Corning Incorporated

Welcome to the Corning Incorporated Quarter 1, 2019 Earnings Call. It is my pleasure to turn the call over to Ann Nicholson, Division Vice President of Investor Relations.

Thank you, Tony, and good morning, everyone, and welcome to Corning's Q1, 2019 Earnings Call. With me today are Wendell Weeks, Chairman and Chief Executive Officer, Tony Trippany, Executive Vice President and Chief Financial Officer, and Jeff Evinson, Executive Vice Chief Strategy Officer. I would like to remind you that today's remarks contain forward-looking statements that fall within the meaning of the Private Securities Litigation Reform Act of 1995. Those statements involve risks, uncertainties, and other factors that could cause actual results to differ materially. These factors are detailed in the company's financial reports. You should also note that we will be discussing our consolidated results using core performance measures unless we specifically indicate our comments relate to gap data. Our core performance measures are non-gap measures used by management to analyze the business. A reconciliation of core results to the comparable gap value can be found in the Investor Relations section of our website at corning.com. You may also access our results on our website with downloadable financials in the Interactive Analyst Center. Supporting slides are being shown live on our webcast, and we encourage you to follow along. They're also available on our website for downloading. Now I'll turn the call over to Wendell.

Thank you, Ann. And good morning, everyone. This morning we reported excellent results that position us for another year of strong growth. For the first quarter, sales were $2.9 billion, up 13 percent -over-year. Net income was $365 million, up 22 percent -over-year. And EPS was 40 cents, up 29 percent -over-year. Four of our five segments achieved double-digit sales growth -over-year. Highlights included that optical communications continued to outpace the market with sales up 20 percent. Environmental technologies delivered 12 percent sales growth, driven by accelerating adoption of our gasoline particulate filters. Specialty materials sales were up 11 percent on the strength of Gorilla Glass and our other innovations. Life science sales were up 5 percent as the business continues to benefit from its leadership in cell culture vessels. Display continues to deliver stable returns with first quarter sales and net income up double digits -over-year in the best first quarter pricing environment in well over a decade. These results keep us on track to deliver the growth and shareholder returns we designed into the four-year strategy and capital allocation framework introduced in October of 2015. We targeted returning more than $12.5 billion to our shareholders through repurchases and dividends, while investing $10 billion to extend our leadership and deliver growth. We continue to make great progress and we expect to meet all our stated goals. Our cash generation is on target. Through the first quarter of 2019, we have returned $12.3 billion to shareholders, reducing outstanding shares by approximately 37 percent. And we've increased dividends per share by 67 percent since the framework began, including an 11 percent increase in February. Our investments in RD&E capital expenditures and acquisitions are also on track, totaling $8.8 billion through first quarter 2019. Now let's take a closer look at our progress in each of our market access platforms, starting with optical communications. Our performance in optical communications continues to be outstanding. We remain on track to surpass our goal of $5 billion in 2020 sales. We're growing faster than the overall market as our unique co-innovation model continues to deliver the right product at the right time for the right customer. Our first quarter results reflect our progress with 20 percent sales growth. We continue to earn recognition around the world for our stream of product and technology innovations that reduce network cost and increase the speed of installations. For example, in the first quarter, LightWave Innovation Reviews recognized two of our solutions, an extreme high density cable, which makes hyperscale data center fiber deployment up to 30 percent faster. And a surface mounted in-home fiber connection solution that is not only fast and easy to install but also integrates seamlessly into the decor because its transparency renders it essentially invisible. This product is among the innovations added to Corning's portfolio through our 2018 acquisition of 3M's Communication Markets Division. At the global conference OFC in March, we demonstrated that our Edge 8 solution provides data center operators with a simple migration path to 400G transmission speeds and beyond. This helps them stay ahead of requirements for emerging technologies such as artificial intelligence. We were first for 100G and will be first for 400 as well. March also marked the introduction of the new Corning Technology Center Montreal. The center will serve as Corning's global home for software solutions for telecommunications networks. And it will support emerging technologies such as artificial intelligence, augmented reality, cloud computing, and data analytics. The center will eventually become a hub for software innovation across all of Corning's business segments. And we're off to a strong start as two major North American service providers are now using software for their fiber to the home installation and maintenance. Overall, recognition of the value created by our solutions and co-innovation approach continues to grow. And that results in our optical communication sales growing faster than the market. Now let's turn to mobile consumer electronics where we are the world leader in glass for smartphones, tablets, and emerging categories like wearables and augmented reality devices. Our goal has been to double mobile