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Corning (NYSE:GLW)
Q4 2017 Earnings Conference Call
Jan. 30, 2018 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Corning Inc. Quarter 4 2017 earnings results. It's my pleasure to turn the call over to Ann Nicholson, division vice president of investor relations.

Ann Nicholson -- Vice President of Investor Relations

Thank you, John, and good morning. Welcome to Corning's 2017 year-end conference call. With me today are Wendell Weeks, chairman and chief executive officer, and Jeff Evenson, senior vice president and chief strategy officer. Because of a family emergency, Tony Tripping, vice president and chief financial officer, is not on the line today, but he looks forward to talking with investors throughout the quarter and we're sending his family our regards.

Joining us today are Ed Schlesinger, vice president and corporate controller, and Stephan Becker, vice president and operations controller. I'd like to remind you that today's remarks contain forward-looking statements that fall within the meaning of the Private Securities Litigation Reform Act of 1995. 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.

We should also note that we'll be discussing our results using core performance measures. Unless we specifically indicate, our comments relate to GAAP data. Our performance measures are non-GAAP measures used by management to analyze the business. Our reconciliation of core results to the comparable GAAP value can be found in the investor relations section of our website at corning.com.

Supporting files are being shown live on our webcast and we encourage you to follow along. It will also be all be available on our website for downloading. Now I'll turn the call over to Wendell.

Wendell Weeks -- Chairman and Chief Executive Officer

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

We expect to see the benefits of these initiatives in the second half of 2018 and beyond as production ramps. 2018 will be another year of strong growth and investment, consistent with our strategy and capital allocation framework. All of our businesses contributed to the outstanding 2017 results, highlighted by 18% year-over-year sales growth in optical communication, 25% growth in specialty materials, 7% growth in environmental, and price declines in display that were the best in seven years. As we've shared, this strategy and capital allocation framework outlines our leadership priorities.

We continue to focus our portfolio and utilize our financial strength to expand our leadership, drive our growth, and reward our shareholders. Under the framework we target generating $26 billion to $30 billion in cash through 2019. We plan to return more than $12.5 billion to our shareholders through repurchases and dividends, and invest $10 million to extend our leadership and deliver growth across all of our market platforms. We've made great progress toward those goals since we announced the framework in October 2015.

Our cash generation is on target. And through the end of 2017, we returned $9 billion through share repurchases and dividends. We've invested $4.5 billion under the framework in RD&E, capital expenditures and acquisitions. We're starting to see the returns already, as you can see in our most recent results.

Full-year sales increased 8% and EPS increased 11%. We expect these returns to accelerate. We believe these results illustrate the benefits of our framework. We are best in the world in three core technologies for manufacturing engineering platforms and five market-access platforms.

We focus 80% of our resources on opportunities that use capabilities in at least two of these three categories. We stepped up our investments over the last six months to meet opportunities in front of us in all our market-access platforms. Significant portions of the investment are going toward capacity expansions to meet committed demand. Currently we have 23 projects under way, including construction of 11 new plants.These investments dampened our profitability in the second half of 2017 and they will do so again in the first half of 2018.

We really see the benefits of those investments in sales and profitability in the back half. So we feel great about the year ahead of us. Now let me review progress in our market-access platforms, starting with optical communications. We are the world leader in passive optical communications and the only true end-to-end supplier of integrated optical solutions.

2017 was another great year. We expanded strategic relationships like the ones we've recently announced with Verizon and Saudi Telecom, which supports our view of strong future growth. We expanded our manufacturing capacity to support growing demand and initiated programs to further expand capacity in 2018. During 2017, we acquired Spider Cloud to enhance our wireless portfolio and announced an agreement to purchase 3M's communications market division.

We expect that transaction to close later this year. It brings us a talented group of employees and enhances our offerings in the rapidly growing fiber-in-the-home and optical solutions markets. We expect to continue growing more than twice as fast as the communications infrastructure market. Rapid adoption of optical solutions in more market segments combined with the strength and the relevance of our technology and co-innovation approach support our superior growth.

We believe that the opportunities ahead of us are much greater than those that are behind. To capture these opportunities we continue to invest in plants, innovations, and market access. We expect 2018 growth to keep us solidly on pace to $5 billion in sales by 2020. Now let's turn to mobile consumer electronics, where we are the world leader in glass and smartphones, tablets, and in emerging categories like wearables and augmented reality devices.

Our goal is to double global consumer electronics sales over the next several years. We made significant progress toward that goal in 2017. Major milestones during the year included the 10th anniversary of Corning Gorilla Glass, the rapid adoption of Gorilla Glass 5, and Apple's commitment to our future innovations through its American manufacturing initiative. The fundamental properties of Gorilla Glass make it an ideal choice for smartphone enclosures.

