Ann H. S. Nicholson - Corning, Inc. Wendell P. Weeks - Corning, Inc. R. Tony Tripeny - Corning, Inc..

Vijay Bhagavath - Deutsche Bank Securities, Inc. Doug Clark - Goldman Sachs & Co. Joseph Wolf - Barclays Capital, Inc. Rod B. Hall - JPMorgan Securities LLC Patrick Newton - Stifel, Nicolaus & Co., Inc. Steven Fox - Cross Research LLC Stan Kovler - Citigroup Global Markets, Inc. (Broker) George C. Notter - Jefferies LLC.

Ladies and gentlemen, thank you for standing by. Welcome to the Corning, Incorporated Third Quarter 2016 Earnings Results Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Instructions will be given at that time. As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Division Vice President of Investor Relations, Ann Nicholson. Please go ahead..

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

Before we begin our formal comments, I'd like to remind you that today's remarks contain forward-looking statements that fall within the meaning of the Private Securities Litigation Reform Act of 1995. These remarks involve a number of risks, uncertainties and other factors that could cause actual results to differ materially.

These factors are detailed in the company's financial reports. You should also note that we will be discussing our results using core performance measures. Unless we specifically indicate, our comments relate to GAAP data. Our core performance measures are non-GAAP measures used by management to analyze the business.

A reconciliation of core results to the comparable GAAP value can be found on the Investor Relations section of our website at corning.com. We have slides posting live on our webcast to go with our formal comments, and they will be available on our website later this morning. Now, I'll turn the call over to Wendell..

Thank you, Ann. Good morning, everyone. As you saw in this morning's press release, we had a great third quarter. Sales and gross margins increased in every business segment year-over-year. We also grew the company's sales, net income and EPS, both sequentially and year-over-year. Core EPS was $0.42, up 14% sequentially and 24% year-over-year.

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

On our earnings call one year ago, we introduced our Strategy and Capital Allocation Framework. We design the framework to create significant value for shareholders by focusing our portfolio and leveraging our financial strength.

The framework includes a commitment to delivering at least $12.5 billion to shareholders, while investing $10 billion in growth opportunities through 2019. As a reminder, we focus 80% of our portfolio on three core technologies, four manufacturing and engineering platforms, and five market-access platforms.

We believe that this focus reduces the cost of innovation, increases our likelihood of success, and attracts some of the world's leading companies to our ecosystem, because they see how our unique expertise can help address some of their toughest challenges. We are very pleased with the progress on our framework.

Since its introduction a year ago, we've gained traction with our customers on our growth initiatives, realigned our interest in Dow Corning and are on track to distribute $6 billion to shareholders by the end of 2016.

Achievements on the framework this quarter include the launch of the $2 billion accelerated share repurchase, which we expect to conclude in the fourth quarter, significant new product introductions, and progress on several of our new growth initiatives. Let's look at a few examples.

In our mobile consumer electronics market-access platform, our goal is to double sales despite the maturing of the IT and handheld markets. We do this primarily by introducing products that advance the state-of-the-art. This allows us to capture a price premium and to win in new places like wearables and phone backs.

We introduced two of these innovative products during the third quarter, Gorilla Glass 5 and Gorilla Glass SR+. Gorilla Glass 5 has up to 1.8x better damage resistance than Gorilla Glass 4. And delivers up to 4x improvement in drop height to failure versus competitive glass designs.

We are seeing superior drop performance translate into a meaningful price premium versus Gorilla Glass 4 and the opportunity to expand the use of Gorilla. Given that drop performance is the number one want from consumers, it's not surprising the traction at our customers has been strong.

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

In our automotive market-access platform, we seek to build a gorilla sized automotive glass business and also to create a significant new business around gas particulate filters. Let's start with the automotive glass opportunity, where our excitement continues to grow.

Previously, we focused most of our commentary on the advantages of Gorilla Glass for car windows. But designers of connected and autonomous vehicles are likely to dramatically increase the use of glass and touchscreens in auto interiors.

Gorilla Glass provides a unique path to deliver curved designs cost-effectively, and creates a great new opportunity for us. Examples were featured recently at the Paris Auto Show inside the Renault Trezor concept car and also at the Faurecia booth in a curved, full-glass center console called Smart Pebbles.

