Q4 2019 Earnings Call
Welcome to the Corning incorporated quarter for 2019 earnings call to be placed into the Q when a Q. Please depressed one been zero. It it's my pleasure to turn the call over it and Nicholson Vice President of Investor Relations. Please go ahead.
Thank you Stephen Good morning, and welcome to Corning's fourth quarter 2019 earnings call.
With me today, our window, we chairman and Chief Executive Officer, Tony Tripeny, Executive Vice President and Chief Financial Officer, and Jeff Evanson, 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 Companys 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, our non-GAAP measures used by management to analyze the business a reconciliation of core results to the comparable GAAP value can be found it yet.
Mr Relations section of our website. According dotcom.
They also access core results on our website with downloadable financials in the interactive analysts center.
Supporting slides are being shown live on our web cast and we encourage you to follow along there also available on our website for downloading.
Now I'll turn the call over to window.
Thank you 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.
[noise] E. P. S was 46 cents.
For the full year sales increased 2% to $11.7 billion net income was $1.6 billion and E. P. S was the dollars 76.
While our 2019 growth did not meet our long term targets, we once again outperformed our underlying markets.
We grew environmental sales, 16% well car sales were down.
We grew specialty materials sales, 8% wall smartphone units were down.
In life Sciences, we exceeded industry growth on the strength of new products for bio processing and advanced cell culture.
In display our glass volume grew mid single digits, Walt TV unit sales were down.
And in optical we outperformed the passive optical market, which declined high single digit percentage.
Changing market and customer dynamics impacted our 2019 performance significantly.
According to enter 2019 building on two years of strong growth and that growth continued in the first half with sales up 11% and E. P S up 24% year over year.
In the second half.
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 in 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 in 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 supply chain correction has ended.
We expect normal seasonality to resume though with the majority of volume and growth in the second half.
We also plan to start production at our next Gen 10.5 plants, which will support faster than market growth as the plants ramp.
In optical we expect a year over year gross in the second half driven by projects for Fiveg fiber to the home and Hyperscale datacenter deployments.
We expect these higher volumes to increase factory utilization and support higher profitability and we expect to benefit from the recent and ongoing cost actions in optical communications and display.
Tony will provide additional segment details and I will focus on our overall progress and outlook.
2019 was challenging from a financial perspective, but we remain committed to our new strategy and growth framework introduced last year.
Our new framework is the evolution of our strategy and capital allocation framework, which we successfully completed last year.
Building on the strong foundation of our original framework, we made excellent progress on many strategic initiatives during the year.
We made commercial and regulatory progress on dollar we opened a dedicated factory for our burgeoning auto interiors glass business and grew our order book significantly.
Display pricing remained moderate and we advance several compelling innovations and gorilla glass and optical communications.
We met or exceeded all of the goals of our 2016 to 2019 strategy and capital allocation framework, including returning more than 12, and a half billion dollars to shareholders over four years through share repurchases and 60.
The 7% dividend per share increase.
All while creating a better stronger more resilient company.
Under our new strategy and growth framework, we expect to continue capturing significant organic growth and creating additional value for shareholders.
From 2020 to 2023, we expect to deliver 68% compound annual sales growth and 12% to 15% compound annual EPS growth.
Expand operating margin or return on invested capital invest between 10 and $12 billion with a focus on organic growth.
And return $8 billion to $10 billion to shareholders through a combination of dividend increases and opportunistic share repurchases.
How do we plan to achieve these schools.
We are targeting and incremental $3 billion to $4 billion in annual sales along with improved profitability by the end of 2020 three.
Driven primarily by our strategy to create and sell into new product categories that enhance our customers offerings.
As I've said before we're not just counting on everybody buying more stuff.
We're putting more corning into the products that people already by this provides a mechanism for us to grow even in challenging environments.
We saw that happened during 2019 in environmental specialty materials in life Sciences as I outlined earlier.
In short a big part of Corning story over the next four years is a content story.
And we expect to see it across the company.
