Corning Incorporated (GLW) Earnings Call Transcript & Summary

Welcome back to the TMT conference. Thank you for joining us. I have the pleasure of hosting Tony Tripeny, the CFO of Corning. [Audio Gap] back.

Good to see you, Rod. It's great to be back, and I appreciate you hosting us.

Yes, virtually anyway. It would be nice to see you in person, but...

Yes. The dinner isn't as good as we had last year, but what can you do?

That's right. So I guess I'll just jump into questions if you don't mind, Tony, or if you wanted to make a couple of opening comments, feel free. But otherwise, I'll start asking you some questions.

I just had a couple of opening comments. I mean first of all, a reminder, I may -- I'm going to make forward-looking statements, but we closed out the year. We were very pleased with how things ended up. We had a strong fourth quarter, growing sales and earnings year-over-year in every one of our businesses. We expect that momentum to grow again, to continue into 2021. We talked about first quarter guidance a couple of weeks ago with sales in the $3 billion to $3.2 billion range, which is 20% to 30% year-over-year growth and EPS of $0.40 to $0.44. And the nice thing is, and I know we'll get into the details, but you see it in every one of our market access platforms. So we feel good about that. From an overall standpoint for the year, we'd expect to grow sales, expect to grow earnings and expect to grow free cash flow. And hopefully, you also saw that we increased the dividend last week by $0.02.

Yes. Okay. Good summary. So let's start off with something that's kind of indirectly related to Corning but directly related to the whole supply chain and the technology landscape. And that is the semiconductor supply impacts. So we see a lot of semiconductor supply shortages being talked about. We have a lot of companies here at the conference that are talking about these shortages lasting all the way into the end of the year. You'll know what's going on with auto production. But that's -- it's starting to affect a lot of different end markets. So just curious if you think that this has the risk of knocking on into your own business? Or do you think it isn't such a big deal for Corning?

Yes. Obviously, we're hearing about it on a regular basis, both from reading it in the news but then also some of our customers talking about it from a problems issue standpoint. And what we're doing is working very closely with those customers and in our supply chain to make sure that we're meeting whatever demand they have. So will it inevitably have a little bit of an impact? I mean it's always hard to judge, but I don't think we see it as a really big thing.

Does it -- I guess, the flip side of it, does it give you any more visibility into the future? Because for gated by semiconductor supply, they clearly get more visibility. I don't know how you would feel about it driving visibility longer term? I mean long term, meaning 2 or 3 quarters.

Yes. I think from the area where we see the biggest impact, of course, is on -- is in the automotive industry. They run their factories at certain levels, and we already have pretty good visibility into that. And what really drives that over time, of course, is car sales. So maybe it gives us a little bit of visibility -- more visibility, but it's not that big a deal. And of course, as this time goes on, if it increases the demand for semiconductor equipment, of course, that's very good for our specialty materials business and the EUV products, which grew a lot last year, and we expect them to grow this year, too.

Okay. Well, let's talk about display pricing a little bit. We continued to ask you guys whether it could ever go up in display glass and certainly reset really well here at the beginning of the year, substantially better than historical norms. You're talking about flat panel price or flat glass pricing in Q1. And so I guess my question is, do we now expect a normal kind of seasonal track now that we've reset due to some supply shortages out there? Or how does that glass pricing flow through the year now?

Yes. I mean, clearly, what we're seeing right now is very tight supply and demand. It was tight in Q3 and Q4. It actually went into shortage with an issue at one of our competitors, and there's been an issue at another one of the competitors. And that probably makes the shortage go on even a little bit longer than that. And so in the first quarter, we'd expect flat pricing, and there are even some cases where pricing may actually go up. And we'd expect that shortage, tight demand to continue for the upcoming quarters. And how that actually will play out exactly, I mean, it's hard to say. But I mean it's all very good from a pricing standpoint.

I know on this, you -- at least our perception is, usually, you'll reset pricing in the first part of the year, but you build into the contracts some reduction of pricing through the year. Is that still likely to be the case? Or is the supply shortage changing the nature of those agreements as they go -- as they flow through the year?

