Corning Incorporated (GLW) Earnings Call Transcript & Summary

Hi, everybody. Thank you for coming today. Tim Long here, Barclays IT hardware, comm equipment analyst. Happy to have Corning with us. We have Ed Schlesinger, EVP, CFO, relatively new to the role, within a year. It's been -- done a pretty good job in some tumultuous times so far this year. So maybe we've been starting with a lot of the companies just talking a little bit higher level kind of priorities maybe for the next 1 year or 2. So maybe if we could start there, and then we'll start digging into some of the business line questions.

Yes, sure. So thinking for a couple of years, which is a great time frame, we usually were so focused on the next quarter. I think we have a lot of great growth opportunities really across all of our businesses. So allocating capital and how we're thinking about how we're going to do that, maintaining a strong balance sheet through this sort of cycle is important for us. That's a huge priority. But I think just couple of things that I feel good about Optical Communications next couple of years, certainly beyond that, a lot of growth. So how that plays out or making sure we have capacity available for that is important. Solar, we've started talking a little bit more about that. We restarted capacity. I feel great about it in the next couple of years. It's definitely a priority for us. And then I think -- if you think about this year and sort of the last couple of years to some extent, kind of normalizing the supply chain is a big thing, getting our costs back in line with where they were pre-pandemic levels to the extent we can do that, continuing to raise price to offset that. I think those are big priorities over the next year or 2.

Okay. Great. Excellent. Let's start getting into the divisions. Everyone tends to start with display. So we'll start there. It's obviously been crazy times, kind of had COVID rebound. So maybe just -- I know you guys had some corrections in your business just based on what's going on in the panel market. So just give us your latest update on kind of how you're viewing that industry and kind of renearing that bottom, where we start to see better dynamics as we go into 2023.

Yes, sure. So maybe I'll back up a little bit and start kind of as we enter 2022. We knew at some point, panel makers would have to take their utilization down. They were producing more than they needed to. And we expected that to kind of happen earlier in the year, and it took maybe to the middle of the year until it really started happening. And then it really happened sharply in the third quarter. And as we articulated on our call back in October, we exited the third quarter really at the lowest run rate for panel makers in over 10 years, the lowest rate in the quarter. So pretty bottom as we would see it. And we're starting the fourth quarter or started the fourth quarter the same way. And our view is that it doesn't go down from here. And the real question is, when does it start to tick up. We look to see panel prices tick up, which they've done a little bit. So that's a good sign. We'll look at inventory through the entire supply chain as that kind of reports out for the quarter. We believe that's getting healthier, maybe a little bit in the third quarter, definitely in the fourth quarter. And then at some point, the good news is that will be in a really good place. And those are 2 positive things. And then ultimately, in the end, how much retail plays out in 2023 and beyond will have an impact on to what extent panel makers tick up. Our view is that their production will go up just when and how much is hard to say.

Okay. Maybe 2 more here. One, can you talk a little bit about -- I know you've used this opportunity to do modifications and set up for a better margin structure going forward. So can you kind of walk us through some of the benefits that you guys have seen from this industry disruption?

Yes. I mean we were really running our tanks or running our glass, our own glass supply tight for the last few years. So using this time to take some of our end-of-life tanks off-line, put new technology on, that's good cost improver over time. We'll regulate when we bring those tanks back online, depending on demand, replenish our own inventory, which is also a good cost improver, because we were doing things to move our inventory around to our customers. That was a little bit unnatural in the supply chain environment. So having a little bit more inventory helps us. I think both of those things are good. I think our competitors probably do the same thing. So I think that helps the supply-demand balance to stay reasonably tight or certainly balanced even in this lower utilization time period.

Okay. And then last one on display. When we're coming out of this, do you think there's any change to the competitive landscape with Corning and the 2 main competitors. I mean, I think you guys are a little bit over-indexed to 10.5 plants, which should be a benefit. So do you think that market share or any of those dynamics are different a year from now?

I don't think so. I think the Gen 10.5 comment you made is an important one. We have 3 out of 4 Gen 10.5 facilities. That's not going to change. That captures a huge section of the market. Another dynamic is our competitors are far less profitable. And in this time window, it's hard to imagine they're making any money in this really low volume window. So I think that helps to keep the competitive dynamic similar to where it is.

