Welcome to the Corning Incorporated Quarter 4 2017 Earnings Results. It's my pleasure to turn the call over to Ann Nicholson, Division Vice President of Investor Relations.
Thank you, John. Good morning. Welcome to Corning's year-end 2017 conference call. With me today are Wendell Weeks, Chairman and Chief Executive Officer, and Jeff Evenson, Senior Vice President and Chief Strategy Officer. Because of a family emergency, Tony Tripeny, Senior Vice President and Chief Financial Officer, is not on the line today, he looks forward to talking with investors throughout the quarter, and we're sending his family our regards. Joining us today are Ed Schlesinger, Vice President and Corporate Controller, and Stefan Becker, Vice President and Operations Controller. I'd like to remind you that today's remarks contain forward-looking statements that fall within the meaning of the Private Securities Litigation Reform Act of 1995. Those statements involve risks, uncertainties, and other factors that could cause actual results to differ materially. These factors are detailed in the company's financial reports.
You should also note that we'll be discussing our results using core performance measures, unless we specifically indicate our comments relate to GAAP data. Our core performance measures are non-GAAP measures used by management to analyze the business. A reconciliation of core results to the comparable GAAP value can be found in the investor relations section of our website at corning.com. Supporting slides are being shown live on our webcast, we encourage you to follow along. They'll also be available on our website for downloading. Now, I'll turn the call over to Wendell.
Thank you, Ann. Welcome everyone. This morning, we reported a strong finish to an outstanding year, we feel great about our progress and our prospects. Strong growth and strong investment generated an $800 million sales increase for the year and set the stage for additional growth. We exited the year running at full capacity in several of our businesses and with committed customer demand, which supports our current capacity expansion initiatives. We expect to see the benefits of these initiatives in the second half of 2018 and beyond as production ramps. 2018 will be another year of strong growth and investment, consistent with our strategy and capital allocation framework.
All of our businesses contributed to the outstanding 2017 results, highlighted by 18% year-over-year sales growth in Optical Communications, 25% growth in Specialty Materials, 7% growth in Environmental, and price declines in Display that were the best in seven years. As we've shared, the strategy and capital allocation framework outlines our leadership priorities. We continue to focus our portfolio and utilize our financial strength to extend our leadership, drive our growth, and reward our shareholders. Under the framework, we target generating $26 billion-$30 billion in cash through 2019. We plan to return more than $12.5 billion to our shareholders through repurchases and dividends and invest $10 billion to extend our leadership and deliver growth across all of our market access platforms. We've made great progress toward those goals since we announced the framework in October of 2015.
Our cash generation is on target, and through the end of 2017, we returned $9 billion through share repurchases and dividends. We've invested $4.5 billion under the framework in RD&E, capital expenditures, and acquisitions. We're starting to see the returns already. As you can see in our most recent results, full-year sales increased 8% and EPS increased 11%, and we expect these returns to accelerate. We believe that these results illustrate the benefits of our framework. We are best in the world in three core technologies, four manufacturing and engineering platforms, and five market access platforms. We focus 80% of our resources on opportunities that use capabilities in at least two of these three categories. We've stepped up our investments over the last six months to meet opportunities in front of us in all of our market access platforms.
Significant portions of the investments are going towards capacity expansions to meet committed demand. Currently, we have 23 projects underway, including construction of 11 new plants. These investments dampened our profitability in the second half of 2017 and will do so again in the first half of 2018, but we'll really see the benefits of those investments in sales and profitability in the back half. We feel great about the year ahead of us. Now let me review progress in our market access platforms, starting with Optical Communications. We're the world leader in passive Optical Communications and the only true end-to-end supplier of integrated optical solutions. 2017 was another great year. We expanded strategic relationships like the ones we've recently announced with Verizon and Saudi Telecom, which supports our view of strong future growth.
We expanded our manufacturing capacity to support growing demand and initiated programs to further expand capacity in 2018. During 2017, we acquired SpiderCloud to enhance our wireless portfolio and announced an agreement to purchase 3M's Communication Markets Division. We expect that transaction to close later this year. It brings us a talented group of employees, and it enhances our offerings in the rapidly growing fiber to the home and optical solutions markets. We expect to continue growing more than 2 times as fast as the communications infrastructure market. Rapid adoption of optical solutions in more market segments, combined with the strength and relevance of our technology and co-innovation approach, support our superior growth. We believe that the opportunities ahead of us are much greater than those that are behind us. To capture these opportunities, we continue to invest in plants, innovations, and market access.
We expect 2018 growth to keep us solidly on pace to reach $5 billion in sales by 2020. Let's turn to mobile consumer electronics, where we are the world leader in glass for smartphones, tablets, and emerging categories like wearables and augmented reality devices. Our goal is to double mobile consumer electronic sales over the next several years. We made significant progress toward that goal in 2017. Major milestones during the year included the 10th anniversary of Corning Gorilla Glass, rapid adoption of Gorilla Glass 5, and Apple's commitment to our future innovations through its American manufacturing initiative. The fundamental properties of Gorilla Glass make it an ideal choice for smartphone enclosures. Flagship models from Samsung and others now feature glass on the front and the back. Glass backs double the area we sell for phone and also support new innovation opportunities like fabric.
