Corning Inc

NYSE:GLW

Earnings Call Transcript 2017-Q4

[Operator]

Ladies and gentleman, thank you for standing by. Welcome to the Corning Incorporated Quarter Four 2017 Earnings Results.

It’s my pleasure to turn the call over to Ann Nicholson, Division Vice President of Investor Relations.

[Ann Nicholson, Division Vice President of Investor Relations]

Thank you, Jerome, and good morning. Welcome to Corning's year end 2017 conference call. With me today is Wendell Weeks, Chairman and Chief Executive Officer and Jeff Evenson, Senior Vice President and Chief Strategy Officer. Because of a family emergency, Tony Tripeny, Senior Vice President and Chief Financial Officer is not on the line today, but he looks forward to talking with investors throughout the quarter and we’re sending his family our regards. So, joining us today are Ed Schlesinger, Vice President and Corporate Controller and Stephan Becker, Vice President and Operations Controller.

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. The 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 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.

Supporting slides are being shown live on our webcast, and we encourage you to follow along. They'll also be available on our website for downloading.

Now I'll turn the call over to Wendell.

[Wendell Weeks, Chairman and Chief Executive Officer]

Thank you, Ann and welcome everyone. This morning we reported a strong finish to an outstanding year and we feel great about our progress and our prospects. Strong growth and strong investment generated $800 million sales increase for the year and set the stage for additional growth. We exited the year running at full capacity in several of our businesses and with committed customer demand that supports our current capacity expansion initiatives. We expect to see the benefits of these initiatives in the second half of 2018 and beyond as production ramps.

2018 will be another year of strong growth and investment consistent with our strategy and capital allocation framework. All of our businesses contributed to the outstanding 2017 results highlighted by 18% year-over-year sales growth and Optical Communications 25% growth in specialty materials, 7% growth in environmental and price declines in display that were the best seven years.

As we shared, the strategy and capital allocation framework outlines our leadership priorities. We continue to focus our portfolio and utilize our financial strength to extend our leadership, drive our growth and reward our shareholders. Under the Framework, we target generating $26 billion to $30 billion in cash through 2019. We plan to return more than $12.5 billion to our shareholders through repurchases and dividends, and we invest $10 billion to extend our leadership and deliver growth across all of our market access platforms. We made great progress towards those goals since we announce the Framework in October of 2015.

Our cash generation is on target, and through the end of 2017, we return $9 billion through share repurchases and dividends. We’ve invested $4.5 billion under the Framework in RD&E capital expenditures and acquisitions. We’re starting to see the returns already. As you can see in our most recent results 4-year sales increased 8%, EPS increased 11% and we expect these returns to accelerate. We believe that these results illustrate to benefits of our framework. We are best in the world in three, core technologies, four manufacturing and engineering platforms, and five market access platforms.

We focus 80% of our resources on opportunities that use capabilities in at least two of these three categories. We stepped up our investments over the last six months to meet opportunities in front of us in all of our market access platforms. Significant portions of the investments going towards capacity expansions to meet committed demand. Currently, we have 23 projects underway including construction of 11 new plants. These investments tap into our profitability in the second half of 2017 and will do so again in the first half in 2018. For we really see the benefits of those investments in sales and profitability in the back half. So, we feel great about the year ahead of us.

Now let me review progress in our market access platforms starting with Optical Communications. With the world leader in passive Optical Communications and the only true end to end supplier of integrated optical solutions, 2017 was another great year. We expanded strategic relationships like the ones we've recently announced with Verizon and Saudi Telecom, which supports our view of strong future growth. We expanded our manufacturing capacity to support growing demand and initiated programs to further expand capacity in 2018.

During 2017 we acquired SpiderCloud to enhance our wireless portfolio and announced an agreement to purchase 3M's communications markets division. We expect that transaction to close later this year. It brings us a talented group of employees and it enhances our offerings in the rapidly growing fiber to the home and optical solutions markets. We expect to continue growing more than twice as fast as the communications infrastructure market. Rapid adoption of optical solutions in more market segments combined with the strength and relevance of our technology and co-innovation approach supports our superior growth. We believe that the opportunities ahead of us are much greater than those that are behind us. To capture these opportunities, we continue to invest in plants, innovations and market access. We expect 2018 growth to keep us solidly on pace to reach $5 billion in sales by 2020.

Now let's turn to mobile consumer electronics where we are the world leaders in glass for Smartphones, tablets and emerging categories like wearables and augmented reality devices. Our goal is to double mobile consumer electronics sales over the next several years. We made significant progress towards that goal in 2017. Major milestones during the year included the tenth anniversary of Corning gorilla glass. Rapid adoption of gorilla glass 5 and Apple's commitment to our future innovations through its American manufacturing initiative.

The fundamental properties of gorilla glass make it an ideal choice for smartphone enclosures. Flagship models from Samsung and others now feature glass on the front and the back. Glass backs double the area we sell for phone and also support new innovation opportunities like fabric. We expect additional growth in 2018 as more devices adopt our latest innovations including our next generation of cover glass which we plan to introduce later this year.