Right. Okay. You mentioned Optical Communications as one of the real growth areas. It's been great for you. So maybe just talk a little bit about the trends you're seeing, maybe split it between carriers in the enterprise hyperscale markets?

Yes. I think if you think about 2022, we saw good growth really both in cloud and hyperscale and in carrier, fiber-to-the-home being kind of a big driver of that, especially in the U.S. I think those 2 dynamics will continue to play out over time, both well. Both growth will grow well over time. As we sort of exit the year, we've seen certainly a slowdown in the carrier space in the fourth quarter sort of dynamics around various different projects for carriers, them managing their own inventories or their own costs as they sort of exit the year. I don't expect that to have a long-term impact on what we see going forward, could have a couple of quarter impact. The business is definitely lumpy. If you go back to the beginning of the year, we had 20% growth rates, both carrier and enterprise growing sort of above maybe even the levels we would expect kind of over time. So that just has to normalize as you kind of go through the year. And I think as we talk to our customers and we think about the government incentives that are out there, we expect the growth to continue for multiple years.

Okay. And then this Q4 type of -- would you attribute this to macro? Because clearly, a business like display is going to be macro impacted. We tend to think of telcos a little bit less, but we are starting to see some signs of the macro headwinds.

Yes. I think it's hard to decouple anything in some sense from macro completely. I think the dynamics that we are seeing here now are probably less macro maybe than in a lot of the other industries where we participate, like display or consumer electronics where clearly, there's macro impact to those industries. I would say that companies manage their own spending based on the macro to some extent. So I think it's hard to say that carriers or enterprises or cloud data center hyperscalers aren't doing that as well. But I think it's more around just the dynamics of them managing their own deployments of networks as opposed to it being really a big macro thing.

Okay. And the hyperscale cloud piece is important. People tend to be worried about that. Have you seen any changes there? And obviously, you got a lot of data center construction and upgrades, where optical is working its way in there a lot more. So you do have very positive dynamics underneath it. But any changes there that you guys have picked up on?

Nothing that I would say makes us feel any different about the future than we did 6 months ago. Could it impact in a given quarter or a given period of time? For sure, but nothing material.

Okay. And you're still looking at this overall business is kind of around 10% growth the next few years? Do you think that's a pretty good bogey?

Yes. I think high single double-digit growth over a multiyear period of time is a reasonable way to think about it.

And then maybe last one here, talk a little bit about margin profile for this business. I think you did mention you guys have been adding capacity. So maybe talk about the different dynamics and puts and takes on profitability here?

Yes. This is -- so we've talked about inflation a lot in 2021 and 2022, and it hits us in our different businesses in different ways. This is a business that has been hit pretty hard transportation cost, industrial gases, energy, and in the middle of 2022, certainly the back half of '22, we're definitely seeing a lot of inflation hitting the business. So I think that's impacted the margin. To some extent, the ramping of capacity impacts our margin for a period of time until that capacity is fully utilized and fully at the right level of productivity. But I think a lot of it has to do with inflation, and we've been raising price. We're raising price again. We'll continue to raise price until we offset that. It does mute your gross margin percentage or your margin percentage because you're offsetting it dollar for dollar, but it brings your percentage down even when you do that. So I think margins stay muted even as we grow, I think our margins will expand, but maybe not as fast as they normally would because of the higher costs, higher input costs.

And those ASP increases, I mean, it's happening everywhere. I'm assuming from a customer standpoint, it's not a surprise. I mean it's probably been more surprising on display, but that was kind of a year, 1.5 years ago where that kind of inflected. I'm assuming in this business, it's much more obvious that the supply chain has to raise.

Yes. I mean, so far, so good. I think the fact that there is not a lot of available fiber and cable helps, right? The industry is constrained to some extent. I think that helps with our ability to pass price along. I think we will continue to do it to the extent we can. I mean we may test the balance of that at some point, but so far, so good.

Yes. Okay. I did want to go over to Hemlock. You mentioned solar. Maybe just give us -- because it's still a relatively new business, just how you look at kind of the end market there and restarting capacity. And it just seems like it's been a great deal, great timing for you guys, and it seems to be inflecting very positively.