Flagship models from Samsung and others now feature glass on the front and the back. Glass backs double the area we sell per phone and also supports new innovation opportunities, like fiber. We expect additional growth in 2018 as more devices adopt our latest innovations, including our next generation of cover glass, which we plan to introduce later this year.Turning to our automotive market-access platform, our expertise focuses on helping customers build cleaner, safer, and more connected vehicles. Corning pioneered the substrate at the heart of catalytic converters and is now leading the next wave of emissions control, with our introduction of gas particulate filters.

Most European and many Chinese OEMs have now awarded platforms and we won the majority, reflecting our market leadership. We had our first commercial sales in the second half of 2017, and we expect a sales ramp in 2018. Once regulations are fully implemented in Europe next year and in China in the early 2020s, we estimate GPF opportunity will exceed $500,000 in sales for Corning. Moving to Gorilla Glass for auto.

Innovation trends continue to point toward a significant growth opportunity. On the exteriors of cars, Gorilla Glass laminates are tougher and lighter than conventional auto glass. Plus, the superior optical quality allows for larger and clearer heads-up display. For interiors, integrated and interactive displays are becoming a seamless part of the cabin and user experience.

Corning is helping OEMs with this transition because Gorilla Glass provides an advanced durable optical interface surface with tremendous economics. Earlier this month, exhibits at CES provided impressive evidence for the increasing use and importance of glass in cars. We believe our solutions provide compelling value, and we are investing to prepare for the industry's transition to highly connected and autonomous vehicles which will use Gorilla Glass. Hope for collaboration from leading OEMs is increasing and we have already been awarded 35 platforms globally.

We expect to make additional and significant progress during 2018. In our life-science vessels platform we're building a new, long-term multibillion-dollar franchise. Last July, we introduced Corning Valor Glass, our remarkable new pharmaceutical glass packaging solution. Valor Glass dramatically reduces particle contamination, breaks, and cracks while significantly increasing throughput.

Valor Glass helps protect patients and improve pharmaceutical manufacturing. The industry is excited about our innovation and we continue to make progress, although it moves at a deliberate pace. Recently, the Parenteral Drug Association hosted a conference dedicated to glass quality. Corning presented in a session focused on new developments and innovations in pharmaceutical packaging.

While we remain closely engaged with our development partners Merck and Pfizer and are pleased with the progress we've seen with our customers over the last quarter, we've successfully completed multiple collaborative projects to support customer adoption of Valor. We also continue to engage with the Food and Drug Administration, which is committed to streamlining the introduction of new innovations so technologies like Valor Glass can reach patients quickly. In 2018, we plan to invest in high-volume manufacturing that will enable us to deliver commercial volumes to our customers. You will hear more from us regarding the manufacturing site and location in the coming months.

We continue to believe Valor has the potential to power Corning's growth for the next decade.In display, we remain the global leader. Our priority is to deliver stable returns and win in new display categories. We expect 2018 to be another strong year of progress in our display business. Our new plant in Hefei, China, has started shipping the world's first Gen 10.5 glass.

We are the only manufacturer to have successfully scaled glass production to this size. Ramping our new Gen 10.5 facility on a pace with BOE, our major customer, will augment volume growth. In addition, pricing has become consistently more favorable over the past three years. In June, we stated that improvement in mid-single-digit declines was possible.

We now believe this will happen in 2018. Reaching mid-single-digit annual pricing is a huge milestone to our goal of maintaining stable returns.Finally, Iris Glass, which adds a third piece of glass to LCD displays, is gaining momentum. We are excited about Lenovo's and Dell's new, ultra-thin monitors, which offers the world's brightest monitors in a thin narrow-bezel package, uniquely enabled by Corning's Iris Glass. I think it's pretty clear we're making terrific progress across all of our market access platforms.

We are investing to capture these opportunities and expect to maintain 2017 momentum in 2018. We plan to deliver another a strong year of sales and earnings growth and stay on track to fully achieving our strategy and capital allocation framework goals. Now let me turn the call over to Jeff for a review of our results, details on our outlook, and additional updates on our framework.

Jeff Evenson -- Senior Vice President and Chief Strategy Officer

Good morning, everyone. Our 2017 results were outstanding. In 2018, we'll continue investing to support our customers and extend our leadership. We expect core sales to grow to approximately $11 billion, or about 7% on a constant-currency basis.

Before reviewing statement results, I want to talk about two items impacting our GAAP results: FX accounting and tax reform. As we discussed before, GAAP accounting requires earnings-translation hedge contracts settling in future periods to be mark to market and recorded at current value at the end of each quarter, even though those contracts will not be settled in the current quarter. For us, this resulted in an after-tax GAAP gain of $1 million for the quarter and a loss of $247 million for the full year. To be clear, this mark-to-market accounting has no impact on our cash flow.

