Welcome to the Corning Incorporated Quarter One 2019 Earnings Call. It is now my pleasure to turn the call over to Ann Nicholson, Division Vice President of Investor Relations.

Thank you, Tanya, and good morning, everyone. And welcome to Corning’s Q1 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 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 our 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. Now, I will turn the call over to Wendell.

Thank you, Ann, and good morning, everyone. This morning we reported excellent results to position us for another year of strong growth. For the first quarter, sales were $2.9 billion, up 13% year-over-year. Net income was $365 million, up 22% year-over-year and EPS was $0.40, up 29% year-over-year. Four of our five segments achieved double-digit sales growth year-over-year. Highlights included that Optical Communications continued to outpace the market with sales up 20%. Environmental Technologies delivered 12% sales growth driven by accelerating adoption of our Gasoline Particulate Filters. Specialty Materials sales were up 11% on the strength of Gorilla Glass and our other innovations. Life science sales were up 5% as the business continues to benefit from its leadership in cell culture vessels. Display continues to deliver stable returns with first quarter sales and net income up double digits year-over-year and the best first quarter pricing environment in well over a decade. These results keep us on track to deliver the growth and shareholder returns we designed into the four year strategy and capital allocation framework introduced in October of 2015. 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 continue to make great progress and we expect to meet all our stated goals. Our cash generation is on target. Through the first quarter of 2019, we have returned $12.3 billion to shareholders, reducing outstanding shares by approximately 37%. And we’ve increased dividends per share by 67% since the framework began, including an 11% increase in February. Our investments in RD&E capital expenditures and acquisitions are also on track, totaling $8.8 billion through first quarter 2019. Now let's take a closer look at our progress in each of our market access platforms, starting with…

Thank you, Wendell and good morning. We had another outstanding quarter. We grew sales 13% year-over-year with every business segment growing. We also grew net income 22% and earnings per share 29%, all while continuing to invest for even more sales growth this year and beyond. Now 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’ve discussed before, GAAP accounting requires earning translation hedge contracts settling in future periods to be mark-to-market and recorded a 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 an after-tax GAAP gain of $138 million in Q1. Now 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 first quarter, sales were up 13% year-over-year to $2.9 billion. Net income rose 22% to $365 million and EPS was $0.40, up 29%. As Wendell noted, our strong growth results from our technology and manufacturing leadership. We are benefiting from recent investments, including capacity expansions for Optical Fiber and Cable,…

Thank you, Tony. Tanya, we are ready for the first question.

Okay. Your first question comes from the line from Asiya Merchant. Please go ahead.

Great. Thank you, everyone. If you can just clarify Optical once again and then talk about how we should think about margin improvements in this segment, as you continue to grow. And what’s driving potentially higher margin? Is it -- should we think about utilization being a bigger factor, should we think about mix here that’s helping drive improved margins in the segment? Thank you.

Sure. In terms of the sales adjustment, I think it's pretty straightforward. We have one fiber-to-the-home customer that we expected to shift its deployments from homes passed to homes connected in Q3, and it's actually starting in Q2. So that impact sales about $100 million and it means we will be up around 10% in sales versus low teens, but that's still a lot faster than the market is growing. So we feel good about that. And in terms of the margin profile, yes, we see the opportunity to expand margins. Part of it is, is that just like all of our other businesses, we’ve been investing in this business. And as we ramp capacity in those businesses, you would expect margins to improve. And then the second thing is that we are offering a lot of great innovations to our customers and those innovations help save them money and also give us an opportunity to provide solutions in some of our technologies and that’s good from a margin standpoint too.

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

Yes. Hi, guys. Thanks for the question. I guess, I wanted to focus in on cash flow a little bit, because we are struggling to model the cash flow on a quarterly basis. And it actually came in a little bit lower than we thought this quarter, but then if you look back last year there were some seasonality then as well. So I’m wondering, Tony, is there any way that you could give us some idea of what you think cash flow might be for 2019 and maybe talk about some of the puts and takes around working capital in Q1 and then I’ve got a follow-up to that.

