康寧 (GLW) 2016 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Corning Incorporated third-quarter 2016 earnings results conference call.

(Operator Instructions)

As a reminder this conference is being recorded. I would now like to turn the conference over to your host, Division Vice President of Investor Relations, Ann Nicholson. Please go ahead.

Thank you, Greg, and good morning everyone. Welcome to Corning's third-quarter 2016 conference call. With me today are Wendell Weeks, Chairman and Chief Executive Officer; Tony Tripeny, Senior Vice President and Chief Financial Officer; and Jeffrey Evenson, Senior Vice President and Chief Strategy Officer.

Before we begin our formal comments I'd like to remind you that today's remarks contain forward-looking statements that fall within the meaning of the Private Securities and 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 data. Our core performance measures are non-GAAP measures used by Management to analyze the business. A reconciliation of core results for the comparable GAAP value can be found on the Investor Relations section of our website at Corning.com.

We have slides posting live on our webcast to go with our formal comments and they will be available on our website later this morning. Now I'll turn the call over to Wendell.

Thank you, Ann. Good morning everyone. As you saw in this morning's press release we had a great third quarter.

Sales and gross margins increased in every business segment year-over-year. We also grew the Company's sales, net income, and EPS both sequentially and year-over-year. Core EPS was $0.42 up 14% sequentially and 24% year-over-year.

On earlier calls we told you that we expected our momentum to build steadily throughout 2016 -- and it has. For the fourth quarter we expect again to see year-over-year growth in sales, net income, and EPS. Our operating results and our progress on key growth initiatives continue to reinforce our confidence in Corning's strategy.

On our earnings call one year ago we introduced our strategy and capital allocation framework. We designed the framework to create significant value for shareholders by focusing our portfolio and leveraging our financial strength. The framework includes a commitment to delivering at least $12.5 billion to shareholders while investing $10 billion in growth opportunities through 2019.

As a reminder we focus 80% of our portfolio on three core technologies, four manufacturing, and engineering platforms and five market access platforms. We believe that this focus reduces the cost of innovation, increases our likelihood of success, and attracts some of the world's leading companies to our ecosystem because they see how our unique expertise can help address some of their toughest challenges.

We are very pleased with the progress on our framework. Since its introduction a year ago, we have gained traction with our customers on our growth initiatives, realigned our interest in Dow Corning and are on track to distribute $6 billion to shareholders by the end of 2016. Achievements on the framework this quarter include the launch of the $2 billion accelerated share repurchase which we expect to conclude in the fourth quarter, significant new product introductions and progress on several of our new growth initiatives.

Let's look at a few examples. In our mobile consumer electronics market access platform our goal is to double sales despite the maturing of the IT and handheld markets. We do this primarily by introducing products that advance the state of the art.

This allows us to capture a price premium and to win in new places like wearables and phone backs. We introduced two of these innovative products during the third quarter. Gorilla Glass 5 and Gorilla Glass SR+.

Gorilla Glass 5 has up to 1.8 times better damage resistance than Gorilla Glass 4 and delivers up to four times improvement in drop height to failure versus competitive glass designs. We are seeing superior drop performance translate into a meaningful price premium versus Gorilla Glass 4 and the opportunity to expand the use of Gorilla. Given the drop performance is the number one want from consumers is not surprising the attraction at our customers has been strong.

We are very pleased with the rate of adoption in just three months. Next Gorilla Glass SR+ delivers an unparalleled combination of toughness, scratch resistance, and optical clarity for today's wearable devices. You'll find SR+ on the Samsung Gear 3 later this year.

In our automotive market access platform we seek to build a gorilla sized automotive glass business and also to create a significant new business around gas particulate filters. Let's start with the automotive glass opportunity, where our excitement continues to grow. Previously we focused most of our commentary on the advantages of Gorilla Glass for car windows.

But designers of connected and autonomous vehicles are likely to dramatically increase the use of glass and touch screens in auto interiors. Gorilla Glass provides a unique path to deliver curve designs cost-effectively and creates a great new opportunity for us. Examples were featured recently at the Paris Auto Show.

Inside the Renault Trezor Concept Car and also at the Faurecia booth in a curved full glass center console called Smart Pebbles. Both OEMs promoted their use of quote -- ultra tough Corning Gorilla Glass -- end quote and received significant media coverage. A reporter commented that the Trezor's dashboard is a big curved OLED display made from Gorilla Glass that controls most car functions and possesses a design DNA that will be passed on to the French automakers future models.

