Corning Incorporated (GLW) Earnings Call Transcript & Summary

Hello, everybody. Thank you for joining us today. This is Tim Long at Barclays, along with Elisa Shreves on my team. We are happy to have Corning with us for this 9:10 presentation. With Corning, we have Brendan Mosher, VP and General Manager of Corning Pharmaceutical Technologies; and Ann Nicholson, VP, Investor Relations. So we hope to get a good insight on the Life Sciences business as well as some of the other key end markets that Ann might chime in on as well. So first, I'm going to throw it over to Brendan to give us a little bit of an overview, and then we'll dive into Q&A.

All right. Well, thank you, Tim. Appreciate the introduction. As Tim said, I am Brendan Mosher, the Vice President and General Manager of Corning Pharmaceutical Technologies. And just a reminder that today, we'll be making some forward-looking statements and you should review our filings and our website to see any potential reasons that actual results may differ materially from the perspectives that I offer. As I start today, I just want to say really how proud we are that Corning has been serving the life sciences market for more than 100 years. We're a market leader in many areas, including the development and production of life science components, including optical biosensors for cells, advanced cell culture vessels, microplate, bioprocess production equipment for the manufacture of biologic drugs and novel surfaces for drug discovery. And really, over the last decade, we've been focused on expanding and building our business into high-quality pharmaceutical grade tubing and pharmaceutical packaging for drug storage and delivery, and I'm happy to lead this business. And today, I want to share some of the exciting progress that we're making on what we think is a multibillion-dollar content opportunity for Corning. As I look back, it was really just over 18 months ago, when it became clear that the pandemic was going to require mass vaccination campaign unlike anything the world has ever seen before. And even more concerning was the experts such as Bill Gates and Rick Bright, were seeing supply chain challenges such as glass vial capacity and fill/finish capacity as challenges almost as large as developing a safe and effective vaccine in record time. So we, at Corning, saw this as a great opportunity to step up and answer the call with Valor Glass. We were able to leverage our innovative vial technology to secure a $204 million U.S. government grant to rapidly scale up our capacity for pharmaceutical vials and tubing across 3 sites in New York, New Jersey, North Carolina. And over the past 18 months, I'm very happy to report that Corning's tubing and advanced vials have enabled the delivery of over 3 billion doses of COVID-19 vaccine to patients and people all over the world. Now for Corning, this is a tremendous proof point for us as we think about our future and building this business. But just as exciting, I think, is how we've continued to serve our customers, expand our capacity and find new ways to add value with our innovator products. Really, in just the last 6 months, we've continued to expand our product portfolio with the introduction of Velocity Glass, expanded our capacity with 2 new high-volume manufacturing sites, one in Durham, North Carolina and one in Bengbu, China, and continue to advance key partnerships, now focused on really building our long-term customer base to grow this business. As the pandemic had presented a new set of supply chain challenges for the industry, Corning continues to evolve and support the needs by ensuring high-quality and reliable domestic supply of vials to address the needs of the pandemic, but beyond the pandemic other life-saving drugs now and into the future. So I think you all know Valor Glass. Valor Glass was introduced in 2017, along with our lead adopters, Merck and Pfizer, and was designed to be the gold standard for pharmaceutical packaging. With Valor, we took a transformationally different approach than anyone else in the market. We took a quality by design approach to eliminate and prevent as many possible problems associated with conventional for borosilicate glass as possible. We at Corning saw there have been very little change over the previous 100 years in pharmaceutical packaging, while the innovative drugs, the way they're filled, the way they're distributed had evolved greatly. We thought it was time to develop a 21st century glass for 21st century drugs. So we're very excited to see how a Valor Glass has been performing, especially for frozen mRNA drugs with the glass strength of Valor really differentiates it from conventional borosilicate glass. And looking forward, we continue to believe Valor Glass really is the ideal solution for pipeline drugs, capacity-constrained drugs, on sensitive lyophilized and cold storage products. And now we're excited to announce Velocity Glass as Corning is expanding our advanced vial product portfolio to help further accelerate the delivery of life-saving treatments in critical drugs with the launch of Velocity Glass. Velocity is an externally coated type 1 borosilicate vial engineered to improve drug quality and increase pharmaceutical fill/finish productivity, which can ensure more reliable drug supply and help reduce the cost of our customers as they produce their life-saving drugs. Velocity vial really has 3 key benefits. It enables better economics, better quality and more sustainable packaging designs. On better economics, velocity vials have demonstrated up to a 50% improvement in the efficiency of fill/finish when compared to traditional borosilicate vials on customer filling lines. This means you can fill more vials in less time and reduce the fill/finish costs by up to 50% by improving the throughput and quality. Like Valor, Velocity has better quality. Corning's low coefficient of friction surface reduces the likelihood of key quality problems, such as damage, cracks, glass particles and other defects, and can enable up to a 90% reduction in glass particles, which is a leading source of recalls. And finally, Corning cares about the environment and sustainability. So we're making Velocity Glass and Valor Glass available as the option for renewable electricity and the ability to reduce landfill waste and energy costs back to 40% compared with conventional vials. We feel really good about Velocity Glass as we do Valor Glass, and we look forward to coming to market now with 2 leading products, which give our customers a choice between both aluminosilicate and borosilicate glass compositions to meet their unique drug packaging needs. So Corning is really building it's commitment to innovation and helping our customers solve as we continue to scale. The global pandemic presented a number of opportunities along with the challenges. We've built a very successful public-private partnership with the U.S. Department of Health and Human Services and U.S. Department of Defense. To date, we've received over $261 million in funding to accelerate our capacity and the delivery of COVID-19 vaccine by helping to ensure a reliable supply domestic pharmaceutical manufacturing. And just last month, we announced the start of our high-volume manufacturing site in Durham, North Carolina, which at full capacity, will be able to produce more than 500 million Valor and Velocity vials per year and support billions of doses, life-saving drug annually. In addition, we also recently partnered with CNBC and CMGN China announced the opening of Corning's 21st facility in China, and this cutting-edge for silicon tubing facility marks the first of its kind in the Bengbu region, and will enable the production of high-quality tubing to supply the Chinese market and surrounding regions for decades to come. I hope you can see why we feel like the future looks incredibly bright for Corning in the pharmaceutical packaging and drug delivery space. And looking forward to the conversation this morning. With that, I'll turn it back over to Tim for Q&A.

