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Corning Inc  (NYSE:GLW)
Q3 2018 Earnings Conference Call
Oct. 23, 2018, 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Welcome to the Corning Incorporated Quarter Three 2018 Earnings Call. It is my pleasure to turn the call over to Ann Nicholson, Division Vice President of Investor Relations.

Ann H.S. Nicholson -- Division Vice President, Investor Relations

Thank you, Haley, and good morning everyone and welcome to our third quarter 2018 earnings call. With me today are Wendell Weeks, Chairman and Chief Executive Officer; Tony Tripeny, Senior Vice President and Chief Financial Officer and Jeff Evenson, Senior Vice President and Chief Strategy Officer.

I'd like to remind you that today's remarks contain forward-looking statements that fall within the meaning of the Private Securities Litigation Reform Act of 1995. Those statements involve risks, uncertainties and other factors that could cause actual results to differ materially. These factors are detailed in the company's financial reports. We should also note that we will be discussing our consolidated results using core performance measures unless we specifically indicate our comments related to GAAP data.

Our core performance measures are non-GAAP measures used by management to analyze the business, a reconciliation of core results to the comparable GAAP value can be found in the Investor Relations section of our website at corning.com. You may also access core results on our website with downloadable financials in the interactive analyst center. Supporting slides are being shown live on our webcast and we encourage you to follow along. They're also available on our website to download.

Now, I'll turn the call over to Wendell.

Wendell P. Weeks -- Chairman and Chief Executive Officer

Thank you, Ann and good morning everyone. This morning we reported excellent sales and earnings growth for the third quarter and we are increasing our full year 2018 outlook, In total for the quarter, sales were $3 billion, up 16% year-over-year, net income was $476 million up 18% year-over-year and EPS was $0.51, up 28% year-over-year.

We also delivered on our goal to improve gross margin to 42%, a significant increase over last year and the first half of 2018. All businesses delivered year-over-year sales and NPAT growth. Highlights include optical sales up 22% year-over-year, environmental sales up 19% year-over-year, specialty material sales up 23% year-over-year better than expected, driven by strong pull through new innovations, such as Gorilla Glass 6. In display as expected sales in net income grew year-over-year and annual price declines continue to improve reaching the important milestone of mid-single digits.

As we said, we would, we grew sales and profitability significantly by leveraging our recent phase of intense operating and capital investments to capture substantial benefits. Third quarter results demonstrate a step change in our earnings power. Underpinning our success, our climbing production and efficiency rates at several of the largest expansion projects, plus strong customer adoption of our innovations. Our annualized sales run rate now exceeds $12 billion, growth is accelerating and our margins are expanding. Execution across the company is outstanding.

We expect to exceed $11.3 billion in full year sales, up more than 10% year-over-year and we expect to build on this strength as we address the rich set of opportunities ahead of us. So we feel great about both the back half of 2018 and our future opportunities as Tony will describe in just a few moments.

Now let's turn to the strategy and capital allocation framework, which outlines our leadership priorities. Under the framework, we target generating $26 billion to $30 billion in cash through 2018. We plan to return more than $12.5 billion to our shareholders through repurchases and dividends and to invest $10 billion to extend our leadership and deliver growth. We continue to make great progress toward the framework goals we announced in October of 2015.

Our cash generation is on target and through the end of the third quarter we have returned $11.4 billion to shareholders. Dividends per share have increased 50% since the framework began. Investments in RD&E capital expenditures and acquisitions also remain on track to our four year plan, totaling $7.3 billion through September 30th.

As outlined in our framework, Corning is best in the world: in a three core technologies; four manufacturing and engineering platforms; and five market access platforms. Our capabilities are interrelated in reinforcing. We focus 80% of our resources on opportunities that use capabilities in at least two of these three categories. This increases our probability of success, reduces the cost of innovation and creates stronger competitive advantages and delights our customers.

Now I'll turn to our progress in each of our market access platforms. Starting with optical communications. Our performance in optical communications continues to be outstanding. We remain the world leader in Passive Optical Solutions and the only true end-to-end supplier of integrated solutions. First, I want to note the team's response to the September hurricane in North Carolina, home to most of our fiber and cable manufacturing. Our people pulled together and did an outstanding job, working through the challenges of Hurricane Florence. They showed the highest level of commitment to safety and to supporting each other. Despite this powerful storm, their efforts kept us on track with our expectation for high-teen sales growth this year.

Next, recognition of the value created by our solutions and our unique co-innovation approach continues to grow. We continue to secure contracts with industry leaders in the carrier and data center segments that will add significant sales in 2019 and beyond. These multi-year commitments, support additional manufacturing capacity and drive profitable growth.