Moving to gas particulate filters or GPFs. You've seen major car manufacturers announce that they will equip vehicles with GPFs to meet the Euro 6 regulation. We won the majority of platforms awarded to date and we expect sales to begin ramping in 2017.

As a reminder, no GPFs are used in commercially available vehicles today. Consistent with OEM announcements we believe that GPFs will be required to control particulate omissions from gasoline direct injection engines. GDI engines offer both higher performance and better fuel economy and as a result have grown to about a quarter of passenger car sales worldwide with units growing in the high teens annually.

We expect gas particulate filters to become a significant business for Corning. They offer the potential to increase our sales opportunity per vehicle by a factor of three to four with profitability similar to our current business. Today sales of GPFs are insignificant.

However, in line with our commitment to invest $10 billion in growth opportunities our investment on GPF is ramping in tandem with customer commitments. So you will see both cost on our P& L and capital expenditures in the near-term as we seek to build another significant business within our automotive market access platform.

In our Optical Communications market access platform our goal is to grow at least twice as fast as telecom industry CapEx. We plan to do this by focusing on high-growth segments and by delivering integrated solutions that offer new levels of performance and reduce our customers' cost. Optical Communications is now a fully evolved example of our focused 3-4-5 portfolio.

We began more than 40 years ago by leveraging our deep knowledge of optical physics, glass science and vapor deposition to disrupt the telecommunications industry with optical fiber. Over time we increased our value-add by leveraging ceramics, extrusion and precision forming. We are now working with customers on glass motherboards based on our fusion platform.

Today we are reaping the benefits of this unique combination of capabilities and segments like fiber to the home and hyperscale data centers. We are also seeing the benefits of our approach in the wireless arena. For example, in August the Atlanta Falcons Chief Technology Officer announced that Atlanta's new Mercedes-Benz Stadium will use the Corning ONE platform as a single optical network core that integrates Wi-Fi, cellular, and video.

We will be providing 4,000 miles of optical cable and 1,400 Wi-Fi access points. So it gets me excited about wins like this is not the size which is, it's certainly impressive, but instead it's that the skill sets underlying the Corning ONE platform are directly applicable to the emerging opportunities and 5G wireless and more to come on innovations in this space.

In summary under the strategy and capital allocation framework we are utilizing our financial strength both to return capital to shareholders and also to invest in growth through research and development capital expansion in M&A. Since we introduced the framework a year ago we have returned a total of $5.6 billion to shareholders in dividends and buybacks, reducing outstanding shares by about 18% and increasing the dividend by 12.5%. We believe that our investments will allow us to deliver secular growth over the long-term while consistently returning significant sums to our shareholders.

Tony will now provide a more detailed review of our third-quarter results and fourth-quarter outlook. Tony.

Thank you, Wendell, and good morning. As we noted in today's press release our Q3 core results reflected the sequential and year-over-year improvement we expected.

We were very pleased with our strong operating performance. Sales in gross margins were up in every segment year-over-year and our net income and earnings per share were up significantly. Looking ahead, we see year-over-year sales, net income and EPS growth in the fourth quarter.

Before I get into the details of our core performance and outlook I wanted to briefly note that the primary difference between our GAAP and core results for the third quarter is again a non-cash mark-to-market loss. As we have discussed previously GAAP accounting requires earning translation hedge contracts settling in future periods to be mark-to-market and recorded at their current value in the current quarter even though those contracts will not settle in the current quarter. Consequently in this quarter we marked our contracts to market again as required by GAAP resulting in a GAAP loss of $150 million.

The loss in this quarter was significantly smaller than we saw in the first two quarters of the year because the yen exchange rates moved less. And to be clear this mark-to-market accounting has no impact on our cash flow. We remain very pleased with the results of our hedging program and the economic certainty it delivers.

Since the inception of this strategy we have received cash totaling $1.2 billion under hedged contracts. These proceeds offset much of the currency related decline in displaced earnings due specifically to the weaker yen. At present we have hedged approximately 70% of our projected yen exposure through 2022 at a blended rate of approximately JPY106 per dollar.

For investors who are concerned that a weakening yen would negatively impact our business, hedging earnings and cash flow through 2022 substantially mitigates that concern. Now for investors who have additional questions please refer to the more extensive discussion in our first- and second-quarter conference call or the tutorial on FX hedge accounting on the digital media disclosure section of our Investor Relations website. And as always, Ann and her team are available after the call.

Now let's turn to the results for the third quarter. As a reminder these are core performance metrics. Sales in the quarter were $2.55 billion up 4% versus last year and exceeding our expectations.

