will lead to additional growth. Overall, we expect to continue to grow more than twice as fast as the communications infrastructure market. 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 has been to double mobile consumer electronic sales over the next several years despite a maturing smartphone market, and we have been making significant progress toward that goal. First, we are capturing more value per device. We expanded our leadership in the carbon glass market with the launch of Gorilla Glass 6 in July. Leading OEMs are continuing to design our premium glasses into their devices. We expect more than 10 new models with Gorilla Glass 6 to launch throughout this year. We are not only benefiting from the adoption of our premium glasses but also from more glass on each phone. Glass-backed penetration on smartphones doubled from 15% in 2017 to 30% in 2018, and we expect continued growth in 2019. We are also significantly expanding our presence in the aftermarket. As announced this month, we will collaborate with OtterBox, the number one selling smartphone case brand in the U.S., to introduce the Amplify line of glass screen protectors. This will offer extra protection for consumers and add a third piece of our glass to devices. Second, we are winning in new and emerging device categories. We launched Corning Gorilla Glass DX and DX+ in July, which provides enhanced anti-reflective optics and scratch resistance for wearables. These new glass composites continue to gain traction in the wearable market with several launches slated during the first half of the year. We are also partnering with leading consumer electronics makers on augmented reality devices and precise 3D sensing technology. For example, at CES, we announced an agreement with WaveOptics to help enable sleek augmented reality wearables. The ultra-flat high-index glass that Corning supplies coupled with our proprietary laser processing and characterization tools enable optimized image quality and sleek device form factors. So overall, we are off to a great start to meet our goal to double sales in mobile consumer electronics. A quick fun fact: since 2016, smartphone unit sales have been relatively flat. We, however, grew our sales in this space by 30% due to our innovations. We will continue to innovate for our customers, and you will continue to see more Corning in your devices. Turning to automotive market access platforms, our materials expertise is helping to propel the auto industry into a new era of clear cost, enhanced cockpit functionality, connectivity, and design. Our objectives are to build on our base business with the gasoline particulate filter opportunity and to launch our automotive glass business. 2018 was an exciting year for both objectives. Our gasoline particulate filter technology mixes caused significantly cleaner emissions. We exceeded $50 million in GPF sales in 2018 as European regulations took effect and we expect more than $150 million in 2019 GPF sales. China will be the next to introduce GPFs with initial filter sales this year as OEMs prepare for the first phase of China 6 regulations in mid-2020. We are ramping dedicated capacity in China to support our robust pipeline of business resulting from upcoming Chinese regulations. Next, we experienced strong demand for Gorilla Glass in automotive applications in 2018. We are capitalizing on long-term industry trends that are driving demand for technical glass. At CES, automakers confirmed the trend towards larger, longer, shaped, and more integrated displays. We also saw strong demand for Corning's industry-first auto-grade glass solutions for automotive interiors, launched exclusively with customers at CES. These new solutions are making it easier and more affordable for automakers to bring curved and flat displays to market. In total, we have been awarded more than 55 platforms to date globally. Demand is materializing faster than we expected, and we are accelerating our investments accordingly. 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 towards the FDA certification required for the use of Valor. We continue to make progress with our development partners Merck and Pfizer and shipments are increasing to other major pharmaceutical manufacturers supporting their individual drug regulatory filings. Total shipments of Valor Glass increased fourfold compared to 2017, indicating growing progress towards certification across more pharmaceutical companies. In parallel, we are supporting customers by scaling up our production capabilities on pace with market adoption. We brought new capacity online in 2018 and expanded our range of products. We are 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, with regulatory concerns about the need for improved glass packaging highlighted in the lead story of the January PDA letter, reinforcing the need for new solutions such as Valor Glass. In addition, Valor Glass was named one of the top six pharmaceutical and medical packaging developments in 2018 by Packaging Digest. We continue to believe Valor has the potential to power Corning’s growth for the next decade and beyond. We remain closely engaged with the SPS 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. During 2018, we extended our global leadership by successfully ramping the world’s first Gen 10.5 glass plant. This accomplishment allowed us to grow volume faster than the overall market. The Display Glass pricing environment continues to improve. We reached the important milestone of mid-single-digit year-over-year price declines in the second half of 2018. In fact, 2018 was the best pricing environment in more than a decade. We expect the pricing environment to improve further in 2019 and reach mid-single-digit declines for the full year. We’re off to a great start, with first quarter price declines expected to be significantly better than the first quarter of 2018 and the best first quarter in a decade. Display will continue to execute its proven strategy to deliver stable returns. 