Corning Incorporated

Welcome to the Corning Incorporated Quarter 3, 2019 earnings call. It is my pleasure to turn the call over to Ann Nicholson, Vice President of Investor Relations.

Thank you, Sean, and good morning everyone, and welcome to Corning's Third Quarter 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 Evenson, Executive Vice President and Chief Strategy Officer. 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 will be discussing our consolidated results using core performance measures unless we specifically indicate our comments related 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 value can be found in the Investor Relations section of our website at corning.com. You may also access core results on our website with downloadable financials in the Interactive Analyst Center. Supporting slides are being shown live on our webcast. 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 results in line with the early update we released in September. Sales were $3 billion. Net income was $397 million. And EPS was 44 cents. While challenges unfolded throughout the quarter, our results and expectations are consistent with our September update. We are not immune to the types of challenges facing us and many other companies this earnings season. But I think we are more resilient than at any other time in our history. And we are taking actions on the things within our control. We're adjusting our cost and capacity while at the same time maintaining focus on key growth initiatives. We continue to invest in technology and innovate with industry leaders across our markets as we pursue the rich set of opportunities outlined in our 2020 to 2023 strategy and growth framework. I'd like to share a few other important notes on the quarter. The favorable pricing environment in the display market continued as third quarter glass prices and display technologies were consistent with the second quarter. Environmental technologies grew sales 20% year over year as the company's gasoline particulate filter solution propelled sales well above the underlying auto industry growth rate. Specialty materials and life sciences also grew faster than their underlying markets as adoption of Corning's new technology continued. Of course, we're living in uncertain times. We see it in the headlines about trade disputes, political unrest, and China's economy. Amid this uncertainty, you may be wondering why we continue to be confident that we will grow over the next four years. Part of our confidence stems from the relevance of our technology leadership and the tangible customer commitments that support our build projects. We're also confident because we're not just counting on everybody buying more stuff. Instead, we're putting more Corning into the products that people already buy. This provides a mechanism for us to grow even when spending in the end market category is down. There's no clearer example than in automotive. In the third quarter, we grew sales in environmental 20% in a market that is expected to be down 3% this year. Our growth is driven by increasing sales of our proprietary gasoline particulate filters which trap fine particulates and help reduce harmful engine emissions. From a financial perspective, GPS increase Corning's opportunity per car by $30. These types of content plays create a path for growth even when underlying unit demand is flat or declining as our environmental results are demonstrating. We expect to double our sales to the auto industry by 2023. By adding auto grade interior glass solutions to GPS, we increase our opportunity per car by another $25 to about $70 in total. That's up almost a factor of five versus just two years ago. And additional products will further increase our opportunity. So we're not counting on more cars being sold, we're driving more Corning into each car. In short, a big part of Corning's story over the next four years is a content story. We see it playing out in mobile consumer electronics, display, optical communications, and life science vessels as well as automotive. Because we're capturing significant technology substitutions, we have sales drivers beyond just and market growth. Let's look at how we advance our strategy in each market access platform in the third quarter. In optical communications, we continue to be impacted by capital spending reductions in both the carrier and enterprise markets. Despite this near term weakness, we are confident in our ability to outperform the passive optical market over time. As you've seen with fiber to the home and corporate data centers, Corning is the unquestioned technology and market leader. We delivered on those opportunities and we are well positioned for the next waves of growth as 5G and hyperscale data centers drive the optical signal closer to the edge. Our near term goals in optical communications are to align cost with demand and to continue advancing our product portfolio through co-innovation. We made progress in both areas during the quarter. Verizon and