Our currency hedges protect us economically from foreign-exchange rate fluctuation and provide higher certainty for our earnings and cash flow, our ability to invest in growth, and our future shareholder distributions. We are very pleased with our hedging program and the economic certainty it delivers. We've received $1.6 billion in cash under our hedge contracts over the last five years. Our non-GAAP or core results provide additional transparency into operations by using a fixed currency rate aligned with the yen and won translation hedges, and also by adjusting for other items that do not reflect ongoing operations.

For 2015 to 2017, our core reporting used a constant-currency rate of 99 yen to the U.S. dollar and 1,100 won to the U.S. dollar. For 2018 to 2020, we have established hedges for approximately 90% of our expected display earnings.

We expect this to result in an average rate of 107 yen to the dollar and we plan to use that rate for our core reporting over the next three years. Additionally, we will use a constant rate of 1,175 Korean won to the dollar, which is closely aligned for our current won portfolio for currency hedges. Nearly all the analysts covering Corning are already publishing estimates for 2018 and beyond at a yen exchange rate of approximately 107 yen to the dollar. For today's discussion, I will present for the fourth quarter and FY 2017 results in the 99 rate.

My comments on our 2018 outlook will be based on 107 yen per dollar and 2017 results will be recast to our new core rates for comparison. We've provided 2016 and 2017 results recast to the new core rate [Inaudible] so you can update your model to compare our operating results on an apples-to-apples basis.Turning to taxes, our full-year and fourth-quarter 2017 core results have been adjusted to exclude $1.8 billion in noncash items related to U. S. tax reform.

The majority of the $1.8 billion is a one-time toll charge of approximately $1.2 billion on unremitted foreign earnings. The cash cost is almost entirely offset by our foreign tax credit carry-forwards. We have also revalue our deferred-tax assets and liabilities. While we're still finalizing the impact of reform on our effective tax rate for 2018 we expect it to increase to between 20% and 22%.

In 2018, our projected tax rate will reflect the new lower U.S. tax rate offset by anti-base-erosion provision. The net impact does not fully replace the benefit of our previously available foreign tax credit planning. Near term, tax reform provides greater flexibility in accessing our non-U.S.

cash and we have already benefited from that flexibility. Longer term, as we execute our growth initiatives and our U.S. income grows, we will further benefit from the lower tax rate in the United States. As a final note, our investment and shareholder distribution target in the 2016-to-2019 strategy application framework are not impacted by tax reform.Now let's look at our results and outlook.

For the fourth quarter, core sales were up 7% year over year, and EPS was $0.49. Full-year sales rose 8% and EPS was up 11%, to $1.72. Core earnings were $1.8 billion, consistent with 2016. An apples-to-apples comparison that reflects the strategic realignment of Dow Corning by excluding silicone's equity earnings from the first half of 2016 shows that core earnings grew 5% year over year.

As Wendell mentioned, gross and operating margin dollars grew more slowly than sales in the back half of 2017, primarily because of planned and very attractive growth investments. These include capacity expansions for optical fiber and cable. Our Gen 10 display glass plant, capacity for gas particulate filters, plus development for Gorilla Glass and Valor, and other projects that we're not quite ready to dive into publicly.Turning to the balance sheet, we ended the year with $4.3 billion of cash. With the new flexibility created by U.S.

tax reform, we brought $2 billion in cash back to the United States already this month. Adjusted operating cash flow for the year was $2.6 billion and keeps us on track to meet the goals of our four-year capital allocation plan. Now let's look at detailed segment results in outlook beginning with display technologies. Display's 2017 core sales were $3.4 billion and core earnings were $944 million.

Q4 2017 volume was up slightly sequentially, exceeding our guidance and in line with the market. Sequential LCD glass pricing declines were slightly better than Q3 and better than expected. For the full year our volume was up mid-single digits, in line with our expectations. Pricing improved and reached single-digit year-over-year declines in both Q3 and Q4.

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

First, we expect glass supply to be balanced or even tight. Our Gen 10.5 plant supports the expected growth of large-sized TV's with [Inaudible] and dedicated to our customer, BOE. We pace and align capacity in tandem with BOE to ensure our Gen 10.5 glass supply is balanced to demand. We expect glass supply demand balance below Gen 10.5 to tighten further because demand continues to grow in 2018, but public information indicates there is little capacity growth planned in this segment by glassmakers.

Second, our competitors continue to face profitability challenges at current pricing levels. Therefore, we expect their price declines will slow further as they try to remain profitable. Third, LCD glass manufacturing requires ongoing investment in current and new capacities to support growth. To generate acceptable returns on investments, glass pricing will need to improve even further.

We typically see the largest quarterly price change in the first quarter. In Q1 of 2018, we expect sequential glass price declines to again be moderate and more favorable than first-quarter sequential price changes in recent years. In sum, pricing will be favorable in 2018.Let's turn to volume. We expect LCD glass market volume to grow mid-single digits as television-screen-size growth continues.