We continue to reach milestones that demonstrate a long track record of innovation and industry expertise less than a year ago, we announced that we've sold over 1 billion kilometers of optical fiber, and in August, we announced that our pre-connectorized fiber-to-the-home solutions have passed more than 45 million homes around the world.

We're also proud to have reduced energy intensity in our fiber and cable plants by 50%, as part of our commitment to protecting the environment through continuous improvement to process its products and services. Stepping back, we positioned our Optical Communications market access platform to deliver advantaged optical fiber, cable and connectivity solutions for access networks. Cloud data centers and the network densification necessary for 5G. This year we've ramped fiber and cable capacity in North Carolina and during the quarter, we announced the opening of a manufacturing facility in Strykow, Poland. Our investments in innovation and capacity are clearly paying off in the second half of the year. We're excited about our excellent performance, our current growth and especially our future opportunities.

Now let's turn to mobile consumer electronics, where we are the world leader in glass for smartphones, tablets and emerging categories like wearables and augmented reality devices. Our goal is to double mobile consumer electronic sales over the next several years. We continue to make significant progress in adding more sales dollars per device through our innovations, while also expanding our share developing regions and entering new product categories.

Corning Gorilla Glass has been designed into more than 6 billion devices worldwide and it is increasingly being adopted for glass backs. We introduced Gorilla Glass 6 in the third quarter and have additional exciting innovations on the roadmap, so much, much more to come. We're also innovating in new device categories. Gorilla glass continues to be the most widely used cover material on smart watches. And in July, we launched Gorilla Glass DX and Corning Gorilla Glass DX+, which offers enhanced anti-reflective optics and scratch resistance for wearables. As announced in August, you'll find DX+ on the Samsung Galaxy watch, in addition the FitBit charge 3 launched in August featuring Gorilla Glass.

Corning also partners with leading consumer electronics makers on augmented reality devices and precise 3D sensing technology. The glass we supply coupled with our laser processing and characterization tools, enables optimized image quality, compact form factors and more accurate facial recognition. Overall, we continue to be excited about bringing our innovations to market to drive our sales and profit growth and to enhance the way we all benefit from our personal devices.

Turning to the automotive market access platform, our expertise focuses on helping customers build cleaner, safer and more connected vehicles. Our leadership in gasoline particulate filters technology puts us at the forefront of the next wave of emissions control. European regulations took full effect in September and GPS sales are ramping as we partner with most major automakers to equip their European vehicles with the technology necessary for compliance. China will be next to introduce GPS with initial filter sales in 2019 as OEMs prepare for the first phase of China six regulations in mid 2020.

Last week, we announced that Changan Automobile selected Corning as its supplier for gasoline particulate filters. This agreement is based on our strong long-term partnership with one of the largest Chinese automakers. Once regulations are fully implemented, in Europe and China, we expect gasoline particulate filters to add $0.5 billion in annual sales for Corning.

Next, excitement about Gorilla Glass for auto continues to grow, industry trends toward greater connectivity, economy, sharing and electrification, a driving demand for technical glass. Call for a collaboration for more than 20 leading OEMs is increasing. And we have been awarded more than 50 platforms to date. One customer, Porsche, described the benefits of using Gorilla Glass as "ideal visual characteristics, low weight and very high strength"

Another customer, Harley Davidson, launched its 2019 line of touring and trike motorcycles featuring an entertainment system with Gorilla Glass. It uses our advanced surface treatment for exceptional visibility in bright sunlight. Overall, we have several $100 million in our auto glass business pipeline. These customer commitments will acquire the creation of a dedicated factory for Gorilla Glass for auto interiors which we announced in July. We expected it to be operational in 2019.

In our life sciences vessels platform, we continue to make strong progress on the path to a new long-term, multi-billion dollar franchise. Valor glass substantially reduces particle contamination, breaks and cracks, while significantly increasing throughput. Valor helps protect patients and improve pharmaceutical manufacturing. Key customers are advancing toward the FDA certification required for the use of Valor. Our development partners Merck and Pfizer are at the forefront.

To support individual drug regulatory filings by our customers, we increased our shipments of Valor glass by threefold versus this time last year, indicating growing progress toward certification across more pharmaceutical companies. In parallel, we are supporting customers by scaling up production. We brought new capacity online in the third quarter and expanded our range of products. We're also progressing with the construction of the new high volume manufacturing facility in North Carolina that we announced in April.

Finally, industry poll remains favorable. In September, more than 40 leaders in the pharmaceutical industry visited Corning for the annual drug and pharmaceutical packaging Committee Meeting which we hosted. They learned about the patient safety and manufacturing benefits of Valor glass.