Sure. I think if you go back and look at our cash flow cycle for the last several years, I mean actually -- probably longer than that, we always start off with Q1 being our lowest cash flow cycle and we grow robustly throughout the year. And that's exactly what we expect to happen in 2019. And the reason for that is, is that we kind of wind down a lot of our sales in the fourth quarter, especially as we entered December and we wind them up in the first quarter, especially as we get to the month of March. And so you have significant change in working capital in those two periods. And then in addition to that, we’ve some of our payments like our incentive payments get paid out in the first quarter. So they improve during the year, but they get paid out in the first quarter and we expect exactly that similar cycle to continue in 2019. Now, I think if you go back and look at, you will see that same cycle last year. Last year did have some incentive payments that happened in the first quarter. So it was a little bit higher than what it was the first quarter this year, but the cycle is exactly the same. And we are certainly on track to what we said we were going to do from a full-year standpoint in our capital allocation framework.

Okay.

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

Thanks. Good morning. Two questions, please. First on gross margins. Tony, I was wondering, the gross margin guidance quarter-over-quarter is solid, but maybe a little less than some of us were expecting and you called out some puts and takes in that. I was wondering how much you can sort of quantify where maybe there's a drag from adding capacity versus where you’re getting better mix, etcetera to maybe better understand how you are coming up with your gross margin guidance for the second quarter? And then I had a follow-up.

Sure. I think the news in this call is the investments that mute our gross margin percentage are going to be a little bit higher than we thought a quarter ago. In particular, in the second quarter, as both Wendell and I talked about, we see GPFs accelerating, the market is appearing to develop faster and we are winning more of those platforms. And so that clearly is having an impact on second quarter gross margin. In Specialty Materials, we are investing now in some innovations that our customers are going to introduce in to the back half of the year as they launch new products and so that’s occurring in the second quarter. And then in the Auto Glass factory, we are beginning to put that together because we are having good success in that market. As you know we’ve introduced the AutoGrade glass earlier this year. And so we need to be prepared for what happens with sales probably in the fourth quarter, maybe in the first quarter, but it takes a few months to ramp up in advance of that. And then in the back half of the year, besides those kind of opportunities exactly where we end up with the Blue Sky initiative in the diesel factory will just depend on exactly where things end up in the back half of the year. But from an overall standpoint, I mean we are really happy with this, we consider this all to be good news. It's going to drive both short and near-term growth. And on top of that, our operating margin is expanding, and so we end up actually with more of our revenue dollars to the bottom line and that makes a CFO very happy.

Great. That’s helpful. And then just -- I was just curious, Wendell there were some -- there was a Tier 1 auto supplier this week that had a -- or in the last week had a push out related to having trouble ramping some hot formed display technology. And I know you guys are patented on cold forming, but the question is, as you think about sort of these ambitious displays, which have different shapes and curves and are larger than typical [indiscernible]. How confident are you in the ability to ramp these displays or at least your glass portion to manufacturing volumes? It seems like it's a big leap based on what we heard over the last few days? Thanks.

Thanks for the question. Very insightful question. The struggle of that particular Tier 1 is actually what our innovation is about is that we believe that trying to get shape in a vehicle, if you want a hot form the glass and then try to laminate, try to put the different coatings on something that has shaped already is way more difficult and is way more costly than our innovative way to do it, which is cold forming where basically we do all those processes in the flat 2D form and then because of our unique glass and our patented way to get form, we then take and create the form after those processes. This saves just a ton of money and it's really, we believe, going to put us in a position to extremely well in the industry. And needless to say after that Tier 1's experience and another Tier 1's experience, our phone has been ringing off the hook with interest to get a chance to collaborate with us to help bring this innovation to market.

Great. I appreciate that color. Very helpful, thank you.

Thank you. Our next question comes from the line of Samik Chatterjee with JPMorgan. Please go ahead.

Hi. Thanks for taking the question. Just one from my side. You talked about the single customer in Optical, which had a change in the schedule. Can you just talk about kind of what you are seeing in terms of fiber demand from other customers, particularly, if we look at kind of data center customers we’ve kind of heard of some movement in the CapEx number -- outlook there. Also we saw some auctions in China over the last quarter, was there any result or the outcome -- did the outcome of that impact your guidance for the year?

