康寧 (GLW) 2016 Q2 法說會逐字稿

Welcome to the Corning Inc quarter-two 2016 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, Cynthia.

Good morning.

Welcome to Corning's second-quarter conference call.

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

Before we begin our formal comments, I'd like 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 we will be discussing our results using core performance measures, unless we specifically indicate our comments relate to GAAP.

Our core performance measures are non-GAAP measures used by management to analyze the business.

A reconciliation of quarter results to the comparable GAAP value can be found in the Investor Relations section of our website at Corning.

We have slides posting live on our webcast to accompany 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.

As you saw in this morning's press release, second-quarter results exceeded our expectations, with core EPS up 32% sequentially to $0.37.

We told you coming into this year that we expected the first quarter to be the weakest and then momentum would build throughout the year.

We still expect that to be the case.

We're very encouraged by our second-quarter improvement.

We are confident that we will see both sequential and year-over-year growth in sales and EPS in the third quarter.

Tony will discuss our results in detail, but before he does, I want to offer some color on the great progress we are making against the strategy and capital allocation framework we announced last October.

You'll recall that our priorities are to focus our portfolio and utilize our financial strength to grow, return cash to our shareholders and create significant value.

No doubt a highlight of our second-quarter progress was closing the realignment of our interest in Dow Corning.

In the transaction, we exchanged Corning's 50% interest in Dow Corning Corporation for a 100% other subsidiary that holds an equity interest in Hemlock and approximately $4.8 billion in cash.

The $4.8 billion is approximately 30 times the equity earnings from Dow Corning's silicones business, unlocking tremendous value for our shareholders.

Our continued ownership interest in Hemlock allows us to catch a potential upside from a rebound in the solar market, while also providing market insight and access for our semiconductor innovation programs.

Notably, the realignment was a significant milestone in delivering on our strategy to focus 80% of our resources on our three core technologies, four manufacturing and engineering platforms and five market access platforms.

We are also making steady progress on other aspects of our focused portfolio strategy.

Let's take a look at a few examples.

We continue to leverage our competitive advantages and strong customer relationships in display to stabilize returns and deliver new innovations that increase our revenue per display.

In May, our Iris Glass earned a Display Component of the Year Award at SID for enabling thinner displays with lower color shift.

This technology replaces plastic light-guide plates, adding a third piece of glass to large, edge-lit TVs.

I'm very pleased with the additional commercial transaction that we are gaining on this product.

In the automotive space, we are reapplying our core technologies and reusing our manufacturing assets to assist manufacturers looking toward connected cars and tighter regulations.

Gorilla Glass for auto is a great example.

It is 30% lighter than traditional auto glass, offers important safety advantages and provides a superior surface for heads-up displays.

In April, we presented a joint paper at SAE with Ford that demonstrated Gorilla Glass for auto is to 2 to 3 times stronger in rock strikes with reduced spalling hazards versus soda-lime glass.

I'm very much looking forward to reporting more on this topic in the future.

Our efforts to lead in gas particulate filters also advanced during the quarter.

Remember that if adopted, this technology increases our revenue by 3 to 4 times for gasoline direct injection engines.

The exciting news for us is that both Volkswagen and Mercedes-Benz announced that they will equip vehicles with gas particulate filters beginning as early as 2017.

We won several new GPF platforms in quarter two.

In mobile consumer electronics, we just announced a new member of the Corning Gorilla Glass family, Gorilla Glass 5. It has up to 1.8 times better damage resistance than Gorilla Glass 4 and delivers up to 4 times improvement in drop height to failure versus competitive glass designs.

We expect this superior drop performance to translate into a meaningful price premium versus Gorilla Glass 4 and to expand the use of Gorilla.

Given that drop performance is the number one want from consumers, it's not surprising the traction at our customers has been strong.

We should be hearing announcements from them in the near future.

In the growing optical communications market, we closed on the acquisition of Alliance Fiber Optic Products, bolstering our presence in the high-growth cloud data center market.

Now, this acquisition supports our optical market access platform by accelerating our co-innovation strategy and adding new products.

We see it strengthening our ability to deliver high-value optical solutions for network operations worldwide.

We also announced a separate investment in a small company, Versalume, to commercialize our Fibrance Light-Diffusing Fiber.

Fibrance combines Corning's strengths in glass, optical physics and fiber manufacturing, but it's benefits extend beyond Corning's current market focus.

Versalume will enable Fibrance's technology to quickly get into the hands of designers and customers in architecture, auto lighting, medical devices, athletic apparel, aerospace and other industries seeking to solve difficult lighting challenges.

Versalume demonstrates one way where we can keep our focus on the core 3-4-5 portfolio, while still extending the impact of Corning innovation to new markets.

Those projects illustrate just some of the ways that we will invest $10 billion under the strategy and capital allocation framework.

We believe the investments will produce significant sales growth by extending our leadership in existing markets and positioning us to win in new markets.