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. In 2018, we leveraged our investments to meet increased demand from our customers, grow sales, and significantly improve profitability in the second half just as we said we would. Looking ahead, we are confident in our ability to deliver sustained performance. We have multiple businesses driving our growth. Our capabilities are becoming increasingly vital to important trends. Our relationships with industry-leading customers are opening new opportunities, and our strategic investments are paying off. We’re not only succeeding in building a bigger company; we’re building a stronger, more resilient one. We look forward to outlining the next phase of our strategic framework in the coming months. 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 another outstanding quarter, and our full-year results exceeded our expectations. In 2018, we did what we said we were going to do, which was to expand our manufacturing capacity in the first half and begin leveraging those growth investments in the second half. In 2019, we expect to build on this momentum and keep growing across all of our businesses. 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 contracts settling in future periods to be marked-to-market and recorded at fair 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 loss of $180 million for the fourth 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 are very pleased with our hedging program and the economic certainty it provides. We have received $1.7 billion in cash under our hedge contracts since their inception, slightly over five years ago. Now, that brings me to our results and outlook. For the fourth quarter, sales were up 15% year-over-year to $3.1 billion; net income rose 18% to $539 million; and EPS was $0.59, up 28%. For the full year, sales were $11.4 billion, and EPS was $1.78, both up 11%. As Wendell noted, this strong growth resulted from customers adopting our innovation and from us capturing the benefits of our capacity investments. As a reminder, our capacity expansion projects in 2018 supported strong committed customer demand across all businesses. These investments include capacity expansion for optical fiber and cable, Gen 10.5 Display Glass, gasoline particulate filters, and multiple development projects such as Gorilla Glass for mobile devices and automotive. 2018 capital spending totaled $2.2 billion. As our new capacity ramps towards full production levels, our sales run-rate climbed and our gross margin expanded by 42% in the second half of the year. Turning to the balance sheet, we ended the quarter with $2.4 billion of cash. Adjusted operating cash flow for the year was $3.2 billion and on track for the cumulative target in the full-year capital allocation plan. Now, let’s look at the detailed segment results and outlook. In Display Technologies, we are delivering stable returns. Our full-year sales were $3.3 billion, up 4% year-over-year. Fourth quarter performance was in line with our expectations. Sales were $899 million, and net income was $240 million. 2018 was the best pricing environment in more than a decade. As expected, fourth quarter price declines were very moderate and in mid-single-digit percentage year-over-year and even more moderate than Q3. With over 90% of our volume under contract, we expect our full-year 2019 price declines to improve further to a mid-single-digit percentage and to be even better than they were in 2018. For the first quarter of 2019, we expect sequential price declines to be significantly better than the first quarter of 2018 and to be the most favorable first quarter price change in over a decade. Now, three factors continue to 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-size TVs. It is co-located with and dedicated to our customer BOE. We pay for the line 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 supply-demand balance below Gen 10.5 to continue to be tight. As public information indicates, there is low capacity growth planned in the segment. Second, our competitors continue to face profitability challenges at current pricing levels. Therefore, we expect their price declines to decrease further as they try to remain profitable. And third, Display Glass manufacturing requires ongoing investment in current capacity to maintain operations. To generate acceptable returns on investments, glass pricing will need to improve even further. For cloning, we will only add capacity if we can get an attractive return for our shareholders. In the fourth quarter, display glass market volumes were low single-digit sequentially, and our volume grew faster as expected due to the ramp of our Gen 10.5 plant. For the full year, the display glass market volume increased mid-single-digits as expected, driven by growth in TV screen size. We expect mid-single-digit growth again in 2019, also driven by growth in TV screen size. We also expect our volume to grow more than the market once again, resulting from the ramp of our Gen 10.5 plant during 2018. In the first quarter of 2019, we expect the display glass market to be up mid-single-digits year-over-year, and our volume to be up significantly more. Sequentially, we expect the market and our volume to decline by a mid-single-digit percentage consistent with normal seasonality. In summary, we remain very pleased with the current dynamics in our display business, including 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 our fastest-growing segment, Optical Communications. Full-year sales were $4.2 billion, up 18% for the second consecutive year. The business is on track to surpass its goal of $5 billion in 2020 sales. Net income was up 26% year-over-year. In the fourth quarter, sales exceeded $1 billion for the third consecutive quarter, and we were up 26% over 2017. Net income for the quarter