The only thing that’s impacting our guidance is this change with this one customer. The rest of our businesses are very strong, the data center business is very strong, our other carrier business is very strong. We aren't -- we haven't been that strong in China and so that doesn't have much of an impact on us. But everywhere else, I mean, we feel really good about the business and I think what we are trying to get across is that the changing guidance is totally related to this one customer, and we are growing a lot faster than the market.

I think just add some commentary on growth for us. Where we've succeeded is to broaden our product offering as well as our customer base. And we are seeing a glass and fiber optics and our innovative products penetrate more of the networks and in all of the different style networks. And so as a result, what’s interesting is, here we are talking about a customer who has just moved by one quarter their fiber-to-the-home, but, in the old days one customer of that size and scale moving something as significant as fiber-to-the-home, we would have felt in a really strongly. Instead, we are just talking about how fast do we continue to grow and that is a really interesting spot where we’ve tried to engineer and has happened and we will still feel as our different customers do big civil works projects at different times right, how much growth that we have. But the big mega trend here is that you are seeing densification, enter into the wireless network, enter into the cloud computing network, and densification means glassification. And the exact timing of those builds can sometimes be hard to predict, but we are seeing a ton of wind behind us solutions. Just from a little bit broader perspective as we look at it, we think it's quite exciting calling exact timing during a quarter, not so easy, right? But the mega trends look really good here to us.

Great. Thanks for the color. Thank you.

Thank you. Our next question comes from the line of Vijay Bhagavath with Deutsche Bank. Please go ahead.

Yes, thanks. Hey, good morning, Wendell. My question is on, just a quick report card from you on the 3M asset, how's it going? And then, any thoughts on adding similar such assets to the Optical portfolio -- you think you -- you have what it takes now for your customer expectations heading into the rest of the year and into next year? Thanks.

Thanks for the question, Vijay. Yes, we are really happy with the people and the products and some of the customer access that we brought on board with 3M. They were stronger with some customers that we were weaker and now we are able to bring our integrated package and we feel really good about the revenue synergies we've gotten there. And the people that we brought on board, feel delighted to be part of it, Enterprise, where Optical Communications and connectivity is so important. So that we're really happy with. As far as bringing on additional pieces, we are always going to be looking for those opportunities that fit just right, our market-access platform and allow us to grow any asset we would require faster than the current holders. That being said, as you heard from Tony, we actually have -- we are quite busy delivering on our organic growth opportunities. We are having so much pull from our customers that it means we are having to invest more, we are quite busy delivering that incremental growth. So we don’t have any big targets in mind right now, mainly because we are having so much, pull, but we are always open and if you have any ideas, Vijay, we would be glad to hear.

Always. Thank you, Wendell.

And your next question comes from the line of James Faucette with Morgan Stanley. Please go ahead.

Thank you very much. I wanted to follow-up on your comments on the work that you’re doing with the cold form for auto as well as the Valor Glass testing. Just in those conversations you are having, are you seeing any change in in-design times or time-to-market opportunity, especially if automakers are having to change kind of what the roadmap look like and catch up or not? And then, on Valor Glasses, as your potential customers are going through that testing, any update on timing of when we could start to see Valor move into production and general availability.

Thanks for the question. It's you’re -- it's something really interesting, James. I would say in automotive interiors, it's going faster than we anticipated. We thought we had a pretty good understanding of the automotive market-access platform, because we’ve been in it so long and we felt it was going to be relatively slow for our advanced glass solutions, just because of the way that industry works. We've actually gotten a positive surprise by how quickly people are pulling on our interior solutions and how excited they’re about some of our new cost advantage solutions. So as a result, we’ve accelerated our investments to bring up a dedicated facility to do these large area glass parts with the various optical treatments that we had through our vapor deposition platforms. So there, it's gone faster and we are sort of playing catch up with the supply chain, not because anybody else is ahead of us, but because we have so much pull. So the way we are sort of doubling down on a positive surprise there. Valor, I'd say is moving at a very stately pace, okay? In this industry, as you know, if you follow it, adopting new technologies tends to be slow, it's a highly regulated industry and because margins tend to be quite high in the industry, there tends to be a relatively slow move of gravity towards new solutions because they’re quite profitable where they’re. That being said, we are seeing just tremendous amount of excitement from our customers, especially because of the opportunity to provide more out of existing facilities. And as if you follow the industry, you’re going to see many reports of drug shortages and inability to get enough vaccines and inability to provide enough of lifesaving medicines and where we are getting very strong pulp, like come as fast as we can adopt it, tends to be in those areas where they’re missing revenues and endangering patients' lives by an inability to supply with the capital platform that they have. So, Valor I view as stately, but feeling very strong attraction from the industry to bringing us into it to help them serve patients better.

