Corning Incorporated (GLW) Earnings Call Transcript & Summary

Hi, good morning. Thanks guys. So I'm Samik Chatterjee. I cover the IT hardware and networking equipment needs at JPMorgan. For the first session from our side this morning, we have the pleasure of hosting Corning. And Wendell Weeks, the CEO, is with us. Wendell, thanks a lot for attending the conference and giving us the opportunity to host you here for the fireside chat. Before I dive into the questions, let me just start by reminding investors who are tuned in that they do have the option of sending in questions through the Q&A feature. And we can ask it on their behalf. Wendell, why don't I -- I know you have some opening comments. Why don't I let you start with that before we dive into some questions?

Well, first, good morning, Samik, and I hope you're all staying safe and healthy. First, just a reminder that statements that I'll make today do contain forward-looking information. And of course, actual results may differ materially. So we're all confronting some pretty profound challenges as a result of COVID-19, and our thoughts as always are with those that are directly affected by the pandemic and the many people fighting it on the front lines. At Corning, we've been responding to this pandemic directly since the very early cases in Wuhan, where we were in a process of building a new Gen 10.5 display plant. So we had the opportunity to develop and refine best practices to protect all of our facilities as this virus worked its way around the world. To date, we feel blessed to report that of our over 50,000 employees worldwide, only 33 have tested positive, 22 have fully recovered, 9 of them are back to work, and 11 are in the process of recovering and 0 at this point are hospitalized. So we feel blessed by our progress. We've also mobilized our innovation capabilities to combat this pandemic more directly, such as Valor Glass for vaccine clinical trials and using our advanced flow reactors to scale production of small molecule antivirals to treat the virus. And we have donated Guardiant antimicrobial particles for an antiviral paint for the new hospitals being built in the Wuhan area. As we look at our priorities as we work our way through this challenge, it is, first and foremost, to protect our employees and our communities, then to deliver for our customers, and then to preserve our financial strength as a company. Our balance sheet is, quite frankly, built for times like these. We're committed to preserving our financial strength. We've adjusted our operating plan to reduce cost and capital spending, all while maintaining our ability to meet our customer commitments. We expect to maintain a very strong cash balance throughout, and we're going to generate positive free cash flow for the year. We plan to maintain our current dividend. By design, we have a very conservative balance sheet and a very conservative debt structure. Over the next 2 years, we have under $70 million of debt coming due. And our average debt maturity is 25 years, which is the longest in the S&P 500. To put that in perspective, about 80% of the debt in the S&P 500 is coming due within the next 20 years, less than half of ours is. So our debt coming due over the next 20 years is only $3.4 billion. And that ratio of 20-year debt to EBITDA is 1.1x. Now clearly, the world and our outlook have changed significantly since we exited last year. Anticipating lower sales, we are aggressively adjusting our operating plan and taking actions that will maintain this financial strength and, as I've said, positive free cash flow for the full year. So if I were to summarize, we're built to last. We're 169 years old. So even though our outlook has changed significantly, we still fully expect to weather this current storm well and to return to growth as soon as the world does. The good news is, as soon as the growth returns, our capital is already in place, so we have the strong financial foundation. We'll have good, strong operating leverage coming out of this economic pause. So back to you, sir.

Okay. Many thanks for that. And our best wishes with your employees, and I hope everyone recovers soon who is impacted by this as well. Maybe if we can just start off with just looking through the different segments and kind of where you're seeing more of a short-term disruption in -- across your product lines. Just outlining that would be helpful for investors.