The growth was driven largely by strong performance in Optical Communications. Corporate gross margin was 43% on track with guidance and well ahead of last year. The year-over-year improvement largely reflected improved profitability in Optical Communications and good cost performance in display.

SG&A was 13% of sales at $328 million. RD&E costs were 7% of sales at $187 million. Total gross equity earnings were $19 million, recall we closed on the realignment of Dow Corning on May 31 so third-quarter equity earnings predominantly reflect our equity earnings from Hemlock.

Our effective tax rate for the quarter was 15%. Net income was $466 million up 7% sequentially and 4% from last year's third quarter. Adjusting for the former Dow Corning silicone's business equity earnings which no longer contribute to our results, net income grew 16% on the 4% sales growth.

This reflects our strong underlying financial performance. EPS was $0.42 up 24% versus last year and above expectations. Now let's turn to our balance sheet and cash flow.

We ended the quarter with $4.8 billion of cash. During the quarter we repurchased $2.4 billion worth of common shares outstanding and adjusted operating cash flow for the quarter was $721 million up significantly over Q1 and Q2 as expected and driven primarily by higher core net income. Now consistent with history we expect Q4 operating cash flow to be up sequentially. We expect the increase to be driven primarily by a reduction in working capital and other cash receipts.

Now let's look at the detailed segment results and the outlook for each business beginning with display technologies. Display had a very strong third-quarter exceeding our expectations. Looking ahead we continue to expect the 2016 glass market and our volume to be at mid-single digits for the full year.

As you would expect there are a few puts and takes at retail versus our expectations. But the biggest driver of the growth remains TV screen size which is tracking solidly to be more than 1.5 inches of year-over-year growth.

In the third quarter the set makers pulled very hard for panels ahead of the Q4 peak retail season. Our customers, the panel makers, increased their utilizations to meet this demand which resulted in additional sequential growth for the glass market. The glass market was up high-single digit sequentially versus our expectations that the glass market would be up mid-single digits sequentially.

Our glass volume was up slightly more than the glass market due to customer mix. For the ninth consecutive quarter the decline in LCD glass pricing remained moderate and met the expectations we noted last quarter. These drivers produced the strong results for our display business in the third quarter with sales up 7% and net income up 14% sequentially.

Forward-looking weeks of supply chain inventory remain at a healthy level and panel maker inventories remain lean. As I already said we expect the 2016 glass market and our volume will be up mid-single digits for the full year. In the fourth quarter we expect panel maker utilization to remain high and glass supply to remain tight.

So we could see Q4 glass volume consistent with Q3. But in light of the third quarter upside it only follows that our fourth-quarter volume may be down slightly. Therefore, while our overall guidance for the year remains unchanged our guidance for the fourth quarter glass volume is consistent to down slightly sequentially.

We will watch this closely as the quarter unfolds. In the fourth quarter we expect LCD glass prices to decline moderately and be more moderate than Q3. And we expect that the moderate pricing environment we've experienced over the last nine quarters will continue or even improve for two reasons.

First we monitor utilization in market demand and other market factors very closely and all of those indicate that glass supply should remain tight for the balance of the year and into 2017 especially in large [gen] sizes as a result of the strong TV demand. We will manage our operating capacity to our demand and maintain our stable share strategy.

And second our competitors profitability is low even though prices declines have been moderate for two years now their profitability has remained low during that period. Therefore we expect that their price declines will slow down 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.

Let's move to Optical Communications. Overall we are pleased with the growth in Optical Communications in the third quarter and expect strong growth again in Q4. Third quarter sales were $795 million up 6% versus last year, with fiber to the home very strong.

While our growth in Optical Communications was strong on an absolute basis, we missed our own guidance because growth in hyperscale data center projects was below expectations. Note that our sales for our large hyperscale data center range from $5 million to $10 million, so delay of a single project can reduce total segment growth by more than a percentage point. We remain well-positioned to capture secular long-term growth in the hyperscale segment.

Net income at $98 million was up 38% over last year. Improved manufacturing costs and favorable shift toward sales of our solution products contributed to the higher year-over-year profitability. For the fourth quarter we expect sales to grow in the high single digits year-over-year led by continued fiber to the home strength.

We expect hyperscale sales to continue growing faster than overall Optical Communication segment but at a rate lower than we anticipated earlier in the year. In Environmental, Q3 sales were up 3% versus last year and slightly ahead of expectations. Sales of light duty substrates for auto were a record up 17% year-over-year driven by continued strong demand in North America, Europe and China and additional platform wins.

