康寧 (GLW) 2017 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the Corning Incorporated quarter 4 2017 earnings results.

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

Thank you, Jon.

And good morning.

Welcome to Corning's Year-end 2017 Conference Call.

With me today are Wendell Weeks, Chairman and Chief Executive Officer; and Jeff Evenson, Senior Vice President and Chief Strategy Officer.

Because of a family emergency, Tony Tripeny, Senior Vice President and Chief Financial Officer, is not on the line today, but he looks forward to talking with investors throughout the quarter.

And we're sending his family our regards.

And joining us today are Ed Schlesinger, Vice President and Corporate Controller; and Stefan Becker, Vice President and Operations Controller.

I'd like to remind you that today's remarks contain forward-looking statements that fall within the meaning of the Private Securities Litigation Reform Act of 1995.

Those statements involve risks, uncertainties and other factors that could cause actual results to differ materially.

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

You should also note that we'll 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 to the comparable GAAP values can be found in the Investor Relations section of our website at corning.com.

Supporting slides are being shown live on our webcast, and we encourage you to follow along.

It will also be available on our website for downloading.

Now I'll turn the call over to Wendell.

Thank you, Ann.

And welcome, everyone.

This morning, we reported a strong finish to an outstanding year.

And we feel great about our progress and our prospects.

Strong growth and strong investment generated an $800 million sales increase for the year and set the stage for additional growth.

We exited the year running at full capacity in several of our businesses and with committed customer demand that supports our current capacity expansion initiatives.

We expect to see the benefits of these initiatives in the second half of 2018 and beyond as production ramps.

2018 will be another year of strong growth and investment, consistent with our strategy and capital allocation framework.

All of our businesses contributed to the outstanding 2017 results, highlighted by 18% year-over-year sales growth in Optical Communications, 25% growth in Specialty Materials, 7% growth in environmental; and price declines in displays that were the best in 7 years.

As we've shared, the strategy and capital allocation framework outlines our leadership priorities, but we continue to focus our portfolio and utilize our financial strength to extend our leadership, drive our growth and reward our shareholders.

Under the framework, we target generating $26 billion to $30 billion in cash through 2019.

We plan to return more than $12.5 billion to our shareholders through repurchases and dividends and invest $10 billion to extend our leadership and deliver growth across all of our market access platforms.

We've made great progress toward those goals since we announced the framework in October of 2015.

Our cash generation is on target.

And through the end of 2017, we returned $9 billion through share repurchases and dividends.

We've invested $4.5 billion under the framework in RD&E, capital expenditures and acquisitions.

We're starting to see the returns already.

As you can see in our most recent results, full year sales increased 8% and EPS increased 11%.

And we expect these returns to accelerate.

We believe that these results illustrate the benefits of our framework.

We are best in the world in 3 core technologies, 4 manufacturing and engineering platforms and 5 market access platforms.

We focus 80% of our resources on opportunities that use capabilities in at least 2 of these 3 categories.

And we've stepped up our investments over the last 6 months to meet opportunities in front of us in all of our market access platforms.

Significant portions of the investments are going towards capacity expansions to meet committed demand.

Currently, we have 23 projects underway, including construction of 11 new plants.

These investments dampened our profitability in the second half of 2017 and will do so again in the first half of 2018, although we really see the benefits of those investments in sales and profitability in the back half, so we feel great about the year ahead of us.

Now let me review progress in our market access platforms, starting with Optical Communications.

We're the world leader in passive optical communications and the only true end-to-end supplier of integrated optical solutions.

2017 was another great year.

We expanded strategic relationships, like the ones we've recently announced with Verizon and Saudi Telecom, which supports our view of strong future growth.

We expanded our manufacturing capacity to support growing demand and initiated programs to further expand capacity in 2018.

During 2017, we acquired SpiderCloud to enhance our wireless portfolio and announced an agreement to purchase 3M's communications markets division.

We expect that transaction to close later this year.

It brings us a talented group of employees.

It enhances our offerings in the rapidly growing fiber to the home and optical solutions markets.

We expect to continue growing more than twice as fast as the communications infrastructure market.

Rapid adoption of optical solutions in more market segments, combined with the strength and relevance of our technology and co-innovation approach, support our superior growth.

We believe that the opportunities ahead of us are much greater than those that are behind us.

To capture these opportunities, we continue to invest in plants, innovations and market access.

We expect 2018 growth to keep us solidly on pace to reach $5 billion in sales by 2020.

Now let's turn to mobile consumer electronics, where we are the world leader in glass, in smartphones, tablets and emerging categories like wearables and augmented reality devices.

Our goal is to double mobile consumer electronics sales over the next several years.

We made significant progress toward that goal in 2017.

Major milestones during the year included the 10th anniversary of Corning Gorilla Glass, rapid adoption of Gorilla Glass 5 and Apple's commitment to our future innovations through its American manufacturing initiative.

The fundamental properties of Gorilla Glass make it an ideal choice for smartphone [enclosures].

Flagship models from Samsung and others now feature glass on the front and the back.

