Corning Incorporated (GLW) Earnings Call Transcript & Summary

All right. Good afternoon, everyone. Thanks for joining us for the Corning Incorporated group presentation. I'm Kevin Condon with Baird Research. Corning develops and manufactures specialty glass, ceramics and fibers for the optical communications, consumer electronics, automotive and life services -- life sciences markets. We're pleased to have Corning's CFO, Tony Tripeny, on the line with us. Tony, it's great to have you.

Thanks, Kevin.

Before we jump into to some Q&A, where I'll ask questions and invite the audience to submit questions to me via the chat feature, Tony has a presentation on Corning. Tony, the floor is yours.

Thank you, Kevin. I appreciate the opportunity to speak here today and appreciate everyone's participation in it. Before I get started, just to remind you, there are forward-looking statements and non-GAAP financials in this presentation. I'd like to tell you a little bit about Corning. At our most basic level, we invent, make and sell. Now a few companies do that these days, but we've been successful for 169 years. We are one of the world's leading innovators in material science. We combine our unparalleled expertise in glass science, ceramic science and optical physics with our proprietary manufacturing and engineering platforms to create revolutionary products for 5 major markets: optical communications, mobile consumer electronics, display, automotive and life sciences. In optical communications, we manufacture optical fiber, cables, hardware and connectivity solutions for the premise, data center and in-building networks. In mobile consumer electronics, we enhance performance and deliver new features on Corning Gorilla Glass, a cover glass for smartphones, laptops, tablets and wearables. In addition, Corning's Advanced Optics is a global leader in providing cutting-edge solutions, offering a diverse set of optical products from materials to full systems. In display, Corning manufactures glass and glass substrates for LCD and OLED displays. We innovate to enable larger, higher resolution, thinner and flexible displays. In automotive, we have environmental products and auto glass solutions. In environmental, we create ceramic substrates and particulate filters for vehicles, including light-duty passenger cars, heavy-duty trucks and construction equipment. In auto glass solutions, we engineer in-vehicle displays distinguished by their durability, flexibility and touch sensitivity. And finally, in life sciences, we have our traditional business serving customers with laboratory consumables and equipment for key cell culture and drug discovery. And we have Corning Valor Glass. Valor Glass is a newly marketed pharmaceutical packaging product that enables the storage and delivery of injectable drugs. It will help enable faster filling line speeds and increase patient safety. Right now, we're expanding capacity in supplying glass vials for vaccines as part of Operation Warp Speed. Now Corning is the best in the world in 3 core technologies, 4 manufacturing and engineering platforms and 5 market-access platforms. Our probability of success increases as we apply more of our world-class capabilities, and our cost of innovation declines as we reapply talent and repurpose our existing assets. Few competitors can match our expertise in any one of our core capabilities. When we combine them, we create breakthrough products with significant and sustainable competitive advantages. And we have unique capabilities, and almost none of our manufacturing and testing equipment can be purchased off the shelf. We enhance these assets by attracting and developing top scientists and engineers and by continuously leveraging accumulated knowledge. Over many years, we have developed trust-based relationships by helping global customers with some of their toughest technology challenges. We benefit from these relationships by capturing new insights and by getting the first shot at opportunities to attack the next round of technology challenges. I'll highlight a recent example. The new cover material for Apple's iPhone 12 is our nanocrystal ceramic -- glass ceramic, which is a new-to-the-world material we invented. It was developed and scaled in partnership with Apple for use on the new iPhone 12 lineup. Apple's contribution from its Advanced Manufacturing Fund supported our efforts in state-of-the-art processes, equipment and materials integral to the manufacturing. Apple and Corning's rich history dates back more than a decade with the very first iPhone. Although the overall smartphone market is expected to be down 12% this year, our sales are up 16% year-to-date, demonstrating our ability to outperform our underlying market. This type of outperformance is not unique. From 2016 to 2019, we added $0.5 billion in sales or 42% cumulatively, while smartphone sales were actually down. And we're extending that growth streak this year. In fact, this outperformance is coming as we capture more opportunities to add more Corning to existing products in network densification, smartphones, TVs and cars. A big part of Corning's story over the next several years, thus, is a content story. This is especially powerful value creation lever in times of economic uncertainty because we aren't exclusively relying on people buying more stuff. Rather, we are putting more Corning in the products that people are already buying. And because we're capturing significant technology substitutions, we have revenue drivers beyond end market growth. That makes our growth more reliable and allows us to outperform the industries we serve. For instance, in our automotive market-access platform, gasoline particulate filters and AutoGrade interior glass increase our opportunity per car to $70, up almost a factor of 5 versus 2017. And additional products will take that even higher. So we're counting on -- we're not counting on more cars being sold, we're driving more Corning into each car. Turning to optical communications. The area you see here requires less than 1,000 kilometers of fiber to support a 4G network. For the same area, a 5G network requires about 100x more fiber, and this pattern is repeated in hyperscale data centers. So we're not talking about more networks, we're talking about network densification, which creates glassification, which means more Corning. In sum, we create vibrant technology franchises that generate strong cash flow, outperform the competition and lead their industries for decades. Now switching gears a bit to our near-term reality. Our financial performance has improved significantly since April, and we expect a strong fourth quarter. Nevertheless, we remain vigilant and continue to adapt appropriately to multiple disruptive forces that are playing out in the world, from the pandemic, the civil unrest to recession and geopolitical struggles. We've been rising to the challenges since day 1, and our priorities remain clear. First, we must make our values evident in our actions. Our commitment to health, safety, the well-being of our employees underlines every facet of our operations. We're dedicating resources and providing leadership to support our communities around the world. And when it comes to the global health fight, we're all in. We're mobilizing our capabilities to combat the virus. We must also safeguard our financial health. Our third quarter results show that our decisive actions are providing clear benefits as we leverage cost savings and increase efficiencies across the company. Regardless of the depth or duration of global uncertainties, we're doing everything in our power to keep the company strong. And it is working. Now to ensure that we emerge even stronger, we're continuing to invest to create additional revenue streams. We're inventing new-to-the-world materials and manufacturing processes and co-innovating new solutions in partnership with our customers. The relevance of our portfolio puts Corning at the heart of ongoing innovations with industry leaders, and we continue to solve our customers' toughest technology problems. So in summary, we are built to last. What we know at Corning is that our underlying growth drivers are intact, and we're confident Corning is positioned to come back stronger than ever. Kevin, I'd be happy to answer any questions.

