Corning Incorporated (GLW) Earnings Call Transcript & Summary

Hello, everybody. Tim Long here at Barclays along with Peter Zdebski and my team. We welcome you to the fireside chat with Corning. We're happy to have Tony Tripeny, CFO. Many of you know, with us, he's a longtime veteran at Corning. So we're really looking forward to his insights. Before we get into the Q&A, I'm going to throw it over to Tony. He's got a few comments to begin with, and then we'll start the Q&A session.

Well, thanks, Tim. It's great to be here. Just as a reminder, the statements made in the course of my presentation today may contain forward-looking information, and the actual results may differ materially from what we are presenting today. Here we are in December at the end of the year. I normally look forward to the Barclays conference because it's a good opportunity to see investors one more time and, of course, lots of good meals in San Francisco, but here we are virtually. But I do think it's important to reflect back on how the year went as you're thinking about the year ahead of us, although I certainly hope that some of the aspects of 2020 will never repeat themselves. But seriously, I'd like to share with you what we told the Board at our meeting last week regarding our 2020 performance and strategic position. And here's the first paragraph of that letter. During 2020, we faced and overcame numerous challenges. We effectively protected our employees from the earliest days 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 market access platform structure and promoting the 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 ceramic shield and a new suite of connectivity products driven by 5G deployment requirements. We coupled these achievements with the strong execution to deliver attractive financial results in the third and fourth quarter. And you do see that strong performance reflected in the press release we had last week stating that we expect fourth quarter sales to be up 5% to 8% sequentially and for operating margins to grow at approximately double the rate of sales. So as I step back as CFO, I think the relevance of our capabilities in our focused portfolio and strength of our relationships with the industry leaders are creating new opportunities for us to deliver Corning content. Our performance this year demonstrates the strength of our portfolio and our ability to execute even in a very challenging environment. So with that, Tim, I'm happy to take some questions.

Great. Appreciate it. It's nice to almost be considered a Board member for a minute there, getting to hear that. Yes. So maybe we'll start with some of the segment views. If we want -- I want to start on the display front. So maybe 2 vectors here. First, on the demand front, can you talk a little bit about -- I know it's been kind of a choppy, crazy year, but some of the verticals did see some pretty good work from home or being home dynamic. So if you can touch on that side of it for display and sustainability. And then just would love your view. It's been a while now that this whole supply chain, Korea to China, has been going on. So can you kind of give us your assessment how that's transpired? What that's meant for your business? And what does that mean as we head into 2021 and beyond?

Sure. I mean, first, starting on the end market standpoint, which is, of course, at the end of the day, what really drives our business. I'd say, overall, it's been a pretty strong end market. I think starting with -- from a TV sales standpoint, I mean TV sales around the world have been really strong on a year-over-year basis. In particular, that's true in North America and in Europe. Not so true in China, but in the places where the stay at home has been much longer served than in China, the sales have been strong. And then in addition to that, of course, that the -- what people have been buying as they focused on more in-home entertainment is larger TVs. The year-over-year growth year-to-date in TVs greater than 65 inches is over 40%. And of course, as a glass maker, that really matters to us, and it especially matters because that's what we have built those Gen 10.5 factories for and is really going to help us from a long-term standpoint. I think in addition to that, you saw for the first time in a while where both notebooks and tablets have grown on a year-over-year basis. And while that's a smaller part of our overall glass market, it clearly has been part of what's happened in this market. And it is part of the reason why, from an overall standpoint, demand has been good. And, in fact, the -- things have been relatively tight in the supply chain really since the second quarter. And that really fits into what we saw in Korea. The idea that there'll be a shift from Korea to China, it was not a surprise to us. But it was a little bit of a surprise to us that it is happening faster than what we had originally projected as the pandemic came on. But I think it's important to note that it's actually happening slower than what everybody thought in April when the Korean panel makers made their announcements. And the reason for that all has to do with the panel maker utilization and the strong market that's been there. Value chain inventory has been tight. Panel makers have postponed their previously announced capacity shutdowns to maintain the panel supply. So you're really going to see this more over the next several quarters. And what -- at the end of the day, what really matters is what is in the in-demand standpoint. And that, we feel very good about and, again, especially since the move is really to these Gen 10.5 factories. And as a reminder, not only did we get other people's money to invest in those factories, but on top of that, we have 3 out 4 of those factories in China. So that's good for us from a long-term standpoint.

