Q2 2019 Earnings Call
Welcome to the Corning incorporated second quarter earnings Conference call. It is my pleasure to turn the call over to an Nicholson Vice President of Investor Relations.
Thank you and good morning, welcome to Corning's quarter due 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 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 995.
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 on the Investor Relations section of our website at Corning Dot com.
You May also access core results on our website with downloadable financials in the interactive analysts center.
Supporting slides are being shown live on our webcast and we encourage you to follow along we are also available on our website for downloading and now I'll turn the call over to Wendell.
Thank you and good morning, everyone.
This morning, we reported excellent results keep us on track for growth in 2019 and beyond.
Our performance demonstrates the strength of coatings portfolio and our ability to deliver for shareholders.
In a mixed macro environment.
Looking at the second quarter.
Sales were $3 billion up 8% year over year.
Net income of $410 million grew faster than sales at 14% year over year, driven by operating margin expansion.
And EPS was 45 cents up 18% year over year.
Segment sales growth rates ranged from the mid single digits to mid teens and we grew earnings in all segments.
Highlights from the quarter include optical communications met expectations delivering high single digit sales growth driven by data center and fiber demand.
Environmental technologies delivered 15% year over year sales growth driven by the accelerating adoption of our gasoline particulate filters and continued strong demand in the north American heavy duty market.
Life Science sales were up 6% year over year with net income growing much faster than sales up 29% year over year.
Specialty materials sales were up 8% year over year on the strength of gorilla glass and other innovations.
Display continues to deliver stable returns with second quarter sales and net income up significantly year over year and better than expected pricing.
Our performance stems from the successful execution of our four year strategy and capital allocation framework introduced in October .
Of 2015.
Under the framework, we targeted returning more than 12, and a half billion dollars to our shareholders through repurchases and dividends, while investing $10 billion to extend our leadership.
And deliver growth.
We surpassed our four year goal of 12, and a half billion dollars by returning more than $300 million to shareholders during the second quarter.
And we're seeing the benefit of our investments in our first half a year over year performance and in our expectations for the second half of 2019.
Of course.
As you've all seen this earning season, many companies are facing uncertainty and macroeconomic headwinds.
And we're not immune to economic downturns or trade disputes or other geopolitical upsets.
But we are more resilient then at any other time in our history.
Across the company.
While the end markets, we serve are experiencing downward growth revisions.
And many of our competitors are not growing at all.
We continued to outpace the markets.
In the auto market Global auto production is down, but we expect sales growth in our environmental business to be in the low teens this year.
Retail television sell through for a cast are declining in units.
But we expect display volume and sales growth this year.
Smartphone unit sales are also forecasted to be down.
But we are growing gorilla glass sales this year as well.
In life Sciences, the industry is relatively immune to economic headwinds. So it is growing and it's typical low single digit rate.
But we expect mid single digit growth of our life Sciences business this year.
And finally in optical communications, we now expect the passive optical market to be down.
Earlier in the year, we projected the market to be up 5% and for our sales to grow in the low teens.
We now expect the market to be down mid to high single digits.
And for our sales to grow low to mid single digits.
While the growth is lower than previously expected. It is still very positive relative to the market.
You'll hear more details from Tony on the current dynamics.
So.
The good news is even in this environment we are growing.
And when markets improve we'll grow even more.
We are confident in our long term growth prospects.
The successful execution of our strategy and capital allocation framework adds to our confidence.
We face challenges along our path to growth throughout our 2016 to 2019 plant.
But we address those challenges and met or exceeded all our goals.
In so doing we created a bigger.
Stronger company.
And we created a strong foundation for significant additional growth.
Our new strategy and growth framework since our leadership priorities for 2020 to 2023.
It's our original framework evolved for new growth era, we will continue to focus our portfolio and utilize our financial strength.
We plan to return $8 billion to $10 billion to shareholders and to invest $10 billion to $12 billion and growth.
And extending our leadership.
We expect a sales compound annual growth rate of 6% to 8%.
And an EPS compound annual growth rate of 12% to 15%.
Annual dividends per share growth of at least 10%.
Our capabilities are becoming increasingly vital and multiple trends are driving growth across multiple businesses and in multiple geographies.
In optical communications, we are on track to deliver growth twice as fast as the passive optical market driven by opportunities in Fiveg and Nexgen Hyperscale.
Recently, Centurylink announced that it is using corning fiber to build the largest ultra low loss fiber network in North America.
They are connecting more than 50 major cities throughout the U.S.
And we will soon expand into parts of Europe , as well, creating a 4.7 million mile fiber network.
In the second half, we're going to be introducing next generation solutions that enable fiveg and access networks to be installed faster and reduce the total cost of ownership.