was up 60% year-over-year. Sales growth for the year and the quarter were driven by multi-year data center and carrier projects, the availability of new manufacturing capacity, as well as sales from the recently acquired 3M Communications Markets division. As planned, we are leveraging our capacity investments to drive higher volume and earnings. Our mid-year acquisition of 3M’s Communications Markets division contributed about $200 million to 2018 sales. We are pleased with our progress on integrating this acquisition and continue to expect it to be accretive to EPS in 2019. Looking forward, we expect first quarter sales to be up in the low-20% range year-over-year. We expect another year of growth, with full-year 2019 sales up low-teens. Key growth drivers include customer projects and the full year of sales from the 3M acquisition. Our customers, the world’s leading network and cloud operators, continue to deploy Corning’s optical solutions to densify their 4G, 5G, and data center networks. We continue to be very excited about the growth ahead of us. Environmental Technologies, 2018 sales were $1.3 billion, up 17% year-over-year, driven by growth in all product categories and accelerated by emerging sales of GPF. Net income grew faster than sales at 26% year-over-year. 2018 GPF sales were more than $50 million as demand ramped strongly in the second half of the year, primarily in Europe. We are now starting to sell into China with early adoption of China 6 regulations. Dedicated capacity and engineering investments support the ramp of this business. Fourth quarter environmental sales grew 10% year-over-year. Looking to 2019, we expect first quarter sales growth of mid-single-digits and the full-year sales to be up high single-digits year-over-year. We expect $150 million of GPF sales in 2019, and we continue to add capacity to meet the additional demand. In Specialty Materials, 2018 results were strong after an exceptional year of 25% sales growth in 2017. Full-year sales rose 5% as OEMs adopted our portfolio of premium glass products, and the use of glass backs doubled to about 30% of smartphones in 2018. Fourth-quarter sales were $399 million in line with our expectations, up 2% versus a very strong fourth quarter in 2017 when customers built aggressively to support launch cycles. Overall, we are pleased with our performance in Specialty Materials. Our results demonstrate the value of our premium glasses, the strength of our innovation portfolio, and the continued adoption of glass smartphone backs. For the first quarter, we expect sales to grow mid-to-high single-digits year-over-year. We also expect to grow again for the full-year, despite a mature market. Exactly how much will depend on the adoption rate of our innovations. In Life Sciences, 2018’s sales were $946 million, up 8% year-over-year, with strong fourth quarter sales as we continue to outpace market growth. Net income was up 23% year-over-year, driven by higher sales volume and manufacturing efficiencies. We expect sales growth to be a low to mid-single-digit percentage year-over-year for the first quarter and full-year. In summary, 2018 was a terrific year. All of our businesses had strong momentum, and we expect another year of sales, gross margin, net income, and EPS growth in 2019. We expect 2019 gross margin dollars and percentage to expand due to the manufacturing capacity that came online in 2018, our improved utilization of that capacity, and the strength of our sales growth. The percentage increase will be somewhat muted due to our continuing investments in 2019 to meet committed demand for optical communications, GPF, and automotive glass. We expect to see the sales and margin benefit of these additional investments starting in Q2 and build throughout the remainder of the year. In the first quarter, we expect double-digit year-over-year sales, gross margin dollars, and net income growth. We expect gross margin percentage to improve slightly from Q1 2018. Sequentially, we expect Q1 gross margin dollars and percentage to be down due to seasonality in Display and Specialty as is typical. We expect both to improve in Q2 and to continue climbing throughout the year. Annual operating expenses should remain consistent with last year as a percentage of sales. For the full-year, SG&A is expected to be about 14% of sales and R&D between 8% and 8.5%. We expect other income, and other operating expenses to be approximately $250 million for the year. Full year gross equity earnings are expected to be approximately $210 million predominantly from Hemlock Semiconductor, with the first quarter adding approximately $20 million consistent with typical seasonality. Fourth quarter 2018 gross equity earnings were $152 million. Our tax rate should be between 21% and 22% for the year and for the quarter. The slide we posted gives you additional modeling details for the first quarter and the full-year. In 2019, we expect to spend just over $2 billion on capital expenditures, with programs in every market access platform. How much more will depend on how quickly we ramp some of our investments. We’ll provide more detail as the year progresses. Finally, I would like to make a couple of comments on the economic environment, specifically regarding China. First, as we said previously, we do not expect a material impact from the enacted tariffs. Second, we 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, 2018 demonstrates that we are delivering on our priorities to grow and extend our leadership. Results were outstanding, with 11% sales growth and second half margin expansion. Our strong guidance reflects the rich set of opportunities ahead of us in 2019 and beyond, as we continue to grow faster than the market across all of our businesses. We are also rewarding investors by returning more than $12.5 billion to shareholders, which compounds the benefit of our future growth for long-term shareholders.

