Corning Incorporated (GLW) Earnings Call Transcript & Summary

Good morning, everyone. I'm Samik Chattergee and I cover hardware networking companies at JPMorgan. The -- I have the pleasure of hosting the Corning management team today for the fireside chat. I have with me Wendell Weeks, who's the Chairman and CEO of the company. Before I get started, I just want to remind everyone that Corning will be discussing forward-looking information and actual results may differ as part of you may defer over -- I guess, that's what I've been given. So I'll leave it there. Wendell just kick it off, I saw the press release this morning, just looks things are getting better and better. In context of that, maybe just help us understand what is getting better? And then how do you think about share buybacks, the timing of that? What should we expect in context of that improvement?

Will do. To begin with -- because I think you're right. Things are looking up, winter is over. I think to just ground us for a second. I want to just take a moment and reduce sort of like how we create ongoing value in the long term and just like why we're so energized right now about some of the tremendous growth and shareholder value creation opportunities that are like right in front of us. So for us, it all starts with our focused and cohesive portfolio. We have three core technologies: glass science, ceramic science and optical physics. Along with four proprietary manufacturing and engineering platforms -- and we're world leaders in each of these, even in the eyes of our competitors. And today, we focus our efforts on five market access platforms. And this is what we call our 3-4-5 approach. Now the way this works is that our probability of success increases as we apply more of our world-class capabilities. Our cost of innovation declines as we reapply our talent and we repurpose our existing assets. And perhaps most importantly, by combining the capabilities in our portfolio, we create higher and more sustainable competitive barriers, and most importantly, of all, we delight our customers. So when we talk about focusing our portfolio, what that means is that we direct 80% of our resources on opportunities that use our existing capabilities from at least two of those three categories within our portfolio. Now a few competitors can match our capabilities in any one of these areas. So when we combine them, that's how we create these big market-leading positions and margins that are much higher than anybody else in our industries. So I think -- let me just give you an example of this in action that's pretty topical, which is: let's just take one of our manufacturing and engineering platforms, Fusion. When you all think about Fusion, I know when you do Samik, you probably think of our display business, where our latest Gen 10.5 technology produces glass larger than 2 King size beds put together. Over 100 square feet, and as thin as a business card. And upon which our customers build 6 75-inch TVs at a time. And that's what's leading to how low cost that LCD technology is. But we also use those same Fusion assets to serve almost all of our other market access platforms. The most famous of these, of course, is our Gorilla Glass business, which we built on the assets that we originally capitalized for display. And today, now, we built a world-leading $2 billion mobile consumer electronics platform. We're taking the same approach in automotive. We've introduced our automotive customers to our glass expertise and we now have a triple-digit fast-growing automotive glass business using these same fusion assets. And now as we speak, it is one of the things that makes this topical, we're applying our Fusion platform to our Optical Communications segment. The rise of generative AI is driving the potential for our Fusion technology to bring flat, pristine, highly stable glass, initially as a substrate for GPUs. And in the near future, that substrate to become embedded with optical waveguides for co-package optics. So, just with this one example, I think you can see how our portfolio works. We just -- in just one of our core manufacturing platforms together with three of our core technologies, we're able to serve four out of our five market access platforms. And that's really the power of 3-4-5, and it's a great example really of how the capabilities in this portfolio lead to long-term growth and continued increasing effectiveness of innovation and reducing cost and innovation. Now turning more to the medium term, which is what has us pretty energized right now. As we shared the last couple of quarters, even though our market leadership position really has only strengthened the last several years. Demand in our markets has been temporarily depressed in supply chain corrections and macroeconomic factors. And as a result, our sales were also well below our trend lines. The good news is that we believe Quarter 1 is the bottom, and we now see our sales and markets improving. Over the last couple of quarters, I've also outlined a framework for you, which we refer to internally a much more detailed plan, which we call SpringBoard. And this framework has three primary components. First, we believe that the first quarter 2024 will be the lowest quarter of the year, will improve from the Quarter 1 levels, and we have clear evidence of improving market conditions. Second, we expect to grow by more than $3 billion in annualized sales in the next 3 years. And the outlook, really, in each of our markets remains positive, and our market positions are very strong. Our innovative products and deep customer relationships are positioning us well to capture this growth. Third, and perhaps I think most importantly, as we capture this growth, we expect to deliver very powerful incrementals. And the reason's really simple, we already have the required production capacity and the technical capabilities in place to service that growth. And the cost and the capital are already in our financials. So this is just a tremendous opportunity, we believe, for our shareholders. Now it's important to note that the SpringBoard opportunity is well above $3 billion. We communicated the revenue opportunity conservatively to provide you with a more high confidence plan. Now to develop that, we had to think very deeply in probabilistic terms about various outcomes for our markets and our businesses. And let me give you an example that I know is on your mind, Samik, which is the yen and its related impact on our display business, on price in our display business. With respect to the yen, as we have shared many times, we're hedged through the end of 2024 to support our core rate of 10. Currently, the end spot rate is significantly weaker than 107. But we've also told you that going forward, we would maintain appropriate profitability in our display business through some combination of hedging and industrial solutions like price adjustments. So I just thought I'd share with you in a little more detail what our approach will be to that mechanism in 2025. We already have hedges in place for 2025. They're not at the 107 rate, but they are much better than the current spot rate. Now as a reminder, our customers buy glass from us in yen and they sell panels in U.S. dollars. So they're benefiting from the current weak end rate. To maintain the level of profitability we have in display, we plan to use a currency-based price adjustment in combination with our hedges to ensure that we continue to deliver appropriate returns in this business. And because, Samik, I know you will have a question for your models. For your modeling purposes, the way we think about appropriate profitability in our display business is if you just look at the average in PAT return on sales at our segment reporting over the last 4 or 5 years, right? That average return is the return that we would expect to have in this business in 2025. Now that's just one example of the approaches that we're using to ensure that our SpringBoard plan delivers greater than a $3 billion revenue opportunity with significant incremental profit and cash flow. Finally, many investors have asked us, okay? So, when SpringBoard is successful, what will you do with the additional cash that we generate from these strong incrementals. As you know, our capital allocation priorities are to invest for organic growth. We invent, make and sell product sets. We're an organic grower. And that we return any excess cash that we have above those organic growth needs to our shareholders. Now because we already have the capital and capabilities in place to support our medium-term expected increase in sales, we also expect to generate a significant amount of excess cash in that term. Therefore, with the success of the SpringBoard framework, we'd expect to be able to accelerate the return of cash to our shareholders. In fact, because of growing confidence in SpringBoard, as each month goes by, we have begun to buy back our shares in the second quarter. So right before we turn to Q&A, a few quick points. First quarter sales, we see encouraging signs of us returning to spring. As our markets improve, we're going to increase by more than $3 billion with powerful incrementals. Our second quarter guidance reflects this, right? We've already established a higher profitability and cash flow base, and we've got a strong framework in place to drive even stronger returns on our existing innovation and capacity investments. And we're going to make a lot of progress rapidly, and we'll continue to share that with you.