Yes. So -- maybe I'll back up a little. Hemlock, we're a minority owner. We acquired 40% from DuPont back in September of 2020. They make polysilicon for the semiconductor and the solar industries, which I think are 2 really great relevant industries right now for the long term. They have a very strong semiconductor business. It's growing around the rate of the market. There aren't a lot of competitors, pretty high barrier to entry. So I think that part of the business is in great shape, generating cash and growing, and we expect that to continue. On the solar side, they had exited the business back in like the late 2018, 2019 time frame, primarily because the industry had really moved to China for the most part, and they are unable to sell in China because they're blocked out by tariffs. And as the industry became constrained and as the U.S. put legislation in place to block certain polysilicon from various different regions within China or to incent U.S. based polysilicon, it gave Hemlock the opportunity to sell out any inventory they had and to restart capacity. So we have sort of 2 types of capacity. We had a tranche of capacity that had been running and we have mothballed it. We've restarted that pretty low cost. It's pretty much sold out. Prices are really strong. I'm sure prices will come down a little bit over time, but I think we feel great about that portion of the business. We've also got a tranche of capacity that had never been started, and we're in the process of figuring out what happens next. So I think we can grow the business from where we are. And I think as you all know, there's a lot of incentives out there now in the U.S. related to the solar industry, and we're looking at what that means for us and whether or not we think a U.S. solar supply chain can be built out, which I think bodes really well. There are not a lot of polysilicon makers in the U.S. You've got Hemlock and Wacker. We're the biggest one. So I think it puts us in a pretty good strategic position long term in that space.

Okay. And there's increased investor attention. So maybe talk to us a little bit about visibility we're going to get into this business as it ramps, does it get its own little bucket? Or how do we think about that?

Yes, it's a good question, a popular question. We're working on it, and I think we're probably just a little too soon for us to break it out. At some point, we might. Regardless of whether we break it out or not, I think over time, we'll provide some transparency about how we're thinking about it, what it might mean from a growth perspective, how we play, how we see the U.S. market kind of playing out, but we're sort of a little early in that process in our thinking about it.

Okay. And the semi piece of the business here, do you think that's kind of decoupled from semi industry cycle, which is pretty bad, but this business is doing pretty well.

Yes. A couple of reasons why I think our semi business is fine. We have long-term take-or-pay contracts that go out a decade. There's not a lot of polysilicon. So it's not one of those industry components that sort of oversupplied. It's not tight, meaning that there's not any available. But I'm not too worried about it in the macro sense if the industry doesn't grow significantly in the next 12 months, I think it doesn't really have much of an impact. I think quite the opposite if a U.S. supply chain were to be built out over time, I think the industry could be constrained, not in a 1- or 2-year time frame, but maybe in the 5-year time frame. It's not inexpensive to put new capacity in. So I think it puts us in a position where we have a great asset and how we use that asset down the road and what happens with respect to how much polysilicon is needed, if there are 2 sort of parallel supply chains for semiconductors will be an interesting thing for us, but not a short-term thing, but a long-term thing.

Okay. Maybe if we shift to environmental and auto. Auto has been another -- end market has been kind of all over the board. So maybe talk to us a little bit about broadly in auto and then we could kind of get into the 2, the ways you play in there as well.

Yes. So I said this a little bit at the onset. a lot of our markets are sort of in recession, right? I mean I don't know that we're necessarily technically in a macro recession, but if I think about display, mobile consumer electronics, auto, they're all way down. Auto has been down for 3 years below where we think the normalized number of cars to be produced should be. So I don't know how you don't call that a recession of some sort. . Now the dynamic, I think, is different than the other industries, where there is a demand driver that's kind of causing the market here. I think it's still more supply than demand driven. I've been wrong a couple of times. I think the industry experts have been wrong around when the auto market really frees up and you start to see more cars produced. So I'm certainly not going to predict when that happens. I would say we're not counting on it happening anytime soon. We're ready for it to happen. So I think in our environmental business, if I use that as an example, we've got capacity. We have some inventory. So if the industry were to free up, we think we would be in a great place, and we would be able to grow kind of right out of the gate. Whether that happens in '23? I don't know.