While Pos is may occur as network operators transition between projects.
Photons, replacing electrons in network. After network provides a strong upward trajectory over longer periods.
In mobile consumer electronics, we are well on our way to doubling sales despite a maturing smartphone market.
As the world leader in glass for smartphones tablets, and emerging categories like Wearables and augmented reality devices, we expect to continue capturing more value per device.
Gorilla glass has now been featured on 7 billion devices worldwide.
And adoption of Gorilla glass six is expanding.
We continue to innovate in new categories and expect further adoption of new products in the second half.
Turning to the automotive market.
We expect to double sales by 2023, driven by gas particulate filter adoption and our new auto glass solutions business.
As I already noted many companies in the auto industry are dropping expectations.
Were generating double digit growth and ramping new capacity.
In one new plant, we're now producing large parts to serve the growing pipeline of projects awarded to our automotive glass solutions business.
In another.
We're capturing accelerating demand for gasoline particulate filters.
And not only are we making great progress building, a $500 million GPF business.
We're growing faster than we expected.
We now expect GPM sales to exceed $200 million for the full year.
Our market leadership for this new technology was publicly recognized by two customers in the first half of 2019.
We received the Diamond supplier award in March.
And just recently, we also won the Volkswagen Group Award.
We were one of just eight suppliers honored in the global performance championed category.
Chosen from Volkswagen's Global network of 40000 suppliers.
Turning to life science vessels, we aim to outpace the industry by more than two times.
Weve recently increased manufacturing capacity for several key products used in cell and gene therapy development and production.
Our growth is also supported by the increasing need for safety and quality in the packaging of injectable drugs on this front, we continue to make strong progress on the path to a new long term multibillion dollar franchise with valid glass.
In display.
Our goal is to stabilize returns and we are successfully delivering.
The growth driver for display glass is large size Tvs, which are most efficiently produced by our customers on Gen 10, and a half apps.
We continued our leadership in quarter two with the announcement of two new Gen 10, and a half plans.
Corning now has three of the planned for Gen 10, and a half facilities in the world.
And we are thrilled about pricing.
Third quarter glass prices are expected to remain consistent with quarter two.
Yes, you heard me correctly third quarter prices should be approximately flat to quarter two.
As a result of the glass pricing through three quarters, we now expect full year glass prices to only decline in the low to mid single digit range.
Across our markets.
Our relationships with industry, leading customers are creating new opportunities for collaboration.
And our strategic investments are paying off.
We're capturing opportunities in generating significant top and bottom line growth in multiple businesses.
I look forward to sharing our progress against our new objectives over the next four years.
Now, let me turn the call over to Tony for more details.
Thank you Wendell and good morning.
We had another excellent quarter.
Year over year, we grew sales, 8% net income, 14% and earnings per share, 18% with sales and earnings growth in every business segment.
And we did this all while continuing to invest for long term growth.
Before I get into the to the details of our performance and results I want to note that the largest difference between our GAAP and core results are a noncash mark to market adjustment for our currency hedge contracts.
And a change in our tax reserves.
With respect to mark to market adjustments GAAP accounting requires earning translation 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 these contracts will not be settled in the current quarter.
For us this reduced GAAP earnings in Q2.
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're very pleased with our hedging program and the economic certainty. It provides weve 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 second quarter sales were up 8% year over year to $3 billion.
Net income rose, 14% to $410 million and EPS was 45 cents up 18%.
Our strong growth results from our technology and manufacturing leadership, we are benefiting from recent investments, including capacity expansions for optical fiber and cable Gen 10, and a half display glass gasoline particulate filters and multiple development projects, such as advanced glass for mobile devices and automotive.
We are very pleased with how these investments are playing out.
And we are continuing to invest.
We are bringing new plants online this year, creating capacity for committed demand and driving additional sales growth in 2019 and beyond.
Capital spending in Q2 totaled $570 million and we expect to spend just over $2 billion in 2019 with programs in every market access platform.
Now, let's look at the detailed segment results and outlook.
In display technology, our goal is to stabilize returns and we had a very strong quarter.
Second quarter sales were $848 million up 9% year over year, and net income was up 11% year over year.
Second quarter sequential glass price declines were moderate and even better than we expected.
As Wendell said, we expect third quarter glass prices to be approximately flat to Q2.
As a result of the glass pricing through three quarters, we now expect full year glass prices to decline in the low to mid single digits versus our prior guidance of mid single digits.
Now three factors drive our view that this favorable pricing environment well continue.
First we expect glass supply to continue to be balanced to demand.
Or even tight.
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.
Absolute glass prices must support acceptable returns on those investments.
For Corning, we will only add capacity, if we can get an attractive return for our shareholders.