We continue to believe Valor glass has the potential to power Corning's growth for the next decade and beyond. And we remain closely engaged with the FDA and support its efforts to address this important public health issue. We look forward to being able to share additional updates soon. In this light, we're delivering stable returns. TV retail demand and screen size growth supported strong volume growth in the display glass market. Corning is exceeding this growth due to the ramp of our Gen 10.5 plant in tandem with BOE's panel production, further extending our global industry leadership. As the benefits of our investments in fleet optimization in Gen 10.5 take hold, profitability is improving substantially in the second half as we planned.

In the third quarter as expected, pricing continued to improve, we reached the important milestone of annual mid-single digit percentage price declines. And expect the improvement trend to continue in the fourth quarter. We also expect our full year 2019 price declines to further improve from 2018. So, we continue to make significant progress across all our market access platforms. Ultimately, we remain on track to fully achieve our strategy in capital allocation framework goals. We've leveraged our investments to meet increased demand from our customers, gross sales and significantly improved profitability in the third quarter. We will continue to reap the benefits of those investments in the future, and are very well positioned to deliver strong growth for the remainder of the year and beyond.

Now let me turn the call over to Tony for a review of our results and outlook.

Tony Tripeny -- Senior Vice President & Chief Financial Officer

Thank you, Wendell and good morning. We had an outstanding quarter. Each one of our businesses delivered excellent results with year-over-year sales and profit growth across the board. We expect very strong performance again for the fourth quarter and full year and now expect to exceed $11.3 billion in sales for 2018. We have passed at an inflection point. Our significant investments over the last few quarters are now delivering greater sales and profitability. We are gaining momentum and we plan to build on that going.

Before I get into the details of our performance and results, I want to note that the primary difference between our GAAP and core results is again a non-cash mark-to-market adjustment for our currency hedge contracts. As we've discussed before, GAAP accounting requires earning translations hedge contracts, settling in future periods to the mark-to-market and recorded a current value at the end of each quarter. Even though, those contracts will not be settled in the current quarter. For us this resulted in an after tax GAAP gain of $151 million for the third quarter. 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 in the 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 that provides. We received $1.6 billion in cash under our hedge contracts since their inception slightly over five years ago.

That brings me to our results and outlook. Third quarter sales increased 16% year-over-year. Net income was up 18% and EPS was $0.51 up 28%. As Wendell noted, this strong growth results from customers adopting our innovation and realizing the benefits from our capacity investments. As a reminder, our capacity expansion project supports strong and committed customer demand across all businesses. These investments include capacity expansions for optical fiber and cable, our Gen 10.5 display glass plant, capacity for gasoline particulate filters and multiple development projects, including Gorilla glass for mobile devices and for automotive. As our new capacity continues to ramp toward full production levels, our sales run rate is climbing and our gross margin is going up. Gross margin in the third quarter expanded to 42% and we expect to sustain that level in the fourth quarter.

Turning to the balance sheet, we ended the quarter with $1.9 billion of cash and adjusted operating cash flow for the quarter was $956 million. Now let's look at the detailed segment results and outlook. In display technologies, we're delivering stable returns. Third quarter sales were $852 million and net income was $218 million both up sequentially and year-over-year. As we explained in July, the gross margin in our display business is improving because of two factors, the Gen 10.5 start-up and fleet optimization.

Our investment and successful capacity ramp are extending our industry leadership and contributing significantly to the stable profits we're now seeing. As expected third quarter sequential price declines were very moderate and we reached the important milestone of annual price declines improving to a mid-single digit percentage. For the fourth quarter, we expect sequential price declines to be even more moderate than the third quarter.

We expect our full year 2019 price declines to further improve from 2018. Three factors drive our view that this favorable pricing environment will continue. First, we expect glass supply to continue to be balanced or even our tight. Our new Gen 10.5 plan supports the expected growth of large sized TVs. It is collocated with and dedicated to our customer BOE. We pay for the line capacity in tandem with BOE to ensure our Gen 10.5 glass supply is balanced to demand. The ramp is on schedule.

We expect the glass supply demand balance below Gen 10.5 to tighten further because demand continues to grow by public information indicate there is low capacity growth plan in this segment, like glass makers. Second, our competitors continue to face profitability challenges at current pricing levels. Therefore, we expect our price declines will slow further as they try to remain profitable. And third, display glass manufacturing requires ongoing investments in current capacity to maintain operations. To generate acceptable returns on investments, glass pricing will need to improve even further. For Corning, we will only add capacity if we can get an attractive return for our shareholders.

Moving to retail, TV demand has been strong year-to-date and we expect it to remain robust for the rest of the year. We continue to expect TV screen size to grow 1.5 inches this year. We also continue to expect display glass market volume growth in the mid-single digits for the full year. Third quarter display glass market volume grew mid-single digit sequentially and our volume grew faster, as we ramp production in our Gen 10.5 plan in line with our July guidance.