We expect our volume to grow faster than the market as we ramp production in tandem with BOE's Gen. 10.5 demand in Hefei.For the first quarter of 2018, we expect both the LCD glass market and our volume to decline sequentially by low single digits in line with normal seasonality. First-quarter volume will be up low single digits on a year-over-year basis. We feel good about price and volume, and gross margin should improve throughout the year.

Two factors will dampen display's growth margin percentage in the first quarter of 2018. First, we're starting up our Hefei facility. As always, during a plant start-up, fixed costs and staffing ramp ahead of production. Second, we'll be taking advantage of the seasonally lighter volume in display and Gorilla to rebuild tanks and optimize the fleet with our latest technology.

As you may recall in the third and fourth quarters of 2017, we ran a handful of tanks outside their optimal range to meet strong demand. We'll be correcting this in the first half. The higher utilization at the Hefei plant and the fleet optimization will improve productivity in gross margin, especially in the second half of the year. In summary, we have essentially all of our 2018 volume under contract.

We remain very pleased with the current dynamics in our display business and our progress in maintaining stable returns. Let's move to optical communications. Full-year sales were $3.5 billion, up 18%, and core earnings were up 33%. Fourth-quarter sales grew 13% over last year.

Fourth-quarter earnings declined slightly as we invested to support in 2018 and beyond. In addition to new fiber and cable capacity, we invested in building supply chain and new products for Saudi Telecom. Our the first significant sales occurred during the quarter and required some setup costs. We're honored to support Saudi Telecom as it begins the largest network build in the history of the kingdom.

In the first quarter and for full-year 2018, we expect sales to be up about 10% year over year, excluding any contribution from the pending acquisition of 3M's communications market division. Key growth drivers include strong demand from carrier and enterprise customers that will fill new capacity as we bring it online. We expect profitability to improve through the course of the year as we ramp our plants to meet customer demand. For your modeling purposes we expect the 3M transaction to close in the middle of 2018.

The transaction will add about $200 million in sales and be neutral to EPS in 2018 due to integration costs. As previously announced, we expect it will be accretive in 2019 and beyond. Stepping back, we're excited about 2018's growth potential for optical communications and pleased to have additional opportunities ahead of us. Environmental technologies 2017 sales were $1.1 billion, up 7%, driven by worldwide growth of the auto market and from winning additional business which allowed us to grow faster than the market.

Fourth-quarter sales grew 19% year over year, with fourth-quarter earnings rising 33%. As anticipated, the North American heavy-duty market improved in the second half of the year, driving 7% growth in our diesel sales for 2017. In addition, our gasoline particulate filter business delivered its first commercial sales in the third quarter, as the initial phase of Euro 6 regulations took effect in September 2017. In the fourth quarter, we had additional sales and we won additional platforms.

We have won the majority of platforms awarded to date. 2017 core earnings were $139 million, as investments in select capacity and engineering to support the GPF business partially offset the benefits of increasing sales. In the first quarter and full-year 2018 we expect high-single-digit sales growth, driven by continued strength in auto sales, ongoing improvement in the heavy-duty diesel market and from the GPF launch.In specialty materials, 2017 sales rose 25% over last year and core earnings were up 32%. We're clearly benefiting from the rapid adoption of Gorilla Glass 5 and the trend toward glass backs on devices.

We also made progress with our innovation in other areas, including Google Glass emerging as the most widely used cover material on smartwatches worldwide. Fourth-quarter sales increased 17% and core earnings were up 12% year over year. Sales benefited from brand building aggressively to support their launch cycles. This demand [Inaudible] is the primary reason we expect first-quarter 2018 sales to be down about 10% year over year.

Overall, we remain very pleased with our performance in specialty materials. We expect to grow again in 2018 following our strong 2017. The 2018 growth rate will depend on new model launches and the adoption of our innovations. In the second half of 2018, we expect year-over-year growth, as customers launch their new products and as we announce new innovations to meet customer needs in mobile consumer electronics, including the introduction of the next generation of Gorilla Glass.In life sciences, 2017 sales were $879 million and core earnings were $80 million, with strong fourth-quarter sales, as we continue to outpace market growth.

For full-year 2018, we expect sales to grow mid-single digits. First-quarter sales should be up high-single digit year over year. As a reminder, my comments on the 2018 outlook are based on the new 107 yen and 1,175 won core rates. For comparing to 2017 results recast to our new corporate rate.

For 2018, all of our businesses have positive momentum and we expect full-year sales of about $11 billion, up 7%. We expect the full-year gross margin to exceed 41%, similar to 2017. The first quarter will be the low point for the year. We expect gross margin to be about 40% of sales, consistent with 2017's fourth quarter.

In the second half of 2018 our investments, for example in the Gen 10.5 facility, gas particulate filter capacity, and new fiber and cable plants will exit the start-up phase and result in new sales. Quarterly gross margin should exceed 42% in the second half. Annual operating expenses should remain consistent with last year as a percentage of sales. For the full year, SG&A is expected to be about 14% of sales and RD&E about 8%.