Okay. Yes. I think you just stole my follow-up there. So as far as -- when we think about market share after this transition, does that -- having 3 out of 4, does that make you feel better about overall glass market share in the display area?

Yes. I think from a standpoint that, clearly, one of those panel makers in Korea was a big customer of ours, and so that is a bit of a negative. But having 3 out of the 4 of where the market is going is -- more than offsets that from a positive standpoint.

Okay. And then, Tony, maybe moving to optical communications. We've seen a nice stabilization in the carrier business over the last 2 quarters after some weakness that began in 2H '19. And I'm realizing that it's always a lumpy business and tough to predict. But could you maybe comment on any visibility you're seeing in when we might see a return to growth in carrier investments for fiber densification and those sorts of upgrades?

Sure, Peter. I mean I think the really good news here is that network traffic is at an all-time high, and that is what is eventually going to drive investments in the networks. There's lots of data out there. Upstream traffic is -- in the U.S. is up 37%. VPN use, Verizon noted, was up 72%. Lots of peak network traffic. I think Nokia had some data that said it was up 25% to 30% versus pre-COVID. And of course, those are averages. I mean I think everybody knows there are places where there's really been a pinch from a network standpoint. That being said, there were COVID-related factors that have hampered carriers' abilities to invest in the networks. But there's no doubt that from a longer-term standpoint, we'd expect demand for our products to be driven by increasing bandwidth demand, consumer preference for more capable access, deployment of 5G and shift to the cloud. And so right now, I think most of those carriers are making additional investments to reestablish kind of the network headroom that they've lost or capacity that has -- not that they've lost, they've consumed since COVID began. The issue always is, what quarter is that going to show up. But I suspect that as we go throughout next year, we're going to start seeing some of that investment happening.

Got it. That's great. And then I guess the same question or more or less the same question on the enterprise side. In your estimation, at what point -- how much headroom do we have in the -- on the data center front? And what are you seeing in terms of investments there?

Yes. So I think that's almost a carbon copy answer to the carriers. In the places in the enterprise segment that are cloud-related and hyperscale data center related, I mean they have consumed a ton of their headroom. You've got data like -- I think Microsoft Teams had a record which is up 4x versus what it had been previously in one given day. I mean there's just -- I mean the -- hardly a week goes by where you don't see something like that. And so there is -- just like there is in the carriers, a great deal of focus on working on that capacity plans constrained by a variety of things that are COVID-related. But that's an area where the investments are definitely taking off and, again, you'll see those in 2021. There's other parts of the enterprise network that's not so great, small and medium businesses, real estate and the like, I mean some of those areas. Even some of the corporate spending, as people have adjusted, has been -- hasn't been as strong. But for sure, the hyperscale data center and cloud computing has been pretty strong.

Probably less fiber consumed in those weaker areas, though, but...

Yes. I mean those businesses, which, historically, are not big growth businesses, but those have definitely been constrained.

Right. And then maybe could you just give us an update and perhaps just a refresher for investors who may not be familiar about some of the competitive dynamics to consider in the optical market and how you see Corning's position?