Corning are co-innovating at our manufacturing and technology center in Hickory, North Carolina. Engineers from both companies are using Verizon's 5G ultra wideband service and Corning's optical fiber and cable innovations to explore the capabilities of 5G in a manufacturing environment. Our work will demonstrate 5G's ability to revolutionize the way goods and services are produced as the technology enhances capabilities like machine learning, augmented reality and virtual reality. Corning is also co-innovating on 5G with Intel. We're making future 5G in building networks scalable and easy to install. Our innovations will allow for faster adoption of 5G features as they are standardized. Shifting to hyperscale. Corning and Facebook are demonstrating how to meet ever increasing bandwidth demand through space division multiplexing or SDM. Internet content providers like Google and Facebook are making SDM their primary strategy for increasing capacity between their data centers across the globe. In short, this technology boosts the number of fibers in a submarine cable and multiplies Corning's opportunity per cable by up to four times. In mobile consumer electronics, we're well on our way to doubling sales despite a maturing smartphone market. Apple announced that it is awarding $250 million from its advanced manufacturing fund to Corning. This builds on the $200 million we received from Apple's fund in 2017. Both investments support Corning's state of the art glass processes, equipment and materials integral to the delivery of next generation consumer devices. In the third quarter, we continued to lead the industry as our innovations were adopted on more and more devices. Apple announced phones with the toughest glass ever used on a smartphone. And we saw the launch of multiple laptops, convertibles and tablets with Gorilla Glass. Corning continues to win in new device categories with nine wearable launches in quarter three, four featuring Gorilla Glass DX and DX Plus. Gorilla Glass DX delivers improved optics while DX Plus also provides scratch resistance approaching the finest watches. Both maintain the superior drop performance of Gorilla Glass. Moving to the automotive market, as I already noted, our goal is to double sales by 2023. In the third quarter, we continued ramping production capacity in Hefe, China to meet committed demand for both our auto glass solutions and our gasoline particulate filter products. We're making great progress building a $500 million plus GPF business and we expect over $200 million in 2019 sales. Our auto glass solutions business continues to build its order book. At next month's Guangzhou Auto Show, the industry's first shaped dual display module with a single cover glass part will be on display in the GAC Ion LX, an electric vehicle. The module's cover glass is produced using Corning's 3D cold form technology. In life science vessels, we have some very exciting news. The FDA has approved Corning Valor Glass for use as a primary packaging for an already marketed drug produced by a leading pharmaceutical company. This approval makes Valor Glass the first and only fundamentally new glass composition to be approved by the FDA since the advent of borosilicate glass more than 100 years ago. This approval also marks a major milestone in our strategy to build a long-term multi-billion dollar franchise. And the success provides another step on our journey to create a new, higher standard in pharmaceutical glass packaging. Overall, we continue making good progress with our development partners and interest and engagement with other major pharmaceutical manufacturers continues to grow as well. In display, our goal is to stabilize returns. In the near term, retail demand continues to track to our expectations with TV viewing area growing year to date through August. Set makers are purchasing panels more conservatively, apparently due to macro uncertainty, which drove panel maker utilization reductions in the third quarter. This caused the panel makers to purchase less glass in the third quarter. We expect this supply chain adjustment to be temporary and for panel maker utilization to increase in the first half of 2020. We remain confident in our long-term strategy because our growth driver is large-sized TVs, which are most efficiently produced by our customers on Gen 10.5 fabs. Our leadership in Gen 10.5 glass supports medium and longer-term volume growth despite temporary supply chain adjustments. And we have great news about pricing. We now expect full year glass price declines of a low single-digit percentage compared with our previous guidance of a low to mid single-digit percentage. You can see that across our markets, our strategic investments are well aligned with major trends and our relationships with industry-leading customers are creating new opportunities. Of course, we understand our current environment and will continue to navigate thoughtfully through any headwinds that may arise. Now let me turn the call over to Tony for more