Let's look at how we advanced our strategy in each market access platform in the fourth quarter and for the full year.
In optical communications, we are currently feeling the impact of capital spending reductions in both the carrier and enterprise markets, we expect to recovery driven by Fiveg fiber to the home and Hyperscale datacenter deployments.
Our goals in optical communications I do advance our product portfolio and align costs with demand in the near term.
We're making progress in both areas.
From a product perspective in 2019, we continued to transform the way the world Connex by enabling Fiveg solutions with industry leaders.
New collaborations with Intel and Verizon demonstrate our commitment to helping our customers increase efficiency and address the challenges of new network deployment.
We also extended our leadership in data centers as all Tees, Portugal, the country's largest provider of telecommunication services selected our edge product.
Edge provides the increase speed power and capacity needed to withstand future pressure on servers and network capabilities.
And she has been playing a vital role in our continued success in enterprise. It's been deployed in 30 countries used in 50000 installations and as received 10 Global awards since its introduction.
Stepping back.
The long term trend in optical is strongly positive due to the benefits of photons, replacing electrons in network after network.
And we are uniquely situated to enable that shift.
But.
It's not always this moves line.
As one network or segment upgrades to optics, there can be a pause before the next one begins.
That pause is where we are right now.
So we're aligning capacity in inventory to current market demand, we've idled equipment and reduced head count and were delaying capital investments.
In the long term because of our leadership, we are positioned to continue putting more according solutions into every network that is built.
We will return to growth.
As the inevitable optical trend continues.
Turning to mobile consumer electronics.
We're making significant progress on our goal of doubling sales.
Since 2016, we've added $500 million in sales on a base of $1.1 billion. We grew sales, 42% cumulatively, while smartphone unit sales did not grow.
In 2019, we bolstered the presence of corn and content on AD in mobile devices with amplify screen protectors decorative backs and durable solutions for Wearables.
Apple announced it is awarding $250 million permits advanced manufacturing fund to Corning building on the $200 million, we receive from apples fund in 2017.
Both investments support Corning's state of the art glass processing equipment and materials integral to the delivery of next generation consumer devices.
In 2019 as one of our prominent customers noted we took a major step forward in state of the art cover glass in 2020 , We will continue to advance introduced new glasses, and we're confident that the adoption of.
Our technologies will enable us to our salespeople.
So stay tuned.
Moving to the automotive market.
Our goal is to double sales by 2023.
In 2019, we ramp production capacity and halfway China to meet committed demand for both our auto glass solutions and our gasoline particulate filter products.
We are well on our way to building a 500 million dollar plus GPF business by 2023 sales in 2019 exceeded $250 million.
And in 2019 automotive glass solutions deliver the industry's first auto grade gorilla glass for two D. and three d. interiors, along with corning's patented cold for technology.
Earlier this month, we announced collaborations with industry leaders across the auto ecosystem, including Visteon L. G. B O eight envy optronics.
We are beginning mass production and have built in order book worth several hundred million dollars with nearly half of that book under contract.
In life Science vessels, we reached several exciting milestones in 2019, we exceeded $1 billion in sales in our life Sciences segment as adoption of our industry, leading bioprocess in advanced cell culture products continues driving organic growth rate.
7%.
And we continue to build momentum for valid glass, we signed commercial agreements with three leading pharmaceutical companies and received FDA approval for use of Corning Valor glass as a primary package for a marketed drug product.
These major milestones validate our strategy to build a long term multibillion dollar franchise as we create a new standard in pharmaceutical glass packaging.
In display.
Paul is to stabilize returns.
The market continues to shift to large size Tvs, which are most efficiently produced by our customers on Gen 10.5, Fabs our leadership in Gen 10.5 glass supports medium and longer term volume growth.
In 2019, we continued to increase output at our first Gen 10.5 plant.
In 2020, we plan to ramp additional Gen 10.5 capacity in tandem with our customers.
And 2019 wasn't great year for display glass pricing.
We saw low single digit percentage price declines for the full year, which was even more moderate than anticipated.
