Corning Incorporated (GLW) Earnings Call Transcript & Summary

Okay. Great. So hi, everyone. Thank you for joining us. My name is Shannon Cross, and I'm the IT hardware analyst at Credit Suisse. So anyway, today, I'm joined by Dr. Jeff Evenson, Chief Strategy Officer of Corning. So I think before we get going with Q&A, Jeff, would you like to introduce yourself and tell us about your role at Corning and then we'll head into Q&A.

Sure. Thanks, Shannon, and good morning, everyone. Just a reminder that I will be making some forward-looking statements today. You should check our SEC filings to see reasons why actual results may differ materially from the perspectives that I provide today. Also, we will be discussing our results using core performance measures. Now I'm Corning's Chief Strategy Officer. I've been at Corning for about 11 years, and today, I'd like to spend a few minutes discussing our value creation model, how it informs our relationship with stakeholders and how it's driving performance across our market access platforms. So let's dig in. We are world leaders in glass science, ceramic science and optical physics. We transform that expertise into products using our 4 proprietary manufacturing and engineering platforms. Our leadership in these areas makes us highly relevant to fundamental secular trends playing out across the globe and across society. We address these trends by applying our capabilities to invent category-defining products, developing scalable manufacturing platforms and advancing strong trust-based relationships with customers who are leaders in their industries. Our contributions help move the world forward and lead to profitable franchise-like businesses for Corning. We seek to create mutual success among a diverse set of stakeholders, our people, our partners, our communities, our investors, society and importantly, future stakeholders. Our most sweeping impact is enabled by our technology. Our inventions help deliver benefits to an overwhelming percentage of the global population. Through our more than 170-year history and our current contributions, we clearly demonstrate that Corning is vital to progress. We find that the more we advance our expertise, the more options we have to provide value to society and the more content we drive into our markets. We call this our More Corning approach. It expands our total addressable market and reduces our sensitivity to economic cycles. With that in mind, I want to highlight some of the life-changing contributions we're delivering across our 5 market access platforms, optical communications, display, mobile consumer electronics, automotive and life sciences, and I'll share an update on our objectives for each. In optical communications, we're helping build a more connected world and playing a key role in bridging the digital divide. For example, in August, we announced a new manufacturing facility here in Arizona during an event attended by AT&T's CEO, John Stankey and U.S. Secretary of Commerce, Gina Raimondo, whose leadership helped pass infrastructure legislation dedicated to the idea of Internet For All. Our new plant will boost optical cable capacity to meet growing demand as AT&T builds on its mission of connecting the unconnected. We continue to meet our goal of outpacing optical market growth, which is today driven by broadband, 5G, densification and cloud computing. Our innovative, low-cost, faster to deploy and greener optical solutions as well as our growth-enabling capacity allow us to build on our leadership and to participate in a multiyear wave of growth for passive optical networks. Moving to our next market access platform. We're helping our customers create a world with large lifelike displays. In display, we're executing well on our goal of stabilizing returns even as panel maker utilization this September reached the lowest level since the fourth quarter of 2008. We are the industry leader with a global manufacturing footprint, cost advantages, distinctive capabilities and leadership in Gen 10.5, which is critical to capturing long-term growth in large-screen televisions. And we expect to exit this current display industry correction with strengthened customer relationships and a refreshed manufacturing fleet. In mobile consumer electronics, we're enabling a world where the most powerful applications can be accessed from the devices you carry with you every day, and a more equitable world in which billions of people have access to knowledge at an unprecedented scale. Our objective is to outpace growth in smartphones and semiconductor equipment. Our leadership and innovations, think scratch, drop, optics and surfaces, our ability to expand into new categories, such as bendable phones and augmented reality technology as well as our leadership in key components for semiconductors are driving outperformance in the face of soft near-term consumer demand for smartphones and IT devices. Progress in the third quarter included industry-leading customers further adopting premium and new-to-the-world materials such as Gorilla Glass Victus and Ceramic Shield for their major product launches. Longer term, we expect to continue outperforming the market through our product leadership, our More Corning approach and our ongoing contributions -- or collaborations with industry leaders. Moving to automotive. We're helping build a world where software and displays are enabling new in-vehicle experiences and where vehicles are increasingly green. This year, we're continuing to outperform the market as we make progress on our objective of $100 per car content opportunity. We're seeing growing adoption of our technical glass for displays, windows and sensors. At the same time, we're continuing to build on our long-standing leadership in emissions control products by delivering important new innovations for hybrids. In the third quarter, we deepened our role in the global automotive ecosystem. Car UX, a leading car display company owned by Intelex, one of our display customers, announced its use of our ColdForm technology to offer innovative automotive interior displays. Looking ahead, glass is critical for more advanced design-oriented cabins, enhanced driver assistance features and autonomy and the overall user experience. Our relationships and capabilities position us to capture the expected growth. Finally, in Life Sciences, we're helping support the discovery and delivery of new medicines, including biologic medicines that are personalized, effective and safe. And we're tracking well toward our current objective to outpace the market. Throughout the year, we continue to commercialize innovations, including a new cell and gene therapy production platform. And looking ahead, we expect to see continued growth in bioproduction and 3D cell culture as well as additional wins for our premium pharmaceutical packaging portfolio. Now stepping back, Corning is not immune to the effects of a macro slowdown. And like all companies, we are dealing with challenges in this complex external operating landscape. Nevertheless, our cohesive and focused portfolio provides strategic resilience that is playing out well in the current environment. We've established a deep relevance to secular trends and we're driving more content into our markets. Consequently, we expect to maintain our strength throughout an economic downturn and to deliver profitable multiyear growth. We feel great about the contributions we'll make in the years to come as we continue to deliver innovations that help move the world forward. And we'll continue to execute with discipline, invest where we see strength and pace to demand. With that, Shannon, I'd be happy to take your questions.

