Corning Inc (GLW) — Q1 2019 Earnings Call Transcript

Thank you, Tanya, and good morning, everyone. And welcome to Corning’s Q1 2019 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 our 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. Now, I will turn the call over to Wendell.

Thank you, Ann, and good morning, everyone. This morning we reported excellent results to position us for another year of strong growth. For the first quarter, sales were $2.9 billion, up 13% year-over-year. Net income was $365 million, up 22% year-over-year, and EPS was $0.40, up 29% year-over-year. Four of our five segments achieved double-digit sales growth year-over-year. Highlights included that Optical Communications continued to outpace the market with sales up 20%. Environmental Technologies delivered 12% sales growth driven by accelerating adoption of our Gasoline Particulate Filters. Specialty Materials sales were up 11% on the strength of Gorilla Glass and our other innovations. Life science sales were up 5% as the business continues to benefit from its leadership in cell culture vessels. Display continues to deliver stable returns with first quarter sales and net income up double digits year-over-year and the best first quarter pricing environment in well over a decade. These results keep us on track to deliver the growth and shareholder returns we designed into the four-year strategy and capital allocation framework introduced in October of 2015. We targeted returning more than $12.5 billion to our shareholders through repurchases and dividends, while investing $10 billion to extend our leadership and deliver growth. We continue to make great progress, and we expect to meet all our stated goals. Our cash generation is on target. Through the first quarter of 2019, we have returned $12.3 billion to shareholders, reducing outstanding shares by approximately 37%. And we’ve increased dividends per share by 67% since the framework began, including an 11% increase in February. Our investments in R&D capital expenditures and acquisitions are also on track, totaling $8.8 billion through first quarter 2019. Now let's take a closer look at our progress in each of our market access platforms, starting with Optical Communications. Our performance in Optical Communications continues to be outstanding. We remain on track to surpass our goal of $5 billion in 2020 sales. We are growing faster than the overall market as our unique co-innovation model continues to deliver the right product at the right time for the right customer. Our first quarter results reflect our progress with 20% sales growth. We continue to earn recognition around the world for our stream of product and technology innovations that reduce network cost and increase the speed of installations. For example, in the first quarter, Lightwave Innovation reviews recognized two of our solutions in extreme high-density cable, which make hyperscale data center fiber deployment up to 30% faster, and a surface-mounted in-home fiber connection solution that is not only fast and easy to install but also integrates seamlessly into the decor because its transparency renders it essentially invisible. This product is among the innovations added to Corning's portfolio through our 2018 acquisition of 3M's Communication Markets Division. At the Global Conference, OFC, in March, we demonstrated that our EDGE 8 solution provides data center operators with a simple migration path to 400G transmission speeds and beyond. This helps them stay ahead of requirements for emerging technologies such as artificial intelligence. We were first for 100G and will be first for 400 as well. March also marked the introduction of the new Corning Technology Center Montréal. The center will serve as Corning's global home for software solutions for telecommunications networks and will support emerging technologies such as artificial intelligence, augmented reality, cloud computing, and data analytics. The center will eventually become a hub for software innovation across all of Corning's business segments. And we're off to a strong start, as two major North American service providers are now using our software for their fiber-to-the-home installation and maintenance. Overall, recognition of the value created by our solutions and co-innovation approach continues to grow. And that results in our Optical Communications sales growing faster than the 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 continue making significant progress toward that goal with steady adoption of our premium glass and the other innovative solutions we offer for smartphones, laptops, tablets, and wearables. We launched our Amplify line of glass screen protectors on OtterBox.com and in more than 1,600 corporate-owned Verizon stores in the United States. Amplify screen protectors provide a new channel for Corning to capture an additional piece of high-value glass on smartphones. Our strategy combines the best screen protector glass with the number one selling smartphone