And we expect a moderate pricing environment again in 2020.
You can see that across our markets, our strategic investments are well aligned with major trends and our relationships with industry, leading customers are creating new opportunities.
We've got to structural steel in place.
Our strategy is sound.
We're advancing growth in each of our market access platforms.
And we will overcome the challenges in display in optical.
In 2023 operational priorities drive our focus.
Successfully ramping our next Gen 10.5 plants.
Aligning cost in capacity to current demand.
And commercializing innovations to support our customers.
Execution against these priorities will create the momentum needed to achieve our strategy and growth framework goals.
Now, let me turn the call over to Tony for more details.
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 why 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 noncash 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 at 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 accounting has no impact on our cash flow.
Our currency hedges protect us economically from foreign exchange rate fluctuations and provide higher certainty for 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're very pleased with our hedging programming and the economic certainty. It provides we received $1.7 billion in cash under our hedge contract sensor inception more than five years ago.
Shifting to results fourth quarter sales were $2.9 billion net income was $406 million and EPS was 46 cents for the full year sales were up 2% to $11.7 billion net income was $1.6 billion and EPS was $1.70.
The sex.
Now, let's look at the detailed segment results and outlook.
In display technologies fourth quarter sales were $795 million and net income was 180 million.
Q4 glass prices declined slightly sequentially as expected.
Our fourth quarter volume was up low single digit sequentially.
Better than expected.
Displace full year sales were $3.3 billion and net income was $786 million.
Our full year 2019 price decline was a low single digit percentage.
Retail demand in 2019 with strong.
Our preliminary view with most but not all the data in is that retail display area increased mid single digits in 2019, driven by TV screen size growth.
Last month glass market volume was up low single digits west and retail as set makers took a conservative stance in the back half of the year due to macro uncertainty.
This conservativism drove panel maker utilization reductions and led to a supply chain correction.
We believe that supply chain inventory exiting 2019 is healthy and we think the correction is largely behind us.
Full year 29 for full year 2019, our glass volume was up mid single digits.
Outperforming overall glass market driven by our increased Gen 10, and a half output during the year.
The glass market shipped more volume in the first half than the second half due to the supply chain correction.
And so did we.
The lower shipments in the second half reduced our gross margin.
For 2020, we again expect the retail market measured in square feet to be up by a mid single digit percentage driven by TV screen size growth.
And given that the supply chain is now at a healthier inventory level, we expect the glass market to increase in the mid single digits and for our volume growth to be similar to the overall glass market.
In the first quarter, we expect the glass market to be up low single digit sequentially as panel maker utilization increases.
We expect our volume to be down low single digit sequentially underperforming the glass market because of a structural shift in the Korean panel market.
Up until two years ago, South Korea, with a leading provider of panels Grand panel makers are going through structural changes that will reduce their capacity significantly as the global center apparel, making moves to China.
This reduction impacts our shipments in Korea.
In the second half a 2020, we expect to grow faster than the glass market as our new Gen 10, and a half tanks in China fire up and absorb the panel demand that is shifting from South Korea.
Given corning's leadership with three of the four plan Gen 10, and a half Fabs, we expect the benefit from this regional shaft.
We expect more normal seasonality in 2020 and for almost all of our year over year volume growth to incur in the second half.
As our volume increases, we expect our margins to improve.
Turning to pricing, we expect Q1 sequential glass price declines to be moderate.
For 2020 with over 90%, 5% of our volume under contract, we expect full year price declines to be at mid single digit percentage.
We reached our goal of mid single digit year over year declines in the second half a 2018 and had even more favorable changes for several subsequent quarters.
More recently as just discussed the panel industry is working through a fundamental restructure of capacity.
Hi, grading from Korea to China.
The fact that we continue to have moderate price declines while these changes are happening is positive.
We believe that three factors continue to drive the favorable glass pricing environment, we've been experiencing.
First we expect glass supply to continue to be balanced with demand or even tight.
For Corning, we're aligning our capacity with demand.
