Welcome to the Corning Incorporated Quarter Four 2019 Earnings Call. [Operator Instructions] It is my pleasure to turn the call over to Ann Nicholson, Vice President of Investor Relations. Please go ahead.

Thank you, Steve, and good morning, and welcome to Corning's fourth quarter 2019 earnings call. With me today are Wendell Weeks, Chairman and Chief Executive Officer; Tony Tripeny, Executive Vice President and Chief Financial Officer; and Jeff Evenson, Executive Vice President and Chief Strategy Officer. I'd like to remind you, that today's remarks contain forward-looking statements that fall within the meaning of the Private Securities Litigation Reform Act of 1995. Those statements involve risks, uncertainties and other factors that could cause actual results to differ materially. These factors are detailed in the company's financial reports. You should also note that we will be discussing our consolidated results using core performance measures, unless we specifically indicate our comments relate to GAAP data. Our core performance measures are non-GAAP measures used by management to analyze the business. A reconciliation of core results to the comparable GAAP value can be found 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 and 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 fourth quarter and full year 2019 results. For the fourth quarter sales were $2.9 billion, net income was $406 million and EPS was $0.46. For the full year, sales increased 2% to $11.7 billion, net income was $1.6 billion and EPS was $1.76. While our 2019 growth did not meet our long-term targets, we once again outperformed our underlying markets. We grew Environmental sales 16%, while car sales were down. We grew Specialty Materials sales 8%, while smartphone units were down. In Life Sciences, we exceeded industry growth on the strength of new products for bioprocess and advanced cell culture. In Display, our glass volume grew mid-single digits, while TV unit sales were down, and in Optical, we outperformed the passive optical market, which declined a high-single digit percentage. Changing market and customer dynamics impacted our 2019 performance significantly. Corning entered 2019, building on two years of strong growth, and that growth continued in the first half with sales up 11% and EPS up 24% year-over-year. In the second half, a supply chain correction in the Display industry and weakness in the Optical market, highlighted by capital spending reductions at two of our significant customers, led to declines in Display Technologies and Optical Communications. While we acted quickly to mitigate lower than expected second half demand in Display and Optical, we did not fully overcome these challenges. As a result, our second half sales were down versus 2018 and as our volume decreased, factory utilization declined and so did our profitability, especially gross margin. We're confident that the situations in Display and Optical Communications are temporary, and we expect the company to return to sales and profit growth in the second half. In Display, we see indicators that the…

Thank you, Wendell, and good morning. In the fourth quarter, we delivered on sales and EPS expectations. Sales in each of our businesses performed at or above expectations and we generated over $1 billion in adjusted operating cash flow. We accelerated actions in Optical Communications to align production output and working capital to current customer demand. This impacted gross margin, which was below our fourth quarter guidance. For the full year as expected sales and profitability were down due to the challenges in Display and Optical Communications. While we also faced challenges in other markets, it's important to note that Specialty Materials, Environmental Technologies and Life Sciences powered through and grew sales. As we turn to 2020, we expect continued strong growth in all three of these businesses. We also expect Display and Optical sales and profitability to grow year-over-year beginning in the second half. As a result, we expect margins and profitability for the corporation to improve in the second half of the year. Now, before I get into the details of our performance and results, I want to note that the largest difference between our GAAP and core results are related to charges associated with capacity realignment in Display and Optical Communications and at our equity venture Hemlock Semiconductor. Other differences between our GAAP and core results come from a non-cash mark-to-market adjustment for our currency hedge contracts and a change in our tax reserves. Now, with respect to mark-to-market adjustments, GAAP accounting requires earning translations, hedge contracts and foreign debt 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 impacted GAAP earnings in quarter four by $59 million. To be clear, this mark-to-market…

Thanks, Tony. Okay, Steve, we're ready for our first question.

[Operator Instructions] Our first question will come from the line of Rod Hall of Goldman Sachs. Please go ahead.