In the second quarter, the display glass market volume grew mid single digits year over year, and our volume grew faster as expected due to the ramp of our Gen 10, and a half plant.
Now while end market demand is meeting our expectations as you've been hearing recently some panel makers have lowered their utilization.
Therefore for the third quarter of 2019, we expect the display glass market volume to be roughly consistent year over year.
And to decrease by a low single digit percentage sequentially.
However, our volume is expected to be up year over year again due to the Gen 10, and a half ramp and decreased low single digit sequentially.
In line with the market.
Now for the full year. Despite this anticipated weaker third quarter, we continue to expect to outperform outperform the market by delivering volume growth in the high single digits.
Driven by Gen 10, and a half.
In summary, we remain very pleased with the current pricing dynamics in our display business and our ability to capture Gen 10, and a half glass growth to deliver stable returns.
Let's move to optical communications in the second quarter sales were $1.1 billion up 2% sequentially and 7% year over year.
Net income of $158 million grew 11% sequentially and 5% year over year.
Growth was driven by multi year data center projects.
Fiber sales and the addition of sales from our three Am Communications markets Division acquisition.
Now in spite of our strong first half we are reducing our expectations for the year.
We entered 2019 projecting the global passive optical market to increase by more than 5%.
And our sales to grow in the low teens.
We now believe that the global market will be down mid to high single digits and that our sales will be up in the low to mid single digits.
We see weakness primarily in the carrier market.
Since the last earnings call several large build projects, we projected for the second half of the year have been pushed out.
Multiple carriers have reduce capex for the remainder of the year.
We see delays in fiber to the home builds at several tier two carriers.
Slower deployment at North America cable operators and fiber Densification for next generation wireless has not yet gain momentum outside the early leaders.
Also we have further reduced our expectations for the 2019, China market and are now seeing related weakness in India and southeast Asia.
The delay in China, Mobile's tender announced earlier this year resulted in surplus inventory, which is currently being absorbed in these regions.
Now, we continue to execute well against factors in our control and our growth remains significantly above the market.
For the third quarter, we expect sales to be consistent sequentially and down low single digits versus an exceptional third quarter in 2018.
Environmental technologies second quarter sales were $366 million up 15% year over year and ahead of expectations driven by ramping GPF sales and continued strong demand in North America heavy duty market.
Net income grew 20%.
We are well on our way to building a $500 million gasoline particulate filter business.
European regulations are in full effect and automakers in China are preparing for fall China six implementation in 2020.
The market is developing faster than we planned and we are winning more platforms than we anticipated.
We sustained our majority position of awarded platforms to date with additional wins, particularly as Oems prepare for China six implementation.
As a result, we now expect GPF sales to exceed $200 million in 2019 and to grow robustly thereafter.
Based on our accelerating demand, we now expect full year sales to be up by a low teen percentage versus our prior expectation of 10%.
We also expect third quarter sales to be up by a low teens percent year over year.
In specialty materials second quarter sales were $369 million up 8% year over year and driven by continued strong demand for the company's portfolio of mobile consumer electronics glass solutions.
Net income was up 5%.
For the third quarter, we expect sales to be.
Up approximately 25% sequentially and consistent year over year.
We continue to expect full year growth again in 2019, despite a maturing smartphone market.
Exactly how much will depend on the adoption rate of our innovations.
Our results and outlook demonstrate the value of our premium glasses and the strength of our innovation portfolio.
In life Sciences second quarter sales were $260 million up 6% year over year net income was up 29% year over year.
Manufacturing performance and operating leverage were outstanding.
For both the third quarter in the year, we expect sales to be up mid single digits year over year.
In summary, we had an excellent second quarter with strong performance across the company.
The benefits of our recent investments are contributing to results.
All of our businesses have solid momentum relative to their markets and we are on track for sales growth for full year 2019.
Now, let's move to the consolidated income statement second quarter gross margin was 40.1% a slight increase from the first quarter.
As I described last quarter, we are continuing to invest.
While we build startup ramp and optimize new facilities associated cost offset some of the normal leverage on our gross margin line.
For the second half of 2019, we expect gross margin to be slightly better than the first half.
This is less than we thought in April because of lower than expected sales in optical.
As well as higher than expected costs in display.
And our Gen 10, and a half facility, we are bringing up new technology ramping volume and improving our cost.
Just not as quickly as we expected.
We are excited about our gen 10, and a half projects because they enable us to capture the majority of the market growth.
And will ultimately provide a step change in glass manufacturing.
From an operating margin standpoint, we expect the second half to expand over the first half.
Moving to additional outlook details, we expect other income other expense to be approximately $250 million for the full year.