Turning to our automotive market access platform our expertise focuses on helping customers build cleaner, safer and more connected vehicles. Corning pioneered the substrate at the heart of catheretic converters and is now leading the next wave of emissions control with our introduction of gas particulate filters. Most European and many Chinese OEMs have now awarded platforms and we won the majority reflected on market leadership. We had our first commercial sales in the second half of 2017 and we expect a sales ramp in 2018.

Once regulations are fully implemented in Europe next year and slightly in the early 2020, we estimate the GPF opportunity will exceed $0.5 billion in sales for Corning.

Moving to Gorilla Glass for auto. Innovation trends continue to point towards a significant growth opportunity. On the exteriors of cars, Gorilla Glass laminates are tougher and lighter than conventional auto glass, plus the superior optical quality allows larger and clearer head-up displays.

For interiors, integrated and interactive displays are becoming a seamless part of the cabin and user experience. Corning is helping OEMs with this transition because Gorilla Glass provides an advanced, durable, optical interface surface with tremendous economics. Earlier this month, exhibits at CES provided impressive evidence for the increasing use and importance of glass in cars. We believe that our solutions provide compelling value and we are investing to prepare for the industry’s transition to highly connected and autonomous vehicles which will use Gorilla Glass. Pole [ph] for collaboration for the leading OEMs is increasing and we’ve already been awarded the for these platforms globally. We expect to make addition and significant progress during 2018.

In our life science vessels platform, we’re building a new and long-term multibillion dollar franchise. Last July, we introduced Corning Valor Glass, our remarkable new pharmaceutical glass packaging solution. Valor Glass dramatically reduces particle contamination, breaks and cracks, while significantly increasing throughput. Valor helps protect patients and improved pharmaceutical manufacturing. The industry is excited about our innovation, and announcement and we continue to make strong progress although it moves at a deliberate pace.

Recently, the Parenteral Drug Association hosted a two-day conference dedicated to glass quality. Corning presented in a session focused on new development and innovations in pharmaceutical packaging. We remained closely engaged with our development partners, Merck and Pfizer, and are pleased with the progress we have seen with our customers over the last quarter. While we successfully completed multiple collaborative projects to support customer adoption of Valor. We also continue to engage with the Food and Drug Administration which is committed to streamlining the introduction of new innovations so technologies like Valor Glass can reach patients quickly.

In 2018, we plan to invest in high volume manufacturing that will enable us to deliver commercial volumes to our customers. You will hear more from us regarding the manufacturing site and location in the coming months. While we continue to believe Valor has the potential to power Corning’s growth for the next decade in vehicles.

In display, we remain the global leader. Our priority is to deliver stable returns and win in new display categories. We expect 2018 to be another year of strong progress for our display business.

Our new plant in Hefei China has started shipping the world’s first Gen 10.5 glass. We are the only manufacture to have successfully scale glass production through this time. Ramping our new Gen 10.5 facility on a pace with BLE our major customer will augment volume growth.

In addition, pricing has become consistently more favorable over the past two years. In June, we stated that improvement to mid-single-digit decline was possible. We now believe this will happen in 2018. Reaching mid-single-digit annual pricing is a huge milestone toward our goal of maintaining stable returns.

Finally, Iris Glass which adds a third piece of glass to LCD displays is gaining momentum. We are excited about Lenovo's and Dell's new ultra-thin monitors which offer the world’s greatest monitors in a thin, no bezel package, uniquely enabled by Corning's Iris Glass.

I think it’s pretty clear, we’re making terrific progress across all of our market access platforms. We are investing to capture these opportunities and expect to maintain the 2017 momentum in 2018. We plan to deliver another strong year of sales in earnings growth, stay on track to fully achieving our strategy and capital allocation Framework goals.

Now let me turn the call over to Jeff for a review of our results, details on our outlook and additional updates on our Framework.

[Jeff Evenson, Senior Vice President and Chief Strategy Officer]

Thank you, Wendell and good morning, everyone. Our 2017 results were outstanding. In 2018, we’ll continue investing to support our customers and extend our leadership. We expect core sales to grow to approximately $11 billion or about 7% on a constant currency basis. Before reviewing segment results, I want to talk about two items affecting our GAAP results, FX accounting and tax reform. As we’ve discussed before, GAAP accounting requires earnings translation hedge contracts settling in future periods to be mark-to-market and recorded at current value at the end of each quarter, even though those contracts will not be settled in the current quarter.

For us, this resulted in after-tax GAAP gain of $1 million for the fourth quarter and a loss of $247 million for the full year. To be clear, this mark-to-market accounting has no impact on our cash flow. Our currency hedges are protected economically from foreign exchange fluctuations and provide higher certainty for our earnings and cash flow, our ability to invest for growth and our future shareholder distributions. We’re very pleased with our hedging program and economic certainty it delivers. We receive $1.6 billion in cash under our hedge contracts over the last five years.

Our non-GAAP or core results provide additional transparency into operations by using a fixed currency rate aligned with our yen and [indiscernible] translation hedges and also by adjusting for other items that do not reflect ongoing operations. For 2015 to 2017, our core reporting use a constant currency rate of 99 yen to the US dollar at 1,100 yen to the US dollar.