Thank you very much.

Thank you. Our next question comes from the line of George Notter with Jefferies. Please go ahead.

Hi, guys. Thanks very much. I guess, I wanted to ask about the Display business. I guess, I'm wondering if you guys are seeing the inventory build in that supply chain? And I bring up the question, because if I just do the math on your Display business, it's grown about 12% or 13% over the last six months. Just in terms of revenue growth and given your comments about pricing, I think that translates into about 17% or 18% in terms of area. We tend to think of the end markets as growing 7% to 8%. I certainly heard what you said about BOE and ramping share there, but it seems like a pretty big gap and I'm wondering if you're seeing inventory or indeed it's [indiscernible]? Thanks a lot.

We are not seeing any inventory build in the supply chain. We are growing faster than the market because of our ramp of our Gen 10.5 factory. Demand is exactly where we said it was going to be at the beginning of the year and it's all driven by screen size growth. This business is delivering on stable returns and I mean we couldn't really be any more happier than where we are right now. At the core, I totally get how you are wrestling through it, when you take a look at the total industry and if you take a look at many of our competitors' releases. But at the core, it is just, we had the right product at the right time with the right customers. And that means that area growth is falling more into our hands, right? And allowing us to capture the growth in the industry and it's all concentrating with us. And that’s the dynamic that you're seeing in the numbers.

Next question?

Thank you. The next question comes from Wamsi Mohan with Bank of America.

Yes, thank you. Good morning. I have one for Tony and Wendell as well. Tony, how do you feel about leverage and the possibility for Corning's ability incrementally to take on more debt and do you see the need to do that to fund some of these growth opportunities that you are investing in? And Wendell, in the Display segment, can you maybe comment on this faster than market growth? Clearly, you're benefiting from the BOE exposure, but doesn't that also mean that structurally there is a shift under way for panel capacity to be -- for the Chinese panel makers to be taking share relative to the Taiwanese. And if that happens over time, would you need to drive incremental investments in China, and maybe shut down some of the capacity that’s located in other regions? Thank you.

Let me take the leverage question first. We don't need to add any leverage to meet these investments. We have very strong operating cash flow and that’s more than sufficient to meet the investments, both in our capital spending, our R&D and actually continuing to increase dividends every year. So I think we are in good shape there. We certainly have the ability to add leverage, but we are doing it selectively, I mean, places where we’ve added leverage over the last couple of years has been in Japan where the interest rates are low and we have high exposure and that’s been over 10 years maturity. And in the United States, where we've added a lot of -- we’ve added -- what debt we've added has been at the 30 to 40 year maturity. And we are also looking maybe in the China market, where we have some -- where we also have a lot of exposure. But we certainly don't need that leverage in order to fund our investments.

Let me take on the Display piece. The only thing I would add to Tony's is, the great benefit of the investments that we’ve made is that we are going to see very nice expansion in our operating cash flows. And that expansion in the operating cash flows, which we will talk more about when we all get together for IR day, is really giving us just very, very nice financial resilience and strength to pretty much fund, both our growth as well as nice shareholder returns. So we feel really good about that. Now let's deal with Display. So I think you are quite right to point out that, as some of the major new Gen 10.5 plants come on stream, they are lower cost than some of the older plants and so therefore they'll get most of the growth and then the question is what happens to some of the older generation LCD plants for our customers and will those lose share. So first, from our customer basis, you're seeing them try to develop new markets and technologies, things like the automotive display, market wearables, a bunch of other areas, to put their product to use. But really from a more selfish standpoint, from Corning standpoint, this is what is behind our strategy for things like Gorilla, we're already a pretty significant part of what was display capacity, we've already moved over, to doing Gorilla for Mobile Consumer Electronics and now increasingly for Auto. And you can expect us to continue to do that and that allows us to basically repurpose those assets and to capitalize those businesses without having to spend a lot of capital. So that’s worked out really well. I think what’s more of a dynamic for us will be our increasing productivity as we bring our new -- you are seeing us invest in new technologies in our LCD glass plants and our Gorilla Glass plants. This allows us to continue to improve our cost position, which usually means increasing productivity. And as a result that could give us the opportunity to consolidate facilities etcetera, but it has more to do with how quickly we can develop those new process technologies than it does our ability to repurpose, we’ve done a really good job of repurposing.