Glass backs double the area we sell per phone and also support new innovation opportunities like fiber.

We expect additional growth in 2018 as more devices adopt our latest innovations, including our next generation of cover glass which we plan to introduce later this year.

Turning to our automotive market access platform.

Our expertise focuses on helping customers build cleaner, safer and more connected vehicles.

Corning pioneered the substrate at the heart of catalytic converters and is now leading the next wave of emissions control with our introduction of gas particulate filters.

Most European and many Chinese OEMs have now awarded platforms, and we won the majority, reflecting our market leadership.

We had our first commercial sales in the second half of 2017, and we expect a sales ramp in 2018.

Once regulations are fully implemented in Europe next year and China in the early 2020s, we estimate the GPF opportunity will exceed $0.5 billion in sales for Corning.

Moving to Gorilla Glass for auto.

Innovation trends continued to point toward a significant growth opportunity.

On the exteriors of cars, Gorilla Glass laminates are tougher and lighter than conventional auto glass, plus the superior optical quality allows for larger and clearer head-up display.

For interiors, integrated and interactive displays are becoming a seamless part of the cabin and user experience.

Corning is helping OEMs with this transition because Gorilla Glass provides an advanced, durable optical interface surface with tremendous economics.

Earlier this month, exhibits at CES provided impressive evidence for the increasing use and importance of glass in cars.

We believe that our solutions provide compelling value.

And we are investing to prepare for the industry's transition to highly connected and autonomous vehicles, which will use Gorilla Glass.

Pull for collaboration from leading OEMs is increasing, and we have already been awarded 35 platforms globally.

We expect to make additions and significant progress during 2018.

In our life science vessels platform, we're building a new, a long-term multibillion-dollar franchise.

Last July, we introduced Corning Valor Glass, our remarkable, new pharmaceutical glass packaging solution.

Valor Glass dramatically reduces particle contamination, breaks and cracks while significantly increasing throughput.

Valor helps protect patients and improve pharmaceutical manufacturing.

The industry is excited about our innovation and announcement.

And we continue to make strong progress, although it moves at a deliberate pace.

Recently, the Parenteral Drug Association hosted a 2-day conference dedicated to glass quality.

Corning presented in a session focused on new developments and innovations in pharmaceutical packaging.

And we remain closely engaged with our development partners Merck and Pfizer and are pleased with the progress we have seen with our customers over the last quarter.

We've successfully completed multiple collaborative projects to support customer adoption of Valor.

We also continue to engage with the Food and Drug Administration, which is committed to streamlining the introduction of new innovations so technologies like Valor Glass can reach patients quickly.

In 2018, we plan to invest in high-volume manufacturing that will enable us to deliver commercial volumes to our customers.

You will hear more from us regarding the manufacturing site and location in the coming months.

We continue to believe Valor has the potential to power Corning's growth for the next decade and beyond.

In display, we remain the global leader.

Our priority is to deliver stable returns and win in new display categories.

We expect 2018 to be another year of strong progress for our display business.

Our new plant in Hefei, China has started shipping the world's first Gen 10.5 glass.

We are the only manufacturer to have successfully scaled glass production through these odds.

Ramping our new Gen 10.5 facility on pace with BOE, our major customers, will augmented volume growth.

In addition, pricing has become consistently more favorable over the past 3 years.

In June, we stated that improvement to mid-single-digit declines was possible.

We now believe this will happen in 2018.

Reaching mid-single-digit annual pricing is a huge milestone toward our goal of maintaining stable returns.

Finally, Iris Glass, which adds a third piece of glass to LCD displays, is gaining momentum.

We are excited about Lenovo's and Dell's new ultrathin monitors which offer the world's brightest monitors in a thin, narrow-bezel package uniquely enabled by Corning's Iris Glass.

I think it's pretty clear we're making terrific progress across all of our market access platforms.

We are investing to capture these opportunities and expect to maintain the 2017 momentum in 2018.

We plan to deliver another strong year of sales and earnings growth and stay on track to fully achieving our strategy and capital allocation framework goals.

Now let me turn the call over to Jeff for a review of our results, details on our outlook and additional updates on our framework.

Thank you, Wendell.

And good morning, everyone.

Our 2017 results were outstanding.

In 2018, we'll continue investing to support our customers and extend our leadership.

We expect core sales to grow to approximately $11 billion or about 7% on a constant currency basis.

Before we do each segment results, I want to talk about 2 items affecting our GAAP results: FX accounting and tax reform.

As we've discussed before, GAAP accounting requires earnings translation hedge contracts settling in future periods to be marked to market and recorded at current value at the end of each quarter even though those contracts will not be settled in the current quarter.

For us, this resulted in an after-tax GAAP gain of $1 million for the fourth quarter and a loss of $247 million for the full year.

To be clear, this mark-to-market accounting has no impact on our cash flow.

Our currency hedges protect us economically from foreign exchange rate fluctuations; and provide higher certainty for our earnings and cash flow, our ability to invest for growth and our future shareholder distributions.