Okay. Well, I'll try to do 2 things. I'll try to give you what it is we have seen in quarter 1 and then what we're seeing in some of the end markets, especially in China, which is going to be the first economy to sort of coming out of a lockdown in a strong way. We shouldn't over-conclude from the short-term data, but I'll share it with you. So in display, the stay-at-home policies have definitely impacted us. Our preliminary quarter 1 worldwide television sell-through units are reported to be down low single digits year-over-year. For quarter 2, early data indicates that TV sell-through units could decline even more than in quarter 1. Now weak TV demand will be partially offset by pockets of strength for some IT products. Based on our experience in past economic downturns, we would expect TV demand to rebound rather quickly and the relatively insensitive to economic downturns over a period of time. Now the data we're seeing right now, in China, it's encouraging to note that China TV sell-through in March increased 50% over February. But that said, it's still down 22% year-over-year. The preliminary April results are also showing improvement, but still down significantly year-over-year. In Specialty Materials, we, of course, would expect this to be impacted. The data that we're seeing was global smartphone units were down 20% as store closures and stay-at-home restrictions, particularly in China, hit in quarter 1. As China emerged from the restrictions, preliminary data is showing smartphone unit demand was up in April, 17% year-over-year. So that was encouraging. But once again, very early, and one shouldn't over-conclude from it. As we see other countries emerge from lockdowns, we would expect to see some recovery in demand. In automotive, everybody has been covering this. The impact is obviously quite significant. The data that we're seeing right now is, if you take a look in China, vehicle sales were down 80% year-over-year in February. But as their economy began to reopen, they were then down 45% year-over-year in March, okay? Preliminary data on China, and I emphasize preliminary, in April is that it's only down 1% year-over-year. So again, one should not over-conclude. For optical and Life Sciences, there's very little meaningful end-market data. We continue to see good demand from carriers and from cloud providers. We would expect to see the primary impact to be in small and medium business customers, plan networks and the like. And Life Sciences demand has been strong in certain areas. But with the lockdown of academic research, we're seeing some negative from that. But overall, we think we'll weather it. So that's a short version of what we're seeing now. I would just have to emphasize again that we should not overreact to early data, that we believe that it's going to take some time for us all to get a good understanding of what's going to happen to consumer behavior over time as a result of this particular pandemic.

Wendell, that's very interesting. But maybe just given your experience in past economic downturns, if you can share, like you mentioned, you expect the TV market to rebound fairly quickly. How do you think about the different end markets, I think, outside of TV? And where do you expect the rebound to maybe a bit more slower than some of the others that rebound quickly that are more consumer-driven maybe?

Yes. So typically, in any type of significant shock, you don't really see new trends, but you will see an acceleration of previous trends, if you know what I mean, right? So for us, we take a look at our long-term trends and say, how are they impacted by the pandemic. So if we take a look at our optical business, for instance, overall, what we believe is this will speed the shift to optical. And as soon as the telecom companies have enough financial strength to do it, we expect them to have pretty strong infrastructure builds, and we would expect those builds to go to very high bandwidth, wireless and very high bandwidth optical networks and high bandwidth cloud networks. So we would expect that trend to assume as they're financially able to be one that accelerates. I think a really interesting one is display in Mobile Consumer Electronics. What's happening everywhere is what's happening to you and I right now. Increasingly, where we go to meet with people is to our displays. And this makes us believe that it will continue to prioritize for people, their consumer electronic devices that increasingly mediate their experiences with the world, and they'll invest more in those as will companies invest more in those and the infrastructure to be -- to enable work at home and things like that. Environmental and automotive, there's a tough one. As I talk to different auto executives, most of them are expecting a pretty robust recovery. I'm still not so sure. I'd like to see what happens with consumer behavior. The good news is it will continue the emphasis on clean technologies, which almost all of our technology is aimed at. There's actually was a fascinating Harvard study that recently came out that showed that countries that have adopted strong particulate standards, which enable the use of our product, do better for respiratory health and specifically on COVID-19. And then we think it provides good strong opportunities for us for Valor in Life Sciences and for all sorts of different Life Science products that enable test kits, et cetera. So overall, we feel pretty good about our long-term growth drivers of being driven by the health impact of the pandemic. The key question, though, is what happens with the economic impact? How negative and how long is the unemployment going to last? Is the strong economic shock -- because people actually need money to buy products. And that, I think it's just too early to tell.