For 2018 to 2020 we established hedges for approximately 90% of our expected display earnings. We expect these hedges to result in average rate of 107 yen to the dollar and we plan to use that rate for our core reporting over the next three years. Additionally, we will use the cost of break of 1175 Korean won to the dollar which is closely aligned to our current won portfolio of foreign currency hedges. Nearly all the analysts covering Corning are already publishing estimates for 2018 and beyond at a yen exchange rate of approximately 107 yen to the dollar.

For today's discussion I will present fourth quarter and full year 2017 core results at the 99 rates. My comments on our 2018 outlook will be based on 107 yen per dollar and 2017 results will be recast to our new core rates for comparison. We provided 2016 and 2017 results recast to the new core rate in [indiscernible]. So, you can update your models and compare operating results on an apples to apples basis.

Turning to taxes, our full year and fourth quarter 2017 core results have been adjusted to exclude $1.8 billion in non-cash items related to US tax reform. The majority of the $1.8 billion is a onetime toll charge of approximately $1.2 billion on unremitted foreign earnings. The cash cost is almost entirely offset by our foreign tax credit carry forward. We have also revalued our deferred tax assets and liabilities. While we are still finalizing the impact of reform on our effective tax rate for 2018 we expected to increase to between 20% and 22%. In 2018 our projected tax rate will reflect the new lower tax rate offset by anti-base erosion provision. The net impact does not fully replace the benefit of our previously available foreign tax credit planning.

Near term tax reform provides greater flexibility in accessing our non-US cash and we have already benefited from that flexibility. Longer term as we execute on our growth initiatives and our US income grows, we will further benefit from the lower tax rate in the United States.

As a final note our investment in shareholder distribution target in the 2016-2019 strategy in capital allocation framework are not impacted by tax reforms.

Now let's look at our results and outlook. For the fourth quarter core sales were up 7% year over year and EPS was $0.49. Full year sales rose 8% and EPS was up 11% to a $1.72. Core earnings were $1.8 billion consistent with 2016. An apple to apples comparison that reflects the strategic realignment of Dell Corning by excluding Silicom's equity earnings from the first half of 2016 shows that core earnings grew 5% year over year.

As Wendell mentioned growth in operating margins dollars grew more slowly than sales in the back half of 2017, primarily because of planned and very attractive growth investments. These include capacity expansions for optical fiber and cable. Our Gen 10.5 Heisei display glass, capacity for gas particulate filters plus development for gorilla glass, Valor and a few other projects that we're not quite ready to dive into publicly.

Turning to the balance sheet we ended the year with $4.3 billion of cash. with the new flexibility created by US tax reform we brought $2 billion in cash back to the United States already this month. Adjusted operating cash flow for the year was $2.6 billion and keeps us on track to meet the goals of our four-year Capital Allocation plan.

Now let's look at detailed segment results and outlook beginning with Display Technologies. Display's 2017 core sales were $3.4 billion and core earnings were $944 million. Fourth quarter $217 billion was up slightly sequentially exceeding our guidance and in line with the market. Sequential LCD glass pricing decline were slightly better than Q3 and better than expected. For the full year, our volume was up mid-single digits in line with our expectations. Pricing improved and reached single digit year-over-year decline in both Q3 and Q4.

Let’s turn to 2018. We expect further pricing improvement with year-over-year declines reaching mid-single digit. Reaching mid-single digit annual declines is an important milestone toward our goal of stabilizing returns in Display and is occurring earlier than the view we communicated to investors in June 2017. Three factors drive our view of a more favorable pricing environment.

First, we expect glass supply to be balanced or even tight. Our Gen 10.5 plant supports the expected growth of large sized TVs [indiscernible] with and dedicated to our customer BOE. We pace underlying capacity in tandem with BOE to ensure our Gen 10.5 glass supply is balanced to demand.

We expect glass supply demand balance below Gen 10.5 to tighten further because demand continues to grow in 2018 while public information indicates there is little capacity growth planned in this segment by glass makers.

Second, our competitors continue to face profitability challenges at current price declines. Therefore, we expect their price declines with fall further as they try to remain profitable.

Third, LCD glass manufacturing requires ongoing investment in current and new capacities to support growth to generate acceptable returns on investments; glass pricing will need to improve even further.

We typically see the largest quarterly price change in the first quarter. In Q1 2018, we expect sequential glass price declines to again be moderate and more favorable than first quarter’s sequential price changes in recent years. In sum, pricing will be favorable in 2018.

Let’s turn to volume. We expect LCD glass market volume to grow mid-single digits as television screen size growth continues. We expect our volume to grow faster than the market as we ramp production in tandem with BOEs Gen 10.5 demand in Hefei.

For the first quarter of 2018, we expect both the LCD glass market and our volume to climb sequentially by low single digit in line with normal seasonality. First quarter volume will be up low single digits on a year-over-year basis. We feel good about price and volume and gross margin should improve throughout the year.

Two factors will dampen Display's gross margin percentage in the first quarter of 2018. First, we are starting up our Hefei facility. As always during our plant startup and fixed cost and staffing ramp ahead of production.