In the fourth quarter of 2018, we expect the display glass market volume to grow low-single digit sequentially and our volume to grow faster as we continue ramping Gen 10.5 production in tandem with BOE's Gen 10.5 demand. In summary, we remain very pleased with the current dynamics in our display business. Our ability to capture higher productivity and margins through fleet optimization in the Gen 10.5 ramp and most importantly, the fact that we are now delivering stable returns.

Let's move to this year's fastest growing segment, Optical Communications. Third quarter sales were up 22% year-over-year and exceeded $1 billion for the second quarter in a row. Sales growth was driven by both our data center and carrier customers and sales from 3M's Communication Markets Division, which we acquired in June. Net income was $168 million, up 27% year-over-year. Our capital investments are yielding clear benefits.

Fourth quarter sales are expected to remain strong and be at low-single digit sequentially. Capacity continues to ramp, which will enable us to meet additional demand from large projects under way at multiple customers in both the carrier and data center businesses. On a year-over-year basis, sales growth is expected to exceed 22%. Overall, we are growing Optical Communications much faster than the market. Our growth is driven by preference for our advantaged solutions in the data center and carrier market and enabled by increased fiber and cable output from our new capacity expansions. We continue to expect high-teens growth for the full year with organic growth in the low-teens.

Our mid-year acquisitions of 3M's Communication Markets Division contributes about $200 million of the 2018 sales growth. We are pleased with our progress on integrating this acquisition and continue to expect it to be accretive to EPS in 2019. Environmental Technologies third quarter sales were $331 million, up 19% year-over-year. Third quarter net income grew faster than sales. Our results in this business benefit from volume growth in all product categories, as well as strong performance in our manufacturing operations.

The North America heavy duty market continue to drive strong demand, resulting in year-over-year diesel sales growth of 30% for the third quarter. In auto, we are growing our sales faster than the market due to winning additional business and a shift to premium products. Sales were up 12% year-over-year. Additionally, gas particulate filters contributed to growth as OEMs ramp for full adoption of Euro 6 Regulations, which began in September. We are making progress on capacity and engineering investments to support the ramp of the GPS business.

We expect growth to continue in the fourth quarter with sales up high-single digits year-over-year. We expect our full year sales to be at mid-teens year-over-year with continued strength in sales of all products including ramping GPS sales. In specialty materials third quarter performance was exceptionally strong with sales of $459 million, up 23% year-over-year and ahead of our expectations. This outstanding growth was driven by a strong pull for Gorilla Glass innovations to support second half new product releases. Net income was a $116 million up 35% year-over-year.

The third quarter demonstrates our ability to innovate and deliver value-added products at a premium price. For example, the use of glass on the backs of phones has doubled over the past year. We delivered another breakthrough innovation in July with Gorilla Glass 6 and broaden our portfolio to capture more value in multiple applications. Innovations like these increase the value of our glass, extend our differentiation and support using more glass in more places. For the fourth quarter, we expect sales to remain strong and be comparable with the fourth quarter of 2017, which was specialty's highest sales quarter.

For the full year, we expect mid-single digit sales growth after an exceptionally strong year of 25% growth in 2017. In life sciences third quarter sales were $231 million, up 4% year-over-year and net income grew 20% driven by improved manufacturing performance. Fourth quarter sales are expected to grow by a low to mid-single digit percentage year-over-year. We remain on track to deliver full year sales growth of a mid-to-high single digit percentage over last year, which outpaces overall market growth. So for 2018, all of our businesses have positive momentum. We now expect full year sales to exceed $11.3 billion which is up slightly more than 10%.

Now, I'll share some additional outlook details. First, let's turn to gross margin. We delivered on our goal to expand our gross margin to 42%. As we said we would, we accomplish this goal by ramping the new capacity in optical, ramping the new capacity in display and completing the display fleet optimization. We expect to sustain this gross margin percentage in the fourth quarter. This is a significant improvement over the first half and versus last year. Annual operating expenses should remain consistent with last year as a percentage of sales. For the fourth quarter SG&A is expected to be about 14% of sales and RD&E about 8%. We expect other income, other expense in Q4 to remain at our third quarter run rate or about $55 million to $65 million.

For the full year, we expect a net expense of approximately $210 million to $220 million. Full year gross equity earnings are expected to be similar to 2017 at just over $200 million, predominantly from Hemlock semiconductor, with fourth quarter at approximately $120 million consistent with typical seasonality. Recall that the timing of contracts typically makes Hemlock's fourth quarter its strongest. In the third quarter, our year-to-date tax rate is 20.8%, we expect our effective tax rate in Q4 to remain at this level. The slides we posted give you additional modeling related details for the fourth quarter and the full year. In 2018, we expect to spend slightly more than $2 billion on capital expenditures with programs in every market access platform.