Yes, thanks for the question. A couple of quick ones. So, on Display pricing I wanted to start off, Tony and Wendell to whoever wants to answer this, on the movement of pricing through 2020 understand that the mid-single digit declines are being driven by the movement from Korea to China. But could you talk us through more of that dynamic? What is driving that? Are you assisting that movement with your own pricing or is there a mix of factor or something like that. And then could you also talk about the timing of that is the first half pricing view that we're going to see different from the second half in Display? And then I also wanted to just quickly ask you about Optical. I know Jeff's been working on modeling that. And it sounds like you feel like you've got some better visibility. I'm just wondering on the low end of that guide, are you – do you think you are adequately cautious. I guess the answer is, yes, but how do you have any confidence in engaging the risk on Optical? Thanks.

All right. Rod, Let me first start with the pricing answer. I mean, as you know, most of our contracts get put in place in the fourth quarter and the seasonally the largest price decline that we have in any quarters in the first quarter and that is the case here too, and we expect more moderate price declines as items move out throughout the year. I think from a Korea standpoint, I think what's important to highlight here is that there is just a lot of change going on in the industry. I think Korea capacity is going to be down around 40% on a year-over-year basis. So that's a pretty significant decline from a pricing standpoint or from a capacity standpoint. And has that capacity comes offline, it shows back up in China. So, as we see our year flow out, we're going to see less volume – a little bit less volume in the market in the first half of the year and more volume in the back half of the year. And so, I think that that's a trend that's been going on and that's a trend that we really see the impact on 2020.

I think if we just think through Display. First, I think you've got it right. Rod, on that, just the way in which we do our contracts sort of the pattern of price through the year in a little more weighted earlier in the year than later. I think what Tony was trying to get across is, if you take a look at the Korean market or the Korean production and their share of the overall world market, just two years ago they were the largest producer of large size panels in the world. And what's happening is Gen 10.5 plants in LCD are to so much lower cost and you're seeing sort of the China industrial policy of that capital being underwritten to China, that is giving our Korean customers a challenge to how do they compete when they haven’t made that investment in Gen 10.5. So, you're just seeing a pretty natural switch begin and what Tony was talking about was that we've seen announcements out of the Koreans that over time you're going to see about a 40% reduction in their capacity, it won't all happen this year, but over that time period and you're just going to see that shift towards China and the Gen 10.5 plants. Now, when that shifts, there are players at the glass level who are better or worse positioned in that. We are extremely well positioned in that, but the overall industry structure just sort of has to move with that dislocation and so, the fact that we are able to maintain such really good strong pricing performance in the face of this level of announcements for folks, I think is what Tony is getting at is why we feel that's really good news for the pricing environment. And then just sort of the – that is since we're so well positioned in China, we'll just see that progress that he talked about in the back half just continue to accelerate through time

And Wendell, Can I just ask you, do you guys think that this year is the year that all this kind of, is this play out this year and the next year things go back to more of a normal trajectory or do you think this is a multiyear kind of transition and it will continue next year to be strange?

Well, I think you're going to see the bulk of it happen with the – this year with just the fact that how clear the Korean panel makers have become just on their future. We always anticipated, much like we move from Japan to Taiwan and Korea happened that and then we prepositioned for that, that we see this move to China. I think this year what was surprising to everybody in the industry is, as we went through this last supply chain correction is that the Chinese players continue to produce pretty strongly and pretty aggressive pricing for panels and this made the Korean customers sharply act, and sort of implement sort of some the long-term strategy thought they had in nearer term. And they're just focusing their guns on next-gen innovations for their Korean-based panel capacity. And while they’re set - arms are sourcing more and more out of the Chinese panel makers. So, our view that the bulk of this move has been announced we’ll feel the industry will continue to feel its aftereffects. It's pretty big change. But I think the bulk of it going to be behind us this year [indiscernible].

Okay, thank you. And Optical visibility?

Yes, I think from an Optical visibility standpoint as you're right, Jeff and his team have been doing a lot of work, relative to what the future especially in the near-term looks like over the next year or so. And we've tried to integrate that work along with what we know from a business standpoint and what our customers are telling us. And the range is really informed by both of us – both of that work. I mean, at the minus 5% of the range, that's an indication that we've got certain customer projects and we're following those closely and if that happens, we'll be closer to that and at the lower end of the range, the minus 10%, that would be reflective of what some of those projects actually get themselves pushed out. So, I mean, that's how we've done the work and clearly, we've really focused on getting better at that over the last six months.