details. Thank you, Wendell, and good morning. In the third quarter, Corning took steps to offset recent market headwinds. In display technologies, we aligned capacity to demand. In optical communications, we idle capacity and reduce capital spending to reflect our customers' near-term infrastructure investment plans. And across the company, we reduced operating expenses to align with near-term sales projections. While we experienced these headwinds and took steps to offset them, it is important to note that even in these challenging markets, we grew sales year over year and faster than the underlying markets in environmental technologies, life sciences, and specialty materials. It is also important to note that while we are taking these steps, we continue to advance our long-term growth initiatives, investing in technology, and innovating with customers to capture future commercial opportunities. Now before I get into the details of our performance and results, I want to note that the largest difference between our gap and core results come from charges related to capacity realignment in display technologies and optical communications. Other differences between our gap and core results come from a non-cash -to-market adjustment for our currency hedge contracts and a change in our tax reserves. With respect to -to-market adjustments, gap accounting requires earnings translation hedge contracts and foreign debt settling in future periods to be -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 impacted gap earnings in the quarter, in quarter three by $72 million. Now to be clear, this -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 in 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 third quarter, sales were $3 billion. Net income was $397 million and EPS was 44 cents. Operating cash flow in the quarter was $864 million. As we said in July, we built working capital in the second half. We also said we expected to reduce working capital in the second half. And we did reduce working capital in Q3 and expect to further reduce it in Q4. Now let's look at the detailed segment results and outlook. In display technologies, third quarter sales were $793 million and net income was $185 million. Net income was down year over year, primarily driven by the lower volume. Third quarter volume was down high single digit sequentially and prices were consistent with the second quarter, both as expected. Now there's no change in our outlook in terms of volume. Retail demand is tracking to our expectations with TV viewing area growing year to date through August. And preliminary data for September is also encouraging. The industry, however, remains conservative on inventory and panelmaker utilization is expected to stay at current levels in the fourth quarter. Consequently, we expect our fourth quarter glass volume to be down mid single digits sequentially. That said, we expect this current supply chain adjustment to be temporary. We expect panelmaker utilization to increase in the first half of 2020 over the second half of 2019. Glass pricing in the fourth quarter continues to be positive. We expect prices to decline only slightly sequentially, which is equivalent to down low single digits year over year. For the full year, our volume outlook remains consistent with our September 16th update. We expect our volume to be up slightly year over year, which is higher than the glass market driven by the ramp of our Gen 10 and a half facility in Hefe. In terms of price, our outlook is more favorable than our previous guidance. We are revising our full year price guidance to low single digit declines from prior expectations of low to mid single digit declines. And we expect that the favorable pricing environment will continue into 2020. Now, three factors drive our view. First, we expect glass supply to continue to be balanced to demand or even tight. For Corning, we are aligning our capacity with demand. We are also pacing our Gen 10 and a half capital projects to align with panelmaker's schedules. Second, our competitors continue to face profitability challenges at current pricing levels. And third, display glass manufacturing requires periodic investments in existing capacity to maintain operations. Glass prices must support acceptable returns on those investments. In summary, we are experiencing a temporary supply chain correction. However, retail TV viewing area is growing and expected to create more demand for display glass, especially at Gen 10 and a half. As the leader in Gen 10 and a half, we expect to capture most of the growth. And we expect the favorable pricing environment to continue. Results in optical communications were consistent with our September update. In the third quarter, sales were $1 billion and net income was $127 million. Our third quarter sales and net income were down versus last year. These results reflect overall market weakness, including the spending decisions of several major carrier customers. For the full year, we continue to expect sales to decline in the 3 to 5% range as previously guided. We have taken actions to align our cost