We're very pleased with our hedging program and the economic certainty it delivers.

We've received $1.6 billion in cash under our hedge contracts over the last 5 years.

Our non-GAAP or core results provide additional transparency into operations by using a fixed currency rate aligned with our yen and won translation hedges and also by adjusting for other items that did not reflect ongoing operations.

For 2015 to 2017, our core reporting used a constant currency rate of JPY 99 to the U.S. dollar and KRW 1,100 to the U.S. dollar.

For 2018 to 2020, we have established hedges for approximately 90% of our expected display earnings.

We expect these hedges to result in an average rate of JPY 107 to the dollar, and we plan to use that rate for our core reporting over the next 3 years.

Additionally, we will use a constant rate of KRW 1,175 to the dollar, which is closely aligned to our current won portfolio of foreign currency hedges.

Nearly all the analysts covering Corning are already publishing estimates for 2018 and beyond at a yen exchange rate of approximately JPY 107 to the dollar.

For today's discussion, I will present fourth quarter and full year 2017 core results at the [99] rate.

My comments on our 2018 outlook will be based on 170 -- JPY 107 per dollar.

And 2017 results will be recast to our new core rates for comparison.

We provided 2016 and 2017 results recast to the new core rate in an 8-K so you can update your models and compare our operating results on an apple-to-apples basis.

Turning to taxes.

Our full year and fourth quarter 2017 core results have been adjusted to exclude $1.8 billion in noncash items related to U.S. tax reform.

The majority of the $1.8 billion is a onetime toll charge of approximately $1.2 billion on unremitted foreign earnings.

The cash cost is almost entirely offset by our foreign tax credit carryforwards.

We have also revalued our deferred tax assets and liabilities.

While we are still finalizing the impacts of reform on our effective tax rate for 2018, we expect it to increase to between 20% and 22%.

In 2018, our projected tax rate will reflect the new lower U.S. tax rate, offset by anti-base erosion provisions.

The net impact does not fully replace the benefit of our previously available foreign tax credit planning.

Near term, tax reform provides greater flexibility in accessing our non-U.

S. cash, and we have already benefited from that flexibility.

Longer term as we execute on our growth initiatives and our U.S. income grows, we will further benefit from the lower tax rate in United States.

As a final note, our investment and shareholder distribution targets in the 2016 to 2019 strategy and capital allocation framework are not impacted by tax reform.

Now let's look at our results and outlook.

For the fourth quarter, core sales were up 7% year-over-year and EPS was $0.49.

Full year sales rose 8%, and EPS was up 11% to $1.72.

Core earnings were $1.8 billion, consistent with 2016.

An apples-to-apples comparison that reflects the strategic realignment of Dow Corning by excluding silicone's equity earnings from the first half of 2016 shows that core earnings grew 5% year-over-year.

As Wendell mentioned, gross and operating margin dollars grew more slowly than sales in the back half of 2017 primarily because of plant and very attractive growth investments.

These include capacity expansions for optical fiber and cable; our Gen 10.5 Hefei display glass plant; capacity for gas particulate filters; plus development for Gorilla Glass, Valor and a few other projects that we're not quite ready to dive into publicly.

Turning to the balance sheet.

We ended the year with $4.3 billion of cash.

With the new flexibility created by U.S. tax reform, we brought $2 billion in cash back to the United States already this month.

Adjusted operating cash flow for the year was $2.6 billion and keeps us on track to meet the goals of our 4-year capital allocation plan.

Now let's look at detailed segment results and outlook, beginning with Display Technologies.

Display's 2017 core sales were $3.4 billion, and core earnings were $944 million.

Fourth quarter 2017 volume was up slightly sequentially, exceeding our guidance and in line with the market.

Sequential LCD glass pricing declines were slightly better than quarter 3 and better than expected.

For the full year, our volume was up mid-single digits, in line with our expectations.

Pricing improved and reached single-digit year-over-year declines in both quarter 3 and quarter 4.

Let's turn to 2018.

We expect further pricing improvement, with year-over-year declines reaching mid-single digits.

Reaching mid-single-digit annual declines is an important milestone toward our goal of stabilizing returns in display, and it's occurring earlier than the view we communicated to investors in June 2017.

3 factors drive our view of a more favorable pricing environment.

First, we expect glass supply to be balanced or even tight.

Our Gen 10.5 plant supports the expected growth of large-size TVs.

This is colocated with and dedicated to our customer BOE.

We pace that aligned capacity in tandem with BOE to ensure our Gen 10.5 glass supply is balanced to demand.

We expect glass supply-demand balance below Gen 10.5 to tighten further because demand continues to grow in 2018 but public information indicates there is little capacity growth planned in this segment by glass makers.

Second, our competitors continue to face profitability challenges at current pricing levels.

Therefore, we expect their price declines will flow further as they try to remain profitable.

Third, LCD glass manufacturing requires ongoing investment in current and new capacity to support growth.

To generate acceptable returns on investments, glass pricing will need to improve even further.

We typically see the largest quarterly price change in the first quarter.

