Corning Incorporated (GLW) Earnings Call Transcript & Summary

Great. Just to double check. Jeff, can you hear me?

Yes. Very well. Thanks.

Perfect. This is Sami Badri from Crédit Suisse, and we are hosting the team right now from Corning. Specifically, we will be -- sorry, 1 second. I'm just trying to get this browser out of my screen area. Perfect. So thank you. We're hosting the Corning team today. Dr. Jeffrey Evenson, EVP and Chief Strategy Officer of the company. Thank you, Jeff, for joining us today.

My pleasure. Before we get started with questions, I just wanted to welcome everyone, and I thought I'd give a brief introduction. Each year at this time of year, I write a letter to the Board on behalf of Corning's senior management team. It reflects on our performance during the year and our position going into the new calendar year. And I thought to start today, I'd share the first paragraph of that letter with you. During 2020, we faced and overcame numerous challenges. We effectively protected our employees from the early stage of the pandemic in Wuhan. We protected our financial health by cutting costs and driving free cash flow generation. We prepared the organization for the next level of performance by elevating Eric Musser to Chief Operating Officer, formalizing the map structure and promoting next-generation leaders to the newly created senior leadership team. We focused Valor on addressing challenges created by COVID, gained majority share of Hemlock, leveraged our leadership in gas particulate filters to outperform the auto market and delivered new innovations, including Apple's Ceramic Shield and a new suite of connectivity products driven by 5G deployment requirements. We coupled these achievements with strong execution to deliver attractive financial results in the third and fourth quarters. And I think you're seeing that strength reflected in the press release that we put out this morning where we noted that we expect our fourth quarter sales to grow 5% to 8% sequentially from the third quarter and operating margin to grow at approximately double that rate. So we have a strong portfolio. The relevance of our capabilities continues to increase, and those factors, combined with our relationships with leading innovators, is creating a new set of opportunities for us as we enter the new year. With that, over to you, Sami, and happy to answer any questions you have.

Yes, absolutely. And thank you for opening up with that. Those were very good data points to really kind of shed on the future or at least the backdrop of the company and what you guys have all done. I think maybe for some of the investors that are still trying to warm up to Corning and understand really the compelling opportunity in front of them, what are maybe some 2 to 3 main things people should be cognizant of when they think about Corning and specifically investing into the stock? And I know you mentioned some very specific details with the glass, the Ceramic part, the 5G connectivity aspects. But if you were to kind of simplify the overall kind of macro thesis of the company into 3 key things, both it could be market related, it could be stock related, what are maybe potentially those couple of items that really you would point out?

Yes, sure. As Chief Strategy Officer and thinking of my time at McKinsey, thinking about my time at Bernstein when I covered data networking, and my time working with Corning, a couple of things are really different about Corning. One is we focus on leading in 3 core technical capabilities and 4 manufacturing and engineering platforms. And we build our systems and our processes to make sure that we're good around pivoting to new opportunities based on those. And I think what that leads to is an opportunity to grow for a significantly longer period of time than the average tech company. In my experience, most tech companies focus on a particular product segment or a particular customer segment. And as those products become less relevant or commoditized over time, they transition to services. And that's often a successful business model. But that's not what we do. We focus on inventing, making and selling. And because we're leaders in these capabilities, which are increasingly relevant, and because we want to keep inventing things over time, I think it gives us an opportunity to grow and make meaningful contributions over a much longer period of time than I think most investors appreciate or what I feel is reflected in our multiples. And I think this year has been a great example of some proof points related to that model. You've seen us invent some big products. I think that our work on Ceramic Shield that I mentioned in the beginning, which is Apple's new cover material on the iPhone 12. Our Evolv portfolio, which is the hardened connectivity solutions for 5G and other networks. And you've seen us pivot. How we've pivoted Valor, our new glass pharmaceutical packaging solution to focus on the COVID virus, our introduction of Guardiant and our announcement that we're working with PPG to use Guardiant to make antimicrobial paints shows that we can move in response to the environment effectively and keep creating opportunities that support our customers and also benefit our shareholders over time.

Got it. Got it. So I wanted to -- you made some comments earlier about effects of the pandemic, some of the, I guess, the global macro impacts. Maybe if we could go to the segment level and think about the effects of COVID in 2020. And then perhaps as a segue to that specific update or summary, how those essentially change going to 2021, right? So key headwinds from COVID in 2020 and then potentially any of those that are being alleviated or completely reversed into 2021 and how we should expect to think about that for Corning and some of the subsegments?