to our current sales reality, including idling capacity, pacing capital projects, and reducing operating expenses to align with near term sales projections. At the same time, we continue to innovate to improve network speed, cost, and capacity, and to secure long term agreements with major industry players, sustaining our confidence in our ability to outperform and deliver long term growth. In environmental technologies, third quarter sales were $397 million, up 20% year over year, and ahead of expectations, driven by continued adoption of gasoline particulate filters and strong demand in the heavy duty diesel market. Net income grew 32%, driven by strong operational performance and successful ramping of additional GPF capacity in China. We are well on our way to building a greater than $500 million gasoline particulate filter business. With a market leading product, we continue to earn a majority position globally as automakers award platforms to meet Euro 6 and China 6 regulations. Sales are accelerating as Euro 6 regulations are in full effect, and automakers are preparing for China 6 implementation in 2020. Our Hefei plant startup is ahead of schedule and has been key to delivering incremental sales and net income. As a result, we continue to expect GPF sales to exceed $200 million in 2019 and to grow robustly thereafter. Our strong performance is expected to extend into the fourth quarter, with sales growth up by a low teen percentage year over year. Given a strong second half, we now expect full year sales to be up by a mid teen percentage, compared to our previous guidance of a low teen percentage. In specialty materials, third quarter sales were $463 million, and net income was $92 million. We were pleased with strong sales from our new innovations, as Wendell noted. However, our overall sales growth was muted because our Gorilla Glass shipments in China were lower due to the current trade environment. And advanced optic sales were down on semiconductor market weakness. From a profitability standpoint, some of our newer innovations start initially at lower margins and could not offset the loss of higher margin Gorilla Glass and AO products. We anticipate these issues will improve over time as the trade situation is resolved, the semiconductor market returns to growth, and we reduce costs on newer innovations as we come up the learning curve. For the fourth quarter, we expect sales to be approximately flat year over year. We expect full year sales growth again, despite a smartphone market that is down year over year. This growth is driven by adoption of new innovations, including premium cover glass and innovative parts products, including DX Plus for wearables. Life Sciences third quarter sales were $256 million, up 11% year over year. Net income was $41 million, up 37%. For both the fourth quarter and the full year, we expect sales to be at mid single digits year over year. In summary, our third quarter performance was impacted by changes in the display and optical markets, and we took actions to lower our cost to align with those lower sales. We now expect the full year price decline in display to improve to a low single digit percentage. We grew sales in environmental, specialty materials, and life sciences year over year and faster than their underlying markets. And we delivered strategic milestones with Apple's investment and FDA approval of Valor Glass. Now let's turn to the consolidated P&L. Gross margin in the third quarter was 39% as expected. Last quarter, we talked about the Gen 10 and a half facility, and I'd like to give you an update. We continue to make progress coming up the learning curve and improving our cost in our Gen 10 and a half plant, which should lead to further improvement in 2020. We are excited about our Gen 10 and a half projects because they enable us to capture the majority of the market growth and will ultimately provide a step change in glass manufacturing. For the rest of our P&L, there has been no change in our guidance. Gross margin is expected to be approximately 39% in the back half. SG&A and RD&E are expected to be just under 14% and approximately .5% of sales respectively for the year. And capital expenditure are expected to be approximately $2 billion. Moving to additional outlook details, we expect other income, other expense to be approximately $260 million for the full year. Full year gross equity earnings are expected to be approximately $230 million, predominantly from Hemlock Semiconductor. And we expect our effective tax rate for 2019 to be approximately 20%. In closing, we acted quickly in the third quarter to address changing market conditions. We met our revised targets, we continued our actions to advance our long-term growth plans, and we remain confident in our strategy. We are operating on the strong foundation that we built over the last four years. And we're making progress in key areas as evidenced by our ongoing customer announcements. This makes us confident in our ability to achieve the objectives we laid out in our 2020 to 2023 strategy and growth framework. With that, let's move to Q&A.