Both OEMs promoted their use of "ultra-tough Corning Gorilla Glass", and received significant media coverage. A reporter commented that the Trezor's dashboard is a big, curved OLED display made from Gorilla Glass that controls most car functions and possesses a design DNA that will be passed on to the French automaker's future models.

Moving to gas particulate filters, or GPFs. You've seen major car manufacturers announce that they will equip vehicles with GPFs to meet the Euro VI regulation. We've won the majority of platforms awarded to-date, and we expect sales to begin ramping in 2017. As a reminder, no GPFs are used in commercially available vehicles today.

Consistent with OEM announcements, we believe that GPFs will be required to control particulate emissions from gasoline direct injection engines. CDI engines offer both higher performance and better fuel economy and as a result, have grown to about a quarter of passenger car sales worldwide, with units growing in the high teens annually.

We expect gas particulate filters to become a significant business for Corning. They offer the potential to increase our sales opportunity per vehicle by a factor of 3 to 4 with profitability similar to our current business. Today, sales of GPFs are insignificant.

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

In our Optical Communications market-access platform, our goal is to grow at least twice as fast as telecom industry CapEx. We plan to do this by focusing on high-growth segments and by delivering integrative solutions that offer new levels of performance and reduce our customers' costs.

Optical Communications is now a fully evolved example of our Focus 345 (11:17) portfolio. We began more than 40 years ago by leveraging our deep knowledge of optical physics, glass science and vapor deposition to disrupt the telecommunications industry with optical fiber.

Over time, we increased our value-add by leveraging ceramics, extrusion, and precision forming. We're now working with customers on glass motherboards based on our fusion platform. Today, we are reaping the benefits of this unique combination of capabilities in segments like fiber-to-the- home and hyper-scale data centers.

We're also seeing the benefits of our approach in the wireless arena. For example, in August, the Atlanta Falcons Chief Technology Officer announced that Atlanta's new Mercedes-Benz Stadium will use the Corning ONE platform as a single optical network core that integrates Wi-Fi, cellular and video.

We will be providing 4000 miles of optical cable and 1400 Wi-Fi access points. Now, what gets me excited about wins like this is not the size, which is certainly impressive, but instead, it's that the skill sets underlying the Corning ONE platform are directly applicable to the emerging opportunities in 5G wireless.

And more to come on innovations in this space. In summary, under the Strategy and Capital Allocation Framework, we are utilizing our financial strength both to return capital to shareholders and also to invest in growth through research and development, capital expansion, and M&A.

Since we introduced the framework a year ago, we have returned a total of $5.6 billion to shareholders in dividends and buybacks, reducing outstanding shares by about 18% and increasing the dividend by 12.5%.

We believe that our investments will allow us to deliver secular growth over the long term, while consistently returning significant sums to our shareholders. Tony will now provide a more detailed review of our third quarter results and fourth quarter outlook.

Tony?.

Thank you, Wendell, and good morning. As we noted in today's press release, our Q3 core results reflected the sequential and year-over-year improvement we expected. We were very pleased with our strong operating performance. Sales and gross margins were up in every segment year-over-year and our net income and earnings per share were up significantly.

Looking ahead, we see year-over-year sales, net income, and EPS growth in the fourth quarter. Before I get into the details of our core performance and outlook, I wanted to briefly note that the primary difference between our GAAP and core results for the third quarter is, again, a non-cash mark-to-market loss.

As we have discussed previously, GAAP accounting requires earning translation hedge contracts settling in future periods to be mark-to-market and recorded at their current value in the current quarter, even though those contracts will not settle in the current quarter.

Consequently, in this quarter, we marked our contracts to market again as required by GAAP resulting in a GAAP loss of $150 million. The loss in this quarter was significantly smaller than we saw in the first two quarters of the year because the yen exchange rates moved less.

And to be clear, this mark-to-market accounting has no impact on our cash flow. We remain very pleased with the results of our hedging program and the economic certainty it delivers. Since the inception of this strategy, we have received cash totaling $1.2 billion under hedge contracts.

These proceeds offset much of the currency related decline in Display's earnings due specifically to the weaker yen. At present, we have hedged approximately 70% of our projected yen exposure through 2022 at a blended rate of approximately JPY 106 per dollar.

For investors who are concerned that a weakening yen would negatively impact our business, hedging, earnings and cash flow through 2022 substantially mitigates that concern.