Sure. I think from an overall standpoint, we're very well positioned in the marketplace, especially in North America and in Western Europe. And what we see is a lot of opportunity that is really going to be driven by the long-term expansions of the networks to keep up with this demand along with what's happening from a 5G standpoint. 5G expansion is a really good -- already happening, but a very good longer-term opportunity for us. As they build 5G networks where they have 3G and 4G today, that's going to require a lot greater density from a coverage standpoint, which is just a lot of densification from a fiber standpoint. And as a reminder, in a city, it can be up to 100x more fiber than a 4G network. And then we've got great relationships with the key carriers that are building those networks. And we're in a really key position to take advantage of that partly because of those relationships, but also partly because of our technologies. We just introduced a suite of products, Corning Evolv products, which are hardened connectivity solutions with Pushlok technologies. And we did that with 5G deployments in mind, but it also provides benefits at hyperscale data center customers and fiber to the home. It makes it easier to install, reduces the cost of insulation and, in particular, really speeds up those installations. And in addition to that, we have a whole suite of fiber and cable products which are really designed to maximize the networks in both 5G and hyperscale data center opportunities. So I mean we're very well positioned. We're really the only full line solutions supplier and that's going to make -- I think going to really help us drive more Corning into the network over the next decade.

Great. Well, hopefully, we'll see more of those customer announcements soon.

I totally agree.

Tony -- yes. Tony, maybe we could shift gears a little bit. It's probably been much more topical for you guys over the last 6 months, but life sciences, obviously, with COVID, there's been a lot more focus on health care and vaccines and whatnot. So can you talk a little bit about kind of the Corning position and what this has done for the time line of Valor glass or just the overall strength of that life sciences business?

Sure. I think let me first start with our overall life sciences business, and I'll talk about Valor in a second. This is -- clearly has had an impact from the life sciences business standpoint. On the one hand, a lot of our products get sold into research laboratories. And as the country in both in North America and in Europe went to work-from-home requirements, that did reduce our business for a short period of time, and you did see some of that -- those results in the second quarter. But it really -- that part of the business really picked up in the third quarter as people went back into their laboratories and continued to do the research. But additionally, the pandemic has -- we have really driven to make sure that we're able to support the issues that are out there from a pandemic standpoint. A lot of COVID testing flows, workflows, particularly on the collection and processing of diagnostic test samples, we have a lot of products that go into that. A lot of our consumables have increased as there's been more work done in that area. We also have some single-use consumables that can be used in development of the vaccines. And so from an overall standpoint, that part of the business has been under high demand. And while we did have in the third quarter a bit of an issue with a new distribution center, which was hard to bring up during the pandemic, we'd expect very significant growth in the fourth quarter all really driven by that. From a COVID standpoint, there is -- or I mean from a Valor standpoint, there clearly is a shortage of glass packaging and vaccine fill and cap capacity around the world. And we have really moved all our energy to make sure that we are focused in that area. There's a lot of benefits from a -- both a quality standpoint and a fill capacity standpoint from -- with Valor. We're working with 3 -- we've announced publicly that we're working with 3 vaccine manufacturers. And they just -- I mean we have pivoted our efforts as a business to make sure that we are doing as much as we can to get those vaccines out as fast as possible. I mean that's a good thing from a world standpoint. It's something that we're very proud to participate in. Purely from a financial standpoint, I think you have to remember that the way these vaccines are going to work is going to be 10 doses per vial, and that's because of the vial shortage there. So any numbers that investors have in their heads about the size of this, they need to divide by 10. So from a pure financial standpoint, this isn't going to be a big number in 2021, but the impact that will have on the world, of course, will be very significant. And it does move the whole adoption of Valor forward. So something, Tim, you and I have talked about in the past is to think about the Valor opportunity as being towards the very tail end of the 2020 to 2023 time frame, maybe even early in the next period, that definitely gets moved up some. But the real impact it's going to have in 2021 is the impact it's going to have on the world, less on our financial performance.

Okay. That's probably more important.

Yes. Amen.

And Tony, moving to specialty materials. You've seen some incredible traction in Gorilla Glass with driving content growth at your lead customer. Could you maybe comment on where you see opportunities outside of that customer, whether it's in other parts of the smartphone market or IT or tablets, that sort of thing?