Ann? Thanks, Tony. Okay, Sean, we're ready for our first question.

Thank you. And ladies and gentlemen, if you do wish to ask a question, please press star one on your touchtone phone. Our first question is going to come from line of Aseya Merchant. Please go ahead.

Hi. Good morning, everyone, and congratulations on a, you know, well-executed quarter given the macro environment. I just have a quick, two quick questions for both Wendell and Tony. The multiple growth drivers that you talk about, you know, obviously they're coming into play as we talk about Valor and auto interior, glass, et cetera. When should we expect Corning to demonstrate like, you know, growth margin leverage from these initiatives, you know, in your P&L? And then secondly, just given the macro environment as well and the revised expectations for 2019 as you preannounced September. I mean, should we expect revenue growth for 2020 to sort of come towards your strategic outlook, which was around 6 to 8% revenue growth caterer? Thank you.

So I think from a gross margin standpoint, I mean, clearly what's happened to us in gross margin is really all about volume. You know, we have lower volume in the back half than what we were expected, and it's going to take greater volume for us to recover that gross margin. But once that volume occurs, you know, then our gross margin is going to increase. And in terms of these innovations, you know, specifically, it depends on when those innovations come. But when they do come, they will come with gross margin, incremental gross margin, favorable gross margin for us.

I think it will all be on the end of it. It's a really good question. And it will be the interaction of we invest usually with very strong customer commitment, and we need to put it in place ahead of the time when the demand comes on stream. And in almost all of our cases, we're building bespoke proprietary equipment. So as those plants fill and as we work our way through those learning curves, we'll see that leverage. We'll add as we go through the year next year, a little more information for folks that are trying to model all this to try to be helpful on how do we think about these new innovations as they become a bigger and bigger part of our revenue growth story over time. It's a fair request.

And then in terms of 2020, obviously, we're not giving guidance for that. But the reason we chose compounded annual growth rates in our strategy and growth framework is that we knew there would be times of economic headwinds like we're experiencing now, when we're, you know, not likely to have that level of sales growth. And there'll be times when there's either really great adoption of our technology or economic tailwinds where that will be greater. So you really should think about those objectives just as we intended them to be, which is over a four-year period.

Thanks, Athia. Next question.

Thank you. Our next question is going to come from line of Peter Zabiski from Barclays. Please go ahead.

I guess, hello, this is Peter, on for Tim Long. I wanted to ask about environmental and the app performance there. Obviously, GPF has been doing very well. How should we think about going into 2020, though, the more conventional parts of that business, the heavy-duty diesel, for example, and then have a follow-up?

You know, we're not giving guidance on 2020 on today's call, but clearly, there have been, you know, macroeconomic headwinds that have impacted, you know, both the automotive market and appeared to be beginning to impact the heavy-duty diesel market in North America. Of course, at the same time, in China, there are new regulations that are going into effect on heavy-duty diesel, so you have to factor that in in addition. Plus, the adoption on the GPF, you know, continues to grow into 2020 because that's actually when the regulations become in effect in China.

That's helpful. Thanks. And then, just to touch on optical, it looks like the performance was a little bit better than the low teens that you had guided for. Is that, are you seeing any kind of nascent strength in the service-rider spend there or any factor that you would point to?

Let me adjust both optical and then you also use it as a bit of an example of the more general forecasting approach. So, as you noted in your earlier question, we tend to grow much faster than our underlying markets as customers adopt more of our innovations in their products. And this has been true in Opto, Life Sciences, Gorilla, and Auto over the last four years where our growth rate has been significantly higher than that of the underlying markets we serve. And that's a good thing. But it also means that from a forecasting perspective, we need to be right about both the underlying market and the rate of adoption of specific technologies at specific customers in a specific timeframe. This can be difficult. During quarter three, we heard from some key customers that they plan to reduce their spending on our products below their existing run rates and our expectations. We in turn lowered our expectations across those industries and we initiated actions to adjust our cost and capacity accordingly. Now, as we finish the quarter, some customers exceed that assumed take rate and we perform better. That being said, our approach for the remainder of the year is the same and we're reaffirming our guidance at this time. Is that helpful to you,

sir? That's helpful. Thank you.

Thank you. Our next question then will come from Brian Young from Deutsche Bank. Please go ahead.

Hey, thanks for taking the question. I wanted to ask about the automotive Gorilla Glass opportunity. I saw a recent product announcement kind of highlighting Gorilla Glass windshield as an option on the new Ford F-150. It sounds like there's going to be multiple new products announced and sort of in line with commercial trucks. So my question is, are you seeing an uptick in the exterior glass interest? And if you could just update us on the broader interior automotive glass opportunity, that would be helpful.

Thank you for the question. So the answer is yes. We're continuing to see a momentum building on exterior. However, at the same time, the very strong positive upside has been demand for our new technologies in interior. And we've been shifting more of our resources because the key to innovation is you have to go really towards those positive surprises towards interior. And we continue to build both our order book and momentum there. We were especially excited about being able to demonstrate our proprietary cold form technology in a commercial offering that I talked about for GAC. And we expect to have more momentum there as well. So right now, we're beginning to scale our plant that we just put in place in Hefei, China. And we're really excited about our opportunities. That being said, much like you point out on exterior, the way the car industry works is we will get a nomination well before the sales actually begin. And so sometimes when you're watching the press, there can be some time delay and delayed gratification in seeing what a customer says or when we say we're building our order book and the time period when that revenue shows up. Did I get to the core of your question?

Yeah, absolutely. Thank you.

Thank you. Our next question then will come from James Fossett from Morgan Stanley. Please go ahead.

