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

Thank you and good morning. Welcome to Corning’s quarter two 2019 earnings call. With me today are Wendell Weeks, Chairman and Chief Executive Officer; Tony Tripeny, 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 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. 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 and we encourage you to follow along.

They are also available on our website for downloading. And now, I’ll turn the call over to Wendell..

Thank you, Ann, and good morning, everyone. This morning we reported excellent results that keep us on track for growth in 2019 and beyond. Our performance demonstrates the strength of Corning’s portfolio and our ability to deliver for shareholders in a mixed macro-environment. Looking at the second quarter, sales were $3 billion, up 8% year-over-year.

Net income of $410 million, grew faster than sales at 14% year-over-year, driven by operating margin expansion. And EPS was $0.45, up 18% year-over-year. Segment sales growth rates ranged from the mid-single-digits to mid-teens. And we grew earnings in all segments.

Highlights from the quarter include optical communications met expectations delivering high-single-digit sales growth, driven by data center and fiber demand.

Environmental technologies delivered 15% year-over-year sales growth, driven by the accelerating adoption of our gasoline particulate filters and continued strong demand in the North American heavy duty market. Life Sciences sales were up 6% year-over-year, with net income growing much faster than sales, up 29% year-over-year.

Specialty Materials sales were up 8% year-over-year on the strength of Gorilla Glass and our other innovations. Display continues to deliver stable returns with second quarter sales and net income up significantly year-over-year and better than expected pricing.

Our performance stems from the successful execution of our four-year Strategy and Capital Allocation Framework introduced in October of 2015. Under the Framework, we targeted returning more than $12.5 billion to our shareholders through repurchases and dividends, while investing $10 billion to extend our leadership and deliver growth.

We surpassed our 4-year goal of $12.5 billion by returning more than $300 million to shareholders during the second quarter. And we’re seeing the benefit of our investments in our first-half year-over-year performance and in our expectations for the second half of 2019.

Of course, as you’ve all seen this earnings season, many companies are facing uncertainty and macroeconomic headwinds. And we’re not immune to economic downturns or trade disputes or other geopolitical upsets, but we are more resilient than at any other time in our history.

Across the company, while the end markets we serve are experiencing downward growth revisions and many of our competitors are not growing at all, we continue to outpace the markets. In the auto market, global auto production is down, but we expect sales growth in our environmental business to be in the low-teens this year.

Retail television sell-through forecast are declining in units, but we expect display volume and sales growth this year. Smartphone unit sales are also forecasted to be down, but we are growing Gorilla Glass sales this year as well.

In Life Sciences, the industry is relatively immune to economic headwinds, so it is growing in its typical low-single-digit rate, but we expect mid-single-digit growth of our Life Sciences business this year. And finally, in Optical Communications, we now expect the passive optical market to be down.

Earlier in the year, we projected the market to be up 5% and for our sales to grow in the low-teens. We now expect the market to be down mid- to high-single-digits and for our sales to grow low- to mid-single-digits. While the growth is lower than previously expected, it is still very positive relative to the market.

You’ll hear more details from Tony on the current dynamics. So, the good news is, even in this environment, we are growing. And when markets improve, we’ll grow even more. We are confident in our long-term growth prospects. The successful execution of our Strategy and Capital Allocation Framework adds to our confidence.

We face challenges along our path to growth throughout our 2016 to 2019 plan. But we addressed those challenges, and met or exceeded all our goals. In so doing, we created a bigger stronger company and we created a strong foundation for significant additional growth. Our new Strategy & Growth Framework sets our leadership priorities for 2020 to 2023.

It’s our original Framework evolved for a new growth era. We will continue to focus our portfolio and utilize our financial strength. We plan to return $8 billion to $10 billion to shareholders, and to invest $10 billion to $12 billion in growth and extending our leadership.

We expect a sales compound annual growth rate of 6% to 8% and an EPS compound annual growth rate of 12% to 15%, an annual dividend per share growth of at least 10%. Our capabilities are becoming increasingly vital and multiple trends are driving growth across multiple businesses and in multiple geographies.

In optical communications, we are on track to deliver growth twice as fast as the passive optical market, driven by opportunities in 5G and next gen hyperscale. Recently, CenturyLink announced that it is using Corning fiber to build the largest ultra-low-loss fiber network in North America.

They’re connecting more than 50 major cities throughout the U.S. and will soon expand into parts of Europe as well, creating a 4.7 million mile fiber network. In the second half, we’re going to be introducing next generation solutions that enable 5G and access networks to be installed faster and reduce the total cost of ownership.

While pauses may occur as network operators transition between projects, photons replacing electrons in network after network provides a strong upward trajectory over longer periods. In Mobile Consumer Electronics, we are well on our way to doubling sales, despite a maturing smartphone market.