Thanks, Tony. Tanya, we are ready for the first question.

Thanks. Good morning and congratulations on the results. Wendell, bit of an open-ended question for you on optical. You obviously are growing a lot faster than the market. So I was curious if you could maybe talk about some of the key end-markets you are serving and what you are expecting in terms of spending there? And then one of the key innovations that are driving the out-growth in say like datacenter, broadband and wireless? Thanks.

Thanks for the question, Steve. The primary reason we are growing faster in the market really has sort of two layers to it. First of all, we are seeing new networks being put in place that used to be fiber-poor, and because of the requirements in our innovations, they are going to be fiber-rich. So in a way for us, you can think about it as it’s not just more networks, right, but basically it’s more us in the network, and that’s why you start to see us begin to differentiate for the industry growth. Take something like wireless; as everybody has heard a lot about 4G densification or 5G, wireless today is a relatively fiber-lean architecture. As you move to the wireless of the future, you end up adding a lot of glass. So as they talk about wireless networks densifying, what that really means is they are 'glassifying.' And so, compared to others who are already in the wireless market, we were pretty small, but now we are getting pretty big, because of our innovations and the requirements for what it is, how you need fiber optics expertise. You see a similar dynamic happening in datacenters with the continued strong growth, really at the percent of the load that’s cloud-based, which allows when you do things like public cloud into very large private clouds to concentrate much more processing power, right, that is shared across many, making it more economical. So, once again, there's a substitution effect, moving from copper to fiber. All of these things are furthered by the dynamic that we have a set of unique innovations in all of those areas that give us some additional advantage versus other players. That’s why you tend to see the difference. You also asked about where we expect to see growth. We expect it to be driven by access networks, especially with an accent on wireless densification. We do expect to see a hyperscale datacenter business continue to grow strongly, while a new concept of edge computing is opening opportunities for us. Sorry for the long answer, Steve, and does that get at the core of what you are talking about?

Yes, it does. Just one other clarification on the hyperscale builds. Can you just sort of talk about how that plays out? It tends to be lumpy in general. Did these new contracts actually smooth out the business for you, and what's involved in them if you can expand – to the extent you expand on that?

That’s a really good question. You’re right; they tend to be pretty big construction projects that are a lot like our access network builds, which are also big civil works projects. They can be kind of lumpy. I think what the new contracts do here not so much has changed the civil works of putting in these large facilities, as much as it increases both the size of our business, the number of different areas that we are doing, the number of different customers that we are doing it with, and the number of different locations we are building at. By increasing the number of projects, in a way it becomes a little smoother, not because the individual projects aren’t lumpy, they are, but that they end up being in slightly different stages at different times. But I am quite sure at some point, we will hit a time where things look a little lumpier because a number of the projects go together.

