Corning Incorporated (GLW) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and welcome to the fireside chat with Corning Incorporated. [Operator Instructions] It is now my pleasure to turn the floor over to your host, Mehdi Hosseini. Sir, the floor is yours.

Thank you, Matthew. And I want to welcome to our fireside chat. With the team from Corning, we have Doug Harshbarger and Ann Nicholson. And the format of the fireside chat is that the Corning team will make introductory statement, and then Doug and I will go through a set of questions and topics as part of our chat by the fireside. And if we have time towards the end, we'll open it up to any questions from the floor. If you feel more comfortable e-mailing your question, please send me your questions to [email protected]. So with that, I want to thank the Corning team for taking the time out of your busy schedule. Very excited at the opportunities. I think Display is becoming very interesting. And we were fortunate to have a display sector within our tenth technology conference. And I think it's great to dig into opportunities specifically in auto applications. So with that, I'll pass that mic to you, to you guys, for your introductory statement. And then we open it up to the fireside chat.

Thanks, Mehdi. Just letting the audience know, this is Ann Nicholson in Investor Relations, and I'm really happy that we've got Doug Harshbarger here with us today, he's Division Vice President of Automotive Futures. And he's going to spend a few minutes just telling us what he's been up to and what exciting things are happening. Thanks, Doug.

Thanks, Ann. Thanks, Mehdi. Actually, I wish we were in front of a fireplace right now. It's still kind of cold up here and snow on the ground in Corning, New York. But I'm still happy to be here, and maybe we can do the fireside thing in person some time in the future. Maybe what I'll start with, just some opening remarks. My role at Corning -- one of my roles at Corning is how to assess major industry trends that are evolving and how they might affect us, particularly in auto. Recently, we focused on what a lot of people refer to as the CASE trends, which include connectivity, autonomy, shared mobility and electrification. And every year around this time, we roll out our updated view and interpretation of the impact. My purpose here today is to share some of our observations on how we see these trends affecting us. But I'll kick things off first with a little overview of our progress in auto. So we've previously provided a framework of our auto opportunity in 3 categories: Emissions, Auto Glass Solutions and other technical glass opportunities. Together, we think these things let us address an opportunity of about $100 a car. The first category around emissions is built on our base catalytic converter substrate business that historically delivers about $15 of content on an ICE or a hybrid vehicle. An extension of this is our new gas particulate filter business, which is driven by new particulate pollution regulations in Europe and China primarily. This technology increases our content opportunity by about $30 to at least 3x what it is today. Demand for our GPF has grown quickly, and our market-leading product, we continue to win the majority of platforms awarded to date, which has enabled us to have year-over-year sales growth in spite of lower auto sales due to COVID. So we're actually a little bit ahead of schedule, and the content opportunity continues to grow as we expect our GPF to migrate further as other regions begin focusing on improving air quality. In Auto Glass Solutions, the second area, our advantaged technologies are enabling a very rapid shift towards in-vehicle displays, primarily those that are interactive, integrated and shaped. We see this category opening up another about $25 a car. Today, in AGS, we're collaborating with industry leaders across the automotive ecosystem, including some of the company's you've talked with, Mehdi, like VIA optronics, but also Visteon, LG Electronics, BOE and many others. And we work with many of them focused on our patented 3D ColdForm technology. This is a technology that enables lower-cost shaped auto interior displays. We support this from our large-scale facility in Hefei, China, which is now fully operational and serving our growing demand. We continue to see strong adoption of the technology by OEMs. One recent proof point came at Virtual CES this year, where Mercedes-Benz' Hyperscreen was revealed. So this is a multifunctional display that spans from one door side to the other door side of the car, about 5 feet wide, and has many new features and is covered by Gorilla Glass, which helps enable it for this automotive application. So the last area of opportunity we talked about, which is the other technical glasses, we think, is at least around $30 a car. And these are the areas that are most aligned with what's evolving in the CASE trends. So I'm going to talk about those as I also transition to talk a little bit about what we're seeing on the various trends. And I'll begin with connectivity. So this is by far the most advanced of the trends we're tracking. We see network connectivity for data to and from the car increasing rapidly. It's evident in what's happening in the car platforms themselves, where from 2019 cars with built-in modems moved from about 1/3 of those sold annually to about 1/2 of those sold annually. More interestingly, though, is the very first cars with built-in 5G modems hit the market in 2020. So we see this trend supporting several content opportunities for Corning, including technical glass for displays, which I talked about already, but also high-bandwidth systems, which can use optical fiber. And of course, outside of the car itself, the densification and what we like to call glassification of the mobile network to support 5G. Same thing is true for edge data centers, which also will be used to support the connected vehicle. On autonomy, this is an area that's still attracting huge R&D investment and is very dynamic. Advanced driver assistance systems, like what's referred to as SAE Level 2, are now approaching 50% of the market. Like connectivity, they were about 1/3 last -- in 2019 and about 1/2 in 2020. And there are also limited self-driving systems, like Teslas, which are in the market but at very small share. And also full self-driving vehicles, like Waymos, which are in small trials in limited geographies in various places around the world. What we observe, as the level of autonomy or capability moves from these simpler systems to the more complex ones, the need for additional sensors, additional computing, additional connectivity and greater in-vehicle bandwidth also grows. This supports additional content opportunities that I already talked about in the connectivity section, but also for technical glass and sensors like LiDARs and cameras. The third trend we often talk about is shared mobility. And in 2020, it was a real obstacle for that industry in general, but that really doesn't change things too much for Corning. We've always believed that this was going to be a relatively small fraction of total vehicle miles traveled well into the future. And therefore, it's not an area of focus for us, at least at this time. The last one, and the one we always get a lot of questions about, is electrification. So we've been involved in clean transportation since the 1970s when the Clean Air Act kicked off our CET business. Today, it's hard to miss the increasing activity in vehicle electrification that's driven by even tighter global emissions regulations. In fact, in 2020, battery electric vehicles increased from about 2% to about 3% of the market, while hybrids moved from about 6% to about 13% of the market. So we see the evolution to a greater share of vehicles being electrified, but we also see the overall growth in the automotive market. And so these 2 things combined caused the amount of ICE, or internal combustion engine, vehicles and hybrid vehicles to remain about the same in total volume over the decade. And if you consider the fact that these tighter and tighter emissions, regulations and the hybridization of vehicles, which also require better emission systems together, we believe that we'll see more content per car and our opportunity in emissions will actually grow to about twice of what it has been historically. So in summary, we think the evolution of auto technology is a tailwind for Corning. We're excited about all the opportunities we see developing and believe they will play out in a positive way for decades. So with that as background, I'd be happy to answer any questions you may have.

