康寧 (GLW) 2015 Q3 法說會逐字稿

Welcome to the Corning Incorporated quarter-three 2015 earnings results.

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

Please, go ahead.

Thank you, Roxanne.

Good morning.

Welcome to Corning's third-quarter conference call.

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

Before we begin our formal comments, 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.

These remarks involve a number of risks, uncertainties and other factors that could cause actual results to differ materially.

These factors are detailed in the Company's financial reports.

You should also note that this presentation contains a number of non-GAAP measures and our results are presented in four performance measures.

A reconciliation can found can be found on our website.

We have slides posting live on our webcast that are accompanying our formal comments.

They will be available on our website later this morning.

Now, I will turn the call over to Wendell.

Thank you, Ann.

Good morning, everyone.

I'd like to begin by welcoming Tony Tripeny, our new CFO and Jeff Evenson, our new Chief Strategy Officer.

Welcome, Tony and Jeff.

As we reported in this morning's press release, macroeconomic headwinds are affecting our performance in the near term.

Our businesses were slowed by the weakening global economy, the unexpected devaluation of the Chinese currency and the softening in the television and IT retail markets.

Consequently, our third-quarter results were lower than implied by our first-half performance.

We expect these headwinds to continue into the fourth quarter.

Now, despite these temporary challenges, we like our long-term opportunities.

Consumers want bigger screens and more bandwidth and touch everywhere.

The demand for cleaner air is accelerating.

Our innovation portfolio is rich with opportunities.

Given that, I'd like to use my time with you today to introduce our new strategy and capital allocation framework.

We believe that the framework provides clearer guidelines to define our portfolio and our commitment to excellent capital stewardship.

Tony will then review our third-quarter results.

We will conclude by taking your questions.

First, it's useful to review our current position.

We have delivered outstanding industrial performance.

Over the past decade, we have grown sales, NPAT, EPS and operating cash flow at double-digit rates.

We have beaten the competition on growth in each of our segments.

We have innovated to achieve the lowest cost position in key businesses.

We have created new to the world product categories such as Gorilla Glass, our heavy-duty diesel substrates and filters and our customized fiber-to-the-home solutions.

As we look forward, our innovation pipeline is full.

Taken as a whole, our performance gives us a foundation for sustained cash flow in a tremendous opportunity set.

Our leadership priorities for the next four years are simple.

We will focus our portfolio and utilize our financial strength.

We expect to deploy more than $20 billion through 2019.

We plan to distribute at least $10 billion to our shareholders, which is roughly half our current market cap.

We will also invest $10 billion in growth in sustained leadership.

Today, we are announcing the first steps to deliver our plan.

Our Board of Directors has increased our share repurchase authorization by $4 billion.

We will execute a $1.25 billion accelerated share repurchase program.

We intend to increase our divide per share by at least 10% annually through 2019.

Now let's turn to how we will focus our portfolio to deliver strong financial performance and capital stewardship.

Our framework focuses our portfolio on a set of reinforcing capabilities with strong interconnections.

The core of what we do is invent, make and sell.

We create value by inventing category defining products using transformative manufacturing platforms and building strong, trust-based relationships with the world's leading customers.

That process has served us well not only for the last decade of outstanding industrial performance, but for more than 160 years.

With our new framework, we are seeking to augment that value creation through a more focused and cohesive portfolio that increases our return on innovation.

A moment ago, I said that we have tremendous opportunities.

From a shareholder value perspective, the challenge is to select the right opportunities; we apply both financial and strategic criteria to making our selections.

Our financial hurdles include market size, return on invested capital and sustainability of margins.

Our strategic criteria are about increasing our probability of success and reducing the cost of innovation.

We are the best in the world in three core technologies, four manufacturing and engineering platforms and five market access platforms.

Our probability of success increases as we apply more of these best in the world capabilities.

Our cost of innovation declines as we reapply our talent and repurpose our assets.

Additionally, by combining multiple capabilities, we create higher and more sustainable competitive barriers.

Focusing our portfolio means that 80% or more of our resources go to opportunities that use at least two of these three columns.

Our framework allows us to direct up to 20% of our resources at opportunities that leverage a single capability.

But when we do that, the potential payoff must be dramatically higher because we know the chance of success will be lower.

The framework also means that we will consider removing assets falling outside our core capabilities.

While we operate these assets well and they return more than their cost of capital, we recognize that others may find them more synergistic.

We will consider transactions that create value for our shareholders.

For example, Dow Corning is a great Company that lies outside our core focus.

We are currently in discussions with Dow regarding a potential transaction.

One of the ways that we maximize our return on innovation is by reapplying our talent and repurposing our manufacturing and market access platforms.

Gorilla Glass is a great example.

When we developed Gorilla, we reapplied our world class experts in glass science and optical physics to deliver a new to the world product, faster and at lower cost than anyone else in the world could have done.

To manufacture Gorilla, we repurposed fusion assets built for our display business, that saved us about $800 million in capital, greatly enhancing Gorilla's ROIC.