Great. This is Meeta Marshall for James Fossett. Oh, James, are you on?

Go ahead, Meeta.

Go ahead. Just a question on, it's going to expand upon, you mentioned change in timing to the pacing of additional glass facilities and just wanted to know if there's anything formal around kind of the change in timing there and then second on the impact of Valor glass, you know, just any timing or additional milestones we should expect there.

So, you know, I think in terms of the pacing of the Gen 10 and a half facilities, you know, really need to go to each of the customers on what they're planning to do. I think the important thing is that we're in lockstep with them and we're adjusting, you know, our pacing and consistent with what they're doing.

And on Valor, I would expect us to continue to build momentum. We are. The nature of that industry is one where confidentiality agreements abound. And so when we announce it is largely dependent on how our customers want to handle that topic, they're in an interesting position because what we have on offer here is a superior packaging from both the patient safety and productivity standpoint. Yet at the same time, for a long period of time, this new ascendant technology will live side by side with the older technology. So what our customers have to work through is as they manage through their change process in their customers, they don't want to be in a position of sort of which customers get the new technology, which can be old and how all that works out. So everyone is better served until such time as we build up enough momentum and we build up enough capacity in the thoughtful way where we're working with regulators and our customers that this can be talked about in a more easy fashion.

Thanks.

Thank you. We have a question from Rod Hall from Goldman Sachs. Please go ahead.

Hi, this is RK on behalf of Rod. Thanks for taking my question. I wanted to ask on display, and I am not giving guidance on 2020, but given the slowness in the second half, can we expect class volume growth better than the missing legit growth you've talked about in the past? And should we think about this recent drawdown in inventory as a reset to appropriate levels or are power makers and set makers being overly cautious if retail demand continues to hold?

So you're right. We're not going to give 2020 guidance, but I think the way that you should think about what happens is what's really happening from a retail demand standpoint, because at the end of the day, that's what's going to drive this market. It's going to drive, you know, what's going to drive panel maker utilizations. And it's not only just the number of TV sets that are being sold, but the size of those TV sets. And as, you know, both Wendell and I said, I mean, we haven't really changed our perspective on the market for the rest of the year, for the full year. And in fact, you know, things are coming in a little bit better than what we originally expected. But equally, maybe even more important than that is what's happening with TV sizes. 65-inch TVs are growing greater than 40% on a -over-year basis. And 75-inch TVs are growing greater than 60% on a -over-year basis. So, you know, we believe in the fundamental drivers of this, what's happening in this business. And what's really happening right now is caution with the panel makers in the supply chain, with the set makers in the supply chain because of all the trade uncertainties. And, you know, we think that gets itself worked through the rest of this year. And in the first half of next year, volume is going to be better than the back half of this year.

But I think the core of your question is really good in that if you haven't changed your long-term end market view, as Tony just

went through,

then as you take a look at supply chain corrections where you grow in some periods, the supply chain grows faster than that end market and some periods slower. So, really, you're sort of asking when exactly does that correct? And when does that growth rate accelerate? And I think in Tony's answer, you see that we do expect in the first half of 20, right, that to be above that of the back half of 2019. That being said, sort of the core of what we do is not to try to call sort of specific quarters and specific time periods around supply chain. It is a worthy exercise, but we tend to be focused more on that long-term market and to get our capacity in the appropriate spot to be able to serve our customers.

That's super helpful. Thanks for that. Could you also comment on visibility in the optical segment and any color on when you expect spending to resume?

Yes. In optical. Here's one of those that's a good example of having grown so much faster than the underlying market. As we entered this year, we would see a number of signals that the end market would be going down. And then, but at the same time, we saw adoption of our new technologies at some specific customers more than offsetting that sort of underlying heartbeat. And I think this probably led us to being able to believe as long as that continued, we could ride out this temporary dip in the end market for optical without having much impact on us. That turned out not to be true as some specific customers who were adopting the strong tech changed some of their timing and capital plans. That being said, though it's very hard to call the exact timing by quarter or even by year, we remain more confident than ever that the fundamental drivers for the demand of our technology will become increasingly ascendant. 5G is going to take the wireless network from being a fiber poor network to a very fiber rich network. Our innovations and hyperscale are going to push that optical signal closer to the edge and use more of our product. So over the long term, we see a set of demand that is higher for glass because densification of networks is occurring. That will lead to glassification. And if we do our job well, we will capture our unfair share of that.