Let's turn to the second part of our strategy and capital allocation framework, utilizing our financial strength.

We updated the framework in June to recognize significant progress across multiple fronts, including the closing of the Dow Corning transaction.

We now expect to generate and deploy more than $26 billion through 2019, up from our previous plan to deploy more than $22 billion.

Notably, we raised the lower bound of our commitment to shareholder returns to $12.5 billion through 2019, up from $10 billion.

Cumulatively, since October, we have already returned $3 billion under the framework, including $810 million in share repurchases during the second quarter.

Today, we are announcing our intention to execute a $2 billion accelerated share repurchase, which will approximately offset the EPS impact from the loss of Dow Corning's silicones earnings.

So to summarize, we are making solid progress delivering on our new framework, which is designed to deliver secular growth, while consistently returning significant sums to our shareholders.

We are utilizing our financial strength to invest in our focused portfolio and drive that growth.

We have raised our planned cash distributions to shareholders to more than $12.5 billion, which is equivalent to about half of Corning's current market capitalization.

We look forward to launching our new $2 billion ASR tomorrow.

Now, I will turn the call over to Tony, who will review our second-quarter results and third-quarter outlook.

Tony?

Thank you, Wendell.

Good morning.

As we noted in today's press release, our Q2 core results reflect the sequential improvement we expected across most of our businesses and building momentum for a strong second half.

We were particularly pleased with our strong operating results, including the strong sequential sales and profit growth in optical communications and display's moderate price declines and strong sequential volume growth.

In optical communications, cable production levels recovered during the second quarter from the first-quarter software implementation issue.

Combined with strong demand, the recovery resulted in sequential sales growth for optical of 28%, which was even better than the guidance we provided in April.

Looking ahead, we are encouraged by the further sequential and year-over-year growth we see in the third quarter.

Now before I get into the details of our core performance and outlook, I want to briefly point to the two primary drivers between our GAAP and core results for this quarter.

First, our GAAP net income includes a $2.7 billion non-taxable gain on the strategic realignment of our ownership interest in Dow Corning.

Second, similar to the first quarter, this quarter's GAAP results were affected by a $791 million non-cash mark-to-market loss that reflects the required accounting treatment for our currency hedge contracts.

I'd like to provide a bit of context.

As you know, we sell LCD glass in yen and a 1 point move in the exchange rate, affects our net income and cash flow translation by about $23 million annually at the current exchange rate.

As you also know, we have currency hedge contracts, predominantly in yen, to mitigate the impact of changes in currency exchange rates on our earnings and cash flow.

By hedging, we increase the predictability of our results and our confidence that we can achieve our financial goals.

We are very pleased with the results of our hedging program and the economic certainty it delivers.

Since the inception of this strategy, we have settled hedge contracts and received cash totaling $1.1 billion and offset much of the decline in display's earnings due specifically to the weaker yen.

In January, we increased our hedge coverage, which further reduced our risk and increased our confidence in achieving our financial goals.

We have hedged approximately 70% of our projected yen exposure through 2022 at a blended rate of approximately JPY106 per $1.

For any investor, who is worried that a weakening yen could negatively impact our business, hedging earnings and cash flow through 2022 substantially mitigates that concern.

Now let's move from the economic impact of our hedging program to GAAP accounting.

As we discussed in detail last quarter, GAAP requires earning translation hedge contracts settling in future periods to be marked-to-market and recorded at their current value in the current quarter, even though those contracts will not be settled in the current quarter.

In other words, under GAAP accounting, each quarter we are required to revalue all of our existing contracts at the current and forward rate, and record the difference in value from the prior quarter in through the P&L as an unrealized gain or loss.

This requirement results in significant GAAP earnings volatility if the exchange rates changes from quarter-to-quarter.

Given the size of our hedge portfolio, these adjustments can be large.

For example, in Q3 and Q4 of 2014, we had large unrealized non-cash gains of $431 million and $410 million respectively, primarily due to the weakening yen.

In the first quarter this year, the yen sharply strengthened driving a $599 million unrealized non-cash mark-to-market loss.

Macroeconomic factors, including concern around Brexit, caused further fluctuation in the yen exchange rate.

Overall, it strengthened again over the second quarter, which was the primary factor in the $791 million mark-to-market loss.

Our GAAP results will continue to see this volatility when the yen rate moves.

To be clear, this GAAP accounting has no impact on our cash flow in the quarter.

Actual cash flow in any quarter is determined by the amount of hedge contracts we settle in any given quarter.

Our contracts are designed so that the cash received or paid on the contracts substantially offset the change in display's translating yen earnings and cash flow in that quarter.

Our core reporting convention is designed to convey this matching and to simplify comparisons of underlying business trends.

For investors who have additional questions, there is a tutorial on FX hedge accounting on the Digital Media Disclosure section of our Investor Relations website.

As always, Ann and her team are available after the call.

Now, let's turn to the results for the second quarter.

As a reminder, these are core performance metrics.