And then for the GPF piece, any -- obviously, there's China exposure, there is Europe. Any new developments there where other markets open up or kind of what you're seeing in those 2 end markets? Obviously, Europe has got a little bit more macro risk to it?

Yes. I think China has been constrained in my mind because of COVID more than anything. I think it probably has constrained the demand for autos in 2022. I would say maybe not so much in '21. I don't know. I think it will constrain the demand in '23. But it also has constrained the supply significantly. And I think we're seeing that play out even here in the fourth quarter, even though the lockdowns are different than they were, let's say, in the second quarter where they really impacted the Chinese economy and the supply chain. Europe, I think the demand could be muted because of macro conditions, but people clearly have purchased way less cars than they normally would over the last few years. So I don't see that as being a big long-term demand-driven thing. GPS, for us, obviously, are important. They're important in both China and Europe. They're important in hybrids. So as more cars are made, hybrids use, filters, more filters than an ICE vehicle. So even if more BV-type cars are made, if they're hybrid, that's helpful for us. Eventually, we think the U.S. passes legislation that requires GPFs, probably not for a few years. So I think that space bodes well and potentially allows us to grow above the market over a longer period of time.

Okay. And then maybe just talk a little bit about auto glass, kind of where are you in the per vehicle. And as you continue -- as we continue to see more screens in vehicles. How are you guys doing there and design wins and moving that along?

Yes. I think that unlike the environmental space is going to be a growth opportunity for us for sure, regardless of the number of cars made. It's a much smaller business, but we've won a lot of business and a lot of that will come -- kind of come online as new model years unfold. We'll see growth in 2023 and growth in '24 and '25 as we kind of start to fill the backlog that we've got out there. I think that is a sort of a reasonably certain sort of outcome for us. I think the opportunity set is also really large as new cars are made, they're being made with more glass on the interior. That bodes well for us. A lot of that has to do with the connectivity, the way cars are used today versus, say, the way they were used in the past. Our capability set is really good for large form factor glass on the inside of a car, and that's where we're seeing a lot of opportunities. So I think that actually is a nice growth opportunity sort of regardless of auto market, what kind of cars are produced, what -- how many cars are produced. We're also seeing opportunities on the exterior, in particular, in electric vehicles, lightweighting the vehicle, soundproofing the vehicle are 2 good examples for what we think the value prop is. And then in other specialty glass areas, like LiDAR, for example, any case where the glass needs to be really strong and have good optical properties that hits kind of the sweet spot for us, and we're seeing those opportunities. And I think as cars become more advanced, you'll see cars contain more content. So it just gives us a larger TAM, if you will, in that space.

Okay. Maybe go over to specialty. You mentioned kind of some of your macro impacted areas, obviously, phones is one of them. So I think you've been kind of talking a little bit more conservatively about this. So maybe talk to us where you think we are in that end market.

Yes. I mean clearly, 2022 wasn't a great year for smartphones or PC, IT, monitors, things of that nature. I don't know whether you grow significantly from here in 2023, but it's hard to imagine a repeat kind of a year in '23 in those markets, right? I mean they're down double digits. Phones being down 14% or something like that for the year. We've, I think, taken our view down to a pretty good place for 2022. We haven't guided anything yet, either on the market or our own view of how it will play out in '23. I think we can still grow faster than the market. So even in this down market we are currently growing faster, and I think we can continue to grow faster as we add content into the devices that we serve as well as substitute materials into those devices as well. So I think those drivers still exist for us. I think there's some runway on that. And then how big the market is next year will -- remains to be seen.

Okay. Anything in that business, new product or evolution, new form factor that over the next several years, you think could be something interesting to spark a little bit of growth there.

Next couple of years, I would say, we'll continue to innovate and introduce new -- more content, new materials. There's nothing specific that I'd call out. If you go beyond that window of time, I think AR, VR are areas where we could play. I think the question is what does the device really look like? How big is that market? We believe that if the market exists and it is sort of a device-driven market that we can have the content per device at a much higher level than a phone. So I think the opportunity set is quite large, but I would say that's out a while, at least sitting here today, hard to imagine a significant market in the next couple of years.