Okay, great, thank you guys. I appreciate it.

Our next question will be from the line of Wamsi Mohan, Bank of America. Please go ahead.

Yes, thank you. I was wondering if you can maybe talk a little bit about your plans to use this capacity is going to be stranded in LCD in Korea. What timeframe can or should we expect asset redeployment and that to show up in your financial results? And I have a follow-up.

So we – basically we've already done most of that. Korea is a low-cost production facility for us. So, what we are doing and what we've been planning for is to continue to use that as a strong melting source for full sheet to feed some of our finishing operations in China. So, therefore the main piece that we'll see will be on that part of the plants, which is where we finished the glass cut it into the right sizes. So that's where we’ll primarily see that. We've made those adjustments. We have to continue to work our way through just sort of what's the appropriate way is to work our way through all the workforce implications and we're continuing to do that. But remember, so much of our higher cost capacity in Display, we have evolved to play into our Gorilla plays, right, and in Korea as well, we've taken a hunk of their panel making production and instead put that in the Gorilla. So, this is all playing out on our long-term planning. It's just, it's happening at a little more accelerated fashion, Wamsi.

Okay. Thank you, Wendell. And just as a follow-up, there was obviously a meaningful step down here in your CapEx plans for this year. How should we think about sort of the next couple of years, given what we know about the demand environment here, is this sort of a level that we should expect that we can sustain over a couple of year timeframe or is this something that, given the market conditions and given sort of the more elevated CapEx levels over the last couple of years that this is sort of more of a one-time. How should we think about this CapEx levels over the next few years. Thank you.

Wamsi, as you know, our CapEx is really kind of divided into two different pieces, one is what it takes to kind of sustain and continue to improve our businesses and then the second is what it takes to build and grow the businesses, especially as we get new customer demand. And so, what always going to matter in the longer-term is how much additional customer demand and commitments do we get. And then what is going to drive as far as capital spending. Now of course, once we start those projects, it takes a couple of years for the – for both the sales and the revenues to show up. And if you think back on to IR Day, I think Jeff, did a good description of that. But I think as we look at in 2020, there are certain projects that we’re finishing up with customer demand that will drive growth in 2021 and 2022. And exactly what we'll spend in 2021 and 2022 will just depend on how our innovations continue to evolve and how much customer commitment we get there. So overall, we said we'd spend $6 billion to $8 billion and I think these numbers are really consistent with that.

Yes, I think the way to think about the timing is, we've got now sort of the bulk of the investment that we need to deliver the revenue and earnings growth that we laid out on our Strategy & Growth Framework.

Okay, thank you for the context. That's helpful.

And they only thing now, we told to is what happens in the period after that and then how much strong demand will we see then, and then we'll just have to start early because it takes a while to build those facilities. So, that's a little bit far out in the future for us to be able to dial-up exactly. And as we get closer to it, we'll be a lot more clear with you, sir.

Okay, great. Thank you.

Our next question will come from the line of Meta Marshall, Morgan Stanley. Please go ahead.

Great, thanks. I wanted to dig a little bit into kind of the growth in Specialty Materials next year. And just, it seems as if just get a sense of how much of that is just from newer generations of Gorilla Glass versus kind of a new use cases. And then maybe second, just a little bit of a description of kind of what is the difference between core and non-core gross margins, kind of backing out one-time effects that impacted in Q4 and just how that carries forward to Q1 would be helpful. Thank you.

Well, why don't I start with that, I think that there is – as we do the various restructuring actions, some of that shows up into the gross margin and since that is in part of our ongoing operations that ends up in our GAAP results, but not in our core results. We did a number of things during the quarter, in particular in Optical Communications and in our Display business, and those are one-time charges and that's where you see that.

And in Specialty, the bulk of our financial drivers are the new generations of glass. But we will also see some revenue growth out of our new innovation sets that are non-glass especially our group of very durable optical treatments. And that has a little bit lower gross margin percent then glass, but clearly this next year we're counting on our glass innovations to get adopted and that providing strong growth in an overall unit growth market, which we are not anticipating to grow strongly.