Operator, we got time for one more question.

Thank you. And our last question comes from Tejas Venkatesh with UBS. Please go ahead.

Thanks for taking my question. The delta between depreciation and CapEx has widened significantly over the last couple of years. I think that helps gross margin near-term, but perhaps keeps your gross margin pressured in the future years. Can you comment a bit on that? And then, if I could push you one more time on Optical, normalizing your 2019 Optical revenue outlook for the 3M acquisition and the $100 million impact from the single FTTH customer, organic growth appears to be decelerating to 8%. I know this is much higher than market, but this was a business that was organically growing well into the double digits. So, I was hoping you could provide some color into how your customer conversations have evolved over the last year?

Sure. Let me start with your question about increasing depreciation versus capital spend. I mean, there's no doubt that we are investing in our businesses. And the reason we are investing in the businesses is that our customers are coming to us with lots of great opportunities and we are inventing products and solutions for those customers. And when we do that, we grow significantly, and we’ve seen that growth in the back half of 2018. We are seeing that growth this year and we are going to see that growth into the future. So there is no question that is happening, we are getting greater depreciation, of course, that will have an impact on the gross margin line. But it creates a lot of great cash flow and gives us the opportunity to continue investing in. So, we are really happy about where we are right now from that standpoint. And then in terms -- from a standpoint of where we are in Optical Communications again, we are very pleased with our results here. We are growing considerably faster than the marketplace and we’ve been working closely with our customers and you look at our results and you will see strong results, both in the carrier market and in the enterprise market, which is where we have our hyperscale data center customers and we feel good about the growth there.

Yes. And I think your observations on, sort of how much organic growth at what time period, it's truly important, when you think about Opto [ph] is how these are large movements in architecture and they can get pretty inevitable, but their exact timing of when they start and which individual player starts a given program, right, all can move you around from one quarter to another, especially when you're doing, sort of year-over-year comparisons, where you may be comparing to someone's great big fiber-to-the-home build in the last part of last year, right? And then you're comparing that to this year when that same customer isn't doing a major pass, right, but then we still growing and it's made up by other pieces. I think what’s really important here to think for the long-term perspective is, do you believe that wireless is going to move from a structure that is relatively glass light to one that becomes very glass heavy and that’s what we believe 5G does, densification happens. And so now in the biggest telecommunications network in the world, which is wireless, right, moves to being a very glass heavy network that speaks very well for our growth opportunities. As cloud continues to grow rapidly that -- what that leads to is this sort of centralization of data flow, which means you get a lot more bandwidth and that area has to get there and get out, which once again leads to very dense very glass rich network. That we also look at and say, that's going to continue, but these are big build. So the exact timing of how they all work out and what periods you are comparing that will -- that can allow you to be -- for it to be hard to just lay a monotonic growth rate out there, right? So, I feel that some of the difficulty of doing the comparisons, but when you step back just architecturally and it looks pretty good to us for glass.

Thanks, Wendell. And I want to thank you all for joining us. Before we close today, I wanted to let everyone know that we will be at the JPMorgan Tech Conference on May 15 and as we said, hosting our Investor Day at the Conrad in New York City on June 14. Registration for that event is open on our Events and Presentations webpage. Finally, a web replay of today’s call will be available on our site, starting later this morning. So once again, thank you all for joining us. Tanya, that concludes our call. Please disconnect all lines.

Thank you. We are now at the end of the Corning Incorporated quarter one 2019 earnings call. You may now disconnect.