We were able to reuse technology and manufacturing capabilities.

However, at the time Gorilla started, we didn't have a mobile consumer electronics market access platform.

Our confidence in our ability to win with Gorilla convinced us to build that platform.

It was a smart decision.

In the future, we can apply other capabilities such as precision forming or vapor deposition to products like Project Phire and 3D shapes that leverage our mobile consumer electronics market access.

This gives us the opportunity to further increase our return on innovation.

Our approach to leveraging our optical communications market access platforms demonstrates how combining multiple capabilities creates bigger and more sustainable competitive advantages.

Using glass science and optical physics, we have reinvented optical fiber multiple times, dramatically increasing its performance and lowering its cost.

Ceramic science has helped us improve connectors, a critical point of signal loss in communication systems.

We use vapor deposition to make fiber extrusion to make cabling and precision forming to make connectors.

We are also exploring the use of fusion to make key components for next generation switches and routers.

As a result, our optical communications customers benefit from all three of our core technologies and all four of our manufacturing and engineering platforms.

Ultimately we want all of our customers to experience all of our capabilities.

Now, why is that important?

Few competitors can match our expertise in any of our individual focus capabilities.

When our products derive value from combinations of capabilities, we build dramatically higher barriers to competition.

As a result, we can enjoy market leading positions and margins.

Over the next several months, we will be out with investors to share and discuss more examples of how we will apply this framework to Corning's next set of category defining products.

But for now, let's turn to our 2016 to 2019 capital allocation model.

Our plan is to generate more than $20 billion, with the majority produced by our growing operating cash flow.

We will invest $10 billion of the cash in RD&E, CapEx and acquisitions.

We will distribute at least $10 billion to shareholders.

We are committed to annually increase the dividend at a double-digit rate.

We will continue to be opportunistic on share repurchases.

As I mentioned earlier, potential transactions may provide upside to shareholder distributions.

So that's our new framework.

It reflects the financial and industrial strengths of Corning and our ongoing commitment to create value for shareholders through thoughtful, capital stewardship.

We deliver value by creating life changing innovations.

We are augmenting our value creation by focusing our portfolio and managing it more cohesively.

Along the way, we seek to reward our shareholders with significant and consistent cash distributions.

I will now turn the call over to Tony, who will review the third quarter and provide guidance.

Thank you, Wendell.

Good morning.

I would like to begin by highlighting my role in executing our framework over the next four years.

As you might expect, my emphasis will be on financial discipline, returns and ensuring we are good stewards of capital.

Specifically, I look for us to deliver strong financial results and investment returns, to manage an efficient balance sheet and to lower our cost of capital over time.

Currently, we use several metrics to evaluate investment returns including net present value, internal rate of return and payback period as well as return on invested capital measured after commercialization.

Our disciplined approach to capital allocation and focus on lowest cost have enabled our businesses to have excellent ROIC metrics against their respective industries and well above their cost of capital.

Going forward, I will continue to emphasize returns.

I expect us to improve our corporate ROIC over the next four years.

I look forward to keeping you updated on our financial strength and focus.

Now let's talk about the quarter.

As Wendell said, weakening economies, particularly in China and the stronger dollar, impacted our businesses.

For example TV demand is weaker, TV growth in China has slowed, TV demand in Europe, Latin America and Middle East/Africa is softer due to the effect of the stronger dollar on retail prices and continued economic uncertainty.

We expect worldwide TV unit sell-through to be down slightly versus last year.

IT and mobile demand is weaker, driven by lack of replacement drivers, the strong dollar and continued economic uncertainty.

We expect the worldwide IT market to be down 10% this year and smartphone sales in China to be flat versus last year.

China's auto and heavy-duty truck production has slowed through the year.

China's auto production is now expected to be flat year over year.

Heavy-duty truck production is down 34% year to date.

Finally, the growth rate of China fiber optic market is half of what it was last year.

Despite these macroeconomic headwinds, we are encouraged by several trends that support our long-term success.

We are pleased with the improving pricing environment in display.

The market for cover glass is expected to be up 10% this year.

We are gaining share in China and touch notebooks.

We expect to extend our long-term supply agreement with one of our largest LCD customers to 2025.

Optical communications is expected to deliver another year of double-digit sales growth.

Now let's get into third-quarter financials.

As a reminder, these are core results.

In total, sales in the quarter were $2.5 billion, down 5% versus last year.

As expected, the stronger dollar reduced sales in the third quarter by $57 million versus a year ago.

Without this impact core sales would have been down 3%.

Sales in the quarter were lower than expected due to lower volume of LCD glass, lower sales of environmental products in China and lower sales in optical communications.

Corporate gross margin was 42% which is lower than we expected, driven by the sales components I just described.

Most of our businesses have a relatively high fixed cost structure; therefore, decreased sales lower our gross margin as a percent of sales.

I will cover the specifics when I talk about each segment.