case brand in the United States. In the first quarter, we also continued our success in emerging regions with multiple device launches featuring Gorilla Glass in India and Turkey. Overall, we are making great progress on our goal to double sales in mobile consumer electronics. We expect continued momentum throughout the year as we look forward to more new device announcements, and we will continue to innovate for our customers, and you'll continue to see more Corning in your devices. Turning to the Automotive market access platform. Our core technologies are helping to propel the auto industry into a new era of cleaner cars with enhanced cockpit functionality, connectivity, and design. Our objectives are to grow our environmental business by continuing to win in Gasoline Particulate Filters and to launch a disruptive automotive glass business. We are off to a great start in 2019 on both objectives. Our Gasoline Particulate Filter technology makes cars significantly cleaner, and it increases our sales opportunity per car by a factor of 3 to 4. We continue to see strong GPF sales in the first quarter as European regulations are in full effect, and China's demand is materializing earlier than expected. And we continue to win the majority of platforms with our industry-leading solutions. We now expect to exceed our goal of delivering $150 million in 2019 GPF sales, and we're investing more to capture accelerating demand. We also continued to demonstrate our ongoing leadership in the industry with a Daimler supplier award that recognizes our collaborative development of next-gen emissions control solutions. Next, excitement about Corning Gorilla Glass for automotive continues to grow as the industry transitions to highly connected and autonomous vehicles that use technical glass. Customers have validated their desire for Corning's technical glass solutions by awarding us hundreds of millions of dollars in our automotive glass pipeline. Our new and industry-first auto-grade glass solutions are making it easier and more affordable for automakers to bring curved and flat displays to market. To service the growing pipeline for our solutions, a dedicated manufacturing facility in Hefei, China, is expected to begin ramping in the third quarter this year. In our Life Sciences Vessels platform, we continue to make strong progress on the path to a new, long-term multibillion-dollar franchise. Valor Glass substantially reduces particle contamination, breaks, and cracks while significantly increasing throughput. Valor helps protect patients and improve pharmaceutical manufacturing. We are making headway with our development partners Merck and Pfizer, and our interaction with regulators has been favorable. We also continued important on-site research with a number of customers at their facilities where we completed in-depth validation and filling line studies that reinforce our progress towards certification. What this means, in essence, is that various customers are doing test runs of our Valor Glass vials on their lines. They’re confirming that it's viable on their machines and that it provides the value we described. They’re documenting firsthand how significantly Valor Glass will increase their throughput. We are getting ready for the adoption of Valor Glass by scaling up our production capabilities. 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 last year. Although this market is slow to adopt new technologies, we continue to invest and make encouraging progress. In Display, we are delivering stable returns consistent with our goal. First quarter sales and net income were both up year-over-year with the most favorable first quarter sequential price declines in well over a decade, and we expect continued progress. Full-year 2019 price declines are expected to improve further to a mid-single-digit percentage and to be better than in 2018. Our first in the world Gen 10.5 glass facility is ramping to support the expected growth of large size TVs, allowing us to grow faster than the overall market. Overall, Display will continue to execute its proven strategy to deliver stable returns. These examples demonstrate significant progress across all our market access platforms. Ultimately, we remain on track to fully achieve our strategy and capital allocation framework goals. 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. We continue to invest in capabilities and capacity that will create substantial additional growth, and you can see the benefits of these investments in our recent results. We are not only succeeding at building a bigger company; we are building a stronger, more resilient one. We look forward to outlining the next phase of our strategic framework in the coming months, and we are on path. Some of the opportunities that I’ve discussed today in more detail at our Investor Day on June 14. 