Corning's (GLW) CEO Wendell Weeks Hosts 2017 Investor Meeting Conference (Transcript)

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Corning Incorporated (NYSE:GLW)

2017 Investor Meeting Conference Call

June 16, 2017 08:30 ET

Executives

Ann Nicholson - Vice President, Investor Relations

Wendell Weeks - Chairman, Chief Executive Officer and President

Clark Kinlin - Executive Vice President, Corning Optical Communications

Eric Musser - Executive Vice President, Corning Technologies and International

James Clappin - President, Corning Glass Technologies

Jeffrey Evenson - Chief Strategy Officer and Senior Vice President

Martin Curran - Senior Vice President and General Manager

Tony Tripeny - Chief Financial Officer and Senior Vice President

Analysts

Steve Fox - Cross Research

James Faucette - Morgan Stanley

Grace Hoefig - Franklin Templeton

Stan Kovler - Citi

Patrick Newton - Stifel

Rod Hall - JPMorgan

Mehdi Hosseini - Susquehanna International

Jeff Kvaal - Nomura Instinet

Omar Lal - Private Investor

Phil McClain - McClain Value

Ann Nicholson

Good morning. It’s my pleasure to welcome you to Corning’s Annual Investor Meeting. I would also like to welcome those investors joining by conference or videocast.

Before we begin our formal comments, 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. These remarks involve a number of risks, uncertainties and other factors that could cause actual results to differ materially. These factors are detailed in Corning’s financial reports. You should also note that we will be discussing our results using core performance measures, unless we specifically indicate our comments relate to GAAP data. Our core performance measures are non-GAAP measures used by management to analyze the business. A reconciliation of core results to comparable GAAP value can be found on the Investor Relations section of our website at corning.com.

Your printed agenda includes a link to reference materials as well as details for accessing our wireless network. Also we have a parting gift for those in attendance. Just to receive yours, give your badge back to the registration table on your way out. And finally, please turn your cellphones to vibrate or silent.

We have a great agenda today. Wendell Weeks will kickoff with an overview of our strategy and capital allocation framework. He will also describe our opportunities in display, mobile consumer electronics, life sciences vessels and automotive. Then Clark Kinlin will provide an in-depth look at our opportunities in optical communications. Finally, Tony Tripeny will share details of our progress against our strategy and the capital allocation plan and the consolidated summary. Wendell will return for a quick wrap up and then we’ll move to Q&A and our business leaders will join. We think you will find these presentations informative and we are excited to have you here with us.

And with that, I will turn the podium over to Wendell.

Wendell Weeks

Thank you, Ann. Good morning everyone. It’s my pleasure to welcome you to Corning’s Investor Meeting. Today, I will update you on our progress since we introduced the strategy and capital allocation framework in October of 2015 and illustrate how it positions us to grow and extend our leadership.

We have three objectives. First, we will demonstrate how our financial strength allows us to invest in growth while simultaneously returning significant sums to our shareholders. Second, we will share insights and examples to increase your understanding of how our focused portfolio creates strong competitive advantages and produces unique solutions that delight our customers. And finally, we will provide context on our growth opportunities so that you can synthesize news flow and calibrate timing.

Let’s begin with an overview of our strategy and capital allocation framework. The framework builds on a strong foundation that includes technology leadership and a track record of life-changing innovations that attract an outstanding set of customers and partners, operating excellence that provides the lowest cost position and allows us to consistently beat our competitors and strong financial performance that lets us simultaneously invest in growth and reward our shareholders.

The framework defines our leadership priorities through 2019. We are focusing our portfolio in utilizing our financial strength to extend our leadership, drive our growth and reward our shareholders. Under the framework, we expect to generate between $26 billion and $30 billion in cash through 2019. As you will hear from Tony later, we are off to a great start. We plan to deliver more than $12.5 billion to our investors through share repurchases and annual dividend increases of at least 10%. We are also investing $10 billion to sustain our leadership and deliver growth over the long-term.

So how are we doing? The short answer is extremely well. Here are a few highlights. Since launching the framework, we have reduced outstanding shares by 24% through repurchases. We increased our quarterly dividend by 12.5% last year and followed that up with a 14.8% increase this year for a total dividend increase of 29%. When you add that up, we have returned more than $6.5 billion to shareholders so far. We focused our portfolio with the realignment of our ownership interest in Dow Corning and several small, but strategic transactions.

We also advanced key innovation initiatives. We launched new products in our cover glass portfolio, including Gorilla Glass 5, which is being adopted at twice the rate of earlier generations. We won the majority of platform decisions to date for gas particulate filters, a new product category in emissions control. We captured new customer opportunities with Gorilla Glass for automotive. We delivered new optical solutions for network densification and access networks, and we continue to capture opportunities with leading innovators, who turn to us to help realize their vision. Our strong operating results and solid progress on value creation increase our confidence that we will deliver on the framework goals. In fact, we think that the strategic and financial benefits of our framework are becoming even more apparent during its second year.

Now, let’s take a look a little bit closer at how we focus our portfolio. The core of what we do is invent, make and sell. We create value by inventing category-defining products, developing scalable manufacturing platforms and building strong trust-based relationships with customers, who are leaders in their industries. Corning has a long track record of life-changing innovations, including the glass bulbs for Thomas Edison’s electric light; cathode ray tubes, which helped put a TV in every living room; the world’s first low-loss optical fiber, which ushered in a communications revolution; the ceramic substrates that made catalytic converters possible; and the tough thin cover glass that is on more than 5 billion mobile devices and probably in your pocket right now.

Today, Corning is best in the world in three core technologies, four manufacturing and engineering platforms and five market access platforms. Our probability of success increases as we apply more of our world-class capabilities. Our cost of innovation declines as we reapply talent and repurpose our existing assets. And by combining capabilities, we create higher and more sustainable competitive barriers, and more importantly, delight our customers. Consequently, we focus 80% of our resources on opportunities that use existing capabilities from at least two of the three areas. Few competitors can match our expertise in any one of our core capabilities. When we combine them, we become truly formidable.

Now focusing our portfolio also means we’ll consider strategic acquisitions and divestitures. If we need a capability to provide a more comprehensive solution or accelerate our speed to market, we will go out and get it as we did with Gerresheimer’s tubing business. We will also divest to realign assets if they fall outside of our focus area and we can capture value for our shareholders with a minimum of friction. That was the case with Dow Corning. It continues to be best in the world in silicones, but that technology falls outside our core capabilities. This realignment unlocks $4.8 billion in cash, which is 30x the annual equity earnings we received from Dow Corning silicones business and we retained our ownership interest in Hemlock Semiconductor, which offers further upside. So that’s what we mean by a focused portfolio.

Now let’s talk about what we mean when we say our portfolio is cohesive. We define cohesion as the ability to capture synergies between our capabilities and reapply them to multiple market access platforms. Let’s look at some examples, starting with our three core technologies. We use our glass science expertise to formulate glasses with the right optical, chemical, mechanical and thermal properties for a particular application. When you hear glass science, you probably think of display technologies. But we also use glass science to continually reinvent optical fiber to create new applications, deliver higher performance and reduce costs. And today, we are using our glass science expertise to create next generation pharmaceutical packaging.

Optical physics refers to our ability to characterize and control the path of light. Our optical communications products are the most obvious application, but we also leverage this capability for Iris Glass, where the management of light distribution creates strong advantages for liquid crystal displays and allows our customers to design TVs that are just 0.5 centimeter thick. In addition, we applied our optical physics expertise to create antireflective glass, which makes mobile devices and display screens in cars much easier to read. When you hear ceramic science, our mission control products probably come to mind first. But we also apply this expertise to make the proprietary ceramic component that lies at the heart of our fusion job process, which I will talk about in just a minute. And today, we are introducing beautiful glass ceramics to create new design possibilities in mobile consumer electronics.

Now let’s turn to our four manufacturing and engineering platforms. Our vapor deposition process makes glass so pure that if it replaced the water in the ocean, you could see the bottom clearly from any point on the surface. Vapor deposition is essential to make low loss optical fiber. It’s also the foundation for our High Purity Fused Silica, which enables stepper lenses that are used to fabricate the small power efficient semiconductors that you use everyday in your mobile devices. More recently, we applied vapor deposition to create our new Gorilla SR+ composite, which is especially designed for wearable devices. Our fusion process allows us to make sheets of glass twice the size of a king size bed, as thin as a business card and flat to within 200 atoms. We use this platform to make our industry leading display glass as well as our tough thin Gorilla Glass for mobile consumer electronics and automotive applications. But we also leverage our fusion process to enable flexible OLED displays and it’s helping us create new interconnects for high speed switches, routers and servers.

Precision forming is exactly what it sounds like. We use our precision forming assets to make life science vessels that require an extremely high degree of accuracy, such as liquid handling tools and cell growth surfaces. We apply this same expertise to make optical connectors that align hair-thin fibers perfectly and eliminate the need for splices. Precision forming is also enhancing the value proposition of Gorilla Glass for auto interior applications.

