Corning Incorporated (GLW) Earnings Call Transcript & Summary

All right. Good morning, everyone. Thank you for joining us for the Corning Inc. group presentation. I'm Kevin Condon with Baird Research. Corning develops and manufactures specialty glass, ceramics and fiber for various end markets, including optical communications, consumer electronics, automotive and life sciences. We're pleased to have Corning Chief Strategy Officer, Jeff Evenson, with us today. Jeff, it's great to have you. And Jeff has a presentation on Corning. So without further ado, I will turn the floor over to Jeff. And Jeff, I think you're on mute.

Thanks, Kevin, and hello, everyone. It's a pleasure to be with you. Before I get started, a couple of introductory announcements. First, I will be making forward-looking statements. You should check out the filings on our website to see reasons why actual results may differ material -- materially from the perspectives that I provide. Also, unless I comment otherwise, I will be talking about core performance measures. With that, let's dive into what's going on at Corning. The essence of what we do at Corning is invent, make and sell. We create value by creating category-defining products, developing scalable manufacturing platforms and building strong trust-based relationships with customers who are leaders in their industries. And we consistently support all our stakeholders in the process. For 170 years, our innovations have helped move the world forward from the glass envelopes for Thomas Edison's electric light to cathode ray tubes that help put a TV in every living room to innovations in optical fiber that ushered in a new era in communications to the ceramic substrates that make catalytic converters possible and all the way to our revolutionary vials that enable drug makers to deliver COVID-19 vaccines today. As we look ahead, we actually believe our greatest contributions are yet to come, which is saying a lot given our history. Our relentless commitment to R&D and our leadership in proprietary, highly relevant capabilities allow us to evolve around changing market needs and succeed over the long term. Everything begins with our cohesive portfolio. When we combine our unparalleled expertise in glass science, ceramic science and optical physics with 4 proprietary manufacturing and engineering platforms, we create breakthrough products and processes with significant and sustainable competitive advantages. We focus our strategy on capturing synergies among our core capabilities and applying them to create disruptive innovations. We seek areas where we can have the biggest impact. And today, that is across 5 verticals, what we call our market access platforms: Optical Communications, Mobile Consumer Electronics, Display, Automotive and Life Sciences. In each of these areas, we are at the center of major industry transformations, touching many facets of daily life. We're helping our customers move toward a world with nearly infinite and ubiquitous bandwidth; a world where you can do more right from your mobile device, protected by cover materials that can withstand even greater abuse; a world with large life-like displays, one where cars are cleaner, autonomous and connected; and a world in which medicines are individualized, effective and safe. And as we partner closely with our customers to advance their industries, we unlocked new ways to integrate more of our content into their ecosystems. This is an especially powerful value creation lever in times of economic uncertainty. We aren't exclusively relying on people buying more stuff. We're driving more Corning content into the products they're already buying. Across our markets, we see this content strategy playing out. We're becoming increasingly relevant to major long-term trends that we expect to continue fueling growth over the long term. In Optical Communications, the world is moving toward nearly infinite and ubiquitous bandwidth. And we remain the only large-scale end-to-end manufacturer of optical solutions. Today, our unquestioned technology and leadership and broad customer base position us to benefit from investments into fiber-to-the-home, rural broadband, 5G and cloud computing. We believe the industry is in early innings of major capital deployments across each of these areas. New applications are driving network demand to an all-time high. In response, network and data center operators are expanding network capacity, capability and access. Additionally, governments around the world are announcing and initiating plans to extend the reach of broadband as network is increasingly viewed as a basic human right. Long term, we believe this is just the start of a massive digital transformation that integrates technology and connectivity into virtually every aspect of human life. Corning is uniquely positioned to enable this transformation. We consistently create new products and extend our leadership by delivering solutions that help our customers realize their network visions faster, better and cheaper. Importantly, this includes products supporting the unique challenges of rural deployments, which will factor heavily as we introduce broadband to underserved locations. Simultaneously, we're driving significant productivity improvements and expansions to increase our capacity and lower our cost. As we've announced, next year, we plan to open new fiber capacity in Europe and cable capacity in North America. In Mobile Consumer Electronics, our cover material innovations are helping transform the experience of smartphones, laptops, tablets and wearables. As we help our customers deliver new value to their users, we drive more of our content into each device sold. You've probably seen Apple's iPhone promotions featuring our unique cover material, Ceramic Shield, the world's first highly transparent, color-free glass ceramic. It offers unparalleled durability and toughness. The invention of Ceramic Shield drew on all 3 of our core technologies: glass and ceramic science as well as optical physics. And Apple's contribution from its advanced manufacturing fund supported our efforts into state-of-the-art processes, equipment and materials integral to the manufacturing. To date, we've received $495 million from Apple's funds. Additionally, in the most recent quarter, we expanded our capabilities into a new category, announcing Gorilla Glass DX and DX+ for mobile phone cameras. Samsung was the first adopter on 2 high-profile product launches. This is a great example of our More Corning strategy in action. We're capturing a very attractive opportunity to increase our revenue per device. And of course, both phones also feature Corning Gorilla Glass Victus, the toughest Gorilla Glass yet. Inventions such as Ceramic Shield and Gorilla Glass DX illustrate our abilities to sustain outperformance regardless of underlying markets. We've grown sales in Specialty Materials every year from 2016 to today despite smartphone units remaining roughly flat since 2016. Over that 5-year period, we've added more than $750 million in sales on a base of more than $1 billion. Turning to Automotive. OEMs are designing cleaner, safer vehicles and distinguishing themselves with