Ladies and gentlemen, welcome to the Corning Incorporated Quarter Four 2018 Earnings Call. As a reminder, today’s conference is being recorded. It is now my pleasure to turn the conference over to Ann Nicholson, Division Vice President of Investor Relations. Please go ahead.

Thank you, Tanya and good morning. Welcome to Corning’s fourth quarter 2018 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 would like to remind you that today’s remarks contain forward-looking statements that fall within the meaning of the Private Securities Litigation Reform Act of 1995. Those statements involve risks, uncertainties and other factors that could cause actual results to differ materially. These factors are detailed in the company’s financial reports. You should also note that we will be discussing our consolidated results using core performance measures, unless we specifically indicate our comments relate to GAAP data. Our core performance measures are non-GAAP measures used by management to analyze the business. A reconciliation of core results to the comparable GAAP value can be found in the Investor Relations section of our website at corning.com. You may also access core results on our website with downloadable financials in the interactive analyst center. Supporting slides are being shown live on our webcast. We encourage you to follow along. They are also available on our website for downloading. And now, I will turn the call over to Wendell.

Thank you, Ann and good morning everyone. This morning, we reported very strong finish to excellent 2018. For the fourth quarter, sales were $3.1 million, up 15% year-over-year; net income was $539 million, up 18% year-over-year; and EPS was $0.59, up 28% year-over-year. For the full year, sales were $11.4 billion and EPS was $1.78, both up 11% from 2017. We also delivered on our goal to improve gross margin to 42% in second half, a significant increase over last year and first half of 2018. All of our businesses produced year-over-year sales growth in 2018. Highlights include Optical Communications sales up 18% for the second consecutive year; Environmental sales up 17% as the adoption of gasoline particulate filters accelerated; Specialty Materials sales up 5% following an exceptional 2017 growth of 25%; Display sales, up 4% as we ramp our new Gen 10.5 facility and the annual price declines reached the important milestone of mid single-digits in the second half and full year pricing was the best in more than a decade; Life Science sales, up 8% as we continue to outpace market growth. For the past 3 years, we have invested for growth through our strategy in capital allocation framework. The significant benefits of these investments are evident in our financial performance. In 2018, we have built new capacity, launched new products, grew sales by more than $1 billion and extended our leadership position in all businesses. We exited the year with strong execution, expanded margins and great momentum. We expect our momentum to continue into 2019 and beyond. We expect strong year-over-year growth in the first quarter and additional growth in subsequent quarters. In total, we anticipate another strong year for Corning. We also feel confident that we are well positioned for long-term growth. Important trends such as…

Thank you, Wendell and good morning. We had another outstanding quarter and our full-year results exceeded our expectations. In 2018, we did what we said we were going to do, which was to expand our manufacturing capacity in the first half and begin leveraging those growth investments in the second half. In 2019, we expect to build on this momentum and keep growing across all of our businesses. Before I get into the details of our performance and results, I want to note that the primary difference between our GAAP and core results is again a non-cash mark-to-market adjustment for our currency hedge contracts. As we discussed before, GAAP accounting requires earning translation hedge contracts settling in future periods to beat mark-to-market and recorded a card value at the end of each quarter even though those contracts will not be settled in the current quarter. For us this resulted in an after-tax GAAP loss of $180 million for the fourth quarter. 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 uncertainty it provides. We have received $1.7 billion in cash under our hedge contracts since their inception slightly over 5 years ago. Now, that brings me to our results and outlook. For the fourth quarter, sales were up 15% year-over-year to $3.1 billion, net income rose 18% to $539 million, and EPS was $0.59, up 28%. For the full…

Thanks, Tony. Tanya, we are ready for the first question.

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

Thanks. Good morning and congratulations on the results. Wendell, bit of an open-ended question for you on optical, so you obviously are growing a lot faster than market. So I was curious if you could maybe one, talk about some of the key end-markets you are serving and what you are expecting in terms of spending there? And then one of the key innovations that are driving the out-growth in say like datacenter, broadband and wireless? Thanks.