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. We grew sales 13% year-over-year, with every business segment growing. We also grew net income 22% and earnings per share 29%, all while continuing to invest for even more sales growth this year and beyond. Now, 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’ve discussed before, GAAP accounting requires earning translation hedge contracts 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 $138 million in Q1. Now, 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’ve received $1.7 billion in cash under our hedge contracts since their inception more than five years ago. That brings me to our results and outlook. For the first quarter, sales were up 13% year-over-year to $2.9 billion. Net income rose 22% to $365 million, and EPS was $0.40, up 29%. As Wendell noted, our strong growth results from our technology and manufacturing leadership. We are benefiting from recent investments, including capacity expansions 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. We are very pleased with how these investments are playing out, and we're continuing to invest. Throughout the year, additional manufacturing plants will come online creating capacity for committed demand and driving additional sales growth in 2019 and beyond. Capital spending in Q1 totaled $524 million, and we expect to spend just over $2 billion in 2019, with programs in every market access platform. Now let's look at the detailed segment results and outlook. In Display Technologies, our goal is to stabilize returns, and we had a very strong quarter. First quarter sales were $818 million, up 10%, and net income was up 12% year-over-year. First quarter sequential glass price declines were more moderate than we expected, and the most favorable first quarter in well over a decade. Second quarter sequential price declines are expected to remain moderate as well. With all of our volume under contract, we expect our full-year 2019 price declines to improve further to a mid-single-digit percentage and be even better than they were in 2018. Now three factors continued 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 Gen 10.5 plant supports the expected growth of large size 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. That ramp remains on schedule. We expect the glass supply demand balance below Gen 10.5 to continue to be tight as public information indicates there is little capacity growth planned in the segment. 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 investment in current capacity to maintain operations. To generate acceptable returns on investments, glass price declines will need to improve even further. For Corning, we will only add capacity if we can get an attractive return for our shareholders. In the first quarter, the Display Glass market grew mid-single digits year-over-year, and our volume grew significantly faster, as we expected due to the ramp of our Gen 10.5 plant. In the second 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, again due to the Gen 10.5 ramp. Sequentially, we expect the market and our volume to increase by a mid-single-digit percentage, consistent with normal seasonality. For the full year, we continue to expect the display glass market volume to grow mid-single digits, driven by TV screen size growth. We expect our volume to grow faster than the market, again resulting from the ramp of our Gen 10.5 facility. In summary, we remain very pleased with the current dynamics in our Display business, including our ability to capture Gen 10.5 half glass growth and deliver stable returns. Let's move to our fastest-growing segment, Optical Communications. The business is on track to surpass its goal of $5 billion of sales in 2020, with further growth beyond. In the first quarter, sales were $1.1 billion and were up 20% over last year. Net income for the quarter increased 30% year-over-year. Sales growth in this segment is driven by multiyear data center and carrier projects as well as sales from the recently acquired 3M's Communications Market Division. As planned, we are leveraging our capacity investments to deliver higher volume and earnings. Our 2019 outlook has been impacted by a major fiber-to-the-home customer shifting its deployment from homes passed to homes connected in quarter two, not quarter three as originally anticipated. This will impact sales by about $100 million. As a result, we now expect our full-year sales growth to be up about 10%, which is revised from the low-teens guidance we provided last quarter, but still well ahead of the market. For the second quarter, we expect sales to grow high single digits year-over-year, driven by strong data center, fiber, and cable growth. Overall demand for our fiber, cable, and connectivity solutions remains strong. Our customers, the world's leading networking cloud operators, continue to deploy Corning's optical solutions to densify their 4G, 5G, and data center networks. We continue to outpace the competition and we’re very excited about the growth ahead of us. Environmental Technologies' first quarter sales were $362 million, up 12% year-over-year. Net income grew 