technologies that enhance the driving experience. Corning is uniquely positioned to address these trends, and we're pursuing $100 per car content opportunity across our auto glass and emission solutions. We're enabling the rapid shift toward in-vehicle displays that are interactive, integrated and shaped. A great proof point is the Mercedes-Benz MBUX hyperscreen dashboard display, which features a Gorilla Glass cover nearly 5 feet wide and is a key feature of Mercedes all-new electric EQS. We also introduced a new product category: Curved Mirror Solutions. These are enabling the augmented reality head-up display at Hyundai's new electric crossover, the IONIQ 5. The system essentially turns the windshield into a display screen, letting drivers keep their eyes on the road while accessing navigation and speed information directly in their line of sight. At the same time, tighter emissions regulations continue to provide a strong content opportunity for our environmental solutions. OEMs need higher [indiscernible] performance, and we responded with a new generation of glass particulate filters. The importance of our GPF business exemplifies the value of our content strategy. We're not counting on people buying more cars. We're driving more Corning into the cars that people are already buying. Since 2017, our auto sales are up more than 40%, while global car sales are down 20%. Turning to Life Sciences. We're pursuing growth on multiple fronts with laboratory consumables, equipment for key cell culture and drug discovery and our pharmaceutical packaging portfolio. The global fight against COVID-19 has highlighted our leadership in the industry, and our solutions are in strong demand. Since mid-2020, the U.S. government has awarded Corning more than $275 million to expand domestic manufacturing capacity for many of our products supporting the pandemic response. Our portfolio of advanced vials and pharmaceutical glass tubing has enabled the delivery of more than 3 billion doses of COVID-19 vaccines globally. And we believe our efforts to address the pandemic are driving significant industry shifts. We see a future pharmaceutical packaging landscape defined by enhanced patient safety, lower costs and increased capacity for life-saving drugs. Our fifth market access platform is Display, where Corning helped create the LCD industry by inventing a process for making thin, flat and chemically optimized glass with its exceptional stability and unparalleled surface quality. Today, we're leveraging our expertise and assets to drive continued innovation, defined by higher resolution, larger screen sizes, flexible displays and new form factors. We have a large business with more than $3 billion in annual sales and strong and enduring relationships with industry leaders. We secured significant investment funding from our customers and other stakeholders, which enables us to derisk our capacity builds while delivering attractive returns for our shareholders. Meanwhile, the emergence of Gen 10.5 has created a unique opportunity. The market for large-sized TVs is projected to grow at a double-digit CAGR through 2024. Gen 10.5 enables the most efficient production of large-sized TVs, and we are the leader in this technology. So across our markets, you can see that we're addressing significant and transformational trends. This enables us to expand our total addressable markets by combining capabilities from our focused portfolio and prioritizing opportunities for more Corning. The advocacy of our strategy is evident in our performance, even in this unprecedented era. If we look back pre-pandemic comparing the third quarter of 2019 to the third quarter of this year [indiscernible], we've added almost $700 million in quarterly sales. A bit more than $200 million of this comes from Hemlock Semiconductor as we've consolidated the company's financials as part of the majority position we established in [ September ] 2020. About $450 million is organic growth with more than half of that coming from the success of our More Corning strategy, and the remainder of our organic growth coming from growing with the markets that we serve. Of course, like all companies, we are dealing with challenges associated with the pandemic and global reopening. Currently, the largest macro impact to our sales and profitability involves constraints in the automotive industry, which stems from chip and component shortages. At the start of 2021, global vehicle production was expected to be about 88 million cars. Forecast now anticipate auto production of around 75 million [indiscernible]. The good news is that when the component shortage is resolved, auto production will recover and -- as end market demand remains strong. And we will be prepared to meet the growing demand. We're also expecting a short-term reduction in demand for display glass. After a significant increase in sales in 2020 when many people were working and learning from home, panel makers are now adjusting for what we believe will be temporarily lower TV demand. We do expect the overall glass supply to remain tight and the glass pricing environment to remain attractive as we take advantage of temporarily lower demand to upgrade end-of-life tanks with the latest technology. Looking ahead to 2022, we think TV units and screen size will continue to follow historical trends, and retail glass demand will be up by a high single-digit percentage. The most important driver of demand side for us is screen size. We expect average screen size to once again grow about 1.5 inches in 2022. A 1.5-inch increase in diagonal size boost retail TV demand by about 6%, even if unit volume is flat. And next year is a World Cup year, which will typically boost sales volume. Stepping back, we prioritized delivering for our customers across our businesses in this complex inflationary environment. And we have delivered, despite incurring extra costs. And while we have been taking actions to mitigate those costs, certain costs remain unusually high. So we're taking a number of additional actions, including pricing. We remain focused on meeting demand, protecting our ability to invest for our customers and offsetting margin pressures. To sum up, I believe that Corning is operating exceptionally well on multiple fronts. Today, we're progressing strategic growth initiatives and simultaneously managing the headwinds successfully. In fact, we're on pace to reach about $14 billion in sales for 2021. It's a new high for us and nearly $2.5 billion beyond our previous best year. We're making great strides towards building a stronger, more resilient company and one that is committed to rewarding shareholders with high-return growth investments, dividend increases and opportunistic share repurchases, all while we're supporting our customers, people and communities. Long term, significant trends are converging around our capabilities. Our proprietary capabilities and inventions are vital to the progress of the world. And we feel very positive about our contributions we'll make in the years ahead and decades to come as we continue to evolve around opportunities that help move the world forward. With that, I'd be happy to take your questions. Kevin?