We expect additional growth in 2018 as more devices adopt our latest innovations, including our next generation of covered glass, which we plan to introduce later this year. Turning to our automotive market access platform, our expertise focuses on helping customers build cleaner, safer, and more connected vehicles. Corning pioneered the substrate at the heart of catalytic converters and is now leading the next wave of emissions control with our introduction of gasoline particulate filters. Most European and many Chinese OEMs have now awarded platforms, and we won the majority, reflecting our market leadership. We had our first commercial sales in the second half of 2017, and we expect a sales ramp in 2018. Once regulations are fully implemented in Europe next year, in China in the early 2020s, we estimate the GPF opportunity will exceed half a billion dollars in sales for Corning.
Moving to Gorilla Glass for Automotive, innovation trends continue to point toward a significant growth opportunity. On the exteriors of cars, Gorilla Glass laminates are tougher and lighter than conventional auto glass. Plus, the superior optical quality allows for larger and clearer head-up displays. For interiors, integrated and interactive displays are becoming a seamless part of the cabin and user experience. Corning is helping OEMs with this transition because Gorilla Glass provides an advanced, durable, optical interface surface with tremendous economics. Earlier this month, exhibits at CES provided impressive evidence for the increasing use and importance of glass in cars. We believe that our solutions provide compelling value, and we are investing to prepare for the industry's transition to highly connected and autonomous vehicles, which will use Gorilla Glass. Pull for collaboration from leading OEMs is increasing, and we have already been awarded 35 platforms globally.
We expect to make additional and significant progress during 2018. In our life science vessels platform, we're building a new long-term, multi-billion-dollar franchise. Last July, we introduced Corning Valor Glass, our remarkable new pharmaceutical glass packaging solution. Valor Glass dramatically reduces particle contamination, breaks, and cracks while significantly increasing throughput. Valor helps protect patients and improve pharmaceutical manufacturing. The industry is excited about our innovation and announcement, and we continue to make strong progress, although it moves at a deliberate pace. Recently, the Parenteral Drug Association hosted a two-day conference dedicated to glass quality. Corning presented in a session focused on new developments and innovations in pharmaceutical packaging. We remain closely engaged with our development partners, Merck and Pfizer, and are pleased with the progress we've seen with our customers over the last quarter. We've successfully completed multiple collaborative projects to support customer adoption of Valor.
We also continue to engage with the Food and Drug Administration, which is committed to streamlining the introduction of new innovations so technologies like Valor Glass can reach patients quickly. In 2018, we plan to invest in high volume manufacturing that will enable us to deliver commercial volumes to our customers. You will hear more from us regarding the manufacturing site and location in the coming months. We continue to believe Valor has the potential to power Corning's growth for the next decade and beyond. In display, we remain the global leader. Our priority is to deliver stable returns and win in new display categories. We expect 2018 to be another year of strong progress for our display business. Our new plant in Hefei, China, has started shipping the world's first Gen 10.5 glass. We are the only manufacturer to have successfully scaled glass production to this size.
Ramping our new Gen 10.5 facility on a pace with BOE, our major customer, will augment volume growth. In addition, pricing has become consistently more favorable over the past three years. In June, we stated that improvement to mid-single-digit declines was possible. We now believe this will happen in 2018. Reaching mid-single-digit annual pricing is a huge milestone toward our goal of maintaining stable returns. Finally, Iris Glass, which adds a third piece of glass to LCD displays, is gaining momentum. We are excited about Lenovo's and Dell's new ultra-thin monitors, which offer the world's brightest monitors in a thin, narrow bezel package, uniquely enabled by Corning's Iris Glass. I think it's pretty clear we're making terrific progress across all of our market access platforms. We are investing to capture these opportunities and expect to maintain the 2017 momentum in 2018.
We plan to deliver another strong year of sales and earnings growth and stay on track to fully achieving our strategy and capital allocation framework goals. Now, let me turn the call over to Jeff for a review of our results, details on our outlook, and additional updates on our framework.
Thank you, Wendell, and good morning, everyone. Our 2017 results were outstanding. In 2018, we'll continue investing to support our customers and extend our leadership. We expect core sales to grow to approximately $11 billion, or about 7% on a constant currency basis. Before reviewing segment results, I want to talk about two items affecting our GAAP results, FX accounting and tax reform. As we've discussed before, GAAP accounting requires earnings translation hedge contracts settling in future periods to be marked to market and recorded at current value at the end of each quarter, even though those contracts will not be settled in the current quarter. For us, this resulted in an after-tax GAAP gain of $1 million for the fourth quarter and a loss of $247 million for the full year. To be clear, this mark-to-market accounting has no impact on our cash flow.