Now for investors who have additional questions, please refer to the more extensive discussion in our first and second quarter conference call or the tutorial on FX hedge accounting on the Digital Media Disclosure section of our Investor Relations website. And as always, Ann and her team are available after the call.

Now let's turn to the results for the third quarter. As a reminder, these are core performance metrics. Sales in the quarter were $2.55 billion, up 4% versus last year and exceeding our expectations. The growth was driven largely by strong performance in Optical Communications.

Corporate gross margin was 43%, on track with guidance and well ahead of last year. The year-over-year improvement largely reflected improved profitability in Optical Communications and good cost performance in Display. SG&A was 13% of sales at $328 million. RD&E costs were 7% of sales at $187 million. Total gross equity earnings were $19 million.

Recall, we closed on the realignment of Dow Corning on May 31, so third quarter equity earnings predominantly reflect our equity earnings from Hemlock. And our effective tax rate for the quarter was 15%. Net income was $466 million, up 7% sequentially and 4% from last year's third quarter.

Adjusting for the former Dow Corning's silicone's business equity earnings, which no longer contribute to our results, net income grew 16% on the 4% sales growth. This reflects our strong underlying financial performance. EPS was $0.42, up 24% versus last year and above expectations. Now let's turn to our balance sheet and cash flow.

We ended the quarter with $4.8 billion of cash. During the quarter, we repurchased $2.4 billion worth of common shares outstanding. And adjusted operating cash flow for the quarter was $721 million, up significantly over Q1 and Q2, as expected, and driven primarily by higher core net income.

Now, consistent with history, we expect Q4 operating cash flow to be up sequentially. We expect the increase to be driven primarily by a reduction in working capital and other cash receipts. Now let's look at the detailed segment results and the outlook for each business, beginning with Display Technologies.

Display had a very strong third quarter, exceeding our expectations. Looking ahead, we continue to expect the 2016 glass market and our volume to be up mid-single digits for the full year. As you would expect, there are a few puts and takes at retail versus our expectations.

But the biggest driver of the growth remains TV screen size, which is tracking solidly to be more than 1.5 inches of year-over-year growth. In the third quarter, the set makers pulled very hard for panels ahead of the Q4 peak retail season.

Our customers, the panel makers, increased their utilizations to meet this demand, which resulted in additional sequential growth for the glass market. The glass market was up high single digits sequentially versus our expectations that the glass market would be up mid-single-digits sequentially.

Our glass volume was up slightly more than the glass market due to customer mix. For the ninth consecutive quarter, the decline in LCD glass pricing remained moderate and met the expectations we noted last quarter.

These drivers produced the strong results for our Display business in the third quarter, with sales up 7% and net income up 14% sequentially. And forward-looking weeks of supply chain inventory remain at a healthy level and panel maker inventories remain lean.

As I already said, we expect the 2016 glass market and our volume will be up mid-single digits for the full year. In the fourth quarter, we expect panel maker utilization to remain high and glass supply to remain tight. So we could see Q4 glass volume consistent with Q3.

But in light of the third quarter upside, it only follows that our fourth quarter volume may be down slightly. Therefore, while our overall guidance for the year remains unchanged, our guidance for the fourth quarter glass volume is consistent to down slightly sequentially. And we will watch this closely as the quarter unfolds.

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

First, we monitor utilization, in-market demand and other market factors very closely, and all of those indicate the glass supply should remain tight for the balance of the year and into 2017, especially in large gem (22:51) sizes as a result of the strong TV demand.

We will manage our operating capacity to our demand and maintain our stable share strategy. And second, our competitors' profitability is low. Even though prices declines have been moderate for two years now, their profitability has remained low during that period.

Therefore, we expect that their price declines will slow down further as they try to remain profitable. For these and other reasons, we continue to believe that sequential pricing will be better for us going forward. Let's move to Optical Communications.

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

While our growth in Optical Communications was strong on an absolute basis, we missed our own guidance because growth in hyper-scale data center projects was below expectations.

Note that our sales for our large hyper-scale data center range from $5 million-$10 million, so delay of a single project can reduce total segment growth by more than 1 percentage point. We remain well positioned to capture secular long-term growth in the hyper-scale segment. Net income at $98 million was up 38% over last year.