All right. Thank you, Tony. So maybe if we can start with your largest segment, Optical Communications. You had the slide in there about 100x the fiber being needed to transition to 5G. Can you talk a little bit more about potentially the duration or the timing of that impact and how that will affect the top line for your business?

Sure. I think that the key thing to know about Optical Communications is that the underlying drivers of this business happen both in the carrier network, which is a lot driven by 5G, and then in the cloud computing network or hyperscale data centers. And in both those networks, what's happened during the pandemic is that a lot of the capacity that they build in advance, knowing that the growth is eventually going to occur, has already been consumed. I mean that is -- one of the clear things that occurred during the pandemic is how much of that consumption has happened. And so all of our customers are looking at their networks and saying, okay, we need to build out those networks. Now they have a variety of issues in the short term that may make that difficult, the ability to get labor into -- inside data centers, the ability to get all the right permitting, being able to go outdoors. I mean, all those things have definitely impacted our business in the short term. But from a long-term standpoint, there's no question that this is going to drive growth over the next 1 to 2 to 3 years and then beyond there. And so what happens sometimes -- these are big projects. And so what happens a lot is that picking the exact quarter they're going to start is hard, but picking where directionally things are going to go isn't so difficult. And we feel confident. And we feel like a lot of what we've learned over the last 6 months, we already believe this was going to happen. But we've learned in the last 6 months is it's even more likely to occur.