Thank you, Brendan. Great overview there. I appreciate it. Maybe let's start digging into Valor a little bit more. As you said, it's been a pretty high-profile technology for Corning, and it's obviously come more to the forefront. Could you talk a little bit about how the industry feedback has been for Valor so far? You mentioned a few of the early wins. Could you just kind of update on how broad the partnerships are now? And maybe just give us an update on the time line for approvals and what that would mean to the scaling of the business?

Sure. With Valor, we're really focused on getting every vial out the door as we can. We're currently in a sold-out market. And the leading COVID-19 manufacturers will take as many Valor vials as we can produce. I think the most exciting thing about the last 18 months for Valor is that we've the chance to really see how the product performs at scale. One of the challenges in this market is that it's a regulated market and it requires a lot of work by the customer to adopt the product in order to see the benefits of that product. So you have a little bit of a chicken and the egg problem. The pandemic has really accelerated our ability to run Valor glass on dozens of fill/finish lines all over the world with dozens of product types and be able to see the results at scale at commercial volumes and the results have been very encouraging. So we see that the COVID-19 leading manufacturers really like the performance of Valor glass, things like reduced breakage, which enables more consistent production time, the higher efficiency because of the low coefficient friction coating. And if we continue to see how Valor glass specifically for frozen drugs and lyophilized drugs, really is the purpose-built glass because of the strength inherent in the glass technology due to the ion exchange process. So we're really excited about how Valor Glass has performed. We're getting dozens of approvals all over the world. I think last count, we're up to almost 75 regulatory approvals for Valor Glass which is, again, a major milestone in terms of not having to have other customers be first. No one wants to go first. And we can go out there and have Valor Glass approved almost globally in every jurisdiction by the 200-plus regulatory agencies. That's a really strong proof point for us and allows other customers not to have to be the lead adopter on something new, but to follow and get the benefits of the technology that have been proven out during the course of the pandemic. So we're really excited how the pandemic has helped to accelerate our time line and allow us to demonstrate the performance and benefits of our technology at scale.