S&A and RD&E were down versus last quarter and last year in absolute dollars, driven by a compensation accrual adjustment.

Net income was down 15% versus last year; one-third of the decline was driven by foreign exchange rates including the devaluation of the RMB.

EPS was $0.34, down 8% versus last year.

Now, let's look at the detailed segment results beginning with display technologies.

Display sales were $936 million in Q3, down 11% versus last year.

Sequentially, third-quarter price declines were moderate as expected.

We are very pleased that the LCD glass pricing environment has been improving for more than a year.

We expected panel makers to adjust utilizations in the second half in response to the softer end market I already mentioned, but we weren't sure how much would be in Q3 versus Q4.

Sell-through data indicates TV and IT demand in many regions was weaker than our expectations entering the quarter.

Panel price declines accelerated during the quarter.

Panel makers adjusted utilizations, especially small [gem] sizes where prices hit cash cost.

Therefore, the glass market was flat sequentially in Q3.

At Corning, our volume was down slightly sequentially because of temporary share loss at one of our largest customers due to a contract dispute.

The good news is that we have resolved the dispute amicably and expect to extend our long-term supply agreement to 2025 and for our share levels to be in line with the first half of 2015.

We also expect to make up the missed volume in the fourth quarter.

Net income was down 15% year over year and reflects that the expected year-over-year price declines were only partially offset by volume growth, cost reductions and synergies from CPM.

Now, for optical communications.

Sales were up 7% versus last year, driven by acquisitions and moderate growth in North America fiber-to-the-home and data centers.

Even though we saw growth in carrier sales, it was less than expected in Canada and Asia due to timing delays of certain fiber-to-the-home projects.

In addition, we had an enterprise customer adjust inventory.

Net income was up only 1% versus last year, which is lower than we would normally realize with 7% sales growth.

We expected more sales in higher margin fiber-to-the-home solutions and maintain cost structures in place to service that demand.

In addition to the cost impact, a lower mix of high margin fiber-to-the-home meant a higher percentage of our sales growth came from lower margin businesses like our newly acquired Korean operation.

In environmental, Q3 sales were $257 million, down 9% or $25 million versus last year.

Foreign exchange drove $14 million of the decline.

Soft demand in China drove the remaining decline and the miss versus expectations.

In North America and Europe, we saw solid growth for our light-duty substrates and continued strong demand for heavy-duty diesel products.

Profitability was down more than sales, driven mostly by the softer demand in China for both light-duty and heavy-duty products.

We recently built capacity for growth in China, which has added extra cost that was not covered during the quarter by demand.

Moving on to specialty materials.

We are pleased with our Gorilla Glass business.

The market for cover glass is expected to be up 10% this year.

We are gaining share in China and touch notebooks.

Gorilla Glass volume up was sequentially and consistent with last year's strong Q3, driven by demand at customers ahead of new product launches.

We are pleased with the fast adoption rate of Gorilla Glass 4 by our customers and its favorable impact on our average selling price.

Overall segment sales were down 12% versus last year.

Advanced optics year-over-year sales remained weak, driven by softness at our semiconductor customers.

Year-to-date, AO sales are down almost 20%.

Segment net income was down 17% mainly due to the lower sales in advanced optics.

In life sciences, Q3 sales were $211 million.

Both sales and net income were down slightly year over year, driven by foreign exchange.

Net income would have increased mid-teens without the impact of the exchange rates.

Equity earnings from Dow Corning were $53 million.

This is down 22% versus last year, due to the absence of a one-time tax benefit recorded in Q3 2014 and the impact of the slowing Chinese economy.

Let's turn to our balance sheet and cash flow.

We delivered free cash flow in the quarter of $566 million.

Our pace of capital spending was down in Q3.

We now expect to spend approximately $1.3 billion for the full year.

During the quarter, we spent $827 million on share repurchases.

This sequential 32% increase reflects our view that given the Company's current performance and future outlook, Corning shares are a very attractive investment opportunity.

As Wendell mentioned, the Board has increased our share repurchase authorization by $4 billion as part of our plan to return greater than $10 billion to shareholders over the next four years.

We will be in the market repurchasing shares both programatically and opportunistically over this time period.

We will execute on a $1.25 billion accelerated share repurchase program during the quarter.

We ended the quarter with $5 billion of cash, with approximately $2 billion in the United States.

Now for the outlook.

We expect the global economic headwinds to persist in the fourth quarter and impact most of our businesses year over year.

Let's begin our business outlook with the display market.

As I mentioned a few minutes ago, we see continued softness in both TV and IT markets.

This impacts full-year retail growth and supply chain inventory.

Given the lower end market and the level of inventory at set makers, we expect panel makers to further reduce utilization rates in Q4 and likely into Q1.

Our timing on how quickly panel makers reduce utilization could be off and depends on how rapidly panel prices decline.

Lower utilization will help draw down absolute inventory during the stronger retail season.

Now, for the LCD glass industry in the fourth quarter.