Full year gross equity earnings are expected to be approximately $210 million predominantly from hemlock semiconductor with the third quarter at approximately $20 million to $25 million versus second quarter 2019, gross equity earnings of $28 million.
And we expect our effective tax rate for 2019 to be approximately 20%.
Consistent with Q2.
In closing, we had an excellent first half with sales and NPAC growth in every one of our businesses.
As we discussed most companies are facing uncertainty and macroeconomic headwinds right now.
We feel these headwinds as well, but our solid execution against the factors within our control is evident in our strong first half and makes us confident in our ability to grow every business for the full year.
We are not immune to challenges, but we are more resilient than ever.
Our portfolio, an emphasis on capturing technology substitutions enable us to outpace the markets we serve.
As conditions improve.
Our growth will accelerate.
Our confidence is reflected in the long term growth targets, we've laid out in our 2020 to 2023 strategy and growth framework.
There are exciting opportunities across our market access platforms, we are becoming increasingly relevant to the trends fueling those markets.
And that allows us to capture more opportunities in products and categories, where we are already the leaders.
I look forward to sharing progress on our framework in the months and years ahead.
With that let's move to Q and eight and thanks, Tony Okay. Greg we are ready for our first question.
Thank you, ladies and gentlemen, if youd like to ask a question. Please press Star then one on your Touchtone phone once again for questions. Please press Star then one.
Your first question comes from the line of Wamsi Mohan from Bank of America. Please go ahead.
Yes. Thank you good morning.
Tony can you bridge the gross margin in 2019 versus 2018 in the second half and actually even operating margins if you could.
It would be helpful. If you can isolate the impact of the mix of the faster growth businesses, which might be a little bit lower margin versus the incremental impact that youre talking in display.
And can you just square the trends of improving glass prices to the deteriorating sort of gross margin optics here in the second half. Thank you.
Sure Wamsi.
I think the big change statement here is is that we had expected gross margin.
Two.
Go to 41% to 42% in the back half and now we're looking at it to be slightly better than the first half and is really there are two drivers on this I mean, the first is what's happening in our in the optical communication sales.
This is all driven in the carrier market, where we've gone from low teen sales at the beginning of the year at a low to mid single digits and you know theres incremental profitability on these sales are high given that we have all the fixed cost infrastructure in place. So we see margin compression for CRC in the company as those sales don't occur and then the second area is the higher than expected cost in display.
And that is really driving.
Is really being driven by as we bring up our new technology and ramping volume and improving our cost in Gen 10, and a half it's just not happening as quickly as we expected. So that is the big change statement over what we had expected a quarter ago.
In terms of operating margin, we did expand operating margin in the first half of the year versus last year, and we expect to expand operating margin in the second half of the year.
And so from our standpoint as we've discussed that's the most important of the metrics because of the operating leverage that we get as we grow sales.
Thanks Jay.
Your next question comes from the line of Mehdi Hosseini from SFG. Please go ahead.
Yes, just a quick follow up Tony.
Free cash flow has been negative for two consecutive quarter with gross and operating margin in the second half is slightly better than the first half.
How do you see the.
Free cash flow trendy.
So.
Mehdi I mean keep in mind that the normal operating cash flow pattern for us is to generate most of our operating cash flow in the back half.
And that is because in the first half we have working capital growth to increase to support our increased sales and we also have some significant annual payments that occur in the first half related to compensation tax payments and legal settlements and Thats exactly whats happened. This year I mean, our operating cash flow for the first half is.
About a $150 million.
Included in that is a build in working capital of about one.
$500 million now that's a couple hundred million dollars, maybe more than what you would normally expect which is mostly in inventory and the reason for that is that we have significant new products like GPF Gen 10, and a half some of our new innovations in specialty materials. It's also a little bit higher than you'd expect because we thought at the beginning of the year optical communications would be a little bit.
Stronger in terms of sales and now it's a little bit less than that but we expect that inventory to correct itself in the second half and we expect just like in most years or in all years, we'll generate more operating cash flow in the back half. So you know I think we are confident that we will.
End up with free cash flow for the year and this is just the normal cycle that we have.
Sure and then just one quick follow an optical.
Im a little bit confused and would appreciate any high level color.
On the on the handset side, there's there's increased optimism that the fiveg phone is going to be available, especially with the carriers investing for millimeter wave and now you are down ticking, especially with Densification additional sales capacity. These trends are kind of the country and I just haven't heard some reconciling so any any color or or.
Additional clarification here will be great.
Great Summit.
I think you're actually.
Right on top of it.
And it's just there is two things.
That.
That you need to understand around.
When we think about.
Demand cycle first is the one that you are highlighting which is architecturally which solutions win.
And.