This strength was offset by continued weakness for heavy duty products in North America and China. Note we expect the market for heavy duty trucks in North America to be down 30% this year.

Net income declined $3 million year-over-year in line with our expectations. For the fourth quarter we expect sales to be down low single-digits versus Q4 last year as weakness continues in the heavy duty truck markets.

Let's move to Specialty Materials where both sales and net income were ahead of our expectations. Year-over-year Q3 sales increased 2% and net income was consistent. Compared to the second quarter Q3 sales grew 11% while net income was impacted by a ramp up cost associated with launch of new products and customer mix. With the majority of the launch spin behind us we expect fourth-quarter profitability to improve.

Earlier Wendell noted that we introduced Gorilla Glass 5 and Gorilla Glass SR+ in the third quarter. Just last week Chinese OEM OPPO announced Gorilla Glass 5 on its R9S and R9S Plus smart phones and you can expect to see them on additional devices in the coming months. Volume growth of Gorilla Glass is expected to drive the high single-digit year-over-year sales growth we expect for the segment in the fourth quarter.

In Life Sciences Q3 sales were $214 million and met our expectations for low single-digit growth. Net income was $21 million and we expect Q4 sales to be up low single digits versus last year. Now I'll cover additional items in our fourth-quarter outlook.

On a consolidated basis we expect our fourth-quarter gross margins to be consistent with Q3 at 43% which is up one percentage point from last year's fourth quarter. Our view reflects the higher sales we expect in Optical Communications and year-over-year cost reductions in display. SG&A and RD&E spending should be approximately 14% and 8% of sales respectively.

We expect other income other expense to be a net expense of approximately $40 million. We expect total gross equity earnings to be between $75 million and $85 million. This is higher than some analysts were modeling driven by higher sales from Hemlock's solar business as customers complete their annual contract commitments.

Versus last year Hemlock's contributions to our net income is expected to be up $10 million to $15 million. We expect our effective tax rate for 2016 to be approximately 15%. Let me close by saying that we are very pleased with the strong sequential and year-over-year growth in sales and earnings in the third quarter and we expect similarly strong year-over-year growth in the fourth quarter.

Other than Optical Communications all of our business has met or exceeded expectations. While we do not expect Optical Communications to grow quite as fast as our prior guidance for the back half of the year we are still delighted with high single-digit growth and believe that we remain well positioned to continue growing more than twice the rate of the overall telecom industry. Stepping back, our performance demonstrates the benefits of the strategy in capital allocation framework introduced last fall.

Under that framework 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 and we will have returned $6 billion by year end. We are focusing our portfolio to increase our probability of success, reduce the comp of innovation and increase the barriers to entry for our competition and we have a rich set of growth opportunities. Overall we feel very good about where we are.

With that let's move to Q&A. Ann?

Thank you, Tony. Greg let's open the line for questions.

(Operator Instructions)

Vijay Bhagavath with Deutsche Bank.

Yes, hello.

Hi, Vijay. You got the line open, buddy.

Yes. I was on mute. My apologies. (Inaudible) here. My question honestly is on the optical business and on the hyper-scale cloud demand. Would like to get your clarity on how should we model and think about cloud customer demand heading into the next quarter and also into FY17? Thanks.

So from an overall standpoint, obviously we were disappointed in the third quarter because it wasn't quite as strong as we had expected. We were still up on a year-over-year basis. And as we move into Q4 it's also not going to be quite as strong as we expected. Again it will be up year-over-year but it won't be quite as strong as we expected. So our guidance of being up high single digits reflects that.

And I think the way to think about it is, it's hard to call within a couple of percent because just a couple of these hyper-scale data centers move it from one quarter to the next or changing in their overall build plan can really move those percents around a lot.

But over the sort of sweep of time, we feel good about our position there and if you are a believer as we are that there's going to be a lot more hyper-scale data centers built, then we are going to grow with that. Calling the exact timing of these construction projects is not the easiest thing to do as we have just demonstrated.

A quick follow on would be, could we still anticipate the cloud customers directionally to be kind of a key growth driver for the optical business or is it quite lumpy you don't know and we should kind of focus more on fiber to the home? Thanks.

I think that depends on what you like best, right? I think definitely this is an area that's going to be a key growth driver. Is it going to be uniform and smooth? No. But then again, fiber to the home also can have these project-related flows. So in general we look at both as being two megatrends that are going to drive demand for our product and also where our market access and our shares are quite strong. So I think both of those are worth paying attention to, Vijay.

Thank you. Yes. Solid results overall.