6%. We are well on our way to building a $500 million gasoline particulate filter business. European regulations are in full effect, and auto makers in China are preparing for full China VI implementation in 2020. The market appears to be developing faster, and we are winning more platforms than we anticipated. As a result, we are accelerating our investments and we are raising our short- and long-term sales targets. We now expect GPF sales to exceed $150 million in 2019 and to grow robustly thereafter. China is also considering early implementation of its heavy-duty regulations as part of their Blue Sky initiative. This could further increase both our investment and our sales opportunity. We will have more clarity on the exact timing and impact by the end of quarter two. As we invest to capture the opportunities I just described, it mutes our profitability somewhat in the short term, but will result in greater sales and profit growth in the medium and long term. Based on our accelerating demand, we now expect full-year sales to be up 10% or slightly more versus our prior expectations of high single-digit growth. We also expect second quarter sales to be up about 10% year-over-year. In Specialty Materials, first quarter performance was strong. First quarter sales were $309 million, up 11% year-over-year and driven by continued strong demand for the company's portfolio of Mobile Consumer Electronics glass solutions. Net income grew 7% year-over-year. For the second quarter, we expect sales to grow high single digits year-over-year. We continue to expect to grow again in 2019, despite a maturing smartphone market; exactly how much will depend on the adoption rate of our innovations. Our results and outlook demonstrate the value of our premium glasses and the strength of our innovation portfolio. In Life Sciences, we continue to outpace market growth. First quarter sales were $243 million, up 5% year-over-year; net income was up 15% year-over-year. We expect both second quarter and full-year sales growth of low to mid-single digits year-over-year. In summary, we had an excellent first quarter with strong performance across the company. The benefits of our recent investments are evident in our results. All of our businesses have solid momentum, and we expect continued sales growth through 2019. For the second quarter, we expect year-over-year growth with sales up by a high single-digit percentage, operating margin up 75 basis points, and EPS up by a mid-teen percentage. As both Wendell and I described earlier, we continue to invest in all of our businesses. We are increasing capacity utilization in plants that came online in 2018, and at the same time, we are building new plants, including facilities for GPFs and auto glass finishing. While we build, startup, ramp and optimize those facilities, associated costs offset some of the normal leverage on our gross margin line. As the commitments from and to our customers increase, so does the pace of our work on the manufacturing floor. As a result, the offset to our gross margin line is slightly higher than we anticipated a quarter ago. As sales grow significantly in the second quarter, we expect our gross margin dollars to also grow significantly, both sequentially and year-over-year. We expect our Q2 gross margin percentage to be slightly better than Q1. Now similar to last year, we expect our gross margin percentage in the second half to improve versus the first half as we utilize ramping capacity to meet committed demand. Depending on the pace of facility startup and optimization, we now expect our second half gross margin percentage to be between 41% and 42%. For your modeling purposes, we expect that 2019 operating margin percent to be greater than 2018. Now moving to additional outlook details, we expect other income, other expense to be approximately $250 million for the full year. Full-year gross equity earnings are expected to be approximately $210 million, predominantly from Hemlock Semiconductor, with the second quarter at approximately $20 million to $25 million versus the first quarter 2019 gross equity earnings of $26 million. We expect our effective tax rate for 2019 to be approximately 20%, consistent with Q1. Finally, I would like to make a couple of comments on the economic environment, in particular, 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 into our strong guidance and outlook for 2019. If Chinese demand is better, there's an opportunity for upside. In closing, we are off to an excellent start in Q1. We are benefiting from our recent investments and we are delighted with the customer reactions to our innovations. We welcome the opportunity to invest and continue delivering strong sales and earnings growth for our shareholders. 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 within striking distance of fully delivering on the strategy and capital allocation framework. And I look forward to sharing our exciting longer-term outlook on June 14. With that, let's move to Q&A.