Okay. Great. Great. And then maybe just going over to Velocity vials. Can you kind of give us a sense as to time line there and how you see that market opportunity maybe relative to Valor? And how you see the process going forward on the Velocity side?

Sure. Yes, one of the great things about Velocity is that Velocity can be made essentially on the same manufacturing assets as Valor. Corning is the world's second largest producer of borosilicate tubing today. So we have the raw material, and we make that currently. So really, you can take that raw material, you can convert it into a vial and apply Corning's external coating to the borosilicate vial to enable Velocity. So in a sense, we have pretty high fungibility between our manufacturing assets for Valor and Velocity, which allows us to scale quickly, scale at a cost-effective pace and really manage the mix well between the 2 products. The nice thing about velocity is it represents a slightly smaller change for customers and velocity is really all about speed. We want to take the great performance of Valor in terms of enabling faster fill/finish speeds to more efficient pharmaceutical fill/finish manufacturing, but give customers a choice to get that in a conventional borosilicate material that they're already used to. So we feel like Velocity is a product that can penetrate the market probably at a faster pace than velocity near term, where as Valor is really being targeted to the pipeline, specialty applications which over time, we think we'll need it to be the market standard. But the Velocity product, we've already sold over 50 million vials, so we're out of the gate running and have several customers who are already using Velocity at commercial scale for FDA-approved and distributed products all around the world.

Brendan, it's Elisa here. I just had a quick question. You've talked about how both Valor and Velocity really were able to accelerate at scale due to the pandemic. But how should we kind of think about the pharmaceutical packaging business in a post-pandemic world? How should we kind of think about areas where you're going to expand the portfolio, and just kind of the pace of adoption now moving in a post-pandemic world?

Yes, great question. So there's fundamentally nothing unique about the pandemic world other than the fact this is a time where vials are in the news and fill/finish capacity is extremely tight and every dose matters. But if you look at kind of fundamentally what Valor and Velocity do, they're all about improving the quality and preventing recalls and preventing adverse patient events, and reducing the cost of filling drugs through improved operational efficiency. And we firmly believe that improved quality and lower cost applied to all types of life-saving products, not just COVID-19 vaccines. Our job is really to show our customers that they can have both. They can have better quality, which we've absolutely proven. They can also lower their costs, even though they're going to pay Corning a premium for a higher-quality vial. So we think if we can make that point and the data justifies that what we're seeing out there each and every day on the COVID-19 fill/finish lines is supporting our position, then there's no reason why any drug company, whether you're producing low-cost generics or very high-cost biologics, you don't want to have quality issues that increase your cost or reduce your quality of your product. So we feel really good about the long-term benefits here. I think it's really just a question of how fast we can get the market to tip and get customers to understand that they can pay a bit more for high-quality vials with Corning's proprietary coating and strengthening processes. But in the end, I just going to give them lower cost and better quality. So we're pretty bullish on the outlook, I think it's just a matter of how long it takes for us really to get the market to understand. And I think the more exciting thing is at some point, regulators will see the benefits of the technology and really start to push on customers as well, push on the pharma to say, "You can do better. There's new technologies." And when our technology gets into part of the CGMP and becomes kind of the standard for high-quality drugs, that then will have a really incredible business here. And I think 2 products that are both going to be leading products into the future.