As the world leader in glass for smartphones, tablets and emerging categories like wearables and augmented reality devices, we expect to continue capturing more value per device. Gorilla Glass has now been featured on 7 billion devices worldwide and adoption of Gorilla Glass 6 is expanding.

We continue to innovate in new categories and expect further adoption of new products in the second half. Turning to the automotive market, we expect to double sales by 2023, driven by gas particulate filter adoption and our new Auto Glass Solutions business. As I already noted, many companies in the auto industry are dropping expectations.

We’re generating double-digit growth and ramping new capacity. In one new plant, we’re now producing large parts to serve the growing pipeline of projects awarded to our Automotive Glass Solutions business.

In another, we’re capturing accelerating demand for gasoline particulate filters and not only are we making great progress building a $500 million GPF business, we’re growing faster than we expected. We now expect GPF sales to exceed $200 million for the full year.

Our market leadership for this new technology was publicly recognized by two customers in the first half of 2019. We received the Daimler Supplier Award in March. And just recently we also won the Volkswagen Group Award.

We were 1 of just 8 suppliers honored in the Global Performance Champion category, chosen from Volkswagen’s global network of 40,000 suppliers. Turning to Life Sciences Vessels, we aim to outpace the industry by more than 2 times.

We’ve recently increased manufacturing capacity for several key products used in cell and gene therapy development and production. Our growth is also supported by the increasing need for safety and quality in the packaging of injectable drugs.

On this front, we continue to make strong progress on the path to a new long-term multibillion dollar franchise with Valor Glass. In Display, our goal is to stabilize returns and we are successfully delivering. The growth driver for display glass is large size TVs, which are most efficiently produced by our customers on Gen 10.5 fabs.

We continued our leadership in quarter two, with the announcement of two new Gen 10.5 plants. Corning now has 3 of the planned 4 Gen 10.5 facilities in the world. And we are thrilled about pricing. Third quarter glass prices are expected to remain consistent with quarter two.

Yes, you heard me correctly, third quarter prices should be approximately flat to quarter two. As a result of the glass pricing through three quarters, we now expect full-year glass prices to only decline in the low- to mid-single-digit range.

Across our markets, our relationships with industry-leading customers are creating new opportunities for collaboration and our strategic investments are paying off. We’re capturing opportunities and generating significant top and bottom line growth in multiple businesses.

I look forward to sharing our progress against our new objectives over the next 4 years. Now, let me turn the call over to Tony for more details..

Thank you, Wendell, and good morning. We had another excellent quarter. Year-over-year, we grew sales 8%, net income 14%, and earnings per share 18% with sales and earnings growth in every business segment. And we did this all while continuing to invest for a long-term growth.

Before I get into the details of our performance and results, I want to note that the largest difference between our GAAP and core results are a non-cash, mark-to-market adjustment for our currency hedge contracts, and a change in our tax reserves.

With respect to mark-to-market adjustments, GAAP accounting requires earning translations hedge contracts and foreign debt setting in future period to be mark-to-market and recorded a current value at the end of each quarter, even though these contracts will not be settled in the current quarter. For us this reduced GAAP earnings in Q2.

To be clear, this mark-to-market accounting has no impact on our cash flow. Our currency hedges protect us economically from foreign exchange rate fluctuations and provide higher certainty for our earnings and cash flow, our ability to invest for growth and our future shareholder distributions.

Our non-GAAP or core results provide additional transparency into operations by using a constant currency rate aligned with the economics of our underlying transactions. We are 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 second quarter, sales were up 8% year-over-year to $3 billion. Net income rose 14% to $410 million and EPS was $0.45, up 18%.

Our strong growth results from our technology and manufacturing leadership. We are benefiting from recent investments, including capacity expansions for optical fiber and cable, Gen 10.5 display glass, gasoline particulate filters and multiple development projects such as advanced glass for mobile devices and automotive.

We are very pleased with how these investments are playing out, and we are continuing to invest. We are bringing new plants online this year, creating capacity for committed demand and driving additional sales growth in 2019 and beyond.

Capital spending in Q2 totaled $570 million and we expect to spend just over $2 billion in 2019 with programs in every market access platform. Now let’s look at the detailed segment results and outlook. In Display Technology, our goal is to stabilize returns and we had a very strong quarter.

Second quarter sales were $848 million, up 9% year-over-year and net income was up 11% year-over-year. Second quarter sequential glass price declines were moderate and even better than we expected. As Wendell said, we expect third quarter glass prices to be approximately flat to Q2.

As a result of the glass pricing through three quarters, we now expect full year glass prices to decline in the low- to mid-single digits versus our prior guidance of mid-single-digits. Now three factors drive our view that this favorable pricing environment will continue. First, we expect glass supply to continue to be balanced demand or even tight.

