Corning Incorporated (GLW) Earnings Call Transcript & Summary

Okay. Thank you, everyone. I'm Sami Badri, Credit Suisse. Right now, we're going to kick start with Corning, and we have Jeff Evenson, EVP and CSO of Corning. And Jeff, I'll let you get started, and then we can jump into some questions.

Great. Thanks, Sami, and welcome, everyone. It's great to be with you in person today, and welcome to all of you on our webcast as well. Just a reminder, I will be making forward-looking statements, and you should check out our filings on our website to see reasons why actual results may differ materially from the perspectives that I provide today. Also, we're going to be discussing our results in terms of core performance measures. Now the essence of what we do at Corning is invent, make and sell. We create value by inventing category-defining products, developing scalable manufacturing platforms and building strong, trust-based relationships with customers who are leaders in their industries. Everything begins with our portfolio. Our long-term strategy is built on a complementary set of 3 technical capabilities and 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 that use combinations of our capabilities and enhance the experience for [indiscernible] consumers are already buying. We call these more Corning opportunities because they drive more of our content into our markets. We focus our efforts in areas where we can have the biggest impact. Currently, that is across 5 verticals, what we call our market access platforms: optical communications, display, mobile consumer electronics, automotive and life sciences. Today, I'd like to spend some time highlighting opportunities in 3 of those areas: Optical Communications, which we believe presents significant growth opportunities and has excellent visibility at the moment; Display, which we have grown since 2017, despite a difficult market environment; and Life Sciences, where we're advancing some exciting growth initiatives. In Optical Communications. Our technology leadership and broad customer base position us to benefit from investments in fiber-to-the-home, [ rural ] broadband, 5G and cloud computing. We believe the industry is in the 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 plans to extend the reach of broadband as network access is increasingly viewed as a basic human right. In the United States, the Federal Communications Commission has authorized more than $1 billion to winning bidders of the Rural Digital Opportunity Fund, with the acting commission Chairwoman recently saying, "Broadband is an essential service." Importantly, many of the winning bidders have publicly stated their commitments to predominantly fiber-based architectures. And a few weeks ago, Congress passed an infrastructure bill allocating $65 billion in spending for broadband infrastructure, including $42.5 billion for new network builds. The bill, which includes a Buy America provision, creates a multibillion-dollar market opportunity for us as our customers tell us that they will overwhelmingly choose fiber to build out these networks. Although the bill outlines a 4-year deployment beginning in 2023, it could take longer because of high overlays with current fiber-to-the-home premise projects. Over the deployment period, we expect to build to increase our addressable market by about $4 billion in total. Corning is uniquely positioned to rise to this historic challenge. We're the only large-scale end-to-end manufacturer of optical solutions, and we're working closely with more industry players at regional and national levels. We have the right products, the right customer access and the right investments. In 2022, we plan to open new fiber capacity in Europe and expand cable capacity in North America. And we recently introduced innovations to help customers speed deployments and lower costs. The newest additions to our Evolv portfolio provide enhanced fiber deployment, flexibility and are especially well suited for rural deployments, while our Everon millimeter wavelength indoor small cell system delivers 5G-ready coverage in high-density environments. Turning to Display. We're leveraging our expertise and assets to provide -- drive higher resolution, larger screen sizes and new form factors, including flexible displays. We have a large business with more than $3 billion in annual sales and strong and enduring relationships with industry leaders. We secure significant investment funding from our customers and other stakeholders, which enables us to derisk our capacity builds while delivering attractive returns. Meanwhile, the emergence of Gen 10.5 has created a unique opportunity. The market for large-sized televisions is projected to grow at a double-digit rate through 2024. Gen 10.5 enables the most efficient production of large-sized televisions, and we are the leader in this technology. Currently, we are expecting a short-term reduction in demand for display glass. After a significant increase in TV sales in 2020, when many people were staying at home, panel makers are now adjusting for what we believe will be temporarily lower TV demand. We expect the oral glass supply, however, 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. And looking to 2022, where TV units and screen size will continue to follow historical endearing retail glass demand will be up. The most important driver of retail glass growth for us is screen size. We expect average screen size to once, again, grow by 1.5 inches in 2022. A 1.5-inch increase in diagonal size boost retail TV glass demand by about 6%, even if the unit volume is flat. And next year is a World Cup year, which typically boost TV unit sales. Moving on to Life Sciences. We're seeing strong ongoing demand in support of the global pandemic response. Our innovations have allowed for the delivery of more than 3 billion doses of COVID-19 vaccines. And as the pandemic presents a new set of supply chain problems for the industry, we're stepping up with a new product called Velocity Vials. Our specialty engineered vials accelerate manufacturing output and enable a fast regulatory process. Velocity will help the industry address supply chain challenges and meet global vaccine demand. The launch of Velocity Vials extends our comprehensive end-to-end pharmaceutical packaging portfolio. Combined with Valor Glass, Corning now has 2 leading vial products that give customers different options for different use cases, significantly expanding our addressable market as we pursue a multibillion dollar content opportunity in pharmaceutical glass packaging. Turning to the macro environment. Like all companies, we are in the challenges associated with the pandemic and global reopening. Currently, the primary factor affecting our sales and profitability involves constraints in the automotive industry, which stem from chip and component shortages. At the start of 2021, global vehicle production was expected to be about 88 million. Forecast now anticipate auto production around 75 million for the year. The good news is that when the component shortage is resolved, auto production will recover because the end market demand remains strong, and we will be prepared to meet the growing demand. Across the company, we have prioritized delivering for our customers in a complex inflationary environment, and we've succeeded, but we have incurred an extra cost. And while we have been taking actions to mitigate them, certain costs continue to be unusually high. So we're taking a number of additional actions, including pricing that preserves our ability to continue to invest on behalf of customers. We remain focused on meeting demand, protecting our ability to invest and offsetting the margin pressures. To sum up, I believe that Corning is operating exceptionally well on all fronts. The efficacy of our strategy is evident in our performance, even in this unprecedented area. If we look back pre-pandemic, comparing 2019 to 2021, we expect to add more than $1.5 billion in organic growth, with only about 1/3 of that coming from growing with the market. About 2/3 or $1 billion is from more Corning and share gains. For 2021, we're on pace to reach about $14 billion in sales. That's a new high, and nearly $2.5 billion beyond our previous best year. We're making great strides towards building a stronger, more resilient company, one that is committed to rewarding shareholders with high-return growth investments, dividend increases and opportunistic share buybacks, all while supporting our customers, people and communities. And we're confident about our long-term growth outlook. Significant trends are converging around our capabilities, and our inventions are vital to progress. We feel positive about the contributions we'll make in the years to come as we continue to deliver on opportunities that help move the world forward. With that, I'm happy to take your questions, Sami.