That brings us to extrusion. Now if you ever made your own fresh pasta, you are already familiar with the basics of extrusion. We do the high-tech version. Corning’s expertise in extrusion is why our cellular ceramics substrates compact the surface area of a football field into an object the size of a soda can. We also use extrusion to make highly reliable and accurate pipettes for life science applications and we are leveraging the same expertise to make durable optical fiber cables for data centers as well as other applications. Those are just a few examples, but you can see that we are constantly reapplying our knowledge and repurposing our assets across product sets and markets. So what happens when our portfolio meets a customer opportunity, now we have a lot of examples, but let’s look at one that’s become a bit of a legend. Most of you have heard the story about Steve Jobs coming to us to provide glass for Apple’s first iPhone. I would like to give you the insider’s view.

Less than six months before the highly anticipated iPhone launch, Steve was incredibly frustrated by how badly the plastic cover on his own phone was scratching after just a few weeks of routine use. Now he was already a big fan of glass from a design perspective, so he turned to Corning to supply a glass cover that would resist scratches and other damage. Now we were pretty confident that we could make a glass that was tough enough for him. We weren’t so sure that we could make it fast enough to meet his super tight deadline. But we are not in the habit of disappointing customers. So we assembled our top glass scientists and launched a crash development program. A couple of folks even delayed their retirement to work on the project because they believed so strongly in the opportunity.

Corning had experimented with damage resistant glass in the 1960s, so we started by drawing on that knowledge. We then developed more than 100 new glass compositions before we felt like we had one with the right attributes. But developing the composition was just the first hurdle. When we learned how much glass Apple required, we realized we needed a scalable manufacturing platform instead of the small specialty tanks we originally had in our minds. So we repurposed our fusion assets with a few engineering modifications for the unique forming characteristics of the new glass. It was a daunting challenge. But we had the best people, the right manufacturing platform and existing assets that gave us a huge head start. The result was a product that went from idea to commercialization in less than 6 months and one very satisfied customer. But there is more to the story, including a powerful financial wheel that keeps turning. By repurposing fusion assets from our display business for Gorilla Glass, we initially saved about $800 million in capital spending. Since then, we have unleashed our capabilities to continually improve the composition and make our manufacturing processes more efficient.

We are now on our fifth generation of Gorilla, and we have increased sales and profits with each generation. Simultaneously, we have also increased the productivity of our display business, which frees up more assets for mobile consumer electronics. And as we apply more of our existing tanks to meet the growing demand for Gorilla, the savings ramped, too. We estimate that we have saved close to $1 billion ramp in Gorilla so far. But the real payoff is even larger. By repurposing assets, we also reduced cost in display. When you take that into account, our incremental return on invested capital is through the roof. But that’s still not the end of the story we are now turning that power loose to disrupt the automotive market with new Gorilla Glass products for vehicle interiors and exteriors.

Now even though a car is very different from a phone, we are able to reuse the same talent and the same assets. And after a century in the automotive industry, our customers know us and trust us so we are an ideal partner. We are on the brink of creating another $1 billion business, and we believe that we can capture $700 million of sales with minimal capital investment. No question, the Gorilla story is a powerful example of our cohesive portfolio in action. But it’s not unique. It’s how we work and what we do over and over again.

As I walked through our market access platforms, you are going to see a clear pattern. We apply our unique capabilities, market experience and customer insights to create disruptive innovations. We become the industry leader by delivering products with superior performance and the lowest cost position, and we continue to leverage our expertise and our deep customer relationships to capture new opportunities for disruptive innovation.

So let’s turn to Display. Corning has been enabling revolutions in the Display industry since 1939. When our engineers supply glass tubes for a futuristic new technology called television exhibited by David Sarnoff at the World’s Fair, Corning’s cathode ray tubes and television bulbs helped accelerate the proliferation of black-and-white TV sets in the 1940s, and the company built on this expertise to develop specialized bulbs for color sets in the mid-’50s. In the 1980s, Corning helped create the LCD industry when our scientists advanced a revolutionary manufacturing process to produce a glass with exceptional dimensional stability, unparalleled surface quality and chemistry tuned for semiconductor manufacturing. Our steady stream of innovations helped transform the use of displays, first, in personal computers, then in television sets and mobile devices. By leveraging our core technologies and evolving our fusion platform, we continue to enable larger, thinner and higher-resolution displays.

Today, Corning is the undisputed leader in precision display glass. Our leadership in cost, revenue and product attributes creates tremendous competitive advantages along with strategic and operational options unavailable to our competitors. We have twice the sales and half the manufacturing cost of our nearest competitor. This allows us to maintain strong profits while our competitors struggle with their own profitability. We also lead in product features, performance, including the dimensional stability transmission and thinness and large size, which is where displays are going. And this allows our customers to reduce their cost in design cutting-edge displays for all of us.

Looking ahead, we expect steady LCD glass growth over the next several years, driven primarily by increasing screen size. For us, what matters is display viewing area, where LCD will remain predominant for the foreseeable future. Today, it accounts for 97% of display viewing area. OLED is only 3%, but OLED still interests us. To understand why, you need to look at the display market by screen size. Large screens, so took from tablets to televisions, account for 93% of display viewing area. Within this segment, LCD technology accounts for 99%. LCD innovations for large screens continue to improve performance, reduce cost and increase design freedom.

Consequently, panel makers are investing in GEN 10 LCD fabs. That’s why we expect LCD to remain the preferred technology in large screens for the foreseeable future. Small screens, such as smartphones, account for the remaining 7% of viewing area, and it’s here that OLED has potential. As we predicted many years ago, OLED technology is gaining strength in this space because of power advantages and the potential for conformable and flexible displays.

Today, OLED’s share in the small screen space is 24%, and we expect that to double over the next several years. What people often don’t realize is the glass utilization for OLEDs is basically the same as for LCDs, but the increasingly demanding manufacturing processes for flexible OLEDs creates the need for an even higher performance glass. Our Lotus NXT glass features exceptional thermal and dimensional stability to optimize the production of OLEDs. Lotus outperforms competitive options by a wide margin and customers love it. In fact, Samsung recently selected Lotus for their flexible OLED production, which is now making display panels used in products like the Galaxy S8 and S8+. Although OLEDs are and will remain a very small portion of display viewing area, our leadership Lotus means that small screen OLED growth is a positive for us.

Let’s move from market situation to our strategy. We are leveraging our best-in-the-world capabilities and market leadership position to stabilize returns, while also innovating to win in new display categories. As we told you last year, our first priority in the display business is to deliver stable returns. Our formula for executing on this priority focuses on lowest costs, stable share and supply-demand balance. We believe this maximizes the likelihood of a more favorable pricing environment. Reducing cost is the first element of our formula. We have been reducing cost approximately 10% annually over the last decade and we expect this pace to continue.

The second element is stable share. We have maintained our worldwide share over the last several years and expect to do so again this year. The third element is supply demand balance. Our manufacturing platform is inherently flexible. This enables us to align operating capacity with demand and also repurpose our capacity for new market opportunities when they arise as we did with Gorilla Glass for mobile consumer electronics and as we are doing again for automotive. So, that’s our formula for stabilizing returns and recent results are encouraging. We continue to see progress towards a moderate pricing environment. Our price declines in 2015 were smaller than in 2014. And in 2016, they were smaller still. We expect this pattern to continue with our glass prices declining 10% or less this year. Beyond 2017, we expect annual price declines to moderate further toward mid single-digit percentages or possibly better.

Our belief in more favorable pricing is driven by three factors. First, global glass supply and demand remain balanced. We are successfully aligning our capacity to our demand. Publicly available information indicates the competitors are doing the same. 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 capacity. To generate acceptable returns on new investments, glass pricing will need to moderate even further.

Let’s turn to the second component of our strategy, how we plan to innovate to win in new display categories. We’re leveraging Corning’s core technologies in manufacturing and engineering platforms to drive the next round of display innovations, including richer images, ubiquitous touch, flexible displays and new form factors. Let’s look at one example that adds one-third piece of glass to TVs. Today, edge-lit LCDs use a polymer light-guide plate. That material choice results in TVs that are 10 to 15 millimeters thick. We reapplied our optical physics and glass science expertise and repurposed our fusion assets to create Corning Iris Glass. Iris replaces the polymer light-guide plate and allows set designers to create sets that are less than 5 millimeters thick with vanishing vessels. That means a 60-inch TV with stunning image quality that is as thin as a premium smartphone.

At our Investor Meeting last year, we announced the successful introduction of Iris. Since then, there has been a sevenfold increase in the number of Iris sets in development. Three brands are now selling Iris sets with more coming out this year. We are also pleased to announce that Dell has selected Corning Iris Glass as the light-guide plate for an upcoming line of ultra-thin and ultra-bright monitors. These displays will feature design and performance that will truly set them apart. So Iris is breaking through in the display market. Whether it becomes a breakout really depends on the breadth of adoption by major TV brands. So that’s a quick look at our display market access platform. We continue to beat the competition. Our strategy for stabilizing returns is showing signs of success, and we are driving the next round of display innovations.

Now, let’s turn to our youngest market access platform, mobile consumer electronics. Our confidence in Gorilla Glass convinced us to build this platform 10 years ago. Today, we are the unquestioned leader in this space. We start with the best products. Gorilla Glass is featured on over $5 billion devices and used by 40 major OEMs. The drop performance of Gorilla Glass 5 is 3 times better than the next best cover glass. Our business is 7 times larger than our nearest competitor, and we capture over 90% of industry profits. And we have advantage relationships with leading innovators. We believe that we can build on these relationships and use our distinctive capabilities to double our mobile consumer electronics sales despite maturing smartphone unit growth. Our strategy has three elements: first, increased sales dollars per device by increasing the value and the amount of our materials per phone; second, gain share by attacking in developing markets and the value segment; third, innovate to enter new device categories.