Our currency hedges protect us economically from foreign exchange rate fluctuations and provide higher certainty for our earnings and cash flow, our ability to invest for growth, and our future shareholder distributions. We're very pleased with our hedging program and the economic certainty it delivers. We received $1.6 billion in cash under our hedge contracts over the last five years. Our non-GAAP, or core results, provide additional transparency into operations by using a fixed currency rate aligned with our JPY and KRW translation hedges, and also by adjusting for other items that do not reflect ongoing operations. For 2015 to 2017, our core reporting used a constant currency rate of JPY 99 to the US dollar and KRW 1,100 to the US dollar. For 2018 to 2020, we have established hedges for approximately 90% of our expected display earnings.
We expect these hedges to result in an average rate of JPY 107 to the dollar, and we plan to use that rate for our core reporting over the next three years. Additionally, we will use a constant rate of KRW 1,175 to the dollar, which is closely aligned to our current KRW portfolio of foreign currency hedges. Nearly all the analysts covering Corning are already publishing estimates for 2018 and beyond at a JPY exchange rate of approximately JPY 107 to the dollar. For today's discussion, I will present fourth quarter and full year 2017 core results at the JPY 99 rate. My comments on our 2018 outlook will be based on JPY 107 per dollar, and 2017 results will be recast to our new core rates for comparison. We've provided 2016 and 2017 results recast to the new core rates in an 8-K.
You can update your models and compare our operating results on an apples-to-apples basis. Turning to taxes, our full year and fourth quarter 2017 core results have been adjusted to exclude $1.8 billion in non-cash items related to U.S. tax reform. The majority of the $1.8 billion is a one-time toll charge of approximately $1.2 billion on unremitted foreign earnings. The cash cost is almost entirely offset by our foreign tax credit carryforwards. We have also revalued our deferred tax assets and liabilities. While we are still finalizing the impact of reform on our effective tax rate for 2018, we expect it to increase to between 20%-22%. In 2018, our projected tax rate will reflect the new lower U.S. tax rate offset by anti-base erosion provisions. The net impact does not fully replace the benefit of our previously available foreign tax credit planning.
Near term, tax reform provides greater flexibility in accessing our non-U.S. cash. We have already benefited from that flexibility. Longer term, as we execute on our growth initiatives and our U.S. income grows, we will further benefit from the lower tax rate in the United States. As a final note, our investment and shareholder distribution targets in the 2016 to 2019 strategy and capital allocation framework are not impacted by tax reform. Let's look at our results and outlook. For the fourth quarter, core sales were up 7% year-over-year, and EPS was $0.49. Full year sales rose 8%, and EPS was up 11% to $1.72. Core earnings were $1.8 billion, consistent with 2016. An apples-to-apples comparison that reflects the strategic realignment of Dow Corning by excluding Silicones equity earnings from the first half of 2016 shows that core earnings grew 5% year-over-year.
As Wendell mentioned, gross and operating margin dollars grew more slowly than sales in the back half of 2017, primarily because of planned and very attractive growth investments. These include capacity expansions for optical fiber and cable, our Gen 10.5 Hefei display glass plant, capacity for gasoline particulate filters, plus development for Gorilla Glass Valor, and a few other projects that we're not quite ready to dive into publicly. Turning to the balance sheet, we ended the year with $4.3 billion of cash. With the new flexibility created by U.S. tax reform, we brought $2 billion in cash back to the U.S. already this month. Adjusted operating cash flow for the year was $2.6 billion and keeps us on track to meet the goals of our four-year capital allocation plan. Now, let's look at detailed segment results and outlook, beginning with Display Technologies.
Display's 2017 core sales were $3.4 billion, and core earnings were $944 million. Fourth quarter 2017 volume was up slightly sequentially, exceeding our guidance and in line with the market. Sequential LCD glass pricing declines were slightly better than quarter three and better than expected. For the full year, our volume was up mid-single digits, in line with our expectations. Pricing improved and reached single-digit year-over-year declines in both quarter three and quarter four. Let's turn to 2018. We expect further pricing improvement with year-over-year declines reaching mid-single digits. Reaching mid-single digit annual declines is an important milestone toward our goal of stabilizing returns in Display, and it's occurring earlier than the view we communicated to investors in June 2017. Three factors drive our view of a more favorable pricing environment. First, we expect glass supply to be balanced or even tight.
Our Gen 10.5 plant supports the expected growth of large-sized TVs. It is co-located with and dedicated to our customer, BOE. We pace that aligned capacity in tandem with BOE to ensure our Gen 10.5 glass supply is balanced to demand. We expect glass supply-demand balance below Gen 10.5 to tighten further because demand continues to grow in 2018, but public information indicates there is little capacity growth planned in this segment by glass makers. Second, our competitors continue to face profitability challenges at current pricing levels. We expect their price declines will flow further as they try to remain profitable. Third, LCD glass manufacturing requires ongoing investment in current and new capacity to support growth. To generate acceptable returns on investments, glass pricing will need to improve even further. We typically see the largest quarterly price change in the first quarter.