We're also pacing our gen 10, and a half capital projects to align with panel makers schedules.
Second our competitors continue to face profitability challenges at current pricing levels.
And third display glass manufacturing requires periodic investments in existing capacity to maintain operations.
Glass prices must support acceptable returns on those investments.
Now to recap display the industry is emerging from a temporary supply chain correction.
Retail remained strong with the increase in TV screen size, continuing to drive glass volume growth.
We are well positioned with our customers and successfully ramping new Gen 10, and a half facilities.
And we expect to return to year over year growth in volume.
Margins and profitability in the back half of the year.
In optical communications fourth quarter sales were $903 million and net income was $62 million.
Profitability was impacted by lower volume and reduce production output that bring down inventory.
For the full year sales were $4.1 billion down 3% in a market that declined by a high single digit percentage.
Net income declined 17% for $489 million.
In 2020 sales increased 13% year over year in the first half and declined 16% in the back half.
The lower volume in the back half negatively impacted sales margins and profitability.
Nearly 90% of the second half year over year decline can be explained by changes in spending by two large customers.
A large carrier completed its fiber to the home build and redirected capital to pay down its debt.
Our hyperscale datacenter customer concluded a period of unusually intense building.
We have excellent relationships with these customers and continue to co innovate with them.
We expect our sales to increase at both companies as they spend more on optical passes.
In 2020, we expect year over year sales to be down 5% to 10% as the lower level of sales we experienced in the second half a 2019 continues throughout the first half of 2020.
And we expect first quarter sales to be down about 25% versus the strong project spending in Q1 or 2019.
In the back half of 2020, we expect year over year growth in sales and profits to resume.
Driven by projects for Fiveg fiber to the home and Hyperscale data center deployments.
Of the exact timing of these projects is hard to predict.
If they proceed as expected will be in the upper range of our guidance. If the project start later, we'll be at the lower end of the range.
When year over year growth occurs our factories will fill and our margins and profitability will improve.
We are working closely with our customers and we'll keep you informed as the year progresses.
Stepping back we are innovating to improve network speed cost and capacity. We also continue to receive confirmation that optical is essential for fiveg and hyperscale and to secure long term agreements with major industry players.
All of which sustains our confidence in our ability to deliver long term growth.
In environmental technologies fourth quarter sales were $374 million up 17% year over year and ahead of expectations.
Continued adoption of gasoline particulate filters drove the growth.
Net income was $64 million driven by strong operational performance and successful ramping of additional GPF capacity in China.
For the full year sales were one and a half billion dollars up 16% net income was $263 million.
2019, GPF sales exceeded $250 million and we're well on our way to building a greater than $500 million gasoline particulate filter business.
With a market leading product we continue to earn a majority position globally as automakers award platforms to meet Euro six and China sex regulations sales are accelerating is euro six regulations are on full effect and automakers are preparing for China six implementation in 2020.
Our halfway plant startup is ahead of schedule and has been key to delivering incremental sales and net income.
We expect continued growth.
Looking to 2020, despite continued weakness in the global auto markets and the expected downturn in the North America heavy duty market.
We once again expect to grow year over year with sales up in the mid single digits in the first quarter and for the full year.
We expect GPF sales to exceed $350 million for the year.
Specialty materials in its tour ended 2019 strong driven by demand for our premium glasses fourth quarter sales were $453 million up 14% year over year and net income was $94 million.
Full year sales were $1.6 billion up 8% year over year and grew for the fourth straight year, Despite essentially flat smartphone unit volume.
Net income was $302 million.
Similar to took 2019, we expect our growth in 2020 to come from further advancement and adoption of our premium glasses as well as our additional innovations for mobile consumer electronics.
We expect specialty materials sales to be up by high single digit percentage for the full year.
We expect Q1 sales to be up a mid single digit percentage year over year.
Life Science. This also ended the year strong exceeding expectations with fourth quarter sales of $256 million, an increase of 8% year over year.
Net income was $38 million up 31% year over year.