Thank you.

Doug Clark from Goldman Sachs.

Hi. Thanks for taking my question. First one is on the glass business. You mentioned in the prepared remarks tight glass supply in the fourth quarter but volume still being flat to down slightly. Does that set up for 2017 where we are in an environment where inventories are still fairly low and we could see further restocking?

Yes, so I think as we look at inventories right now, we think that the value chain inventories are healthy. And set makers clearly are counting on a strong Q4 retail season and they have been pulling hard on the panel makers and we've seen that. We continue to see high glass supply and we think that's going to continue throughout the fourth quarter.

So if set makers are right about the retail season, we feel pretty good about how we enter into next year. And right now we are right at the beginning of that retail season, so it's always the hardest time to know and be able to predict but we are all paying very close attention to that.

Okay. That makes sense. On pricing as well, I think you talked about an additional moderation in pricing in the fourth quarter. We've gotten the question I'm just kind of curious in your opinions on this, has the FX environment in any way impacted your discussions over pricing particularly to the beginning of the year? And then second question and slightly unrelated but in the Gorilla Glass business any impact from the Note 7 recall knowing that was a Gorilla Glass 5 product?

Sure. Let me start with the answer from a yen standpoint. Clearly the yen from a customer standpoint does have an impact, and of course customers always ask for lower prices when we're having discussions with them, but I think when you think about it from an overall standpoint the yen fluctuations can be pretty temporary. And we've seen now two quarters where the yen has been stronger and prices have been moderate, so we don't think it has a big impact.

In terms of from a Note 7 standpoint, of course you never want to see a customer have an issue like that, but from an overall standpoint we sell into the Note 7 into the premium handheld market and just depends on what people who are going to buy that buy instead. And as long as they buy a premium phone, of course we have very high share on the premium phones, and of course the Note 7 even though it was a premium part of Samsung's devices it's not the biggest handheld that they sell. So from an overall standpoint we don't see a really big impact there.

Joseph Wolf from Barclays.

Thank you. I wanted to follow up on the optical side. First just quick housekeeping. Were the issues from earlier in the year completely resolved at this point? And then as a follow-up, is there any distinction between what we would call the public cloud and the private cloud as you think about either lumpiness opportunity or the direction or timing of spend right now? And if bandwidth is still growing, are we just looking at timing issues in optical?

Yes. I think the fundamental answer is yes. We are just looking at timing issues in optical. In terms of the computer issues that we had at the beginning of the year, we clearly got back to full production at the end of the second quarter. There's still some backlog that we are working through, but from a production standpoint, we are running full out in that business just as we said we were going to.

The short answer, Joseph, to both your questions is, yes.

And is there any difference between public and private cloud appetite to spend right now?

You know it's so hard to tell the difference because some of the public cloud players are also big private cloud players. So as an equipment manufacturer into it I don't know that we are the best ones to ask. We can't tell which -- what you are using our fiber and connective for or whether you are doing public or your own private cloud.

Okay. Fair enough. Just one last follow-up. You mentioned 5G in the Corning ONE platform. Are cable vendors at all already looking at that for widespread Wi-Fi coverage outside of stadiums? Is that an opportunity that connects up to the fiber to the home story?

Now are you asking about ONE or are you asking about 5G or are you asking about medium power wireless?

I am asking -- I guess on the way to 5G when you look at some of the cable vendors looking for ubiquitous Wi-Fi is this a product that also can sell into that?

So far where we've been focusing ONE, you are asking an excellent question, is in those areas where you want very intense and high-bandwidth and low latency applications, so that tends to be where you bring an awful lot of users together in one area. So that's been the focus of our development because we think if you look longer term in wireless and longer term at things like 5G, the critical thing to drive new applications will be that combination of high-bandwidth and low latency.

Those are the apps that get exciting and that's what shaped our efforts in wireless to not be a me too player, but instead set a platform that would have real legs over time. So you're right, ultimately you can see this type of approach spreading because it's the same conceptual framework for what you have to do to get low latency high-bandwidth systems. Whether or not cable TV will be a strong adopter here or not, I'm not so sure that I would know the answer to that.

Okay. Thank you.

Rod Hall from JPMorgan.

Good morning, guys. Thanks for the question. I wanted to start with specialty again the guidance is about 6% below what we were expecting and I think if I remember right your guidance was weak last quarter as well. I wanted to get a feeling for whether that is a demand expectation, just overall market demand that's weak, or is there something going on with lower content? Can you just give me a little bit more color on what's going on with specialty when the guidance is a little bit weak?