In quarter one 2018, we expect sequential glass price declines to again be moderate and more favorable than first quarter sequential price changes in recent years. Pricing will be favorable in 2018. Let's turn to volume. We expect LCD glass market volume to grow mid-single digits, as television screen size growth continues. We expect our volume to grow faster than the market as we ramp production in tandem with BOE's Gen 10.5 demand in Hefei. For the first quarter of 2018, we expect both the LCD glass market and our volume to decline sequentially by low single digits, in line with normal seasonality. First quarter volume will be up low single digits on a year-over-year basis. We feel good about price and volume, Gross margin should improve throughout the year. Two factors will dampen Display's gross margin percentage in the first quarter of 2018.
First, we are starting up our Hefei facility. As always, during a plant start-up, fixed cost and staffing ramp ahead of production. Second, we will be taking advantage of the seasonally lighter volume in Display and Gorilla to rebuild tanks and optimize the fleet with our latest technology. As you may recall, in the third and fourth quarters of 2017, we ran a handful of tanks outside their optimal range to meet strong demand. We will be correcting this in the first half. The higher utilization at the Hefei plant and the fleet optimization will improve productivity and gross margin, especially in the second half of the year. In summary, we have essentially all of our 2018 volume under contract. We remain very pleased with the current dynamics in our Display business and our progress in maintaining stable returns. Let's move to Optical Communications.
Full-year sales were $3.5 billion, up 18%, and core earnings were up 33%. Fourth quarter sales grew 13% over last year. Fourth quarter earnings declined slightly as we invested to support growth in 2018 and beyond. In addition to new fiber and cable capacity, we invested in building supply chain and new products for Saudi Telecom. Our first significant sales occurred during the quarter and required some set-up costs. We are honored to support Saudi Telecom as it begins the largest network build in the history of the kingdom. In the first quarter and for full year 2018, we expect sales to be up about 10% year-over-year, excluding any contribution from the pending acquisition of 3M's Communication Markets Division. Key growth drivers include strong demand from carrier and enterprise customers that will fill new capacity as we bring it online.
We expect profitability to improve through the course of the year as we ramp our plants to meet committed customer demand. For your modeling purposes, we expect the 3M transaction to close in the middle of 2018. The transaction will add about $200 million in sales and be neutral to EPS in 2018 due to integration costs. As previously announced, we expect it will be accretive in 2019 and beyond. Stepping back, we are excited about 2018's growth potential for Optical Communications and pleased to have additional opportunities ahead of us. Environmental Technologies 2017 sales were $1.1 billion, up 7%, driven by worldwide growth in the auto market and from winning additional business, which allowed us to grow faster than the market. Fourth quarter sales grew 19% year-over-year, with core earnings rising 33%.
As anticipated, the North American heavy-duty market improved in the second half of the year, driving 7% growth in our diesel sales for 2017. In addition, our gasoline particulate filter business delivered its first commercial sales in the third quarter as the initial phase of Euro 6 regulations took effect in September 2017. In the fourth quarter, we had additional sales, and we won additional platforms. We have won the majority of platforms awarded to date. 2017 core earnings were $139 million as investments in select capacity and engineering to support the ramp of our GPF business partially offset the benefits of increasing sales. In the first quarter and for full year 2018, we expect high single-digit sales growth driven by continued strength in auto sales, ongoing improvements in the heavy-duty diesel market, and from the GPF launch.
In Specialty Materials, 2017 sales rose 25% over last year. Core earnings were up 32%. We're clearly benefiting from the rapid adoption of Gorilla Glass 5 and the trend toward glass backs on devices. We also made progress with our innovations in other areas, including Gorilla Glass emerging as the most widely used cover material on smartwatches worldwide. Fourth quarter sales increased 17%. Core earnings were up 12% year-over-year. Sales benefited from brands building aggressively to support their launch cycles. This demand pulling is the primary reason we expect first quarter 2018 sales to be down about 10% year-over-year. Overall, we remain very pleased with our performance in Specialty Materials. We expect to grow again for the full year 2018, following our strong 2017. The 2018 growth rate will depend on new model launches and the adoption of our innovations.
In the second half of 2018, we expect year-over-year growth as customers launch their new products and as we announce new innovations to meet customer needs in mobile consumer electronics, including the introduction of our next generation of Gorilla Glass. In life sciences, 2017 sales were $879 million. Core earnings were $80 million, with strong fourth quarter sales as we continue to outpace market growth. For full year 2018, we expect sales to grow mid-single digits. First quarter sales should be up high single digits year-over-year. As a reminder, my comments on our 2018 outlook are based on the new JPY 107 and KRW 1,175 core rates. We're comparing to 2017 results recast to our new core rates. For 2018, all of our businesses have positive momentum. We expect full year sales of about $11 billion, up 7%.
We expect the full year gross margin to exceed 41%, similar to 2017. The first quarter will be the low point for the year. We expect gross margin to be about 40% of sales, consistent with 2017's fourth quarter. In the second half of 2018, our investments, for example, in the Gen 10.5 facility, gas particulate filter capacity, and new fiber and cable plants, will exit the startup phase and result in new sales. Quarterly gross margins should exceed 42% in the second half. Annual operating expenses should remain consistent with last year as a percentage of sales. For the full year, SG&A is expected to be about 14% of sales and RD&E about 8%. The slides we're showing give you additional details for the first quarter and for the year.