Yes. Thanks for taking my question. Tony, you are displaying a net income margin average of 25% for 2018, and it was in the 28% range for ‘17. You are talking about continued improvement. Should I assume that it’s going to take a couple of years to get back to that 28% margin, or is there any other metric that you can provide so that we could better see how the margin improvement, especially for display, is going to track? And then for Wendell, Specialty Material, you have been investing in diversifying outside of the smartphone. It’s great to know that you have higher content in the smartphone, but can you provide us an update on diversification out of the smartphone and into other end markets? Thank you.

Sure, Mehdi. Let me take the display question first. Clearly, what happened to us in display in the first half of the year is that we saw our margin contraction, and that was driven both by our investment in Gen 10.5, but then was also driven by our fleet optimization. What we saw in the second half was the benefit of those things occurring, and you saw it in the fourth quarter results where our profits were up more than our sales on a year-over-year basis. When we talk about stabilization, we are talking about getting to a certain profit level and continuing that on a going forward basis. We feel good about the stabilization we saw in the second half. In fact, we grew profits in the second half, and we think that’s evidence of the strategy that we have been working on for a number of years really starting to pay off. Regarding the content piece and wearables going outside of smartphones, we expect smartphones for the foreseeable future to be people’s primary device. But we are making really strong progress in areas like wearables, notebooks, and augmented reality. In wearables and notebooks, we have introduced our vapor deposition technologies and new composite materials that take our value on something like a wearable or in notebook up like a factor of five. For devices outside smartphones, we can see us playing the same basic approach, which is getting new innovations adopted in those areas that also allows us to add value. Then you have entirely new device categories like augmented reality where you are seeing the potential start to take shape for really significant innovation, but it’s still too soon to get too excited about it. This is the time for all the positioning innovations, and years from now will offer a larger opportunity for us than what smartphones do today. But that’s going to take a while to develop.

Can I have a follow-up here if I may? It seems to me in the specialty material and environmental technology, you are executing and able to increase content either for smartphones or for other applications. As to end market diversification, is maybe a couple of years away, is that the best way to summarize this?

Absolutely.

Yes. Thank you. Good morning. Tony, can you address sort of the overall gross margins in 2019? Pretty easy compares from Q1 of last year when you were ramping your Gen 10; but you’re talking about only a marginal uplift here in Q1 of this year, and you noted some investments. So, could you just give us some sense on sort of the magnitude of these investments and the overall magnitude of gross margin improvement like 50 basis points or 100 basis points in 2019? And a quick follow-up to your comment about China end-market assumptions being conservative. Can you maybe quantify those? Are you talking about auto production down 10%? Like what is smartphone assumptions? What TV unit assumptions? That would be helpful. Thank you.

Sure. Wamsi, overall, we’re really pleased with our gross margin performance. We said at the beginning of 2018 that we were investing intensely and that it would lead to significant growth and margin expansion in the back half, and that’s exactly what happened. Our sales were up 16% in the back half over the first half and our gross margins expanded about 150 basis points. We expect continued strong margin performance both in dollars and percentages, but it does get somewhat muted by investments that we’re making. The good news is those investments are for committed growth in Optical Communications, GPF, and then Auto Glass, and we’re going to start seeing those investments starting in Q2, with the benefits expanding from there. In any given quarter, things are going to be impacted by the seasonality of our businesses, as is the case in Q1, but we’re happy with each of our businesses’ performances. They're the best in their respective industries, and we are excited about the total impact of these investments. So in Q1, you will see some of these investments impacting us, but the main reason why Q1 is down versus Q4 is really seasonality, not the investments. In terms of China, we were pleased with our approach in the third and fourth quarters and feel we were right in where auto production ended up in China and in the TV standpoint. We feel good about our estimates for next year.

Yes, hi guys, thanks for fitting me in. I just had a real quick question on the full-year guidance; maybe a two-parter actually. So, the guidance is better than we expected. The most bullish point of it is Display. I wondered if within Display you could talk about the interplay of your share assumptions versus unit growth assumptions. Any color on which of those – how much share you expect to gain, for example, would be interesting? And then on Specialty, is all of the weakness or the slowdown in Specialty due to China, or are there other macro issues you see or demand issues? Any further color on that would also be helpful in that full-year guide? Thanks.