Sure. We've been dealing with the pandemic since the earliest days. We were working to open a plant in Wuhan. Since that time, our top priorities have been protecting our employees and supporting our customers. And those are kind of recurrent themes throughout the year. I would say one thing that affects all the segments is that our response to COVID has added expenses in terms of buying PPE, in terms of deploying thermal sensors, building access to testing in regions that don't have health care systems that can support that. When I focus down on the segment level, I kind of think of 2 categories. The segments where our markets have been mixed and the segments where there's just been clear headwinds created pretty much uniformly by COVID. The segments where it's been mixed would be Display, Specialty Materials and Life Sciences. Where we've seen clear headwinds are in the Environmental business and in Optical Communications. Although I think that the surge in bandwidth we've seen this year definitely bodes well for Optical over the long term. Diving down a level deeper on the positive side in Display. Retail has been fairly robust this year, both for television and in the IT segment. And I think those are certainly driven by people staying home more and wanting to have good entertainment. And also work from home, which has driven their desire to upgrade their equipment to have better connectivity. What's been especially negative on the Display side is that we expected our ramp-up of Gen 10.5 facilities in Mainland China to be a positive factor for us this year. And while it's been, to some extent, from a volume contribution, it's behind our earlier plans. And it was just tough to get those plant to open, get the people in place during pandemic conditions. We think that those issues are behind us, and we expect the Gen 10.5 facilities to be a significant growth driver in 2021 as consumers continue to prefer large televisions, which are produced most economically on Gen 10.5 facilities. In Specialty Materials, we expected smartphones to be flat to slightly up globally coming into 2020. Instead, they're going to be down by a low double-digit percentage. On the other hand, the IT segment was strong for us this year. But the big message of Specialty Materials is related to a core feature of our strategy, what we call more Corning, where we look for opportunities to deliver the benefits of our capabilities into products that consumers already buy. And the example here this year is Ceramic Shield. And when we have a strong product that offers more Corning, it -- the more Corning concept just wins. In fact, year-to-date in Specialty Materials, we're up 17% versus 2019. So really strong performance in that business, and we look forward to smartphone growth in 2021. Looking at the Life Sciences segment. There have been benefits for increased demand related to test kit components, things like ELISA plates, centrifuge tubes. On the other hand, a lot of laboratories, particularly academic labs, have had restrictions on the number of people who can work in the lab or just were entirely shut down. Also in Life Sciences, I think we've really used the pandemic to engage more customers on Valor, our new glass packaging solution, and explain its benefits of accelerating their efforts and protecting the quality of their products better. So again, those are the areas where, I think, kind of our performance has been mixed. I'd look forward to growth in all of those areas again next year. Looking at the areas where the COVID and other factors in 2020 have just been a clear drag, Environmental, we sell primarily into the Automotive segment. Auto sales for this year are expected to be down 18%. And in our Optical Communications business, most of the work by operators this year has been focused on alleviating bottlenecks as opposed to broad network deployments. And we think that as we look forward to 2021, we're optimistic that those broad network deployments start and you start seeing more growth in our Optical Communications business. So overall, I think we've operated extremely well during the pandemic to achieve the results, particularly in the second half of the year, and we look forward to growth in 2021.

Got it. Corning was in the news recently for the Valor vials in conjunction with COVID-19 vaccine trials. And I think one thing that would be interesting is how is demand -- how has demand been specifically for the vials that are playing out currently just because there is chatter or, I guess, there are very, very prevalent updates in dynamics regarding the vaccine? How should you expect the actual demand for the vials in 2021 and potentially just maybe in the more near term? How should we expect that to play out?

Yes. The discussions and a lot of the media coverage has called attention to the fact that there's a worldwide shortage of pharmaceutical glass packaging. And the -- there are also constraints on the fill and cap capacity in the pharmaceutical industry as well. Valor addresses these circumstances especially effectively. The 2 main parts of the Valor value proposition are, number one, to accelerate the efforts of pharmaceutical and biotech companies. Probably the best way that it accelerates the efforts is because it increases the throughput of the fill and cap facilities. So without doing much optimization at all, we've seen 20% to 30% increase in throughput through fill and cap. If you do optimization, deploy equipment that's specially designed to work with Valor, you can get 50% and up increases, which is a big deal when you want to get drugs to consumers as rapidly as possible. The other part of Valor's value proposition is protecting quality. And it does that in a variety of ways. But one of the most important with respect to COVID is its thermal performance and it's superior to traditional glass packaging at very cold temperatures, which is obviously relevant from things people have been reading in the press. So all those are good things. I think it's caused broad engagement on Valor's benefits. I think it bodes well for our future adoption, but I really want to temper near-term expectations for several reasons. One, this is still an industry where every product that wants to use Valor has to be approved on an individual basis. Second, Operation Warp Speed, which we're honored to be a part of and received a $204 million grant to expand our capacity from, anticipates putting 10 doses in 1 vial. And third, pharmaceutical and biotech companies are conservative by nature. This isn't consumer electronics where you can have massive shifts over a short period of time. So I -- we remain on a path toward building $1 billion-plus franchise around glass packaging. But it's a longer-term process, and I wouldn't expect material sales benefits of Valor in 2021.

Got it. Got it. And I wanted to take a little bit of a segue here. Joe Biden has laid out a plan for rural America with environmental regulations and lowering emissions as key goals. And when could the Environmental segment for Corning see an uptick, if any, for an emission standard change? And then maybe just kind of a second part to this is how are you thinking about the overall opportunities as this potential administration changes things to how things looked more 4 years ago versus today? That would be very helpful for us.

Sure. Just a bit of history. This business was born in the early 1970s to meet the requirements created by the Clear Air Act (sic) [ Clean Air Act ], I believe it was 1972 in the United States. And this theme of tighter regulations leading to more opportunities for Corning has played out over the last 5 decades. And I would believe that, that will continue for the next several decades as well. So let me give you a couple of examples of regulations that might be particularly important in the United States over the next few years. First is tightening regulations around fleet fuel economy. One of the ways that a manufacturer would deliver better fuel economy is to offer greater levels of electrification. We believe that the primary mode that this will happen over the next decade is through adoption of hybrids. In fact, we, along with many third parties, believe that in the 2025 to 2030 time frame, there'll be 2 to 3 hybrids sold for every full battery electric vehicle. That's good news for our Environmental business because hybrids tend to need more sophisticated and bigger filters than go into standard internal combustion cars. The primary reason for that is the engines tend to be slightly smaller, so they're less efficient, the gas engines. And then there are numerous on off... [Technical Difficulty] Sami, can you hear us?

Yes. Jeff, you're back.