Improved manufacturing cost and favorable shift towards sales of our solution products contributed to the higher year-over-year profitability. For the fourth quarter, we expect sales to grow in the high single digits year-over-year, led by continued fiber-to-the-home strength.

We expect hyper-scale sales to continue growing faster than overall Optical Communications segment, but at a rate lower than we anticipated earlier in the year. In Environmental, Q3 sales were up 3% versus last year and slightly ahead of expectations.

Sales of light-duty substrates for auto were a record, up 17% year-over-year, driven by continued strong demand in North America, Europe, and China and additional platform mix. This strength was offset by continued weakness for heavy-duty products in North America and China.

Note, we expect the market for heavy-duty trucks in North America to be down 30% this year. Net income declined $3 million year-over-year, in line with our expectations. For the fourth quarter, we expect sales to be down low single digits versus Q4 last year, as weakness continues in the heavy-duty truck markets.

Let's move to Specialty Materials, where both sales and net income were ahead of our expectations. Year-over-year, Q3 sales increased 2% and net income was consistent. Compared to the second quarter, Q3 sales grew 11%, while net income was impacted by ramp-up costs associated with the launch of new products and customer mix.

With the majority of the launch spend behind us, we expect fourth quarter profitability to improve. Earlier, Wendell noted that we introduced Gorilla Glass 5 and Gorilla Glass SR+ in the third quarter. Just last week, Chinese OEM, OPPO, announced Gorilla Glass 5 on its R9s and R9s Plus smartphones.

And you can expect to see them on additional devices in the coming months. Volume growth of Gorilla Glass is expected to drive the high single-digit year-over-year sales growth we expect for the segment in the fourth quarter. In Life Sciences, Q3 sales were $214 million and met our expectations for low-single digit growth. Net income was $21 million.

And we expect Q4 sales to be up low-single digits versus last year. Now I'll cover additional items in our fourth quarter outlook. On a consolidated basis, we expect our fourth quarter gross margins to be consistent with Q3 at 43%, which is up 1 percentage point from last year's fourth quarter.

Our view reflects the higher sales we expect in Optical Communications and year-over-year cost reductions in Display. SG&A and RD&E spending should be approximately 14% and 8% of sales, respectively. And we expect other income/other expense to be a net expense of approximately $40 million.

Now we expect total gross equity earnings to be between $75 million and $85 million. This is higher than some analysts were modeling, driven by higher sales from Hemlock's solar business as customers complete their annual contract commitments. Versus last year, Hemlock's contributions to our net income is expected to be up $10 million to $15 million.

And we expect our effective tax rate for 2016 to be approximately 15% Let me close by saying that we are very pleased with the strong sequential and year-over-year growth in sales and earnings in the third quarter, and we expect similarly strong year-over-year growth in the fourth quarter.

Other than Optical Communications, all of our businesses met or exceeded expectations.

While we do not expect Optical Communications to grow quite as fast as our prior guidance for the back half of the year, we are still delighted with high single digit growth and believe that we remain well positioned to continue growing more than twice the rate of the overall telecom industry.

Stepping back, our performance demonstrates the benefits of the Strategy and Capital Allocation Framework introduced last fall. Under that framework, we expect to generate more than $26 billion through 2019. We will invest $10 billion to grow and sustain our leadership.

We also plan to distribute more than $12.5 billion to our shareholders and we will have returned $6 billion by year-end. We are focusing our portfolio to increase our probability of success, reduce the cost of innovation, and increase the barriers to entry for our competition, and we have a rich set of growth opportunities.

Overall, we feel very good about where we are. With that, let's move to Q&A.

Ann?.

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

Okay. Your first question comes from the line of Vijay Bhagavath with Deutsche Bank. Please go ahead. Vijay, your line is open. Please go ahead..

Yes, hello?.

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

Yeah, hi. Sorry, I was on mute. My apologies. So solid results here. My question honestly is on the Optical business and on hyper-scale cloud demand. Like to get your clarity on how should we model and think about cloud customer demand heading into the next quarter and also into fiscal 2017? Thanks..

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

So our guidance of being up high-single digits reflect that..

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

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

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

Well, I think that depends on what you like best, right? So, I think, definitely this is an area that's going to be a key growth driver. Is it going to be uniform and smooth? No. But then again, fiber-to-the-home also can have these projects related flows.