Right, right. Okay. Maybe if we pivot to Life Sciences, we could throw a Velocity, Valor in there. Also it seems like a rollercoaster ride with COVID and just a lot more attention in business pulling forward, but still a lot to go on approval, so there's a longer term. So maybe just if you can break down for us kind of the outlook there? And are we still expecting a pretty long-term strong growth as these technologies get more approval.

Yes. Maybe I'll start for a second with our legacy Life Sciences business, and then I'll talk a little bit about Valor, Velocity. In our legacy business, we saw really strong growth 2021, primarily driven by the COVID -- the need for COVID consumables. We've seen that sort of taper off a good bit and the sort of demand moving back towards the more traditional research-type products. I think growth will come from gene therapy, things of that nature that are sort of the future of that space for us. How fast that kind of inflection comes hard to say, but I think we'll grow a little faster than the market. So I feel pretty good about that over the next few years. Valor, Velocity, for us has been rough in terms of getting it launched. COVID actually allowed us to really accelerate and build out quite a lot of manufacturing capability. We now have a high-volume manufacturing facility running in North Carolina, built and sold tons of pharmaceutical packaging devices for COVID. I would say that what really remains to be seen now is, as COVID tapers off, how fast can we take what we've learned in this process, accelerate FDA approval and find a solution that works in the marketplace that we can sort of scale. I think that's the hardest thing so that you're not sort of going drug by drug to get your product on those drugs. We've got some innovative business model ideas that we're thinking about. Velocity is a good one. It's different requirements for approval than Valor, and I think there's opportunity there. I would caution that I don't see that as a huge near-term growth driver.

Right. Okay. Maybe we've got a few minutes left, maybe we'll pivot to some financial questions for you. Talk a little bit about recapturing margin. There's just been a lot going on with like you mentioned inflation, logistics costs, adding capacity, redoing your tanks. So walk us through kind of the next few years on how that gross and operating margin can look.

Yes, I think there are 3 dynamics that will move our margin around, our ability to grow, so making sure all our capacity is full, that clearly is one of the strongest drivers. And right now, if you think about the back half of 2022, display volume is really low. Display is a very profitable business. Our Specialty Materials volume is very low. It's a very profitable business. So just from a sales perspective, that impacts our margin. That will come back. I have high confidence in that. Second is inflation. We've been chasing inflation now for a few years. We're not caught up. That's clearly impacting our margins. I think we have a shot at getting caught up on a dollar basis, but I don't know on a margin basis, right? So I think that could be with us for a while unless we start to see some form of deflation, right, come back into play and costs kind of normalize and come back down maybe to 2019 levels. We have a lot of initiatives underway. I mean, we talk a lot about price because it's easy to talk about and it's an important lever. But I think longer term, we're looking at if we baseline our costs to pre-pandemic level, how do we get them back to that level? What would we have to do to be able to do that. I think that is in that inflation bucket, the harder of the things and it will take longer, but I think we'll make some progress there. And then I think -- the other thing that is going to always have an impact on our business is you talked about it in the form of capacity, but I think it's also the mix of our businesses and how we grow and where we grow. Some of our businesses have higher margins to the extent those are growing at a faster rate, that obviously moves our corporate average up to some extent as some of our newer businesses, auto glass is a good example, ramp, you may be in a window of time for years where you're really kind of in this ramping phase, and there's a little bit of a drag on margin. So I think that will be with us for a while. And if we continue to grow, margins will definitely be better than where they are today.

Okay. And then just really quick because we're running out of time. Just on the cash flow side, I think we've kind of stabilized, I would guess any meaningful changes in cash flow would probably be more success-based where you need capacity or the new 10.5 plant? Or is that how we should kind of think about CapEx and cash flow impacts.

Yes. I mean, cash flow is really important to us to try to stabilize our cash flow. We've been managing our CapEx. Obviously, we need capital to grow. So we'll never be a 0 capital company. I mean even just to maintain our assets, we need about $1 billion a year of capital, right? I would say that we're not building any new Gen 10.5 facilities anytime soon. We'll certainly be adding capacity in various aspects of our business, so we will be spending capital, but I don't see it as a huge dilutor of our free cash flow in the next few years.

Okay. Awesome. Thank you, Ed. Really appreciate it. Thank you everybody for joining.