Maybe before we kind of dive into some of these segments in more details. One of the major kind of questions that investors have -- kind of had going into this earnings season, and clearly, the market is saying investors are feeling better about is most are assuming Q2 is the trough in conjunction with the trough in the economic activity. Based on the data you're seeing, again, I appreciate this is a very early stage, and it's tough to kind of draw linear improvements from here on. But is there -- is the data enough to kind of say that 2Q is the trough in terms of your full year expectations as well? Or is it still too early to kind of draw those conclusions as well?

I think it's too early. There is -- it is natural for people and for executives to take a look at early, especially encouraging data and predict that spring is here. I think there's -- we should all be very cautious of false springs right now. Like I gave that data of like what happened in smartphone demand, or what happened in automotive demand in China as they came down on lockdown. But I could also explain that data by saying people have emerged from lockdown that absolutely needed a thing finally went out to get it. But that still hasn't taken into account the longer-term economic impact in those areas. So I just think it's way too early to call when we're out of the downturn, my opinion.

Let me dive a bit into Optical Communication. And you mentioned kind of telecom service providers will eventually have to invest, say, figure out their own balance sheets and cash flow. Maybe on the other side, you do a lot of business with the hyper-scale customers. And the general impression investors have had is because like we're using a lot of video, et cetera, there's increasing usage of the cloud. There were some companies in relation to data center infrastructure that did see an upside in terms of demand, new tone from them. What are you seeing on that front? Are you seeing them kind of show interest in kind of investing very quickly to -- which could end up being an offset that even while you wait for the telecom companies to invest?

I think both cloud and carriers have experienced a similar phenomenon, which is they both build ahead to be able to have enough excess capacity, usually about 18 months ahead. And what they've seen is that I think networks have performed incredibly well. And the way they've been able to do that is that buffer capacity is what they engaged with these large spikes in usage. So they now have used that buffer up. And then the question becomes, is that the new baseline, and therefore, we should start to build now for that next 18 months because that's a new baseline? Or will the baseline return to a lower level? Most of the cloud folks that I'm talking to are treating it like a new baseline. I would say the telecom guys are in their early thinking, sort of thinking of it the same way. And then they want to make sure they're going to take care of their customers. So when they are able to physically take new material in a cloud environment, though a lot of them have locked down their hyperscale data centers, ceased building, ceased letting outsiders in, et cetera, I think we should see that both cloud and carrier return to some good strong infrastructure build.

Prior to this quarter, when the macro wasn't that concerning, you had talked about the Optical Communication business getting back to growth in the second half, and I understand that has changed quite significantly. But maybe just give us an update on where you're thinking, stand on that? And how much of this is just kind of -- even if your thinking has changed, how much of this is just the shelter-in-place restrictions, et cetera, just pushing out stuff temporarily versus companies really evaluating their CapEx plans?

I think you've got a combination. On one hand, telecom has been deemed essential, and the companies have really done amazing work to keep the networks operational and to be able to upgrade to provide service. And they've deployed so many field personnel to do that. But there's no question that anything that was optional to do was spread out, was pushed out in time. It's a very challenging time to do network installation. Then we'll also have whatever this economic impact plays out, and each company is different. They have different balance sheets. They have different mix of businesses. But I do believe, whether or not it happens in the second half or whether or not it happens after that, I feel like the -- it's overall a bull signal for high-capacity networks. And this is back to new trends don't usually get created, but trends that were in place get accelerated. So I think we're just going to have more and more substitution of optical and our content will continue to go up and up. I still think that's the main message out of this. When? I just don't know yet. I mean, as soon as I do and we can do it with confidence, we'll tell you guys.

Let me move to the Specialty Materials or kind of a smartphone and the wearables part. Now this is not the first year that the smartphone market is declining. Obviously, this year, I think the magnitude of the decline is higher but you've managed to continue to outperform the smartphone market drivers and maybe some of that is content growth, some of that is the wearables growth being much stronger. Can you just remind us of when you look kind of towards to the next 3 to 5 years, how much more headroom there is in getting adoption of your premium glass in the smartphone market? And how much of a contributor today is wearables? And what's your outlook for that market as well?