For the full year the business reached a milestone of with sales of $1 billion, a 7% increase year over year net income was $150 million up 28% year over year.
For 2020, our market outlook and customer demand remain positive and we expect growth to continue with full year sales up mid single digits in the first quarter. We also expect sales to be up mid single digits year over year.
Now, let's turn to the consolidated results and outlook.
Operating cash flow in the quarter was $1.1 billion.
As we said in October we expected to reduce working capital in the second half.
We did reduce working capital in Q3 and again in Q4.
Full year adjusted operating cash flow was $2.1 billion.
And Capex was just under $2 billion.
We are taking actions that will result in stronger operating cash flow and lower capital spending in 2020.
We expect capex to be approximately $1.5 billion for the year.
Gross margin in the fourth quarter was 37%.
Gross margin was impacted by the lower volume and reduce production output to bring down inventory in display and optical communications.
In the first half a 2019 gross margin was 40%.
In the back half of the year as display and optical communications volumes declined gross margin also declined to 38%.
In the first half a 2020, we expect display in optical volumes to remain low impacting our gross margin percent.
We expect volume and display in optical communications to grow sequentially and year over year in the second half.
When that happens gross margin should improve to approximately 40%.
In the first quarter, we expect sales to be seasonally lower than the fourth quarter and gross margin to be the lowest for the year down 100 to 150 basis points from the fourth quarter.
We expect gross margin dollars and percentage to increase sequentially thereafter.
Moving on to the rest of RPM now as a percent of sales, we expect SGN and R&D any to be nearly 14% and approximately 8.5% respectively for the full year.
In addition, we expect other income other expense to be approximately $275 million in 2020.
Full year gross equity earnings are expected to be approximately $170 million down $67 million from the prior year.
The expected decline in 2020 is due to lower expected sales at our hemlock semiconductor JV.
Most of hemlock semiconductor his business is under long term take or pay contracts, which include upfront cash payments.
In the fourth quarter of 2019 similar to prior years hemlock settled some of their solar customer contracts.
The settlements positively impacted their 2019 cash flow and reduced expectations for future sales in the seller segment.
Hemlock took a charge related to realigning capacity to the lower sales level.
The business remains quite profitable selling primarily semiconductor products, which are supported by hemlocks quality leadership and long term take or pay contracts.
We expect our effective tax rate for 2020 to be approximately 20% to 21%.
Now before I close I know there are a lot of questions on the impact of the Corona virus on Corning.
The safety and well being of our people is our number one priority.
We are in close contact with our employees customers and suppliers and we are engaging with governments in health services organizations as we monitoring the situation.
At the same time, we have not factored any meaningful operational our financial impact in our guidance the situation remains fluid and as more information becomes available we will update you accordingly.
In closing, we expect 2020 to be in many ways the mirror image at 2019.
We believe that the first half will remain challenging as markets and customer dynamics reflect.
We expect the first half will remain challenging as market and customer dynamics reflect what we've seen over the last six months.
And in the second half, we expect a return to growth and display and optical communications improve and as strong growth continues and environmental specialty materials and life Sciences.
As this happens we expect the company to return to grow to growing sales and profitability as we saw in the first half 2019.
Overall Corning is operating on a strong foundation that we built over the past four years and we continue to make progress in key areas as evidenced by our ongoing customer announcements, we are confident in our ability to achieve the objectives, we laid out in our 2020 to 2023.
Strategy and growth framework.
With that let's move acuity and.
Thanks, Tony Okay, Steve are ready for our first question.
As a reminder, if you have a question please depressed one than zero.
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 one so on display pricing I wanted to start off Tony and and will to whoever wants to answer this on the.
The numerator 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 out are you assisting movement with your own pricing or is there a mix that factor or something.
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 and display.
And then I also wanted to just quickly ask you about off the goal I know just 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 to that.
Guide are you.
Do you think you are adequately cautious I get the answer is yes, but how do you have any confidence and.
Engaging.
Risk on optical thanks.
All right right. 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 in that.