Second, we’ll be taking advantage of the seasonally wider volume in Display and Gorilla to rebuild tanks and optimize the fleet with our latest technology. As you may recall, in the third and fourth quarters of 2017, we ran a handful of tanks outside of our optimal range to meet strong demand. We will be correcting this in the first half.

The higher utilization at the happening plan and the fully optimization will improve productivity and gross margin especially in the second half of the year.

In summary, we had essentially all of our 2018 volume under contract. We remain very pleased with the current dynamics of our display business and our progress in maintaining stable returns.

Let’s move to Optical Communications. Full year sales were $3.5 billion, up 18% and core earnings were up 33%. Fourth quarter sales grew 13% over last year. Fourth quarter earnings decline slightly as we invested to support growth in 2018 and beyond. In addition to fiber and cable capacity, we invested in building supply chain and new products for Saudi Telecom. Our first significant sales occurred during the quarter and required some setup costs. We’re honored to support Saudi Telecom as it begins the largest network build in the history of the Kingdom.

In the first quarter and for full year 2018, we expect sales to be up about 10% year-over-year excluding any contribution from the pending acquisition of 3M’s Communications Markets division. Key growth drivers include strong demand from carrier enterprise customers that will fill new capacity as we bring it online. We expect profitability to improve through the course of the year as we ramp our plans to meet committed customer demand. For your modeling purposes, we expect the 3M transaction to close in the middle of 2018. The transaction will add about $200 million in sales and be neutral to EPS in 2018 due to integration costs. As previously announced, we expect it will be accretive in 2019 and beyond.

Stepping back, we’re excited about 2018’s growth potential for Optical Communications and pleased to have additional opportunities ahead of us. Environmental technologies, 2017 sales were $1.1 billion, up 7% driven by worldwide growth in the auto-market and from winning additional business, which allowed us to grow faster than the market. Fourth quarter sales grew 19% year-over-year with core earnings rising 33%. As anticipated the North America and heavy-duty market improved in the second half of the year driving 7% growth in our diesel sales for 2017.

In addition, our gasoline particulate filter business delivered its first commercial sales in the third quarter as the initial phase of Euro VI regulations to comeback in September 2017. In the fourth quarter, we had additional sales and we want additional platforms. We have won the majority of platforms awarded to-date. 2017 core earnings were $139 million as investments in select capacity and engineering to support the ramp of our GPF business partially offset the benefits of increasing sales.

In the first quarter and for full year 2018, we expect high-single-digit sales growth, driven by continued strength in auto sales ongoing improvements in the heavy-duty diesel market and from the GPF launch.

In specialty materials 2017 sales was 25% over last year and core earnings were up 32%. We’re clearly benefiting from the rapid adaption of Gorilla Glass 5 and the trend for glass backs on devices. We also made progress with our innovations in other areas including Gorilla Glass emerging as the most widely used cover material on smart watches worldwide.

Fourth quarter sales increased 17% and core earnings were up 12% year-over-year. Sales benefitted from brands building aggressively to support their launch cycles. This demand pull-in is the primary reason we expect first quarter 2018 sales to be down about 10% year-over-year.

Overall, we remain very pleased with our performance in specialty materials. We expect to grow then for the full year 2018 following our strong 2017. The 2018 growth rate, will depend on new model launches and the adoption of our innovations. In the second half of 2018, we expect year-over-year growth as customers launch their new products and as we announce new innovations to meet customer needs in mobile consumer electronic including the introduction of our next generation of Gorilla Glass.

In life sciences, 2017 sales were $879 million and core earnings were $80 million with strong fourth quarter sales as we continue to outpace market growth. For the full year 2018, we expect sales to grow mid-single digits. First quarter sales should be up high single digits year-over-year.

As a reminder, my comments on our 2018 outlook are based on a new 107 and 11.75 of rates. While comparing to 2017 result recast to our new quarter rates. For 2018, all of our businesses have positive momentum and we expect full year sales of about $11 billion up 7%. We expect the full year gross margin to exceed 41% similar to 2017. The first quarter will be the low point for the year. We expect gross margin to be about 40% of sales consistent with 2017’s fourth quarter.

In the second half of 2018, our investments for example in the Gen 10.5 facility gas particular filter capacity, and new fiber and cable plant will exit the startup phase and result in new sales. Quarterly gross margin should exceed 42% in the second half. Annual operating expenses should remain consistent with last year as a percentage of sales. For the full year, SG&A is expected to be about 14% of sales and RD&A about 80%. The slides we are showing give you additional details for the first quarter and for the year.

In other items, we expect other income, other expense to remain at our fourth quarter 2017 run rate, generating a net expense of approximately $200 million for the year or about 45 to $55 million in Q1. Full year 2018, total growth equity earnings are expected to be similar to 2017 at approximately $200 million predominantly from hemlock [ph] semiconductor, with first question at about 25 to $30 million consistent with typical seasonality. As a reminder, our tax rate should be between 20% and 22% for the year and for the first quarter.

In 2018, we expect to spend slightly more than $2 billion on capital expenditures with programs in every market access platform. How much more will depend on how quickly we ramp some of our investments. We’ll provide more information as the year progresses.