We expect glass market volume to be down low single-digits sequentially and our sales volume to be down only slightly because we believe we will make up the Q3 share loss at one of our largest customers, due to favorable resolution of the contract dispute.

In July, we told investors we had levers to control our capacity to demand.

We are keeping our capacity off-line to match supply to demand by leaving tanks down after repairs and by allocating capacity for development trials.

With the lower panel maker utilizations in Q4 likely to continue into Q1, we will manage the startup of tanks down for scheduled repairs to match Q1 supply to demand.

We expect glass market supply and demand to remain balanced as we will continue to control our capacity to our demand.

Other glass suppliers have said publicly that they have levers to take similar actions.

Finally, I will outline our expectations for LCD glass prices.

We expect price declines to further moderate in the fourth quarter.

This expectation is based on the customer input we have already received about the prices offered by other suppliers for this quarter.

Recall that, under some of our contracts, our price movement at the customer depends on price movements that were made by comparable suppliers at that customer.

These price movements by these suppliers at these customers define the price movement for a substantial portion of our sales.

For Q4, because we have already been told how these other suppliers' prices moved, we are confident that our overall price decline will be even less in Q4 than it was in Q3.

Additionally, we do not expect that our Q4 pricing will be affected by customers moving from thick to thin.

We do not expect our pricing to be significantly effected by the weaker than anticipated glass demand.

Last, price declines have been below historic levels for the last 12 months.

As we have previously explained, we expect this more favorable pricing environment to continue and maybe even improve for several reasons.

First, the financial situation at our competitors indicate that they cannot continue historical price declines and remain profitable.

Second, the significant weakening of the Japanese yen has in itself given our customers a significant economic benefit without any decline in the yen price of our glass.

Third, as we've said before, we believe that glass supply and demand will remain balanced throughout this recent weakening in panel demand.

For these and other reasons, we continue to believe that our quarter-over-quarter price comparison will be better for us going forward than they have been in the past.

However, as we explained, our glass price movements depend in large part on what is decided between some of our customers and our competitors.

So to summarize display, we expect our volume in Q4 and likely into Q1 2016 to reflect the weaker retail market.

We will manage our supply to demand.

We expect the improved pricing environment to continue.

We do not believe that the current economic environment reflects any fundamental change to the longer-term drivers of TV demand.

We continue to expect excellent long-term demand, driven by the replacement of older sets and technology innovations such as 4K TV.

Moving to optical communications.

For the fourth quarter, we expect sales to be up low to mid single-digits versus last year as certain project delays continue.

We expect projects to be on track next year.

Looking at the full-year 2015, we expect another strong growth year with sales up 10% or low teens if you exclude the impact of the stronger dollar.

These results are further confirmation of our fundamental growth outlook for our optical communications business over the next several years.

Turning to environmental, we expect sales to be down mid single-digits year over year driven by the weaker euro and continued softness in China.

In specialty materials, we expect Gorilla Glass volume to be down about 10% sequentially and year over year, reflecting the differences in new product launch timing and supply chain builds at major brands versus last year.

We expect Gorilla Glass 4 to be a significant portion of glass volume in the quarter.

We are pleased with the performance of Gorilla Glass and expect double-digit profit growth this year.

While advanced optic sales are improving sequentially, we expect continued weakness on a year-over-year basis.

Overall, we expect total segment sales to be down low teens year over year.

In life sciences, we expect sales to be down mid single-digits versus last year, driven by the weaker euro.

Without the foreign exchange impact, sales are expected to be consistent with Q4 of last year.

Now, continuing with the rest of fourth-quarter forecast.

We expect Q4 equity earnings from Dow Corning to be approximately $80 million.

This is up from Q3 due to polysilicon customers meeting annual contract obligations.

We expect gross margin to be approximately 42% consistent with last quarter.

This is approximately 1.5 points lower than Q4 last year.

As a reminder, corporate gross margin is really an average of five separate businesses.

In Q4, display is lower as a percent of the total Company, which will impact the corporate average gross margin but display's business percent gross margin is consistent with last year's Q4.

Other drivers of the decline are in optical and environmental, where we have cost structures in place for expected growth.

As I just said, softness in demand is continuing in Q4.

We do expect these businesses to grow in 2016.

If they don't, we have levers to adjust costs.

SG&A and RD&E spending will be approximately 14% and 8% of sales, respectively.

We expect other income, other expense to be a net expense of approximately $50 million.

We expect our effective tax rate for 2015 to be in the range of 16% to 17%.

That concludes our outlook for the fourth quarter.

Now, I will hand the call over to Wendell to summarize before we go to Q&A.

Thank you, Tony.

To sum up, economic headwinds are impacting our business, but our strong opportunity set, the more stable LCD pricing environment and our ability to generate cash even in a challenging economy provide a foundation for continued outstanding industrial performance.

As we focus our portfolio and utilize our financial strength, we expect to build on our best in the world capabilities to deliver growth and significant sustained cash distributions to our shareholders.