Is it is the case here too and we expect more moderate price declines is as items move out.
Throughout the year I think from a Korea standpoint, I think what's important to highlight here is that theres 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 as that capacity comes offline you know that shows backup 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 in more volume in the back half of the year.
And so I think that that's that's a trend thats been going on and that's a trend that we really see the impact of on 2020, yet I think if we just think through display first I think you've got it right.
On that.
Just the way in which we two contracts sort of the pattern of price through the year.
Our weighted earlier in the years in later.
Tony was trying to get across is if you take a look at the Korean market.
Between production and those share the overall world market just two years ago. They were the largest producer.
Slide size panels.
The world.
And what's happening is Gen 10.5 days.
Plants and LCD are just so much lower cost.
And you're seeing sort of the China industrial policy of that capital will be under.
China.
That is giving our Korean customers a challenge.
How do they compete and they haven't made that investment engine 10.5.
So you're just seeing a pretty natural switch gears.
Tony was talking about was that we've seen announcements.
The Koreans that over time, youre going to see about a 40% reduction in their capacity won't all happened this year, but over that time period.
And you're just going to see that shift towards China end agenda.
Now when that shares.
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 were able to maintain since really good strong.
Pricing performance in the face at this level of announcements for folks I think is what Tony is getting that is why we feel that's really good news for the pricing environment.
And.
And just sort of the does since we've sold well positioned in China, we'll just see that.
Progress that he talked about in the back half just continue to accelerate.
And when nor can I just ask you do you guys think that this year is the year that all those kind of is this play out this year in the next year things go back to more of a normal trajectory or you think this is a multi year kind of transition and it will continue next year to be.
Strange.
I think you're going to see the bulk of it happened with the.
This year with just the fact of how clear the Korean panel makers have declined just on their future.
Always anticipated.
Much like the move from Japan.
I want to Korea happened.
And then we've been pretty position for that that Weve see this move.
To China.
I think this year what was surprising to everybody in the industry is as we went through this less supply chain correction.
Is that.
The Chinese players continue to.
Produce pretty strongly.
Pretty aggressive pricing for panels.
At this made.
Korean customers sharply.
Sort of implement sort of some long term strategy thought they had.
Your turn and they're just focusing their guns on nexgen it.
Innovations for their Korean base panel.
Pasadena.
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 it's after effects, it's pretty big change, but I think the bulk of its going to be behind us this years there.
Okay. Thank you.
And optical visibility.
Yeah, 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 what the future, especially in the near term looks like over the next year, 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 those.
Both of that work coming in 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 will be closer to that and if the.
Lower end of the range the minus 10% that would be reflective of what some of those projects actually get themselves pushed out something thats, how weve done the working and clearly we've we've really focused on getting better at that over the last six months.
Okay, great. Thank you guys 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 up a little bit about your plans to use this capacity is going to be stranded and LCD in Korea, what timeframe can or should we expect asset redeployment and up to show up in your financial results level, although up.
So weve basically weve already.
Done most of that creates a low cost production facility for us So what we're doing and what we've been planning for is to continue to use that as soon 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 we'll be on that part of the plants, which is where we finished glass cutting into the right sizes.
So that's where it will primarily see that we've made those adjustments we have to continue to work our way through.
Just sort of what 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 our higher cost capacity.
In display.
We have evolved play into our gorilla plays.
And worked in Korea, as well, we've taken hunk of their panel making.
Production and instead put that into gorilla. So this is all playing out on our long term planning issues, it's happening in a little more accelerated fashion.
Okay. Thank you all know and.
Just a follow up.
There is obviously meaningful step down here in Europe 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 than we can sustain or a couple of your timeframe or is this something that given the market conditions and given sort of the more elevated capex levels over the last couple of.
Fears that this was sort of more of a one time.
How should we think about this capex levels over the next few years. Thank you well Wamsi as you know our Capex is really kind of divided into two different pieces. One is what it takes to kinda 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 was always.