Stepping back, the fourth quarter marked the half way point of our four-year strategy and capital allocation framework and I will conclude with a look at our accomplishments and our expectations. In brief, our progress on all dimensions had been excellent and we expect to deliver on all of our goals. In the first two years of the framework, our cash generation has been on target. We have invested $4.5 billion in planned investments to grow and extend our leadership and we have returned more than $9 billion to shareholders from share repurchases and dividend. Over the next two years of the framework, we plan to invest an additional $5.5 billion in our growth initiatives and we plan to continue repurchasing shares and paying dividend totally at least $3.5 billion additional over the remainder of the program. We expect our board to increase the dividend by at least 10% next week and at least 10% again in 2019.

Putting it all together, as we invest $10 billion to drive growth and extend our leadership we are rewarding our investors by returning more than $12.5 billion which compounds the benefit of our future growth for long-term shareholders. We are very pleased with our continued positive momentum. We’re focused on keeping that momentum heading into 2018. We remained on track to deliver the goals of our strategy and capital allocation framework and are excited about the ridge stand of opportunities ahead.

With that, let’s move to Q&A. Ann?

[Ann Nicholson, Division Vice President of Investor Relations]

Thank you, Jeff. John, we can open the line for questions. We have live in the queue today so we’re hoping that you can keep one question for everybody.

[Operator]

[Operator Instructions] Our first question comes from the line of George Notter with Jefferies. Please go ahead.

[George Notter, Jefferies]

Hi guys. Thanks very much. I guess I wanted to dig into the Optical business a bit. You guys are adding a lot of capacity here, I saw the announcement the other day about that your cable manufacturing facility I guess the question here, can you refresh us on the amount of new capacity you are adding in that business and then also the timing with which that capacity comes on line?

[Wendell Weeks, Chairman and Chief Executive Officer]

Thanks George. We are not giving exact guidance on how much capacity we’re adding for obvious competitive reason. We launched on this latest round of the capacity expansion really anchored by the Verizon announcement in their commitment to $1 billion over the next few years. that together with a few other building blocks of key customer committed demand had us really try to expand our capacity footprint across all those products that we’ll be acquiring.

What you can fix that on timing where you heard from Jeff is that investment in capacity is a bit of a drag on our profitability in the back half of 2017 and the first half of 2018 and you are going to feel those plants ramp up and increasing utilization in the back half of 2018. So, the return from the drag to being a real force for positive momentum in the back half.

[Operator]

Our next question is from Vijay Bhagavath with Deutsche Bank. Please go ahead. Vijay Bhagavath, your line is open if you are on mute possibly.

And we will move on to Mehdi Hosseini with SIG. Please go ahead.

[Mehdi Hosseini, SIG]

I’m looking at the display as a percentage of net income and the mix has steadily declined back in 2013 was, in the high 60% and now is almost 50%. As you accelerate the investment in other areas like what happened in the second half of ’17. Should we also expect acceleration in this decline, decline in display net income as a percentage of overall net income? I’m just trying to better understand how other segments or the net growth and have continued diversify the revenue and operating income mix?

[Wendell Weeks, Chairman and Chief Executive Officer]

So, I think, you’ve got it -- I think your observation on what’s happened in the past and your projection of what’s in the future is directionally correct. Our other market-access platforms are going to grow faster and our display market-access platform and therefore it will become a smaller part of our overall corporate mix.

[Mehdi Hosseini, SIG]

I guess the question is, since you have a stepped-up investment in other areas, should we expect acceleration in contribution from other segments?

[Wendell Weeks, Chairman and Chief Executive Officer]

Yes.

[Mehdi Hosseini, SIG]

Would you like to elaborate on the rate of increase?

[Wendell Weeks, Chairman and Chief Executive Officer]

No. There is only so much guidance we really want to give and project mainly because, we don’t want to -- everything has a higher compatibility set to it. But I think in general on track with it, which you heard from Jeff was it is expect an $11 billion of revenue this year. With the bulk of that revenue growth coming from other segments other than display. I think that type of numbers that you saw, that you can interpolate from there and what you saw for 2017, I think directionally, that’s the way to think about it going forward, there is very strong growth for the company overall with display being stable. Certainly, with the pricing dialogue you heard from Jeff, there is a possibility that display as a segment begins to gross up, but still, it will be at a lower rate than the rest of the company I believe.

[Operator]

And next go to Steven Fox with Cross Research. Please go ahead.

[Steven Fox, Cross Research]

Two questions from me please. First of all, on the gross margin swing there in 2018. Can you give us an idea of how much of the swing is just from ramping down some of the spending versus expecting new volumes to ramp in the second half?

And then as a follow-up, can you just give us a little bit better color on some of the grow gas auto wins. Maybe just buy large buckets of interior versus exterior and how you expected to realize revenues from that? Thanks.

[Jeff Evenson, Senior Vice President and Chief Strategy Officer]

Steve, when we open any new plant, the staffing and fixed costs tend to ramp earlier than the production. We had to commit demand for these plans and as we move to higher utilization rates due to volume increases and meeting this committed demand, we would expect our gross margins to improve throughout the year with especially strong growth in the second half.