Thank you so much. Can we talk a little bit about the current macro environment? One of the things that I really admire about Corning is the fact that you have such a conglomerate diversified base of business that allows for something to overachieve while maybe something else has a bit of a challenge, given some of the macro that's going on. So I guess what are you seeing out there? What businesses are you most excited about in, say, the next 12 months, 24 months? And which ones are you a bit more concerned?

Sure. Our objective is to be leadership in the 3 core technologies and 4 proprietary manufacturing and engineering platforms. And as we select opportunities, we're looking for a couple of things. One, what is the highest and best use of our capabilities? And that lets us serve a fairly diverse range of markets but really by reapplying and reusing what we already have in many cases. And that gives us the benefits of some diversification, but we also get great focus that comes out of that and lets us move forward and extend our leadership, kind of regardless of what we're working on in that space. The other thing that we're looking for is a certain characteristic of growth. One is that the market itself will be expected to grow over a long period of time, and also that there's an underlying technology adoption curve in those markets. And I think in times of an economic downturn, what we really focus on is making progress on those technology adoption curves, keeping our relationships strong, getting our size and capacity in line with the overall market demand and do things that let us perform well in the environment, whatever it is, but also position us for growth when that occurs. And I think that, that is a way that we probably can execute without exquisite precision in our market forecast. Having said that, we're really seeing some opportunities across our portfolio. I would say today that around half of our revenue is in markets that have pretty low demand, I would say cyclically low demand. The other half, things are pretty good. I would say not at peak demand but pretty good. And I think that, that -- those kinds of cycles will let us keep going reasonably well regardless of what the macro economy holds, whether the 50-50 chance of a soft landing turn -- which side it turns out on. If I think about our markets for next year, there are markets like automotive and display. And when we look at display, it's really the demand from the panel makers which has been much lower over the last 2 quarters than demand at retail. I think those generally have upward biases as we go into next year. I think that over the next 2 years for optical communications, there's going to be tremendous activity going on. I think right now, we're seeing some positives, as we talked about on our most conference call. And then in mobile consumer electronics, smartphones and IT devices are at fairly low levels of demand at the moment. So I think that there's some upward bias there as well. And life sciences is more of a constant demand environment. As long as labs are open, that's what we learned during the pandemic, and that one depends on kind of where we are in our technology cycles. I mentioned the Ascent Platform for cell growth. That is important, we think, for gene therapy and sort of medium scale production of cells. That's an exciting new technology for us. And also earlier this year, we announced Velocity, which unpacks the technology stack for Valor and delivers it, we think, to more customers in an easier way for them to gain adoption. So we're looking forward to growth in that area as well.