And I also wanted to come back to display. I think, Tony, your comments suggested that you guys are maybe being pretty cautious on guidance there. It sounds like demand was pretty good in Q3 but you're still guiding for a little bit weaker than expected Q4. So I just wonder are you guys less confident on demand in the retail or retailers of the panel makers, or just give me a little bit more color on what you're thinking on display. I guess overall I'm trying to get some understanding on what you guys are thinking about end market consumer demand. Thanks.

Okay let's start with display and then we'll go to specialty. In display I think, Rod, you've read us pretty well. In that if we were to believe what our customers are saying and what the set makers seem to be preparing for, then our guidance may be a little conservative. At the same time, we have a view of the full-year demand for glass that hasn't changed. So more glass was bought in quarter three than what we expected, so therefore, arithmetic tells us that we ought to have a little bit lower in quarter four.

Which of these things ends up being right I think is hard to tell, and that's why you hear our guidance of the sort of flat to down some. If the set makers are right, you'd expect the very strong performance we've seen in quarter three to carry forward beautifully into quarter four. If we are right that the total glass market is what it is we think it is, then arithmetically there needs to be a correction. Whether it's in quarter four this year, quarter one of next. That's hard for us to tell. So I think you read us pretty well. Does that answer that question, Rod?

Yes, that's helpful, Wendell. Thank you.

On specialty, we're expecting sort of high single-digit growth in quarter four, and that's pretty much in line with what it is we were thinking about. You could make a case for higher as you may have and you can make a case for lower, but I don't see anything systemically going on, net our sort of momentum has been building.

Tony answered the Note 7 question with basically it's too early to tell for sure. You could make a case, as I think you may even have, Rod, of how much glass is used on one device versus another, and that's all solid logic, Rod. It's just there's just so much stuff that goes on in that supply chain, even though your logic is really sound, it's hard for us to draw a direct line once we start trying to guess what a consumer of a phone buys next but your logic is sound.

Wendell, can I just get you to -- what do you think about just broader end market demand in smart phones? Do you think that it's a little bit weaker than you would've anticipated or sort of in line with what you think? I just was just curious what you think.

I think it was when you asked me when, right? So I think overall, if you'd asked me at the beginning of the year, I probably would've been a little more bullish on demand, and now we pretty much look at this market over time as being pretty darn mature, right?

So the secret for us to double our revenues here has got to be innovation to drive up our price point and make it possible to use the glass in new ways on the phone. So we can double the amount of glass usage on a phone because we've improved drop so much. That can allow us to keep growing our revenues despite what we see is a pretty mature mobile market. Does that answer your question, Rod?

Yes. It does. Thank you very much, Wendell. Thanks, guys.

Patrick Newton from Stifel.

Good morning, Wendell and Tony. Thank you for taking my questions. I wanted to switch gears and talk a little bit about automotive. You had some commentary around autonomous vehicles driving interior demand in your prepared remarks. I am curious if this is a shift away from a focus on Windows 2 interiors or is this purely additive to the story? And then from a targeted time frame of the $1 billion in automotive by 2020, is that still the right revenue level and the right time frame?

I'll do the first one and I'll let Tony do the second one (laughter). If Tony's foolish enough to predict revenues in a brand-new innovation, we will let him do that as CFO. So it is truly additive. When we launched our first automotive work a number of years ago and as friends of ours pulled us in to try to disrupt the automotive industry.

Really it was both aspects. Both the exterior glazing as well as car interiors. And all you are seeing now is a lot of excitement is getting built up around the interiors and that you're just hearing a lot more buzz about what we're doing there. But both remain really important.

Both can be similar size markets and so we are really aggressively pursuing both of them. I think in both areas you will see us breakthrough. We will get revenues in both areas. Right? And we are already experiencing that. How big it will be, that we just don't know yet. We just don't know. Unless Tony wants to make a guess. Tony?

I do not.

All right. So I guess shifting gears. Tony, you spoke to some one-time Hemlock buys possibly impacting 4Q. We have some noise surrounding kind of the Dow Corning transaction. So can you help us understand what a more normalized equity earnings line should look like in 2017 and is roughly $80 million annually plus or minus the right way to think about 2017 equity earnings potential?

Yes. I mean were not giving guidance on 2017 but I think in general that's right. What you have to remember about Hemlock is that a lot of their volume is under contract and so the cycles of the timing will depend on when the customers meet those contracts. And historically, if you go back over the last four or five years, that's been primarily in the fourth quarter. You know sometimes it moves to the third quarter a little bit and the like, but in general, it's in the fourth quarter. And so I think somewhere in the $80 million to $100 million range is right.