Finally, I'd like to make a couple of comments on China. First, as we said in July, we do not expect a material impact from the enacted tariffs. Second, we have incorporated conservative estimates for China end market demand for TVs and autos in our strong guidance and outlook for 2019. If Chinese demand is better, there is an opportunity for upside.

In closing, our very strong third quarter results underscores that we're well positioned and on track for the remainder of our four year strategy in capital allocation framework. We met our goal to expand margins and now expect to exceed $11.3 billion in full year sales. Strength is expected to continue across Optical Communications, Specialty Materials, Environmental Technologies and Life Sciences, and we are delivering stable returns in display. Other progress on the framework included returning $542 million to shareholders in the third quarter of 2018 for a total of $11.4 billion since the framework's introduction.

Putting it all together, we have moved beyond the inflection point. We are now seeing our four year, $10 billion investment drive growth and extend our leadership. We are rewarding investors by returning more than $12.5 billion which compounds the benefit of our future growth for long-term shareholders.

With that, let's move to Q&A. Ann?

Ann H.S. Nicholson -- Division Vice President, Investor Relations

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

Questions and Answers:

Operator

Thank you, and that will come from Asiya Merchant from Citigroup. Please go ahead.

Asiya Merchant -- Citigroup -- Analyst

Great. Thank you and congratulations on the strong quarter. If you can just humor me on China, I know it's a very conservative guidance that you guys have baked already in. But if you can just talk about how you are thinking about the macro-demand environments there? And not just as it relates to TV, but as it relates to optical as well, I think that will diffuse a lot of investors who've been very nervous about China, the demand elasticity and how that plays out for Corning, not just for this year, but also into next year? Thank you.

Tony Tripeny -- Senior Vice President & Chief Financial Officer

So as I said in my comments, I mean, what we've tried to do or what we have done is incorporate conservative guidance for the China end markets. For example on TVs, in the TV demand, we've actually been strong this year, retail has been up about 9% on a year-over-year basis year-to-date. But we're forecasting it to be up only 2% in the fourth quarter as a reflection of the slowdown in the end market and we are very similar from a vehicle standpoint, where the market has been up about 3% on a year-to-date basis and we're expecting it to actually be down 3% year-over-year in the fourth quarter. And from an optical standpoint of course, most of our biggest part of our business in optical is actually outside of China, and in particular in the North American market and that market has been very strong and you can see that in our optical results.

Operator

Thank you. Next we'll go to the line of Wamsi Mohan of Bank of America Merrill Lynch.

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

Yes, thank you. Tony you've completed almost 11.5 out of your at least 12.5 billion in capital return, and I was wondering if you can give us some sense on how willing you might be to take on incremental debt to continue to return cash to shareholders at a time when it seems like a lot of economic indicators are pointing toward somewhat of a peak in the near-term.

And how should people think about gross margins heading into next year? You've obviously exiting with a lot of momentum over here, 42% as you had thought at the beginning of the year, you're delivering on that. And it seems as though with all the growth vectors you have heading into 2019 that gross margin should commensurately see a pretty decent step up. Am I thinking about that, right? Thank you.

Tony Tripeny -- Senior Vice President & Chief Financial Officer

I think from a gross margin standpoint, we're obviously pleased that all the investments we made in the first -- over the last couple of years are paying off, we're seeing additional growth and we've expanded our margins to 42%. And although, we're not given gross margin guidance for next year, I mean, I would expect to stay somewhere at this level, and that's what we expect in Q4 and that's roughly what I'd expect in 2019.

In terms of leverage, we said in the capital allocation framework that there we would add $3 billion to $4 billion of debt and we haven't added that much up to now, and so, we'd expect to continue to be able to lever because we have such strong operating cash flow. And that's certainly what we continue to look forward doing over the next, as we finish up the capital allocation framework.

Operator

Thank you. Next we'll go to the line of Joseph Wolf with Barclays.

Joseph Wolf -- Barclays -- Analyst

Thank you. A question on just optical in the carrier side of the equation. There's been some enthusiasm about 5G and how that would be related to optical, Verizon seems to have slowed momentarily. I'm just wondering your sense of the five year deployments and how that's -- whether we've got momentum going into 2019 and how you're looking at optical outside of the data center?

Wendell P. Weeks -- Chairman and Chief Executive Officer

Joseph, I would characterize 5G is being in the beginning. We're just really at the early stages of the deployments of the infrastructure needed to have a 5G service level. And some of the first ones you see at a different carriers are some of the easier ones. They're really going to see the demand for our products get stronger and stronger as you have to support for mobility for 5G. That's also going to take phones being upgraded to 5G. So we're just right in the beginning and we've got a long, long way to go to get that much glass in the ground.