Great, Doug. This is very informative. And thanks for making it very objective, like in a sense, where you are breaking opportunities into 3 buckets. If I just go to the first bucket. How should I think about the hybrid -- opportunities in the hybrid car and kind of -- isn't that somewhat against the electric vehicle that is captured in the third bucket? How can I reconcile it, too? Because if opportunities in electrification, electric vehicle, were to happen, would that be incremental to hybrid? Or is there a chance that it would -- actually hybrid would be less of a contribution? Am I clear?

I think so. So let me start by how we kind of think of the competitive landscape between fully internal combustion engine vehicles, hybrid vehicles and fully electric vehicles. So the thing that's driving all of those right now are regulations which require lower emissions. And there are a lot of different ways you can get to lower emissions. You can have internal combustion engines that are more efficient. You can have hybrids which avoid the internal combustion engine, the large amount of emissions that it makes. Or you can have fully electric vehicles which have no tailpipe emissions. We think each of those have a role to play as time goes on. In the near term, it's very clear, though, that the additional expense of batteries and the -- some limitations that they have, like around range and charging infrastructure, will keep the BEV fraction of the market fairly small for a while to come. And that's also why so many automakers have filled their new product pipelines with hybrid vehicles because they solve some of the problem, but they also are offering fewer of the compromises you have to make with EVs. We do think over the long term, battery costs can come down and EVs will become more compelling and there will be many, many models available so people can find one that they like. But in the relatively near term, and by that, I mean the next decade, we see hybrids remaining a really significant and important part of the mix. And we also believe that these vehicles have tougher emissions requirements or put more strain on the emission system, so they do offer an opportunity for additional Corning content. That's all happening at the same time as the particulate emissions regulations are playing out as well. And those regulations absolutely require more content. That's why our GPF business is growing so rapidly right now. So like I said, I think we're well positioned. We understand what's happening in the market. Of course, it's going to play out over a decade, no one knows for sure exactly what will happen. But we make assumptions that are optimistic for EVs, and we still see a great opportunity for Corning over the next 10 years.

I actually like your approach because you're not assuming that one type of a car or auto would fit everyone. And maybe in Northern California, where I'm based, a lot of people drive Tesla or electric vehicle, but there are other parts of country where a hybrid model would be more applicable. So in that context, I like the fact that how you're diverse. You're not just depending on one growth driver or one type of a car. Would that be fair to say?

It is, actually. And maybe coming back around to moving off the emissions topic for a little bit and moving into some of the other technologies that we have, one interesting and a little bit of a surprising outcome is that the ability to introduce new content on your car, take for instance, our interior display cover glass business from Auto Glass Solutions. It's much easier to introduce new content like that when you design a new platform from the ground up. So when you take a clean sheet of what the interior is going to look like and you build some really new cool and interesting functionality, which is what happened with the Mercedes-Benz MBUX platform. When you do that, you will -- we -- what we've seen is a much higher likelihood to be using these large displays with more form, more function, more capability, more size and ultimately more glass. And so as we see all of the announcements of all of these new EV platforms that automakers are making, it's basically accelerating the new model availability, which allows there to be an acceleration of things like the display applications that we're serving through AGS. And so you can't say that electrification is causing more displays inside the car, but what you can say is it's accelerating the adoption of them because of the cool features they already have, and there's more opportunity for new models. That make sense?