Great. Thank you.

Thank you. Our next question that will come from the line of Wansey Mowen from Bank of America, please go ahead.

Yes, thank you. I want to ask a clarification on display. In your press release, you talk about aligning capacity in display to demand. When you, are you primarily just shifting the timing of maintenance of glass tanks here? And if that is the case, wouldn't that automatically mean that as you sort of complete the maintenance and bring those tanks up, you should start to see margins start to recover, you know, perhaps as quickly as late this year or early next year?

Well, let's separate the two sort of questions. First is what we're going to do around our capacity matching to demand, both in macro and regionally. You're right that our tanks are modular and we always have available to us that ability to manage the timing of when we bring up tanks. We have other tools that we bring to bear on managing our capacity as well to better match to particular customer demand in particular regions. And we will do that. Overlaying all that though is just sort of the simple driver which is right now, the gross margin pressures primarily being driven by volume, right? And as volume comes back as we work through the supply chain, we should see gross margins also come back. And those are interrelated between capacity and demand, right? Because that just helps you on how much leverage you have on that particular number. But the core of the piece here is I think if you come to a point of view on when you expect the supply chain correction to be done and when we expect volume to come back, you will have a good idea of the timing of the improvement in gross margins. So.

Gwendal, just to follow up on that, would you say that are there any dynamics now? I mean we've spoken about this in the past about how Chinese New Year for instance has changed the seasonality. Anything that you see that changes the seasonality this year going from four Q to one Q, you know, if we just exclude the supply chain related disruption?

Not really, Wonsi. I mean I think that from an overall standpoint there is a, you know, a little bit of seasonality as you go throughout the year. But to build for Chinese New Year's, a lot of that building has to happen in the fourth quarter. And so, you know, I think it's really, there's nothing really different I think this year with respect to kind of the end retail market. What is different is, you know, what's happening in the supply chain. And obviously going through a temporary supply chain correction in the back half of this year.

Yeah, thanks, Billy.

Thank you. We have a question from Steve in the box from Cross Research. Please go ahead.

Thanks. Good morning. Two questions please. First, Tony on the gross margin. So if I understand correctly the difference between originally doing 40% and then doing 39% in the quarter is volumes. But then when we think ahead to Q4, can you just sort of explain to put some takes to the flat 39% I think you still have some quarter over quarter volume pressures, pricing's a little bit better on LCD and then the impact of the capacity shifts. And then I had a follow up.

Yeah, Steve you got it exactly. I mean I think it's those things and, you know, we think the back half gross margin is going to be around 39%. And I think you hit on the things that are tradeoffs in that calculation.

And next is a net neutral or helper or how does that play out?

You know, it always, it's essentially a net neutral. I mean, you know, essentially what you're looking at is that we are taking actions and, you know, each of the businesses have their own dynamics as it comes to the sales numbers but, you know, fundamentally we think we're in the same place where we were on September 16th which is the back half at 39%.

Okay, thanks. And then Wendell, just on the optical, you just made a comment that it's hard to call the timing by quarter or even by year. Understanding obviously that, you know, the construct for more demand is there. Is there any kind of green shoots or anything you would point to that would give us confidence that maybe you've seen the worst of the cuts for optical and that we could sort of build our models of what we're seeing in the second half or is it still that early and too hard to call? Thanks.

That's an excellent question Mr. Fox. I think we're still a little early. I'd like to work our way through a little more time here. And work through some of the changes that we're making to improve our ability to get better acuity on these items. Certainly, you know, we see a lot of green shoots if green shoots are taking the form of incredibly strong interest in what it is we can do in 5G and what it is we can do in hyperscale. That being said, we also see this as an industry, different particular customers sort of working their way through their broad strategy, their broad financial management challenges because at the core here is an investment strategy that are pretty significant decisions for them. So I'd like to get a little more time before we update you on that point of view if you don't mind sir.