Sales in the quarter were $2.4 billion, up sequentially from $2.2 billion in Q1 and exceeding our expectations, driven by optical communications.

Corporate gross margin was 43%, up more than 200 basis points sequentially and better than our guidance.

The uptick reflected the added volume in optical communications.

SG&A was 14% of sales at $342 million as expected.

RD&E costs were flat sequentially and versus last year at $192 million.

Our effective tax rate for the quarter was 15% as guided.

Net income was $434 million, up almost $100 million from Q1.

EPS was $0.37 and above expectations.

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

In the second quarter, the display market and our performance tracked with our observations in April.

You may recall that in the first quarter, panel makers lowered utilization, which allowed the supply chain to reduce inventory.

Glass demand was down sequentially and year-over-year.

We expected panel makers to increase utilization in Q2 to meet demand for the second-half retail season and for glass demand to grow.

That's what we saw in industry dynamics in recent months.

At retail, sell-through data through May showed demand tracking to overall expectations for glass area growth of 8% to 10% in 2016.

Panel prices across most TV sizes increased and panel makers turned up utilization rates to meet demand through the second quarter.

Weeks of inventory in the supply chain ended the quarter at a healthy level.

Glass supply and demand remains balanced.

Our share is stable.

As a result of these and other factors, our volume returned to year-over-year growth and was up high single-digits sequentially.

Price declines were moderate, as expected.

These dynamics inform our belief that we will see year-over-year volume growth continued in the second half.

The moderate pricing environment we've experienced over the last eight quarters will continue orr even improve, which is good for Corning.

Second-quarter sales and net income in display were up 6% sequentially, driven by the stronger volume.

Let's move to optical communications.

Results snapped back from the first quarter due to strong demand and the return to full production in our cabling facilities toward the ends of the quarter.

Q2 sales were $782 million, up 28% sequentially and better than we expected.

Net income at $86 million was more than triple the first quarter.

We are very pleased to be at full production and continue to work hard to meet our commitments to customers.

In environmental, Q2 sales were consistent with last year and in line with expectations.

Sales of light-duty products for auto were up year-over-year, driven by continued strong demand.

This strength was offset by the continued weakness in North America and China for heavy-duty diesel products.

Truck production in North America is down this year.

China's production is also expected to be down for the second consecutive year, driven by the weakness in their economy.

Net income was consistent with Q1 and in line with our expectations.

Let's move to specialty materials.

For the quarter, sales were up 17% sequentially.

Net income was up 50% on the higher volume.

The premium on Gorilla Glass 4 drove a 9% increase in year-over-year net income.

That said, more broadly the market for smartphones, tablets and laptop computers is lower than we expected.

Worldwide macroeconomic conditions are slowing demand in emerging markets.

Additionally, there have been fewer major product launches to drive demand and replacement cycle appears to be longer.

Our customers are responding to this lower demand environment.

As a result, Gorilla Glass volume in specialty materials sales did not meet expectations in Q2.

Segment sales were down 2% versus last year.

We anticipate this weaker handheld and IT end market environment will persist through the second half.

We now expect full-year sales in specialty materials to be consistent with or down slightly from 2015, driven primarily by our performance in Q1.

We do expect sequential growth in each quarter.

Although, we expect the overall market to be flat, we are extending our leadership in the cover glass market.

First, we are gaining even more share in the aluminosilicate cover glass.

Second, our ability to innovate and deliver value add products at a premium price is playing out as we expected.

As Wendell said, we are attacking again with our recent launch of Gorilla Glass 5. We look for innovations like this to drive revenue and income growth, even in a maturing market.

In Life Sciences, Q2 sales were $215 million and met our expectations for low single-digit growth.

Net income was $21 million consistent with last year and higher than Q1 on higher sales.

Now let's turn to equity earnings.

As Wendell said, the close of the Dow Corning realignment in June was a significant milestone for Corning.

The transaction adds $4.8 billion in cash to our balance sheet or about 30 times Dow Corning's annual silicones equity earnings and was essentially tax-free.

The freedom to deploy that capital is a tremendous value driver for our shareholders.

Because of the timing of the transaction, the equity earning line in our second-quarter financial statements reflect only two months of Dow Corning's silicones equity earnings, plus a full quarter of Hemlock's equity earnings.

For your models, the way we will report Hemlock's equity earnings in our income statement going forward is changing.

Prior to restructuring, equity earnings in Hemlock was reported in equity earnings on an after-tax basis.

Going forward, it will be reported on a pretax basis.

The taxes will be reported as part of Corning's total tax expenses.

As you can see from this example on the slide, the contributions to our net income does not change.

If you have any questions on this, of course, Ann and her team are happy to help.

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

We ended the quarter with $7.1 billion of cash, up $3.5 billion in cash at March 31, including approximately $5 billion in the United States.

Adjusted operating cash flow for the quarter was up significantly over Q1, as expected at $595 million.