Our framework, intent to increase the dividend at a double-digit rate and accelerated share repurchase program are important steps in our four-year plan.

Over the next several months, we will be out with investors to share more details.

We really look forward to the dialogue.

Ann?

Thank you, Tony and Wendell.

Operator, we will now open the lines for questions.

(Operator Instructions)

Rod Hall, JPMorgan.

I guess I wanted to kick off with a question about the capital program and specifically, the $10 billion beyond the capital returns, so the $10 billion that you're going to invest in the business.

Wendell, I know you lined out the three core technologies, four manufacturing engineering platforms, five market access platforms that you're going to be investing in, but can you give us any more detail on how that $10 billion or maybe a little less than $10 billion will be deployed?

Against what strategic initiatives?

Then any other sort of background on this strategic thinking change?

How it developed and so on would be helpful.

Thanks.

I have one follow-up.

Great.

Thanks for the question, Rod.

I'll deal with the first one first, second, second.

As far as sharing how we will deploy the $10 billion that we are going to invest in our growth and sustained leadership, we will be sharing more in the future about how we think about that allocation, towards which of the various platforms we are going to be leaning.

But we'd like to do that as we engage with folks like you and our investors, over the coming months.

There will be pieces of it, which are still in stealth that we won't be able to share.

But we will be able to give you a pretty good idea of where you can expect to see us place our emphasis.

Now, to why now?

Really is your question -- so really, it's three things that are leading us to discuss this at this point in time.

The first is, as you know, we have a pretty strong engineering and scientific culture here.

What that means is that we have hypotheses and we test them with controls.

So the core of the hypothesis here is that we can increase our return on innovation through focus on our three, four, five plan.

We have been running experiments to prove that hypothesis; that also takes a control.

So we have been looking side by side, we have analyzed the data and what we are able to conclude is that we do see a much higher return on innovation when we use the portfolio as we've just described.

That increasing productivity of the portfolio helps get at the next two items.

The second reason that we are talking about today is we had to be confident that we could sustain our cash flows, even in a time when the economy wasn't going our way.

We are really confident that we can do that, Rod.

Then finally, and perhaps most importantly, when you focus a portfolio, you have to be really sure that there's enough opportunity set in that portfolio to generate a lot of growth.

Where we are right now is very confident in that; the amount of pull from our customer base that makes use of our three, four, five capability sets is quite high.

So really those are the three reasons you're hearing from us today.

We have run the experiments, the data is in, the probability of success goes up, cost of innovation goes down and our competitive advantages go up when we apply it.

We are confident we can sustain our cash flow, even in times of economic uncertainty and our opportunity set is big enough that we can benefit from focusing.

Okay.

Thanks, Wendell.

Then my follow-up was on display.

I mean, little more short-term, those numbers were actually better than we expected, maybe we were too pessimistic, but I wanted to just see if internally, the display results in Q3 were better than you guys were anticipating?

Also, if you could comment on how 4K demand is going at this stage, I would appreciate that.

Thanks.

So, Rod, no, these numbers actually were a little bit worse than what we had expected.

When we began the quarter, we thought volumes would be up sequentially and they weren't.

Now some of that, of course, was the contract dispute that I talked about.

But the rest of it was -- panel maker utilization went down a little bit more than we expected.

The reason it did was our expectations for the end market came down during the quarter.

Those expectations came down -- as evidence came in that TV demand was going to be lower in the -- for the full year than we had thought it was going to be.

That was also true from an IT demand standpoint.

I think in the call last time, we talked about how we could be wrong on this and it could come down further in Q3.

That's actually what happened than what we had originally anticipated.

4K?

So 4K continues to track in a way that we like.

Now, actually, where we are starting to turn a hunk of our focus is, what version of 4K can create a -- the most compelling package for our customers and that is with the added quantum dock technology as well.

But we're really liking the way the sets are looking, the improvements from a performance standpoint.

It's still too early to call the bend in the curve; right?

Where it's going to drive replacement cycles.

We got an awful lot of noise in the marketplace with the really strong dollar -- sort of an economic headwind.

So the data just isn't screaming at us yet, that we've got that driving replacement cycle feature.

But, gosh, you can't help but look at these things technically and really like what you're seeing.

Okay.

Great.

Thank you, guys.

Mark Sue, RBC Capital Markets.

Thank you for the focus on shareholders being stewards of capital.

When I look at the step function jump in cash returns in a tougher macro environment, is part of the framework to get that return on innovation potentially consolidating cash generating businesses and focusing on higher improved ROIC?

For example, if I look at what, according to what's done in display glass, going after -- both maintaining share and then seeing a lift in industry profits.

Is that the framework we should see in the other segments such as telecom and diesel, for example?

That would be helpful.

I think the short version is yes.

You're going to see us use that type of tool.

Especially in telecom, we think we have a lot of potential leverage that looks just like that.

So that is one of the things we are going to do as we deploy that $10 billion.

That's helpful.