In quarter 1 2018, we expect sequential glass price declines to again be moderate and more favorable than first quarter sequential price changes in recent years.

In sum, pricing will be favorable in 2018.

Let's turn to volume.

We expect the LCD glass market volume to grow mid-single digits as television screen size growth continues.

We expect our volume to grow faster than the market as we ramp production in tandem with BOE's Gen 10.5 demand in Hefei.

With the first quarter of 2018, we expect both the LCD glass market and our volume to decline sequentially by low single digits, in line with normal seasonality.

First quarter volume will be up low single digits on a year-over-year basis.

We feel good about price and volume.

And gross margins should improve throughout the year.

2 factors will dampen display's gross margin percentage in the first quarter of 2018.

First, we are starting up our Hefei facility.

As always, during a plant startup, fixed costs and staffing ramp ahead of production.

Second, we'll be taking advantage of the seasonally lighter volume in display and Gorilla to rebuild tanks and optimize the fleet with our latest technology.

As you may recall, in the third and fourth quarters of 2017, we ran a handful of tanks outside of optimal range to meet strong demand.

We'll be correcting this in the first half.

The higher utilization at the Hefei plant and the fleet optimization will improve productivity and gross margin, especially in the second half of the year.

In summary, we have essentially all of our 2018 volume under contract.

We remain very pleased with the current dynamics in our display business and our progress in maintaining stable returns.

Let's move to Optical Communications.

Full year sales were $3.5 billion, up 18%.

And core earnings were up 33%.

Fourth quarter sales grew 13% over last year.

Fourth quarter earnings declined slightly as we invested to support growth in 2018 and beyond.

In addition to new fiber and cable capacity, we invested in building supply chain and new products for Saudi Telecom.

Our first significant sales occurred during the quarter and required some setup costs.

We're honored to support Saudi Telecom as it begins the largest network build in the history of the kingdom.

In the first quarter and for full year 2018, we expect sales to be up about 10% year-over-year, excluding any contribution from the pending acquisition of 3M's communications markets division.

Key growth drivers include strong demand from carrier and enterprise customers that will fill new capacity as we bring it online.

We expect profitability to improve through the course of the year as we ramp our plants to meet committed customer demand.

For your modeling purposes: We expect the 3M transaction to close in the middle of 2018.

The transaction will add about $200 million in sales and be neutral to EPS in 2018 due to integration costs.

As previously announced, we expect it will be accretive in 2019 and beyond.

Stepping back.

We're excited about 2018's growth potential for Optical Communications and pleased to have additional opportunities ahead of us.

Environmental Technologies 2017 sales were $1.1 billion, up 7%, driven by worldwide growth in the auto market and from winning additional business, which allowed us to grow faster than the market.

Fourth quarter sales grew 19% year-over-year, with core earnings rising 33%.

As anticipated, the North American heavy duty market improved in the second half of the year, driving 7% growth in our diesel sales for 2017.

In addition, our gasoline particulate filter business delivered its first commercial sales in the third quarter as the initial phase of Euro 6 regulations took effect in September 2017.

In the fourth quarter, we had additional sales and we won additional platforms.

We have won the majority of platforms awarded to date.

2017 core earnings were $139 million, as investments in select capacity and engineering to support the ramp of our GPF business partially offset the benefits of increasing sales.

In the first quarter and for full year 2018, we expect high single-digit sales growth driven by continued strength in auto sales, ongoing improvements in the heavy-duty diesel market and from the GPF launch.

In Specialty Materials, 2017 sales rose 25% over last year, and core earnings were up 32%.

We're clearly benefiting from the rapid adoption of Gorilla Glass 5 and the trend for glass backs on devices.

We also made progress with our innovations in other areas, including Gorilla Glass emerging as the most widely used cover material on smart watches worldwide.

Fourth quarter sales increased 17%, and core earnings were up 12% year-over-year.

Sales benefited from brands building aggressively to support their launch cycles.

This demand pull-in is the primary reason we expect first quarter 2018 sales to be down about 10% year-over-year.

Overall, we remain very pleased with our performance in Specialty Materials.

We expect to grow again for the full year 2018, following our strong 2017.

The 2018 growth rate will depend on new model launches and the adoption of our innovations.

In the second half of 2018, we expect year-over-year growth as customers launch their new products; and as we announce new innovations to meet customer needs in mobile consumer electronics, including the introduction of our next generation of Gorilla Glass.

In Life Sciences, 2017 sales were $879 million and core earnings were $80 million, with strong fourth quarter sales, as we continued to outpace market growth.

For full year 2018, we expect sales to grow mid-single digits.

First quarter sales should be up high single digits year-over-year.

As a reminder, my comments on our 2018 outlook are based on the new JPY 107 and KRW 1,175 core rates.

We're comparing to 2017 results recast to our new core rates.

For 2018, all of our businesses have positive momentum.

And we expect full year sales of about $11 billion, up 7%.

We expect the full year gross margin to exceed 41%, similar to 2017.

The first quarter will be the low point for the year.