Thanks for the question, Steve. So, the primary reason we are growing faster in the market really has sort of two layers to it. First of all, in just seeing new networks being put in place that used to be fiber-poor and because of the requirements in our innovations are going to be fiber-rich. So in a way for us you can think about it as it’s not just more networks right, but basically it’s more us in the network and that’s why you start to see us begin to differentiate for the industry growth. Take something like wireless as everybody has heard a lot about 4G densification or 5G, wireless today is a relatively fiber lean architecture. As you move to the wireless of the future, you end up adding a lot of glass, so as they talk about wireless networks densifying what that really means is they are glassifying. And so if you compare us to others who already in the wireless market, we were pretty small, but now we are getting pretty big, because of our innovations in the requirements for what it is, how you need fiber optics expertise offer. You see a similar dynamic happening in datacenters with the continued strong growth really at the percent of the load that’s cloud based, which then allows when you do things like public cloud into very large private cloud. You would concentrate much more processing power, right, that is shared across many, that then makes it more economical, which we have that bandwidth all in one place, so start using fiber where you used to use copper, so once again, a substitution effect. Now, all of these things are furthered by the dynamic that we have a set of unique innovations in all of those areas that give us some additional advantage versus other players. So that’s why you tend to see the difference. Now, then you asked another question which is where do we expect to see the growth here in the coming years. We expect to see it being driven by in access networks, especially with an accent on wireless densification. And then we do expect to see a hyperscale datacenter business to continue to grow strongly and has now a new concept of sort of what edge compute and where edge cloud is that also opening up some opportunities for us. So, sorry for the long answer, Steve and does that get at the core of what you are talking about.

Yes, it does. Just one other clarification on the hyperscale builds, can you just sort of talk about how that plays out. It tends to be lumpy in general. Did these new contracts actually smooth out the business for you and like what’s involved in them if you can expand – to the extent you expand on that?

That’s a really good question. So you rise if they tend to be pretty big construction projects to the little like our access network builds, which are also big civil works projects. They can be kind of lumpy. I think what the new contracts do here not so much has changed the civil works of reality of putting in these large facilities. As it does is it increases both the size of our business and the number of different areas that we are doing, the number of different customers that we are doing it with and the number of different locations we are building at. So by increasing the number of projects in a way it becomes a little smoother, not because the individual projects aren’t lumpy, they are, but that they end up being in slightly different stages at different times. But I am quite sure at some point we will hit a time where things look a little lumpier because the number of the projects go together.

Great. It’s very helpful. Thank you.

Thanks.

Thank you. Our next question comes from the line of Mehdi Hosseini. Please go ahead.

Yes. Thanks for taking my question. Tony, you are displaying net income margin average 25% for 2018 and it was in the 28% range for ‘17, you are talking about continued improvement, should I assume that it’s going to take couple of years to get back to that 28% margin or is there any other metric that you can provide so that we could better see how the margin improvement, especially for display going to track? And then for Wendell, specialty material, you have been investing in diversifying outside of the smartphone, it’s great to know that you have higher content in the smartphone, but can you provide us an update on diversification out of the smartphone and into other end markets? Thank you.

Sure, Mehdi. Let me take the display question first. I mean, clearly what happened to us in display in the first half of the year is that we saw our – some margin contraction and that was driven both by our investment in Gen 10.5, but then was also driven by our fleet optimization. And what we saw in the second half of the year was the benefit of those things to occur. And you saw it in the fourth quarter results where our profits were up more than our – the sales were I mean year-over-year basis. And so when we have always talked about stabilization, what we have talked about is getting to a certain profit level and continuing that on a going forward basis. And we think that we feel good about the stabilization we saw in the second half, in fact the fact that we grew profits in the second half and we think that’s evidence of the strategy that we have been working on for a number of years really starting to pay off. And then to the content piece and wearables going outside of smartphone, we of course expect smartphones for the foreseeable future to be people’s primary device. But where we are making really strong progress is in the areas like wearables, notebooks and augmented realty, right. And so in wearables and notebooks what we have done in both of those areas is introduced using our vapor deposition technologies new composite materials that take our value on something like a wearable and in notebook up like a factor of five. And so either outside smartphones you can see us playing the same basic approach which is getting our new innovations adopted in those areas that also allows to add value. Then you have entirely new device categories like augmented reality where you are seeing the potential start to take shape for really significant innovation and the vast new device category, but it’s soon, it’s too soon to get too excited about it. This is the time for all the positioning innovations and that’s something that years from now will offer a larger opportunity for us than what it is smartphones do today. But that’s going to take a while to develop.