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. Absolute glass prices must support acceptable returns on those investments.

For Corning, we will only add capacity if we can get an attractive return for our shareholders. In the second quarter, the display glass market volume grew mid-single digits year-over-year and our volume grew faster as expected due to the ramp of our Gen 10.5 plant.

Now, while end-market demand is meeting our expectations, as you’ve been hearing recently some panel makers have lowered their utilization. Therefore, for the third quarter of 2019, we expect to display glass market volume to be roughly consistent year-over-year, and to decrease by a low-single digit percentage sequentially.

However, our volume is expected to be up year-over-year again due to the Gen 10.5 ramp and decreased low-single digit sequentially in line with the market. For the full year, despite this anticipated weaker third quarter, we continue to expect to outperform the market by delivering volume growth in the high-single digits driven by Gen 10.5.

In summary, we remain very pleased with the current pricing dynamics in our display business and our ability to capture Gen 10.5 glass growth to deliver stable returns. Let’s move to Optical Communications, in the second quarter sales were $1.1 billion, up 2% sequentially and 7% year-over-year.

Net income of $158 million, grew 11% sequentially and 5% year-over-year. Growth was driven by multi-year data center projects, fiber sales and the addition of sales from our 3M Communication Markets Division acquisition. Now in spite of our strong first half, we are reducing our expectations for the year.

We entered 2019 projecting the global passive optical market to increase by more than 5% and our sales to grow in the low-teens. We now believe that the global market will be down mid- to high- single digits and that our sales will be up in the low- to mid-single digits. We see the weakness primarily in the carrier market.

Since the last earnings call, several large build projects we projected for the second half of the year have been pushed out, and multiple carriers have reduced CapEx for the remainder of the year.

We see delays in Fiber-to-the-Home builds that several Tier 2 carriers, slower deployment at North America cable operators, and fiber densification for next generation wireless has not yet gained momentum outside the early leaders.

Also, we have further reduced our expectations for the 2019 China market and are now seeing related weakness in India and Southeast Asia. The delay in China Mobile’s tender announced earlier this year resulted in surplus inventory, which is currently being absorbed in these regions.

Now we continue to execute well against factors in our control and our growth remains significantly above the market. For the third quarter, we expect sales to be consistent sequentially and down low-single digit versus an exceptional third quarter in 2018.

Environmental Technology second quarter sales were $366 million, up 15% year-over-year and ahead of expectations, driven by ramping GPF sales and continued strong demand in North America heavy-duty market. Net income grew 20%. We are well on our way to building a $500 million gasoline particulate filter business.

European regulations are in full effect and automakers in China are preparing for full China 6 implementation in 2020. The market is developing faster than we planned and we’re winning more platforms than we anticipated.

We sustained our majority position of awarded platforms to date with additional wins particularly as OEMs prepare for China 6 implementation. As a result, we now expect GPF sales to exceed $200 million in 2019, and to grow robustly thereafter.

Based on our accelerating demand, we now expect full year sales to be up by a low-teens percentage versus our prior expectation of 10%. We also expect third quarter sales to be up by a low-teens percent year-over-year.

In Specialty Materials, second quarter sales were $369 million, up 8% year-over-year and driven by continued strong demand for the company’s portfolio of mobile consumer electronics glass solutions. Net income was up 5%. For the third quarter, we expect sales to be up approximately 25% sequentially and consistent year-over-year.

We continue to expect full year growth again in 2019 despite a maturing smartphone market, exactly how much will depend on the adoption rate of our innovations. Our results and outlook demonstrate the value of our premium glasses and the strength of our innovation portfolio.

In Life Sciences, second quarter sales were $260 million, up 6% year-over-year. Net income was up 29% year-over-year, manufacturing performance and operating leverage were outstanding. For both the third quarter and the year, we expect sales to be at mid-single digit year-over-year.

In summary, we had an excellent second quarter with strong performance across the company. The benefits of our recent investments are contributing to results. All of our businesses have solid momentum relative to their markets and we are on track for sales growth for full year 2019.

Now let’s move to the consolidated income statement, second quarter gross margin was 40.1%, a slight increase from the first quarter. As I described last quarter, we are continuing to invest, while we build startup, ramp and optimize new facilities associated cost offset some of the normal leverage on our gross margin line.

For the second half of 2019, we expect gross margin to be slightly better than the first half. This is less than we thought in April because of lower-than-expected sales in optical as well as higher-than-expected cost in display.

In our Gen 10.5 facility, we are bringing up new technology, ramping volume and improving our cost, just not as quickly as we expected. We are excited about our Gen 10.5 projects, because they enable us to capture the majority of the market growth and will ultimately provide a step change in glass manufacturing.