Yes. I actually have some follow-ups to some of the things you talked about right now.

Great.

You mentioned the average increase of 1.5 inches for display per year. Does -- is that the typical pattern for a World Cup year or World Cup year is usually higher than 1.5 inches?

I don't know the answer to that question. The way I would think of it is advances in manufacturing, which we're a big part of enabling the larger display manufacturing, bring down the cost of the larger screen sizes and tend to have consumers by larger sets. On average, that's about 1.5 inches or about 3% on the diagonal, 6% in terms of area. In a particular year, maybe a little bit higher or a little bit lower depending on what new capacity comes online. We think, given our outlook for manufacturing, 1.5 inches is about right for next year.

Got it. Got it. You talked about how automotive is one of the main verticals that did see some impact because of COVID, because of chips and other factors.

Yes.

What about fiber and broadband communications and that entire industry? And some other companies in the industry have actually found it very difficult to get materials together and other dynamics, but could we just recap Corning's observations in fiber communication?

Sure. We're expecting a very strong growth year in Optical Communications. We've had accelerating growth throughout the year. Our order book is large. At the moment, we are selling everything that we can make. And my personal belief is that if we could make more, we would be selling that, too. So we're looking forward to bringing new capacity online next year. Recall that the products that we make are the passive components of the network. It's -- to utilize all of it, you need to install the chips. But it's a big public works infrastructure project in general, and they usually go in different phases. So we haven't seen an impact of the chip shortage on our sales of passives really at all in Optical Communications.

Got it. Got it. I wanted to talk about Corning pre-COVID, and then the Corning post-COVID. And I think one thing you did really well as you talked about multiple significant trends, all kind of converging benefiting Corning. But would those significant trends have come in place without COVID? Or did COVID catalyze some of those significant trends?

Yes. I think a lot of the things that we've been working on that we have seen pre-COVID -- if you think about in Life Sciences, this vision of individualized medicine that -- and gene therapy that goes with it where we've been making advances in cell culture technology. The increase in use of vaccinations and large molecule drugs that need a 21st century package, we've been working on for quite a few years. I think COVID has accelerated some of those things. I think that our wins with packaging COVID vaccines have been an important step forward in commercialization of our portfolio of glass packaging, for sure. They've helped us think about how we can unpack our technology stack in that area and deliver value in new ways to customers that may make the regulatory process easier. Velocity is the first to those that we announced 2 weeks ago. I think that's accelerated. I think that the use of remote work and education and seeing discrepancies that have happened based on access to technology, either from geographic reasons or for socioeconomic reasons has increased understanding and resolved at the government level, that broadband is really a basic human right and have helped accelerate that. So I think those are a few areas where the pandemic is probably, at least, accelerated belief in -- of some trends and understanding more technology a bit. And in other areas like what we're doing in automotive, working for an autonomous world with much more connected cars that are cleaner, that hasn't changed. I think that's pretty much the same as it was before.