The comparison to 2015 is challenging because this year, we did not receive dividends from Dow Corning in light of the realignment in June.

We paid a one-time legal settlement and net income was lower.

We expect operating cash flow to be up even more in the second half.

Historically, most of our operating cash flow is generated in the back half of the year.

Major drivers of the increase include higher net income, a reduction in working capital and the non-repeat of front-half loaded cash expenses.

During the quarter, we repurchased $810 million worth of common shares outstanding.

Now for the outlook.

Let's begin with display and the display market.

For the full year, our view of end market and glass market growth is unchanged.

While there are puts and takes by region, we continue to expect worldwide TV unit growth of 2% and screen size to increase by more than 1.5 inches.

As I already mentioned, the outlook for handheld and IT market is lower than our prior expectations, but those segments are our relatively small part of the overall display glass market.

Therefore, in total for the year, we still expect the overall retail market in square feet to be up 8% to 10%.

We continue to expect the overall glass market, in terms of area, to be up in the mid single-digits.

The first-quarter supply chain inventory draw-down accounts for the difference.

Turning to our third quarter, we're seeing healthy supply chain inventory.

Panel maker inventory is lean.

They are further increasing utilization to meet increased demand from set makers.

As result, we expect the glass market and our volume to be up mid single-digit sequentially in the third quarter.

We also expect our LCD glass prices to decline moderately sequentially consistent with Q2.

As we have previously explained, we will maintain our stable share strategy and align our operating capacity with market demand.

We continue to expect a more favorable pricing environment will continue or possibly improve for two reasons.

First, we monitor utilization and market demand and other market factors very closely.

All indicate that glass supply should remain tight for the balance of the year, especially in the large gen sizes as a result of strong TV demand.

Second, our competitors' profitability is low, even though price declines have been moderate for two years now, their profitability has declined during that period; therefore, we expect that their price declines will slow further as they try to remain profitable.

For these and other reasons, we continue to believe that sequential pricing will be better for us going forward.

Moving to optical communications.

For the third quarter, we expect sales to be up approximately 10% versus last year, driven by growth in fiber-to-the-home and data centers.

Turning to environmental, we see continued strength in the auto market, but expect weakness in the heavy-duty truck markets in North America and China to continue.

We expect third-quarter environmental sales to be down slightly year-over-year, driven by foreign exchange.

In specialty materials, we expect sales to be consistent with Q3 last year.

This is an 8%, up sequentially, driven mainly by volume growth of Gorilla Glass in preparation for new product launches later this year.

For the full year, as I said earlier, the handheld and IT retail market for 2016 has weakened, which impacts sales of Gorilla Glass.

As a result, we now expect the sales in specialty materials will be consistent or down slightly from last year, but will be up sequentially each quarter.

In Life Sciences, we expect Q3 sales to be up low single-digits versus last year despite a drag from our foreign-exchange.

Turning to the consolidated outlook, we expected the gross margin to be approximately 43% and consistent with Q2.

Gross margins expand versus last year, with growing volume in display and higher sales in optical communications.

SG&A and RD&E spending will be approximately 14% and 7% of sales respectively.

We expect other income/other expense to be a net expense of approximately $60 million.

We expect Q3 total gross equity earnings to be approximately $15 million.

As a reminder, we no longer have silicones equity earnings.

We expect our effective tax rate for 2016 to be in the 15% to 16% range.

Now, that concludes our outlook for the third quarter.

Let me close by saying that we were pleased with the strong sequential growth in sales, in earnings in the second quarter.

We are confident that Corning's performance we'll continue to improve with year-over-year sales and EPS growth in both the third and fourth quarters.

We look forward to delivering on our long-term commitments to create strong value.

We expect to generate more than $26 billion through 2019.

We will invest $10 billion to grow and sustain our leadership.

We also plan to distribute more than $12.5 billion to our shareholders.

We are focusing our portfolio to increase our probability of success, reduce the cost of innovation and increase the barriers to entry for our competition.

We have a rich set of growth opportunities.

Thank you.

Ann?

Thank you, Tony.

I will open the lines now for questions.

Cynthia?

(Operator Instructions)

Mehdi Hosseini, SIG.

Going to your comment about pricing trend and this, in the glass segment, you're talking about price decline moderating.

Can you help us understand the magnitude?

Are you referring to -- is moderation a reference to down low single-digits or down 3% to 5%?

Any additional color would be great.

I have a follow-up.

Sure.

It is low single-digits.

It's similar to what we experienced in Q2.

Okay.

Then on the Gorilla side, I'm surprised that you're down-ticking again.

Even if I were to look at the revised smartphone unit shipment, it still shows up 3% to 5% on a year-over-year basis.

The display size is actually growing.

So why is it that you're down-ticking?

I'm asking you, in the context of, if there's any ASP pressure here?

No.

This is all about volume.

I think the piece that you're missing, Mehdi, is what's happening on the tablet market.