He's going to matter in the longer term is how much additional customer demand and commitments do we get and what is that going to drive ins as far as capital spending now of course it once we start those projects. It takes a couple of years for the.
For both the sales in the revenues to show up and if you think back on to IR day, I think Jeff did good description of that but I think as you know as we look in 2020. There are certain projects that were can finishing up with customer demand that will drive growth in 2021 in 2022 and exactly what was.
Spend in 2021 in 2022 will just depend on how our innovations continue to evolve and how much customer commitment we get there. So overall, we said we spend $6 billion to $8 billion and I think these numbers are really consistent with that.
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 strategy in gross.
Framework.
Okay. Thank you for the context that's helpful.
The only thing that now we touches what happens in the period after that.
And then how much strong demand will we see that 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 will be a lot more clear with you Sir.
Great. Thank you.
Our next question will come from the line of motto Marshall Morgan Stanley . Please go ahead.
Great. Thanks.
Wanted to dig a little bit into kind of the growth and specialty materials next year and test it seems as if.
Just get a sense of how much of that is just from newer generation gorilla glass versus kind of new use cases.
And then maybe second just a little bit of a description of kind of what.
What is the difference between core and non core gross margin.
Backing out onetime FX impacted in Q4 into us how that carry it forward to Q1 would be helpful. Thank you.
Well why don't I start with that I think that theres.
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 get a number of things during the quarter.
In particular in optical communications and in our display business and.
Those are onetime charges and that's that's where you see that.
And as 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 innovations sets that are non glass.
Especially.
Our group of.
Very durable.
Optical treatments add that has a little bit lower gross margin percent than glass, but clearly this next year, we're counting on our glass innovations to get adopted and that's providing strong growth and overall unit growth market, which we're not anticipating to gross.
Got it thank you.
Our next question will come from the line of Meek Chatterji JP Morgan. Please go ahead.
Hi, Thanks for taking the questions. If I can just start off on environmental technologies and it'll be if you can talk to be were you expecting what's the craveable flipping moderation in growth that you're expecting from the beans close rate you heard this fuel.
Great 90 into more of a mid single digit ingrained trading is that kind of content moderation on automotive or is that more driven by the diesel segment, which obviously has a more challenging articles I believe.
It is mostly driven by the change in the diesel segment.
We feel continues to be very strong and we expect sales to be up $100 million.
In 2020, they were up more in that in 2019, but we're well on our way to the half a billion dollar goal that we set out for this business, where we are clearly the market leader and continue to have great success.
Okay, and Kenefick diesel segment, you're going to see us because you're going to see the north American heavy duty diesel market.
Digital seen from.
Talking to our customers that we expect to go through.
Cycle here, but we're replacing that with.
Gains.
The Chinese adopt.
Some of our new Tech.
And there are diesel market, so thats why its sort of monitoring.
Tony.
Can you clarify, what's driving the confidence and improving cash flow and trade credit you will see a straight 19, when the outlook on the profitability of profit sites into more kind of flat down more risky.
So there's a couple of things there I mean I think the first thing is is that in 2019, we built a lot of working capital.
Now, we always buy 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 theres, we wouldn't be growing as much working capital in 2000.
20, as we did in 2019 on in 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 spend in 2019, so from an overall standpoint, we expect our free cash flow to be much greater than it was this year.
Thank you thanks for taking the questions.
And once again, if you have a question. Please to press one but in general our next question will come from the lives 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'm just curious on your view on the just the industry supply situation. My understanding is that there's quite a bit of excess capacity in China for fiber and cable I understand that cannot move.
Mostly across the globe, but it seems to be making its way into Europe are you guys factoring in any of those any that excess supply into your model should we be concerned about pricing pressure risks as the year goes on and then they have follow.
I think on that one Steve.
You are seeing that the extent that is going to this is already in our financials.
The actual level of excess inventory in China has been trending down.
There's still some too.
I think.
How.
Rapidly the Chinese market tightens up.
Will depend a lot on this upcoming tender and we'll see out of China.
Yeah.
So paid that as part of this.