Got it. Got it. Also one of the lovely byproducts of COVID is we now have this big thing called inflation.

Yes.

And I wanted to talk about -- and I'm being sarcastic for everyone who didn't pick up the sarcasm in that. On the topic of inflation, on topic of just increased component pricing and overall increases in input costs, how is Corning navigating this? And what is Corning's ability to push pricing and price increases on products and to customers? Could you walk us through that?

Sure. The net impact for us the last couple of quarters has been about 150 basis points, maybe a bit higher. We believe that the net impact is about half of the gross impact. The majority of the mitigation efforts that we have pursued in 2021 or have been able to obtain are around cost mitigation. We have also had price increases in some places. I think that as you look at Corning, we have some businesses where the pricing is reset on a relatively frequent basis. In Display, it's reset quarterly. We had price increases in the second and third quarter. For some of our more catalog-oriented sales and optical communications, we've been able to have price increases this year. But a big part of Corning's sales are under larger contracts that are reset on more of an annual basis. And we think that it's important to preserve our ability to invest, that it's a matter of fairness that we share in some of the inflation costs that we've had, and we look forward to getting more price increases in the first half of 2022.

Got it. Got it. I want to shift gears to, one, government stimulus, government funding, this entire category. And how long it's going to take from announcement, allocation and as it starts to trickle into your numbers? What do you think is kind of the time line we should be thinking about here when we start -- we might see like the uptick or the benefit?

Sure. In the last 12 to 18 months, our big source of government funding was in our Life Sciences business. We've received about $265 million in support to expand our high-volume manufacturing for vials in North Carolina. We had an opening event 2 weeks ago. There's some great video that was put on the CNBC website that you can check out, if you would like to see that. We also received capacity increases for some of the diagnostic test components that we make in our factories. But the big source of government investment, I think, will go more to our customers, which is with the implementation of the infrastructure bill starting in 2023, the broadband spending that, over time, will increase our addressable market by about $4 billion. So we're looking forward to that and looking forward to the capacity increases we have coming next year, both to grow our sales in 2022 and to be ready for some of that infrastructure pending to start.

Got it. Got it. And then on just optical communications. I know the government can be kind of a customer, a quasi customer and all of this. Have there been any delays with government decision-making or allocation of funds or any kind of -- anything to do with the project decision-making process?

To the extent that government decision-making reaches my desk, it's actually been part of our value proposition that when you do 5G densification, you need to do something like 10,000 local antennas for city the size of Manhattan. Those need to get put on the side of buildings, on the top of light post. They need to be unintrusive and fit into the architecture. And we've done a lot of work with our Evolv portfolio to create innovations that reduce the size of our pre-connectorized networks and the terminal boxes that have helped our customers get local authorities' approval faster. At a more macro national level, I can't. I haven't been in any conversations on where that's impacted has one way or the other.

Got it. Got it. I want to shift gears.

Sure.

And you talked about the total addressable market growth. You talked about your own organic versus kind of TAM expansion opportunity that you guys are going after. But one thing I kind of wanted to translate into was just margins. So how are -- what's the margin profile of Corning as you grow into these new TAMs and as you grow your revenue?

Yes. I think that we have opportunities for margin expansion. Not only are there the inflationary costs that we've broken out, there are significant expenses associated with COVID. Some of them direct and quantifiable in terms of testing some of the things that we've had to do in factories to ensure that we have workers available. An expansion of our medical department, but less tangible things like when you expand when you open new capacity, getting people recruiting is harder during a time of COVID slows you down, makes the time to get to your should be margins take a bit longer. Hopefully, we're getting those behind us. And I think that's one driver. I think that you'll always see the effect of when we go into something new like auto glass. In your early days of perfecting the manufacturing, the proprietary techniques that go into this, your margins are lower at the beginning than they will be as you reach steady state. That's a business where we've had great growth this year. Even though auto sales are down, we've had some high-profile wins that are coming to market. And we've done a good job at improving our margins, but they are not yet really close to the corporate average. I think there's a lot of improvement opportunities available in those. So I think that looking for some improvement in Corning's margin structure over the next few years is something we're certainly looking at as operators.

Got it. Got it. I'm going to shift back to inflation.

Okay.

And as you guys run the company and as inflation as a dynamic is rather fluid, are there any key specific indicators, or metrics, or KPIs that you or the company are tracking to gauge pricing and make corporate action decisions?