Great. And I guess thinking about the Optical business, I understand there's a pause right now but there's a significant amount of stimulus that's going to be coming in. Obviously, there's a big push for Internet Everywhere. How do we think about the timing? How do we think about the magnitude of the benefit? How are you positioning the company to make sure you take optimal advantage of what might be out there?

Yes, our view is that the big spending from the stimulus gets underway in 2024. We've timed the opening of our new Arizona plant to be consistent with that. The other aspect that we're working on hard is to communicate the value proposition of our solutions to a larger set of service providers and data center operators. In the environment we're in today, labor is tight and our solutions significantly reduce the amount of labor that you need in the field and the training that, that labor needs because we've done a lot of the work in our own factories to make essentially bespoke, but snap together networks. It's like a custom Lego set. And it's a little more sophisticated to assemble than a Lego set, but we're getting to the point that you can even have a consumer in a rural area do a self-installation and we've had some good success with those trials. So I think as people understand that they reduce their cost, they reduce their need for labor, that solutions are a really positive opportunity for us, both from a sales growth and a margin expansion perspective.

I can appreciate the complexity when we renovated our house several years ago. My husband is very techy, and he actually -- we had fiber throughout the house and he and my son sat there and spliced the fiber. And my son actually got to be pretty good at it, which he could see better because he wasn't losing his eyesight like my husband.

Well, there are jobs out there for him right now.

Exactly, exactly. Maybe just on Hemlock. How do you see the benefits there? How should we think -- again, it's a lot of it may be stimulus-driven. There's obviously a long-term bias to solar. So how are you thinking about opportunities within that? And also, how do you think about the Inflation Reduction Act just in terms of maybe -- I think the EU had some -- I don't know if this is something that would hit you, but there's some anticompetitive concerns that are kicking around out there.

The Hemlock is a business that's been in some form in the Corning portfolio since the 1960s. It was originally founded as part of Dow Corning to supply highly pure silicon to the emerging semiconductors industry. And indeed, it's a leader in doing that. But we also make solar-grade capacity. Corning acquired majority control of Hemlock in September 2020. And since that time, the solar, both the semiconductor market has grown and the solar market has grown significantly. And that business is approaching double the size that we acquired it to. So a great success. That acquisition was paid off in about 1.5 years from the cash flow from the business and we see a bright future in solar. Right now, we're evaluating the benefits of the Inflation Reduction Act, which contains a number of incentives for solar production in the United States at all stages of the value chain. We believe that it's an important contribution to the world that Corning could make by expanding its presence in solar. And we'll be back to you with more details. But I think that certainly -- this year, it's been a great growth area for us, and I would expect it to be a meaningful growth area for us in 2023 as well.

Is this an area that will require a lot of CapEx or do you feel like you have sufficient capacity to meet needs for the next few years?

This year, we focused on opening mothballed capacity. We have a significant amount of mothballed capacity that we could still open. And there could be opportunities where we'd go beyond that, that become very attractive with IRA and we're evaluating those now.

Got it. And maybe the conversation -- or one of your investment points is the ability to increase content per product.

Yes.

And yet I look at my iPhone and it's a lot of Corning already. So I'm wondering, when you look at -- I understand like autos, I get where you can go there. But how do you convince your customers, I guess, to become even more dependent on Corning? Where do you see the biggest opportunity for increased content? And even like in displays, I think do you continue to expect, what, about, I think, 1.5-inch increase in display size, which effectively is increased content over time?