What our folks choosing and then second is.
How quickly do our customers put it in.
So you're right.
Sort of all lights are flashing green.
On that were right.
With the point of view, we laid out over two years ago that fiveg is going to equal significant network densification, which in turn means classification.
Which means more demand for our innovations.
And you're right. All you tend to be hearing is confirmatory data on that topic. So that's what we're hearing as well. So we are increasingly confident of our long term projections of which architectural wins for fiveg and Thats a bolus signal.
Now then the next piece has to happen. These are significant capital projects at our customers need to get themselves organized make the decision and then begin to make those investments now is that timing can be difficult to haul and what we're seeing right now is that.
People are waiting a little bit this sort of a little.
GAAP between projects other than the sort of real leaders in Fiveg.
They're putting their plans together getting their financing house in order.
And getting their alliances in place.
Then we would expect.
All the demand that you're pointing to two.
Does that make sense to you.
They do yes.
Budd.
Would you say are these trends coming together is it like a 12 month timeframe or does that require more than 12 months.
No. It's really so customers specific and announcements specific that it's hard to like name that exact time period.
Oh, we had thought coming into the year, there was going to be at least one other major player.
That came on strong.
That fiveg Densification piece.
The alternative business models slightly and change their timing slightly.
So I think that.
What we're trying to do is be right on the architecture and the long term demand cycle, and then be able to support our customers as they gear up.
The good news here is this is it going to be subtle.
As our customers announce.
And decide they're going to roll and how they're going to roll in Fiveg they'll talk about it all the different cities that are going to go to we'll talk about it.
And in a way you will see the normal cycle of the announcement piece getting a little bit ahead of demand and then demand will follow and will have a hard time keeping up.
Great. Thanks, so much for the color I appreciate it.
Your next question comes from the line of Steven Fox from Cross Research. Please go ahead.
Thanks. Good morning, I was wondering if you could provide a little bit more perspective on the change in the 10 point Fiveg ramp that you mentioned.
You're still looking for it it sounds like about the same growth in your own units overall.
TV demand is obviously weaker.
But.
How does this change in terms of the new.
Projects, you're bringing on versus the existing putting your operating et cetera, any help there would be appreciated.
So turning to make some comments on how the relative strength of the large size TV market in a moment, which I think a really interesting.
Data points, but at the core.
What's happening to us from jet tended to happen, it's not really a ramp issue of significance right you have the normal sort of how high our customer utilization is in a given month, but what's really driving our dynamics is we're meeting all those requirements and we're really bullish on it.
Gen tended to have the ability to be the powerhouse of large size TV. All this happening to us is how quickly our yields are improving.
That's all that's going on here right. So there's nothing to date. This is just a matter of us, making our technology yield at the rate at which we would like it to yield to be able to put more profit in the hands of our shareholders.
So Tony maybe you want to talk about yes stable, yes, I would just add in terms of the TV market sell through is actually tracking slightly ahead of our expectations through April as you know it takes a couple of months for all the data that come in but the most important piece of that is what's happening on large size Tvs in a sell through for 65 inch Tvs have grown almost 40% and for 75 inch Tvs, they've grown almost 60% and of course, that's the Tvs that are really are optimized in the gen 10, and a half and is really what is driving these gen 10, and a half investments where we have ended up going to have three out of the four announced a gen 10, and a half factory. So we feel really good about that.
And so from an overall standpoint, why there's some of a little bit of a panel maker utilization slowdown in the third quarter, we expect for the full year, our volume to be up high single digits in a well ahead of the market because the gen 10 and a half.
That's helpful. And then just a quick follow up when you think about the gen eight and below market for you guys.
Is there a functionality here, where you're taking more tanks offline given what's going on at the customers and is pricing trends. Similarly, as strong as you're seeing overall thank you.
So our pricing trends.
Yes, it's very strong.
Right.
We feel really good about that and then what you will see from US is that we'll continue to account for our increasing yields and productivity out of our technologies by adjusting the overall capacity and roofs that we have.
To support it so that's really the dynamic more than anything else, we feel really good about the market feel really good about price right.
And we feel really good about our ability to service, our increasing share of that market.
With our technology, and we'll just adjust by taking sort of the older generations attack.
Offline or repurchasing it for for other markets, so that long term trend year on Steve.
I think is just continues and all we got to do is get our yields up a little faster and then that would match beautifully to our plan.
Great Thats very helpful. Thank you.
Your next question comes from the line of Rod Hall from Goldman Sachs. Please go ahead.
Hi, guys. Thanks for the question.
I guess I wanted to come back to this flat glass pricing indication window and see if you could comment on what it is.