Of course, from a glass standpoint, tablets are bigger, so that has an outsized impact.

I think both the outlook for in smartphones and on tablets have come down in the second quarter.

That's the primary reason that we now believe that market is going to be consistent to down slightly, as opposed to the way we thought it would grow in the past.

Okay.

Got it.

Thank you.

Patrick Newton, Stifel.

Tony, a clarification on the guidance for the equity earnings of $15 million in the quarter.

I believe you said that will now exclude Hemlock Semiconductor, which is going to up the P&L.

I'm curious if you could help us understand what the contribution from Hemlock will be in the quarter?

I'm sorry, I maybe didn't explain that very well.

It will be on the equity earnings line still.

That $15 million is mostly from Hemlock.

The difference is, that previously Hemlock was reported on an after-tax basis, because the taxes were taken care of at the Dow Corning level.

Now, taxes are taken care of at the Corning level.

So there's a slight change in the geography, but it's not off the equity earnings line.

Wonderful.

Thanks for the clarification.

I guess, just dovetailing off the prior Gorilla Glass question, what are the volumes forecasted to be from a growth perspective in 2016?

Then longer term, can you walk us through what will return Gorilla Glass to growth post their multi-year stagnation?

For us in Gorilla, I think as Tony said, when we came into the year, we felt the market was going to grow, albeit, at a slower rate.

Now, pretty widely reported that the expectations are for the market to be up pretty flattish.

So now then, you'd start where do our strategies begin to impact our revenue realization in that slower growth market, as well as what will be the next uptick in the market one way or the other.

So let's deal with the second, first.

Uptick in the market for us, it really does get driven by how exciting a product our customers come out with and its impact on consumers.

So I can't give much insight into that for you, but we do believe that we see some pretty exciting products coming that should help on the total market growth.

Now then, let's take a look at us in a more micro way.

We would normally expect that we're going to grow faster than the market.

That is because of our superior product.

We should be always in a sort of share gaining mode, as well as that as we introduce higher value add products, we will get higher revenue per device.

I think this year, we have an interesting dynamic in that customer mix can really make an impact.

We have some customers where we do virtually all of their cover glass needs and some, where we just do the majority.

So which customer gets impacted, can impact us, a little more outsized when you're dealing with the slower growth market.

Then second is just been timing on adoption of some of the higher value-added products and our ability to manufacture.

A good example of this is Fire, where we continue to get pretty good pull, on Fire, especially for wearables.

But the difficulty in that manufacturing process has pushed us a little bit out in time versus our original launch dates.

But overall, we would look over the long-term for this business for us to continue to have pretty robust growth and to be able over that four-year timeframe to double our revenue on this overall platform.

It also includes things like augmented reality but more on that to come in the future.

Great.

Then just one more, if I may, is on the gross margin line that was the largest positive surprise relative to our expectations.

If we go back and look at multi-year trend, we've generally had a negative trajectory outside of acquisition benefits.

I guess my question to, Tony, is can you walk us through outside of the optical communication volumes, what drove gross margin to rebound?

Based on the guidance of sustaining this level at 43%.

If we take maybe an intermediate to longer-term view, are we at a point where Corning's gross margin should be stable to having a poor trajectory from current levels?

Sure.

I'm happy to do that.

I think compared to Q1, really two things.

One was the optical communications improvements.

Both in terms of sales, but the amount of money that we were spending on our software project issue also reduce during the quarter.

There was a lot of one-time manufacturing inefficiencies, they got better in the second quarter.

That helped us.

The fact that we also have volume growth up in the high single-digits on a display, also helped us considerably.

That's how we ended up with the 43%.

When you look out into Q3, we expect to see growth.

We see some of it in optical communications and some of it in display and specialty materials.

When you average those out, keeping in mind that optical communications gross margins are lower than the corporate average and the others are higher, we end up back at that 43% level.

As you look forward, it obviously is going to depend on where the mix of our businesses are, but I think being in that 43% plus level is certainly lower aiming from an overall business standpoint.

Great.

Thank you for taking my questions.

Good luck.

Thanks.

Rod Hall, JPMorgan.

I just wanted to ask on display, Tony, you guys are keeping the display guidance unchanged for the full year, at least the market guidance.

The seasonality implication for that, at least on our calculations, is that Q4 ends up higher than normal seasonally?

So I wanted to see if we get more color on why you see that occurring given the weakness we see in smartphones and elsewhere in the consumer electronics market?

Then secondly, I wonder if you guys could comment on the specialty guidance reduction?

That is consistent with what see in the market as well, which is weak demand.

But I wonder, could you give us more color on regional demand weakness?

Where do you see things incrementally developing weaker as you sit right now?

How do you think the regional demand plays out through the back end of the year?

Thank you.

Okay.

Let me start with the display demand question.

What really drives this market, Rod, of course, is what happens in TVs.

Even though it is true that IT and handheld demand is down, it has a small impact on the overall display market.

But really it matters is what happens in TVs.