The slides we're showing give you additional details for the first quarter and for the year. In other items, we expect "other income-other expense" to remain at our fourth-quarter 2017 run rate, generating a net expense of approximately $200 million for the year, or about $45 million to $55 million in Q1. Full-year 2018 total gross equity earnings are expected to be similar to 2017 at approximately $200 million, predominantly from Hemlock Semiconductor, With first quarter at about $25 million to $30 million, consistent with typical seasonality. As a reminder, our tax rate should be between 20% and 22% for the year and for the first quarter.

In 2018, we expect to spend slightly more than $2 billion on capital expenditures, with programs in every market-access platform. How much more will depend on how quickly we ramp up some of our investments. We'll provide more information as the year progresses. Stepping back, the fourth quarter marked the halfway point of our four-year strategy in capital allocation framework.

And I'll conclude with a look at our accomplishments and our expectations. In brief, our progress on all dimensions of the framework has been excellent and we expect to deliver on all of our goals. In the first two years of the framework, our cash generation has been on target, we have invested more than $4.5 billion in planned investments to grow and extend our leadership, and we returned more than $900 billion to shareholders through share repurchases and dividends. Over the next two years of the framework, we plan to invest an additional $5.5 billion in our growth initiatives, and we plan to continue repurchasing shares and paying dividends totaling at least 3.5 billion additional dollars over the remainder of the program.

We expect our board to increase the dividend by at least 10% next week and at least 10% again in 2019. Putting it all together, as we invest $10 billion to drive growth and extend our leadership, we're rewarding our investors and returning more than $12.5 billion, which compounds the benefit of our future growth for long-term shareholders. We're very pleased with our continued positive momentum. We're focused on keeping that momentum heading into 2018.

We remain on track to deliver the goals of our strategy and capital allocation framework and are excited about the rich set of opportunities ahead of us. With that, let's move to Q&A. Ann?

Ann Nicholson -- Vice President of Investor Relations

Thank you, Jeff. Now John, let's open the lines for questions. We have a lot of folks in the queue today, so we're hoping that you can keep it to one question so we can get to everybody.

Questions and Answers:

Operator

Certainly, and just a quick reminder for those on the call, if you have a question, please press *-1. You'll hear a tone indicating you've been placed in the queue. If your question gets answered and you wish to remove yourself from the queue, please press the * key. I'll first go to the line of George Notter with Jefferies.

Please go ahead.

George Notter -- Jefferies -- Analyst

Hi guys. Thanks very much. I guess I wanted to dig into the optical business a bit. You guys are adding a lot of capacity here.

I saw the announcement from the other day about the new cable manufacturing facility. I guess the question here is, can you refresh us on the amount of new capacity you're adding in that business and then also the timing with which that capacity comes online?

Wendell Weeks -- Chairman and Chief Executive Officer

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

What you can expect on timing, what you sort of heard from Jeff, is that investment in capacity has been a drag on our profitability in the back half of 2017 and the first half of 2018 and you're going to feel those plants ramp up and increase their utilization in the back half of 2018. So it will turn from a drag to being a real force for positive momentum in the back half.

Operator

Our next question is from Vijay Bhagavath from Deutsche Bank. Please go ahead. And Vijay Bhagavath, your line is open. If you're on mute, possibly? And we will move on to Mehdi Hosseini with SIG.

Mehdi Hosseini -- SIG -- Analyst

Thanks for taking my question. I'm looking at display as a percentage of net income and the mix has steadily declined. Back in 2013 it was in the high 60% and now it is almost 50%. As you accelerate the investment in other areas like what happened in the second half of '17, should we also expect an acceleration in this decline and decline in display net income as a percentage of overall income? I'm just trying to understand how other segments are going to grow and help continue diversify the revenue and operating income mix.

Wendell Weeks -- Chairman and Chief Executive Officer

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

Mehdi Hosseini -- SIG -- Analyst

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

Wendell Weeks -- Chairman and Chief Executive Officer

Yes.

Mehdi Hosseini -- SIG -- Analyst

Would you like to elaborate on the rate of increase?

Wendell Weeks -- Chairman and Chief Executive Officer

No. Not to be cute about it, there's only so much guidance we really want to give and project, mainly because we don't want -- everything has an arc of probability sets to it, but I think in general you're on track with what it. What you heard from Jeff was that he's expecting an $11 billion of revenue this year, right? With the bulk of that revenue growth coming from segments other than display. I think that type of numbers that you saw, that you can interpolate from there, and which you saw from 2017, I think directionally that's the way to think about it going forward.

Very strong growth for the company overall with display being stable. Certainly with the pricing dialogue you heard from Jeff, there is a possibility that display as a segment begins to grow some, but still, it'll be at a lower rate than the rest of the company, I believe.

Mehdi Hosseini -- SIG -- Analyst

Got it. Helpful. Thank you.