[Wendell Weeks, Chairman and Chief Executive Officer]

And on auto Steve, did I hear your question right how we're feeling about the ramp and the mix between glazing exterior versus interiors.

[Steven Fox, Cross Research]

Yeah, I was just trying to understand like if you looked at the 35 new wins sort of what kind of buckets they fall into within the vehicle location, whether outside inside, what type of things inside and when would these programs start to ramp.

[Wendell Weeks, Chairman and Chief Executive Officer]

The majority of the platform wins that we have right now are on the interior. But one of the reasons for that is people refresh interiors and adopt new design in interiors much more rapidly than they refresh the exterior of a car platform. So, the majority of those are in interiors. I think that when we think through the revenue opportunity we don't see a lot of difference between the revenue opportunity in interiors and exteriors. Even though the glass area is quite higher in exterior the relatively higher value that we had in interior with special optical surfaces to create a particular viewing experience means that that's quite a high revenue realization business for us. So, I would say determining between the two probably isn't as important as the overall rate of adoption as we try to drive this business to another $1 billion sort of revenue generator for Corning over time.

[Steven Fox, Cross Research]

And this would be for 2019-2020 model year vehicles.

[Wendell Weeks, Chairman and Chief Executive Officer]

We'll start shipping commercially for those products late this year, right we'll begin. But you won't start to see a significant ramp till starting in 2019 and beyond you should look for when we start to put in some high-volume manufacturing for the part finishing and optical treatment should give you some more evidence and you should hear about that sometime this year Steve.

[Operator]

Our next question is from Wamsi Mohan with Bank of America-Merrill Lynch, please go ahead.

[Wamsi Mohan, Bank of America-Merrill Lynch]

So, I was just wondering around these price declines sounded from your Q1 commentary that there was an improving but higher than mid-single digit decline which will improve the pricing improves, more so throughout the course of the year close to Q1. I appreciate your volumes are lower in Q1 relative to full year but is 2Q the right timeframe to think about price declines to get to mid-single digits.

And secondarily I know Tony in the past has said that the core rate could be locked in maybe over a five-year period. Is the FX volatility causing you to rethink for the period of locking in the core rate at this 107 for three versus five years? Thank you.

[Wendell Weeks, Chairman and Chief Executive Officer]

Thanks for your questions Wamsi. First one on pricing, so let's make sure we're talking about the right terms. There's no sequential price decline in Quarter 4 and Quarter 1 for instance and then there's year over year declines Quarter 1 this year versus Quarter 1 last year. What you heard from Jeff was that we're talking now about the really important milestone of towards the back half of this year. We expect the year-over-year decline to be a mid-single digit. That’s a very significant milestone.

The sequential declines are there have been a low single digit and continue to be. We’re seeing improvement in this Q1 decline versus Q1 of last year and of course we are going to continue to see improvement in the sequential declines to be able to reach much lower year-over-year decline rate, but that little shift in terms can be a misunderstanding. I think the key granule we see the rate of price decline improving for us and we would expect to see that especially in the back half of the year that we had additives for it already in Q1 and anticipate it as well in Q2.

[Jeff Evenson, Senior Vice President and Chief Strategy Officer]

With respect to hedging, we are probably giving a three-year core rate to be effective, it’s a good window to buy certainty for our cash flows and earnings. It allows us to execute in a focused way our strategy of capital allocation framework and deliver all the goals consistent with our financial policies. We do have hedges in place for the next three-year period, but at lower coverage than the 90% we have through the 2020. So, we’ll give you more details on how we expect our core rates evolve as we get closer to that 10-year period.

[Operator]

And our next question is from Vijay Bhagavath with Deutsche Bank. Please go ahead.

[Vijay Bhagavath, Deutsche Bank]

My question is on your optical portfolio in 5G in particular 5G if you'd agree with me is fundamentally different from previous wireless generations, 5G uniquely needs both wireless and optical communication. So, my question is around, would you focus primarily on the optical communications opportunity in 5G or any thoughts in building up a wireless communication portfolio for 5G now with the fixed wireless starting to pick up and then we’re getting into mobility in 5G? Thanks.

[Wendell Weeks, Chairman and Chief Executive Officer]

An excellent question, Vijay. I think your assessment of the difference between 5G wireless technology in previous generations is accurate and that wireless now becomes a very optically rich offering as people move towards dense 4G and 5G.

As far as expanding outside of optical, mainly our focus will be on those things that are fully integrated into our passive optical system where we can uniquely be able to package and/or facilitate the implementation of wireless for our customers, we would augment our offering. But that is a dialogue which we’re involved with deeply with our key customers and is really quite straightforward, it becomes do you want to view this or do you want to source it and what is the least expensive way to build out this infrastructure. So, depending on how those dialogues go in a more the value could shifted beyond the optical, but I think it’s too soon yet to conclude where those dialogues end Vijay.

[Vijay Bhagavath, Deutsche Bank]

Thanks Wendell. Truly helpful. A quick follow on, as you bring up more optical fiber capacity I mean I keep seeing these blurbs on the news wire, you keep continue to build up new optical manufacturing capacity. Would that have any near-term impacts on segment margins? Thanks.