From an operating margin standpoint, we expect the second half to expand over the first half. Moving to additional outlook details, we expect other income, other expense to be approximately $250 million for the full year.

Full year gross equity earnings are expected to be approximately $210 million predominantly from Hemlock Semiconductor with the third quarter at approximately $20 million to $25 million versus second quarter 2019 gross equity earnings of $28 million. And we expect our effective tax rate for 2019 to be approximately 20% consistent with Q2.

In closing, we had an excellent first half with sales and NPAT growth in every one of our businesses. As we discussed, most companies are facing uncertainty and macroeconomic headwinds right now.

We feel these headwinds as well, but our solid execution that gets the factors within our control is evident in our strong first half, and makes us confident in our ability to grow every business for the full year. Now, we are not immune to challenges, but we are more resilient than ever.

Our portfolio and emphasis on capturing technology substitutions enable us to outpace the markets we serve. As conditions improve our growth will accelerate. Our confidence is reflected in the long-term growth targets we’ve laid out in our 2020 to 2023 Strategy & Growth Framework. There are exciting opportunities across our market access platforms.

We are becoming increasingly relevant to the trends fueling those markets, and that allows us to capture more opportunities in products and categories, where we are already the leaders. I look forward to sharing progress on our Framework in the months and years ahead. With that, let’s move to Q&A.

Ann?.

Thanks, Tony. Okay, Greg, we’re ready for our first question..

Thank you. [Operator Instructions] Your first question comes from the line of Wamsi Mohan from Bank of America. Please go ahead..

Yes, thank you. Good morning. Tony, can you bridge the gross margins in 2019 versus 2018 in the second half and actually even operating margins if you could? It will be helpful if you can isolate the impact of the mix of the faster growth businesses, which might be a little bit lower margin versus the incremental impact that you’re talking in Display.

And can you just square the trends of improving glass price to the deteriorating sort of gross margin optics here in the year in the second half? Thank you..

Sure, Wamsi. I think the big change statement here is that we had expected gross margin to go to 41% to 42% in the back-half. And now we’re looking at it to be slightly better than the first half. And it’s really there are two drivers on this. I mean, the first is what’s happening in the Optical Communications sales.

This is all driven in the carrier market, where we’ve gone from low teens sales at the beginning of the year to low- to mid-single-digits. There is incremental profitability on these sales are high, given that we have all the fixed cost infrastructure in place. So we see margin compression for COC in the company as those sales don’t occur.

And then the second area is the higher-than-expected cost in Display. And that is really driving – is really being driven by, as we bring up our new technology and ramping volume and improving our cost in Gen 10.5, it’s just not happening as quickly as we expected. So that is the big change statement over what we had expected a quarter ago.

In terms of operating margin, we did expand operating margin in the first half of the year versus last year. And we expect to expand operating margin in the second half of the year. And so, from our standpoint, as we’ve discussed, that’s the most important of the metrics, because of the operating leverage that we get as we grow sales..

Thanks, Tony..

You next question comes from the line of Mehdi Hosseini from SIG. Please go ahead..

Yes, just a quick follow up, Tony.

Free cash flow has been negative for two consecutive quarters, with gross and operating margin in the second half is slightly better than the first half, how do you see free cash flow trending?.

So, Mehdi, I mean, keep in mind that the normal operating cash flow pattern for us is to generate most of our operating cash flow in the back-half. And that is, because in the first half, we have working capital growth to support our increased sales.

And we also have some significant annual payments that occur in the first half related to compensation, tax payments and legal settlements. And that’s exactly what’s happened this year. I mean, our operating cash flow for the first half is about $150 million. And included in that is the build and working capital of about $500 million.

Now, that’s a couple of hundred million dollars maybe more than what you would normally expect, which is mostly in inventory. And the reason for that is that we have significant new products like GPF, Gen 10.5, some of our new innovations in Specialty Materials.

It’s also a little bit higher than you’d expect, because we thought at the beginning of the year Optical Communications would be a little bit stronger in terms of sales. And now it’s a little bit less than that. But we expect that inventory to correct itself in the second half.

And we expect just like in most years or in all years, will generate more operating cash flow in the back-half. So I think we’re confident that we will end up with free cash flow for the year. And this is just the normal cycle that we have..

Sure. And just one quick follow on Optical. I’m a little bit confused and would appreciate any high level color. On the handset side, there’s increased optimism that the 5G phone is going to be available especially with the carriers investing in for millimeter wave. And you’re down ticking especially with densification of additional sales capacity.

These trends are kind of contrary and I’m just having a hard time reconciling. So any color or additional clarification here would be great..