Great. Now move -- absolutely. Yes, completely. And then in that context, and just taking what you just said and extending it, I'm looking at the second bucket, interior center stack. A couple of follow-ups. Are you assuming that the underlying display technology is -- would need to change? In other words, we would need to have kind of an OLED display to make it more flexible? Or is that based on existing technology? Or does it even make a difference to you to generate $25 of revenue opportunity?

I think it doesn't matter that much to us. Obviously, our technology works with either display technology and the -- there are several -- many examples out there in the market using traditional display technology, and there are even some out there using OLED technology right now. The thing -- one thing that OLED does that is pretty cool is that it can be made flexible. And I think we've talked before about our technology we call 3D ColdForm. So that's kind of the first -- that's maybe the first level of value in having a flexible cover glass. Because what we do there is we take a flat piece of glass, we do all of the work to turn it into a part that's used for covers, which includes ion exchanging it and decorating it and adding the technical surfaces to it and making it into the shape that you need. We do that all with a flat piece of glass, which is inherently a lower-cost approach to doing that work. And then we ship to the display maker, the Tier 1 or Tier 2 who we're working with, a flat piece of glass. So even that's easier to do than the alternative if you want a 3D shape, which is to hot-form the glass permanently into that shape. And so then they build it into their model -- into their module using our 3D ColdForming technology. And so the nice and interesting thing about OLEDs is that the display itself can be made flexible. So you could conceivably put a curved display behind a curved cover glass and get a really unique and interesting shape. And we feel certain that the designers who are pushing the boundaries of auto interiors, to make them more interactive and more immersive, will be doing that going forward. So we think there's some synergy with OLEDs, but it's certainly a great opportunity for us with standard traditional displays.

Sure. And how much of the $25 opportunity is driven by Gorilla content?

Well, I think the right way to think about that is we entered the market with our Auto Glass Solutions with a -- with something called an auto-grade glass, which is based on Gorilla Glass technology. And so our baseline products are all using Gorilla Glass technology. But if you're actually talking about maybe a question Ann would take, which is if you look at the -- how we break down our Gorilla Glass business, the one that we talked publicly about, I'll let her answer how we fit that into the auto opportunity.

Yes. But I think, Mehdi, the $25 that Doug mentioned is our...

Our auto opportunity. It has nothing to do with the consumer electronics part.

Okay, okay. That's great. That's incremental. And maybe as a follow-up, and just to keep Ann involved. Would you eventually break Gorilla? Or would you -- should we assume that the interior center opportunity would be added to the auto segment of your revenue breakdown?

So in terms of where the sales -- where you would see the sales is going to be in the Other segment.

Okay, okay. Until it's significant enough?

Yes, yes.

Okay. Got it. And then, Doug, let's move on to the third bucket, which is really exciting because it's a true conversion. Essentially, a car becomes -- or interior of the car becomes a big iPad, and all the connectivities and antennas that you can embed will provide or would enable the interior of a car to become a big iPad. Am I thinking about this the right way?

We're -- I got to say we're super excited about the opportunity that comes with these trends like connectivity and autonomy. And it's not unreasonable to think about the interior of a car offering a lot of the same things to passengers that our mobile phones and other things do to us as we walk around. But they will require all of this technical content to enable that. And so that means things like high-bandwidth networks inside the car and 5G connectivity to and from the car and technical glass for sensors and technical glass for displays like we talked about already. All those things come along with the -- what we sometimes refer to as the digitalization of the car. And so it's a really cool opportunity, and your analogy with the big iPad isn't way off from the way we're thinking about it.

Sure. And then I have some kind of a technical follow-up. Is optical bonding a key technical obstacle that you need to overcome? Because if there is this convergence, then the question is how -- what enables the convergence? And is optical bonding the key technology or methodology to do this?

Yes. I think maybe the first comment is it's very true that the automotive use case is different than the consumer electronics use case. So you have temperature extremes and humidity extremes and exposure to sunlight and all of these different things that make the physical part of building new technologies into a car more challenging than some other markets. . The good news here, though, is that the technologies for optical bonding are fairly well known. We and others in the industry have been working with them for many, many years. And we work very closely with our Tier 1 and Tier 2 counterparts to make sure that we both agree that the, say, the formulations of the adhesives or the mechanism for doing the optical bonding will work for the application. And so we don't see this as a barrier to adoption, but it's something you have to be careful about. And you might imagine, with the technology like our 3D ColdForm, where we ship something flat, and then we work with our Tier 1 or Tier 2 customer to turn it into the 3D shape, it becomes even more important. So that's why we pay particular attention to that. We make sure that we do a technology transfer of the right formulas for the adhesives and the right processes to use them so it ends up with something being really reliable. So it's something you got to pay attention to. But like I said, we don't see it as a barrier.