Can I have a follow-up here if I may? It seems to me in the specialty material and environmental technology you are executing and able to increase content either for smartphone or for other applications, as to end market diversification is maybe a couple of years away, is that the best way to summarize this?

.:

Thank you.

Thank you. Our next question comes from the line of Wamsi Mohan with Bank of America. Please go ahead.

Yes. Thank you. Good morning. Tony, can you address sort of the overall gross margins in 2019, pretty easy compares from Q1 of last year when you are ramping your Gen 10, but you’re talking about only a marginal uplift here in Q1 of this year and you noted some investments. So, could you just give us some sense on sort of the magnitude of these investments and the overall magnitude of gross margin improvement like as 50 basis points or 100 basis points in 2019? And a quick follow-up to your comment about China end market assumptions being conservative. Can you maybe quantify those? Are you talking about auto production down 10% like what is smartphone assumptions, what TV unit assumptions, that would be helpful? Thank you.

Sure. Wamsi, overall, we’re really pleased with our gross margin performance. We said at the beginning of 2018 that we’re investing intensely and that would lead to significant growth and margin expansion in the back half and that’s exactly what happened. Our sales were up 16% in back half over the first half and our gross margins expanded about 150 basis points. And we expect going forward continued strong margin performance both in dollars and percentages but does get somewhat muted by investments that we’re making. And the good news is, those investments are for committed growth in Optical Communications, GPF, and then Auto Glass, and we’re going to start seeing those investments starting in Q2, the benefits of those investments and it’s going to expand from there. Now in any given quarter things are going to be impacted by seasonality of our businesses like it is in the first quarter by the various mixes that we have in the businesses, but we’re happy with our – each of our businesses’ performances, they are the best in the industries and also just like the total impact of these investments. So, in Q1 you see some of these investments impacting us, but the main reason why Q1 is down versus Q4 is really the seasonality not the investments. In terms of China, we were happy with the approach we took in the third and the fourth quarter. It turned out that we were exactly right on both in terms of where the auto production ended up in China and also from a TV standpoint. So, we feel good about that and as we go forward into next year, we’re assuming the declines in both of those markets and the strong guidance that I gave you for the year.

Next question?

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

Yes, hi guys, thanks for fitting me in. I just had a real quick question on the full-year guidance, maybe a two-parter actually. So, the guidance is better than we expected. The most bullish point of it is Display. And I wondered if within Display you could talk about the interplay of your share assumptions versus unit growth assumptions. So, any color you can give us on which of those – how much share you expect to gain for example would be interesting? And then on Specialty, is all of the weakness or the slowdown in Specialty China or are there other macro issues that you see or demand issues, just any further color on that would also be helpful in that full year guide? Thanks.

Sure. Let me start with the Display guidance. Fundamentally, what drives our, the Glass market and Display, of course, is screen size. And in 2018, the screen size drove the market growth to the mid single-digits and that’s what we expect to happen again. Now, we also were benefited a little bit in 2018, where the number of TV units went up, but that’s still – what really matters here is the screen size growth. As we go into 2019 we again think the market is going to grow about the mid single-digits and what’s driving that is the screen size growth. Now, most people looking at the market think that TV units themselves are going to be flat to down a little bit, a lot of that being driven in China and we have factored that into our projections. But what really drives the market is the screen size growth and we expect it once again to be in about the mid single-digits. Now we will grow faster than that because of the Gen 10.5 ramp. But generally speaking, it’s about the mid single-digits. Relative to Specialty Materials, again what really drives the growth there is the technology adoption of our products, which as Wendell would say, having more Corning in those products. Last year, I think most people believe smartphones were down a little bit. That’s what they are projecting again for this year, lot of that being driven in China, but the reason that we are confident that we can be up is because of the adoption of the technologies. How much were going to be up will depend on the actual timing of that adoption, but we feel pretty good about that.