[Wendell Weeks, Chairman and Chief Executive Officer]

Yes. Excellent question Vijay. As you would have heard from Jeff is, we had from our investments in optical, a bit of a drag in the back half of 2017 and we had a bit of a drag here in the first quarter of 2018. We would expect as those facilities will ramp, that drag will disappear and then turn into strong positive. As you know having visited our Optical Communications plants, our fixed costs in those facilities is high. So, our variable margins are also quite high. So, as we feel that up, you can expect to see it have a pretty potent effect on our gross margins.

[Operator]

Our next question from Patrick Newton with Stifel. Please go ahead.

[Patrick Newton, Stifel]

Excuse me, I want to dig a little bit more into gross margin perhaps a two-part question. So, I guess, I’m strongly see how the commentary on several segments running at full capacity exiting the year results in the 4Q gross margin missing your guide by about 100 bps. And it appears to me that the comments that you’re making on the investment headwinds tend to be more targeted at the first half of ’18. So maybe, you can help us bridge the 41% gross margin results relative to the 42% guide.

And then if we look forward and taking into account that a substantial portion of your growth is coming from some larger -- some lower margin businesses, how should we think about gross margin post investments, I think that you talk about 42% gross margin in back half of the year? But is that a good intermediate term target meaning that 43% plus that we saw in the 2014-15 timeframe is unachievable given mix going forward?

[Wendell Weeks, Chairman and Chief Executive Officer]

Let’s start with the Q4. So, in Q4, we’re also seeing that the drag from our investment cycles. And you’re having, what can cause timing delta is that as we actually start-up a plant then there is certain costs that are attributed that are sitting in a project now flow through our P&L in our gross margins. So, some of that fitting quarter four as well as you may have seen the announcement from Saudi that the major new strategic alliance we’ve announced. That also started to shift and so there we had to build a new supply chain and that as about 4th generations of product to that. So, it’s a new product, new supply chain and so as we started to shift that, that also as profitability was not at the level that it will be ultimately.

So, I think really quarter four and quarter one is the same basic story, a little bit different mix revenue investment is. But you’re seeing that strong investment takeaway from some of this strength in the overall operations and we’d expect that to reverse.

Now turn it over to Jeff for the back half, but you’re right on the target for our gross margins. Jeff?

[Jeff Evenson, Senior Vice President and Chief Strategy Officer]

At our new core rates of 107 yen per dollar and 1,175 Korean won per dollar, the 2017 gross margin was 41.3%. We expect to be about it at this year. First quarter we're going to be at 40% in the back half of the year for Quarter 3 and Quarter 4 we expect to be above 42%. The two primary drivers of that are that our new factories will act as the startup stage as we ramp to meet the committed demand and then the second factor is we're taking advantage of the seasonally lighter demand and display to upgrade our display tanks with the latest technology and that will also have a strong benefit in the back half of the year.

[Operator]

And next we go to Stanley Kovler of Citi Research, please go ahead.

[Stanley Kovler, Citi Research]

Just one question on displays and then a follow up on the optical side. Panel makers have commented recently that they wanted to refocus on profitability and so one question was for 2017 for example when in the second half of the year there was more discounted to get inventory moving in China. How should we think about those types of developments going forward when maybe panel makers or OEMs will be less inclined to discount to get volume through. Your thoughts would be great.

[Jeff Evenson, Senior Vice President and Chief Strategy Officer]

We think that the supply chain inventory in actually 2017 had a healthy level and we think it will be healthy throughout 2018 as we see growth at the retail level. In terms of impact on us, we think that the glass market volume is going to be up mid-single digits and we believe that our pricing can reach mid-single digit year over year decline. We think that pricing is going to be driven by three things, the supply demand balance, competitive profitability of glass makers and also the need for attractive returns on ongoing investments. If you look over the last three years correlation between tail [ph] makers performance and glass pricing has been very low. So, we feel pretty confident on our guidance.

[Wendell Weeks, Chairman and Chief Executive Officer]

Stan was that the question you were asking or were you aiming more at the display market.

[Stanley Kovler, Citi Research]

Appreciate it, no that was the question. I just wanted to follow up on optical related to Verizon. The amounts from [indiscernible] capabilities I think that allow them multiple wavelengths on a single fiber for some of the edge [ph] deployments and I think the focus more from these technologies was to get to speed up on a single wavelength. Does this have any implication for you guys on demand or ramp of single mode fiber, is this an accelerator or could this actually slow things down for you, thank you.

[Wendell Weeks, Chairman and Chief Executive Officer]

So, in general what drives our demand is going to be footprint by neighborhood or by city. It is putting the [I in telecom] [ph] it is putting in place the regional infrastructure that we're going to service. As always when you put in something like [indiscernible] the capability of the fiber is always well in excess of what you're driving it at. And so quite often what you'll see is our demand comes when we basically due to home passes and then ultimately the home drops and then it’s always the telecom company can turn up the rate and turn up the service level with pretty simple upgrades in the [indiscernible] system inside sort of a level of itself. So, this is atypical and we don’t see it as impacting us frankly one way or the other, even negatively or positively other than to the extent that the degree with which auto customers serve their customers better, that net long-term turned in to more demand for us.