Thank you, Tony. Tanya, we are ready for the first question.

Thank you, everyone. Could you clarify Optical again and discuss how we should consider margin improvements in this segment as you continue to grow? What factors might be driving higher margins? Should we focus on utilization as a key factor, or is the product mix contributing to improved margins in this segment? Thank you.

Sure. In terms of the sales adjustment, I think it's pretty straightforward. We have one fiber-to-the-home customer that we expected to shift its deployments from homes passed to homes connected in Q3, and it's actually starting in Q2. So that impacts sales by about $100 million and it means we will be up around 10% in sales versus low teens, but that's still a lot faster than the market is growing. So we feel good about that. And in terms of the margin profile, yes, we see the opportunity to expand margins. Part of it is that just like all of our other businesses, we’ve been investing in this business. And as we ramp capacity in those businesses, you would expect margins to improve. And then the second thing is that we are offering a lot of great innovations to our customers, and those innovations help save them money and also give us an opportunity to provide solutions in some of our technologies, and that’s good from a margin standpoint too.

Yes. Hi, guys. Thanks for the question. I guess, I wanted to focus in on cash flow a little bit, because we are struggling to model the cash flow on a quarterly basis. And it actually came in a little bit lower than we thought this quarter, but then if you look back last year there were some seasonalities too. So I’m wondering, Tony, is there any way that you could give us some idea of what you think cash flow might be for 2019 and maybe talk about some of the puts and takes around working capital in Q1 and then I’ve got a follow-up to that.

Sure. If you look back at our cash flow cycle over the last few years, or even longer, you'll see that Q1 is typically our lowest cash flow period, and we experience significant growth throughout the year. We expect the same trend for 2019. This is because we tend to decrease our sales in the fourth quarter, particularly in December, and then ramp them up again in the first quarter, especially as we approach March. This results in noticeable changes in working capital during those two periods. Additionally, some of our payments, like incentive payments, are disbursed in the first quarter. While these payments will improve as the year progresses, they are still made in the first quarter, and we anticipate maintaining this cycle in 2019. If you review the previous year, you'll observe a similar pattern. Last year also included incentive payments in the first quarter, resulting in a slightly higher figure compared to this year's first quarter, but the cycle remains consistent. We are definitely on track with our full-year plans within our capital allocation framework.

Thanks. Good morning. Two questions, please. First on gross margins. Tony, I was wondering, the gross margin guidance quarter-over-quarter is solid, but maybe a little less than some of us were expecting, and you called out some puts and takes in that. I was wondering how much you can sort of quantify where maybe there's a drag from adding capacity versus where you’re getting better mix, etcetera to maybe better understand how you are coming up with your gross margin guidance for the second quarter? And then I had a follow-up.

Sure. I think the news in this call is the investments that mute our gross margin percentage are going to be a little bit higher than we thought a quarter ago. In particular, in the second quarter, as both Wendell and I talked about, we see GPFs accelerating, the market is appearing to develop faster, and we are winning more of those platforms. And so that clearly is having an impact on second quarter gross margin. In Specialty Materials, we are investing now in some innovations that our customers are going to introduce in the back half of the year as they launch new products, and so that’s occurring in the second quarter. And then in the Auto Glass factory, we are beginning to put that together because we are having good success in that market. As you know, we’ve introduced the AutoGrade glass earlier this year. And so we need to be prepared for what happens with sales probably in the fourth quarter, maybe in the first quarter, but it takes a few months to ramp up in advance of that. And then in the back half of the year, besides those kinds of opportunities, exactly where we end up with the Blue Sky initiative in the diesel factory will just depend on exactly where things end up in the back half of the year. But from an overall standpoint, I mean, we are really happy with this, we consider this all to be good news. It's going to drive both short and near-term growth. And on top of that, our operating margin is expanding, and so we end up actually with more of our revenue dollars to the bottom line, and that makes a CFO very happy.

That's helpful. I was curious, Wendell, there was a Tier 1 auto supplier this past week that experienced delays due to issues in ramping up some hot-formed display technology. While I know your focus is on cold forming, I'm interested in how confident you are about ramping these ambitious displays, which feature different shapes and curves and are larger than usual, particularly regarding your glass component to reach manufacturing volumes. It seems like a significant challenge based on recent updates. Thank you.