Let’s start with how we get more sales dollars per device. We will capture more value per device by continuing to produce best-in-class products. Gorilla Glass 5 leads the market for drop performance and the adoption rate has been twice the rate of Gorilla Glass 4. Across-the-board, we’re seeing strong customer benefits translate into meaningful price premium that increases our revenue and profit per phone. The superior drop performance of Gorilla Glass 5 also opens up opportunities to increase the amount of glass per phone. One trend we are particularly excited about is the growing use of glass on the back of smartphones. Today, plastics and metals are the primary materials for phone backs. Glass offers design advantages including more elegant form factors and better scratch resistance, but there are additional performance benefits as well. Device makers are starting to incorporate new capabilities, including wireless charging and faster data transmission. The physical and electromagnetic properties of glass make it particularly well suited for these capabilities and eliminate the design and performance trade-offs associated with plastic and metal.

As a result, we are already seeing more glass on the backs of devices, such as the Samsung Galaxy S8 and the Google Pixel. This is great news for Corning and at least conceptually doubles our addressable market. And since the backs of phones don’t have the same optical transparency requirements as the front, we can provide designers with new possibilities such as true color glass ceramics or vibrant Gorilla Glass with photorealistic images. These options provide more value to the customer and to us. Commercialization is early, but the response is really encouraging.

We can also increase sales by delivering advantage glass screen protectors for consumers who are just looking for some additional protection. We believe customers are being underserved by the existing product choices. So we developed a glass optimized specifically for screen protectors. It’s available in stores today on brands such as Belkin and BodyGuardz. We are just getting started in the screen protectors space in the U.S. and we plan to expand internationally.

So before I move on to the second element of our strategy, let’s do some quick math. Traditionally, smartphones have featured one piece of Gorilla Glass on the front. With the trend toward glass phone backs, we are now seeing more phones with two pieces of Gorilla Glass. And the adoption of glass screen protectors could soon mean three pieces of Gorilla Glass on the exterior. Now obviously, not all phones will use three pieces of glass, but the opportunity to triple our total addressable market is very exciting. The second lever on our strategy is to capture more share. As you know, our share in developed regions with global brands is already very high, but we see a real opportunity to increase our footprint with local brands in developing regions. Our value proposition is strong. Gorilla Glass is typically less than 1% of the price of a phone yet the benefits are significant, fewer returns, lower warranty costs, the opportunity to benefit from our globally recognized brand and ultimately happier customers.

Our strategy is to get in early and collaborate with the local players. The smartphone market in China shows what can happen. Penetration can double in 5 to 6 years and local brands can become global. For example, our early engagement with Oppo and Vivo has paid off. 5 years ago, they were relatively unknown. Today, they are powerhouses and significant customers for us. Our goal is to duplicate that successful strategy in other emerging markets like India and Brazil. The India market is roughly 250 million devices and fewer than half of them are smartphones. Earlier this year, local brand, Micromax, launched a phone with Gorilla Glass for the value segment. We supported them with co-promotion efforts, including a video that has had 4 million views and you can check it out in our booth later this morning. Similarly, Positivo, a leading Brazilian brand, recently announced three models with Gorilla Glass covers. So, we believe there is lots of opportunity when we align early with local brands in developing regions. The third lever in our strategy is to innovate to enter new device categories, such as wearables and augmented reality. Early smartwatches and fitness trackers use plastic or soda lime covers. It didn’t take long for brands to realize the need for improved scratch and damage resistance.

Today, Gorilla Glass holds the majority share of the smartphone market. Although the glass area on a smart watch is much smaller than a smartphone, the market is growing 20% a year and we can add significant value. For example, we have recently reapplied vapor deposition and optical physics to create Gorilla Glass SR+, which offers the impact resistance of Gorilla with the scratch resistance approaching sapphire. The added value justifies a considerable premium and offers the opportunity to significantly increase our sales per device.

Augmented reality is another great example of how we can add value as our customers create new device categories. Augmented reality requires the precise movement of light over very short distances. Our expertise in glass science, optical physics and precision forming make us uniquely qualified to develop solutions. It’s still early, but we are looking forward to sharing information as we progress in this exciting space.

Before I move on to life science vessels, I want to underscore one more point. Throughout the morning, I have talked about Corning’s deep trust-based relationships with our customers, but their actions are more profound than my words. I am sure you all saw Apple’s announcement last month about investing in our advanced glass manufacturing capabilities in Harrisburg, Kentucky, to enable next generation mobile devices. Jeff Williams, Apple’s Chief Operating Officer, could not join us here today, but you can still hear the story in his own words.

[Video Presentation]

So here is what you should take away on mobile consumer electronics. Gorilla Glass continues to set the standard in cover glass, and we remain the industry leader. Our deep capabilities and strong relationships with customers are creating new opportunities in smartphones, in tablets as well as entirely new device categories. We are 10 years into our mission and we are just getting started.

Now, let’s move from our youngest market access platform to our longest lived. In life science vessels, we have a proud tradition of disruptive innovation beginning in 1915, with the invention of PYREX. We combined our expertise in glass science and precision forming to develop a revolutionary glass for laboratory applications. PYREX vessels have been central to many key scientific breakthroughs, including the mass production of penicillin during World War II and the development and production of the polio vaccine by Jonas Salk in the 1950s.

Corning built upon this pioneering invention with technologies that help accelerate vaccine development in the 1970s and new products to enable cell culture research in the 1980s. Since then, we have continued to introduce vital research tools, including microcarrier beads, microplates and our hyper-stacked vessels, all of which increase cell culture productivity by more than 250% over the incumbent technologies. We have delivered a steady stream of innovations by combining Corning’s expertise in glass science, precision forming and extrusion and by leveraging our trusted relationships with customers. Today, we are an industry leader in lab products, cell culture, bioprocess vessels and specialty services. Almost every life science laboratory around the world uses Corning’s premium branded products, which are known for their quality, consistency and reliability. We serve more than 100,000 customers through a large direct sales team and a global network of authorized dealers. We continue to grow our base business with sales and profitability outpacing the market and outperforming the competition and we have generated consistently high returns on our invested capital.

Our life science sales have doubled since 2009, exceeding $800 million in 2016. Yet, we are still a very small percentage of the overall life sciences market, because we made a strategic choice to focus on the specific market categories that can benefit most from our unique expertise. As we look ahead, we see more opportunities to leverage our capabilities to continue to grow our base business, while extending our leadership in areas where we have a distinct advantage. We are also applying our expertise to capture an exciting new opportunity in pharmaceutical glass packaging. Continuous innovations in drug development and processing have created extreme chemical and mechanical environments that today’s glass packaging was simply not designed to handle. This increases the likelihood of degradation, contamination and breakage, potentially putting patients at risk.

We can help solve this problem. We are applying our expertise in glass science, optical physics, vapor deposition, precision forming and extrusion to develop a 21st century glass for 21st century drugs. We are leveraging our industry experience to pursue joint development projects with several major pharmaceutical companies, who recognized the powerful benefits of our innovation. We are nearing a breakthrough moment with our development partners and we believe we will begin to see initial revenue soon.

You have heard me say that the timing and ultimate revenues of disruptive innovation are very difficult to predict. This is especially true in highly regulated industries, such as drug packaging. But we are extremely excited about this initiative. The current market for pharmaceutical packaging is $4 billion and growing at 5% annually. In addition, the industry spends another $8 billion each year on issues associated with glass quality. In total, that’s a $12 billion addressable opportunity. More importantly, we are excited about adding to our track record with an innovation that is not only life changing, but also potentially life saving.

Now let’s turn to our automotive market access platform, where we have a century of experience innovating for our customers. It started when Corning applied its expertise in glass science and precision forming to develop a specialized headlight glass, which help automakers comply with new safety standards for highway safety. Fast-forward to 1970, the auto industry faced a new disruption. The Clean Air Act required a 90% reduction in emissions by the 1975 model year, a task that many experts considered impossible. Corning scientists applied their deep knowledge of ceramic science and extrusion to develop honeycomb substrates, with thousands of cells per inch to convert exhaust into harmless gases. Corning’s revolutionary ceramic material is at the heart of the catalytic converter and remains the global standard today. Our clean air technologies have captured or neutralized billions of tons of pollutants over the past four decades, helped billions of people breathe easier.

Today, we are an industry leader and the lowest cost manufacturer for light duty substrates. We serve all major car and truck manufacturers with trusted products across an extensive global footprint and we consistently win top supplier awards. The automotive market delivers us more than $1 billion in sales each year, with ROIC in the high teens. We have outperformed the competition in both sales and profit growth over the past 3 years and we expect this trend to continue.

Now we are once again leveraging our unique set of capabilities to address a new set of disruptions driven by the demand for cleaner, safer, more connected cars. We are utilizing all three core technologies and all four manufacturing and engineering platforms to extend our leadership in clean air technologies and also build a new business in automotive glass. Let’s begin with our launch of gas particulate filters. Air quality remains a concern in both advanced and developing markets. The particulates released by gasoline engines can be absorbed deep into the body, leading to serious health issues. While new generations of gas engines deliver higher performance and better fuel economy, they also generate more particulates, trillions for every mile driven. Many countries are addressing this growing problem by adopting regulations that set more stringent limits for particulate emissions.