Got it. Thank you.

Our next question will come from the line of Samik Chatterjee, JPMorgan. Please go ahead.

Hi, thanks for taking the question. If I can just start-off on Environmental Technologies and going to be, if you can talk to the – what are you expecting? What's the driver for the moderation in growth that you're expecting from the teens growth rate you had this year in 2019 to more of a mid-single digit in 2020. Is that kind of content moderation on automotive or is that more driven by the diesel segment, which obviously has a more challenging outlook, I believe?

It is mostly driven by the change in the diesel segment. GPF we feel continues to be very strong and we expect sales to be up a $100 million in 2020. They were up more than that in 2019, but we're well on our way to the $0.5 billion goal that we set out for this business, where we are clearly the market leader and continue to have great success.

Okay, thank you.

In the diesel segment, you're going to see us – because you're going to see the North American heavy-duty diesel market, as you'll see from talking to our customers that we expect to go through down cycle here, but we are replacing that with our gains as the Chinese adopt some of our new tech and there diesel market. So that's why I've sort of moderating.

And Tony, if you can quickly clarify what's driving the confidence in improving cash flow in 2020 versus 2019 when the outlook on the profitability or profit side seems to be more kind of flat to down modestly.

So, there is a couple of things there. I mean I think the first thing is that in 2019, we built a lot of working capital. Now we always build inventory and working capital as we expect businesses to grow, but obviously compared to the first part of the year, our businesses didn't grow as much. So there is, we wouldn't be growing as much working capital in 2020 as we did in 2019. And then the second thing is, in the back half of the year, we do expect to see growth on a year-over-year basis and I think that will help us from a cash flow standpoint. And then of course, finally, we are going to also reduce our capital spending compared to what we spent in 2019. So from an overall standpoint, we expect our free cash flow to be much greater than it was this year.

All right, thank you. Thanks for taking the questions.

[Operator Instructions] Our next question will come from the line of Steven Fox of Cross Research. Please go ahead.

Hi, good morning. I had a question – a couple of questions on Optical actually. First of all, I was curious on your view on the, just the industry supply situation. My understanding is that, there is quite a bit of excess capacity in China for fiber and cable. I understand you cannot move seamlessly across the globe. But it seems to be making its way into Europe, are you guys factoring in any of those any of that excess supply into your model, should we be concerned about pricing pressure risks as the year goes on. And then I have follow-up.

I think on that one, Steve. Where you’re seeing that to the extent that is going to impact us, is already in our financials. The actual level of excess inventory in China has been trending down, there is still some to come. I think how rapidly the Chinese market tightens up will depend a lot on this upcoming tender, it will see out of China Mobile. We anticipate that is part of this, they will lay forward a little more clearly what their 5G plans are and therefore what they'll need to densify that network. If that comes out with a very aggressive set of 5G builds, then the China market itself will tighten up very significantly. If it's not quite as aggressive, we'll just have a little bit longer-tail. We think we've got the bulk of that in these numbers.

Okay. That's very helpful. Thanks for that. And then just in terms of the Optical margins. I guess the rough math is you did about 9% pre-tax margins this quarter, which is about half of what you are doing a few quarters ago. So, I guess maybe just I think I understand the walk from 18% to 9%, but if there is anything you want to point out there. But more importantly when you get to the second half of the year, if you're executing or demand is where you think it's going to be, are the 18% margins reasonable or should we think about that is taking a little longer to come back? Thanks.

I think from an overall standpoint, our margins in this business and its Display are all about volume and we had significant decline in volume in the back half of last year, 16% on a year-over-year basis and that really impacts our factory utilizations and the like and that clearly causes our margins to go down. And we do expect to return to growth in the back half of 2020 and when that happens, we get both the benefit of that volume. But of course, we've also done some cost reductions during that period of time. So we expect, from an overall company standpoint, we'd get back to the 40% gross margins and Optical both Optical and Display would also get back to where they were before.

Great, very helpful. Thank you.

Our next question will come from the line of Asiya Merchant of Citigroup. Please go ahead.