consumer electronic sales over the next several years despite a maturing smartphone market. And we continue making significant progress toward that goal with steady adoption of our premium glass and the other innovative solutions we offer for smartphones, laptops, tablets, and wearables. We launched our Amplify line of glass screen protectors on OtterBox.com and in more than 1,600 corporate owned Verizon stores in the United States. Amplify screen protectors provide a new channel for Corning to capture an additional piece of high value glass on smartphones. Our strategy combines the best screen protector glass with the number one selling smartphone case brand in the United States. In the first quarter, we also continued our success in emerging regions with multiple device launches featuring Gorilla Glass in India and Turkey. Overall we're making great progress on our goal to double sales in mobile consumer electronics. We expect continued momentum throughout the year as we look forward to more new device announcements and we'll continue to innovate for our customers and you'll continue to see more Corning in your devices. Turning to the automotive market access platform, our core technologies are helping to propel the auto industry into a new era of cleaner cars with enhanced cockpit functionality, connectivity, and design. Our objectives are to grow our environmental business by continuing to win in gasoline particulate filters and to launch a disruptive automotive glass business. We're off to a great start in 2019 on both objectives. Our gasoline particulate filter technology makes cars significantly cleaner and it increases our sales opportunity per car by a factor of three to four. We continue to see strong GPF sales in the first quarter as European regulations are in full effect and China demand is materializing earlier than expected. And we continue to win the majority of platforms with our industry leading solutions. We now expect to exceed our goal of delivering $150 million in 2019 GPF sales and we're investing more to capture accelerating demand. We also continue to demonstrate our ongoing leadership in the industry with a Daimler supplier award that recognizes our collaborative development of next gen emissions control solutions. Next, excitement about Corning Gorilla Glass for Automotive continues to grow as the industry transitions to highly connected and autonomous vehicles that use technical glass. Customers have validated their desire for Corning's technical glass solutions by awarding us hundreds of millions of dollars in our automotive glass pipeline. Our new and industry first auto grade glass solutions are making it easier and more affordable for automakers to bring curved and flat displays to market. To service the growing pipeline for our solutions, a dedicated manufacturing facility in Hefe, China is expected to begin ramping in the third quarter this year. In our life science vessels platform, we continue to make strong progress on the path of the future to a new long term multi billion dollar franchise. Valor Glass substantially reduces particle contamination, breaks and cracks while significantly increasing throughput. Valor helps protect patients and improve pharmaceutical manufacturing. We're making headway with our development partners Merck and Pfizer and our interaction with regulators has been favorable. We also continued important on site research with a number of customers at their facilities where we completed in depth validation and filling line studies that reinforce our progress towards certification. What this means in essence is that various customers are doing test runs of our Valor Glass vials on their lines. They're confirming that it's viable on their machines and that it provides the value we described. They're documenting firsthand how significantly Valor Glass will increase their throughput. We're getting ready for adoption of Valor Glass by scaling up our production capabilities. We brought new capacity online in 2018 and expanded our range of products. We're also progressing with the construction of the new high volume manufacturing facility in North Carolina that we announced last year. Although this market is slow to adopt new technologies, we continue to invest and make encouraging progress. In display, we're delivering stable returns consistent with our goal. First quarter sales and net income were both up year over year with the most favorable first quarter sequential price declines in well over a decade. And we expect continued progress. Full year 2019 price declines are expected to improve further to a mid single digit percentage and to be better than in 2018. Our first in the world Gen 10.5 glass facility is ramping to support the expected growth of large size TVs, allowing us to grow faster than the overall market. Overall display will continue to execute its proven strategy to deliver stable returns. These examples demonstrate significant progress across all our market access platforms. Ultimately, we remain on track to fully achieve our strategy and capital allocation framework goals. Looking ahead, we are confident in our ability to deliver sustained performance. We have multiple businesses driving our growth. Our capabilities are becoming increasingly vital to important trends. Our relationships with industry leading customers are opening new opportunities. We continue to invest in capabilities and capacity that will create substantial additional growth. And you can see the benefits of these investments in our recent results. We're not only succeeding at building a bigger company, we're building a stronger, more resilient one. We look forward to outlining the next phase of our strategic framework in the coming months and we'll unpack some of the opportunities that I've discussed today in more detail in our investor day on June 14th. Now let me turn the call over to Tony for a review of our results