So then shifting to your Display Technologies segment. You have these new Gen 10.5 glass plants that I think you've talked about before. Can you just frame up the impact that those are going to have and the opportunity for that segment? I think on your last earnings call, you mentioned the retail market for glass screen sizes being up year-to-date. But just in terms of the volume outlook and then maybe the pricing on glass as well and the impact that you expect from all that?

Sure. The way we think about our displays is we love our display business, a very big segment, our second largest in sales and by far and away, our largest in profitability and cash flow generation. But it is a business that's in a more mature phase, less growth than some of our other businesses. So the key here is to operate it in a way that the business, we like to say, Wendell and I, that it ages gracefully, that the business keeps at its current level of profitability or maybe down a little bit. And the reason we're confident that it can do that is, is that the underlying growth in that business is the size of TVs. And for a number of years, TVs grow about 1.5 inches a year. And that's what's happening this year, too. TVs over 65 inches are up 40% on a year-over-year basis. And so if you get that kind of growth in TVs, you end up with a glass volume market growing in the mid-single digits. For a host of reasons, we believe that pricing is going to be down in the mid-single digits. So along with cost reductions, you've got a business that's essentially stable. I think the interesting thing from our standpoint this year is the number of drivers of growth that are occurring. Again, maybe a little different than we would have thought at the beginning of the pandemic. For sure, TVs are being sold, especially in the Western World, as people are spending more time at home and from an in-home entertainment standpoint. Also, PCs, notebook computers, monitors, tablets are all very -- growing very rapidly this year because of the study and work from home. So the underlying market is good. It adds to growth in our overall glass market. And the bigger the TVs, the best way to manufacture those is on Gen 10.5 factories. There are 4 Gen 10.5 factories that are being built or have been built in China. Corning has 3 of those 4, and we get 100% share at those 3. So that all also bodes well for us.

All right. So you mentioned Valor Glass in your presentation, which has been chosen by Operation Warp Speed to play a role in the distribution potentially of a COVID-19 vaccine. Can you talk about or frame the opportunity that this would present? And then maybe just a little bit more broadly on your life science business, the impact of the pandemic, what impact has that had on demand for products like that?

So from a Valor standpoint, I mean, we've invented a pharmaceutical packaging product, the first innovation in more than 100 years, that is much better from a safety standpoint, and it's also much better from a manufacturing standpoint. You can increase fill line speeds. And so you can get out more drugs, and you can do it in a safer manner. And in particular, there's extreme packaging like very low temperatures that even increases the value proposition there. And what I think has happened from a pandemic standpoint is that it's accelerated the interest by pharmaceutical companies in this product. Very specific, we're very excited about the announcement as the whole world was yesterday, and we think this is all the right things to be focused on. Purely from a business standpoint, though, keep in mind that most people believe vaccines are going to be delivered 10 doses per vial. So it's not as big as opportunity as it might be if it was a single-use drug. But that doesn't matter because what really matters is that we get -- attack after the pandemic and that we play our part in that. So we -- I would say, we used to talk about when we're at this conference last year, we would have said, think about this as a 2023, 2024 business. Clearly, it's being brought in with this, but it's not like it's going to be a big number in the first quarter. In terms of our other life sciences business, it's been kind of a tale of 2 different scenarios. On the one hand, to the degree that we have equipment that helps with diagnostics and testing of COVID, that business has been pretty strong. A lot of what we do, though, goes into research labs. And in the first couple of months and really even up until today, research labs have been cut back. They went from being shut down. They're now open but with social distancing and the like. They're not at full capacity. So we've had a little bit of a mixture of both. But as we enter the fourth quarter and as we think about on a going-forward basis, most of the things that are holding it back are behind us and the things that are causing growth are in front of us. So we do expect that business to grow in the fourth quarter.

So I mean, again, this came up in the presentation, but automotive seems like a big end market for several of your core competencies. And you framed a per car opportunity. But where does that opportunity come from exactly? I know you've got environmental filters as well as some display glass. But how should investors track your progress? Or -- and how do they frame the growth there?