Operator

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

Steven Fox -- Cross Research -- Analyst

Thanks, good morning. Two questions for me, please. First of all on the gross margin swing during 2018, can you give us an idea of how you how much of the swing is just from ramping down some of the spending versus expecting new volumes to ramp in the second half? And then as a follow up can you just give us a little bit better color on some of the Gorilla Glass auto wins? Maybe just by large buckets of interior versus exterior and how you expect to realize revenues from that?

Jeff Evenson -- Senior Vice President and Chief Strategy Officer

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

Wendell Weeks -- Chairman and Chief Executive Officer

And on auto, Steve, did I hear your question right? How are we feeling about the ramp and the mix between glazing, exterior versus interior?

Steven Fox -- Cross Research -- Analyst

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

Wendell Weeks -- Chairman and Chief Executive Officer

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

Steven Fox -- Cross Research -- Analyst

And this would be for 2019, 2020 model-year vehicles?

Wendell Weeks -- Chairman and Chief Executive Officer

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

Steven Fox -- Cross Research -- Analyst

Right. Thank you very much.

Operator

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

Wamsi Mohan -- Bank of America Merrill Lynch -- Analyst

Thank you. I was just wondering, around these price declines, sounded from your Q1 commentary that there was an improving but higher than mid-single-digit decline which would improve that pricing improves more so throughout the course of the year, post-Q1. I appreciate the volumes are lower in Q1 relative to full year, but is 2Q the right time frame to think about price declines to get to mid-single digits? And, secondarily, I know Tony in the past has said that the core rate could be locked in and maybe over a five-year period -- is the FX volatility causing you to rethink the period of locking in the core rate at this 107 for three versus five years? Thank you.

Wendell Weeks -- Chairman and Chief Executive Officer

Thanks for the questions, Wamsi. To the first one on pricing, so let's make sure we're talking about the right terms. There's both sequential price declines, between Quarter 4 and Quarter 1, for instance, and then there's year-over-year declines, Quarter 1 this year versus Quarter 1 of last year. What you heard from Jeff was that we are talking now about the really important milestone of, toward the back half of this year, we expect the year-over-year decline to be mid-single digits.

That's a very significant milestone. The sequential declines, they have been low-single-digit and continue to be. We're seeing improvement in this Quarter 1 decline versus Quarter 1 of last year. And of course we're gonna continue to see improvement in the sequential declines to be able to reach this much longer year-over-year decline rate, but that little shift in terms can lead to misunderstanding.

I think the key thing is we see the rate of price decline improving for us, and we would expect to see that especially in the back half of the year, that we have evidence for it already in Quarter 1, and we'd anticipate as well in Quarter 2.

Jeff Evenson -- Senior Vice President and Chief Strategy Officer

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

Wamsi Mohan -- Bank of America Merrill Lynch -- Analyst

Yes, thank you.

Operator

And our next question will go to Vijay Bhagavath with Deutsche Bank. Please go ahead.

Vijay Bhagavath -- Deutsche Bank -- Analyst

I'm sorry I was on mute the last time you called me. Good morning. My question is around your optical portfolio and 5G. In particular, 5G if you'd agree with me, is fundamentally different from previous wireless generations.

5G uniquely needs both wireless and optical communications, so my question is around, would you focus primarily on the optical communications opportunities with 5G or any thoughts in building up a wireless communication portfolio for 5G, now that the fixed wireless starting to pick up and then we're getting to mobility in 5G? Thanks.

Wendell Weeks -- Chairman and Chief Executive Officer

Excellent question, Vijay. I think your assessment of the difference between 5G wireless technology in previous generations is accurate and that wireless now becomes a very optically rich offering as people move toward dense 4G and 5G. As far as expanding outside of optical, mainly our focus will be on those things that are fully integrated into our passive optical system where we can uniquely be able to package and/or facilitate the implementation of wireless for our customers, we would augment our offering but that is a dialogue which we're involved with deeply with our key customers and it is really quite straightforward. It becomes, "Do you want us to do this or you want to source it, and what is the least expensive way to build out this infrastructure?" So depending on how those dialogues go, more of the value could shift to us beyond the optical, but I think it's too soon yet to conclude where those dialogues will end, Vijay.

Vijay Bhagavath -- Deutsche Bank -- Analyst

Thanks, Wendell, truly helpful. A quick follow-up on, as you bring up more optical fiber optic capacity, I keep seeing these blurbs on the newswire you [Inaudible] keep continue to build up new optical manufacturing capacity. Would that have any near-term impacts on the segment margins? Thanks.

Wendell Weeks -- Chairman and Chief Executive Officer

Yes, excellent question, Vijay. As you would have heard from Jeff is, we've had from our investments in optical of a bit of a drag on the back half of 2017 and we're having a bit of a drag here in the first quarter of 2018. We would expect as those facilities ramp that that drag will disappear and then turn into a strong positive. As you know, having visited our optical communications plant, our fixed cost in those facilities is high, so our variable margins are also quite high.