and

outlook.

Thank you Wendell and good morning. We had another outstanding quarter. We grew sales 13% year over year with every business segment growing. We also grew net income 22% and earnings per share 29% all while continuing to invest for even more sales growth this year and beyond. Now before I get into the details of our performance and results, I want to note that the primary difference between our gap and core results is again a non-cash, mark to market adjustment for our currency hedge contracts. As we've discussed before, gap accounting requires earning translation hedge contracts settling in future periods to be mark to market and recorded at current value at the end of each quarter even though those contracts will not be settled in the current quarter. For us, this resulted in an after tax gap gain of $138 million in Q1. Now to be clear, this mark to market accounting has no impact on our cash flow. Our currency hedges protect us economically from foreign exchange rate fluctuations and provide higher certainty for our earnings and cash flow, our ability to invest for growth and our future shareholder distributions. Our non-gap or core results provide additional transparency into operations by using a constant currency rate aligned with the economics of our underlying transactions. We're very pleased with our hedging program and the economic certainty it provides. We've received $1.7 billion in cash under our hedge contracts since their inception more than five years ago. That brings me to our results and outlook. For the first quarter, sales were up 13% year over year to $2.9 billion. Net income rose 22% to $365 million and EPS was 40 cents, up 29%. As Wendell noted, our strong growth results from our technology and manufacturing leadership. We are benefiting from recent investments including capacity expansions for optical fiber and cable, Gen 10 and a half display glass, gasoline particulate filters, and multiple development projects such as Gorilla Glass for mobile devices and automotive. We are very pleased with how these investments are playing out and we are continuing to invest. Throughout the year, additional manufacturing plants will come online, creating capacity for committed demand and driving additional sales growth in 2019 and beyond. Capital spending in Q1 total $524 million and we expect to spend just over $2 billion in 2019 with programs in every market access platform. Now let's look at the detailed segment results and outlook. In display technologies, our goal is to stabilize returns and we had a very strong quarter. First quarter sales were $818 million, up 10% and net income was up 12% year over year. First quarter sequential glass price declines were more moderate than we expected and the most favorable first quarter in well over a decade. Second quarter sequential price declines are expected to remain moderate as well. With all of our volume under contract, we expect our full year 2019 price declines to improve further to a mid single digit percentage and be even better than they were in 2018. Three factors continue to drive our view that this favorable pricing environment will continue. First we expect glass supply to continue to be balanced or even tight. Our Gen 10 1 ½ plant supports the expected growth of large size TVs. It is co-located with and dedicated to our customer BOE. We pace and align capacity in tandem with BOE to ensure our Gen 10 1 ½ glass supply is balanced to demand. That ramp remains on schedule. We expect the glass supply demand balance below Gen 10 1 ½ to continue to be tight as public information indicates there is little capacity growth planned in this segment. Second, our competitors continue to face profitability challenges at current pricing levels. Therefore, we expect their price declines will slow further as they try to remain profitable. And third, display glass manufacturing requires ongoing investment in current capacity to maintain operations. To generate acceptable returns on investments, glass price declines will need to improve even further. For Corning, we will only add capacity if we can get an attractive return for our shareholders. In the first quarter, the display glass market grew mid-single digits year over year and our volume grew significantly faster, as we expected due to the ramp of our Gen 10 1 ½ plant. In the second quarter of 2019, we expect the display glass market to be up mid-single digits year over year and our volume to be up significantly more, again due to the Gen 10 1 ½ ramp. Sequentially, we expect the volume to increase by a mid-single digit percentage, consistent with normal seasonality. For the full year, we continue to expect the display glass market volume to grow mid-single digits driven by TV screen size growth. We expect our volume to grow faster than the market, again resulting from the ramp of our Gen 10 1 ½ facility. In summary, we remain very pleased with the current dynamics in our display business, including our ability to capture Gen 10 1 ½ glass growth and deliver stable returns. Let's move to our fastest growing segment, optical communications. The business is on track to surpass its goal of $5 billion of sales in 2020, with further growth beyond. In the first quarter, sales were $1.1 billion and were up 20% over last year. Net income for the quarter increased 30% year over year. Sales growth in this segment is driven by multi-year data center and carrier projects, as well as sales from the recently acquired 3M's Communications Market Division. As planned, we are leveraging our capacity investments to deliver higher volume and earnings. Our 2019 outlook has been impacted by a major fiber of the home customer shifting its deployment from homes passed to homes connected in quarter 2, not quarter 3 as originally anticipated. This will impact sales by about $100 million. As a result, we now expect our full year sales growth to be up about 10%, which is revised from