Brendan, it's Tim again. It sounds like you had a great demand environment and you got new manufacturing facilities across the world scaling. So can you talk a little bit, generally, it's pretty specific types of manufacturing that Corning is doing and certainly has some different input sources than some other technology companies. So can you talk a little bit about how hard it is to scale that manufacturing and any supply issues. I mean we obviously see it across the world, but maybe that are a little bit more specific to the pharma business at Corning? And how is that impacting the business and the ramp currently?

Yes, it's certainly been a challenge. I think we've done well and worked very closely with the Department of Defense to overcome as many of the supply chain challenges as possible, and they've been great partners. Fundamentally, when we make vials, we turn sand and salt into glass vials. So there is an abundance of the raw material inputs. Corning is a very large buyer, as you imagine, of those products. So we've done well, I think, on the raw material sourcing. The biggest challenge, honestly, has been getting equipment and getting subcontract manufacturers and vendors on site, in North Carolina. So we've worked really closely with our equipment friends and partners try to accelerate lead times, things like air shipping and other creative ways to kind of reduce the time that typically takes to build, install and validate new equipment. So we haven't had luckily anything that has dramatically slowed us down. In fact, we're able to bring the high-volume facility in North Carolina online, more than 4 months ahead of our commitment to the U.S. government. So I think we've done a pretty good job. But everyday, there's a fight out there and you have to work to knock down each barrier as they arise. We have a great team and lucky to work for a company as large as Corning, the global footprint and very long standing relationships with key equipment suppliers across a variety of industries.

Okay. Great. Thank you. And maybe we'll get you involved a little bit here and move away from life sciences for a few. Maybe just start on display. There's been a lot of noise out there about display manufacturers cutting production, softer TV demand. But at the same time, you guys have been in a very healthy glass pricing environment. Could you kind of just go through, give us the latest thinking on where we are on supply and demand as we head into 2022, where are we kind of in both of those cycles?

Yes, sure, happy to. So we're coming off a period where we had really struggled to meet demand in 2020 and the first half of 2021. So glass demand has been pretty tight. And like other glassmakers, we've run down our inventories, we've expedited shipping, and we've really had tanks running beyond their targeted life to be able to meet that demand. And as you said, what we're seeing now is the industry in temporary lower TV demand, our customers are lowering their utilization panel makers. And you see that supply-demand balance shift a little bit by them having lower panel prices. So they're making adjustments to their utilization. And what that does for us is allow us to repair and rebuild those tanks that have been running beyond their end of life. And obviously, when we rebuild, we put on our latest technology so that when we restart those tanks, they're running more efficiently, and they help us from a cost and profitability perspective. So by doing that, having a pause to repair our tanks, it also is a natural lever to keep our supply balance to demand. So as we think about heading into 2022, we expect this lower period to continue in the first quarter, most likely -- so that gives us a good couple of quarters to get our fleet ready, to get our inventory back in a decent position, to meet the expected growth that we think is going to happen in retail in 2022.

Okay. And when you think about 2022, obviously, it's a World Cup year and that has tend to be a positive. Maybe can you just balance that with kind of some of the abnormal growth we may have seen in the end markets through the pandemic thinking about maybe TVs and also laptops and displays and things like that.

Yes, sure. In the pandemic, we saw significant growth in TV units. So beyond the typical range of 225 million to 235 million, of around 240 million. And a lot of those were smaller sets probably to address the work from home and school from home. We saw an uptick in PC demand, monitor demand as well, in 2020. So TV is 70% of all the glass that we make, we really focus on that market. So we think that after being above the trend line in 2020 that we're going to see TV unit sales below the trend line in 2021. So I think most people have sell-through around 215 million units for 2021. PC demand is staying relatively strong through this time period as well. And then as we look into 2022, we think that TV units bounce back into that normal range. It being a World Cup year, as you mentioned, is a good stimulator for TV demand. The last 2 World Cups, TV units were up 8% and 7%. I don't know if they'll hit the 230s that we saw in those 2 prior World Cup years, but getting into that healthy or -- I'm sorry, the usual range of units between 225 million and 235 million. And screen size through all of this has continued to be in the zone of 1.5 inch a year. So we think that 1.5 inch of screen size growth, that gives us a natural volume lift and with unit growth on top of it is why we think the retail market is going to be up next year. And I don't know, PCs, so our customers are making public statements that would say that PC demand is going to remain -- think that we're kind of at a new normal for that market.