Joseph Wolf -- Barclays -- Analyst

Thank you. And if I could just ask a follow-up on Valor, and you gave a lot of details, which was helpful. Could you just help us understand how -- what these programs mean in terms of are you selling right now? None of this seems to be approved yet. So what are the customers taking? Are they buying? And have you targeted a specific volume of specific drug as you start these programs, I mean what we see at first win which is pretty big if you get an FDA approval?

Wendell P. Weeks -- Chairman and Chief Executive Officer

Great question. The way this works is you keep going through stages even before you file with the FDA and because the change has taken so seriously inside a pharmaceutical production unit. So we go through numbers of trials and then collect stability data and analyze what happened to the act of pharmaceutical ingredient after those trials. So that's the stage that we've been in as we have sampled dollar across the industry. The phase we're entering into now will be that our customers will bring a full file with all the data that they've collected to the FDA and state their intent to use this package when they produce this drug.

At that point, they will begin to take Valor really across that entire drug that they have submitted, because one of the things that Valor does is enable you to increase throughput, as well as guarantee patient safety. And so, the pharmaceutical companies will want to do is get both of those benefits every time someone is injected with that particular active pharmaceutical ingredient. Does that answer your question, Joseph?

Joseph Wolf -- Barclays -- Analyst

I guess just from a selection perspective that at the customers, are they targeting small things to see how this works or are they targeting a large kind of active ingredient where you could see a very large win early on with an early approval?

Wendell P. Weeks -- Chairman and Chief Executive Officer

You see different approaches from different pharmaceutical companies. Some people are aiming at their pipeline, other people are aiming at transferring all of our current drugs. But everyone is looking as doing it across their large scale pharmaceutical product sets because the benefits are-- they want to accrue to the patient and their production facilities, where they actually do volume. So very few are saying let's just try a little, they -- that's part of the overall process, but what they're really looking at is to take their mainline commercial production over the Valor.

Joseph Wolf -- Barclays -- Analyst

Thank you, Wendell.

Operator

Thank you. We'll go next to the line of James Faucette with Morgan Stanley.

James Faucette -- Morgan Stanley -- Analyst

Good morning. I wanted to just ask a quick follow-up to the question that have been asked. Tony you said that you're taking a conservative view, particularly on Chinese demand. I'm wondering as you've formulated your guidance and outlook for the December quarter, are the growth rates that you're looking for now, have you reduced those from what maybe you would been looking for earlier in the year? And are you actually seeing any change in demand that is causing you to be conservative? Or are you just being conservative given the headlines?

And I guess a similar follow-up question is, as we come to the end of the capital allocation program, is there a time frame that we should be looking at for update as to what comes after that and what are the kind of the key elements that we should be thinking about as to -- that you'll be weighing as you think about future capital allocation? Thanks.

Tony Tripeny -- Senior Vice President & Chief Financial Officer

Sure James. I think first on the answer on China. We are being conservative based on the headlines that we see. And the demand has been strong in China both in terms of our TV business and also the vehicle business up to now, but we see the headlines and that's why we're being conservative. And if that demand turns out to be better, there is opportunity there for upside.

In terms of the framework, I mean clearly our focus remains on delivering the first four years of that framework. We have more than a year to go and operationally we like to deliver on what we say we're going to do and that's really continues to be our focus. So -- at some point next year, I'm sure we'll talk about what's beyond 2019. I think that things to keep in mind is that our businesses, especially display are generating very strong operating cash flow and we expect that to continue and we expect to continue to have multiple large opportunities for growth in all of our market accessed platforms. And any cash that's in excess of that, we'll continue with our practice of returning in the shareholders. But in terms of the specifics of that, that will cover some time in 2019.

James Faucette -- Morgan Stanley -- Analyst

Thank you.

Operator

Thank you. We'll go next to the line of Samik Chatterjee with JP Morgan.

Samik Chatterjee -- JP Morgan -- Analyst

Hi, good morning. I just wanted to ask on display glass pricing where things have been improving on the lines of how you kind of talked about it or guided to it. Just thinking about kind of the upside risk and the downside risk here. Are you now thinking of a scenario in 2019, where prices could eventually be there like flat year-on-your or even kind of increase year-on-year, and what are kind of the developments that could drive faster progress on that front?

And then similarly on the downside is kind of capacity additions by your competitors thing that we need to watch out for, as we track or monitor kind of the progress on this front?

Tony Tripeny -- Senior Vice President & Chief Financial Officer

Sure. I mean I think in terms of the pricing I mean the important thing here is that we expect our 2019 price declines to further improve from 2018. Certainly over a time period, we'd like to see them continuing improve even more than that. But the important thing here is I think the news in something that's different than we said before is we do expect that to improve in 2019. In terms of the downside variables, and I explained why I don't think there is much risk there. And that has to do with glass supply and demand being balanced, the competitors' profitability challenges and the need to get returns on ongoing investments. So I think we feel pretty good about our pricing environment right now, it is the best environment in more than a decade.