So, in general, we look at both as being two megatrends that are going to drive demand for our product and also where our market-access and our shares are quite strong. So I think both of those are worth paying attention to, Vijay..

Thank you. Yeah, solid results overall..

Thank you..

Your next question comes from the line of Doug Clark from Goldman Sachs. Please go ahead..

Hi. Thanks for taking my question. First one is on the glass business. You mentioned in the prepared remarks tight glass supply in the fourth quarter, but volume still being flat to down slightly.

Does that set-up for 2017 where we're in an environment where inventories are still fairly low and we could see further restocking?.

Yeah. So I think as we look out at inventories right now, we think that the value chain inventories are healthy and set makers clearly are counting on a strong Q4 retail season and they've been pulling hard on the panel makers and we've seen that, and we continue to see high glass supply.

And we think that's going to continue throughout the fourth quarter. So, if set makers are right about the retail season, we feel pretty good about how we enter into next year.

And right now, we're right at the beginning of that retail season, and so it's always the hardest time to know and be able to predict, but we're all paying very close attention to that..

Okay. That makes sense. On pricing as well, I think you talked about an additional moderation in pricing in the fourth quarter.

We've gotten the question, I'm just kind of curious on your opinions on this, has the FX environment in any way impacted your discussions over pricing, particularly into the beginning of the year? And then second question and slightly unrelated, but in the Gorilla Glass business, any impact from the Note 7 recall, knowing that that was a Gorilla Glass 5 product?.

Sure. Let me start with the answer on from a yen standpoint. Clearly, the yen from a customer standpoint does have an impact, and of course, customers always ask for lower prices when we're having discussions with them.

But I think when you think about it from an overall standpoint, the yen fluctuations can be pretty temporary, and we've seen now two quarters where the yen's been stronger and prices have been moderate. So we don't think it has a big impact.

In terms of from a Note 7 standpoint, of course, you know you never want to see a customer have an issue like that, but from an overall standpoint, we sell into the – that Note 7s into the premium handheld market, and it just depends on what people who are going to buy that buy instead.

And as long as they buy a premium phone, of course, we have very high share on the premium phones, and of course, the Note 7, even though it was a premium part of Samsung's devices, it's not the biggest handheld that they sell. So from an overall standpoint, we don't see a really big impact there..

Your next question comes from the line of Joseph Wolf from Barclays. Please go ahead..

Thank you. I wanted to follow-up on the Optical side. First, just a quick housekeeping.

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

Yes, I think the fundamental answer is yes, we're just looking at timing issues in Optical. In terms of the computer issues that we had at the beginning of the year, we clearly got back to full production at the end of the second quarter.

There's still some backlog that we're working through, but from a production standpoint, we're running full-out in that business, just as we said we were going to..

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

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

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

Okay. Fair enough. Just one last follow-up. You mentioned 5G on the Corning ONE platform.

Are cable vendors at all already looking at that for widespread Wi-Fi coverage outside of stadiums? Is that an opportunity that connects up to the fiber-to-the-home story?.

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

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

So far where we've been focusing ONE – you ask an excellent question – is in those areas where you want very intense and high bandwidth and low latency applications, so that tends to be where you bring an awful lot of users together in one area.

So that's been the focus of our development because we think if you look longer-term in wireless and longer-term at things like 5G, the critical thing to drive new applications will be that combination of high bandwidth and low latency.

Those are the apps that get exciting, and that's what's shaped our efforts in wireless to not be a me-too player, but instead set a platform that would have real legs over time.

So you're right, ultimately, you can see this type of approach spreading because it's the same conceptual framework for what you have to do to get low latency, high bandwidth systems. Whether or not cable TV will be a strong adopter here or not, I'm not so sure that I would know the answer to that..

Okay. Thank you..

Next question comes from the line of Rod Hall from JPMorgan. Please go ahead..

Yeah, good morning, guys. Thanks for the question. I wanted to – I just wanted to start with Specialty again. The guidance is about 6% below what we were expecting, and I think if I remember right, your guidance was weak last quarter as well.

And I wanted to get a feeling for whether that is a demand expectation, just overall market demand that's weak, or is there something going on with lower content? Can you just give me a little bit of more color on what's going on with Specialty and why that guidance is a little bit weak? And then I also wanted to come back to Display.