So as we fill that up you can expect to see it have a pretty potent effect on our gross margins.

Operator

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

Patrick Newton -- Stifel -- Analyst

Yes, Wendell and Jeff, wanted to dig a little bit more into gross margin, perhaps a two-part question. So I guess I'm struggling to see how the commentary on several segments running at full capacity acts in your results in the 4Q gross margin missing your guide by about 100 bps and it appears to me that the comments that you're making on an investment headwinds seem to be more targeted toward the first half of 2018, so maybe you can help us bridge the 41% gross margin results relative to the 42% guide and then if we look forward, and taking into account that a substantial portion of your growth is coming from some larger, some lower-margin businesses, how should we think about gross margin post-investment phase? I think that you talked about a 42% gross margin in the back half of the year but is that a good intermediate-term target, meaning that you know 43%-plus that was on the 2014-2015 time frame is unachievable given mix going forward?

Wendell Weeks -- Chairman and Chief Executive Officer

Great question, Patrick. Well, let's start with Q4. So in Q4, we're also seeing that the drag from our investment cycles and you're having, what can cause timing delta is that as we actually start up a plant, then there are certain costs that are triggered that were sitting in a project now flow to our P&L and our gross margins, so some of that's hitting Quarter 4. As well, you may have seen the announcement from Saudi that, of a major new strategic alliance we've announced.

That also started to ship and so there we had to build a new supply chain and that [Inaudible] about four generations of product for them so it's a new product, new supply chain, and so as we started to ship that, that also, its profitability was not at the level that it will be ultimately. So I think really Quarter 4 and Quarter 1, it's the same basic story. A little bit different mix of where the investment is, but you're seeing that strong investment take away from some of the strength in the overall populations, and we'd expect that to reverse. And I'll turn it over to Jeff for the back half, but you're right on the target for our gross margins.

So Jeff?

Jeff Evenson -- Senior Vice President and Chief Strategy Officer

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

Patrick Newton -- Stifel -- Analyst

Thank you for taking my question.

Operator

And next we'll go to Stanley Kovler with Citi Research. Please go ahead.

Stanley Kovler -- Citi Research -- Analyst

Hi, good morning, everyone. Thank you. One more question on display and a follow-up on the optical side. Panel-makers have commented recently that they wanted to refocus on profitability and so one question was for 2017, for example, when in the second half of the year there was more discounted to get inventory moving in China, how should we think about those kinds of developments going forward when, maybe panel-makers or OEMs will be less inclined to discount to get volume through? Your thoughts would be great.

Jeff Evenson -- Senior Vice President and Chief Strategy Officer

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

Wendell Weeks -- Chairman and Chief Executive Officer

Stan, was that question you were asking or were you aiming more for the display market?

Stanley Kovler -- Citi Research -- Analyst

I appreciate it. That was the question. I just wanted to follow up on optical, related to Verizon. They announced some NG-PON capabilities I think that allow them multiple wavelengths on a single fiber for some of the [Inaudible] deployments, and I think the focus more on some of these technologies was to get speed up on a single wavelength.

Does this have any implication for you guys on demand or ramp of single-mode fiber? Is this an accelerator or could this actually slow things down for you? Thank you.

Wendell Weeks -- Chairman and Chief Executive Officer

So, in general, what drives our demand is going to be footprint by neighborhood or by city. There's putting -- in telecom it is putting in place the original infrastructure to be able to service. As always when you put in something like GPON, the capability of the fiber is always well in excess of what you're driving it at, and so quite often what you'll see is our demand comes when we basically do the home passes and then ultimately the home drops. And then always the telecom company could turn up the rate and turn up the service level with pretty simple upgrades in their GPON system inside sort of the network itself.

So this is very typical and we don't see it as impacting us, frankly, one way or the other, either negatively or positively, other than to the extent that the degree with which our customers serve their customers better, that net long-term turns into more demand for us.

Stanley Kovler -- Citi Research -- Analyst

That's good.

Ann Nicholson -- Vice President of Investor Relations

John, we'll try to get a couple more people in.

Operator

Next we go to James Faucette with Morgan Stanley. Please go ahead.

James Faucette -- Morgan Stanley -- Analyst

Thank you very much. I just wanted to get a little more color on growth drivers for specialty materials and optical and display. Wendell, you talked a little bit about interior glass starting to move specialty. or starting to contribute in, really in 2019.

How should we think about it as a growth driver for specialty materials overall? Can it be meaningful in that 2019 as a contributor or is it going to take longer than that? And I guess in light of your recent question or your recent comments on this call related to Iris. Similar question on Iris -- can Iris be a meaningful contributor to display in 2019 or once again is that going to take longer? Thank you very much.