Thanks for the question. Very insightful question. The struggle of that particular Tier 1 is actually what our innovation is about. We believe that trying to get shape in a vehicle, if you want a hot-form glass and then try to laminate, try to put the different coatings on something that has shaped already is way more difficult and is way more costly than our innovative way to do it, which is cold forming where basically we do all those processes in the flat 2D form and then because of our unique glass and our patented way to get form, we then take and create the form after those processes. This saves just a ton of money, and it's really, we believe, going to put us in a position to perform extremely well in the industry. And needless to say, after that Tier 1's experience and another Tier 1's experience, our phone has been ringing off the hook with interest to get a chance to collaborate with us to help bring this innovation to market.

Hi. Thanks for taking my question. I just have one. You mentioned a single customer in Optical that experienced a schedule change. Can you share what you're observing in terms of fiber demand from other customers, especially focusing on data center customers? We've heard some updates regarding CapEx outlook in that area. Additionally, we noticed some auctions in China over the last quarter. Did the results from those auctions impact your guidance for the year?

The only factor affecting our guidance is the change with this one customer. Our other business segments are performing very well, particularly in the data center and other carrier businesses. We haven't seen strong performance in China, but that hasn't had a significant impact on us. Overall, we feel very positive about the business, and we want to emphasize that the change in guidance is entirely due to this one customer, and we are experiencing much faster growth than the market.

I think just to add some commentary on growth for us. Where we've succeeded is to broaden our product offering as well as our customer base. And we are seeing glass and fiber optics and our innovative products penetrate more of the networks and in all of the different style networks. And so as a result, what’s interesting is, here we are talking about a customer who has just moved by one quarter for their fiber-to-the-home, but, in the old days, one customer of that size and scale moving something as significant as fiber-to-the-home, we would have felt it really strongly. Instead, we are just talking about how fast do we continue to grow and that is a really interesting spot where we’ve tried to engineer and has happened, and we will still feel as our different customers do big civil works projects at different times, right, how much growth that we have. But the big mega trend here is that you are seeing densification enter into the wireless network, enter into the cloud computing network, and densification means glassification. And the exact timing of those builds can sometimes be hard to predict, but we are seeing a ton of wind behind us solutions. Just from a little bit broader perspective as we look at it, we think it's quite exciting calling exact timing during a quarter, not so easy, right? But the mega trends look really good here to us.

Good morning, Wendell. I'd like to get your thoughts on the 3M asset and how that's progressing. Also, do you believe you have the capability to meet customer expectations as you consider adding similar assets to the Optical portfolio for this year and next? Thank you.

Thank you for the question, Vijay. We are very pleased with the people and products we've integrated from 3M, as well as the customer relationships we've built. Their strengths complement areas where we were previously less robust, and now we are able to provide a cohesive package. We're optimistic about the revenue synergies generated from this collaboration, and our new team members are excited to be part of this, especially in the crucial field of Optical Communications and connectivity. Looking ahead, we will continue to seek opportunities that align with our market-access platform and enable us to accelerate the growth of any assets we acquire, surpassing the pace of current owners. However, as Tony mentioned, we are actively engaged in pursuing organic growth opportunities due to significant demand from our customers, which necessitates increased investment and a focus on delivering this incremental growth. Therefore, we don’t currently have any major acquisition targets, but we remain open to ideas, and we would be happy to hear any suggestions you have, Vijay.

Thank you very much. I wanted to follow-up on your comments on the work that you’re doing with the cold form for auto, as well as the Valor Glass testing. Just in those conversations you are having, are you seeing any change in design times or time-to-market opportunity, especially if automakers are having to change kind of what the roadmap looks like and catch up or not? And then, on Valor Glass, as your potential customers are going through that testing, any update on timing of when we could start to see Valor move into production and general availability?