Okay.

Just briefly on your share question, we cannot think about it so much as share as what’s happening is with this constant move to larger-sized TVs and these new Gen 10.5 plants that are getting built. When those happen, we co-locate and build a Gen 10.5 glass plant with a customer. And since those plants have a much lower cost platform for our overall large television panels, what we expect is that category of Gen 10.5 to take more and more of the market and it just so happens that because of our lead technically right, that ends up being more us than in the below 10 Gen – than the below 10.5. So, that’s another dynamic. This is what’s leading to the more us than Tony’s comments of the overall market growth. Did that answer your question, Rod?

Yes, thanks Wendell. It’s very helpful. Appreciate that.

Thank you. Our next question comes from the line of Asiya Merchant. Please go ahead.

Thank you and congratulations as well on the strong quarter. Quick question on Optical, you guys have been posting strong net income margin growth in that segment. Obviously, as you scale, it’s still obviously below Display. How should we think about the improvement in utilization helping to kind of bridge that gap? Are we ever going to get to margin, not net income, but even on the gross margin line getting to corporate average given the additional investments you are going to be making in 2019? Thank you.

Yes. We are really thrilled with our performance in our Optical Communications business. I mean, we have both been growing sales significantly and we have been growing our profitability even greater than that. And that’s what the real focus is on any given business unit at Corning. I mean, that’s how we measure the business unit success and we are having great success in Optical Communications. We have had some margin expansion in that business and I would expect to continue to have some margin expansion in that business. And I think that’s the way to model. We don’t spend a lot of time comparing business to business, because each of them have different economics and different levels of investment, but I mean we feel great about the Optical Communications performance.

Great. And just if I may given that you are annualizing the 3M acquisition in 2019, the core organic, is that still growing at low-teens or is there any downshift in expectations there?

No, we feel great about our organic growth and in fact if you look at the Q1 numbers, the organic growth is almost about 20% on a year-over-year basis. So we feel really good about organic growth.

Great. Thank you.

We have time for one more question we can squeeze in.

Thank you. And our last question comes from the line of Vijay Bhagavath. Please go ahead.

Yes. Hey, thanks. Hey, Wendell, I must say solid results here. My question is not on Optical this time it’s on Auto Glass, continue to hear lot of news flow around AutoGrade Glass you’re getting into Automotive Interiors, talk to us about how the demand – how that business kind of unravels heading into rest of the year? Thanks.

Thanks for noticing what everything that our customers are saying about us. As I shared last quarter basically our AutoGrade Interior opportunity has come a lot faster than we were ready for operationally. And so we’re investing in a dedicated plant that uses our unique vapor deposition technologies and a part-making capability to be able to set up to start to serve that really strong committed demand that we’re getting. I think this year is going to be that year where you’re seeing the real breakthrough and you’ll start to see the revenues really start to flow. Getting it exactly right of where on the adoption curve we are, we’re still a little early, right, to be able to accurately call while I think the rate of adoption is going to be excellent, revenue growth is going to be, why, we’re still a little bit early to be able to call it, but the great news is, is that’s going to be a real business and it’s going to have real revenues and we’re investing against it and ultimately, we think it’s going to be a real big business. If we’re right on our innovations and this product is as cool as we think it is, we’ll go and like this.

Excellent. Thank you, again.

Thanks, Vijay. And I shall close by saying thank you all for joining us. I also want to let you know that we’ll be at the Goldman Sachs Technology and Internet Conference on February 12, and we’ll be hosting an Investor Day in New York City on June 14. We’ll also be hosting some virtual presentations and webcasts on business topics throughout the year. Finally, the web replay of today’s call will be available on our site starting later this morning. Once again, thank you all for joining us. Tony, that concludes our call. Please disconnect all lines.

Thank you. Ladies and gentlemen, that does conclude our conference for today. We thank you for your participation and for using AT&T executive teleconference service. You may now disconnect.