Well, as you know, I mean those agreements are really based on what's happening in the marketplace from a market pricing standpoint. And so in a marketplace where things are tight, you'd expect that the market pricing would reflect that.

Okay. All right. So let's talk about Gen 10.5 a little bit. You're ramping them. They were a little bit slower to ramp. I think COVID slowed down the ramp of some of the production at those new facilities. Corning's got disproportionately large market share in these. So should we be expecting that your glass market share grows as a result -- as the Gen 10.5 plants ramp up?

Yes. I mean I think the short answer to that is yes. I mean, clearly, what really is driving a lot of growth in the display industry and especially in the glass market are these large-sized TVs with 7 -- over 75-inch TVs growing more than 60%. We'd expect another year of around 1.5 inches of growth. We talk about the -- which -- Gen 10.5 are really ideal for manufacturing TVs of that size. And we do have 2 additional factories that are ramping up, and there's 4 factories. In China, we have 3 of them. So yes, you would expect that to be positive for us.

Can you help us understand just quantitatively how much faster than market growth you might be able to grow as a result of that? Or anything you could do to kind of put us in a ballpark of what growth ought to look like relative to the market would be helpful.

Yes. I mean I think what -- all we've been saying is that we'd expect to grow a little bit faster. What really matters in this market is what happens at retail. And we've got a very good robust retail environment right now. And as we look out, we'd expect that to continue. We've done a number of consumer studies trying to assess people who bought TVs. Were they pulling them in from the future? Or was that really reflection of ongoing demand as people do more entertaining at home, stay at home, do education at home, work from home. We believe mostly that is all incremental demand. So we feel good about from a demand standpoint. And of course, with the whole supply chain being tight, if there was a little bit of extra opportunity, you'd fill up the inventory. So I mean I think we feel pretty well positioned in the display business. Add that to the pricing dynamics, and I think overall, there are really good dynamics in display.

Yes. The other thing we've been tracking is the housing dynamic. Housing numbers are really strong, and we see this migration from cities to suburbs. And TV seems like an obvious thing you buy and maybe more of them as you move into a bigger house out in the suburbs. And I'm curious, do you guys -- did you check that in your surveys? Or would that be in addition to the survey responses that you got from consumers?

I think that would -- that very specific thing would actually be an addition there. I mean you'd obviously see that in the retail information in North America. But our survey focus was really on this question of is the fundamental drivers of what's causing people to buy TV is different or is it just buying them a little bit early. And then we're doing another survey actually right now. And so I suspect in the -- in our April call, it'll either be ready in the April call or the July call. I'm not exactly sure when all the data will be together, but part of our planning process this year.

Do you think you'll -- I know you disclosed the -- kind of the color output of that survey. Do you think you might disclose some of the data a little bit more as time progresses if you're doing these regularly?

We hadn't really thought about that. We'd have to think about it from a competitive standpoint and the like. But we'll -- I'll take that as an action item.

Interesting data, that's for sure. All right. Let's talk about optical a little bit. In market, looks like it ought to improve a lot this year. The C-band auctions were extremely successful. That's an understatement. And usually, when carriers pay that much for spectrum, they want to deploy it. So I would think that, that leads to, if anything, accelerating small-cell deployments. We've got 5G. There's a lot going on. Can you just talk a little bit about the key areas to watch to kind of gauge the speed of recovery of that market? Are there any particular data points we ought to be looking at or particular developments?

No. I mean I think you've really hit on it. I mean we would agree with you, we'd expect optical to grow this year. And there are a lot of positive customer statements about it. There's a lot of plans in terms of what they are saying with respect to spending. You saw it in the fourth quarter. I mean I think the carrier market was up 6%, and the enterprise market was up 13% on a year-over-year basis or at least that was how our sales grew. So we think there's lots of positives there. I mean, for sure, there are things like transceiver shipments and megawatts deployed that we pay attention to in the data centers and home passed and outdoor radio shipments for carriers and commercial construction on -- in building wireless. I mean those are all the things that we pay attention to. I also pay attention to the order rates, obviously, and those order rates have been strong. I mean that gives us -- bolsters our confidence it will be a year of growth in optical.