the low-teens guidance we provided last quarter, but still well ahead of the market. For the second quarter, we expect sales to grow high single digits year over year, driven by strong data center, fiber, and cable growth. Overall, demand for our fiber, cable, and connectivity solutions remains strong. Our customers, the world's leading network and cloud operators, continue to deploy Corning's optical solutions to densify their 4G, 5G, and data center networks. We continue to outpace the competition, and we are very excited about the growth ahead of us. Environmental Technologies' first quarter sales were $362 million of 12% year over year. Net income grew 6%. We are well on our way to building a 5G network. We are a $100 million gasoline particulate filter business. European regulations are in full effect, and automakers in China are preparing for full China 6 implementation in 2020. The market appears to be developing faster, and we are winning more platforms than we anticipated. As a result, we are accelerating our investments, and we are raising our short and long-term sales targets. We now expect GPF sales to exceed $150 million in 2019, and to grow robustly thereafter. China is also considering early implementation of its heavy-duty regulations as part of their Blue Sky initiative. This could further increase both our investment and our sales opportunity. We will have more clarity on the exact timing and impact by the end of quarter two. As we invest to capture the opportunities I just described, it mutes our profitability somewhat in the short term, but will result in greater sales and profit growth in the medium and long term. Based on our accelerating demand, we now expect full-year sales to be up 10% or slightly more versus our prior expectations of high single-digit growth. We also expect second-quarter sales to be up about 10% year over year. In specialty materials, first-quarter performance was strong. First-quarter sales were $309 million, up 11% year over year, and driven by continued strong demand for the company's portfolio of mobile consumer electronics glass solutions. Net income grew by 7% year over year. For the second quarter, we expect sales to grow high single digits year over year. We continue to expect to grow again in 2019, despite a maturing smartphone market. Exactly how much will depend on the adoption rate of our innovations. Our results and outlook demonstrate the value of our premium glasses and the strength of our innovation portfolio. In life sciences, we continue to outpace market growth. First-quarter sales were $243 million, up 5% year over year. Net income was up 15% year over year. We expect both second-quarter and full-year sales growth of low to mid-single digits year over year. In summary, we had an excellent first quarter with strong performance across the company. The benefits of our recent investments are evident in our results. All of our businesses have solid momentum and we expect continued sales growth through 2019. For the second quarter, we expect year over year growth with sales up by a high single digit percentage, operating margin up 75 basis points, and EPS up by a mid-teen percentage. As both Wendell and I described earlier, we continue to invest in all of our businesses. We are increasing capacity utilization in plants that came online in 2018, and at the same time, we're building new plants, including facilities for GPFs and auto glass finishing. While we build, start up, ramp, and optimize those facilities, associated costs offset some of the normal leverage on our gross margin line. As the commitments from and to our customers increase, so does the pace of our work on the manufacturing floor. As a result, the offset to our gross margin line is slightly higher than we anticipated a quarter ago. As sales grow significantly in the second quarter, we expect our gross margin dollars to also grow significantly, both sequentially and year over year. We expect our Q2 gross margin percentage to be slightly better than Q1. Now, similar to last year, we expect our gross margin percentage in the second half to improve versus the first half, as we utilize ramping capacity to meet committed demand. Depending on the pace of facility start up and optimization, we now expect our second half gross margin percentage to be between 41 and 42%. For your modeling purposes, we expect the 2019 operating margin percent to be greater than 2018. Now, moving to additional outlook details, we expect other income, other expense to be approximately $250 million for the full year. Full year gross equity earnings are expected to be approximately $210 million, predominantly from Hemlock Semiconductor, with the second quarter at approximately $20 to $25 million versus the first quarter 2019 gross equity earnings of $26 million. We expect our effective tax rate for 2019 to be approximately 20%, consistent with Q1. Now, finally, I'd like to make a couple of comments on the economic environment, in particular China. First, as we said previously, we do not expect a material impact from the enacted tariffs. Second, we incorporated conservative estimates for China and market demand for TVs and autos in our strong guidance and outlook for 2019. If Chinese demand is better, there is an opportunity for upside. In closing, we're off to an excellent start in Q1. We are benefiting from our recent investments and we are delighted with the customer reactions to our innovations. We welcome the opportunity to invest and continue delivering strong sales and earnings growth for our shareholders. Our strong guidance reflects the rich set of opportunities ahead of us in 2019 and beyond, as we continue to grow faster than the market across all of our businesses. We are within striking distance of fully delivering on the strategy and capital allocation framework. I look forward to sharing our exciting longer term outlook on June 14th. With that, let's move to Q&A. Ann?