In other items, we expect other income, other expense, to remain at our fourth quarter 2017 run rate, generating a net expense of approximately $200 million for the year, or about $45 million-$55 million in Q1. Full year 2018 total gross equity earnings are expected to be similar to 2017 at approximately $200 million, predominantly from Hemlock Semiconductor, with first quarter at about $25 million-$30 million, consistent with typical seasonality. As a reminder, our tax rate should be between 20%-22% for the year and for the first quarter. In 2018, we expect to spend slightly more than $2 billion on capital expenditures with programs in every market access platform. How much more will depend on how quickly we ramp some of our investments. We'll provide more information as the year progresses.
Stepping back, the fourth quarter marks a halfway point of our four-year strategy and capital allocation framework. I'll conclude with a look at our accomplishments and our expectations. In brief, our progress on all dimensions of the framework has been excellent, and we expect to deliver on all of our goals. In the first two years of the framework, our cash generation has been on target. We have invested $4.5 billion in planned investments to grow and extend our leadership, and we have returned more than $9 billion to shareholders through share repurchases and dividends. Over the next two years of the framework, we plan to invest an additional $5.5 billion in our growth initiatives, and we plan to continue repurchasing shares and paying dividends, totaling at least $3.5 billion additional dollars over the remainder of the program.
We expect our board to increase the dividend by at least 10% next week and at least 10% again in 2019. Putting it all together, as we invest $10 billion to drive growth and extend our leadership, we are rewarding our investors by returning more than $12.5 billion, which compounds the benefit of our future growth for long-term shareholders. We are very pleased with our continued positive momentum. We're focused on keeping that momentum heading into 2018. We remain on track to deliver the goals of our strategy and capital allocation framework and are excited about the rich set of opportunities ahead of us. With that, let's move to Q&A. Ann?
Thank you, Jeff. John, let's open the lines for questions. We have a lot of folks in the queue today, so we're hoping that you can keep it to one question so we can get to everybody.
Certainly, just a quick reminder for those on the call, if you have a question, please press star one. You'll hear a tone indicating you've been placed in the queue. If your question gets answered and you wish to remove yourself from the queue, please press the pound key. First, go to the line of George Notter with Jefferies. Please go ahead.
Hi, guys. Thanks very much. I guess I wanted to dig into the optical business a bit. You guys are adding a lot of capacity here. I saw the announcement from the other day about the new cable manufacturing facility. I guess the question here is, can you refresh us on the amount of new capacity you're adding in that business, and then also the timing with which that capacity comes online?
Thanks, George. We're not giving exact guidance on how much capacity we're adding for obvious competitive reasons. We launched on this latest round of capacity expansion, really anchored by the Verizon announcement and their commitment to $1 billion.
The next few years, that together with a few other building blocks with key customer-committed demand, had us really start to expand our capacity footprint across all those products that they'll be requiring. What you can expect on timing, really sort of heard from Jeff, is that investment in capacity has been a bit of a drag on our profitability in the back half of 2017 and the first half of 2018, and you're going to feel those plants ramp up and increase their utilization in the back half of 2018. They'll turn from a drag to being a real force for positive momentum in the back half.
Our next question. Our next question's from Vijay Bhagavath with Deutsche Bank. Please go ahead. Vijay Bhagavath, your line is open if you're on mute, possibly. We will move on to Mehdi Hosseini with SIG. Please go ahead.
Yes, sir. Thanks. Excuse me. Thanks for taking my question. I'm looking at the Display Technologies as a percentage of net income, and the mix has steadily declined. Back in 2013, it was in the high 60%, and now it's almost 50%. As you accelerate the investment in other areas, like what happened in the second half of 2017, should we also expect acceleration in this decline, a decline in Display Technologies net income as a percentage of overall net income? I'm just trying to better understand how other segments are going to grow and help continue diversify the revenue and operating income mix.
I think you've got it, Mehdi. I think your observation about what's happened in the past and your projection of what's in the future is directionally correct. Our other market access platforms are going to grow faster than our Display Technologies market access platform, and therefore, it will become a smaller part of our overall corporate mix on income.
I guess the question is, since you have a stepped-up investment in other areas, should we expect acceleration in contribution from other segments?
Yes.
Would you like to elaborate on the rate of increase?
No. It's just not to be cute about it. There's only so much guidance we really want to give and project, mainly because we don't want to Everything has an arc of probability sets to it. I think in general, you're on track with it. What you heard from Jeff was that he's expecting $11 billion of revenue this year, right? With the bulk of that revenue growth coming from other segments other than Display. I think that type of numbers that you saw, that you can interpolate from there, and what you saw for 2017, I think directionally, that's the way to think about it going forward, Mehdi. Very strong growth for the company overall with Display being stable.