I know you and I, we've talked about optical supply shortages potentially out in the future. Do you think this is a year we might see that?

I mean, in a big, huge business like this, there's always possibilities in one place or another you might see a little bit of that. But I'd say, generally speaking, we've put a lot of capacity in place to be able to meet the demand, especially the most expensive pieces of the build capacity around the fiber and the like. So there's always the possibility there may be -- that may happen here or there. But we think, overall, I mean, this is the strong demand we had been expecting, and COVID kind of slowed it down a bit, but it also sped up the need for it at the same time.

All right. Let's talk environmental a little bit, then we kind of touched on the auto industry situation. But I wonder if you could talk a little bit about what you think is going on from a regulatory point of view. We know the GPF stuff in China, but maybe an update on that. And also, do you think that eventually stimulus programs in the U.S. might drive a more rapid shift toward electrification or maybe a push toward hybrids? Or just maybe an update on what you're thinking on the regulatory environment and how that affects environmental?

Yes. I mean, for sure, the regulatory environment is a big driver of that business, and the regulations came into full effect last month in China. So we'd expect -- the growth that we saw that has got our GPF business growing faster than our original expectations of getting that to $0.5 billion worth of sales, we'd expect that to continue. I think in the North America market, the push to electrification, we still believe for every BEV car sold, there's going to be 2 or 3 hybrid cars. And that's really good for our business because it has a lot more content of our products. You think about all the start-stop, that's when a lot of pollution were to occur. And so that from a standpoint, we think, is a positive longer-term trend. And then, of course, any regulations that have happened in Europe and in China that we've moved to the U.S. around particulate matter and regulating that and given all the health dangers around those lines, of course, that would be a longer-term driver of the business. I mean those kind of things, though, as you know, Rod -- I mean the regulations don't sneak up on you. So we'd have notice on that, but I'd say we feel good about that. And then you add on to the nonenvironmental side of the business, the auto glass business, which we're getting nice traction on, especially on the interiors of cars, the Mercedes-Benz introduction last month. But just in general, the -- we're making progress there. And I think what you and I have always talked about is that when we get on that $100 million run rate is when we'll come out and talk more about that. And hopefully, that will be soon.

Okay. Great. On that auto glass opportunity, you talked about $100 per car. Is there any breakdown you give us for that? How do you break down the $100? What components are we -- are we just talking about display glass? Or...

Yes. So the $100 per car is for all of our products. And it started when we first rolled that out, we were selling $10 to $15 worth of content, mostly in the environmental business. GPF gives it the opportunity to get to $45. The interior, center stack on average, we think about it as $25, although clearly a 5-foot piece of glass like the Mercedes-Benz has would have a different ASP than that. But then I mean, on average, we think that's the opportunity. And the remaining $30 comes from things we've talked about like exterior glass but also lighting, sensors, other areas that we've been spending time on that we haven't talked about as much. But I think in the near term, the interior, center stack and our ColdForm technology and the like is around $25 a car. So more than a car that doesn't have a GPF but less than a car that does have a GPF.

Okay. I got 2 follow-ups on that. One is you said hopefully soon $100 million. Like how soon? This year, next couple of quarters, when might that happen?

All of that would be great. I mean we're not predicting that. All I'm saying as we get that business up to a stronger run rate, then, of course, we'll spend more time on that.

Okay. And then the $25 in the center stack, how conservative is that? It seems like there ought to be a move toward more and more glass. But I -- maybe could you contextualize that in terms of what we would see in an actual product? Are we just talking -- what do we see for $25? And how does something like a Tesla relate to that? Is it similar to what we'd see in like a Model Y or a Model 3? Or is that more than $25? Not asking you to comment on Tesla specifically, but generally in terms of glass volume.

Yes. I think what normally happens in these kind of adoptions is the early adopters' higher end is, of course, more expensive. And then as you go to get it adopted across the board, and I think when we talk about $25, we're talking about at some point in the future where this is more widely adopted than the early adopters.