Corning Incorporated (GLW) Earnings Call Transcript & Summary

Good morning, everyone. Thank you for joining me today. My name is Jay Huang. I'm the industrial technology analyst at Bernstein. Together with me today is Corning's Chairman and CEO, Wendell Weeks; and EVP and CFO, Tony Tripeny; and also, Head of IR, Ann Nicholson. Today, we are going to have a fireside chat. Before that, we're going to -- Wendell will give us a brief introduction of the company with some slides. Just as a reminder to investors joining the call today, there is a live Q&A function on the right side of your viewing screen. Please use that path to submit your questions. There are already some good questions there. If you see any of those and you want to vote for it, we will prioritize it. With that, I will pass the mic to Wendell. Thank you for joining us today, Wendell.

Well, thanks for having me, and good morning, everyone. Before we get started, please remember that my statements will contain forward-looking expectations because they would be boring without those. And that actual results may differ in a material way. Also, we'll be discussing results using core performance measures. So in April, we reported a really strong start to what we expect will be an outstanding year. For the first quarter, all 5 of our segments delivered double-digit sales and net income growth year-over-year. And relative to pre-pandemic levels, sales increased 14% versus the first quarter of 2019. For the second quarter, we're on track to meet the sales and EPS estimates that we provided during our April call. We expect sales of $3.3 billion to $3.5 billion and EPS in the range of $0.49 to $0.53, which is approximately double our EPS in the second quarter of 2020 and up by double-digit percentage from 2019. For the full year, we anticipate generating significantly more free cash flow in 2021 than in 2020 and overall expect our momentum to continue. As a result, we increased the quarterly dividend per share by 9% in February and resumed share buybacks in April by repurchasing 35 million shares from Samsung. In addition to our strong financial performance, we've advanced commercialization efforts for multiple innovations. And let me share some highlights from all of our different market access platforms. In Mobile Consumer Electronics, Apple awarded Corning another $45 million from its Advanced Manufacturing Fund. Over the last 4 years, we've received $495 million in total from Apple's fund. The new investment will help us expand manufacturing capacity in the United States. It will also support our research and development into innovative new technologies. And our ongoing collaboration with Apple builds on both companies' deep commitment to protecting the environment. In Display, we just hosted the official opening ceremony for our Gen 10.5 facility in the city of Wuhan. This site is co-located with a large BOE plant, allowing Corning to deliver Gen 10.5 glass substrates directly to our customer for its production of large-sized display panels. The market for large-sized TVs is projected to grow at a double-digit CAGR through 2024. And Gen 10.5 glass provides the most economical approach for larger sets. Gen 10.5 also provides strong economics for our shareholders. We obtained about $3 out of every $4 in capital from others, and we received long-term supply agreements. Additionally, our fusion assets are fungible across multiple businesses. We create options to use earlier generation fusion tanks for new applications, including automotive and cover glass. For example, we launched our Gorilla Glass business by repurposing our fusion assets, avoiding more than $1 billion in capital spending. In Life Sciences, we're helping the industry meet demand during this critical juncture when every dose of the COVID vaccine counts. Recently, we work with Thermo Fisher and Optima Pharma to identify solutions that increase vial filling capacity up to 70%. This is critical because that is a bottleneck in the production of the COVID vaccine. Our collaboration features a combination of Corning's Valor vials and Optima's ultra high-speed fill and finish solutions. Thermo Fisher called the results a game changer. In automotive, we're helping customers design cleaner and safer vehicles. This year, we're advancing commercialization efforts for a new generation of gasoline particulate filters. And we continue making progress commercializing our automotive glass innovations. Our advantage glass solutions enable the rapid shift towards in-vehicle displays that are interactive, that are integrated and shaped. A recent proof point is the new Mercedes-Benz hyper screen dashboard display, which features a Gorilla Glass cover nearly 5 feet wide. Auto Glass is another great example of how we achieve greater capital efficiency through repurposing and reusing our assets since we're applying the glass for tanks to produce this product that we built originally for our display business. Finally, we're energized by the outlook for our optical business. We gauge the market by 3 key indicators. First is network need. And we can see that demand on the network has only been increasing and that people are deciding; second, to build on that network, and they're being very public about it. Our customers are articulating that they're going to build in 3 key areas: a 5G, fiber-to-the-home and hyperscale data centers. As they make those encouraging announcements on capital investment in each of those areas, we take that positively in our view of both near and long-term demand. Additionally, governments that shape policy around the world are beginning to assert that true broadband access is a basic right. This could have the government enter more directly to subsidize harder to serve areas and create yet another additional stimulus for our demand. The third indicator we watch is our order book, perhaps the most important, and we're seeing both orders and sales increase. We remain the unquestioned technology and market leader in optical communications. We're driving significant productivity improvements to increase capacity and lower our cost. And we consistently create new products that extend our lead by delivering solutions that help our customers realize that their network vision is faster, better and cheaper. Along these lines, we're launching some exciting new innovations designed to drive the industry forward. And I look forward to updating you on these announcements in the near future. Now given Bernstein's tradition of taking the long view, I'd like to just spend a few minutes on our model for ongoing value creation. Our long-term strategy is built on a complementary set of 3 core technical capabilities and our 4 proprietary manufacturing and engineering platforms. We are leaders in each. And the synergies among them allow us to create distinctive benefits for our customers, improve the return on our innovation investment and reduce our capital intensity. We prioritize opportunities for more Corning. In other words, opportunities that increase the value we deliver to customers through new combinations and applications of our leadership capabilities, creating a purpose engineered glass for the auto industry or inventing ceramic shield for Apple are great examples. These opportunities typically increase our total addressable market and strengthen our relationships with industry leaders in each of our 5 market access platforms. Our more Corning strategy also provides a mechanism to sustain outperformance across up and down markets because we're not simply counting on consumers buying more stuff. We're counting on them, getting more Corning content in the products that they are already buying. Consider specialty materials as a great illustration of this. We have grown sales every year from 2016 to today despite smartphone unit sales being roughly flat or down each year. Over that 5-year period, we've added more than $750 million in sales on a base of about $1 billion. Stepping back, our model has helped us lead in optical communications for 5 decades. It's why our cover glass has been featured on more than 7 billion mobile devices worldwide since the launch of Gorilla Glass. It's why we've steadily increased our competitive advantage in display glass over the last 35 years. And it's how we're extending 50 years of automotive leadership to keep winning in the newest category of emissions control, and it's why top pharmaceutical and biotech companies are turning to us for their production and protection needs. Looking ahead, we believe we will continue to develop category-defining products that transform industries and enhance lives. The long view is that we're moving towards a world with nearly infinite and ubiquitous bandwidth with large life-like displays, where cars are autonomous and connected and where medicines are individualized, effective and safe. Across our market access platforms, we're doing our part to make that world happen. And now I'd be happy to take any questions that you may have.