Just kind of switching from display to one of your other large segments Optical. Optical had a really strong year with both carriers and hyperscales, increased fiber demand. And kind of now that we're at the end of '21, kind of how should we think about the growth outlook as we move into 2022?

Yes. So demand on networks is at an all-time high. And it's really setting the stage for continued investment in fiber infrastructure, as operators are looking to expand that capacity, capability and access. So we're well positioned to capture significant ongoing growth as this network and data center investment continues to increase. And then on top of that -- so that gives us good growth if you think about it in -- we'll call them private carrier networks. And then on top of that, we've got the approval of the bar [Indiscernible] around allocating broadband infrastructure. And so that's a good growth opportunity on top of this underlying private network investment.

That's really helpful.

And then, Ann, maybe just to follow it up there. What are you seeing kind of competitively in the optical comms market, given that it does seem like it's a more favorable backdrop than what you've seen. So competition, pricing, particularly given what's going on with some of the raw material and inflation costs out there?

Yes. Yes. So one of the raw materials that has gone up significantly is resin, and we use resin in optical and our cabling. So that has impacted us, and we have been making moves to offset that with some cost mitigation actions as well as pricing actions. So we expect the pricing actions to begin to take effect in Q1 in this business. And I think from a competitive perspective, we're all in the same boat in terms of what those costs are, I think in terms of how we look at our -- what we can do for our customers, we can make products that are unique, talk about being able to make an optical solution where we have not just selling cable and not just selling hardware and equipment, but selling preconnectorized solutions in both the carrier space and increasingly so in the hyperscale data center space that is unique to our customers. And just like what Brendan said, with Velocity and Valor, that ultimately, we save our customers time and money. And they pay a premium versus buying those components for the preconnectorized but we're -- that costs us a little bit more to do it, but we're adding value for them. And ultimately, it's a net cost reduction for them and time saver.

Okay. Great. Great. I think we've got 2 minutes left. So I was hoping to go back to Brendan for one more on the pharmaceutical side. You talked about getting really getting into a lot more markets. Just curious, now that you're kind of scaling both Valor and Velocity, what's the outlook for new product, new development? Is this still going to be an R&D heavy space? Could we see tuck-in M&A? Or are we more in a harvest phase at this point?

Yes. I think our primary focus now is that we have that capacity, we have the demonstrated data to really go out and show we can be successful through securing long-term supply agreements with key customers at premium pricing, that represents the value that's created by our products. At the same time, I think the pharmaceutical industry continues to evolve. And as drug administration and new types of therapies come to market, cell and gene therapy, high viscosity biologics. There's continuing demand for new formats and new routes of administration for parenteral injectable drugs. So we'll continue to work and think about kind of our play and other adjacencies such as cartridges used for insulin, prefilled syringes, which are used for several chronic diseases. And I think mostly what we're focused on is internal development of those technologies. I think we'll always consider M&A where it makes sense, we can kind of secure some needed technology, but I think largely, we've developed a platform here with Valor that should be able to scale to any type of injectable-based device system. So primarily, it would be a Corning internal, and we'll continue to partner with the right supply chain partners to hopefully bring those systems to market. But like I said, our primary focus is now we have the capacity. We have the demonstrated data is to really go out and prove, just how successful we can be with our 2 product portfolio featuring Valor and Velocity.

Okay. Great. Great. I think we're bumping up against the end of time here. So Brendan and Ann, thank you very much for the color here. It's very insightful and enjoy the rest of the day. And everyone else on the line, we look forward to talking to you on some of these other calls today. Thank you.

Thanks, Tim. Thanks, Elisa.

Thank you.