Thank you, Tony. Tony, we're ready for the first question.

Okay, our first question comes from the line from a C emergent. Please go ahead.

Great. Thank you, everyone. If you could just clarify optical once again and then talk about how we should think about margin improvements in this segment as we continue to grow and what's driving potentially higher margins? Should we think about utilization being a bigger factor? Should we think about mix here that's hoping to drive improved margins in this segment? Thank you.

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

Thank you. Our next question comes from the line of Rod Hall with Goldman Sachs. Please go ahead.

Hi guys. Thanks for the question. I guess I wanted to focus in on cash flow a little bit because we're struggling to model the cash flow on a quarterly basis and it actually came in a little bit lower than we thought this

quarter,

but then if you look back last year, there was some seasonality then as well. So I'm wondering, Tony, is there any way that you could give us some idea of what you think cash flow might be for 2019 and maybe talk about some of the puts and takes around working capital in Q1 and then I've got a follow up to that.

Sure. You know, I think if you go back and look at our cash flow cycle for the last several years, I mean actually for probably longer than that, you know, we always start off with Q1 being our lowest cash flow cycle and we grow robustly throughout the year and that's exactly what we expect to happen in 2019. And the reason for that is that we kind of wind down a lot of our sales in the fourth quarter, especially as we enter December and we wind them up in the first quarter, especially as we get to the month of March and so you know, we have significant change in working capital in those two periods and in addition to that, we have some of our payments like our incentive payments get paid out in the first quarter. So they accrue during the year, but they get paid out in the first quarter and we expect exactly that similar cycle to continue in 2019. Now I think if you go back and look at, you'll see that same cycle last year. Last year did have some incentive payments that happened in the first quarter, so it was a little bit higher than what it was the first quarter this year, but you know, the cycle is exactly the same and you know, we're certainly on track to, you know, what we said we were going to do from a four-year standpoint in our capital allocation framework.

Okay.

Thank you. Our next question comes from the line of Stephen Fox with Cross Research. Please go ahead.

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

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

Great. That's helpful. And then just, I was just curious, Wendell, there was some, there was a tier one auto supplier this week that had a, or last week had a push out related to having trouble ramping some hot formed display technology. And I know you guys are patented on cold forming, but the question is, as you think about sort of these ambitious displays which have different shapes and curves and are larger than typical, etc., how confident are you in the ability to ramp these displays or at least your glass portion to manufacturing volumes? It seems like it's a big leap based on what we heard over the last few days. Thanks.