Thank you very much, Wendell, for the presentation. [Operator Instructions] Wendell, you mentioned some very exciting new opportunities in your presentation. When you think about the next 1 to 3 years, which of those opportunities do you think will start to make more revenue contributions to Corning?

We're really expecting strong revenue growth across all of our market access platforms. The strongest, I think, is -- all depends on what you mean, right? In terms of percentage growth rate, it's always easier to grow a smaller business faster than a larger. But we're entering into this long period of sustained growth, driven by secular and technical demand where you see in each of our segments, these strong drivers that are moving our customers' products more towards our core technologies, more towards our advantage, manufacturing and engineering platforms, and actually, more towards a higher technical content, which really plays towards our strength. And so I think our -- as we look at it, we probably have more growth opportunities than we can pursue. So for us, it's all about focusing that portfolio, and delivering on the most significant innovation opportunities.

Okay. Sounds good. So if we think of slightly longer term, even more than 3 years, we know invention is always fundamental to Corning's long-term strategy. What are some of the R&D priorities right now and that could lead to maybe new businesses more than 3 years from now?

Great. So we start with where are we solving the most significant problems of where industries will there be the most change. So in automotive, for instance, automotive is into a period of where it's going to change more or over the next 10 years than it has over the last 15. And so there is an area where we have multiple technical platforms aimed at helping transform the driving experience to make it cleaner, to make it more connected, to make it safer. And we have opportunities that basically increase our opportunity in automotive by an order of magnitude. Where for any given vehicle, and we're seeing it now actually in certain vehicles, where we can generate up to $100 a car of revenue, up from just a few years ago, when it was about $15. So there's one area that's really significant. Another area would be in optical communications primarily because the world's biggest networks are wireless networks. And what's happened technically with 5G is that in the move between those technologies, between 4G and 5G, you need about 100x more fiber to deliver a true 5G experience. So into a network that's been relatively fiber-poor wireless that turns it into a very fiber-rich sort of fiber-to-the-home type of network, we're going to see that continue to drive as strongly. There's other areas, but the only -- the last one I'm going to name is in Life Sciences because of 2 major trends. One will be the trend towards cell and gene therapy, where our -- some of our unique technologies and our position there allows us to significantly increase our content. And then, of course, as we see the importance of pharmaceutical package during this time period, we see that only continuing. In that business, longer term, we expect to be a very significant franchise, billion-dollar-plus franchise. So that's just a few examples. It all comes down to the core story, which is we're not counting on people just buying more stuff. It's just we're putting way more Corning content into products that people already consume.