Great. So, Mehdi, I think you’re actually right on top of that. And it’s just those two things that you need to understand around, when we think about our demand cycle. First is the one that you’re highlighting, which is architecturally which solutions win and what our folks choosing. And then, second is, how quickly do our customers put it in.

So you’re right, sort of all lights are flashing green. And that we’re right with the point of view we laid out over 2 years ago, that 5G is going to equal significant network densification, which in turn means classification, which means more demand for our innovations. And you’re right; all you tend to be hearing is confirmatory data on that topic.

So that’s what we’re hearing as well. So we are increasingly confident of our long-term projections, of which architecture wins for 5G. And that’s a bullish signal for us. Now, then, the next piece has to happen.

These are significant capital projects and our customers need to get themselves organized, make the decision, and then begin to make those investments. Now, in that, timing can be difficult to call. And what we’re seeing right now is that people are waiting a little bit, there is sort of a little gap between projects.

Other than the sort of a real leaders in 5G, they’re putting their plans together, getting their financing house in order and getting their alliances in place, that then we would expect the demand that you’re pointing to, to occur.

Does that make sense to you?.

Yes.

But, what you’re saying, are these trends coming together, is it like a 12-month timeframe? Or does that require more than 12 months?.

No, it’s really so customer specific and announcement specific that it’s hard to like name an exact time period. We had thought, coming into the year, there was going to be at least one other major player that came on strong, on the 5G densification piece. They altered their business model slightly and changed their timing slightly.

So I think that, what we’re trying to do is be right on the architecture and the long-term demand cycle, and then be able to support our customers as they gear up. The good news here is this isn’t going to be subtle, as our customers announce and decide they’re going to roll. And how they’re going to roll in 5G, they’ll talk about it.

All the different cities that they are going to go to, we’ll talk about it. And in a way, you’ll see the normal cycle of the announcement piece getting a little bit ahead of demand, and then demand will follow, and will have a hard time keeping up..

Great. Thanks so much for the color. I appreciate it..

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

Thanks. Good morning. I was wondering if you could provide a little bit more perspective on the change in the 10.5 G ramp that you mentioned. You’re still looking for, it sounds like about the same growth in your own units overall.

TV demand is obviously weaker, but how does this change in terms of the new projects you’re bringing on versus the existing plant you’re operating, et cetera? Any help there would be appreciated..

So, Tony, will make some comments on how – the relative strength of the large sized TV market in a moment, which I think a really interesting data point. But at the core of what’s happening to us from Gen 10.5, it’s not really a ramp issue of significance, right? You have the normal sort of how high our customer utilization is at a given month.

But what’s really driving our dynamics is we’re meeting all those requirements and we’re really bullish on Gen 10.5’s ability to be the powerhouse of large size TVs. All that’s happening to us is how quickly our yields are improving. That’s all that’s going on here, right? So there’s nothing deep.

This is just a matter of us making our technology yield at the rate at which we would like it yield to be able to put more profit in the hands of our shareholders. So Tony, maybe you want to talk about television..

Yeah, Steve. Yeah, I would just add in terms of the TV market, sell-through is actually tracking slightly ahead of our expectations through April. As you know, it takes a couple of months for all the data to come in, but the most important piece of that is what’s happening on large-size TVs.

Sell-through for 65-inch TVs have grown almost 40% and for 75-inch TVs they’ve grown almost 60%. And of course, that’s the TVs that are really are optimized in the Gen 10.5 and it’s really what is driving these Gen 10.5 investments, where we have ended up going to have three out of the four announced Gen 10.5 factories.

So we feel really good about that. And so from an overall standpoint, while there’s some of – a little bit of a panel maker utilization slowdown in the third quarter. We expect for the full year our volume to be up high-single-digits well ahead of the market because of Gen 10.5..

That’s helpful. And then just a quick follow-up, when you think about the Gen 8 and below market for you guys. Is there a functionality here where you’re taking more tanks offline given what’s going on at the customers and as pricing trends similarly as strong as you’re seeing overall? Thank you..

So our pricing trends. Yes, it’s very strong, right. We feel really good about that. And then what you will see from us is that will continue to account for our increasing yield and productivity out of our technologies by adjusting the overall capacity and roots that we have to support it.

So that’s really the dynamic more than anything else, we feel really good about the market, we feel really good about price, right. And we feel really good about our ability to service our increasing share of that market with our technology.

And we’ll just adjust by taking sort of the older generations of tech offline or repurposing it for other markets. So that long-term trends you’re on, Steve, I think is just continues. And all we got to do is get our yields up a little faster, and then that would match beautifully to our plan..

Great. That’s very helpful. Thank you..

Your next question comes from the line of Rod Hall from Goldman Sachs. Please go ahead..

Hi, guys. Thanks for the question.