Yes. We really see more Corning opportunities across the portfolio. In display, I think, the largest More Corning opportunity for us is the increased screen size because we're such a leader in Gen 10.5. When 65-inch-and-up displays get purchased, odds are those are on our Gen 10.5 class because that's by far the most cost-effective platform to build it on. So that's a More Corning opportunity for there. In mobile consumer electronics, I think there are a number of More Corning opportunities. One is as we improve the performance of our products, whether that's with Gorilla Glass Victus and its successors or whether that's with Ceramic Shield and its successors, we offer more value to the consumer and to our customers, and that's a way increase our sales per device even if we don't increase our area per device. But I think there are also ways to increase the area where we've had great success in the camera lens covers. We're doing bendables. And then if you think of mobile consumer electronics broadly, I think augmented reality is an emerging device where we could play a key role. And then the other part, our Specialty Materials business is -- has semiconductor plays. And the ones I'm most excited about our role in EUV. We are the standard for the material that's used in lenses in all EUV systems worldwide, where glass is increasingly getting used not only for wafer handling, but also being later-stage development for packaging. And then as new types of semiconductors come out and new fabs get built like for silicon carbide, then our optics are really important in doing wafer evaluations and measurements and things like that. So lots of More Corning opportunities there. You referred to auto where we have great opportunities on the interior and the exterior of cars. That we're making great progress on. That was certainly a great spot for us and growth in 2022. Life Sciences, more cell-based medicine, increasing in packages. And I think that's the full extent.

And beyond the More Corning, what about from a market share or competitive standpoint? Do you see opportunity for market share gains? And maybe what drives that -- what drives the market in terms of share beyond just pricing, which obviously...

I think I'll just give you 1 example of how we think about that and I'll go back to optical communications. A narrow definition of optical communications market is how much gets spent on optical fiber and cable and the connectors. That would be the passive market. That would be the passive market overall. But maybe a better way to think about that from the perspective of the value we create is that you should think of the market as all of those things plus the labor that you have to install it. And our opportunity is to take a greater share of that labor. Similarly, in Corning pharmaceutical technologies where we put out, I think the benchmark glass packaging in the pharmaceuticals industry, that it's not just how much do companies spend on vials today, but it's how much do they spend on the vials plus the amount on quality assurance to keep issues with those vials out of the market, which turns out to be 3x to 4x higher than what they spend on the vials itself. With our vial, you don't need to do that because it's sort of self -- it either doesn't break or it's self-monitoring that you really see it. So we can get a premium because of that. So we try to think broadly about what our addressable market is. And sometimes by redefining it, we see new ways that we can create value with our expertise.

Great. And then maybe if we can move to margins. I'm just curious maybe on a segment basis, if you can talk about margins. And then is there an opportunity to improve margins segment by segment or from an overall Corning perspective? Is it more just a mix story and maybe scale and leverage over time?

I think that there are both sets of opportunities for us. As we get to the end of the year, one of my jobs as Chief Strategy Officer is to step back and look at what has happened during the year in all of our businesses, what the priorities are for next year. And I think that there were some good progress on certain manufacturing things that lead to cost reduction this year. And we have a robust set of initiatives underway to improve margins in each of our businesses in 2023 and beyond. So I think we can make some real improvements there. I think it's harder sometimes to see from the outside because inflation still is plaguing us. There are certain materials and energy that have had more of an impact later in the year than we expected going into the year. We're working hard to offset those. But I think we have margin improvement opportunities in each business. We will look, in some cases, to go back for additional price increases to help us where we have to offset the inflation we've seen. And then in terms of mix, sometimes that helps within a business. I talked about solutions in Optical being positive for our margins in that business because we save the customer so much money and we share in that benefit. And then as an overall company, there's mix, and you should think of display and mobile consumer electronics as our highest gross margin businesses. Those are running at, I would say, below the normal run rate of demand right now. So I think as those increase, that's positive for our margins as well. So I think we have a number of levers to improve our margin structure.