Great and just on the optical communication side and the hyper-scale commentary, is there anything I guess just given that every check seems to be pointing to a very hot market in general but still understanding lumpiness, is there anything in particular you can point to?

Is there ongoing shifts from 40 to 100 main customers, are you seeing constraints elsewhere in the supply chain that maybe are preventing you from generating better growth, or is there any comment you can make on AFOP? Was the slowdown more pervasive with that acquisition?

I think that right now we've got a signal-to-noise sort of issue. There's nothing we've seen so far that's telling us that the signal ought to be fundamentally different than the sort of logic that you've laid out. We think the same things. We think there's a good amount of noise level around that signal. Timing. Different architectures being tried in one place versus another. What does their supply chain inventory look like? Did they buy our product perhaps before they buy storage product? Right?

There's all these things that I'm not so sure yet that we are able to look forward and say, let me deconvolve all that noise. This is what's going to happen. I think we will get better at it as the business continues to scale, and as we get better at it, we will give you better tools to understand it. But nothing we are seeing right now that takes us off your fundamental logic. We will keep working to get better sense of capability. Does that make sense?

Yes, but is AFOP any different or any one of your more recent acquisitions?

No.

No. Thank you for taking my questions. Good luck.

Steven Fox from Cross Research.

Thanks. Good morning. On the Gorilla Glass mix. I think you mentioned that Gorilla Glass 5 is off to a really good start. I think in the last few months you've talked about Gorilla Glass 4 becoming the largest percentage of the unit sales. So I was wondering if you could reset where that mix is today and how it plays out with the Gorilla Glass 5 ramping? Then I have a follow up.

I think Gorilla Glass 4 is still the largest part of what we ship. You know Gorilla Glass 5 is just starting. It has had a more successful launch than we had with Gorilla Glass 4 and we are on some devices, you know I mentioned one that we announced last week, and there will be more coming up in this quarter. So I think as time goes on you're going to continue to see the Gorilla Glass 5 is going to become a bigger part of the mix and from a pricing standpoint that's good, from a profitability standpoint that's good.

Do you think that there's a path to Gorilla Glass 5 eventually becoming a majority of the unit sales or is it too high end to think of that in the next year or so?

I think it's too early to tell. There is that potential because it's a very unique product. It's really competitively advantaged. So that's possible. I think that's possible. But it's just a little early for us to tell. Let's get another quarter underneath our belt. We have only had it out there for a few months. Give us a few more months and then hit us with the question again, okay, Steve?

That's fair. And then just lastly, another Gorilla Glass question just in terms of the increasing your content or actually doubling your content per device, can you sort of give us some road marks in terms of where you're at now? Did you actually see some significant progress in this, this quarter, or would we think of that slope maybe picking up next quarter, quarter after? Any help there would be appreciated.

So I think the two areas to think about, about doubling our overall revenue in this space is introducing higher price point products that perform better, and you saw us in this last quarter introduce two of them. Right? And then take up on GG5 has made us feel good and that's definitely going to help.

The other piece is increasing the amount of glass utilized both on phones, as well as other apps like wearables, and those performance improvements that we've announced on GG5 that previously on GG4 certainly have shifted the design conversation towards a desire to use all glass enclosures or use more glass per enclosure. It's too early to tell how those design conversations turn into product sets. But it's without doubt our improving performance is enabling designers to think about the product in a different way.

Just think about it this way. If you think it is likely the material is going to break if it's dropped on asphalt, then you probably aren't going to double the amount of that material and put it on both fronts and backs. If you think it is unlikely that happens and GG5 certainly makes it less likely, right, and other products we are working on will make it less likely still, then that opens up the potential to consider that type of design choice. But still too early to bank it. It's our strategic desire. We are making progress but way too early to declare victory. Okay?

That's very helpful. Appreciate the color. Thanks again.

Stanley Kovler from Citi Research.

Hello. Good morning. Thanks for taking my question. I just have one question on the environmental business and then a follow-up on display. So on environmental as you look out into 2017 and we have the European regulation that's driving the gas particular filter opportunity. Do you see that as more of a second-half opportunity given that the timing of the regulation kicks in, in the latter half of the year, or should we expect a buildup in the first half as well as the product launches get going?

I think it's mostly going to be a second-half opportunity.