We expect gross margin to be about 40% of sales, consistent with 2017's fourth quarter.

In the second half of 2018, our investments, for example, in the Gen 10.5 facility, gas particulate filter capacity and new fiber and cable plants will exit the startup phase and result in new sales.

Quarterly gross margin should exceed 42% in the second half.

Annual operating expenses should remain consistent with last year as a percentage of sales.

For the full year, SG&A is expected to be about 14% of sales, and RD&E about 8%.

The slides will show and give you additional details for the first quarter and for the year.

In other items, we expect other income, other expense to remain at our fourth quarter 2017 run rate, generating a net expense of approximately $200 million for the year or about $45 million to 50 -- $55 million in Q1.

Full year 2018 total gross equity earnings are expected to be similar to 2017 at approximately $200 million, predominantly from Hemlock Semiconductor, with first quarter at about $25 million to $30 million, consistent with typical seasonality.

As a reminder, our tax rate should be between 20% and 22% for the year and for the first quarter.

In 2018, we expect to spend slightly more than $2 billion on capital expenditures, with programs in every market access platform.

How much more will depend on how quickly we ramp some of our investments.

We'll provide more information as the year progresses.

Stepping back.

The fourth quarter marks the halfway point of our 4-year strategy and capital allocation framework.

And I'll conclude with a look on our accomplishments and our expectations.

In brief, our progress on all dimensions in the framework has been excellent, and we expect to deliver on all of our goals.

In the first 2 years of the framework, our cash generation has been on target.

We have invested $4.5 billion in planned investments to grow and extend our leadership, and we have returned more than $9 billion to shareholders from share repurchases and dividends.

Over the next 2 years of the framework, we plan to invest an additional $5.5 billion in our growth initiatives.

And we plan to continue repurchasing shares and paying dividends, totaling at least $3.5 billion additional dollars over the remainder of the program.

We expect our board to increase the dividend by at least 10% next week and at least 10% again in 2019.

Putting it all together.

As we invest $10 billion to drive growth and extend our leadership, we are rewarding our investors by returning more than $12.5 billion, which compounds the benefit of our future growth for long-term shareholders.

We are very pleased with our continued positive momentum.

We're focused on keeping that momentum heading into 2018.

We remain on track to deliver the goals of our strategy and capital allocation framework and are excited about the rich set of opportunities ahead of us.

With that, let's move to Q&A.

Ann?

Thank you, Jeff.

Jon, let's open the lines for questions.

We have live folks in the queue today.

(Operator Instructions)

(Operator Instructions) I'll first go to the line of George Notter with Jefferies.

I guess I wanted to dig into the optical business a bit.

You guys are adding a lot of capacity here.

I saw the announcement from the other day about the new cable manufacturing facility.

I guess the question here is can you refresh us on the amount of new capacity you're adding in that business and then also the timing with which that capacity comes online.

Thanks, George.

We're not giving exact guidance on how much capacity we're adding, for obvious competitive reasons.

We launched on this latest round of capacity expansion really anchored by the Verizon announcement and their commitment to $1 billion over the next few years.

That, together with a few other building blocks with key customer-committed demand, had us really start to expand our capacity footprint across all those products that they'll be requiring.

What you can expect on timing, as you sort of heard from Jeff, is that investment in capacity has been a bit of a drag on our profitability in the back half of 2017 and the first half of 2018.

And you're going to feel those plants ramp up and increase their utilization in the back half of 2018.

So they'll turn from a drag to being a real force for positive momentum in the back half

(technical difficulty)

Is that helpful?

Okay.

Our next question is from Vijay Bhagavath with Deutsche Bank.

And we will move on to Mehdi Hosseini with SIG.

I'm looking at the display as a percentage of net income.

And the mix has steadily declined.

Back in 2013, it was in the high 60%.

And now it is almost 50%.

As you accelerate the investment in other areas, like what happened in the second half of '17, should we also expect an acceleration in this decline in display net income as a percentage of overall net income?

I'm just trying to better understand how other segments are going to grow and help continue to diversify the revenue and operating income mix.

So I think you've got it, Mehdi.

I think your observation on what's happened in the past and your projection of what's in the future is directionally correct.

Our other market access platforms are going to grow faster than our display market access platform.

And therefore will -- it will become a smaller part of our overall corporate mix on income.

I guess the question is, since you have a stepped-up investment in other areas, should we expect an acceleration in contribution from other segments?

Yes.

Would you like to elaborate on the rate of increase?

No.

It's just [not for the queue, that is].

There's only so much guidance we really want to give and project mainly because we don't want to -- everything has arc of probability sets to it, but I think in general you're on track with it.

As you heard from Jeff, it was he's expecting $11 billion of revenue this year, right, with the bulk of that revenue growth coming from other segments other than display.

I think -- that type of numbers that you saw that you can interpolate from there and what you saw through 2017, I think directionally that's the way to think about it going forward: very strong growth for the company overall, with display being stable.

Certainly, with the pricing dialogue you heard from Jeff, there is a possibility that displays as a segment begins to grow some, but still it'll be at a lower rate than the rest of the company, I believe.