Thanks for the question. It's something really interesting, James. I would say in automotive interiors, it's going faster than we anticipated. We thought we had a pretty good understanding of the automotive market access platform, because we’ve been in it so long, and we felt it was going to be relatively slow for our advanced glass solutions just because of the way that industry works. We've actually gotten a positive surprise by how quickly people are pulling on our interior solutions and how excited they’re about some of our new cost advantage solutions. So, as a result, we’ve accelerated our investments to bring up a dedicated facility to do these large area glass parts with the various optical treatments that we had through our vapor deposition platforms. So there, it's gone faster, and we are sort of playing catch-up with the supply chain, not because anybody else is ahead of us, but because we have so much pull. So the way we are sort of doubling down on a positive surprise there. Valor, I'd say is moving at a very stately pace. In this industry, as you know, if you follow it, adopting new technologies tends to be slow, it's a highly regulated industry, and because margins tend to be quite high in the industry, there tends to be a relatively slow move of gravity towards new solutions because they’re quite profitable where they are. That being said, we are seeing just tremendous amounts of excitement from our customers, especially because of the opportunity to provide more out of existing facilities. And if you follow the industry, you’re going to see many reports of drug shortages and inability to get enough vaccines and inability to provide enough lifesaving medicines and where we are getting very strong pull, like come as fast as we can adopt it, tends to be in those areas where they’re missing revenues and endangering patients' lives by an inability to supply with the capital platform that they have. So, Valor I view as stately, but feeling very strong attraction from the industry to bring us into it to help them serve patients better.

Hi, guys. Thanks very much. I guess, I wanted to ask about the Display business. I guess, I'm wondering if you guys are seeing the inventory build in that supply chain? And I bring up the question because if I just do the math on your Display business, it's grown about 12% or 13% over the last six months, just in terms of revenue growth, and given your comments about pricing, I think that translates into about 17% or 18% in terms of area. We tend to think of the end markets as growing 7% to 8%. I certainly heard what you said about BOE and ramping share there, but it seems like a pretty big gap, and I'm wondering if you're seeing inventory or it is indeed worse.

We are not seeing any inventory build in the supply chain. We are growing faster than the market because of our ramp of our Gen 10.5 factory. Demand is exactly where we said it was going to be at the beginning of the year, and it's all driven by screen size growth. This business is delivering on stable returns and I mean we couldn't really be any more happier than where we are right now. At the core, I totally get how you are wrestling through it, when you take a look at the total industry and if you take a look at many of our competitors' releases. But at the core, it is just, we had the right product at the right time with the right customers. And that means that area growth is falling more into our hands, right? And allowing us to capture the growth in the industry, and it's all concentrating with us. And that’s the dynamic that you're seeing in the numbers.

Next question?

Yes, thank you. Good morning. I have a question for Tony and Wendell as well. Tony, what are your thoughts on leverage and Corning's ability to take on more debt incrementally? Do you feel there's a need to do this to support the growth opportunities you're pursuing? Wendell, regarding the Display segment, could you comment on the faster-than-market growth? Clearly, the BOE exposure is beneficial, but does that also indicate a structural shift towards Chinese panel makers gaining market share from Taiwanese ones? If that occurs over time, would you need to increase investments in China and potentially reduce capacity in other regions? Thank you.

Let me address the leverage question first. We don’t need to take on any additional leverage to support these investments. Our operating cash flow is very strong and is more than enough to cover our capital spending, research and development, and to continuously increase dividends each year. I believe we are in a solid position regarding this. While we have the option to increase leverage, we're doing it cautiously. For instance, we've added leverage in Japan due to low interest rates and our significant exposure there, with maturities over ten years. In the United States, most of the debt we’ve taken on has a maturity of 30 to 40 years. We are also considering opportunities in the Chinese market, where we have considerable exposure as well. However, we certainly do not require that additional leverage to fund our investments.