I guess, I wanted to come back to this flat glass pricing indication window, and see if you could comment on what is kind of driving that? It seems like maybe it’s a mix towards Gen 10.5? So I wonder, if you’d comment on whether that’s helping pricing? Or is it the below Gen 10.5 pricing dynamic is driving that? And then the other thing I wanted to ask about is, Tony, I know you mentioned working capital on the cash flow, but I also see a larger drag in other cash flow.

And I wondered if that is related to some of the tax deferrals? What exactly is going on there’s a non-cash adjustment to income? Thanks..

Sure. Let me first take the pricing one, as Wendell said, this clearly is across the market including below Gen 10.5 and particularly below Gen 10.5. And I think the reasons are pretty straightforward, I mean, first, we expect glass supply demand to continue to be balanced and even tight.

Second, our competitors continue to face profitability challenges at current pricing levels. And third, our display glass manufacturing requires periodic investments to maintain operations, and so absolute glass pricing must support acceptable returns on those investments.

So that’s consistent what we’ve been saying for a number of years and we continue to see improvement in the pricing environment. And as Wendell said, we’re very thrilled by the pricing environment, what happened in Q2 and the continuation into Q3..

If you – Tony, if you expand on that, can pricing actually go up at some point?.

Rod, you’re now really right in the center of this debate that I’ve been really open about between myself and my operators, where I think the wisest thing to do from an investment theory is to count on our Display business aging gracefully, right.

A number of our operators creating leadership of those businesses believe that they can actually make display grow in net income. Their recent performance would tend to be data on their side. And therefore, your question is fair. They have not put together enough consecutive quarters yet though for me to change my investment thesis.

Does that make sense, Rod?.

Yeah. Thanks, Wendell..

And then, Rod, in terms of the operating cash flow, the comparison on the other, I think, last year we had a couple of payments that occurred in the first quarter that were nonrecurring – a couple of receipts that occurred in the first quarter that were nonrecurring, some of them related to the incentives in the factories that we’ve been building and others related to the indemnification asset with our CPM transaction of a number of years ago.

And so that’s the reason why it’s a different number this year than last year..

Okay. Thank you, Tony..

Your next question comes from the line of James Faucette from Morgan Stanley. Please go ahead..

Great. Thank you. I just wanted to ask about, I think, one of the concerns that investors have right now is probably around visibility into end markets back through the supply chain to what you’re supplying? And in particular, I think, the narrative on larger display size as well as in the optical business makes sense.

But I’m wondering, if you can talk a little bit about things that you are doing or can do to further improve your visibility and are you able to see changes in demand trajectory first? My second follow-up question is, at the Analyst Day last month you gave a pretty upbeat assessment of the opportunities in both Valor Glass and automotive opportunities.

Just wondering, if there’s been any additional data points you can contribute to those new products. Thank you very much..

So I think on – let’s do the value chain first, and then I’ll try to tie in the other piece. So for us, it’s a little like the walk through that I just did on optical. We’ve got two levels that we try to align. The first is the long-term technology substitution curves for our innovations.

And as you remember from the Investor Day, the core of our growth story is a content story, which is what we expect over the coming four years is more and more of our innovations to be adopted into the products that people buy.

And then that is our primary growth driver as opposed to how much of everything everybody buys or what type of economy do, we face. We continue to get nothing, but positive signals on those items whether it’s an optical or in the areas that you just named, automotive.

So here we are in a time period when you see declining forecasts of overall automotive sales and production, but we’re projecting growth in the teens, because of more and more of our content. Similar things we would expect to happen in the Valor story.

We once again tend to have confirmatory evidence that we’re on the right side of that substitution curve. Optical, very much the same as you heard in my answer. And in Specialty Materials, our Mobile Consumer Electronics business, also much the same. So that’s the first level, we feel pretty good about that.

The next then comes to how does the timing of that substitution curve play out and how does that interact with overall demand for our customers. Now that you can get a little more noise in, in the near-term, and we’re certainly experiencing some of that.

So then we have folks like Jeff Evenson, who’s here in the row as well as pretty significant analytical groups to try to start right at the end market and then work the way – all the way back to the value chain and build models and the right analytic tools to keep track of it.

We don’t always get it exactly right, but we feel pretty good that we are able to track record demand signals through the system..

Thanks a lot..

Your next question comes from the line of Samik Chatterjee from JPMorgan. Please go ahead..

Hi, good morning. Thanks for taking the question. Just wanted to start off with gross margins, and if I get the guidance right here, you probably imply more of 100 basis points decline in gross margin year-over-year for the full year. As we look at kind of the recovery of that 100 basis points and maybe coming back in line with 2018.

Is it more contingent on some of the macro headwinds dissipating? Or are you looking at some cost actions that might help you kind of exit that recovery back of that 100 basis points? And secondly just to follow-up, second question on display side, I just wanted to see given that you have an outsized share of the Gen 10.5 plants market share there.