[Operator]

Right. And next one is James Fossa with Morgan Stanley. Please go ahead.

[James Fossa, Morgan Stanley]

Thank you very much. Just wanted to get a little more color on growth drivers for especially materials and Optical and Displays. Wendell, you talked a little bit about interior glass starting to move specialty or starting to contribute really in 2019. How should we think about bit it as a growth driver for specialty materials overall kind of meaningful in 2019 as a contributor or is it going to take longer than that? And I guess in light of your recent comments on this call related to Iris similar question on Iris, can Iris be a meaningful contributor to Display in 2019 or once again is that going to take longer? Thank you very much.

[Wendell Weeks, Chairman and Chief Executive Officer]

So, let’s start with your first question. The segment was sort of accounting method. Right now, we account for auto in glass area inside other, right. Ultimately, I don’t agree determine where we live is a segment, but it links more closely with our automotive market access platform than it does on mobile consumer electronics platform.

That being said because what you really care about is, does it generate revenue or not. I think 2019 will be the year if everything goes well that we will start to feel it in automotive. We’re a big company and this is just the beginning of this so it’s not going to be a life changing field in 2019.

But we will expect it to be really start to build its momentum in 2019 and then start to really contribute much more in the next decade. So, in the near term, what drives us in specialty is the adoption of our new innovations by more and more of the OEMs and we expect specialty to grow this year in mobile consumer and electronics and rate of growth will depend on how quickly people adopt our innovation sets.

In Iris, it’s still too early to tell. I think it’s very encouraging that two major players in monitors; Dell and Lenovo have adopted the Iris technology for the top of their line. I think we need to see they become a lot mainstream before that turns some of the investment area into a margin producer.

[Operator]

And we’ll go to Joseph Wolf with Barclays. Please go ahead.

[Joseph Wolf, Barclays]

Hi. Thank you. I had a question back to Display but on the transition in the industry towards OLED and not on the TV set but on the smaller panel size and the lower -- I guess the Gen 6, 6.5. Competitively is there any impact, I know you guys are involved in OLED manufacture, but are you competitors involved in the same way and is there any longer-term consideration where the other businesses or your competition is looking at the OLED opportunity differently than Corning?

[Wendell Weeks, Chairman and Chief Executive Officer]

So, could you just build on your question? When you say OLED, what exactly do you mean.

[Joseph Wolf, Barclays]

Both in flexible and in rigid, where, I know that Corning product is used in the manufacture of the end product, or perhaps it’s in the final device. And I’m wondering, if you believe that your competitors have the same sort of manufacturing capability or they are looking at that market differently?

[Wendell Weeks, Chairman and Chief Executive Officer]

How can we tell our competitors are looking at it? So, let me share instead how we think about it. Starting back a number of years ago as we evaluated OLED versus LCD technology. We determine that OLED probably will be most successful in the flexible small mobile area. Because the opportunity need performance advantage is that we’re highly value. So therefore, that’s where we focused a lot of our innovation effort and our share and that business is impressively high. So, to the extent that devices go into OLED mobile consumer electronics as opposed to LCD, that is revenue enhancer for us.

Now to small revenue enhancer, because in glass, the area of the device matters and so overall mobile is relatively small percent of the overall glass demand. What we felt then and we continue to feel is that all OLED for TV can become a player, but a small player that fundamentally it doesn’t offer enough value validate to the cost will create versus the continually improving LCD technologies like you just saw recently at CES with some of the big quantum dot technologies. That being said, we have a strong position as well. Anytime, anybody wants to use the glass. So, I don’t have great insight into how do our competitors feel about it. But I really like our position.

[Operator]

And that will be from Doug Clark with Goldman Sachs. Please go ahead.

[Doug Clark, Goldman Sachs]

I had a question on the display glass volume expectations. First for the market being up mid-single-digits in 2018. Can you explain what that means from a TV unit standpoint? Two units have been down for the past few years, I’m wondering if you’re assuming or reacceleration in growth.

And then secondly on Corning share gains in the relationships with BOE driving above market volume growth. Can you quantify that, should we be expecting high-single-digit glass volume growth for Corning in 2018, so essentially the materiality of BOE in 2018? Thanks.

[Jeff Evenson, Senior Vice President and Chief Strategy Officer]

Sure. We expect screen size to be the primary driver of growth this year. And in terms of our growth BOE is ramping our Gen 10.5 facility, we’re ramping our glass in tandem. So, we expect stability in other areas and that to be a little add for us, but that’s all the guidance we are looking at this time.

[Ann Nicholson, Division Vice President of Investor Relations]

Great, alright thank you all for joining us today. before we closed, I just wanted to remind you that we will issue an 8-K today within our core data recap again a 107 and a one at 1175. We'll be attending the Goldman Sachs conference on February 13th and we'll be planning to attend at least one conference at Corning for this quarter for the rest of the year. We'll also be providing some virtual presentations and webcasts on business topics throughout the year.

Finally, there will be a web replay of today's call on our website starting later this morning and a telephone replay available for the next two weeks with details in today's news release. Once again thank you all for joining us. John that concludes our call, please disconnect all lines.