New standards go into effect in Europe later this year and in China in 2020. Evidence strongly suggest that adding a GPF is the most effective way for automakers to meet these new standards and our product is consistently ranked number one by automakers. Our filters feature a unique microstructure that maintains vehicle performance while meeting the regulation at minimum cost and risk. If GPFs reach wide adoption, which we believe they will, our sales per vehicle will increase by a factor of 3 to 4, with profitability similar to our current environmental business. We are investing in both R&D and capacity to ensure we retain our product leadership and are well positioned to capture growing customer demand. We are confident we can win in this market. We are collaborating with most major automakers in Europe and China and have won the majority of platforms to-date. Since commercial awards began in 2016, we have won more than 50 models from 20 automakers, with more to come. We are breaking through with this innovation, with sales beginning in the second half of this year. Once regulations are fully implemented in Europe and China, we estimate this opportunity will exceed $0.5 billion for Corning. As additional standards go into effect around the globe, our opportunity grows, too.

Now let’s shift gears. So to speak, to Gorilla Glass for automotive, which is helping enable cleaner, safer and more connected cars regardless of the engine technology. We are creating disruptive innovations by combining our expertise in glass science and optical physics, our vapor deposition, fusion and precision forming manufacturing platforms, our unique position in mobile consumer electronics and display and the relationships that we have built with automakers over the past century to capture a gorilla sized opportunity in automotive, exteriors and interiors. On the exterior, our Gorilla Glass laminates provide a lighter, tougher material than conventional auto glass. In fact they could reduce a car’s glass weight by 30% or more. Lower weight equals better fuel economy in gas cars, extended range for electric vehicles and lower emissions for both.

Our lightweight laminates also improve vehicle handling, which enhances performance and increases safety. But that’s just the beginning. The superior optical quality of Gorilla Glass enables larger, clearer head-up displays that transform windows into dynamic information services. Gorilla hybrid windows also defrost 30% faster than conventional windshields, which saves time, uses less energy and allows drivers to get on the road more quickly. And if you have ever had a rock whack your windshield, I am sure you will appreciate Gorilla’s damage resistance.

Here, you can see how the inner ply, the Gorilla ply, reduces breakage and ultimately reduces the need for windshield replacements. On the interior, our Gorilla Glass makes cars more connected and durable. The value of the interior opportunity for us is about the same as for exteriors despite the smaller area. And the industry typically refreshes interiors more frequently, which means we could grow faster. Gorilla’s thin form factor, lightweight, superior optics and multi-touch responsiveness are making it possible to create car interiors with the sophisticated capabilities you come to expect from your smartphone. In contrast, plastic displays scratch easily, are less responsive and can discolor over time. Gorilla can also be formed in the custom shapes, allowing elegant new designs for dashboards and consoles with curved or multidirectional displays. Finally, our antiglare and antireflective technologies improve the readability of displays, increasing safety and ensuring access to critical information.

So where do we stand on this opportunity, although this is a slow-moving industry, with long design and production cycles, we are making solid progress. In early 2016, we told you Gorilla Glass was featured on two models. Today, it’s on more than 20 and our sales are growing. So we have broken through. Our confidence in these auto glass opportunities has driven us to accelerate our manufacturing readiness. You can expect an announcement about the location of our Saint-Gobain JV plant later this year. We know the real tipping point from breakthrough to breakout will come when our glass design wins move beyond luxury models and into everyday vehicles and we are working hard to make that happen. I encourage you to check out our connected car in the exhibit area after today’s formal remarks. That will enable you to get a better idea of how we are enabling cleaner, safer, more connected cars of the future and why we are so excited about this opportunity. In fact, I bet some of you will want to drive it home, but you can’t.

Now to discuss our optical communications market access platform, it’s my pleasure to turn the podium over to Clark Kinlin.

Clark Kinlin

Thank you, Wendell. The optical communications industry began nearly 50 years ago when the British Post Office, the predecessor to British Telecom laid down a challenge to the world; develop a glass fiber that can transmit light with loss less than 20 dBs per kilometer. Corning scientists, Don Keck, Bob Maurer and Pete Schultz quickly tapped the company’s historic strengths in optical physics, glass science and our process knowledge in vapor deposition to create the world’s first low-loss optical fiber. Their achievement gave birth to an entirely new industry called optical communications that would ultimately transform the way we create, share and consume information.

Corning then repurposed its extrusion capabilities to make cables to package and deploy the newly invented optical fiber and later, reapplied ceramics science and precision forming to build optical connectors that dramatically reduced the costs of network installation. Today, optical communications is the most fully evolved example of Corning’s focused portfolio. Over time, our ability to repurpose and continually strengthen our capabilities allowed us to invent, make and sell the essential optical components for the evolving telecom industry. As a result, the invention of low loss optical fibers wasn’t our only first. We also introduced the first loose tube cables, the first plug-and-play solution for fiber-to-the-home and the first high density modular data center solution. These examples demonstrate the power of our co-innovation engine, which allows us to combine our component innovations to deliver an advantaged passive network system that improves our customers’ network performance while lowering their cost.

Today, we are the industry leader. We are a $3 billion business and the industry’s only true end to end manufacture and supplier of optical solutions. In an industry where our competitors sell bag of parts components, we provide advantaged integrated solutions. Our results reflect our leadership. We have grown more than twice the rate of our industry over the past 5 years and have grown both sales and profit faster than our competitors. We have a leading position in passive optical segments and are the world’s largest fiber producer, with the lowest cost manufacturing platform. We are on a roll and we are expecting strong growth. Our goal is to achieve $5 billion in annual revenue by 2020.

Now three important trends give us confidence that we can succeed; number one, more network applications are moving from copper to fiber, number two, these applications are much bigger than the ones that have come before and number three, being connectivity rich allows us to develop better solutions for our customers and to deliver improved growth prospects for Corning. Let me explain the analytical tools we use to better understand these trends. First, we use the concept of the electrical to optical or E-to-O divide to identify when fiber is likely to replace copper in a network application. This allows us to innovate and position ourselves ahead of the next wave of opportunities and it all comes down to distance and bandwidth. So we have distance, or link length in meters, is on the X-axis, gigabits per second is on the Y-axis. Once network requirements exceed approximately 100 gigabit meters per second, we say that application has crossed the E-to-O divide, represented here by the diagonal line on the graph.

This is when the economics of carrying photons on optical fiber beat the economics of carrying electrons over copper based networks. The lower left side of this chart represents the application space that is well served by copper. The upper right is where optical fiber is a better solution and where we have captured large revenue opportunities over time. New architectures and demand for better service levels continued to drive applications up and right on this chart, allowing us to identify where to apply our 3, 4, 5 co-innovation machine to accelerate the transition from electrical to optical and we have been at this now for nearly 50 years. It all began with long-haul’s transition to fiber in the 1970s. Then submarine crossed the divide in the 1980s, metro networks in the ‘90s. And once exclusively copper, these applications are now 100% optical. China Mobile’s recent announcement that they intend to deploy long-haul fiber to neighboring countries and submarine cables to Asia, Europe and the U.S. is an example of the ongoing vibrancy of these segments, and we continue to innovate to serve this market.

Recently, we introduced Corning’s TXF optical fiber, a new ultra low-loss fiber product, for terrestrial data transport applications. TXF leverages our latest proprietary innovations in vapor deposition, resulting in up to 60% longer reach than standard low-loss single-mode fiber. This has real advantages in long-distance applications, such as the growing datacenter interconnect market.

Access networks are now beginning to cross the divide. Now once you believe, as some of our customers do, that every home needs more than 100 megabits per second, optical solutions beat copper on performance and cost and we are beginning to see this play out today. For example, AT&T has announced their plan to deliver 1-gigabit service to residential customers. They are in the process of building an ultra-fast fiber-to-the-home platform. Corning is helping build this 100% optical network, which will reach more than 12 million homes in 75 of the largest cities here in the U.S.

We are seeing these large deployments overseas as well. For example, Saudi Telecom is part of a nationwide fiber-to-the-home build that will connect more than 1 million households. Having identified this trend, we once again leveraged our innovation platform to reduce cost and improve network performance. For example, we introduced compact FDH cabinets and new mini-extend micro cables for crowded duct environments that improve customer cost by dramatically reducing installation time, helping us to win leading positions in many of the most prominent fiber-to-the-home builds. So this explains when these applications move to optical.

Now, let’s turn to a second analytical model to scope how big these opportunities could be for Corning. Our revenue and profit are largely driven by the number of connections. As we move towards the edge of the network, many more connections are necessary to cover the same population and that’s really good for us. A submarine link has two connections, one at each end. However, when we deploy fiber-to-the-home in your neighborhood, there are literally hundreds, if not thousands, of connections. To be more specific, our opportunity set in any given network segment is driven by two things: how many and how long the fiber links are. More fibers equate to a bigger opportunity, not just the fiber count, but everything that goes into connecting, managing and protecting that fiber. This is what we do. And as Wendell said earlier, when we can bring multiple capabilities to bare we become truly formidable. This is what we call the fiber tip diagram, where the X-axis represents link length in kilometers. Let me use an example to explain how this works. A typical submarine link is 10,000 kilometers long, while a typical access link is just 10 kilometers long.