Certainly, with the pricing dialogue you heard from Jeff, there is a possibility that Display as a segment begins to grow some. Still, it'll be at a lower rate than the rest of the company, I believe.
Got it. Helpful. Thank you.
Next we'll go to Steven Fox with Cross Research. Please go ahead.
Thanks. Good morning. Two questions from me, please. First of all, on the gross margin swing during 2018, can you give us an idea of how much of the swing is just from ramping down some of the spending versus expecting new volumes to ramp in the second half? As a follow-up, can you just give us a little bit better color on some of the Gorilla Glass auto wins, maybe just by large buckets of interior versus exterior and how you expect to realize revenues from that? Thanks.
Steve, when we open any new plant, the staffing and fixed costs tend to ramp earlier than the production. As we move to higher utilization rates due to volume increases and meeting this committed demand, we would expect our gross margins to improve throughout the year with especially strong growth in the second half.
On auto, Steve, did I hear your question right? How are we feeling about the ramp and the mix between glazing exterior versus interior? Did I hear that correctly?
Yeah, I was just trying to understand, if you looked at the 35 new wins, what kind of buckets they fall into within the vehicle location, were they outside, inside, what type of things inside, and when would these programs start to ramp?
The majority of the platform wins that we have right now are on the interior. One of the reasons for that is people refresh interiors and adopt new design in interiors much more rapidly than they refresh the exterior of a car platform. The majority of those are interior. I think that, though, when we think through the revenue opportunity, we don't see a lot of difference between the revenue opportunity in interiors and exteriors. Even though the glass area is quite high in an exterior, the relatively higher value that we add in interior with special optical surfaces to create a particular viewing experience mean that that's quite a high revenue realization business for us.
I would say determining between the two probably isn't as important as the overall rate of adoption as we try to drive this business to another $1 billion at a revenue generator for Corning over time.
This would be for 2019, 2020 model year vehicles?
We'll start shipping commercially for those products late this year. We'll begin. You won't start to see significant ramp until starting in 2019 and beyond. You should look for when we start to put in some high volume manufacturing for the part finishing and optical treatments. Should give you some more evidence, and you should hear about that sometime this year, Steve.
Great. Thank you very much.
Our next question's from Wamsi Mohan with Bank of America Merrill Lynch. Please go ahead.
Yes, thank you. I was just wondering, around these price declines, sounded from your Q1 commentary that there was an improving but higher than mid-single digit decline, which would improve if pricing improves more so throughout the course of the year post Q1. I appreciate your volumes are lower in Q1 relative to full year, but is 2Q the right time frame to think about price declines to get to mid-single digit? And secondarily, I know Tony in the past has said that the core rate could be locked in maybe over a five-year period. Is the FX volatility causing you to rethink the period of locking in the core rate at this 107 for three versus five years? Thank you.
Thanks for the questions, Wamsi. To the first one on pricing. Let's make sure we're talking about the right terms. There's both sequential price declines, so quarter four to quarter one, for instance, and then there's year-over-year declines, quarter one this year versus quarter one last year. What you heard from Jeff was that we're talking now about the really important milestone of towards the back half of this year. We expect the year-over-year decline to be mid-single digit. Okay. That's a very significant milestone. The sequential declines is, they have been low single digit and continue to be. We're seeing improvement in this quarter one decline versus quarter one of last year. Of course, we're going to continue to see improvement in the sequential declines to be able to reach this much lower year-over-year decline rate. That little shift in terms can lead to misunderstanding.
I think the key thing is we see the rate of price decline improving for us, and we would expect to see that, especially in the back half of the year, that we have evidence for it already in quarter one, and we would anticipate it as well in quarter two.
With respect to hedging, we find giving a three-year core rate to be effective. It's a good window to provide certainty for our cash flows and earnings. It allows us to execute in a focused way on our strategy and capital allocation framework and deliver on all the goals. Consistent with our financial policies, we do have hedges in place for the next three-year period, but at lower coverage than the 90% we have through the end of 2020. We'll give you more details on how we expect our core rates evolve as we get closer to the next three-year period.
Okay, thank you.
Our next question will go to Vijay Bhagavath with Deutsche Bank. Please go ahead.
I'm sorry, I was on mute the last time you called me. Good morning. My question is around your optical portfolio and 5G in particular. 5G, if you'd agree with me, is fundamentally different from previous wireless generations. 5G uniquely needs both wireless and optical communications. My question is around, would you focus primarily on the optical communications opportunity in 5G, or any thoughts on building up a wireless communication portfolio for 5G now with the fixed wireless starting to pick up and then we're getting into mobility in 5G? Thanks.
An excellent question, Vijay. I think your assessment of the difference between 5G wireless technology and previous generations is accurate in that wireless now becomes a very optically rich offering as people move towards dense 4G and 5G. As far as expanding outside of optical, mainly our focus will be on those things that are fully integrated into our passive optical system, where we can uniquely be able to package and/or facilitate the implementation of wireless for our customers, we would augment our offering. That is a dialogue which we're involved with deeply with our key customers, and it's really quite straightforward. It becomes, do you want us to do this, or do you want to source it? What is the least expensive way to build out this infrastructure? Depending on how those dialogues go, more of the value could shift into us beyond the optical.