Kind of driving that it seems like maybe it's mix towards Gen 10.5, So I wonder if you'd comment on whether that's helping pricing or is it the below Gen 10.5 pricing dynamic that's driving.
And then the other thing I wanted to ask about is.
Tony I know you mentioned working capital on the cash flow, but I also see a larger drag in other cash flow.
And I wonder if that is.
You know related to some of the tax deferrals or what exactly is going on there are those non cash adjustments to.
Income thanks.
Sure. So let me let me first take the pricing one as Wendell said you know this clearly is Ah.
Across the market and including below Gen 10, and a half in particularly below Gen 10, and a half and I and I think the reasons are pretty straightforward I mean first we expect glass supply demand to continue to be balanced and even tight.
Second our competitors continue to face profitability challenges at current pricing levels and third our agents display glass manufacturing requires periodic investments.
To maintain operations and so absolute glass pricing must support acceptable returns on those investments. So you know thats consistent what we've been saying for a number of years and we continue to see.
The improvement in the pricing environment and as Wendell said, we're very thrilled by the pricing environment, what happened in Q2 and the continuation into Q3.
If you totally expand on the pricing actually go up at some point.
Okay.
Roger you are now.
Really right in the center of this.
This debate that you know I've been really opened about between myself and my operators, where I think the wise thing to do from an investment theory is to count on our display business.
Aging gracefully right.
A number of our operators.
Feeding leadership.
Those businesses believe that they can actually make displayed grow.
And net income.
Their recent performance.
So would tend to be data on their side and therefore your question is fair.
They have not put together enough consecutive quarters, yet though.
Needed change my investment thesis.
Does that make sense right.
Yes, thanks to a low dose and then Rob in terms of the operating cash flow. The comparison on the other I mean last year, we had a couple of payments that occurred in the first quarter that were nonrecurring or a couple of receipts that occurred in the first quarter that were nonrecurring some of them related to the incentives in the factories that we've been building and others related to.
The indemnification asset with our CPM transaction of a number of years ago and so that's the reason why its a different number this year than last year.
Okay. Thank you Tony.
Your next question comes from the line of James Faucette from Morgan Stanley . Please go ahead.
Great. Thank you.
Just wanted to ask about.
I think one of the concerns that investors have right now is probably around visibility into end markets back through the supply chain to to what you're supplying and in particular.
I mean.
The the narrative on larger display sizes.
And as well as in the optical business makes sense, but I'm wondering if you talk a little bit about.
I think that you are doing or can do to further improve your visibility in and any changes in demand trajectory first.
My second my follow up question is.
At the Analyst day last month, you gave a pretty upbeat assessment of the opportunities in both dollar glass and in our.
Automotive opportunities just wondering if there's been any additional data points you can contribute to those new products. Thank you very much.
So I think on less to the value chain first.
Try to tie it up so.
For us it's a little like are the walk through that I just did on optical.
We've got two levels.
That.
We try to align the first is the long term technology substitution curves for our innovations and as you remember from the Investor day. The core of our growth story is a content story, which is what we expect over the coming four years is more and more of our innovations to be adopted.
We ended the products that people buy and that that is our primary growth driver as opposed to.
How much of everything everybody buys or what type of economy do we face.
While we continue to get nothing but positive signals.
Those items, whether it's in.
Optical or in the areas that you just made automotive. So here we are at a time period.
When you see declining forecast.
Overall automotive sales and production.
But were projecting growth in the teens because of more and more of our content similar things, we would expect to happen in the valor story, we once again and have four inventory evidence that were on the right side of that substitution curve.
Optical very much the same as you heard in.
My answer and in specialty materials, our mobile consumer electronics business also much the same.
Assess the first level, we feel pretty good about that.
The next to that constant how does the timing of that substitution curve play out and how does that interact with overall demand for our customers now that you can get a little more noise in in the near term.
And we certainly experiencing so yes. So then we have folks like Jeff Evanson who's here in the room.
As well as pretty significant analytical groups to try to start right at the end market.
And then work their way all the way back through the value chain and build models and the right analytic tools to keep track of it.
We don't always get it exactly right.
But we feel pretty good that we're able to track the core demand signals through the system.
Its plot.
Your next question comes from the line of Samik Chatterjee from Jpmorgan. Please go ahead.
Hi, Good morning, Thanks for taking the question just wanted to start off with gross margins and if I get the guidance right here, you, probably implying more a 400 basis points decline in gross margin year over year.
For the full year.
As we look at kind of the recovery of that 100 basis points and maybe coming back in line with 2018 is it more contingent on some of the macro headwinds dissipating or are you looking at some cost actions that might help you kind of access that recovery back after 100 basis points and secondly, just a follow up on a second question on the display side just wanted to see given that you have a outsize share of the gen 10.5 plants or our market share there.