Now, let’s introduce the Y-axis representing number of fibers necessary to cover a population of 100 million people. When a submarine cable traverses an ocean and connects continents, one fiber tip and associated connectivity hardware can serve about 100 million users. Submarine uses the least amount of fiber and hardware to cover the most people. As a result, the market size is the smallest carrier application. In contrast to submarine, a single fiber, leaving the central office, reaches roughly 100 users in a typical wireline access network. Consequently, to cover the same number of people as a submarine connection, you’d need 1 million fiber tips.

Now why is this important? As we move closer to the edge from submarine to long-haul to metro to access, link lengths shrink by an order of magnitude in each step, but the number of connected fibers increases by two orders of magnitude, resulting in order of magnitude increase in the opportunity for optical. And the total access market, which is largely copper today, is two to three orders of magnitude bigger than the submarine market. This is why this is a major focus of our co-innovation effort. Now, the same technoeconomic forces are also at play in data centers and wireless networks, where the final connection is to a server or an antenna, not to a person. In data centers, the bandwidth and distance requirements of switch-to-switch lengths have already crossed the E-to-O divide. However, due to increasing bandwidth speed, there could be a day in the near future when optical fiber displaces copper in even the relatively short lengths from switch to server. Recall that the E-to-O divide is a 100 gigabits-meter per second. For 10-gigabit connections, the divide is at 10 meters. For 40 gig, it’s at 2.5 meters. For 100 gig per lane, it’s at only 1 meter, which is about the length of a rack jumper that is still mostly copper today. And even links inside servers could become optical as we push the limits of Moore’s law.

In anticipation of this, we are reapplying Corning’s expertise in fusion manufacturing and recently acquired micro optics capabilities to develop the glass interposers, fiber-to-the-chip integrated connectivity and optical waveguides necessary to make optical inside switches, routers and servers a reality. Now we’re not the only one innovating in this space. Microsoft is also working on this challenge today. They’re leading a consortium, of which we are a member, to develop optical modules that can be mounted on a network switch or on a motherboard to decrease power consumption and increase bandwidth density.

This is pretty exciting. Perhaps the most interesting development over the last year is what’s going on in wireless. Network operators are now beginning to invest in 4G densification and provisioning for 5G. As operators increase the level of service and position themselves to deliver more bandwidth per user, the fiber tip must move closer to the user. This new optical front-haul opportunity is where we’re putting the focus of our co-innovation machine. This translates into a dense network of optically connected antennas, driving the need for two orders of magnitude more fiber and connectivity when compared to legacy wireless networks. Now besides delivering next-gen service levels, network densification also allows operators to get the most bang out of their spectrum buck.

So what’s going on here is that wireless is following the same evolution as wireline networks, with fiber getting closer and closer to the user. Anticipating this, we fired up our co-innovation machine, and this week we announced a new solution to help our customers make this happen. Our new multiuse optical platform will enable network providers to deploy one network that will allow them to deliver 4G, 5G, fiber-to-the-home and business services, all in one converged network in half the time and at 20% less cost. So we are very bullish about our growth prospects: first, more applications are moving to optical; second, those applications are bigger than what came before in terms of connectivity; and third, this is our wheelhouse, where we co-innovate to create solutions that improve our customers’ network performance and lower their costs. That’s why we believe that opportunities ahead of us are much greater than the ones that are behind us. And when we get it right, our customers are delighted.

As I am sure you heard, in April, Verizon announced a 3-year agreement to purchase more than $1 billion of gear from Corning. In an interview with CNBC, Verizon’s CEO, Lowell McAdam, said that 5G is not only about faster throughput, 100 times faster than what we see today, but also improved latency, the need to exchange data faster than a blink of an eye. Lowell explained that they can’t achieve this type of performance without fiber and noted that this summer Verizon will pilot 5G deployment of small cells in 11 markets. At full deployment, the architecture for a city like New York will require some 8,000 to 10,000 small-cell sites, all fed by optical fiber.

I will let Lowell explain it in his own words.

[Video Presentation]

So this is what it looks like when it all comes together. Market access, trusted partners and a well-oiled co-innovation machine that delivers a steady stream of high value solutions and most importantly, delighted customers.

So thank you for your time. And now I will turn things over to Tony.

Tony Tripeny

Thank you, Clark and good morning all. I am the last presenter between you and some very exciting and interactive exhibits. So I will get right down to business. As Wendell said when we kick things off, we designed our strategy and capital allocation framework to create significant value for our shareholders by focusing our portfolio and utilizing our financial strength. My role in the execution of the framework centers largely on ensuring that Corning continues as a good steward of capital. I take that responsibility very seriously and I am pleased to be able to reiterate that we are on track having already delivered significant cash and enhanced value to shareholders. You will see that as we move through the second year of the framework, we are doing what we said we would do when we introduced the plan. We are delivering on our commitments. When we announced the framework in October 2017, we said we intended to generate more than $22 billion and return more than $10 billion to shareholders.

Now we updated the framework in June of 2016 to recognize significant progress across multiple fronts, including the Dow Corning realignment. Now we expect to generate and deploy more than $26 billion through 2019. We also raised the lower bound of our commitment to shareholders returns to more than $12.5 billion over the 4-year period through repurchases and dividends and we remain solidly on track to meet these goals. And we still intend to invest approximately $10 billion in growth and sustained leadership during the 4 years of the plan.

Our capital allocation plan describes the sources and uses of the cash we plan to deploy through 2019. Now I will address these sources of cash first, focusing on the most significant, operating cash flow. We remain very confident in our ability to generate adjusted operating cash flow of $13 billion to $16 billion over the 4 years, excluding after tax RD&E. Now our confidence stems from our results, the strengths of our businesses and their growth prospects. In 2016, we generated $3.2 billion in line with both our expectations and what is required to reach our $13 billion to $16 billion target. Now looking at the final two sources of cash, we will sustain our continuous effort to improve the efficiency of our balance sheet and we expect to add debt before 2019.

Our transactions represent another source of cash. In mid-2016, we realigned our ownership interest in Dow Corning. As we have discussed previously, under this largely tax-free transaction, we exchanged our 50% ownership in Dow Corning for a company that owns 40% interest in Hemlock Semiconductor and $4.8 billion in cash. In addition to the upside from Hemlock, this transaction added $4.8 billion in cash to our balance sheet, the equivalent of approximately 30x the annual equity earnings of Dow Corning’s silicones business. The freedom to deploy that capital is a tremendous value driver for our shareholders. Now we are pleased with the structure and performance of our portfolio. We are well aligned with 80% of our resources focused on our 3, 4, 5 framework. In addition, each of our businesses is consistently beating its competitors and we see future synergies and growth. Taken together, our certainty in generating $26 billion to $30 billion remains high.

Now let’s look at how we will use that cash, starting with our plan to invest $10 billion in our growth and sustained leadership through RD&E, capital spending and M&A investments. Research, development and engineering are critical to sustaining and extending our leadership positions in our markets. From 2016 to 2019, our plans call for us to invest a total of $2 billion and we are on pace from both an investment and the results perspective. Now our goal in RD&E are to create the best products, deliver the lowest cost and create new revenue streams. Measures of our success include our market share, our customer relationships and operating margins twice as high as our competitors. We believe that our focus and ability to repurpose our assets and reapply our talents will continue to enhance returns on our innovation investments.

Over the last few years, we have invested in RD&E at double the rate of our peers. Between 2012 and 2016, on average they have invested 4% of sales, while we have invested 8% of sales. But we have delivered more than 2x the operating margin or 20% versus their 9% average, or said another way, our additional $2 billion investment in RD&E returned an additional $5 billion over a 5-year period. That is a huge premium.

Turning to CapEx, we are investing in manufacturing capacity and capabilities in line with our plan for $6 billion to $7 billion in capital expenditures over 4 years. We spent $1.1 billion in 2016 and anticipate spending about $1.5 billion this year. Now we expect our return on invested capital to increase as we continue to reuse and repurpose assets and secure co-investments from others. Because capital efficiency is a high priority, we are now linking executive compensation to improvements in ROIC. For acquisitions, we look for opportunities to gain strategic advantage by strengthening our portfolio or increasing our market access. Now, the framework anticipates opportunistically investing $1 billion to $3 billion on these type of strategic transactions. During 2016, we invested about $300 million on several small, but strategic transactions in the optical communications business.

Now finally, let me get back to cash return expectations under the framework. We plan to return more than $12.5 billion to shareholders through share repurchases and dividends. The value of this activity equates to an annual cash payout yield of about 10% over the 4 years of the plan. Now through the first quarter, we have already returned more than $6.5 billion to shareholders and we intend to return at least $6 billion additional over the remainder of the program, which is about a fourth of our current market cap. And the board increased our dividend 14.8% in February on top of a 12.5% increase last year and we intend to increase the dividend by at least 10% in both 2018 and 2019, which means our dividend per share will rise in total by more than 50% over 4 years. Now repurchase activity since we announced the framework has been approximately $6 billion, reducing outstanding shares by about 24% through the end of the first quarter. In 2017, we plan to continue repurchasing shares, reflecting our view that investors have not yet fully incorporated our growth prospects into the stock price. The key takeaway is that we are investing $10 billion to drive growth and extend our leadership. In the meantime, we are rewarding you by returning more than $12.5 billion which compounds the benefit of our future growth for long-term shareholders.