Great. Thanks, Jeff. So why don't we start with the Optical segment and your outlook in 2022 and maybe some of the impact from the Infrastructure Investment and Jobs Act and what that could do to the market and your business?

Sure. We expect 2022 to be a strong growth year for Corning. Our order book continues to increase. We have new capacity coming online. And the passage of the Infrastructure Bill last week contained $65 million for broadband, which we think will translate into significant infrastructure investments that are largely based on optical connectivity. So a very strong multiyear growth trends for us. Even beyond broadband, we have 5G. We have the build-out of cloud infrastructure. It's a strong demand environment. And I think the trends toward using more optical and more solutions are great for Corning.

Great. And then I think you alluded to some of this in your presentation, but just with the supply chain and material shortages, big topics right now for just about any company. But can you talk about more about the impact you felt from these year-to-date and how you're addressing them moving forward?

Sure. As I mentioned in my prepared remarks, the biggest impact on our demand, we think, is associated with chip shortages. The place that we particularly quantified that is in the Automotive segment. We think in the third quarter, that impacted our sales by about $40 million, our EPS by about $0.02. We really started to see the impact occur about halfway through the third quarter. And we expect to feel that impact throughout the fourth quarter, impacting EPS by about $0.04 to $0.05. And that gap is -- was reflected in the guidance that we gave a couple weeks ago for our quarterly results. To address those, we have -- we went from mitigation efforts that were tactical at the segment level, and we've elevated that to be a corporate effort that includes a comprehensive look at opportunities to increase price as well as strategies to improve our supply chain. We expect to see even more benefits from those efforts in the fourth quarter and especially in the first half of 2022. So the drag that we saw in the second and third quarter of about 150 basis points on gross margin, we're expecting to reduce in the coming quarters.

So it sounds like some of the challenges with auto production remain. Do you have any expectation of when that could improve or maybe as we look out more into 2022, just how that affects your business?

We're -- we serve a small part of the auto industry that we are looking at a lot of comments, not only from our customers but third-party forecasting firms on it. Our current expectation is that first half of 2022 demand environment looks a lot like the second half of 2021. And we are hoping for an increase in the second half of the year, but we're -- we were prepared to deliver for our customers whenever that increase comes.

Great. So maybe shifting over to the Display business. Speaking specifically to pricing in Q4 in 2022, what type of actions have you taken there? And are you fully caught up given cost increases and inflation?

Yes. The big thing to look at, in our opinion, for pricing in the glass industry is the supply-demand balance between glass demand and panel production. We believe that, that has been very, very tight throughout 2021 and will continue to be tight for the foreseeable future. Right now, panel makers are reducing utilization. We believe that's appropriate given production levels that we've seen and retail demand dropping this year. We expect utilization to increase in the first half of 2022 at some point. We are using the reduction in demand for us to upgrade some of our tanks to the latest technology. We've been operating tanks beyond end of life. When we upgrade them to the latest technology, that significantly improves the economics of our production. We'll bring them back online as demand ramps up. With respect to near-term pricing, after price increases in both the second and third quarters, we expect pricing to be consistent in the fourth quarter. And we expect the overall demand -- the overall environment for pricing at the LCD glass level to be attractive in 2022 and for the foreseeable future.

Great. And so I think handheld devices, tablets, notebook, those type of devices all increased in 2021. How does that translate to demand for your glass products and some of the products you have in that segment?