Yes, as you point out, our primary story there is a content story. It's not really based on strong growth in the end market. It's just the use of more of our product for RF transparency, for design, for durability. Most industry analysts are guessing sort of a 15% to 20% decrease in smartphone shipments this year. I mean, that's as good a guess as any. And that's as opposed to pre-COVID, most were about a plus 1%. And in quarter 1, we saw handheld units being down about 20% in the end market. Interestingly, our revenue was up 14% year-over-year. Now there are 2 effects in there. One will be just how supply chains work. We have a very critical component. They want to make sure they have it. So our sales don't necessarily map in time with smartphone sales. But then the other effect is this increasing content play. We're seeing higher value product be adopted and more of the product being adopted. I'm really encouraged long-term about wearables. I think we're going to see that increase in its health care uses. And as that happens, I think we're going to move the direction there that we have in phones, which is a direction with almost the whole body being made up of our materials. I think we have the same type of opportunity with wearables. And wow, if we can ever nail next-generation augmented reality and VR, that would make events like this super interesting. And we continue to invest in technologies to make that happen.

Before I leave with the topic of smartphones, one of the next-generation technologies that everyone keeps highlighting are foldable phones. And just wanted to get your thoughts on how popular do you think that form factor will be? And what's Corning doing to make sure that your glass is relevant even in that form factor?

All right. So foldables -- so in general, I'm for them in terms of opportunity because all the units you're looking at tend to have the same 2 pieces of glass on the 2 sides, and then you open it up and there's another piece of glass in there. So I'm sort of for that. And then the technology they use to create the display is almost always built on a mother glass that we provide. So in general, it's a nice opportunity for us. That being said, I've yet to see a good product, me, personally. And part of the problem is our problem. We have yet to develop a foldable material that we could be proud of. But also a part of it is in our customers' hands. I don't think they've necessarily developed the product yet that is durable enough and exciting enough to sort of drive the market towards that in any sort of very aggressive way. It still feels a little bit like technology push. I think if we evolve it better, if we solve some of the problems with it, we could -- it will turn into a pull. But right now, it just feels -- I don't know what you think, but it feels a little like a, look what we can do, surely you want it kind of thing. Doesn't it feel that way to you?

I mean, I don't know if I'm ready to give up my iPad yet.

Yes, exactly. Right?

No, fair. Let me move to the display segment and understand some of the headwinds this year. But when you look longer term, the Gen 10.5 factories ramping up, with the shift of manufacturing moving towards as well, you seem to be in a very favorable position to continue to outperform the market and gain share. Share your thoughts about how you're thinking about kind of longer term, not only revenue growth, but what do you want to do with the profitability of that segment? What's your vision with where the profitability of that segment, too?

All right. Well, I think you described it well. In every one of our businesses, we outperform our underlying industries because of our unique competitive advantages. And we've been doing that the last number of years in display. With the turndown on the Korean peninsula of the major players, LG and Samsung, of their display production, and we were so large in Korea, there's going to be a time period that -- where that reduction in capacity as they turn to now source from China. And we ramp our Gen 10.5 facilities and especially with the COVID-19 delays of those, right? We're going to have a little bit of a mismatch where we're not going to grow a lot faster than the underlying industry until our Gen 10.5 plants come up. So long term, we're positioned on purpose. We've been doing it for years. That China would ultimately take the lead from Korea and Taiwan in this space. That's why we did the 3 out of the 4 Gen 10.5 facilities, all funded by Chinese-based capital while we maintained 100% of the P&L and cash flows. So we do view it as long term. We'll return to growing faster than our markets. And we will like the profitability of those Gen 10.5 plants very much.

Okay. Okay. Let me take one of the questions that came in through these [indiscernible]. I mean, as a reminder to our audience members, you can submit a question through the Q&A feature. The question, I'll just read it out, Wendell, the way it came in, which is, it reads how many distributing [indiscernible] require a review and enhanced focus in R&D and the existing portfolio commitments. How has or how do you see the R&D investment and growth portfolio being impacted?

You broke up a little bit. So let me repeat back what I thought I heard is that how do we see our R&D expenditures and the portfolio being impacted by this. Did I get it right?