The – I think, Tony, your comments suggested that you guys are maybe being pretty cautious on guidance there. It sounds like demand was pretty good in Q3, but you're still guiding for a little bit weaker than expected Q4.

So I just wonder, are you guys less confident on demand than the retailers or the panel makers, or just give me a little bit of more color on what you're thinking on Display. I guess overall, I'm trying to get some understanding of what you guys are thinking about in-market consumer demand. Thanks..

Okay. Let's start with Display, and then we'll go to Specialty. In Display, I think, Rod, you've read us pretty well in that if we were to believe what our customers are saying and what the set makers seem to be preparing for, then our guidance may be a little conservative.

At the same time, we have a view of the full-year demand for glass that hasn't changed. So more glass was bought in quarter three than what we expected. So therefore, our arithmetic tells us that we ought to have a little bit lower in quarter four.

Which of these things ends up being right I think is hard to tell, and that's why you hear our guidance of the sort of flat to down some, and if the set makers are right, you'd expect the very strong performance we've seen in quarter three to carry forward beautifully into quarter four.

If we're right that the total glass market is what it is we think it is, then arithmetically there needs to be a correction. Whether it's in quarter four this year or quarter one in the next, that's hard for us to tell. So I think you read us pretty well.

Does that answer that question, Rod?.

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

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

Tony answered the Note 7 question with basically it's too early to tell for sure. And you can make a case, as I think you may even have, Rod, of how much glass is used on one device versus another, and that's all solid logic. It's just, there's just so much stuff that goes on in that supply chain.

Even though your logic is really sound, it's hard for us to draw a direct line once we start trying to guess which – what a consumer of a phone buys next. But your logic is sound..

Wendell, can I just get you to....

Sure..

What do you think about just broader in-market demand in smartphones? Do you think that it's a little bit weaker than you would have anticipated, or sort of in-line with what you think? I'm just curious what you think there..

I think it's when you ask me when, right? So I think overall, if you had asked me at the beginning of the year, I probably would have been a little more bullish on demand.

And now we pretty much look at this market over time as being pretty darn mature, right? And so, the secret for us to double our revenues here has got to be innovations that drive up our price point and make it possible to use the glass in new ways on the phone.

So if we can double the amount of glass usage on a phone because we've improved drop so much, that can allow us to keep growing our revenues, despite what we see is a pretty mature mobile market.

Does that answer your question, Rod?.

Yeah, it does. Thank you very much, Wendell. Thanks, guys..

Your next question comes from the line of Patrick Newton from Stifel. Please go ahead..

Yeah, good morning, Wendell and Tony. Thank you for taking my questions. I wanted to switch gears and talk a little bit about automotive. You had some commentary around autonomous vehicles driving interior demand in your prepared remarks.

So I'm curious if this is a shift away from a focus on windows to interiors, or is this purely additive to the story? And then from a targeted timeframe of the $1 billion in automotive by 2020, is that still the right revenue level and the right timeframe?.

I'll do the first one and I'll let Tony do the second. If Tony is foolish enough to predict revenues in a brand-new innovation, we'll let him do that as CFO. So it is truly additive.

When we launched our first automotive work a number of years ago and as friends of ours pulled us in to try to disrupt the automotive industry, really it was both aspects, both the exterior glazing as well as car interiors.

And all you're seeing now is a lot of excitement is getting built up around the interiors and that – you're just hearing a lot more buzz about what we're doing there. But both remain really important. Both can be similar size markets, and so we're really aggressively pursuing both of them. I think in both areas, you'll see us break through.

We'll get revenues in both areas, right, and are already experiencing that. How big it will be, that we just don't know yet. We just don't know, unless Tony wants to make a guess.

Tony?.

I do not..

All right. So I guess shifting gears, Tony, you spoke to some one-time Hemlock buys possibly impacting 4Q. We have some noise surrounding kind of the Dow Corning transaction.

So can you help us understand what a more normalized equity earnings line should look like in 2017? And is roughly $80 million annually plus or minus the right way to think about 2017 equity earnings potential?.

Yeah, I mean, we're not giving guidance on 2017, but I think in general, that's right. What you have to remember about Hemlock is is that a lot of their volume is under contract and so the cycles of – the timing will depend on when the customers meet those contracts.

And historically, if you go back over the last four or five years, that's been primarily in the fourth quarter. Sometimes it moves to the third quarter a little bit and the like, but in general, it's in the fourth quarter. And so I think somewhere in the $80 million to $100 million range is right..