I would like to finish off by summarizing our expectations. We expect Optical Communications to reach $5 billion in sales by 2020. We are enabling next-generation networks and our customers are benefiting from our unique set of capabilities. And to support them, we have the ability to economically expand capacity and deliver innovative solutions. Consequently, we expect to grow significantly faster than the optical markets we serve. In our mobile consumer electronic market access platform, we believe we can double sales over the next several years despite maturing smartphone unit growth. Our close relationship with customers enables us to work jointly with them on compelling new mobile consumer products. We have a clear path to capture more value per device, gain share in developing markets in the value segment and win in new device categories.

In display, we are very pleased with our market position and our progress towards our long-term objective to stabilize returns. Cash flow remains strong and you saw that we’re well positioned to win in new display categories by innovating for the next generation of displays. And in the automotive market access platform, we are helping customers build cleaner, safer and more connected vehicles. In the near term, we expect sales growth from the new gas particulate filter business and longer term, we are building a Gorilla-sized business for automotive glass. And in our life science vessels platform, we will continue to beat the competition and grow faster than the markets we serve. In addition, we remain enthusiastic about the long-term multibillion dollar opportunity in pharmaceutical packaging for drug storage and delivery.

Now, we are making great progress against all of these objectives. The best news is we don’t need to win everywhere to deliver on our framework commitments, but if we do, we will create even more value for shareholders. So what I want to leave you with is this we have five powerful market access platforms. We are beating the competition and we intend to keep beating them from innovation and lowest cost manufacturing. We have highly relevant best-in-the-world capabilities that we can leverage to capture attractive new opportunities and we are executing as we said we would. And we are confident in our ability to continue to implement and deliver on all aspects of the framework.

With that, let me turn the podium over to Wendell to close out our formal remarks.

Wendell Weeks

Thanks, Tony and Clark. Thought those guys did a great job. I hope we have given you a better idea of what our strategy in capital allocation framework looks like in action. Over the course of the morning, you have seen powerful examples of how we are utilizing our financial strength and focusing our portfolio to drive Corning’s growth and extend our leadership. We are doing what we said we would do. We have returned more than $6.5 billion of cash to shareholders. We have taken strategic action to focus our portfolio including the successful realignment of Dow Corning. We have advanced multiple innovation programs and we are winning and delighting customers by applying our expertise to solve their tough challenges. We think the recent announcements by Verizon, Apple and Dell are strong votes of confidence because they underscore how vital Corning’s capabilities are to our customers’ ecosystems, which will continue driving our growth.

As we look ahead, we know we have what it takes to deliver on the goals of our framework, and we will continue doing what Corning does best transforming industries, enhancing people’s lives and delivering disruptive innovations that create value for decades. Now our confidence comes not only from our solid execution over the past 18 months but also from Corning’s 166-year track record of success. So before we wrap up our formal presentations, I would like to just take a moment to talk about what it tastes to succeed for 166 years.

I believe there are three key elements. First, you need to focus on problems that matter. We all want cleaner air to breathe and a sustainable planet for our children and grandchildren. We all want medicines that are safe and effective to help us live longer, healthier lives. We all want fast, reliable access to information along with communications networks that help us stay connected to our loved ones anytime, anywhere and we all want devices that enhance our lives with style and performance, beauty and durability. Corning’s innovations are front and center for all of these needs. By focusing on problems that matter, we ensure our ongoing relevance in a changing world. We activate the passion of our people who care deeply about applying Corning’s distinctive skills to make the world a better place and we maintain our focus and commitment during tough times and setbacks because we know we are doing important work that makes a real difference.

Second, you need a distinctive set of capabilities. At Corning, we are just quite simply the best in the world at what we do and we continue to enhance our knowledge and hone our skills. So we are always creating a better version of ourselves. Our distinctive capabilities make us vital to our customers. They make us increasingly relevant to new industries and they make it possible for us to evolve to meet the needs of changing markets. You heard examples today of markets where we have long histories, where we began with one technology and evolves to provide others. That’s because our capabilities are versatile and synergistic and we are constantly leveraging them for new solutions. We don’t know exactly how all our markets will evolve in the decades to come, but we do know that Corning will be there, helping customers manage their own transformations.

Third, you need to maintain the trust of your stakeholders. We work hard everyday to earn that trust with our performance and our actions. We live our values. We honor our commitments and we communicate candidly about good news and bad. When we rolled out our strategy in capital allocation framework in October of 2015, we didn’t just outline our priorities. We also shared insights into how we manage our portfolio and make investment decisions. We wanted you to know what you could expect from us and what to watch for in terms of industry development, news flow and timing. I hope our communications have been helpful and that you understand better what drives us and how we succeed.

We brought our leadership team today and I hope you’ll get the chance not only to do Q&A but to spend some time with them after in the exhibit area. And I must tell you, we can’t recall a time when we’ve had so many rich opportunities in front of us. Corning is so proud to be 166 years young and we are excited about our next 166 years on innovation and independence. Thank you for being on this journey with us.

And now, what I would like to do is invite the executive team to join me, so Ann can get the Q&A started. And I would also like to invite the chairs to come to the front. Here we go.

Question-and-Answer Session

A - Ann Nicholson

So what we’ll do for Q&A is if you have a question, I’d like you to raise your hand. We have folks in the audience that will bring a mic to you for the question. Great. We’ll start with Steve Fox. Mattie, thank you.

Steve Fox

Steve Fox from Cross Research. So, thanks for all the details. There is a lot to unpack there. I am wondering if you can maybe just start talking about the CapEx outlook. You talked about having a lot of success in repurposing capital over the last couple of years. So when we go forward with that idea, can you talk about how much opportunity is still there to repurpose capital, where that’s most prevalent? And then secondly on the optical side, can you maybe define the guardrails of where you will go and won’t go with your optical business? There has been rumors about what you may or may not acquire. So you talked about going as far as the chipset level in your presentation. So, maybe just a little more detail on where the opportunities will take you and where they definitely won’t take you? Thanks.

Tony Tripeny

Yes. Why don’t I start with the capital spending question? I think the good news is, is that everything we have contemplated relative to the kind of growth opportunities we thought we could have between now and 2019 were – is part of that $6 billion to $7 billion. So, there really isn’t anything out there that is going to change the outlook relative to how much capital we are going to need in the next couple of 3 years plus. There is still plenty of opportunity to reposition say in the display business and the Gorilla business. And we talked about first several hundred million dollars of automotive sales not really needing significant capital spending and I think you will see across all of our businesses why we will have to spend some capital to grow. It’s not like we are investing at very high and significant levels.

Clark Kinlin

Yes. Relative to how far we will extend ourselves in the optical space, I will make a couple of comments. One is relative to the framework itself. So we are going to chase the optical space that can be supported by our market access platform and by our core technology set. So on the core technology side, we are at the adjacencies today of data centers switch-to-switch, switch-to-server, hyperscale data centers, wireless backhaul connectivity inside buildings and now actually putting together converged networks to do multiple things, 4G, 5G and everything else. The announcement this week we made was in fact the first commercially available single network that can do all that stuff. So we are going to keep pursuing that. If you look at our growth expectations, we want to be $5 billion in a couple of years. If you unpack that math, we are in the 2% kind of CapEx category. Our types of products grow about twice that fast and the segments we play in, the ones I just described, bode twice as fast as the segment overall. So, we expect to be able to maintain those kind of growth rates and we are continuing to look for acquisitions along the way that will do one of two things, that will either give us the capability that we don’t have to attack one of those adjacencies, a technical or processed capability or they are going to deliver to us market access, regional market access that we don’t have. So I think you should expect that our organic innovation is going to carry us, most of them weighted at $5 billion but they will also be doing selective acquisitions along the way to get us there.

A - Jeffrey Evenson

Hey, Steve, you mentioned chipsets. That image up there in the discussion was meant to show the increasing relevance of glass in semiconductors to make high-speed connections and it’s much more going over short distances and leveraging the dielectric properties of glass and its thermal properties to help take chips that someone else makes and designs to a higher level and those are the types of collaborations that we are doing.

A - Ann Nicholson

Mattie, James Faucette?

James Faucette

Thank you very much. I guess I wanted to follow-up on the auto segment. Just two quick questions there. First, can you help us understand why we think that interior opportunity is similar to the exterior in spite of it obviously being much smaller area, is there a difference in pricing or does this have to do with the way that you are JVed for the exterior glass? And then secondly, can you elaborate a little bit on the forthcoming announcement around new production with the JV? And should we take that to mean that you are improving your visibility and confidence to win exterior opportunities? Thanks.

Wendell Weeks

Great. So why don’t we have Marty Curran, who is head of automotive piece here.

A - Martin Curran

So, on the first question regarding the interiors, if you recall, the concept car had glass everywhere inside and you are correct, there is a smaller amount being deployed here in the center console and the displays. However, we are going further into the stack in terms of providing the parts. And interestingly enough, that value is about the same as the exterior of the car of the windows. On the second one, yes, the answer is on both of these opportunities, we are becoming more confident in seeing them come being disruptive innovations. It’s always tough to say when exactly all these things will hit, but we feel pretty good about this being another gorilla-sized business for Corning. And you can see that with what we are doing with our partners to actually take it into the market.