I think it's too soon yet to conclude where those dialogues will end, Vijay.
Hey, thanks, Wendell. Truly helpful. A quick follow-on. As you bring up more optical fiber capacity, man, I keep seeing these blurbs on the newswire, you keep continuing to build up new optical manufacturing capacity. Would that have any near-term impacts on segment margins? Thanks.
Yes. Excellent question, Vijay. As you would have heard from Jeff, we've had from our investments in Optical Communications, a bit of a drag in the back half of 2017, and we're having a bit of a drag here in the first quarter of 2018. We would expect as those facilities ramp, that drag will disappear and then turn into a strong positive. As you know, having visited our Optical Communications plants, our fixed cost in those facilities is high, so our variable margins are also quite high. As we fill that up, you can expect to see it have a pretty potent effect on our gross margins.
Thank you.
Our next question's from Patrick Newton with Stifel. Please go ahead.
Excuse me, Wendell and Jeff, I wanted to dig a little bit more into gross margin, perhaps a two-part question. I guess I'm struggling to see how the commentary on several segments running at full capacity exiting the year results in the 4Q gross margin missing your guide by about 100 basis points. It appears to me that the comments that you're making on investment headwinds seem to be more targeted at the first half of 2018. Maybe you can help us bridge the 41% gross margin results relative to the 42% guide. Then if we look forward and taking into account that a substantial portion of your growth is coming from some larger on some lower margin businesses, how should we think about gross margin post-investment phase?
I think that you talked about a 42% gross margin in the back half of the year, but is that a good intermediate-term target, meaning that 43% plus that we saw in the 2014-2015 timeframe is unachievable given mix going forward?
Great question, Patrick. Well, let's start with the Q4. In Q4, we're also seeing that drag from our investment cycles. What can cause timing delta is that as we actually start up a plant, then there's certain costs that are triggered that were sitting in a project now flow through our P&L and our gross margins. Some of that's hitting quarter four, as well as you may have seen the announcement from Saudi of the major new strategic alliance we've announced. That also started to ship, there we had to build a new supply chain, we went through about 4 generations of product for them. It's a new product, new supply chain, as we started to ship that also, its profitability was not at the level that it will be ultimately.
I think really quarter four and quarter one, it's the same basic story. A little bit different mix of where the investment is, but you're seeing that strong investment take away from some of the strength in the overall operations, and we'd expect that to reverse. I'll turn it over to Jeff for the back half, but you're right on the target for our gross margins. Jeff?
At our new core rates of 107 JPY per USD and 1,175 KRW per USD, the 2017 gross margin was 41.3%. We expect to be about at that this year. First quarter, we're going to be at 40%. In the back half of the year for quarters three and quarter four, we'd expect to be above 42%. The two primary drivers of that are that our new factories will exit the startup stage as we ramp to meet the committed demand. The second factor is we're taking advantage of the seasonally lighter demand in display to upgrade our display tanks with the latest technology, and that will also have a strong benefit in the back half of the year.
Thank you for taking my question.
Next we go to Stanley Kovler with Citi Research. Please go ahead.
Hi, good morning, everyone. Thank you. Just one question on display, and then a follow-up on the optical side. Panel makers have commented recently that they wanted to refocus on profitability. One question was for 2017, for example, when in the second half of the year, there was more discounted to get inventory moving in China. How should we think about those types of developments going forward when maybe panel makers or OEMs will be less inclined to discount to get volume through? Your thoughts would be great.
We think that the supply chain inventory exited 2017 at a healthy level, and we think it will be healthy throughout 2018 as we see growth at the retail level. In terms of impact on us, we think that the glass market volume is going to be up mid-single digits, and we believe that our pricing can reach mid-single digit year-over-year declines. We think that pricing is going to be driven by three things: the supply-demand balance, competitor profitability of glass makers, and also the need for attractive returns on ongoing investments. If you look over the last three years, correlation between panel makers' performance and glass pricing has been very low. We feel pretty confident in our guidance.
Stan, was that the question you were asking, sir, or were you aiming more at the display market?
Appreciate it. No, that was the question. I just wanted to follow up on optical, related to Verizon. They announced some NG-PON capabilities, I think, that allow them multiple wavelengths on a single fiber for some of the edge deployments. I think the focus more on some of these technologies was to get speed up on a single wavelength. Does this have any implication for you guys on demand or ramp of single-mode fiber? Is this an accelerator or could this actually slow things down for you? Thank you.
In general, what drives our demand is going to be footprint by neighborhood or by city. In telecom, it is putting in place the original infrastructure to be able to service. As always, when you put in something like GPON, the capability of the fiber is always well in excess of what you're driving it at. Quite often what you'll see is our demand comes when we basically do the home passes and then ultimately the home drops. Then always the telecom company can turn up the rate and turn up the service level with pretty simple upgrades in their GPON system inside the network itself.