They will lay forward a little more clearly what their fiveg plans are.
And therefore, what they'll need to densify that network.
If that comes out with a very aggressive set of fiveg builds.
Then the China market itself.
Significantly.
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 some rough math is you did about 9% pre tax margins this quarter, which is about half of what you're doing a few quarters ago. So I guess, maybe just I think I understand the walk from 18 to nine but if there's 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.
Margins in this business and is displayed in our all about volume.
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 in that clearly causes our margins to go down.
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 in display would also get back to where.
They were before.
Great very helpful. Thank you.
Our next question will come from a line of Asia merchant of Citigroup. Please go ahead.
Great. Thank you for taking my questions have been answered, but just a quick question on specialty materials, knowing that primarily goes into a lot of lifestyle and starting to full lifestyles and flat growth this year.
Calendar 20, driven by two models et cetera, and growth rate that you talked about should we expect an inflection there I think you're guiding for growth rate simple similar to what it was this year given they like that.
Down market for smartphone thanks.
Yes, I think from an overall standpoint clearly of 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 those smartphones.
As Wendell said I mean, we've grown 40% over four years grown every every single year 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 that really matters. There arent is our premium glass strategy and some of our other innovations and thats whats really driving our growth.
And so should we expect net five key balance would have higher content I think you guys talked a lot about.
Higher content and other category in other consumer electronics as well.
And we'll talk a little bit about that and then just on margin sorry to keep talking about that 40% inflecting to 40% is that something we expect.
Third quarter third calendar quarter is it more towards the fourth quarter. It really depends on how big or it doesn't just simply a matter at that 5% to 10%.
Range that you talked about that in the optical segment. Thank you.
Let me start with the Fiveg phone and then I'll turn it over to Tony.
Profitability.
So yes, I think your hypothesis on fiveg using more of our content.
Is true.
We don't anticipate that Fiveg becomes a very large segment smartphones here.
This coming year alright, it has more of our content it tends to be most premium phones, which use our very best glass and because of the nature of what it takes to deliver fiveg increase in the need for RF transparency, which tends to increase the amount of glass.
Acquired on those phones.
Sort of a question back for you we would be very interested if you are now predicting a positive inflection point.
Smartphone.
Units sales currently on counting on that so if you have any insight into that.
Helpful to us.
Okay, 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 you know exactly where that ends up in the timing of that volume increases, what's going to drive us back to 40%, but in the back half of the year, we should be back at the 40% number.
Great. Thank you.
Operator, like we've got time for one more question.
And that question will come from a line of Tim along of Barclays. Please go ahead.
Thank you, yes, I am just squeeze two quick ones and if I could just wanted to go back to the GPF market.
You highlighted better than expected results in.
In 2019 in the 100 million additional next year, just talk a little bit about what you think drove the outperformance fee. This year do you think it was better share or were there any advance sales into the China market or what specifically drove that.
And that helping 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 when can we start to see more meaningful contribution there. Thank you.
So on the GPF side.
Our product.
Strengths the relative advantages of applauded led to us winning more than we originally planned.
So that is one driver.
Other is that with the move to real world driving.
The.
Automotive.
Companies.
Our envisioning, perhaps use of GP.
And even some more advanced GPS.
Technologies on or or have.
Their vehicle platforms. So that's more of a longer term piece pretty much everything that we've learned so far has been positive about our relative position and GPS and the need for this technology to help clean up.
Cars, even further specially in the 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 motive market in the supply chain takes longer than say the mobile consumer electronics supply chain. So the bigger impact of that well be in 2021.
But we will see some increases as we go through each quarter. This year, yes, and then after we break through that sort of 100 million dollar.
Revenue run rate level will our analytics will be able to click and it'd be a lot more helpful to add to 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 us breakthrough that run rate and that was shipped.
Able to be a little more accurate for you Sir.
Thank you very much.
Thanks, Alright, 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 the 26 in February and at the Susquehanna Technology Conference on March 12, So once again, thanks for joining US Steve you can please just.
Connect all lines.
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