We expect that TV units are going to be up 2% on a year-over-year basis.

As we go through the year, we've seen some stronger demand than what we expected, in particular in North America but also in Europe.

There's been some areas that have been weaker like in Latin America, Middle East and Africa and also Japan has been a little bit weaker, but when you net that out it comes back to the 2%.

The other really important factor is what happens with screen size.

From a screen size standpoint, we're looking at screen size growth greater than 1.5 inch.

So when you add all that together, even though, it's a little bit weaker on the other mobile consumer electronic products, that still puts us in that 8% to 10% range.

Tony, do you still -- do you see seasonality better than normal though in Q4?

Because that's what seems to be implied by that assumption?

Yes.

We do.

Keep in mind, that last year a lot of that just depends on where the overall demand actually is and how panel makers are adjusting their inventories at the given point.

Given the strength in demand, we do see that.

Rod, it's a very legitimate question.

In that fourth quarter, it's a lot about value chain management.

We're coming off a period, where you can remember last year in Q4 and Q1, we were seeing a correction of the value chain.

We think that's behind us.

But you're right, that quarter four, it's going to get influenced a lot on how people feel about that selling season.

So always worth some thought there, but that's the way we see it.

Okay.

Thanks, Wendell.

Then what about the -- just how you see regional demand developing on IT and handhelds?

I don't think we have that bit of -- much remarkable there, that developing markets overall were part of the spot of weakness, I think, as you take a look in that space, right?

But I think, it's a little -- the data at that level, I think we have a little bit less clarity on than we do on something like TV, that really drives glass demand.

But I think by sort of peeling apart some of the comments by our customers in conversations with them, that's what we're picking up, is that the developing market was a little bit weaker and less excitement about product launch this year.

Great.

Okay, thank you, guys.

Vijay Bhagavath, Deutsche Bank.

Strong results here.

I have a question on the strength in Northern data center, fiber-to-the-home.

Help us understand the sales dynamics, like, would you have multi-quarter design wins at one of the major cloud companies for these data center fiber build-outs and similar design wins at the major service providers?

So have you publicly announced outside plan fiber build-outs?

I want to better understand the sales design win dynamics in optical.

Thanks.

It sounds like you actually understand them, Vijay.

(laughter) That's exactly right.

The only little correction I would make is it's a lot more than multi-quarter.

When we do something like fiber-to-the-home systems, our development cycles with our customers go for a pretty long time.

Then it sort of sets and locks on, this is the design that they're going to use.

Then away we go.

Then what really provides the dynamic there isn't really sort of share shift or things like that, it basically comes down to simple works efforts and were they want to build networks.

So, it sounds to me like you've got a good understanding.

The hyper data centers and data center pieces, our share has been growing.

Both our share of overall spend as optical and then sort of within in optical.

That's another one where our position is strong, so the more they build, the better we get then.

Then a quick follow-on.

Thanks to you.

The AFOP, the land fiber acquisition, is it helping you open doors in the Asia-Pacific in particular?

Thanks.

Interesting.

Yes, they have some position, especially in some of the OEMs, that we don't have in the Asia-Pacific.

We're really, really interested in that.

It wasn't the primary driver of the transaction, which is we want to get as big as we can in hyper data centers.

But I think you've made a good observation there.

We think that could be a nice surprise, nice added benefit for us if it continues to evolve the way it seems like it could, Vijay.

Thanks.

Great results.

Congratulations to you and your team.

Thank you, sir.

Steven Fox, Cross Research.

Two questions for me, please.

First, on Gorilla Glass, you noted how Gorilla Glass 4 mix is actually helping your profitability now.

Can you talk about how that mix plays out in terms of where you are as a percentage of maybe shipments roughly?

Then how Gorilla 5 impacts that mix maybe over the next few quarters and also the profits going forward?

Secondly, Tony, I know you mentioned that the cash flows are back-end loaded for the year, but are we still looking at similar expectations as to what you were thinking a quarter ago or at the analyst meeting for cash flow from operations, around $3 billion?

Or is that maybe a little bit lighter now?

Thanks.

I will start with that question.

Probably from an overall standpoint, it's a little bit lighter than that.

If you think about what drives our cash flow, we did have a one-time payment that legal settlement that wouldn't have been in those projections originally.

Then of course, the other big factor is where income actually ends up on a year-over-year basis.

Our first quarter was obviously softer than what we originally projected, but it still going to be quite strong.

It's still going to be well -- closer to $3 billion that it would be to, say, $2.5 billion.

To your first question, Steven, I would love to answer that question, but they're not letting me tell you.

(laughter) So let me describe it in a little broader sense, rather than give you my direct answer, about what we're trying to do.

So, the market has a certain dynamic in that how do our customers want to position themselves relative to consumers.

That's why we have open to us different products at different price points.

So the way Gorilla Glass 3 plays out is, we really sort of aim that at those of our customers, who are seeking to get benefits of Gorilla relative to soda-lime or other aluminosilicate providers, but are highly price-sensitive.