Is – can you give us a sense of your market share in display today? And what it will be once all the plants are online? Thank you..

So let me talk about our gross margin, clearly, what’s most important to us in the way that we really think about our profitability is what’s happening on the operating margin line.

Our operating margin is being compressed and our gross margin is being compressed, primarily – compared to what we thought at the beginning of the year, and what’s happening on optical communication sales, and what’s happening in cost in our display business. So as those things change then of course we’d expect that continued for improvement there.

But from an overall standpoint, what we’re really measuring and what we’re really driving for is improvement in operating margin. And in the first half of this year, our operating margin actually expanded by 80 basis points and we expect that to continue in the second half of the year.

And the other thing, of course is, what’s very important to us is return on invested capital, over the last four years we’ve improved our return on invested capital by 300 basis points and over the next four years we expect to continue to expand that is our profitability improves, and we get the returns on the investments we’ve been making..

Got it.

Any help on the market share in display?.

I mean – I think that what’s important there, I mean, we don’t disclose market share numbers and what’s important there is that in a market, where the growth is really occurring, because of large-size TVs, where the both in 65 and 75 inch TVs are much larger growth this year.

That gets supplied by Gen 10.5 and we have three of the four projected announced Gen 10.5 factories..

Got it. Thank you..

Your next question comes from the line of Tejas Venkatesh from UBS. Please go ahead..

Thank you. I wonder, if you’re seeing any change in competitive environment in optical. In particular, I was wondering, if you’re seeing any pricing effects of China fiber makers moving to other markets..

This is Wendell. So, yeah, clearly, we are seeing that in China as one of the key parts of the carrier market that had a strong downward revision this year, especially the delay in China Mobile tender, right. And so that led to sort of a buildup in China that expressed itself in terms of pricing largely in China.

We’re also seeing some knock-on effects in India and Southeast Asia, primarily. And we’ve incorporated all that into our outlook for our Optical Communications business..

Thank you. And as a follow-up, the adoption of glass backs on smartphones has been very helpful for your Gorilla business, now you have other smartphone innovations like vibrant glass and so forth.

As we get closer to new smartphone introductions, I wonder, if you expect any of those newer innovations to be adopted over the next 6 to 12 months? Thank you..

That is an excellent observation, and my simple answer to your question is, yes..

Your next question comes from the line of Asiya Merchant from Citi. Please go ahead..

Hi, thank you. A lot of the questions have been answered. But if I could just about the 5G commentary that Wendell shared earlier about some customer push outs, et cetera.

Can you maybe walk us through some of the more puts and takes now to your outlook for the Optical segment? Is there more risk that we see that coming down as the year progresses on the other side as maybe some 5G reception by customers – by the end consumer is better on the phones and the smartphone to we expect an uptick there? Again, it’s more about the puts and takes to the outlook for the Optical segment as the year progresses? Thank you..

That’s an excellent question.

So first, let’s do with the 5G one, because I think there’s – just the way to understand 5G is how quickly does it start and expand beyond some of the few early adopters and leaders? So it’s less people like changing deeply their 5G plans, if them arriving at their 5G plans, and how they’re going to deploy and then get that rolling.

That’s sort of the next leg of growth. And for us, when that clicks in exactly – when it clicks in, it will be very significant in growth. When it happens is sort of hard to call.

Meanwhile, what we see in our near-term results is more having to do with the pieces of the carrier market that dealt with particular projects that they have on wireline, some on wireless, but it’s just really just some delays and push outs that they’ve done into 2020 rather than big significant 5G changes.

So that’s why I keep saying, the 5G piece won’t be subtle when it starts to hit our demand cycle, you’ll see it coming and all you’re seeing in our growth this year primarily, right, is the adoption of our previous innovations and other pieces of the network.

We haven’t really started to feel the big oomph from the wireless networks of the world changing from relatively fiber-poor to very fiber-rich. That’s all ahead of us. Now to your next question on, can we expect continued downward revisions in auto? I would say, it is clearly our intent that that is not the case.

What we’ve tried to do here is guide in a way that we feel highly confident it will deliver. Now as the months go by, we’ll know more and how accurate our point of view is, but it is not our intent to have a sort of sliding set of expectations in [opto] [ph].

Does that answer your question?.

Yeah. No, that’s great.

And then, just as we think about when the 5G hits, like given that it’s more fiber rich, how should we think about the margin for that solution relative to, let’s say, the Fiber to the Home builds, which are driving more of your sales this year? Is there a significant leg-up we should expect or are the margins similar? If you can just kind of walk us through how you see the margin profiles on the more newer innovation relative to what’s been happening for the past few years..