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

Great. I appreciate that, Colbert. Very helpful. Thank you.

Thank you. Our next question comes from the line of Sameek Shatterjee with JP Morgan. Please go ahead.

Hi. Thanks for taking the question. Just one from my side. You talked about the single customer in optical which had a change in the schedule. Can you just talk about kind of what you're seeing in terms of fiber demand from other customers, particularly if we look at kind of data center customers, we've kind of heard of some movement in the CAPEX outlook there. Also, we saw some auctions in China over the last quarter. Was there any result or did the outcome of that impact your guidance for the year?

The only thing that's impacting our guidance is this change with this one customer. The rest of our businesses are very strong. The data center business is very strong. Our other carrier business is very strong. We haven't been that strong in China, so that doesn't have much of an impact on us. But everywhere else, we feel really good about the business. I think what we're trying to get across is that the changing guidance is totally related to this one customer and we're growing a lot faster than the market.

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

Great. No, thanks for the call. Thank you.

Thank you. Our next question comes from the line of Vijay Bhagavat with Deutsche Bank. Please go ahead.

Yeah, thanks. Hey, good morning, Vindal. My question is on just a quick report card from you on the 3M asset. How's it going? And then any thoughts on adding similar such assets to the optical portfolio? Or you think you have what it takes now for your customer expectations heading into the rest of the year and into next year? Thanks.

Thanks for the question, Vijay. Yeah, we're really happy with the people and the products and some of the customer access that we brought on board with 3M. They were stronger with some customers. We were weaker. And now we're able to bring our integrated package. We feel really good about the revenue synergies we've gotten there. And the people that we've brought on board feel delighted to be part of an enterprise where optical communications and connectivity is so important. So that we're really happy with. As far as bringing on additional pieces, we're always going to be looking for those opportunities that fit just right in our market access platform and allow us to grow any asset we require faster than the current holders. That being said, as you've heard from Tony, we actually have, we're quite busy delivering on our organic growth opportunities. We're having so much pull from our customers that it means we're having to invest more. We're quite busy delivering that incremental growth. So we don't have any big targets in mind right now, mainly because we're having so much pull. But we're always open. And if you have any ideas, Vijay, we'd be glad to hear them.

Thank you, Kendall.

Thank you. Our next question comes from the line of James Fossett with Morgan Stanley. Please go ahead.

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

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

Thank you very much.

Thank you. Our next question comes from the line of George Nader with Jeffreys. Please go ahead.

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

We are not seeing any inventory build in the supply chain. You know, we are growing faster than the market because of our ramp of our Gen 10 and a half factory. Demand is exactly where we said it was going to be at the beginning of the year, and it's all driven by screen size growth. This business is delivering unstable returns, and I mean, we couldn't really be any more happier than where we are right now.

At the core,

I

totally get how you're wrestling through it when you take a look at the total industry and if you take a look at many of our competitors' releases. But at the core, it is just we have the right product at the right time with the right customers. And that means that area growth is falling more into our hands, right, and allowing us to capture the growth in the industry, and it's all concentrating with us. And that's the dynamic that you're seeing in the numbers.

Next question.

Thank you. The next question comes from Juan C. Mohan with Bank of America.

Hi, yes, thank you. Good morning. I have one for Tony and Wendell as well. Tony, how do you feel about leverage and the possibility for Corning's ability incrementally to take on more debt, and do you see the need to do that to fund some of these growth opportunities that you're investing in? And Wendell, in the display segment, can you maybe comment on this faster than market growth? Clearly, you're benefiting from the BOE exposure, but doesn't that also mean that structurally there is a shift underway for panel capacity to be – for the Chinese panel makers to be taking share relative to the Taiwanese? And if that happens over time, would you need to drive incremental investments in China and maybe shut down some of the capacity that's located in other regions? Thank you.