Understood. And that's clear. One of the slide you just showed, there are the 5 market platforms you want to leverage. Do you think in the long term, there will be a sixth one? If there could be a sixth one, who do you think that could be?

It's a really good question. We focus 80% of our resources and opportunities that use 2 out of those 3 big columns, core technologies, our manufacturing engineering platforms or the market access platforms. And that's because it increases the probability of success and enhances the returns on innovation. But we do pursue opportunities that will use our core technologies and one of our existing manufacturing and engineering platforms to -- that could lead to us creating a new segment over time. It's hard to judge at this moment which of those will be successful. Once again, going back to human need, an area where we continue to work is how do we combat climate change more directly with our product sets, it's something we've done in air before with all of our different emissions treatment products. And so this is an area that continues to get our focus that if we could come up with some significant innovations that can make a difference in either architecture, could make a difference in direct carbon capture, could make a significant difference in the carbon footprint of our customers, that -- those are areas, I think, that have the most long-term opportunity for us.

Okay. Understood. And you described a lot of great things, great new opportunities for Corning. I think it will also help us to understand Corning's scope by understanding what you choose not to do within glass. Glass is a very, very broad market. Where do you choose to focus? How do you make that decision? What type of glass product Corning choose not to enter into? And help us frame that, please.

So I think about it in sort of 3 levels what we choose in our portfolio. First is, how does it fit within our 3-4-5 Strategy? Does it use our 3 core technologies, our 4 manufacturing, engineering platforms or our 5 market access platforms? 80% of our efforts is going to go into ones that use 2 out of those 3. And so what you'll see a lot of times is a lot of commodity uses of glass that we don't participate in, they just don't use those. In architectural glass, traditional architectural glass, you don't see the need for deep optical physics or advantaged manufacturing and engineering platforms using fusion ore. So as a result, these aren't areas that we have invested in because they don't fit well with that 3 or 4 or 5. Second is, I'm very fond of Warren Buffett's quote that, "You don't pay for the castle, you pay for the moat." So we don't go into businesses where we don't see a clear path where we're going to be not only the technical leader, but also be the lowest cost producer by double-digit percentages and that are protected by intellectual property of one form or another. And so that also becomes quite limiting. When you say that you're going to have that type of extreme advantages, that takes you out to sort of need-to products, need-to processes. And it means that we build bespoke equipment. We have deep focused knowledge in an area. And then the final thing is it's sort of not enough for a product or a business just to be stand-alone good. It also has to reinforce our other segments. The other elements of our portfolio, either we can bring other elements of our technology to those customers or we can basically bring the technologies we use for those customers to other customers in another segment. So really, those 3 things are how we sort through it. And the best news is we have to do that a lot because there's a lot of opportunity set. And we'll still take 20% of our resources. We'll still do things that our people are passionate about because you have to do that. And that's -- sometimes out of that 20% will come some really great ideas. And great products, great ideas beat strategy every day of the week.

Okay. That's clear. So on growth, another question, I think, a lot of investors are interesting in is, I think, some of the key segments your target is to achieve at least 2x the industry growth rate. And we understand that Corning already had very high market share in a lot of things you do. So what would provide you the 2x growth rate versus underlying industry?

It really just comes down to more content. So I think a good way to understand this is in Mobile Consumer Electronics where we started with one side of your phone, relatively small was our innovations around Gorilla Glass. And now fast forward, and you're looking at larger pieces on both sides, new materials at a much higher value add. So that our customers are willing to pay more because it makes the product so much better. So we've done a number of major innovations. And now you see us entering new ways to do camera lenses, you've seen new coatings come into play. And you start to see us increasingly attack some of the content inside the phone. And what's happening is our customers, we have a deep understanding of where it is they're going and where they need us to make a big difference. And so that same story really carries out in each of the segments. And it always creates value for our customers. It reduces -- tends to reduce their cost or improve their performance a lot. But they end up being able to afford to pay us more because it creates so much value for them. And therefore, just more of the chip sort of move to our side, despite markets that aren't necessarily growing robustly.

Understood. Can I say that when you say 2x underlying industry growth, you're comparing -- in this example, you're comparing to the smartphone growth? And if you compare Corning's growth versus the glass content within smartphone, then that's in line. But because the cost glass itself is...

So I mean, when we say twice, what we tend to think about is what is the growth rate sort of in our direct market. So it will be in optical communications. Can we grow twice the rate of the optical communications market? So it's a pretty direct comparison. It's literally saying that we're capturing more value than our competitors in that space, be they indirect competitors or direct.