Wendell Weeks -- Chairman and Chief Executive Officer

Let's start with your first question. Just from a segment accounting method, right now we account for auto in the glass area inside other, right? Ultimately, I don't think we've determined where it will live as to segment, but it links more closely with our automotive market-access platform than it does on mobile consumer electronics platform. That being said, because what you really care about is, it does it generate revenue or not, I think 2019 will be the year if everything goes well that we'll start to feel it in automotive. We're a big company and this is just the beginning of this, so it's not gonna be a life-changing [Inaudible] in 2019, OK? But we'll expect it to be really, start to build its momentum in 2019 and then start to really contribute much more the next decade.

So in the near term, what drives us in specialty is the really the adoption of our new innovations by more and more of the OEMs, and we expect specialty to grow this year in mobile consumer electronics. The rate of growth will depend on how quickly people adopt our innovation sets. And Iris, it's still too early to tell. I think it's very encouraging that two major players in monitors, in Dell and Lenovo, have adopted the Iris technology for the top of their line.

I think we need to see that become a lot more mainstream before that turns from an investment area into a margin producer.

Ann Nicholson -- Vice President of Investor Relations

Another one for us, John?

Operator

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

Joseph Wolf -- Barclays -- Analyst

Hi, thank you. I had a question back to display but on the transition in the industry toward OLED, and not on the TV set but on the smaller panel size, and the lower, I guess the Gen 66.5, competitively is there any impact, I know you guys are involved in OLED manufacture, but are your competitors involved in the same way and is there any longer-term consideration where the other businesses, or your competition, is looking at the OLED opportunity differently than Corning?

Wendell Weeks -- Chairman and Chief Executive Officer

Could you just build on your question? When you say OLED, sir, what exactly do you mean?

Joseph Wolf -- Barclays -- Analyst

Both in flexible and in rigid, where I know that Corning product is used in the manufacture of the end product, but perhaps isn't in the final device. And I'm wondering if you believe that your competitors have the same sort of manufacturing capability or they are looking at that market differently?

Wendell Weeks -- Chairman and Chief Executive Officer

Hard for me to tell how our competitors are looking at it, so let me share instead how we think about it. Starting back a number of years ago, as we evaluated OLED versus LCD technology, We determined that OLED would probably be the most successful in the flexible, small mobile area because it offered some unique performance advantages that were highly valued. So, therefore, that's where we focused a lot of our innovation efforts and our share in that business is incredibly high. So to the extent that devices go into OLED in mobile consumer electronics as opposed to LCD, that is a revenue enhancer for us.

Now, it's a small revenue enhancer because in glass, the area of the device matters and so overall, mobile was a relatively small percent of the overall glass demand. What we felt then and we continue to feel is that OLED for TV can become a player but a small player. That fundamentally it doesn't offer enough value relative to the cost increase versus a continually improving LCD technologies. Like if you saw recently, CES was [Inaudible] the quantum dot technologies.

That being said, we have a strong position, as well, really anytime anybody wants to use the glass. So I don't have great insights into how our competitors feel about it, but I really like our position

Ann Nicholson -- Vice President of Investor Relations

John, I'll take one last question.

Operator

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

Doug Clark -- Goldman Sachs -- Analyst

Thanks for taking my question. I had a question on the display glass volume expectations, first for the market being up mid-single digits in 2018, can you explain what that means from a TV unit standpoint?TV units have been down for the past few years -- I'm wondering if you're assuming a reacceleration in growth? And then secondly, on Corning share gains and the relationship with BOE driving above-market-volume growth, can you quantify that? Should we be expecting high-single digit glass volume growth for Corning in 2018? So, essentially the materiality of BOE 2018. Thanks.

Wendell Weeks -- Chairman and Chief Executive Officer

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

Ann Nicholson -- Vice President of Investor Relations

Thank you all for joining us today. Before we close I just wanted to remind you that we will issue an 8-K today with our core data recast to a yen of 107 and a won of 1,175. We will be attending the Goldman Sachs conference on February 13 and we will be planning to attend at least one conference a quarter for the rest of the year. We'll also be providing some virtual presentations and webcast on business topics throughout the year.

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

Duration: 67 minutes

Call Participants:

Ann Nicholson -- Vice President of Investor Relations

Wendell Weeks -- Chairman and Chief Executive Officer

Jeff Evenson -- Senior Vice President and Chief Strategy Officer

George Notter -- Jefferies -- Analyst

Mehdi Hosseini -- SIG -- Analyst

Steven Fox -- Cross Research -- Analyst

Wamsi Mohan -- Bank of America Merrill Lynch -- Analyst

Vijay Bhagavath -- Deutsche Bank -- Analyst

Patrick Newton -- Stifel -- Analyst

Stanley Kovler -- Citi Research -- Analyst

James Faucette -- Morgan Stanley -- Analyst

Joseph Wolf -- Barclays -- Analyst

Doug Clark -- Goldman Sachs -- Analyst

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