And next we'll go to Steven Fox with Cross Research.

Two questions from me, please.

First of all, on the gross margin swing during 2018, can you give us an idea of how you -- how much of the swing is just from ramping down some of the spending versus expecting new volumes to ramp in the second half?

And then as a follow-up, can you just give us a little bit better color on some of the Gorilla Glass auto wins maybe just by large buckets of interior versus exterior and how you expect that to -- how you expect to realize revenues from that?

Steve, when we open any new plant, the staffing and fixed costs tend to ramp earlier than the production.

We have committed demand for these plants.

And as we move to higher utilization rates due to volume increases and meeting this committed demand, we would expect our gross margins to improve throughout the year, with especially strong growth in the second half.

And on auto, Steve, did I hear your question right, how we're feeling about the ramp and the mix between glazing exterior versus interior...

Yes.

I was just trying to understand, like if you looked at the 35 new wins, sort of what kind of buckets they fall into within the vehicle location, whether outside, inside; what type of things inside; and when would these programs start to ramp.

The majority of the platform wins that we have right now are on the interior.

One of the reasons for that is people refresh interiors and adopt new design in interiors much more rapidly than they refresh the exterior of car platform.

So the majority of those are interiors.

I think that, though, when we think through the revenue opportunity, we don't see a lot of difference between the revenue opportunity in interiors and exteriors.

Even though the glass area is quite higher in exterior, the relatively higher value that we add in interior with special optical surfaces to create a particular viewing experience means that that's quite a high-revenue-realization business for us, so I would say determining between the two probably isn't as important as the overall rate of adoption as we try to drive this business to another $1 billion sort of revenue generator for Corning over time.

And this will be for 2019, 2020 model year vehicles.

We'll start shipping commercially for those products late this year, right?

We'll begin, but you won't start to see a significant ramp 'til starting in 2019 and beyond.

You should look for when we start to put in some high-volume manufacturing for the part finishing and optical treatments.

And it should give you some more evidence.

And you should hear about that sometime this year, Steve.

Our next question is from Wamsi Mohan with Bank of America Merrill Lynch.

So I was just wondering around these price declines.

It sounded from your Q1 commentary that there was an improving but higher than mid-single-digit decline, which would improve that pricing improves more so throughout the course of the year post Q1.

I appreciate your volumes are lower in Q1 relative to full year, but is 2Q the right time frame to think about price declines to get to mid-single digit?

And secondarily, I know Tony in the past has said that the core rate could be locked-in maybe over a 5-year period.

Is the FX volatility causing you to rethink the period of locking-in the core rate at this JPY 107 for 3 versus 5 years?

Thanks for the questions, Wamsi.

To the first one, on pricing.

So let's make sure we're talking about the right terms.

There's no sequential price declines, say, quarter 4 and quarter 1, for instance.

And then there's year-over-year declines, quarter 1 this year versus quarter 1 last year.

What you heard from Jeff was that we are talking now about the really important milestone of, towards the back half of this year, we expect the year-over-year decline to be mid-single digits, okay?

That's a very significant milestone.

The sequential declines is where you have been of low single digit and continue to be.

We're seeing improvement in this quarter 1 decline versus quarter 1 of last year.

And of course, we're going to continue to see improvement in the sequential declines to be able to reach this much longer year-over-year decline rate, but that little shift in terms can lead to misunderstanding.

I think the key thing is we see the rate of price decline improving for us.

And we would expect to see that especially in the back half of the year, that we have evidence for it already in quarter 1. And we would anticipate it as well in quarter 2.

With respect to hedging, we find giving a 3-year core rate to be effective.

It's a good window to provide certainty for our cash flows and earnings.

It allows us to execute in a focused way our strategy and capital allocation framework and deliver on all the goals.

Consistent with our financial policies, we do have hedges in place for the next 3-year period but at lower coverage than the 90% we have through the end of 2020.

So we'll give you more details on how we expect our core rate to evolve as we get closer to the next 3-year period.

And the next question, we'll go to Vijay Bhagavath with Deutsche Bank.

My question is around your optical portfolio and 5G in particular.

5G, if you'd agree with me, is fundamentally different from previous wireless generations.

5G uniquely needs both wireless and optical communications, so my question is around would you focus primarily on the optical communications opportunity in 5G.

Or any thoughts on building up a wireless communication portfolio for 5G now that the fixed wireless is starting to pick up and then we're getting to mobility in 5G?

An excellent question, Vijay.

I think your assessment of the difference between 5G wireless technology and previous generations is accurate in that wireless now becomes a very optically rich offering as people move towards dense 4G and 5G.

As far as expanding outside of optical, mainly our focus will be on those things that are fully integrated into our passive optical system.

Where we can uniquely be able to package and/or facilitate the implementation of wireless for our customers, we would augment our offering, but that is a dialogue which we're involved with deeply with our key customers.

And it's really quite straightforward.

It becomes, "Do you want us to do this?

Or do you want to source it?