Let me take the leverage question first. Now, we don't need to add any leverage to meet these investments. We have very strong operating cash flow, and that's more than sufficient to meet the year. So I think we're in good shape there. We certainly have the ability to add leverage, but we're doing it selectively. I mean, the places where we've added leverage over the last couple of years has been in Japan, where the interest rates are low and we have high exposure, and that's been over 10 years maturity. And in the United States, where we've added a lot of – what debt we've added has been at the 30 to 40-year maturity. And we're also looking maybe in the China market where we have some – where we also have a lot of exposure, but we certainly don't need that leverage in order to fund our investments.

Let me take on the display piece. The only thing I'd add to Tony's is the great benefit of the investments that we've made is that we're going to see very nice expansion in our operating cash flows, and that expansion in the operating cash flows, which we'll talk more about when we all get together for IR day, is really giving us just very, very nice financial resilience and strength to pretty much fund both our growth as well as nice shareholder returns. So we feel really good about that. Now let's deal with the display. So I think you're quite right to point out that as some of the major new Gen 10 1 ½ plants come on stream, they're lower cost than some of the older plants, and so therefore they'll get most of the growth. And then the question is what happens to some of the older generation LCD plants for our customers, and will those lose share? So first for our customer bases, you're seeing them try to develop new markets and technologies, things like the automotive display market, wearables, a bunch of other areas to put their product to use. But really from a more selfish standpoint, from Corning's standpoint, this is what is behind our strategy for things like Gorilla, where already a pretty significant part of what was display capacity, we've already moved over to doing Gorilla for mobile consumer electronics, and now increasingly for auto. And you can expect us to continue to do that, and that allows us to basically repurpose those assets and capitalize those businesses without having to spend a lot of capital. So that's worked out really well. I think what's more of a dynamic for us will be our increasing productivity as we bring our new, you're seeing us invest in new technologies in our LCD glass plants and our Gorilla glass plants. This allows us to continue to improve our cost position, which usually means increasing productivity. And as a result, that could give us the opportunity to consolidate facilities, etc. But it has more to do with how quickly we can develop those new process technologies than it does our ability to repurpose. We've done a really good job repurposing.

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

Thank you. And our last question comes from Tejas Venkatesh with UBS. Please go ahead.

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

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

Yes. And I think your observations on sort of how much organic growth at what time period. It's truly important to when you think about Opto is how these are large movements in architecture and they can get pretty inevitable. But their exact timing of when they start and which individual players starts a given program. Right. All can move you around from one quarter to another, especially when you're doing sort of year over year comparisons where you may be comparing to someone's great big fiber to the home build in the last part of last year. Right. And then you're comparing that to this year when that same customer isn't doing a major pass. Right. But then we're still growing and it's made up by other pieces. I think what's really important here to think from a long term perspective is do you believe that wireless is going to move from a structure that is relatively glass light to one that becomes very glass heavy. And that's what we believe 5G does. It densification happens. And so now in the biggest telecommunications network in the world, which is wireless, right, moves to being a very glass heavy network. That speaks very well for our growth opportunities. As cloud continues to grow rapidly, that what that leads to is this sort of centralization of data flow, which means you get a lot more bandwidth in that area has to get there and get out, which once again leads to very dense, very glass rich networks that we also look at and say, you know, that's going to continue. But these are big builds. So the exact timing of how they all work out and what period you're comparing, you know, that will that can allow you to be to be put to be hard to just lay a monotonic growth rate out there. Right. So I feel that the you know, some of the difficulty of doing the comparisons, but when you step back just architecturally, and it looks pretty good to us for glass.

Thanks, Wendell. And I want to thank you all for joining us. Before we close today, I wanted to let everyone know that we'll be at the JP Morgan tech conference on May 15. And as we said, hosting our investor day at the Conrad in New York City on June 14. Registration for that event is open on our events and presentations web page. Finally, web replay of today's call will be available on our site starting later this morning. Once again, thank you all for joining us. Tanya, that concludes our call. Please disconnect all lines.

Thank you. We are now at the end of the Corning, Inc. quarter one, 2019 earnings call. You may now disconnect.