Great. Great news on the buyback and things are looking better. Maybe just going a bit deeper into the AI-related demand. Just help us understand what -- how you're thinking about the opportunity in total as well as the timing in which it comes through?

Generative AI has the potential to impact many of our market access platforms. Okay? Because it will impact both the generation of the models and use of the models in our infrastructure-based business, optical communications, as well as causing refresh cycles on the user interface, as well as developing an entirely new user interfaces using this technology that we are already engaged on with a number of leaders in the space. But let's concentrate on the one that's going to hit the fastest. So everybody talks about power in generative AI, and it is true. It uses a lot more power. If you look at the world through glass eyes like us, right? So what you see is that you use a lot more fiber optics for any given amount of power to do generative AI, like 5x to 10x as much. So like the example that I've used with uSomIQ is if I equalize on power and just take a current sort of CPU server rack, that's a front end of the network today. That will use about 10 kilowatts, right? So that will use -- you have about 32 fibers that connect to the top of that rack, 16 to fiber connectors. Now let's go to the back-end network and a GPU rack. First of all, let's just equalize on the 10 kilowatt. So that will cover about two H100 servers, right? H100 server will tender different architectures, but we'll tend to run 8 GPUs per server and an InfiniBand switch with 400G ports that uses 16 fibers. So each of those H100 servers uses 128 fibers. If there's 2 of them, interact equalizes on that power as 256 fibers. And so it's an 8x increase in the amount of glass per rack, right? Now from an innovator's perspective, there's two things. First of all, of course, we love the volume. That's awesome. But from an innovator standpoint -- and this is really just the earliest gens, you see having to fit way more in the same space. So this is what's led us to invent a brand-new-to-the-world fiber that's smaller, brand-new-to-the-world cables, which are much smaller, brand-new-to-the-world connectors, which are dramatically smaller like order of magnitude, right? And new systems -- and new passive systems to be able to connect all these things and make installation speed way faster, right, and reduce the probability of a outage on that fiber optic pipe. So from a plumbers perspective, right, the near-term -- the near-term opportunity will be, as those innovations take place, especially in the large GPU clusters, you'll see that start to really run through our numbers and you should start seeing it really in the back half as those big clusters start to get put in. And was that more than you wanted to know?