Samik Chatterjee -- JP Morgan -- Analyst

Great. Thank you.

Operator

Thank you. We'll go next to the line of Vijay Bhagavath with Deutsche Bank. Please go ahead.

Vijay Bhagavath -- Deutsche Bank -- Analyst

Yeah, thanks. Hey, good morning, Wendell. A question for you just bigger picture on the 3M asset, in my view, it's a strategic asset for the optical business, how is it going in terms of top line synergies and also on OpEx? And I also have a follow-on for Tony.

Wendell P. Weeks -- Chairman and Chief Executive Officer

Thanks to the question. We're delighted with the acquisition and done even better on revenue synergies that we originally got. It's still early on the operations integration, so we've got a lot of work ahead of us on that piece, while, we are really delighted with both the customer access and the product attributes that we've been able to bring into our overall market access platform. So, still early days, but so far so good.

Vijay Bhagavath -- Deutsche Bank -- Analyst

Thanks, Wendell. Quick follow-on for Tony on how should we think of gross margin heading into next year. You have many manufacturing capacities getting into the production lines. So any thoughts on how we should think of gross margins would be very helpful.

Tony Tripeny -- Senior Vice President & Chief Financial Officer

Yeah. I mean I think that we're very happy that we've reached the 42% gross margins in the back half of this year and why we are not giving 2019 guidance, think about gross margins in that range, I thinks it's appropriate.

Vijay Bhagavath -- Deutsche Bank -- Analyst

Thank you.

Operator

Thank you. Next we'll go to the line of Steven Fox of Cross Research. Please go ahead.

Steven Fox -- Cross Research -- Analyst

Thanks, good morning. Two questions from me. First, following-up on that last question. Tony, can you just maybe give us a rough timeline of when some of these expansion sort of hit optimal levels from a utilization rate, et cetera? It sounds like the fleet optimization is complete, but what about the others? And then secondly Wendell, can you just talk about maybe round up the fiber discussion and talk about the data center success a little bit more and maybe where your advancements are having the most impact with those customers? Thanks.

Tony Tripeny -- Senior Vice President & Chief Financial Officer

I think in terms of the capacity ramps, I mean obviously, we've been ramping in the third and the fourth quarter and we continue to expect that the ramp throughout next year. And the good news is that we have committed demand for those capacity ramps, so we feel good about that.

Wendell P. Weeks -- Chairman and Chief Executive Officer

And on data center, the places where we're most excited at this moment tend to be as more and more of the operators are adopting some very high fiber count systems. And then glass, much like the way you used to thinking about it for the public networks is also breaking into the next layer of those data centers. So, think about it a little like when you went to the public networks from long haul to regional to that trial to home right, following that line, we're seeing that same thing begin to happen in these great big mesh networks that are getting built inside these data centers.

So more and more of that architecture is falling to glass and the amount of glass acquired is also going up in terms of fiber account, as people try to separate storage from the different processing techniques, and so you end up with these big meshes built and that has to be really good for glass demand, so that's what's going on. To make that happen we need a lot of innovations in our connectivity products and how you manage all that glass and that's when we get really excited about our product road map going forward.

Steven Fox -- Cross Research -- Analyst

Thanks, that's helpful. And just to be clear Wendell, that's -- what you just described is sort of in the here and now happening into next year, you're benefiting from those trends?

Wendell P. Weeks -- Chairman and Chief Executive Officer

Yes, we are. The roadmaps, that sill is product that we're going to have to develop to handle this on a growing trend to make it even more cost efficient as OpEx gets closer and closer to those ASICs that are driving the processing, we're going to have to activate stuff like our glass knowledge, our ability to handle the optical physics of that and thermal challenges of that, that's out in the future. What we're dealing with right now is the main line of how do we connect up with the current levels with the architectures are going to.

Steven Fox -- Cross Research -- Analyst

Great. That's very helpful and congrats on the great results.

Wendell P. Weeks -- Chairman and Chief Executive Officer

Thank you.

Operator

Thank you. We'll go next to the line of Rod Hall of Goldman Sachs.

Roderick B. Hall -- Goldman Sachs -- Analyst

Yeah, hi guys, thanks for fitting me in. I've got a couple of questions. I wanted to start with specialty materials. The -- like, if I look at the second half of the year the numbers are pretty much in line with what we are modelling. But the seasonality is a lot different than what we were modeling a lot more weighted back into Q3 than Q4. So I just wanted to see if you could comment on whether that seasonality is what you would have expected back earlier in the year, is it little bit different just kind of how that flowed versus what you had been expecting earlier in the year, if it's just our models not quite being on track with what actually was going to happen?

And then my second question is on the Chinese automotive glass player, I know you said it will be operational in 2019. Do you have any idea when, I mean, could you give us an idea on whether that's earlier or later in the year? And do you anticipate any tariff impacts for the products coming out of that plant? Thanks.