Let me address the Display segment. I want to add to Tony's comments that a significant advantage of our investments is that we anticipate a substantial increase in our operating cash flows. This increase, which we will elaborate on during our Investor Relations day, provides us with strong financial resilience and the capacity to support both our growth and shareholder returns. We are optimistic about this. Regarding Display, it's important to note that as new Gen 10.5 plants come online, they will operate at lower costs compared to older facilities, leading to greater growth for them. The concern is how this will affect older generation LCD plants for our customers and whether they will lose market share. Our customers are actively exploring new markets and technologies, including automotive displays and wearable devices, to broaden product applications. From Corning's perspective, this focus aligns with our strategy for products like Gorilla Glass. We have become a significant player in display capacity, transitioning to producing Gorilla Glass for mobile consumer electronics and increasingly for automotive applications. We plan to continue this trend, allowing us to repurpose our assets effectively without substantial capital expenditure. Additionally, we are enhancing our productivity by investing in new technologies at our LCD and Gorilla Glass plants, which helps us improve our cost structure. This increase in productivity might lead to the consolidation of facilities, depending on how swiftly we can advance these new process technologies, rather than our ability to repurpose, which we have managed quite successfully.

Operator, we've got time for one more question.

Thanks for taking my question. The delta between depreciation and CapEx has widened significantly over the last couple of years. I think that helps gross margin near-term, but perhaps keeps your gross margin pressured in the future years. Can you comment a bit on that? And then, if I could push you one more time on Optical, normalizing your 2019 Optical revenue outlook for the 3M acquisition and the $100 million impact from the single FTTH customer, organic growth appears to be decelerating to 8%. I know this is much higher than the market, but this was a business that was organically growing well into the double digits. So, I was hoping you could provide some color into how your customer conversations have evolved over the last year?

Sure. Let me start with your question about increasing depreciation versus capital spend. I mean, there's no doubt that we are investing in our businesses. And the reason we are investing in the businesses is that our customers are coming to us with lots of great opportunities, and we are inventing products and solutions for those customers. And when we do that, we grow significantly, and we’ve seen that growth in the back half of 2018. We are seeing that growth this year, and we are going to see that growth into the future. So there is no question that is happening; we are getting greater depreciation, of course, that will have an impact on the gross margin line. But it creates a lot of great cash flow and gives us the opportunity to continue investing in it. So, we are really happy about where we are right now from that standpoint. And then in terms of where we are in Optical Communications, again, we are very pleased with our results here. We are growing considerably faster than the marketplace and we’ve been working closely with our customers, and you look at our results and you will see strong results both in the carrier market and in the enterprise market, which is where we have our hyperscale data center customers, and we feel good about the growth there.

Yes, your observations about organic growth over time are significant. When considering Opto, it's crucial to recognize that these represent major architectural shifts, which can be somewhat unpredictable. The timing of when these shifts begin and which specific player initiates a program can vary from quarter to quarter, especially when making year-over-year comparisons. For instance, you might compare a substantial fiber-to-the-home initiative from the end of last year to a period this year where that same customer isn't undertaking a major project, yet we still achieve growth supported by other factors. Looking at the long-term, it's essential to consider whether you believe that wireless will transition from a relatively light structure to one that is heavily reliant on fiber. We believe 5G will facilitate this densification. Consequently, the largest telecommunications network, which is wireless, is evolving into a fiber-rich network, enhancing our growth prospects. As cloud services expand rapidly, this leads to a centralization of data flow, necessitating more bandwidth, which in turn requires a denser, fiber-rich infrastructure. We recognize that these are substantial developments, and the specific timing of their realization can complicate straightforward growth rate assessments. Thus, while comparisons may seem challenging, the architectural outlook for fiber remains promising.

Thanks, Wendell. And I want to thank you all for joining us. Before we close today, I wanted to let everyone know that we will be at the JPMorgan Tech Conference on May 15 and as we said, hosting our Investor Day at the Conrad in New York City on June 14. Registration for that event is open on our Events and Presentations webpage. Finally, a web replay of today’s call will be available on our site, starting later this morning. So once again, thank you all for joining us. Tanya, that concludes our call. Please disconnect all lines.