When we consider potential asset sales, how should we frame the tax implications considering the JV, I think began before most of us were born?

(laughter) Is there a large capital gains tax that we should consider?

Would there be major depreciation recapture involved as well?

So maybe the framework as you potentially divest some assets that began a long time ago?

So, Mark, first, thank you for not making me feel old today.

Usually, I feel a little bit old, but you're right, we've got some stuff that we started before I was born, which is like nice.

All I do is work with young people these days.

So I normally feel old.

But anyway, I digressed.

So as far as Dow Corning goes, we are not going to discuss any further than that we have a potential transaction under discussion with our good friends at Dow.

Shifting gears and talking about transactions in general and what happens to our out-of-focus assets.

So our out-of-focus assets.

As I said, we are running them pretty well.

They are generating higher than their cost of capital in terms of returns, but we think that some of these assets may offer more synergy to others, if we can realize that synergy including any friction costs that may be involved one way or the other.

For our shareholders, those are the transactions we are willing to consider.

As you take a look at the overall framework of being able to deploy $20 billion; right?

Investing in our growth and back to our shareholders, any transactions in any of the areas we are talking about will represent upside to that deployment.

So thanks, Mark, for making me feel younger.

That's helpful.

One last question.

If we look at the cost of debt, which is at low levels at the moment, any thoughts on the framework for adding more debt to the balance sheet considering that you still want to maintain your credit rating?

So clearly, I think over the next three or four years, we will be adding debt to the balance sheet.

We are not prepared now to talk about what the timing of that is.

In terms of when we need to do it; right now, we have good cash balances, $5 billion including $2 billion offshore.

So we are currently working to try to determine what that is.

But keep in mind that our objective is to have debt balances of 2X our EBITDA.

Over the next few years, we will be putting debt on to do that.

That's helpful.

Thank you.

Good luck.

Thanks, Mark.

Vijay Bhagavath, Deutsche Bank.

A bigger picture question for you, Wendell, which is what gets you impatient about the business?

Are there any areas or parts of the business that you'd see -- you would like to see progress quicker or in a different way than you're seeing now?

It would be very helpful to hear your points.

Then a quick follow-on for Tony.

Well, the short answer to your first question is, yes.

(laughter) There are many things that make me feel impatient; right?

About making progress.

But in general, I think the most significant source of frustration these days is that as we use our three, four, five plan and we apply our core technology sets in our manufacturing and engineering platforms and our market access platforms, when we try to introduce a new product to a customer who knows us well in other areas, sometimes we forget that different industries move at different speeds.

So not everything moves like tech, not everything moves like consumer electronics and mobile consumer electronics.

As a matter of fact, few things do.

So, for instance, it is frustrating how long it's taking us to get widespread adoption of lightweight glazing in automotive.

It's a heck of a good idea, good for consumers, it's good for the environment, it's good for safety, it's good for almost everything.

But the industry, even when you're a highly valued supplier as we are, it just takes time.

So I think the degree of speed with which our innovation can make a difference to our top line, it's a little frustrating.

Yes, excellent.

Then a quick follow-on for Tony.

Give us your view on where do you see the acquisition strategy trending?

Any particular product areas, technologies, market transitions?

Thanks.

Sure.

Thanks, Vijay.

I think Wendell said before that we feel like there's big opportunities in the optical communications business both with our internal growth opportunities and applying our three, four, five strategy but also from an acquisition standpoint.

I would expect that most of our focus as we go forward the next couple of years from M&A, would be looking in the optical communications area.

We think we can generate good synergies there.

We've got a big power house machine that's there today with $3 billion in sales.

I think it gives us really good opportunities to bring in companies and make them better.

We have done three acquisitions this year.

In those acquisitions, we are really happy with our results.

We've been able to prove out, I think, our ability to really drive value with those acquisitions.

So I would expect more of the same.

Excellent.

Thank you.

Doug Clark, Goldman Sachs.

I wanted to touch on LCD glass pricing a little bit.

I understand the three key points that you make about why glass prices could remain stable.

On the other side of that and what isn't addressed is kind of the panel maker dynamic, especially as their profit margins continue to erode.

Do you see that as a possible area of pressure on your glass pricing going forward, to the extent that demand doesn't firm up and remains soft?

For sure, we think that's always a possibility and that could put pricing pressure on us.

But I think what we really expect to see is, as those panel makers go closer to cash costs that they will cut back their utilizations.

We saw that in the third quarter in the small gem sizes.

We think we will see that over the next couple of quarters in the larger gem sizes.

So the reason that we are confident are the three things I talked about relative to the financial situation with our competitors, the benefit that has happened with the significant weakening of the Japanese yen and then our ability to keep glass supply and demand balanced by taking capacity off-line.

But it's an excellent question, Doug.

I mean as our display maker customers hit the -- they never made a lot of money but as they hit pain, they will increase the pressure.

Then the question is going to be what do our competitors choose to do?