Tony Tripeny -- Senior Vice President & Chief Financial Officer

So in terms of the specialty materials, we're very happy with the results in the third quarter, we said in first -- for the full year, we were going to grow after a very strong 2017 were we were up 25%. And how much of that growth was going to be dependent on the adoption of our innovations. And think it's very clear now that, that adoption has been incredibly strong. The issue always is, is the timing of that adoptions is up to our customers and it's hard for us to know at the beginning of the year, how much those adoptions are going to have and what quarter they're going to happen. So from a full year standpoint, we're in line with what we expected at the beginning of the year and from a quarterly standpoint, it's just always depends on where the customer orders.

Wendell P. Weeks -- Chairman and Chief Executive Officer

So much like you -- we have a hard time getting the seasonality right as well. On the automotive interiors piece that production is in the midst of getting built right now, that ramp is going -- will start putting production through that in 2019. I don't want to call exactly the timing at this point in time because it's a pretty complicated project and we also are managing, as well as supply chain beyond the factory that we're building. So -- and if you just give us a little more time when we start making that public of commercial production through that facility, we'll be back to you.

On tariffs, the products that we're making and there are customers we'll incorporate at this time we're not on any tariff list. So we don't anticipate that being an issue if the trade arrangements continue, as we understand them at this time. So --

Roderick B. Hall -- Goldman Sachs -- Analyst

Great. Okay thanks, Wendell; thanks, Tony.

Operator

Thank you. We'll go next to the line of Thejes Venkatesh of UBS.

Thejeswi Venkatesh -- UBS -- Analyst

Good morning. Given, the panel oversupply, there is some concern out there that some of your customers could convert or perhaps shutdown older plans. How should investors think about the impact of this panel supply on Corning?

Tony Tripeny -- Senior Vice President & Chief Financial Officer

I think at the end of the day what really drives our demand is the end market and how many people -- how many TVs are sold and what size was TVs are. And so from -- as we look at this year, we thought we would be up mid-single digits, given both in terms of the -- where the TV unit growth is, but most importantly, the screen size growth. And as we look forward, we -- that screen size growth has continued for number of years and we expect that to continue going forward. So I think the way people should think about our demand is really driven by the TV market.

Ann H.S. Nicholson -- Division Vice President, Investor Relations

We got time for one more question.

Operator

Thank you, and that will come from the line of Rob Cihra with Guggenheim Partners.

Robert Cihra -- Guggenheim Partners -- Analyst

Great, thanks very much for squeezing me in. Just a question on CapEx model from here with this year track and slightly more than $2 billion that's driven by a lot of unit capacity expansion which is great because it's driven by demand. I mean any -- I guess, you probably don't want to give us an outlook for 2019 budget yet, but I mean, what are you thinking in terms of the puts and takes, and then is that $2 billion kind of a new baseline or the demand dependent? Just anything you can give us for 2019 as a model? Thanks.

Tony Tripeny -- Senior Vice President & Chief Financial Officer

As we -- you're right, we don't want to give guidance for 2019, but recall that our strategy in capital allocation framework said that we would spend between $6 billion and $7 billion over the four year period and we still expect to be in that range -- that area.

Robert Cihra -- Guggenheim Partners -- Analyst

Right. Okay, is enough. Thanks.

Operator

Thank you.

Ann H.S. Nicholson -- Division Vice President, Investor Relations

Thanks, Rob, and thank you all for joining us. Before we close today, I wanted to let everyone know that we'll be at the Credit Suisse Technology Media and Telecom Conference on November 27th and the Barclays Global Technology Media and Telecommunications Conference on December 6. We'll be posting some virtual presentations and webcast on business topics through the quarter and finally, the web replay of today's call will be available on our site starting later this morning. Once again, thank you all for joining us. Haley, that concludes the call. Please disconnect all lines.

Operator

Thank you. And ladies and gentlemen, you may now disconnect.

Duration: 60 minutes

Call participants:

Ann H.S. Nicholson -- Division Vice President, Investor Relations

Wendell P. Weeks -- Chairman and Chief Executive Officer

Tony Tripeny -- Senior Vice President & Chief Financial Officer

Asiya Merchant -- Citigroup -- Analyst

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

Joseph Wolf -- Barclays -- Analyst

James Faucette -- Morgan Stanley -- Analyst

Samik Chatterjee -- JP Morgan -- Analyst

Vijay Bhagavath -- Deutsche Bank -- Analyst

Steven Fox -- Cross Research -- Analyst

Roderick B. Hall -- Goldman Sachs -- Analyst

Thejeswi Venkatesh -- UBS -- Analyst

Robert Cihra -- Guggenheim Partners -- Analyst

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