Great.

And then just on the Optical Communications side and the hyper-scale commentary, is there anything – I guess just given that every check seems to be pointing to a very hot market in general, but still understanding lumpiness, is there anything in particular you can point to? Is there ongoing shifts from 40G to 100G at main customers? Are you seeing constraints elsewhere in the supply chain that maybe are preventing you from generating better growth, or is there any comment you can make on AFOP? Was the slowdown more pervasive with that acquisition?.

No, I think that right now, we've got a signal-to-noise sort of issue. There's nothing we've seen so far that's telling us that the signal ought to be fundamentally different than the sort of logic that you've laid out. We think the same things. We think there's a good amount of noise level around that signal.

Timing, different architectures being tried in one place versus another, what does their supply chain inventory look like? Did they buy our product perhaps before they buy storage product, right? That there's all these things that I'm not so sure yet that we are able to look forward and say, let me deconvolve all that noise; this is what's going to happen.

I think we'll get better at it as the business continues to scale, and as we get better at it, we'll give you better tools to understand it. But there's nothing we're seeing right now that takes us off your fundamental logic. We'll keep working to get better sensing capabilities.

That make sense?.

Yeah, but in – is AFOP any different or are any one of your more recent acquisitions?.

No..

No? All right..

No, no..

Thank you for taking my questions. Good luck..

Your next question comes from the line of Steven Fox from Cross Research. Please go ahead..

Thanks. Good morning. On the Gorilla Glass mix, I think you mentioned that Gorilla Glass 5 is off to a really good start. I think in the last few months you've talked about Gorilla Glass 4 becoming the largest percentage of the unit sales.

So I was wondering if you could sort of reset where that mix is today and how it plays out net with the Gorilla Glass 5 ramping? And then I had a follow-up..

Well, I think Gorilla Glass 4 is still the largest part of what we ship and our Gorilla Glass 5 is just starting. It's had a more successful launch than we had of Gorilla Glass 4, and we're on some devices, you know, I had mentioned one that we announced last week, and there'll be more coming up in this quarter.

So I think as time goes on, you're going to continue to see that Gorilla Glass 5 is going to become a bigger part of the mix. And then from a pricing standpoint, that's good, from a profitability standpoint, that's good..

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

I just think it's too early to tell. There is that potential because it's a very unique product that's really competitively advantaged. So that's possible. I think that's possible. And – but it's just a little early for us to tell. Let's get another quarter underneath our belt. It's only – we've only had it out there for a few months.

Give us a few more months, and then hit us with the question again, okay, Steve?.

That's fair. And then just lastly, another Gorilla Glass question just in terms of increasing your content or actually doubling your content per device.

Can you sort of give us some road marks in terms of where you're at now? Did you actually see some significant progress in this this quarter, or would we think of that slope maybe picking up next quarter or quarter after? Any help there would be appreciated..

So I think the two areas to think about doubling our overall revenue in this space is introducing higher price point products that perform better, and you saw us in this last quarter introduce two of them, right? And then – and take-up on GG 5s made us feel good, and that's definitely going to help.

The other piece is increasing the amount of glass utilized both in – on phones as well as other apps like wearables, and those performance improvements that we've announced on GG 5 that previously on GG4 certainly have shifted the design conversation towards a desire to use all-glass enclosures or to use more glass per enclosure.

It's too early to tell how those design conversations turn into product sets. And – but it's without doubt our improving performance is enabling designers to think about the product in a different way. Just think about it this way.

If you think it's likely the material is going to break if it's dropped on asphalt, then you probably aren't going to double the amount of that material and put it on both fronts and backs.

If you think it is unlikely that that happens, and GG 5 certainly makes it less likely, right, and other products we're working on will make it less likely still, then that opens up the potential to consider that type of design choice. But still too early to bank it.

It's our strategic desire; we're making progress, but way too early to declare victory. Okay..

No, that's very helpful. Appreciate the color. Thanks, again..

Your next question comes from the line of Stanley Kovler from Citi Research. Please go ahead..

Hi. Good morning. Thanks for taking the question. I just have one question on the Environmental business and then a follow-up on Display.