Okay. Understood. Let's dig a little bit deeper into some of the important end industries, maybe starting from automotive. What do you think would be the net impact of the electrical vehicle on the glass content per car? Obviously, there are things that use more glass, but there is also probably less use of Corning products in the power trend. So what's the net impact on EV?

Net impact on BEV should be positive revenue growth for Corning for a number of technical reasons. First is, as you'll notice in BEV, there, the fundamental problems that you're trying to solve shift. So now here I am in a cabin, and let's combine 2 things. Let's combine economy and BEV. They both tend to be leaders in the same space. So now what are my problems? So the problem I've got to solve in that cabin is weight becomes even more important, right? And so our ability to light weight that cabin becomes really important. Displays, you'll notice in like every BEV you see is like way more display space, this creates our opportunity for interior automotive glass. Now let's move to autonomy. Once you move to autonomy, you need a pretty significant sensor package. Because different people believe different things, whether or not you can just rely on camera or whether you also need LIDAR, radar, et cetera. I tend to be a member of the second camp, I believe to have to autonomy, we're going to need multiple sensing packages. In each of those areas, there is Corning content availability. So when we look at it, and we can tell also from our direct engagements with our customers, our biggest poll on new tech tends to be with the major folks trying to do BEV and autonomy. And that's what's keeping us really, really busy. We believe that gasoline ICE engines will continue to play a really significant role going forward for quite a long time, but they'll need to be cleaner, too. And since they need to be cleaner and they need to be more efficient, they'll tend to use more of our emissions control content. But overall, we look at the balance, so we're going to -- we ought to be able to double in automotive, and we look forward to more of a change because change creates opportunity for us. So that move to a platform sort of breaks up the traditional commodity industry, gives new technical problems that allows us to lean in and once again, build a really big moat.

That's helpful. I think Corning has mentioned several times that you aim for a $100 per car opportunity. Is that for BEV or for ICE or hybrid? How do we think about this $100 opportunity?

Well, it would be for both. It would be sort of for a given vehicle because so much of it can drive from the glass content as well. But of course, it's way easier if you're already starting with using $40 of content from us because you're in a region that has environmental control regulations that insist on gas particulate filter. But we have $100 per vehicle examples like in production that are full BEV as well.

Okay. Can you help us break down the $100 opportunity per car into the different parts of the car?

Great. So for the 2 businesses that you see us generating revenue for today, which is automotive glass and environmental, both of those -- and automotive glass is an interior business today, primarily, right? Both of those will have sort of similar revenue per vehicle opportunities. So when the 2 come together, that's when you quickly get to the very high content. But then as well, we also have these opportunity sets in exterior as well as all the sensor packages. And that also has sort of been equal to one of those size. So in total, we take a look at it, say, the total opportunity set can take you well above $100 a vehicle. But then what we're aiming at is it will be some combination of technologies that get taken up that will allow us to significantly increase our opportunity per vehicle.

Okay. That's helpful. The next theme I want to probe a little bit more is related to 5G. That obviously impacts both the network business and also the handset. On the network side, I think, you already mentioned earlier in this call, there could be 100x more optical fibers when we switch from 4G to 5G. How do you think about investment time horizon for those fibers? When we'll see like a major lift of the glass content, glass demand from those optical fiber deployment?

Well, you're starting to see it right now. So it's sitting right in our numbers today. And I think the great news is these are big civil works projects. It is going to take many years of investment by our customers to build out the 5G network. Many, many years. And that's good because it means we have a nice, long tail on this demand. The key has been at getting started. It is starting. And then what we're seeing is a real sort of change in mindset, which is, if I'm going to put in new network, which is what they're doing, then they say, well, yes, my impetus to put this in is 5G, but if I'm going to build it, what I should probably also do is figure out how many other revenue opportunities can I put on the tip of that fiber. And because fiber is so inexpensive relative to the civil works build, this is leading them to put high-fiber count cables in and to also build their business plans around direct connections of fiber to businesses, direct connections of fiber-to-the-home to instead think of the network not like they have historically, which is I've got wireless and wireline, but now I'm really going to build very efficient networks that allow me to serve my customers in whatever form they want. And this will tie ultimately to things like edge compute and a lot of other very significant opportunities that they have. And now when you listen to our customers talk about it, you'll hear them start to articulate it that way. You'll hear them say that their investment in their network, their investment in fiber is one of their top returns that they can do. And it's because it enables so many different revenue streams, and it's such a big advantage to actually have network that you own in the ground.

Understood. On this other side, for the smartphones, you already said in the past the glass content increased when the form factor change, material change. Look ahead, what are some of the other drivers that might lead to even more glass content?

Say that again, Jay. I'm sorry, I didn't understand [ half of that ].