And what is the least-expensive way to build out this infrastructure?" So depending on how those dialogues go, more of the value could shift [into us] beyond the optical, but I think it's too soon yet to conclude where those dialogues will end, Vijay.

Wendell, truly helpful.

A quick follow-on: As you bring up more optical fiber capacity -- I mean I keep seeing these blurbs on the news wire you're going to -- keep continue to build up new optical manufacturing capacity.

Will that have any near-term impacts on segment margins?

Yes, excellent question, Vijay.

As you will have heard from Jeff, it's we've had from our investments in optical a bit of a drag in the back half of 2017.

And we're having a bit of a drag here in the first quarter of 2018.

We would expect, as those facilities ramp, that that drag will disappear and then turn into a strong positive.

As you know, having visited our Optical Communications plant, our fixed cost in those facilities is high, so our variable margins are also quite high.

So as we fill that up, you can expect to see it have a pretty potent effect on our gross margins.

Our next question is from Patrick Newton with Stifel.

Wendell and Jeff, I wanted to dig a little bit more into gross margin, perhaps a 2-part question.

So I guess I'm struggling to see how the commentary on several segments running at full capacity exiting the year results in the 4Q gross margin missing your guide by about 100 bps.

And I -- it appears to me that the comments that you're making on investment headwinds seem to be more targeted at the first half of '18, so maybe you can help us bridge the 41% gross margin results relative to the 42% guide.

And then if we look forward and taking into account that a substantial portion of your growth is coming from some larger on -- some lower-margin businesses, how should we think about gross margin post investment phase?

I think that you've talked about a 42% gross margin in the back half of the year, but is that a good intermediate-term target, meaning that 43%-plus that we saw on the 2014, '15 time frame is unachievable given mix going forward?

Great question, Patrick.

Well, let's start with Q4.

So in Q4, we're also seeing that drag from our investment cycles.

And you're having -- what can cause timing delta is that, as we actually start up a plant, then there are certain costs that are triggered -- that were sitting in a project now flow through our P&L and our gross margins.

So some of that's hitting quarter 4, as well as you may have seen the announcement from Saudi that -- of the major new strategic alliance we've announced.

That also started to shift.

And so there we had to build a new supply chain, and that added (inaudible) about 4 generations of product for them.

So it's a new product, new supply chain.

And so as we started to shift that, that -- also its profitability was not at the level that it will be ultimately.

So I think really, quarter 4 and quarter 1, it's the same basic story, a little bit different mix where the investment is, but you're seeing that strong investment take away from some of the strength in the overall operations.

And we'd expect that to reverse, and I'll turn it over to Jeff, for the back half, but you're right on the target for our gross margins.

So Jeff?

At our new core rates of JPY 107 per dollar and KRW 1,175 per dollar, the 2017 gross margin was 41.3%.

We expect to be about at that this year.

On first quarter, we're going to be at 40%.

In the back half of the year, for quarters 3 and quarter 4, we'd expect to be above 42%.

The 2 primary drivers of that are that our new factories will exit the startup stage as we ramp to meet the committed demand.

And then the second factor is we're taking advantage of the seasonally lighter demand in display to upgrade our display tanks with the latest technology, and that will also have a strong benefit in the back half of the year.

And next we'll go to Stanley Kovler with Citi Research.

Just more question on display and then a follow-up on the optical side.

Panel makers have commented recently that they wanted to refocus on profitability.

And so one question was for 2017, for example, when in the second half of the year there was more discounting to get inventory moving in China.

How should we think about those types of developments going forward when maybe panel makers or OEMs will be less inclined to discount to get volume through?

Your thoughts would be great.

So we think that the supply chain inventory in our -- exited 2017 at a healthy level, and we think it will be healthy throughout 2018 as we see growth at the retail level.

In terms of impact on us, we think that the glass market volume is going to be up mid-single digits.

And we believe that our pricing can reach mid-single-digit year-over-year declines.

We think that pricing is going to be driven by 3 things: the supply-demand balance, competitor profitability of glass makers and also the need for attractive returns on ongoing investments.

And if you look over the last 3 years, correlation between panel makers, performance and glass pricing has been very well.

So we feel pretty confident in our guidance.

Stan, was that the question you were asking, sir?

Or were you aiming more at the display market?

Appreciate it.

No, that was the question.

I just wanted to follow up on optical related to Verizon.

They announced some NG-PON capabilities, I think, that allow them multiple wavelengths on a single fiber for some of the EDGE deployments.

And I think the focus more with some of these technologies was to get speed up on a single wavelength.

Does this have any implication for you guys on demand or ramp of single-mode fiber?

Is this an accelerator, or could this actually slow things down for you?

So in general what drives our demand is going to be footprint by neighborhood or by sea.

It is putting the -- in telecom it is putting in place the original infrastructure to being able to service.

As always, when you put in something like GPON, the capability of the fiber is always well in excess of what you're driving it at.

And so quite often, what you'll see is our demand comes when we basically do the home passes, and then ultimately the home drops.

And then always the telecom company can turn up the rate and turn up the service level with pretty simple upgrades in their GPON system inside sort of the network itself.