No, I [indiscernible] . . .

Okay. Okay, good.

. . .back to elaborate on the other piece, which is the hedge VIP's you referenced, and, I mean, we all have our forecast of when AI is going to be driving a replacement cycle, but definitely want to hear what you're hearing from your customers. And when do we see a replacement cycle on smartphone or any other hedge devices you're thinking of?

So like you, Samik -- and depending on who you speak with, which of my customers you speak with you will get a different idea on what the primary interface will be for generative AI. And you will get a compelling case from each of them on why their device set will have an innovation cycle and therefore, become the primary. I don't think I'm smart enough yet to know which one of them is right. But I do think they're all right in a way in which that you are going to have to upgrade your hardware, right, to make use of this new tool in an effective way. Whether or not it's going to be more silicon heavy like notebooks, or whether it will be more like phones, or whether it will be entirely new devices is up for debate. Probably the most interesting space is the very new UI space, like what will be sort of the phone of the future with this. That's super interesting, and there's a lot of really smart people working on it and we're enjoying working on it with them. But that is probably the most speculative of all.

Help me tie that with your specialty materials platform. And I know you've talked about not having a major launch this year, but having -- indicating it's more next year, how do you tie that with how your customers are thinking about when the replacement cycle can really accelerate?

Yes. Right now, I'd say that the first efforts are really to incorporate Gen AI's capabilities into more existing format structures, right? And then that just -- take where -- take mobile consumer electronics. The phones are down - I don't know - 20% since we first did the More Corning strategy. Our revenue is up 40%, right? So I think the first way they look at this is a reason to get phones moving again and to differentiate. Our big next step up into how do we get more Corning on top of that base growth, that relies more on sort of new materials that we're introducing in new form factors. And it's just the way those adoption cycles work. Our next one, our next big material to me, looks more like it will hit next year, in this.

I want to go back and follow up on your comments about using currency-based price adjustments with your display customers. . .

I don't know what the question is, but that's the right topic.

This comes from the step on the heels of taking a 20% price increase last year, same time, I guess. And just talk to us more in terms of how do you think about pricing power that you have to take a price increase following the 20%, and how would you expect your competitors to respond in that sort of dynamic? Right?

So our confidence has grown because we just did a double-digit price increase. And though the industry was slow to follow, they did, right? And for us, the discussion is pretty straightforward with our customers, right, that they're benefiting from this yen and we should be able to share that in a more appropriate fashion. No customer in consumer electronics welcomes a price increase, right? But our relative position because of our leadership in the technology, our ability to serve all types really all across the globe. And that none of our competitors are financially doing that well, right? It means that it's not like we're being greeting. So that's the way we look at it. We're confident that we'll be able to do it again since we've done it. I think the first time we were more nervous than we are the second time.

Okay. Test. Going to the $3 billion SpringBoard opportunity, you're more than $3 billion that you talked about, you did provide a lot of details into the segment itself, clearly, optical display all are part of it, but help us to the extent that you can quantify things? When we think about -- even when we start with the high confidence $3 billion that you talked about, what are the big sort of buckets there, how to think about how much of that comes from display and optical versus the other segments?

So because the pie is much bigger than the three, it's hard to do what share, right? Because we definitely -- we start out with a bigger number than we probabilistically adjust. But what I can do for you is which ones do we expect soonest, right? So we have growth really across all 5 of the platforms. The ones that we'll see this year, like right away, you'll see display and Opto. We'll be the earliest ones coming in, right? And we're beginning to see that evidence, which is what you saw reflected in our quarter 2 guide, right? And as we work our way through quarter 2 and we gather more data, more information, more orders in our order books, and we should be able to speak a little more confidently as we go forward. So those will be ones that will trigger in the nearest term, right? Automotive, both glass and environmental data is going to move also starting late in this time period. As you see I've already shared the next move there is really a More Corning move because we haven't built more growth cycle in for the refresh cycle because we don't feel confident enough yet. That we know when that is going to be, right? And in our Life Science segment, it's really been about that whole pivot from COVID and everything that, that did and returning sort of our product line availability to those other areas that are non-COVID related. And as those come into -- as those get available to supply and the markets clean out of inventory, we'll see that start to come back, too. So a lot of these things start to come in this year, but the big ones for this year that you'll see right away are display and Opto.