Is that can you give us a sense of where your market share in display today in order to be once all the plants are online. Thank you.
Hi, So let me talk about our gross margin I you know clearly you know, what's most important to us and the way that we really think about our profitability is what's happening on the operating margin line on our operating margin is being compressed in our gross margins being compressed, but you know you know primarily you know compared to what we thought at the beginning of the year on what's happening in optical communication sales and the what's happening in cost in our display business. So as those things change then of course, we'd expect that continued for improvement there, but from an overall standpoint, you know were really measuring and what we're really driving for improvement in operating margin and in the first half of this year, our operating margin actually expanded by 80 basis points and we expect that to continue in the second half of the year.
And the other thing of course is what's very important to US is return on invested capital.
You know over the last four years, we've improved our return on capital invested capital by 300 basis points and over the next four years we.
We expect to continue to expand that as our profitability improves and we get the returns on the investments we've been making.
But any help on the market share in display.
I mean, I you know I think that what's important though I mean, we don't.
Disclose market share numbers and you know what's important there is is that in them in a market where the growth is really occurring because of large size Tvs on you know where that both in 65 and 75 inch Tvs are much larger growth. This year I you know that get supplied by June 10, and a half and we have three of the four.
Projected announced Gen 10, and a half factories.
Alright, thank you.
Your next question comes from the line of Teahouse Venkatesh from RBS. Please go ahead.
Thank you I wonder if you're seeing any change in competitive environment in optical in particular I was wondering if you're seeing any.
Pricing effects of China fiber makers moving to other markets.
This is one of them. So yes, clearly we're seeing that in China.
As one of the key parts of the carrier market that had a strong downward revision this year.
Specialty the delay.
China mobile tender.
Right.
And so that led.
To sort of build up in China that expressed itself in terms of pricing largely in China.
We're also seeing some knock on effects in India, and Southeast Asia, primarily and we've incorporated all that.
Into our outlook.
Oh for optical communications business.
Thank you and as a follow up the adoption of glass backs on smartphones has been very helpful. For your Gorilla business now you have other smartphone innovations like a vibrant glass and so forth as we get closer to neutral smartphone introductions I wonder.
If you expect any of those newer innovations to to be adopted over the next six to 12 months. Thank you.
That is an excellent observation and my simple answer to your question is yes.
[noise].
Your next question comes from the line of let's see a merchant from Citi. Please go ahead.
Hi, Thank you a lot of my questions have been answered, but if I could just about the fiveg commentary that when you shared earlier.
About customer push outs et cetera can you.
Maybe walk us through some of the more puts and takes now to your outlook for the optical segment.
Is there more risks that we see that coming down as the year progresses on the other side.
You know as maybe some fiveg reception by customers by the end consumer is better on the phones on the smartphones to be expecting uptake. There again, it's more about you know the puts and takes to the outlook for the optical segment as the year progresses. Thank you.
Excellent question.
So first.
Due to Fiveg.
Because I think there's.
Yes, the way to understand fudge.
How quickly does it start and expand.
Beyond some of the few early adopters and leaders so it's less.
People like changing deeply their fiveg plants, it's them, arriving at their fiveg plans and how they're going to deploy and then get that rolling that's sort of the next leg of growth add for us when that clicks in exactly.
When a quick sense, it will be very significant and growth.
When it happens, it's sort of hard to call.
Meanwhile, what we see in our near term results is more having to do with the pieces of the carrier market.
That dealt with particular projects that they have on wireline saumen wireless, but it's just really to some delays and push outs. It they've done it into 2020 , rather than big significant fiveg changes.
So that's why I keep saying the fiveg piece.
Won't be subtle when it starts to hit our demand cycle, you'll see it coming.
And all you are seeing in our growth. This year, primarily right is the adoption of our previous innovations and other pieces of the network. We haven't really started to feel the big.
From the wireless networks of the world changing from relatively fiber poor to very fiber rich. That's all ahead of us.
Now to your next question on.
Can we expect.
Continued downward revisions in opto.
I would say it is clearly our intent that that is not the case, what we've tried to do here is guide in a way that we feel highly confident that it will deliver.
Now you know.
As the months.
Go buy we'll know more and how accurate our point of view is but it is not our intent to have sort of.
Sliding set of expectations in Opto does that answer your question, Yes, no. That's great and then just you know I mean think about when the Fiveg had like given that it's more fiber rich, yes, how should we think about the margin.
Margin for that solution relative to let's say the fiber to the home down which are driving more of your sales this year.
Is there a significant like we should expect.
Or are the margins.
Similar if you can just kind of walk us through how you see the margin profiles on the more newer innovation relative to what's been happening over the past few years.