A - Ann Nicholson

Great. Up front. Grace?

Grace Hoefig

Yes, hi. Grace Hoefig, Franklin Templeton. With respect to Wendell’s comments on the display business, it seems that you are forecasting gross margin expansion in that business with mid single-digit price declines and continuing 10% cost reduction. Am I missing something there?

A - Ann Nicholson

Go ahead, Jim.

A - James Clappin

Well, clearly, moving into a more positive position for pricing will assist our financial performance. But in the end, our gross margins, whether our margins are expanding or contracting with all that, it depends on a number of factors, right that we are not giving guidance on today. But you can do the math and you can see how it all works and clearly, it’s all in the right direction.

A - Ann Nicholson

Stan?

Stan Kovler

Hi. It’s Stan Kovler from Citi. Just a clarification if I may on the pricing comments. Was the pricing comment a blended comment, when you blend all the new technologies including Iris and the like into the mix, if that gets you to mid single-digits price declines, so that’s the clarification. My question is what is your process for evaluating whether or not to remain, add or subtract some of your market access platforms, there are some market access platforms that are clearly doing better than others and just as an example, when we think about the electrification of cars and you talked a lot about reducing carbon footprint, what does that mean longer term over many years for your business related to emissions, is that an area for you to evaluate or perhaps because of the reinvestments you are doing, the repurchase activity you are doing, you may feel that you are not getting the value from the market for your high growth in optical communications? Thank you very much.

Ann Nicholson

Jim, you want to start with the clarification on pricing?

James Clappin

Yes. The expectation that display pricing move in the direction of mid single-digits or possibly better is purely for LCD and glass we sell into the OLED market. Iris is independent of that comment.

Ann Nicholson

Wendell?

Wendell Weeks

As far as how we think about the portfolio is you heard me talk about focus and cohesion. To remain in our portfolio really comes down to two really simple things. First, we have to be able to demonstrate that we are the best in the world in that platform in terms of how we are delighting customers, how we are actually running our operations and our metric for that is are we growing our sales and profit faster than all of our competitors. If we do that, then that’s pretty compelling evidence that we are the right management team to handle that, that set of assets. But actually, that’s just table stakes for us. The next thing that the platform has to do or any of the products within it has to do is they have to demonstrate cohesion. We have to be able to use those capabilities to help enable other of our capabilities and that’s the way we look at these market access platforms. When you serve something like automotive for a century, we don’t make any of the same products we made. We exited them when the financial opportunity for our shareholders was different somewhere else, but we have always kept that market access platform because we know our capabilities are going to continue to be relevant there and that’s how you have these very long served market access platforms. So that’s the way we think about it. We are always evaluating it and each of our market access platforms has to earn their way not only with their specific performance, but also their ability to help their brother and sister products and capabilities be successful. I hope that helps.

Ann Nicholson

Chris [ph]?

Wendell Weeks

Did we answer his pricing question?

Ann Nicholson

Yes.

Wendell Weeks

Okay, good.

Patrick Newton

I guess a question for Clark. It’s Patrick Newton with Stifel. I wanted to focus a little bit on optical, you gave a bunch of tailwinds whether it’s your AT&T win, the FiberOne [ph] win with Verizon end to end solutions, pervasiveness of optical and data center, etcetera, my question is for you, embedded in that $5 billion revenue growth target, what are you forecasting for China, with it being over 50% of fiber deployments, is that part of the tailwind that drives you to $5 billion, is that the slight headwind that’s built into that expectation, just any help around that?

Clark Kinlin

Alright. For China specifically, as you know, China is about half the world’s consumption of optical fiber today and a growing market and we expect growth in China over the next several years, driven largely by continued investment in wireless backhaul by the major carriers that are particularly China Mobile. Global capacity in fiber is tight right now. The only people adding new capital today to this mix are us and the Chinese. Now, we are a participant in the Chinese market in the cable and fiber segment primarily in the data center segment. And we think the fundamental demand drivers in the telecom space, in optical in China remains strong and we expect growth there to be similar to what we are going to see in the rest of the world.

Ann Nicholson

Yes. Rod Hall?

Rod Hall

Thanks Ann. So I have a couple of questions, I wanted to go back to the pricing commentary and just ask, you said you could achieve mid single-digits beyond 2017, what should we be thinking in terms of trajectory there in terms of how fast do you get there, is it 1% less in ‘18 or can you just help us understand the trajectory, does that take a couple of years to get there? And then I have a follow-up question to that.

James Clappin

Well, pricing has been on a trend for the last several years as Wendell described, pricing being more moderate pricing for the display industry and we expect that to continue. So how fast we get – now we are at 10% or better, how fast we get to 5%, I don’t think we are giving guidance on that, but we are certainly heading in that direction and we expect to get there over the planning horizon.

Rod Hall

Thanks. And then I wanted to go back to the Saint Gobain JV plant and just ask, Tony can you comment on the materiality of the CapEx for that plant and could you also or anyone maybe Wendell, or someone else comment about the amount of capacity that gives you, so does that give you enough capacity to run for a few years now or do you anticipate having to add more capacity down the road in the relatively near future?

Tony Tripeny

Yes. I think in terms of the overall spending at that plant in the partnership and the like, again, I mean I – we feel very good about these kind of growth opportunities having been embedded in our $6 billion to $7 billion of capital spending. So we shouldn’t take away any of these things as that it’s going to be a lot higher than that. The one thing that might in total drive us in the out years to higher capital spending would be tremendously large markets – larger market growth and we would be thrilled with that. But I think from now and the end of 2019, the $6 billion to $7 billion is where we will be.

Martin Curran

And just to add, for one more thing on that, it’s – the way that we will do this always is modularly because that’s the only way you can forecast the disruptive innovation and we will be prepared to add those modules of capital as required.

Ann Nicholson

Great. In the back behind you Dan.

Mehdi Hosseini

Yes. Thank you. It’s Mehdi Hosseini from Susquehanna International. Two follow-ups, one on the display, as the Gen 10.5 capacity comes online in China and given your investment in China with key partners like BOE, should we expect some material share gain. And the follow-up question has to do with optical, the $5 billion revenue target for 2020, is this going to be linear, is it going to be back end loaded, any color how we should model this would be appreciated?

James Clappin

So with respect to the Gen 10.5 plant, that’s BOE. One of our largest customers will be starting up at the end of this year and ramping in 2018 and we are the sole supplier to that plant. We are building adjacent to it. Of course, the share growth through mix depends on a lot of things what’s happening elsewhere. This isn’t the only Gen 10.5 plant to be built. It will certainly be the first to start out and probably have a year gain. And of course, while that’s ramping, that will favorably impact share related to mix. But then when the other plant starts up that we are not supporting likely to balance out. So it’s the best way I can answer that.

Ann Nicholson

Clark, you want to address that?

Clark Kinlin

Yes. Relative to the growth and relative to the $5 billion, I would say that from a modeling perspective I would think of it as fairly linear, but I would remind you that our business, both our data center business and our carrier business are large project businesses that are subject to sort of construction cycles, investment cycles and just the normal ebb and flow of people investing in new capital footprint. So while we would model it sort of in a linear fashion, I expect there will be bumps along the way as we move through that growth period.

Ann Nicholson

Thanks. Dan, right beside you?

Jeff Kvaal

Thanks. It’s Jeff Kvaal from Nomura Instinet. My question is also on that $5 billion, it seems as though and I have to do a little math on it, but it seems as though the market on its own isn’t growing quite enough to get you there, so I am hoping that you can shed some light into how you will be able to outperform the market, are the niches that you are in really growing a little bit faster or how much of that is share gain and where is that coming from? That would be helpful.

Clark Kinlin

Jeff, the simple answer I would offer you is the following that we are in – the general CapEx category of – grows about 2% a year. The optical portion of that grows about 4%. We participate in the highest value, highest profit and highest growth segments of the optical CapEx. This is namely fiber to the home, specialty fiber cables, hyperscale data centers, wireless fronthaul and backhaul and 5G deployment and 4G densification. All those segments are growing faster than the average and are more rich in the sense that they are higher wallet share than the other segments. So that’s why we are reasonably confident that we can grow at around twice the rate of our category. That’s our target. And if you run that math, you still fall short of that $5 billion goal. That’s why we are still looking for those logical accretive acquisitions that are either going to give us a new market access point either a customer, a region or a application or they are going to bring us the capability that we can put into the co-innovation process to continue to grow the business.

Ann Nicholson

Next question? Back to Grace.

Grace Hoefig

Yes, hi. Grace Hoefig, Franklin Templeton. With respect to Tony’s comment on return on invested capital, you mentioned that you are tying executive comp to capital. In your presentation, a lot of the divisions or products had very high-teens return on invested capital. But at the corporate level, the level of return on invested capital isn’t that high. So apparently, there is a lot of leakage from that division that will hold out to that corporate level. Is that comp tied at the corporate level? And I understand there is some balance sheet – structural balance sheet issues that affect that corporate level number, but can you address where that leakage is and how do we address that?