This is very typical, and we don't see it as impacting us, frankly, one way or the other, either negatively or positively, other than to the extent that the degree with which our customers serve their customers better, that net long term turns into more demand for us.
That's great.
John, we'll try to get a couple more people in.
Great. Next we have James Faucette with Morgan Stanley. Please go ahead.
Thank you very much. I just wanted to get a little more color on growth drivers for Specialty Materials and Optical and Display. Wendell, you talked a little bit about interior glass starting to move specialty or starting to contribute really in 2019. How should we think about it as a growth driver for Specialty Materials overall? Can it be meaningful in that 2019 as a contributor, or is it gonna take longer than that? I guess in light of your recent comments on this call related to Iris, similar question on Iris. Can Iris be a meaningful contributor to Display in 2019, or once again, is that gonna take longer? Thank you very much.
Let's start with your first question. Just from a segment sort of accounting method, right now we account for auto in the glass area inside other. Ultimately, I don't think we've determined where it will live as a segment, but it links more closely with our automotive market access platform than it does our mobile consumer electronics platform. That being said, because what you really care about is, does it generate revenue or not? I think 2019 will be the year, if everything goes well, that we'll start to feel it in automotive. We're a big company, and this is just the beginning of this, so it's not going to be a life-changing feel in 2019, okay? We'll expect it to really start to build its momentum in 2019 and then start to really contribute much more in the next decade.
In the near term, what drives us in Specialty is really the adoption of our newer innovations by more and more of the OEMs. We expect Specialty to grow this year in mobile consumer electronics. The rate of growth will depend on how quickly people adopt our innovation sets. In Iris, it's still too early to tell. I think it's very encouraging that two major players in monitors in Dell and Lenovo have adopted the Iris technology for the top of their line. I think we need to see that become a lot more mainstream before that turns from an investment area into a margin producer.
Another one for us, John?
We'll go to Joseph Wolf with Barclays. Please go ahead.
Hi, thank you. I had a question back to Display Technologies, on the transition in the industry towards OLED, not on the TV set, but on the smaller panel size and the lower, I guess, the Gen 6.5. Competitively, is there any impact? I know you guys are involved in OLED manufacture, but are your competitors involved in the same way? Is there any longer-term consideration where the other businesses or your competition is looking at the OLED opportunity differently than Corning?
Could you just build on your question, when you say OLED, sir, what exactly do you mean?
Both in flexible and in rigid, where I know that Corning product is used in the manufacture of the end product, but perhaps isn't in the final device. I'm wondering if you believe that your competitors have the same sort of manufacturing capability, or they are looking at that market differently.
Hard for me to tell how our competitors are looking at it. Let me share instead how we think about it. Starting back a number of years ago, as we evaluated OLED versus LCD technology, we determined that OLED would probably be most successful in the flexible small mobile area because it offered some unique performance advantages there that were highly valued. Therefore, that's where we focused a lot of our innovation efforts, and our share in that business is incredibly high. To the extent that devices go into OLED, in mobile consumer electronics, as opposed to LCD, that is a revenue enhancer for us. Now, it's a small revenue enhancer because in glass, the area of the device matters, and so overall, mobile is a relatively small % of the overall glass demand.
What we felt then, and we continue to feel, is that OLED for TV can become a player, but a small player. Fundamentally it doesn't offer enough value relative to the cost increase versus a continually improving LCD technologies like you just saw recently at CES with some of the quantum dot technologies. That being said, we have a strong position as well, really any time anybody wants to use the glass. I don't have any sort of great insight into how do our competitors feel about it, but I really like our position.
John, let's take one last question.
That will be from Doug Clark with Goldman Sachs. Please go ahead.
Hey, great, thanks for taking my question. I had a question on the Display Technologies glass volume expectations. First, for the market being up mid-single digits in 2018, can you explain what that means from a TV unit standpoint? TV units have been down for the past few years. I'm wondering if you're assuming a re-acceleration in growth. Then secondly, on Corning share gains in the relationship with BOE driving above-market volume growth, can you quantify that? Should we be expecting high single-digit glass volume growth for Corning in 2018? Essentially the materiality of BOE in 2018. Thanks.
Sure. We expect screen size to be the primary driver of growth this year. In terms of our growth, BOE is ramping its Gen 10.5 facility. We're ramping our glass in tandem, we expect stability in other areas and that to be a little adder for us. That's all the guidance we're giving at this time.
Thanks a lot.
Great. All right. Thank you all for joining us today. Before we close, I just wanted to remind you that we will issue an 8-K today with our core data recasted again of 107 and a KRW 1,175. We'll be attending the Goldman Sachs conference on February 13th, and we'll be planning to attend at least one conference a quarter for the rest of the year. We'll also be providing some virtual presentations and webcasts on business topics throughout the year. Finally, there will be a web replay of today's call on our website starting later this morning, and a telephone replay available for the next two weeks with details in today's news release. Once again, thank you all for joining us. John, that concludes our call. Please disconnect all lines.