So this is very typical.

And we don't see it as impacting us, frankly, one way or the other either negatively or positively other than, to the extent that the degree with which our customers serve their customers better, that in long term turns into more demand for us.

Jon, we'll try to get a couple more people in.

And next we'll go to James Faucette with Morgan Stanley.

I just wanted to get a little more color on growth drivers for Specialty Materials and optical and displays.

It's that, Wendell, you touched a little bit about interior glass starting to move specialty or starting to contribute in really in 2019.

How should we think about it as a growth driver for Specialty Materials overall?

Can it be meaningful in that 2019 as a contributor?

Or is it going to take longer than that?

And I guess in light of your recent comments on this call related to Iris, a similar question on Iris: Can Iris be a meaningful contributor to display in 2019?

Or once again, is that going to take longer?

So let's start with your first question.

Just from a segment sort of accounting method, right now we account for auto in the glass area inside Other, right?

Ultimately, I don't agree determined whether it is the segment, but it ranks more closely with our automotive market access platform than it does our mobile consumer electronics platform.

That being said, because what you really care about is it -- does it generate revenue or not, I think 2019 will be the year, if everything goes well, that we'll start to feel it in automotive.

We're a big company and this is just the beginning of this, so it's not going to be a life-changing feel in 2019, okay?

But we'll expect it to be -- really start to build its momentum in 2019 and then start to really contribute much more in the next decade.

So in the near term, what drives us in specialty is really the adoption of our new innovations by more and more of the OEMs.

And we expect specialty to grow this year in mobile consumer electronics.

The rate of growth will depend on how quickly people adopt our innovation sets.

In Iris it's still too early to tell.

I think it's very encouraging that 2 major players in monitors in Dell and Lenovo have adopted the Iris technology for the top of their line.

I think we need to see that become a lot more mainstream before that turn some of the investment area into a margin producer.

And we'll go to Joseph Wolf with Barclays.

I had a question back to display but on the transition in the industry towards OLED and not on the TV set but on the smaller panel size; and the lower -- and the -- I guess, the Gen 6, 6.5.

Competitively, is there any impact?

I know you guys are involved in OLED manufacture, but are your competitors involved in the same way?

And is there any longer-term consideration where the other businesses or your competition is looking at the OLED opportunity differently than Corning?

So could you just build on your question?

When you say OLED, sir, which -- what exactly do you mean?

Anywhere -- both in flexible and in rigid, where I know that Corning product is used in the fab -- in the manufacture of the end product but perhaps isn't in the final device.

And I'm wondering if you believe that your competitors have the same sort of manufacturing capability.

Or they are looking at that market differently.

Actually, it's not how our competitors are looking at it.

Let me share instead how we think about it.

Starting back a number of years ago as we evaluated OLED versus LCD technology, we determined that OLED would probably be most successful in the flexible small mobile area because it offered some unique performance advantages that were highly valued.

So therefore, that's where we focused a lot of our innovation effort, and our share in that business is impressively high.

So to the extent that devices go into OLED in mobile consumer electronics, as opposed to LCD, that is a revenue enhancer for us.

Now it's a small revenue enhancer because in glass the area of the device matters.

And so overall mobile is a relatively small percent of the overall glass demand.

What we've felt then and we continue to feel is that OLED for TV can become a player but a small player, that fundamentally it doesn't offer enough value relative to the cost increase versus the continually improving LCD technologies, like you just saw recently at CES with some of the quantum dot technologies.

That being said, we have a strong position as well really any time anybody wants to use the glass.

So I don't have great -- sort of great insights into how do our competitors feel about it, but I really like our position.

That will be from Doug Clark with Goldman Sachs.

I had a question on the display glass volume expectations.

First, for the market being up mid-single digits in 2018, can you explain what that means from a TV unit standpoint?

TV units have been down for the past few years.

I'm wondering if you're assuming a re-acceleration in growth.

And then secondly, on Corning's share gains and the relationship with BOE driving above-market volume growth, can you quantify that?

Should we be expecting a high single-digit glass volume growth for Corning in 2018?

So essentially the materiality of BOE in 2018.

Sure.

We expect screen size to be the primary driver of growth this year.

And in terms of our growth, BOE is ramping its Gen 10.5 facility.

We're ramping our glass in tandem, so we expect stability in other areas and that to be a little adder for us, but that's all the guidance we're giving at this time.

Great.

All right, thank you all for joining us today.

Before we close, I just wanted to remind you that we will issue an 8-K today with our core data recast to a yen of JPY 107 and a won of KRW 1,175.

We'll be attending the Goldman Sachs conference on February 13.

And we'll be planning to attend at least one conference a corner for each quarter for the rest of the year.

We'll also be providing some virtual presentations and webcasts on business topics throughout the year.

Finally, there will be a web replay of today's call on our website starting later this morning and a telephone replay available for the next 2 weeks, with details in today's news release.

So once again, thank you all for joining us.

Jon, that concludes our call.

Please disconnect all lines.