But in my opening remarks is a really great question in my opening remarks, you heard me make an allusion to that we'll be introducing some new products in the second half.
Related to this densification.
Approach.
What those new products represent is ways for us to bring the full suite of our technical capabilities to bear in wireless what our plans would be is for the fiveg opportunity to have our full suite of products products involved in it or a whole suite of innovations.
And therefore that is relative profitability should be consistent with that which you have grown to expect in optical communications.
Thank little mysterious and the reason it is is I don't want to steal my operators Thunder when they launched a new product set.
Thank you already.
Your next question comes from the line of George Notter from Jefferies. Please go ahead.
Thanks, a lot guys I guess, maybe to start with just a clarification. So when you talk about glass pricing in Q3 being flat relative to Q2 just to be clear you are you're talking absolute pricing or you're talking about a flat rate of pricing erosion.
Not going to oil absolute pricing.
Okay, Great. That's that's a real improvement.
And then just a follow on is I look at it.
The dynamics among your panel maker customers I think about the supply coming on in China. There's certainly Gen 10, and a half but also gen. Six is in Germany, and China and.
I guess with that supply coming online it seems like it can create some changing dynamics among your traditional panel maker customers in places like Taiwan, and Korea, Japan. So how do you see that kind of rippling through for Corning is there potential for that pricing pressure to flow down hill onto you or do you feel like you have enough leverage.
In terms of those customer relationships, where again pricing can remain flat on a go forward basis, and then I guess Alternatively do you think that could ripple effect through in terms of changing utilization rates or how do you see the dynamic with China. Thanks.
So you had a number of observations system pack two key ones. So first.
I think you're quite wisely pointing out that once again, we are seeing some regional shift in the display market.
We have followed it.
Japan, and Korea, Taiwan and China.
Well, we try to do with each of those moves.
To enhance our position in each new region.
And we have done that again here.
So.
We are very well positioned for the direct channel with which we see panel production shift so that's the first strategic level.
Now.
Embedded in there of course, I think you're making.
Otherwise combat which is.
Then what happens to the sort of panel production capability in glass production capability.
In the regions.
That will be relatively weaker relative to China.
So in that you're seeing a combination of things happen first [noise] shifts to newer more advanced display technologies, right, which were supporting with the new newer and more advanced glass types.
Second you are seeing optimization of our network of supply.
Of glass and you can expect to see us to continue to optimize that top always make use of the capital that we have in place to serve our number of growing.
A different class markets. So we will expect us to continue to optimize our cost structure optimize our glass supply and support our customers in those previous regions sort of innovation aspirations and their market diversification.
Like for instance, in Taiwan, we're seeing a nice build up of capabilities to address the automotive industry, which are going very nicely.
With our automotive glass opportunity sets. So that's the way we're going to work through it all.
Now I can't pass this answer to your question.
Without noting that you said pricing continue to be flat in display we are not saying that yes for a long term, but we're just saying is we expect the rate of decline.
To continue to improve.
And for our glass returns to stabilize we're not predicting that glass prices remained flat for the foreseeable future.
Okay. Thank you.
I'll squeeze in on one more question.
Your final question comes from the line of Brian Yoon from Deutsche Bank. Please go ahead.
Hey, Thanks for squeezing me in.
Most of my questions have been answered a small but could you just give us an update on the Hyperscale cloud.
Business any color on the visibility there spending trends into second half 19, or even heading into 2020 would be helpful.
Great I'd say once again here of divide into two layers first architecturally.
We each passing month and peace and new piece of technical work and interactions with our customers are making us more confident at that point of view, we presented at our IR day is accurate.
So we see growing adoption of glass and the classification of the cloud.
Continuing.
And becoming even more dense so we feel really good about that.
Exact timing for cloud and and hyper scale up we're not seeing a real fundamental shifts there.
In terms of the total market add you can get different time periods, where they can't quite get these large facilities up quite as fast as what they may have planned at the beginning of the year.
But we're not seeing any sort of fundamental shift.
That saying, we don't expect.
Hyperscale and the cloud to continue to be a real growth driver for us for this year and beyond.
Great great. Thank you.
Thanks, Ryan and thank you Wendell and Tony and thank you all for joining US today before we close I just wanted to let everyone know that we'll be at the Jefferies semiconductor hardware and communications infrastructure Summit on August 27, and the Citi Global Technology Conference on September 5th.
We'll also be posting some virtual presentations and webcast on business topics.
And a web replay of today's call will be available on our site. Starting later this morning.
Operator that concludes our call. Please disconnect all lines.
Ladies and gentlemen that does conclude your conference. Thank you for your participation you may now disconnect.
Uh huh.