In growth portfolio.

Growth portfolio. So first, let's do the investment side, the expense and investment side. Like every other element of our P&L and cash flow, we'll adjust to our lower revenue expectations for this year. And we'll adjust our spending appropriately in the RD&E side. When we do that, we restack our priority sets and make sure we deliver on those things that are most important long-term drivers. And then where you see us shifting a little more towards is, for instance, in Valor, there'll be a significant opportunity here to accelerate that development, assuming, which is a big assumption, that we see the successful development of a COVID-19 vaccine. We see the opportunity for some of our advanced life science techniques to help in the different testing kits and things like that. So a little bit of a shift in that direction, and a shift towards our next-generation optical network investments and a shift towards our next-generation display and smartphone materials. So that when people are back in the market, we'll have the leading technology for it to be adopted.

Let me just follow-up on that with a question on kind of the CapEx for this year. I think you've mentioned on the last earnings call that you would look to kind of moderate some of the initial CapEx plans just to preserve liquidity and cash. Now when you start to think about next year, again, assuming everything kind of starts to recover and we see a normal kind of recovery, is there any kind of catch-up spend that then need to be made next year, which would then kind of take you above the trend line of around that kind of $2 billion CapEx number? Or is most of the CapEx towards the new growth opportunities for the next year or so done and you're kind of just back to the trend line at that point?

Yes. The main reason we're going to reduce our CapEx this year, it probably isn't so much the financial constraints since I've said we have a really strong financially, is that we built the capacity to support a higher revenue base. And if we're looking at the last year and that revenue base, right, that means that we can slow down some of our spending that was also aimed at 2 years from now type capacity. And that's what we're going to do. Do we think it's going to return to trend line? I think it returns to trend line. At the same time, we're also have capacity in the ground to support a much higher revenue base right now. So as we sort of choose our risk profiles, what we're choosing is let's be thoughtful and see sort of how the recovery starts to look before we start building for 2 years from now. And that, I think, is the dynamic that you're going to see in our numbers. We'll finish up the stuff we've got started. And we'll -- but you won't see us do a lot of new starts without guaranteed revenue against it.

Got it. If I can finish off with a question, just in the time that we have left on Life Sciences. It's now -- it still is a small portion of your revenue. But probably one of the areas that [indiscernible] and kind of leverage some of the growth coming out of this COVID kind of pandemic, help us think about where you are in the process of getting Valor more widely distributed? What else do you need to do to ramp that outside of just production? What do you need to do in the channel, et cetera, to ramp that up more?

I would say this current challenge has actually pointed out some of the weaknesses in the industry that we built Valor to address. So like I said, assuming we get a vaccine or we even get really good strong antiviral treatments, if you look at the capacity in the world, even before the COVID-19 issue, you are about 2 billion doses short of what the world needs in fill capacity and a pharmaceutical packaging. So we developed Valor because it increases the throughput of that fill capacity. And all fill capacity is, is assuming we invent a good COVID-19 vaccine, we've actually got to put it in a pharmaceutical package and then ship it out. If Valor increases the throughput by over 50%, so our existing fill capacity now all of a sudden goes up dramatically. And if you invest in new fill capacity, we can get like a 100% improvement in throughput once you design around our new package. And it's a lot safer for patients. The way Valor works is that it's really -- it overcomes one of the issues with borosilicate packaging, which is you can have throughput of through cracks that create sterility problems. You can have glass flakes. You have all these sets of issues that endanger patients. And Valor is aimed at addressing all those pieces to be able to deliver things like a COVID-19 vaccine cost effectively and safer. So we look at this and say, now the whole world is seeing what we saw, and that ought to mean we ought to have an ability to accelerate Valor. It's to -- it wouldn't be appropriate for me to talk too much in-depth about the different things we're working on to make that acceleration happen. But we -- but as that develops, we will be public about it.

That's all we had time for, but totally a pleasure to host you at this conference. And thanks for making the conference happen. Thank you.

Thanks for having me.