Yes. There are 2 drivers of our sales in Mobile Consumer Electronics. The biggest driver is the value that we've been able to create for consumers and our customers by enhancing the performance of our products. Gorilla Glass Victus, Ceramic Shield are examples of major step -- steps forward in the durability of our products. And in exchange for creating more value, we share in some of the benefits with higher prices for those materials. We also extend our reach to other parts of the handset. The most -- one of the most exciting areas that we've done that recently is entering into the camera optics for smartphones in the middle of this year. You're seeing that on 2 Samsung handsets to start with. What we're doing there is we're creating a composite material, Gorilla Glass DX, that delivers the drop performance and break advantages of Gorilla Glass. And then we build on top of that with materials to enhance the optics. So it transmits more light than Gorilla Glass, significantly more light than sapphire and has scratch resistance that's similar to sapphire. So a big step forward on that. We're excited about taking that other places and moving beyond the watch and cameras that we've done to date. So those are examples of how we grow the value we create per handset. Then there's also just the number of handsets that are sold. When that goes up, obviously, that's good for us. But as I described over the last 5 years, handsets have been approximately flat. We've increased our revenue by about $750 million off a $1 billion base. So both drivers are important to us over time.

Great. Then I wanted to ask about your Valor and Life Sciences business, maybe some of the key products and key innovations there. And then the impact that the pandemic and the related COVID vaccine rollout has had on that business, maybe a kind of pre- and post-pandemic look at what that business is.

Yes. It's an example of how we can combine our capabilities to deliver new products. As investors know, we've been working on starting with research on new glass formulations for the pharmaceutical industry about a decade ago when the FDA put out an advisory identifying problems with existing glass packages. The industry -- the pharmaceutical industry has spent a significant amount of money trying to address those problems. We estimate that for every dollar spent on vials, 3x that is spent -- spending on -- spending to make sure that issues with those vials don't enter the supply chain or a patient. Our approach is different. We started with the formulation of the glass. We understood at a basic scientific level what was going on with the issues in legacy vials. We have designed a complete package that has multiple components that delivers what we think is the state-of-the-art vial for the world today. That is called Valor. That's the product that we have been producing in a significant way for a few vendors for COVID-19 vaccines. It's really driven the ramp-up of our technology and the vast majority of our efforts in 2021. We're very excited that we've begun ramping our high-volume manufacturing capacity in North Carolina. In fact, we doubled our output over the last quarter of those vials. So there's more to come. I think the pandemic has impacted us on Valor packaging by kind of jump-starting the commercialization. We've put it in customers' hand. They've experienced all the benefits. One of the biggest benefits to them in a supply-constrained environment is that a Valor vial is significantly faster to [ build ] in terms of throughput than a legacy vial, and that benefit could potentially apply anywhere that you use Valor or its underlying technology components. And we have some new opportunities we're considering for making Valor technology available in different ways that we think will significantly expand our market. So more to come on Valor, but the commercial progress has been great this year. And its impact has been felt by many of us and probably most of the people on this call directly.

Great. So then I just wanted to ask about capital allocation, specifically buyback activity, what the kind of philosophy is there versus other investments, investments in capacity and other uses of that capital?

Yes. Our most important capital allocation in terms of creating value is for investments in organic growth. And we do those through our R&D investments, and we also pursue attractive capital investments. Right now, we are not in a build cycle. We are adding capacity but in selected areas. I talked about what we're doing in Optical Communications. We're obviously adding capacity for Valor. So at these levels, we are able to add capacity, but it's at a much lower level of capital intensity than we were at a few years ago. At this level and even at the level we were a few years ago, our cash flow generation allows us to also consistently reward shareholders. Over the last [ 2 ] years, we've increased our dividend on average 10% each year. Dividend increases are obviously up to the Board of Directors, but it's our Board's intent to continuing growing dividends at a very attractive rate for the foreseeable future. We also pursue opportunistic share buybacks. And when we think about the opportunity, we think about multiple factors. It's what other investments that we have in front of us, what the risk environment is in the world, where our share price is. During much of the pandemic, we chose to conserve our cash to maintain flexibility. We've enhanced our debt-to-equity ratios a little bit to address that risk. But we are generating cash flow at a significant rate that we felt very comfortable reinitiating our share repurchases this year. We bought back shares on the open market in the third quarter. We plan to do that at a little bit higher rate in the fourth quarter, and we'll continue factoring those areas into our decisions going forward. But I think investors can count on us both to increase our dividends and buy back shares at a consistent rate over a several quarter period.

Great. Well, that does bring us to time for the session. Thank you, Jeff, so much for joining us, and thanks to everyone on the line. We hope you have a great rest of your conference. Thank you.

Thanks very much, Kevin. Take care. Thanks, everyone. Bye.