No, I appreciate all the cover. Thank you.

Thank you. We have a question from line of Samik Chatterjee from JP Morgan. Please go ahead.

Hi, thanks for taking the question. I want to ask, relative to the 2020 to 2023 plan, and you mentioned you're feeling comfortable still about the 6 to 8% revenue growth target that you issued at that in the investor day. I just wanted to ask more relative to the investment plans outlined during, in that plan of like 10 to 12 billion of investments in growth as well as the 8 to 10 billion of returns. Should we now think of those being a bit more back and loaded in terms of that time horizon or are you still feeling very comfortable in terms of the capex trajectory for example of 6 to 8 or should we think of them being towards the lower end of that horizon of that time, of that guidance and then if I can just follow up on the cash flow as well, can we get some visibility into the cash flow for the fourth quarter given that it looks like for the first nine months you are lower on the operating cash flow by 900 million from last year and there's some offsets here on the lower capex but how should we think about kind of free cash flow outlook for the year?

In terms of the cash flow, let me start with that question. You know, as I talked about in the July call, our operating cash flow is seasonal. I mean it is lower in the first half of the year and it's stronger in the back half of the year. And you know what we talked about was the working capital bill that we did in the first half of the year and the expectations that both operating cash flow would improve in the third quarter and inventory would come down or working capital would come down and that's exactly what happened and that caused us to be positive from a free cash flow standpoint in the third quarter and we expect that improvement to continue into the fourth quarters. We have further improvements in working capital so I think from a full year standpoint we expect to be positive from a free cash flow standpoint. In terms of the investments and as the way to think about that over a period of time, of course a lot of those investments as you know Jeff described on IR day really depend on the customer commitments and the timing from a customer commitment standpoint. You know but you know that being said we're not giving guidance on 2020 but you know I think given the environment we're in today you know capital spending probably isn't going to be as high in 2020 but as you go out over time it really is driven a lot by you know what happens from a customer commitment standpoint.

Thank you. Thank you. We have a question line of George Nader from Jeffries. Please go ahead.

Hi thanks guys. I wanted to ask about the FDA approval with Valor Glass. I guess I'm curious about when you think that might start to generate revenues for you and then you know certainly I'm curious about how many other you know drugs or manufacturers you guys have in the pipeline you know marching towards FDA approval at this point so any color there would be great.

Thanks. So as exciting as this approval is and is necessary we are still in the beginning of an industry that moves very thoughtfully for very good reason. So I would say we should keep our expectations low for the near term on it having any significant impact on us. It is very confirmatory for our long term revenue opportunities and our ability to really bring life changing innovation to market but from a financial modeling standpoint I will continue to caution and say exercise great restraint at such time as we believe it becomes important to start modeling this in we will articulate that.

Sean we've got time for one more question.

Thank you. Then our final question is going to come from the line of Tahas Venkatesh from UBS. Please go ahead.

Thank you. This is Tahas Venkatesh. Can you talk to the hyper scale spending trends you're seeing? The enterprise portion of optical which includes hyper scale appears to have decelerated after growing 30% plus in the first half so just curious what you're seeing in the second half. Thank you.

I think we're seeing consistent with some of those external, the various external benchmarks that you're looking at. Our particular dynamics all depend on what you compare to. Right? So if I look delta to last year we can have a different sort of answer than the total market because we grew so much faster than the total market. Right? So we can have dynamics that in the near term in any given quarter can be a little different than that market. But over the sweep of time I think the right way to think about it is those signals in the external market that you're looking at they impact us too and over the sweep of time we should do better than the overall markets. Just due to the ascendancy of our technology. Does that answer your question sir?

It does. Thank you so much.

Thank you Tejas and thank you everybody for joining us today. Before we close I wanted to let you know that we'll be at the Barclays Global Technology Media and Telecommunications Conference on December 12th and the Citi 2020 Global Technology Media and Telecommunications West Coast Conference, West Conference on January 8th. Finally a replay of today's call will be available on our site starting later this morning. Once again thank you for joining us and Sean that concludes our call. Please disconnect all lines.

Thank you. That does conclude the conference for today. Thank you for participation. You may now disconnect.