So on Environmental, as we look out into 2017 and we have the European regulation that's driving the gas particulate filter opportunity, do you see that as more of a second half opportunity, given that the timing of the regulation kicks in, in the latter half of the year? Or should we expect a build-up in the first half as well as product launches get going?.

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

Thanks.

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

I'm not so sure it would really change what we would think about from a retail demand standpoint. But it certainly would have a difference relative to cycling and when people would start building for various retail peak seasons, including the fourth quarter season. So, yeah, I think we're not here to talk about 2017.

But I think when we do talk about 2017 and we look at the cycle in 2017, it's likely to be a little bit different than what we've seen in the past, for that reason..

Yeah. And Stan, I think that's a really, I haven't thought about it quite that way. I think that's a good question.

And I think you're right to bring up the, to the extent that people do the P-OLED by adding new panel capacity then that doesn't impact any of the dialog to the extent that they take out existing panel capacity, then to put in place the new capacity. Your question could impact the behavior at that micro level. So let us think a little more about that.

As we step back and think about P-OLED overall, as you've heard us speak before, we look at this as a net positive for us on volume because our share is so high on P-OLED relative to the LTPS product that it is replacing.

On the dynamic that you're discussing, if we had a customer where we have an above-average market share that takes out capacity, then that could impact us for a temporary time period until the whole thing rebalances for about one or two share points.

Similarly, if we have a customer that has below our average market share and they take out capacity, we can see a gain that would be temporary for a while until the whole industry rebalances.

But how that whole dynamic works its way through, I think we've got to do a little bit better job explaining, and we'll do that as we get a little closer to next year, Stan..

I appreciate it. And if I could just quickly follow up on the OLED opportunity for next year.

For some of the product cycles on potential new products that will have OLED, and you referenced your high share, when do the lead time start for you to actually build and get revenue for potential second-half product cycles next year on the P-OLED opportunity referenced? Thank you..

So we'll start pretty early, Stan. But I think what's really important to keep in mind is the total glass demand for P-OLED is going to be like 1% of the overall glass market for the next couple of years. So we agree it's exciting tack. That's why we've been investigating in it for four or five years and that's why our share position is really strong.

But as far as seeing it in our financials, I don't think you're going to see it, buddy.

That make sense? You still there?.

Appreciate it. Thank you..

Okay..

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

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

Hey. Thanks a lot guys for squeezing me in. I guess I wanted to go back to the Optical business and your comments about hyper-scale customers. I guess my impression on your Optical business is that the dominant variable there is really your ability to ramp up and create additional capacity and supply.

And so I'm a bit confused about the comments about the hyper-scale customers causing a little bit more, I guess, softer trends there. I would assume that given how supply constrained you've been, that extra supply would have been sopped up somewhere else.

Any thoughts on that?.

So, I think from an overall standpoint as we looked into going into the quarter, we expected a certain amount to actually go to those hyper-scale customers.

And basically what happened is that those customers ordered less than what we had originally projected, and although a lot of our capacity is fungible, on a very micro level, there wasn't someplace else we could move some of that capacity to..

So in macro, you're right. In micro, if you expect to sell a product and you make it, then you've used that capacity. So but in macro, you're right. Over the fullness of time, we are net capacity constrained here, which is why we're adding capacity.

So over the sweep of time, it will all turn into revenue, but it's really important to make the right thing that will particular quarter come out..

Great. Thank you..

Great. Okay. That's the end of our questions.

Wendell, you have some closing comments?.

Let me just close out the call by emphasizing we're really pleased with our progress on our framework since we announced it a year ago. We've gained traction with our customers on our growth initiatives. We have a long way to go, but we're making progress.

We realigned our interest in Dow Corning and we returned approximately $6 billion to shareholders by year-end is what we anticipate to do. We are also creating significant value for our shareholders along the way. Thanks, everyone, for listening.

We look forward to updating you on our framework progress and results throughout the rest of the quarter and year..

Thank you, Wendell, and thank you, all for joining us today. Wanted to let everyone know that we will be meeting with investors at the Credit Suisse Conference in Scottsdale in late November. Let us know if you're going to be there. Also, the web replay of today's call will be available on our website for one year starting later this morning.

And at 11:00 a.m. today, you will be able to access the telephonic playback by dialing 800-475-6701, access code 403563. The telephone replay will be available until 5:00 p.m. on Wednesday, November 8. Operator, that concludes our call. Please disconnect all lines..

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