Sure. Got it. And then is there any feature in this bucket of future innovation that would help reduce power consumption? Because -- and I say that because this bucket is targeting like an electric vehicle. There is a lot of activity, R&D activity on the battery side. But is there anything that you can do? Is there anything in this bucket that helps reduce the power consumption that could have a ripple effect on the battery?

I think the way -- so I think the way I think about it, at least, is that if you look at the 2 different industries, maybe 3, that are contributing to the car, all of them are constantly working on reducing power consumption of what they do. So start with displays. Display makers are constantly trying to make their sets thinner and consume less power. Take telecommunications, people working with data centers, always trying to make them use less power. And so the automotive industry is the same way. I worked for quite a while on glasses for cars that were intended to reduce weight which also thereby reduce the power consumption. So I think the natural trend for all of these industries is to constantly work to reduce power, and we do contribute some technologies that help make that happen. I don't think that displays inside the car are a large fraction of the power consumption even in an EV. And so while these are important things to do, I don't think the power consumption of the display is a limiting factor right now for bringing new and larger displays into the vehicle, but it is something that I think progress will happen and glasses that have lower loss, glasses that allow greater clarity, high brightness, backlights, OLEDs, all of these things that some of our technologies help enable will continue the constant march of improvement in the power consumption.

Got it. Okay. And then moving on, just thinking broadly. And -- well, actually, before I get to the communication. Over the past -- it's my understanding, over the past couple of years, you have been working with companies that are intermediary. You may be doing R&D directly with Mercedes, but there are other intermediary companies that are in the supply chain. How is that coming? And is Corning at the point where the supply chain is ready, and now we're going from a discovery phase to production phase? Is that the right way to think about this?

Well, first off, as far as Corning is concerned, we've built a high-volume factory in Hefei, China that's in large-scale production today. And so our end of this puzzle is not production-limited. But you're absolutely right to note that, if we think of ourselves as the beginning of this chain, we have to work through Tier 1s and Tier 2s to get eventually the display into the vehicle. The good news from our side is that many of these companies are already long-term partners of Corning. Display makers and automotive Tier 1s are companies that we've been dealing with either in our display or our automotive market access platform for years, and we've worked closely with them for quite some time to make the supply chain ready. So I also don't think the supply chain is a limiting -- or supply chain technical capability is a limiting factor for adoption of this technology. Does that answer your question?

Yes, absolutely. Yes. Stepping outside of this targeted area now, focusing on emerging innovation. We were fortunate to host a fireside chat with View, a company that has been around for 10, 12 years, but now that they're publicly traded, perhaps they're getting some media attention. And they basically -- the ultimate goal is to change a commercial window into display or commercialize a transparent display, something that, many years ago, we would see some illustration at display conferences, and it was always perceived as futuristic and would never materialize. Now you have actually a company that's prototyping and is trying to commercialize. Is there anything that you can share with us? Is there anything that you can add, where we are in the evolution and commercialization of transparent displays?

So I think maybe this at least initially isn't an automotive application, more like an architectural application. So maybe I'll let Ann comment on that first.

Yes. Yes, so we still have programs kind of across all of these potential applications around Display, including architecture. So it's one that we still look as our role is to be able to provide a technical glass that can help advance in that industry. And it kind of falls in the same category of why we talk about our EAGLE XG glass and the ability to write TFTs and have 4K and 8K displays. It's all about the substrate. So we look to be able to do that in different applications, whether it's transparent or smart windows or super large displays. So we don't have anything more specifically to talk about today, but it is definitely an area that we still are interested in. There's a lot of glass in architecture.

Sure. Yes. Okay. All right. So we have reached the time limit. And do you mind if I go to the floor, see if there's any question before we wrap it up?

Yes, go ahead.

Okay. Matthew, can you please see if there's any question?

Certainly. [Operator Instructions] There are no questions in the queue at this time.

Okay. Well, Doug and Ann, thank you so much for opportunity. I am genuinely excited about these emerging growth area. And I think, basically, convergence is taking a different form and shape, and now we're seeing convergence in auto. And it's going to be very exciting. So I'm glad and thankful grateful for opportunity of hosting this call, and I wish you a great rest of the day. And hopefully, we get to see you in person sooner than later. And for investors on the call, if there is any follow-up, please feel free to shoot me an e-mail. Thanks, everyone. And Matthew, you can close this.

Certainly. Thank you, ladies and gentlemen. This does conclude today's conference call. You may disconnect your phone lines at this time, and have a wonderful day. Thank you for your participation.