Tony Tripeny

Sure. From an overall business standpoint, our return on invested capital is well in excess of our cost of capital where we do have issues relative to our corporate. A lot of it is the amount of cash we have. So when you count cash on return on invested capital, that’s been one of the biggest areas of leakage. The second area of leakage is we have a lot of tax attributes or tax assets. Those are good things to have. It means in the future, when we make money, we won’t pay cash taxes on it. But from a calculation standpoint, that clearly has a negative impact on it. And then the third area is that we have a lot of metals that are a part of our manufacturing process. They don’t depreciate. They are actually good assets to have. But again, that counts as part of your return on invested capital calculation. So as we move forward over time, we expect the corporate average to increase, some of that by being more efficient on the balance sheet and a lot of it by continuing to expand from a business standpoint. And while we haven’t given out the exact goals publicly, it is an improvement that we need to have for us to pay at the base level as executives. And if we have the amount of improvement that would get us the maximum amount, I can assure you all investors would be happy with that.

Unidentified Analyst

Will the executive comp [Question Inaudible]

Tony Tripeny

Yes.

Wendell Weeks

Yes, and what I would add to that is and I think Tony did a good explanation, which is when we think through why our operating units have higher ROIC, it really just comes down to stuff on the balance sheet that are two corporate assets that we are glad we got, a lot of cash, a lot of deferred tax assets and a lot of precious metals. And so there is not much numerator leakage between the two. It’s denominator.

Ann Nicholson

Next question?

Omar Lal

Yes, hi. My name is Omar Lal and I am an individual investor and I have actually been coming here since 2003 and you guys have done a great job. It’s been a really exciting and thrilling adventure for sure, a nice job in the presentation today. So I am going to put you on the spot, Wendell. And in about 2011, you kind of nailed when you guys are going to become a $10 billion business and hats off to you for that prediction and Clark mentioned today about 2020 being around $5 billion. I thought actually Tony, on his last slide was going to kind of put a projection for the rest of the market access platforms for 2020. But can you give a little bit of even a range? I know Marty said yes, hard to predict the disruptive innovations. But if you guys have a road map or scenario as far as what your projected range of forecast sales would be in the 2020 time frame. I asked the same question last year, by the way.

Wendell Weeks

So we do have a roadmap. Regretfully, at this time we are not willing to share those projections. Let us get a little further down the road to the 2019 plan, the strategy in capital allocation framework commitments that we have made and keep asking that question and we will do our best to answer at the appropriate time.

Ann Nicholson

Up front.

Tejas Venkatesh

Tejas Venkatesh, UBS. Can you share more details on the $200 million Apple investment? A couple of years ago, there was a lot of chat about sapphire glass. Is this investment for a new glass competition perhaps fire that you have talked about that you can scale with the investment? And then secondly, as we get closer to new phone introductions in the second half of the year, do you anticipate a breakthrough in terms of volume reduction of glass backs? I think you alluded to this in one of your earnings calls recently. And as we sit here in May closer to it, do you have increased confidence of that happening?

Wendell Weeks

So as you are asking about the Apple investment?

Ann Nicholson

Yes.

Wendell Weeks

Is that correct? Okay. So everything we have to say about the Apple investment was just said by Jeff Williams. I have nothing to add to our valued customer and partner’s commentary.

Ann Nicholson

Next question.

James Clappin

I think you asked about phone backs in the second half. Let me answer that by saying, first, our specialty materials segment is off to a great start in 2017. Our sales were up 33% in the first quarter and we are guiding to upper teens in the second quarter and there’s no change in that guidance. But the rate of growth is largely dependent at least quarter-to-quarter on when new models roll out and when these innovations that Wendell talked about actually start to generate significant revenue, right? So what’s going to happen in the balance of the year including related to backs, it still needs to unfold.

Rod Hall

Looks like questions are going in links. I got a couple of more. I wanted to – you – It’s Rod Hall with JP Morgan. So Wendell, you talked about three pieces of glass on the phones. What about 4? Because you have got a piece of protective glass on the top but what about protective glass on the bottom as people start purchasing glass-backed phones? So is that an opportunity? And I want to come back to Clark and ask about the fixed wireless aspirations of Verizon. They are talking about rolling that out. Do you think that, that has potential to shrink a little bit the access fiber market opportunity? I know it adds opportunity from a multi-small cell deployment kind of side things, but it might reduce the amount of access fiber out there at least the opportunity for that. So I wanted to ask about that.

Ann Nicholson

Wendell, you want to start with the 4 pieces of glass potential?

Wendell Weeks

You actually have sitting relatively close to you our head of our Gorilla business, John Bayne, and maybe after the Q&A period you can sit down and talk to him in a little more detail about his accessory strategy but your logic is sound.

Clark Kinlin

And we like you are thinking.

Ann Nicholson

Clark, fixed wireless?

Clark Kinlin

I think Rod’s logic is sound too. I will adjust it in – first of all, wireless is not that wireless. If you heard anything from me today, densification requires a busload more fiber into the distribution part of the network to make it work. As Lowell said, you are looking at 6 to 8 fibers to every small cell and 8,000 to 10,000 small cells here in New York. Overall, the entire opportunity is a big one for us because it’s fiber-rich and connectivity-rich and it requires a significant amount of innovation to make that converged network super quick to install and super low cost, so that’s great. It is in fact true on the fixed wireless side. When you drop from the pole, if you will, to a dwelling, my belief system is we are going to have all kinds of technologies in that space. Today as you know, we have pure fiber, GPON fiber to the home but we also have all the VDSL-based technologies and all the copper-based technologies including twisted pair. We are actively involved in developing some of the components to do fixed wireless drops. We hope that, that will be a big part of our portfolio. But what I think you are going to see in the network is in every municipality, city, rural application, we are going to see that part of the network be wildly heterogeneous with the lowest cost solution for the drop predominating. In some cases, where that’s a aerial network, that’s most likely to be a fiber drop. In a dense urban environment where you can’t get to MDU, it’s entirely possible that will be a fixed wireless drop and we will see everything in between. But the key thing is that the overall opportunity in the passive optical network from the switch to the home is – grows by an order of magnitude due to this dense application of wireless front-haul.

Wendell Weeks

And I’d just add because I think he has just hit the piece that I think that broadly is not well understood unless you are a real communications geek is the amount of bandwidth that we are talking about to enable 5G is so extreme that there is no real economical way to deliver that much spectrum without it being an incredible positive for us. And we look at even the fixed wireless access piece is probably being a net add, because all that’s going to do is bring a new grouping into the network that we couldn’t have reached to be right next door with fiber. So, the big movement here to keep your eye on is, are operators truly going to do what it is you hear being described? If that happens, that is such an overwhelming tsunami. What you are using for your drop technology is not the most significant piece of the story.

Ann Nicholson

Alright, thanks. Okay. Next question? Yes, up here, Phil.

Phil McClain

Phil McClain, McClain Value. Since the VW emissions issue came up sometime ago, it now looks like that’s perhaps a little more pervasive or at least alleged to be more pervasive among the industry. Can you just kind of update us on impacts to Corning? Thanks.

Eric Musser

Yes. Obviously, we are fully aware in monitoring the situation with VW and other OEMs, but what we have experienced is that any potential impact that we might have expected has really not manifested itself in any impact or meaningful way back on Corning in a negative sense. But what we have seen is there is some positive for us, as we look out over the long-term and that is that we have seen across the board that regulators have been really emboldened and with sort of enforcement of existing regulations and then continued expectation of tightening those regulations as they go forward, which drives the requirements then for advanced products that we have like what you have heard about with the GPF today as well as on hybrids as well as on other forms of improved and efficient combustion engines. So, the outlook for us I think continues to be strong for our environmental segment.

Ann Nicholson

Thanks, Eric. We’ll take one more question. James?

James Faucette

Thanks. Just a couple of final questions for Tony. You mentioned raising debt that we should anticipate that in the future. Can you talk a little bit about how we should think about timing? I guess there has been the general expectation that interest rates will be rising. And so like how are you building that into your planning, first? And then second, when should we expect to get an update on the hedging program and programs, etcetera, especially since we are coming towards the end of the current one? Thanks.

Tony Tripeny

Okay. So from a debt standpoint, as we talked about before, we currently have a lot of cash on our balance sheet and not all of it’s located in the United States. And so like a lot of tech companies, we have to deal with those kind of issues. But I think the idea that we might issue some debt later this year, first part of next year is kind of how to think about from a timing standpoint. But really, the plan is, is between and the end of 2019. As far as the hedging program is concerned, just as a reminder we have hedged about 70% of our exposure in the yen from ‘16 through 2022. The yen is a big exposure to us, a big driver of our cash flow. It’s one of the reasons that we have so much confidence in our ability to deliver on that cash flow was the hedges that we put in place. We continue – as we get closer to 2018, we continue to look at, is there any more hedging we should do? Are there other kind of instruments we should do? But from an overall standpoint, we feel good about where we stand. And in terms of the timing of change in the core rate, we would do that in Q1 of 2018, just like we did 3 years ago. And at that point, we would recast the past. So, it’s very easy for everybody to follow what’s happening in our businesses.

Ann Nicholson

Thank you. Alright. Thank you everybody for doing the Q&A. We’re going to turn out of this room. Exhibits will be open until noon. So you will have a chance to continue to ask questions to the group up here on the stage as well as our other business leadership that’s here, participate in some demos. And as Wendell said, you can’t take the car with you, but don’t forget to get your gift on the way out the door when you leave and thank you very much.

Wendell Weeks

Thank you, guys.

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