So the more that we gain, that's all great because as you know, the margins in Gorilla are terrific, right?

But that price will be moving direct in response to competitors.

GG 4, GG 5 what we're seeking to do there is, for those of our customers, who want to use -- create absolute premium products that are as thin as can be and as damage resistant as can be, they're willing to pay for that innovation.

Therefore, we introduced those products at a premium.

Our overall desire is that, overall, we can continue to push down the cost of Gorilla, while having the price on average so to not fall so much.

That's exactly what we're trying to do in increasing our one piece of increasing our revenue per device.

Now, why the folks don't want us to give guidance on anything like that is, back to the customer mix question that I addressed before.

Now, which customer does what starts to get really important, if you're trying to pick from your gross margin model, how everything is going to work out.

In a market that's already pretty tough to predict, given how the value chain moves, that added degree of complexity won't make us too accurate.

But you're on exactly what it is we're trying to do in that it will be a mix of how much value type brands are going in a certain quarter versus premium cycle upgrade to the new glass.

Does that make sense, Steven?

Yes.

That's very helpful.

I appreciate all that color.

Thanks so much.

Doug Clark, Goldman Sachs.

First one, on display and glass pricing.

I noticed you didn't mention the FX environment in the yen move.

I've got a number of questions, so I wanted to get your opinion if the recent strengthening of the yen has any impact or could factor into conversations about future glass pricing?

Sure.

I would be happy to answer that.

We've got to obviously to enter this based on our analysis of the situation.

We do recognize that the yen fluctuates.

That will impact both glass procurement costs for our customers -- they buy glass in yen, they sell the panels in dollars.

We also know that our competitors, the Japanese glassmakers, could also get a temporary translation benefit when the yen strengthens or, of course, a temporary loss when it weakens against the currencies of the countries they manufacture.

But we don't think this is going to be a big impact.

The effect on customers is not as big as it used to be.

Glass used to be 15% to 20% of the customer material cost, it's now only about 8%.

Then the second factor is our competitors are not as profitable as they used to be.

Any benefit they get from yen appreciation may only be temporary.

So for these reasons, we don't expect to see a meaningful pricing impact, a result of the yen movement.

The perfect example of that is what happened in Q2, where the yen strengthened considerably but price declines were moderate.

So we don't believe this is going to have a big impact, but we recognize there's a couple of areas where we are obviously monitoring it.

A worthy question, Doug, a worthy question.

Sure.

No, that makes sense.

Thanks for the detail.

Second question on -- related to more glass volumes than what's been happening in the supply chain.

There seems to be a bit of a shift from LCD panel capacity to OLED panel capacity.

I'm wondering if that impacts glass volumes either near term or kind of leads to industry rationalization long term?

So, LCD/OLED, let me start macro and then I'll get right down into the micro, particular customer capacity shifts one way or the other.

So in macro, basically when we talk about OLED, you're only really talking about consumer -- mobile consumer electronics, right, really phone-type business, which is a relatively small, right, really small.

(laughter) Like under a single-digit percent sort of small sort of percent of where glass changes in total.

Now -- overall, I think all the adjudication of large sized OLED versus large-sized LCD, LCD continues to just get stronger and stronger relative.

So, all we're talking about is that piece.

Now, there have been rumors about one of our major customers taking some of their capacity that currently makes LCD large-size and take that same plant and make more of the small size [poly emit OLED].

We can't comment on, is that is true or not?

But let's deal with it in a more theoretical way.

So here is what happens.

What says the overall glass demand is going to be what happens in the market, which customer of ours makes it, okay, doesn't impact, is the glass demand there or not?

In micro, we have some customers where we have an incredibly high share and some customers where we have more moderate share.

So what we would expect overall is that we pick up what our average share is of whatever that market is.

So we don't expect that to be a really big market shift for us.

Then specific for us on poly emit OLED is demand there net increases demand on us for glass, because our relative share there is very, very high.

Our relative share in the displays it is replacing, which is basically low temperature polysilicon displays for phones is lower.

So I think overall, you can get some temporal impact, I'm not looking at that as being a huge driver.

Make sense?

That does.

Thanks for that extra detail.

I appreciate it.

Stanley Kovler, Citi Research.

I just wanted to ask, actually, a similar set but a different vein.

So, if the yen strengthened and you have some opportunity for additional hedging in the out years given multi-year lows for the yen, were there any discussions or additional hedging taken?

Then I have a follow-up.

Thank you.

There was not any additional hedges taken.

There was lots of discussions about it.

(laughter) We are 60% -- or 70% hedged out through 2022.

So it is something that we are spending time modeling.

Also thinking both in terms of what the outlying demand is out in those years, maybe different instruments that we could be using as opposed to the forwards we've been using.

So we're doing a lot of work on it.

But we didn't do anything in the second quarter.

Got it, thanks.