Thanks, and then on display, as we think about the panel customer capacity heading into 2017 and just the tight capacity that they have for this year, is there an opportunity for them to start building earlier in the year sort of for next year because a number of the panel makers are shifting capacity to OLED, and given where supply tightness is right now, they would like to maybe buildup in advance? And how would that impact your retail demand outlook into 2017, if panel capacity demand remains tight and a shifting weight from LCD to OLED for smartphones and other products? Thank you.

I'm not so sure it would really change what we would think about from a retail demand standpoint, but it certainly would have a difference relative to cycling and when people would start building for various retail peak seasons including the fourth-quarter season. So, yes, I think we're not here to talk about 2017, but I think when we do talk about 2017 and we look at the cycle in 2017, it is likely to be a little bit different than what we've seen in the past for that reason.

Yes, and, Stan, I think that's a really -- I haven't thought about it quite that way. I think that's a good question and I think you are right to bring up to the extent that people do the POLED by adding new panel capacity then that doesn't impact any of the dialogue to the extent that they take out existing panel capacity then to put in place a new capacity, your question could impact the behavior at that micro level. So let us think a little bit more about that, as we step back and think about POLED overall, right, as you have heard us speak before. We look at this as a net positive for us on volume because our share is so high on POLED relative to the LTPS product that it is replacing.

On the dynamic that you are discussing if we have a customer where we have an above average market share, right? That takes out capacity then that could impact us for a temporary time period until the whole thing rebalances for about 1 to 2 share points. Similarly if we have a customer that has below our average market share and they take out capacity, we could see a gain. It would be temporary for a while until the whole industry rebalances. But how that whole dynamic works its way through, I think we've got to do a little bit better job explaining, and we will do that as we get a little closer to next year, Stan.

I appreciate it and if I could quickly follow-up on the OLED opportunity for next year. For some of the product cycles on potential new products that will have OLED and you referenced your high share, when do the lead times start for you to actually build and get revenue for potential second-half product cycles next year on the POLED opportunity that you referenced? Thank you.

We will start pretty early, Stan, but I think what is really important to keep in mind is the total glass demand for POLED is going to be like 1% of the overall glass market for the next couple of years. So we agree it's exciting tech, that's why we been investing in it for four or five years and that's why our share position is really strong, but as far as seeing it in our financials, I don't think you're going to see it, buddy. Does that make sense? You still there?

Appreciate it. Thank you.

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

Okay. That question comes from the line of George Notter from Jefferies.

Thanks a lot guys for squeezing me in. I guess I wanted to go back to the optical business and your comments about hyper-scale customers. I guess my impression on your optical business is the dominant variable there is really your ability to ramp up and create additional capacity and supply, and so I'm a bit confused about the comments about the hyper-scale customers causing a little bit more I guess softer trends there. I would assume that given how supply constrained you have been that extra supply would've been sopped up somewhere else. Any thoughts on that?

I think from an overall standpoint is, as we looked into going into the quarter, we expected a certain amount to actually go to those hyper-scale customers, and basically what happened is that those customers ordered less than what we had originally projected. Although a lot of our capacity is spongeable on a very micro level, there wasn't some place else we could move some of that capacity to.

So in macro you are right. In micro if you expect to sell a product and you make it, then you have used that capacity. But in macro you are right, over the fullness of time, we are net capacity constrained here, which is why we are adding capacity. So over the sweep of time it will all turn into revenue, but it's really important to make the right thing to have a particular quarter come out.

Got it. Great. Thank you.

Okay. That's the end of our questions. Wendell, do you have some closing comments?

Let me just close out the call by emphasizing we are really pleased with our progress on our framework. Since we announced it a year ago, we've gained traction with our customers on our growth initiatives. We have a long way to go but we are making progress. We realigned our interest in Dow Corning and we returned approximately $6 billion to shareholders by year end is what we anticipate to do. We are also creating significant value for our shareholders along the way.

Thanks, everyone, for listening. We look forward to updating you on our framework progress and results throughout the rest of the quarter and year.

Thank you, Wendell, and thank you all for joining us today. I wanted to let everyone know that we will be meeting with investors at the Credit Suisse conference in Scottsdale in late November. Let us know if you are going to be there.

Also the web replay of today's call will be available on our website for one year starting later this morning. And at 11 AM, today, you will be able to access a telephonic playback by dialing 800-475-6701, access code 403563. The telephone replay will be available until 5 PM on Wednesday, November 8. Operator, that concludes our call. Please disconnect all lines.

Thank you. Ladies and gentlemen, that does conclude your conference for today. Thank you for your participation and for using AT&T Executive Teleconference. You may now disconnect.