Sure. Let me start with the Display guidance. Fundamentally, what drives the glass market in Display is screen size. In 2018, screen size drove the market growth to the mid-single digits, and that’s what we expect once again. We were also benefited in 2018 by the number of TV units going up, but what really matters here is the screen size growth. As we go into 2019, we think the market is going to grow about the mid-single digits, which is being driven by screen size growth. Most people looking at the market think that TV units themselves are going to be flat to down a little, largely driven by China, and we have factored that into our projections. What really drives the market is the growth in screen size, which we expect to remain mid-single digits. We will grow faster than this because of the Gen 10.5 ramp, but generally speaking, it’s about the mid-single digits. Regarding Specialty Materials, what drives growth there is the technology adoption of our products, which, as Wendell would say, means having more Corning in those products. Last year, most people believe smartphones were down a little bit and project a similar trend for this year, particularly driven by China, but we are confident that we can still grow due to the adoption of our technologies. The actual timing of that adoption may vary.

Just briefly on your share question, we don’t think about it so much as share; what’s happening is with the constant move to larger-sized TVs and these new Gen 10.5 plants that are getting built. When those happen, we co-locate and build a Gen 10.5 glass plant with a customer. Since those plants have a much lower cost platform for our overall large television panels, we expect that category of Gen 10.5 to take more of the market, and because of our technical lead, it results in more Corning being in that market than in the below 10 Gen segment. This dynamic leads to more of our success than what Tony discussed regarding the overall market growth. Did that answer your question, Rod?

Thank you and congratulations as well on the strong quarter. Quick question on Optical; you guys have been posting strong net income margin growth in that segment. Obviously, as you scale, it’s still below Display. How should we think about the improvement in utilization helping to bridge that gap? Are we ever going to get to margins, not net income, but even on the gross margin line, getting to corporate average given the additional investments you are going to be making in 2019? Thank you.

Yes. We are really thrilled with our performance in our Optical Communications business. We have been both growing sales significantly and growing our profitability even greater than that. That’s our real focus in any given business unit at Corning. We’ve seen margin expansion in that business, and I would expect it to continue. I think that’s the way to look at it. We don’t spend a lot of time comparing business to business, as each has different economics and investment levels, but we feel great about Optical Communications performance.

Great. And just if I may, given that you are annualizing the 3M acquisition in 2019, the core organic, is that still growing at low-teens or is there any downshift in expectations there?

No, we feel great about our organic growth. In fact, if you look at the Q1 numbers, the organic growth is almost about 20% year-over-year. So we feel really good about organic growth.

We have time for one more question we can squeeze in.

Yes. Hey, Wendell, I must say solid results here. My question is not on Optical this time; it’s on Auto Glass. I continue to hear a lot of news flow around Auto Grade Glass. You’re getting into Automotive Interiors. Talk to us about how the demand – how that business kind of unravels heading into the rest of the year? Thanks.

Thanks for noticing what everything that our customers are saying about us. As I shared last quarter, our Auto Grade Interior opportunity has come a lot faster than we were ready for operationally. We’re investing in a dedicated plant that uses our unique vapor deposition technologies and part-making capability to serve the strong committed demand we’re getting. I think this year is going to be that year where you’re seeing the real breakthrough, and you’ll start to see the revenues really start to flow. Getting it exactly right of where on the adoption curve we are, we’re still a little early, right, to accurately call while I think the rate of adoption is going to be excellent. Revenue growth is still in the early stages, but the good news is, this is going to be a real business and it’s going to have real revenues. We believe it’s going to become a significant business. If we are right on our innovations and this product is as cool as we think it is, we’ll go and like this.

Thanks, Vijay. And I shall close by saying thank you all for joining us. I also want to let you know that we’ll be at the Goldman Sachs Technology and Internet Conference on February 12, and we’ll be hosting an Investor Day in New York City on June 14. We’ll also be hosting some virtual presentations and webcasts on business topics throughout the year. 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. Tony, that concludes our call. Please disconnect all lines.