Yes. Peter, the real driver in this business is increasing content on devices. And we've had great success on that over the last 5 years as we continue to invent and develop new cover materials and better versions of more Corning, which has really allowed us to well outperform the market. I mean over the last 4 years, we've grown every single year. And cumulatively, we've grown sales by 40% over that period of time, even though the smartphone market was down in each of those years. So I mean that kind of gives you a real sense of how we create value here and how the more Corning story really works out. The other thing to keep in mind is that while we did talk a lot in the September call or the October call about ceramic shields and the introduction at Apple, in the July call, we talked about Gorilla Glass Victus, which was another new-to-the-world glass, with really great performance, better than any other Gorilla Glass and/or any other competitive manufacturer from a drop-and-scratch performance standpoint. And so that, clearly, Samsung has introduced products with that. We have other customers that are working with that. And so that is, again, a great example of how we work with other customers to deliver success there. And then I think the final thing I would say is that both from a laptop and a tablet standpoint, just like in the display market, in this business, I mean that has been historically a pretty steady, maybe even declining business. In case of tablets, that has changed. And there's lots of innovations that we are -- that we have that we're also focused in those areas. And then, of course, wearables is another place where our innovations on Gorilla Glass DX and DX+ really play well, some of the antireflective and really good scratch performance, and we're seeing success there, too.

We all enjoy those innovations. So...

Yes. Yes. No. They're really great.

All right. Tony, maybe we'll just -- we'll close it out here and touch on kind of environmental and auto. Obviously, the auto market has been one of the more up and down ones out there. And you got a number of different plays in auto, including the auto glass. So could you kind of walk us through the dynamics and what you're seeing on that front?

Yes. For sure. You're right, this has been like an incredibly crazy year from an auto market standpoint. In North America and Europe, of course, we've seen a very significant decline as COVID first happened and a very dramatic recovery. Although still on a year-over-year basis, the sales are down in those regions. In China, the same dramatic recovery, actually shorter period of time. And the good news there is, actually, sales are up on a year-over-year basis in China. And of course, this is where our more Corning story really plays out with gas particulate filters. And it is why we're performing much better than the market, and in China, in particular, where our high precision and gas particulate filters has really helped from a growth standpoint. As we look out from an environmental technologies business, we think continuing regulations both in terms of -- that drive gas particulate filters, but also on hybrid vehicles, anything that improves fuel efficiency, drives towards more hybrid vehicles really is a place where you need more specialized filters, and that's where we really shine. And so we would expect the more Corning opportunity to continue to grow. And then even in our heavy-duty diesel business in China, regulations are coming into effect and we're beginning to service those, and that will also drive some growth. And then in the auto glass standpoint, on the one hand, during some of the slowdown in the automotive business, some of those programs got put a little bit on hold. But we do expect to grow that business on a year-over-year basis, and we remain well positioned. And we actually think that having some of the more attractive auto interiors is going to continue to be very important from an automaker standpoint. So we continue to have a very strong backlog there and would expect sales to grow there, too. So we think in both areas, in a market that will be up and down a little bit, we're going to be able to grow faster than that because of the Corning content.

Okay. Great. I think we're running light on time, but maybe just a quick one, if we could, on kind of the margin outlook. Obviously, you guys had to make some moves to protect margins. So how do we think about both gross and operating margin as we emerge from this crazy time?

Well, clearly, we adjusted rapidly to this environment and we saw strong performance, in particular, from an operating margin standpoint in the third quarter. I think that's the right place to look at, is on operating margin. Gross margin tends to be impacted a little bit too much by business mix in any given period of time. A lot of those actions were longer-term restructuring actions, and those benefits will continue. Some of them were temporary compensation actions, and of course, those change as we come out of the pandemic. But you've seen really strong operating margin performance, very nice sequential improvement in the third quarter, but even year-over-year improvement in the third quarter. And then in the fourth quarter, as part of our announcement last week, we thought -- we believe that our sequential operating margin performance is going to be more -- be around double what that sales increase is. As we look into 2021, clearly, even though we bring back some of those operating expenses, our objective is to grow that operating expense at about half the rate of sales increase growth. And so with that, we would expect in 2021 our operating margins to -- dollars to be better.

Okay. Great. Great. I think we ran over by 1 minute or 2, but it was really a great content there.

Okay.

We appreciate it. Enjoy the rest of the day. Thank you, everybody, for joining and stay safe.

All right. Thanks, everyone.