We break out the impact of inflation into multiple categories. The big ones for us are freight and logistics and input costs in certain businesses. And we look both at general commodities indexes as an overall indicator and then at some of the specific materials that are a bigger deal for us. This year, resins was a significant increase. Some of the metals that we use to reinforce cables was a meaningful increase. So we stay very close to those. We work with our suppliers to expand our availability as needed. We look to qualify new suppliers. Our manufacturing approach is wherever possible and practical. We try to manufacture near our customers, which helps us with some of the logistics costs. It makes innovation better. It gives us opportunities to have multiple suppliers globally. Those are things we look to leverage and we have a task force that's very focused on those elements.

Got you. I want to go back to one thing you brought up with [indiscernible] as the price increases or just the dynamics in resin, which I think were a problem for many companies in the overall industry? Just Corning multisource resin from multiple vendors. Are you sourcing it from a single vendor? And how have you been -- maybe give us like a little bit of an idea on how you navigated that specific volume?

Sure. And I'm probably -- I'm certainly not the authority on this within Corning. But at a high level, resins are a meaningful component of our cost of goods sold in Optical Communications and in Life Sciences. In Optical Communications, the spend is significantly higher than in Life Sciences, but it's been impacting both. We have multiple suppliers for those on a global basis. I'm really extremely impressed with my colleagues and the global supply management that when a lot of these materials were coming from Texas, which was hit with the cold snap in the first quarter, that they were extremely prepared, did not interrupt our supply for our customers at all. We have incurred additional costs as part of that.

Got you. Got you. I wanted to talk about the competitive landscape, right? Surely, you see the big addressable opportunity that's growing and you see the growth, but the competition also is adjusting accordingly. But would you see Corning's positioning as more competitive or neutralize relative to the competition as more capital comes in?

Yes. I think that we have gained meaningful share in -- we've gained share, I think, in all of our businesses over the last couple of years and meaningful share in several. And I think the reasons for that are -- we've done a great job delivering for customers in terms of getting them product. Our innovations are strong. Some of the most important innovations rely on combinations of our capabilities that our competitors don't have access to. And so I think our competitive position is strengthening recently, and I think it will strengthen more over the next 5 years.

Got it. And then I guess you -- I mean I don't want to put words in your mouth, but as you guys see your innovations in your product portfolio and where you're positioned as well as the scale of the company, this flywheel of strength in market share, expected probably more to continue rather than to...

Yes. I'll give you a great example of that, but it's certainly not the only example. If you think back 5, 6 years ago, we were introducing a product called Fire in the mobile consumer electronics space. The idea was to use a sophisticated coatings process to actually create -- I think we should call it a net material. That's a piece of Gorilla Glass with the sophisticated coating that increases the optical transmission of the glass and raises the scratch resistance of the glass to about the level of sapphire, but retains all of the drop performance and impact resistance of Gorilla. Now we're seeing a lot of the technology that we use in that coatings process to be important in the automotive space, to deal with anti-reflection and better readability in the interior of cars. We're also seeing some really exciting innovation with using that technology for LiDAR covers that we think will become really important in autonomous vehicles over time. And as you gain scale in that, it makes you better in all the places. So the dream would be put that on more mobile consumer electronics over time, and we're certainly moving down the learning curve as we do it in multiple places. That's really when I talk about how we reduce our capital and R&D intensity through this focus. It's by using that flywheel that you mentioned to put our best people on an exciting opportunity, making progress, getting better and then putting them on the next exciting opportunity, which may be in an entirely different vertical.

Got it. One thing -- one question I'd like to ask an organization as big as Corning is what is the one thing that you think investors or industry constituents are overlooking or something that you think should be receiving a little bit more airtime?

Yes. I think it's -- for me, as Chief Strategy Officer, it's the sustainability and durability of our long-term growth. I think that a lot of people look at Corning's 170-year history and say, "Wow, these guys invented Pyrex. They came up with the glass sleeve for Edison's lightbulb. They invented this whole new category of materials and glass ceramics. They invented the first low-loss optical fiber. They invented Gorilla Glass." There have been a lot of life-changing innovations. But there is an underlying engine where we take our glass science, our ceramic science, our optical physics, along with -- we call them proprietary manufacturing processes because it's short. But these are things we actually invented. I mean vapor deposition, fusion, pre-connectorized -- technology for pre-connectorized optical fiber. These did not exist before Corning. And we have a long ways to go in these categories. And when we combine them, we are formidable. And I think that those combinations are becoming more important. I think you'll see us do things in energy storage and energy generation, making what some of my predecessors in this [indiscernible] would call Keystone components. You'll see us contribute in ways that you didn't expect and the things we talk about have great opportunities. So I think the most exciting things Corning is going to deliver are actually in front of us. And I think that sometimes gets masked by what's going on at the present moment. I think it's important what's going on at the present moment, but I think our long-term opportunities are really important as well.

Got it. Got it. Well, we're just about end of time. Thank you, Jeff, very much for spending time with us.

Appreciate the question. Thanks for the questions.

Really appreciate it. Thank you.

Thanks, everybody.