Then back to display.

During the quarter, in late May, you started to suggest that there's a possibility of unit volumes tracking towards more of 1.5% growth versus the original 2% guidance and now back to 2%.

That really is interesting because it didn't really impact your screen size inputs as well.

I would think that with the strengthening of the TV space in general, that there would be some discussions about maybe screen size tracking closer to 2 inches as well.

I know those are two separate topics, but just the market in general.

Then looking out into next year, you talked about your share kind of being relatively stable, irrespective of where customers are.

But if that customer of yours does shift to different technology and let's say, sells off the equipment for gen-7 and that goes to even a different region, how should we think about your share in other regions and with new customer entrants in the panel space?

Thank you.

No.

You are absolutely right on the TV demand.

We saw in the data in the last couple of months, was stronger demand in North America and Europe and a lot of those were larger-sized TVs.

So there was also a little bit of tick-up in our projection on screen sizes.

But when you add it all up, we're still in that range of 8% to 10%.

We realize, as we get data every month, it can change the absolute number little bit, but it doesn't change what we think is the overall underlying demand, which is up in the 8% to 10% range.

On the moving around of capacity, I think what's really important to remember is, how small sort of one gen-7 fab is in the overall scheme of the enormous size of this market.

So in a way, that capacity could end up one place or another, but you're within sort of the error bars on the overall market range.

I think a good way to just think about it is sort of wherever it goes, we'll probably end up one way or the other maintaining a pretty stable share.

Our average share of across the entire market, just because -- its just not that big a deal, right, relative, I mean there was a time, when one gen-7 fab that occupied most of my life, right, but now it's like, another gen-7 fab.

(laughter) Right?

George Notter, Jefferies.

I guess I was curious, going back to the TV unit assumptions, positive 2% year-over-year.

If I look at, for example, the market research firm, IHS, I know those guys are looking for year-on-year comparisons that are negative on TV sales.

Obviously, it's such a huge variable for you.

Do you have any comments on why your assumptions might be different from theirs?

Then also I wanted just to ask on Iris, I think you said earlier in the monologue that you were seeing more commercial attraction.

Any detail you can give us on exactly what you're seeing there in terms of design wins or revenue would be great.

Thanks.

On the TV unit size, we do recognize that some forecasters have different projections than we do.

But it is so important to us that we spend a lot of time looking at things by region.

A good -- intelligence understanding it, the very end markets and what's happening.

We feel very good about the idea that we will be up about 2%.

Especially, what's happened in the last couple of months relative to TV demand, in particular, in North America, where it is a good bit stronger than what we projected at the beginning of the year.

Just to add, I think what -- on TV units, it is a legitimate point of view differences.

But whether or not you thought TV units were going to be up 1%, up 2% or even relatively flat, that -- you can remember, I think we actually showed it to you on this slide on the 2016 outlook, when Tony was going through his talk, that TV units up about 2% would be a growth contribution in glass area by about 2%.

But the screen size being greater, up greater than 1.5 inches, that's driving 5% to 6% growth.

So, what we're hearing from the market is, yes, television unit growth may be a little bit softer than what we would have thought in the very beginning of the year, but actually like a previous question, screen size is maybe a little bit bigger than what we thought.

So it's pushing us in those ranges.

But it could be very legitimate that -- rather than coming in around 2%, it comes in around 1%.

All of that's within the range of possibility.

That's why we try to give you an idea of how to factor the various pieces, so you can plug in what it is, your opinion is.

Then sort of figure out from that what's going to happen in glass demand.

Then the final piece is value chain adjustments are even going to be bigger than that television unit piece.

That's how we all end up at the bottom line at mid single-digits in square footage growth for us, for the market.

I think that's okay.

Right.

So, Iris is continuing to get some really good commercial transaction.

With -- now, we're up to a number of customers that are really evaluating it very strongly and some are choosing to launch with it, right, it's still early days.

Many of you may have heard me speak, I tend to think about disruptive innovations like this, because it's highly disruptive.

You're displacing an incumbent technology of PMMA with a brand-new material set to be able to make televisions thinner and with smaller bezels.

That it tends to go in phases, you go from the idea, then you get a breakthrough.

Then if it's really good, you can get a break-out and then you have to defend your really strong position.

I'm getting increasingly confident we're going to have a breakthrough.

It's going to penetrate large edge-lit TVs.

It's going to have a meaningful penetration into that.

Now, whether or not we've got a break-out and this becomes a really dominant technology choice for edge-lit, it's just too early to tell.

But the good news is, the increased commercial transaction is increasing our confidence that you're going to start to see some multiple sets introduced using this technology.

We're going to penetrate the market some, but to be significant, we've still got a ways to go.

Thank you.

So that was our last question.

Great.

Well, thanks to everyone for listening and the terrific questions.

We wish you an enjoyable summer and look forward to updating you on our framework progress and results throughout the rest of the quarter.

Be well.

Thank you, Wendell.

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