How do you think about where you place your R&D dollars? Like what is the process internally to say, Display gets this and Optical gets that? Or is it more on a product or a program-by-program basis?

Yes, it really depends what stage we are in the research. I think the way we've designed our portfolio, we can pursue many things at the early stage at very low cost. For example, Quantum Communications and Quantum Computing, we have some really important contributions to make, in my opinion. Most of the records for Quantum Communications have been set on our optical fiber. But the research we do to produce that fiber is really about how you make even more perfect optical fiber and lower latency optical fiber. And we actually productize those with advances that are important for certain data center customers and undersea and things like that. So at the early stage, there is a lot of thinking about what -- how we want to advance our capabilities. We have certain senior members of our R&D team who are fellows, but you can really get going on a lot of things because we have so much in place within our portfolio for a low cost. As you get to the point that you're engaging in development and starting to use factory time and like that, the customer pull is really important. And I think one of the things we've done over the last 5 years or so is emphasize the need for meaningful commitments of customers to a product to get a real priority on our R&D resources. I think Apple's investments from their manufacturing fund are one of the most prominent examples of that happening, but there are many others.

Do you see an opportunity to find -- I mean, maybe in some of the stimulus packages in that, is there an opportunity for the government to help fund some of this R&D and new development?

Yes, for sure. I think that we've taken good advantage of that with building out our capacity for pharmaceutical vials and that funding has come from BARDA. Another place that we've taken advantage of it more recently is the expansion of our Fairport facility for semiconductor equipment where we're making a lot of metrology and wafer assessment tools. Senator Schumer and Governor Hochul joined us in August to announce that support from the CHIPS Act. And we'd certainly look at that in other areas. I think one area where I'm personally very excited about is what we can do in climate change. And I think that there are some great opportunities, whether it's using our honeycomb substrates for direct air carbon capture or using our new ribbon ceramic, which we're excited is the #3 most exciting photo that National Geographic took in 2022 according to their most recent issue. So you could see a picture of it. It's used in various climate initiatives from batteries to electrolysis for green hydrogen production. It's a really exciting platform and nothing is like it in the world. We've kind of taken some of the things that we do with glass in terms of Fusion and made a form factor of flexible ceramics that hasn't existed before.

That's awesome. I remember when I went up to Corning, I was amazed by the technology. It's really remarkable. It was -- I guess I was -- I won't say I was surprised but I was pretty amazed by all of the various areas there.

Yes. That's certainly what drew me to the company a couple of years ago.

Yes, it's incredible. So I guess just a couple of more questions. In terms of your capital spend and CapEx requirements, cash flow, what's going on in terms of the interest rate environment, understanding you have the longest duration, I think, out there. But how are you thinking about cash usage and priorities, given some of the macro challenges but also some of the opportunities that you have?

So our view is that in the current macro environment, there are certain areas of our business that need some additional capacity. But overall, we feel in a reasonably good shape. And well, I'm not giving specific guidance. I think for modeling purposes, if you assume our capital investments next year are similar to what they are this year and what they were last year, that's a pretty good assumption. I think optical communications is 1 area where we see significant growth in the coming years that you'll see as a priority. Upgrading our display fleets have been a priority while we've had a pause in demand. And I think there's a lot of refreshing that we do. And when we do that, we add capabilities and we reduce cost. It's an important way we expand our margins. So I think those are some of the big things that we're doing. And in terms of cash, we're cautious about the demand environment. We're -- when I talk about pacing to demand, I'm talking about the size of the company in terms of headcount, in terms of facilities, and we look at all of those things. So I think that -- and we look at inventory, which I think, no secret, grew too much in 2022. So I think you'll look -- you'll see us focusing on those priorities as we enter 2023.

Great. Well, with that, I think we've come to the end of our discussion. Thank you so much for joining us.

My pleasure.

And thank you, everyone, for being here, and look forward to continuing to watch Corning over the years.

Thanks, Shannon.

Thanks.