Do the factors that Tony has laid out, which is -- as they are basically approaching breakeven in one of them and the other's profit is greatly reduced, how do they react to that pressure given that the display makers are on the opposite side of the yen too and have gotten that tremendous benefit.

So how that -- you're on the right question.

How that dynamic plays out in the coming quarters is important.

I think the good news is what you heard from Tony was in this next quarter, we expect our display pricing to moderate further than it did in quarter three.

The profitability problem is already upon the display maker, so that's encouraging data, Doug, encouraging data.

Right.

No, that makes a lot of sense.

That's very helpful.

Thanks.

One follow-up to that more on the volume side.

I think in last quarter, you talked about inventories coming down by about two weeks by the end of the year.

Wondering if you can give us an update on where supply chain inventories are?

To the extent that panel makers cut utilizations between 4Q and 1Q, do you think it will be skewed more towards one or the other quarter?

So right now, our expectations is that there will be some decline in Q4, but it's -- we expect that softness is likely to continue into Q1.

Part of that is, that we do know that some panel makers are bringing on capacity in China.

We think that has an impact.

Of course, we don't know for sure.

We were wrong in our last quarter conference call on how much was going to be in Q3 versus Q4.

Of course, we could be wrong here.

We do think that is what is going to be necessary to get the supply chain inventories at a healthy level.

Clearly, since demand is less than what we thought last quarter, even though inventories are going to go down in the fourth quarter, that inventory level at the end of the fourth quarter is a little bit higher than what we would have projected last quarter.

We expect that to bleed off in the first quarter.

Got it.

Thank you very much.

Joseph Wolf, Barclays.

I just wanted to start and get a lot of detail on the capital deployment.

You mentioned investor input.

I'm wondering if you're having some sort of internal -- I don't know if we call it contest with the engineers that you have mentioned to go after that capital of projects that they are looking at?

Also, any pace of deployment that you're thinking about in terms of over the entire four years?

Or could we wake up one morning and you have decided to spend half of that on one very specific and targeted project with a lot of growth opportunity?

Great questions, Joseph.

So I think you should think of the deployment as fitting our culture, which is in the way our innovation model works.

When you do material science, whether you dig stuff out of the ground or take assets and end up converting them into highly engineered components, that takes time.

Since that takes time, the bad news is that things don't turn overnight your way.

The good news is that the things tend not to sneak up on you.

So I think you can expect some pretty steady behavior honestly.

As we go out and talk to investors, we will give clear indications on, here's where our tendency is going to be as far as where we are going to invest that $10 billion.

We'll give you a good feel for rough ideas of timing and how that plays.

The big thing that we are picking up here with this focused portfolio is increased productivity.

That increased productivity is what's behind our ability to give more to the shareholders.

So if you were to take a look out over the last 10 years; right?

About 30% of the funds we had available, we were able to give to shareholders either in the form of dividend or share repurchase.

As we look forward over this next four years, because of that increased productivity, we are looking at an ability to do about 50% over that time period.

That will be a steady effort.

That's the way you should expect this to behave.

Did that answer your question?

Thank you, that's helpful.

Okay.

Yes.

No, that was very helpful.

Just a follow-up on the environmental business.

If you think about -- if you had a view -- maybe if I had a view or one had a view on the trucking business globally, how would you expect the business would go in terms of the way trucks are moving?

Could they be more negative than you based on that viewpoint?

Or is there growth in the environmental business independent of growth in trucks?

Especially, the heavy-duty or long haul trucking?

I think growth in the environmental business in total, of course, is going to be driven by both what happens with trucks and light-duty vehicles.

On a global basis as long as total production for light-duty vehicles increase, you will see some growth in the environmental business.

Of course, pollution regulations make a big impact on that business too.

I think from the heavy-duty diesel standpoint, we have seen strong growth in North America over the last couple of years, some of it economically driven, some of it regulation driven.

In Europe, the regulations in particular caused nice growth in 2014.

I think what we are faced with right now in 2015 in China is just that the truck production is down significantly compared to what it had run at, actually, over the last six years, down about 34% on a year-to-date basis.

That from a very specific to China impact is impacting us both from a revenue standpoint but also from a cost standpoint because we obviously put cost in place to be able to manufacture to meet that demand.

Until those sales turn around, along with the improving regulatory environment there, those -- I mean, that's really what we are looking for in 2016.

We think there will be some improvement in 2016, but we are still waiting to see -- we certainly don't think that will improve much in Q4.

From the most macro standpoint, it's not the amount of trucks that are bought in the world.

That, we don't need to grow.

What we need is more compliant trucks.

Then same thing with cars, even though cars continue to expand and grow very nicely, right?

For our automotive -- our environmental business, it is driven by compliance.

So the tighter air requirements get, the more of our components get used.

As new countries come on board to clean up their air, that's what adds the big swaths of demand, but it's really an excellent question.

All right.

Thank you very much.

Steven Fox, Cross Research.

Just the first question on the new plan.

I guess when I think about the three, four, five that you laid out, I guess the three and the four have typically outperformed historically for Corning but the five has been the one where timing the products to market et cetera has been problematic.