Great, thank you for taking my questions. Lot of them have been answered, but just had a quick question on Specialty Materials, knowing that this primarily goes into a lot of smartphones. We're starting to see smartphones inflect to growth this year, calendar 2020 driven by 5G models, etcetera. The growth rate that you talked about should we expect some inflection there? I think you're guiding for growth rate to be similar to what it was this year given that it was slightly down market for smartphone. Thank you.

Yes, I think from an overall standpoint, clearly if smartphones started to grow, you would – that would certainly impact our business but what's really has made the difference from our business standpoint is the content that we provide on the smartphones. As Wendell said, I mean, we've grown 40% over four year has grown every single year in the last four years, even though the number of smartphone units have been down in most of those years. And so, yes, I think as you get more smartphones that might put us at the higher end of the high single digits. But what really matters there is our premium glass strategy and some of our other innovations and that's what's really driving our growth.

And so should we expect that 5G phones. We have higher content, but I think you guys have talked a lot about higher content and other category in other consumer electronics as well. So, if you could just maybe talk a little bit about that. And then just on margins. Sorry to keep talking about that. The 40% inflecting to 40%, is that something we expect in the third quarter – third calendar quarter? Is it more towards the fourth quarter? It really depends on how quickly or does it just simply a matter of that 5% to 10% range that you talked about that in the Optical segment? Thank you.

Let me start with the 5G phone and then I'll turn it over to Tony, on the profitability. So yes, I think your hypothesis on 5G using more of our content is true. We don't anticipate that 5G becomes a very large segment in smartphones here in this coming year, but you are right, it has more of our content, it tends to be the most premium phones, which is our very best glass. And because of the nature of what it takes to deliver 5G, we have an increase in the need for RF transparency, which tends to increase the amount of glass required on those phones. I think sort of a question back for you. We would be very interested if you are now predicting a positive inflection point in smartphone unit sales. We currently aren't counting on that, if you have any insight into that, that would be helpful to us.

And then on margins, you're absolutely right, I mean I think what requires for the margins to get back to the 40% is the volume increase that we expect in the back half of the year and exactly where that ends up in the timing of that volume increase is what's going to drive us back to 40% in the back half of the year, we should be back at the 40% number.

Great, thank you.

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

And that question will come from the line of Tim Long of Barclays. Please go ahead.

Thank you. Yes, let me just squeeze two quick ones in if I could. I just wanted to go back to the GPF market. You highlighted better-than-expected results in 2019 and $100 million additional next year. Just talk a little bit about what you think drove the outperformance this year? Do you think it was better share? Were there any advance sales into the China market? Or what specifically drove that, and that help in the trajectory next year. And then on the auto glass side, can you just give us an update on timing there, it sounds like still a lot of wins, but when can we start to see more meaningful contribution there. Thank you.

So on the GPF side, our product strength, the relative advantages of our product led to us winning more than we originally planned. So that is one driver. The other is that with the move to real-world driving the automotive companies are envisioning perhaps use of GPF, and even some more advanced GPF technologies on more and more of their vehicle platforms. So, that's more of a longer-term piece. I think pretty much everything that we've learned so far has been positive about our relative position in GPF and the need for this technology to help clean-up cars even further, especially in a city environment.

And then on the auto glass piece, I mean, clearly we're winning these awards and our factories ramping. So we will see some increased sales this year. But as you know, the automotive market in the supply chain takes longer than say the mobile consumer electronic supply chain. So the bigger impact of that will be in 2021, but we will see some increases as we go through each quarter of this year.

Yes. And then after we break through that sort of $100 million revenue run rate level will our analytics will be able to click and can be a lot more helpful to you and us and being able to guide the trajectory going forward. We just need a little more data. We need to get implanted in a few more places was breakthrough that run rate and then we should be able to be a little more accurate for you, sir.

Okay, thank you very much.

Thanks. All right, thank you everybody for joining us today. Before we close, I wanted to let you all know that we're going to be at the Goldman Sachs Technology and Internet Conference on February 11. Mobile World Congress on 26th of February and at the Susquehanna Technology Conference on March 12th. So once again, thanks for joining us. Steve, you can please disconnect all lines.