In my opening remarks, this is really a great question – in my opening remarks, you heard me make an allusion to that we’ll be introducing some new products in the second half related to this densification approach. What those new products represent is ways for us to bring the full suite of our technical capabilities to bear in wireless.

What our plans would be is for the 5G opportunity to have our full suite of products involved in it or our whole suite of innovations, and therefore, that its relative profitability should be consistent with that which you’ve grown to expect in optical communications..

Right..

That’s a little mysterious. And the reason it is, is I don’t want to steal my operator’s thunder when they launch their new product set..

Thank you..

All right..

Your next question comes from the line of George Notter from Jefferies. Please go ahead..

Thanks a lot, guys. I guess, maybe to start with just a clarification. So when you talk about glass pricing in Q3 being flat relative to Q2, just to be clear, are you talking absolute pricing or are you talking about a flat rate of pricing erosion and I got a follow-up..

Absolute pricing..

Okay, great. That’s a real improvement. And then, just to follow on, as I look at the dynamics among your panel-maker customers, I think about the supply coming on in China, there is certainly Gen 10.5s, but also Gen 6s and Gen 8s in China.

And I guess with that supply coming online, it seems like it can create some changing dynamics among your traditional panel-maker customers in places like Taiwan and Korea, Japan.

So how do you see that kind of rippling through for Corning? Is there potential for that pricing pressure to flow downhill on to you? Or do you feel like you have enough leverage in terms of those customer relationships where again pricing can remain flat on a go-forward basis? And then, I guess, alternatively, do you think that could ripple effect through in terms of changing utilization rates or how do you see the dynamic with China? Thanks..

So you had a number of observations. Let’s just compact two key ones. So first, I think you’re quite wisely pointing out that, once again seeing some regional shift in the display market. We have followed it from Japan to Korea to Taiwan and out of China.

What we try to do with each of those moves is enhance our position in each new region and we have done that again here. So we are very well positioned for the direction with which we see panel production shifting. So that’s the first strategic level.

Now, embedded in there, of course, I think you’re making a wise comment, which is then what happens to the sort of panel production capability, glass production capability, in the regions that will be relatively weaker, relative to China? So in that, you’re seeing a combination of things happen.

First, is shifts to newer and more advanced display technologies, right, which we’re supporting with newer and more advanced glass types.

Second, you’re seeing optimization of our network of supply, of glass, and you can expect to see us to continue to optimize that to always make use of the capital that we have in place, to serve our number of growing different glass markets.

So we will expect us to continue to optimize our cost structure, optimize our glass supply, and then support our customers in those previous regions, so that innovation aspirations and their market diversification.

Like, for instance, in Taiwan, we’re seeing a nice buildup of capabilities to address in the automotive industry, which are going very nicely with our automotive glass opportunity sets. So that’s the way we’re going to work through it all.

Now, I can’t pass this answer to your question without noting that you said pricing continue to be flat in Display. We are not saying that yet, for a long term. What we’re just saying is we expect the rate of decline to continue to improve and for our glass returns to stabilize.

We’re not predicting that glass prices remain flat for the foreseeable future..

Right, thank you..

We’ll squeeze in one more question..

Your final question comes from the line of Brian Yun from Deutsche Bank. Please go ahead..

Hey, thanks for squeezing me in. Most of my questions have been answered as well. But could you just give us an update on the hyperscale cloud side of the business? Any color on the visibility there or spending trends into second half 2019 or even heading into 2020 would be helpful. Thanks..

Hey, I’d say once again here, I’ll divide it into 2 layers. First, architecturally, each passing month in piece – a new piece of technical work and interactions with our customers, are making us more confident that that point of view we presented at our IR Day is accurate.

So we see growing adoption of glass in the glassification of the cloud continuing and becoming even more dense. So we feel really good about that. Exact timing for cloud and hyperscale, we’re not seeing any real fundamental shifts there in terms of the total market.

And you can get different time periods, where they can’t quite get these large facilities up quite as fast as what they may have planned at the beginning of the year. But we’re not seeing any sort of fundamental shift, that’s saying we don’t expect hyperscale and the cloud to continue to be a real growth driver for us, both this year and beyond..

Great. Thank you..

Thanks, Brian. And thank you, Wendell and Tony. And thank you all for joining us today. Before we close, I just wanted to let everyone know that we’ll be at the Jefferies Semiconductor, Hardware and Communications Infrastructure Summit on August 27, and the Citi Global Technology Conference on September 5.

We’ll also be posting some virtual presentations and webcast on business topics. And a web replay of today’s call will be available on our site starting later this morning. Operator, that concludes our call. Please disconnect all lines..

Ladies and gentlemen, that does conclude your conference. Thank you for your participation. You may know disconnect..