Under the new focus, can you just discuss how maybe getting products to market or matching your customers or end market needs gets better and timing more predictable?

Then I had a quick follow-up.

Yes, I think in a way we tend to be -- the timing piece for us by and large -- it's possible to miss timing on both ends, right?

But where we tend to miss timing is we are ready earlier than our customers, which I guess beats the heck out of the other timing base, right?

So that can lead us to have capacity out ahead of demand.

That can lead us to have innovations ready before our customers need to pull them.

It's been one of the lovely things about mobile consumer electronics is it's almost impossible to be faster than those guys.

So we continue to work on how do we get better at picking these inflection points?

Actually I commented that Jeff Evenson, our new Chief Strategic Officer is here today -- a big part of his new role is to work on exactly that.

How do we get a little better at understanding not only the timing basis for our innovation sets but also when our potential inflection points in our market sets?

How should that impact the timing of our capacity decisions?

I think you're quite right to note it as an area where we can improve.

Hopefully, more to come on that topic.

Thanks.

Then just a very quick follow-up.

So if we think about the out-of-focus portfolio, is it safe to assume, then, that it is roughly maybe 20% of your profits today?

Or is that a level of detail?

I wouldn't make assumptions or speculate today on that matter, though I do understand why you're trying to.

Thanks.

Thanks for your understanding.

Yes.

(laughing).

Patrick Newton, Stifel.

On the shareholder return or capital allocation framework that you've talked about, one clarification and one question.

On the clarification and I think, Wendell, you alluded to this but is any potential transaction with Dow Corning baked into this current outlook through 2019 or would it be additive to the current outlook?

Then I guess for Tony, on the global cash use being reduced to about $2 billion, is that going to be focused on acquisition efforts for international targets?

Or is it a repatriation part of your strategy?

Then I have a follow-up.

I think on the first question, any potential transactions we are not going to talk any more about Dow Corning, but any potential transactions are additive to that number.

I mean, what we have very clearly stated is that we believe we can deliver more than $10 billion back to shareholders based on our current plans and anything on top of that from a transaction standpoint would be additive to that.

Our bias right now based on what we know would be to have those transactions be additive, but bottom line is, it's additive.

In terms of the cash amount on the $2 billion, I mean I think clearly it's our belief that $2 billion is an adequate amount to have from a Company standpoint, given our cash flow generations.

As a reminder, our goal is to have 2X EBITDA in debt.

Our plans are have -- is to have that $2 billion, reduce that cash over the next couple of years.

In terms of where that cash is actually located, it will depend a lot depending on where our taxing policy is in the United States, as we can always add the debt in the United States and keep the cash offshore if that makes sense.

Nope That's helpful.

As a follow-up, I really want to dive into gross margin given some of your commentary.

I think in the near term, you're talking about fixed cost absorption as what is pressuring the metric in the September quarter results and then in the December quarter guidance.

But if I step back and I look at your gross profit since 2010 and arguably when display started to mature, it's been on a negative trajectory.

It increased in 2014 due to the consolidation of SCP.

Now as you're lapping that on a -- it seems to be redecelerating, I guess.

Is this -- structurally, how should we think about your gross margin profile perhaps over the next five years or during your capital allocation framework time period, from the 42% level, do you anticipate it will have positive trajectory or will it be sustainable or further pressure?

Yes, we do think we are going to have a positive trajectory.

I mean, where we are right now, as I explained before, is driven really by a few things.

The first item is in our display business.

In the third quarter, our volume was a little bit less than what we expected and that negatively impacted our cost but we can take cost out and reduce capacity to meet market demand.

We are doing that and in the fourth quarter, our gross margins are actually consistent in the fourth quarter of 2015 as they were in the fourth quarter of 2014.

So the real issues are in environmental and optical communications and in both those businesses, we have put capacity in place for new businesses that isn't showing up today.

We expect those businesses to show up in 2016.

For some reason they don't show up, we certainly will take the cost down but the whole purpose of this framework and the integration of this is partly to drive lower -- us to the lowest cost producer and that definitely helps us from a gross margin standpoint.

So I think over time -- right now, we are certainly having seen some gross margin compression as our sales are going down but as our sales return, we would expect gross margins to expand.

Great.

Thank you for taking my questions.

Good luck.

Thank you, Patrick.

Thank you, everyone.

Just as a reminder, the slides are posted on our IR web page for those for your reference.

We have a couple announcements.

We will be out visiting investors during the month of November.

Also, we will be at the UBS conference on November 17 in San Francisco and the Credit Suisse conference on December 1 in Scottsdale.

Thank you all for joining us today.

Our playback of the call is available beginning at 11:00AM eastern and will run until 5:00PM on Tuesday, November 10.

To listen, dial 800-475-6701.

The access code is 370570.

The audio cast, of course, is available on our website as well during that time.

Roxanne, that concludes our call.

Please disconnect all lines.