Corning Incorporated

Welcome to the Corning Incorporated Quarter 1 2020 Earnings Call. It is my pleasure to turn the call over to Ann Nicholson, Vice President of Investor Relations.

Thank you, Tony, and good morning, everybody. Welcome to our first quarter 2020 earnings call. With me today are Wendell Wheat, Chairman and Chief Executive Officer, Tony Trippany, Executive Vice President and Chief Financial Officer, and Jeff Evenson, Executive Vice President and Chief Strategy Officer. I'd like to remind you that today's remarks contain forward-looking statements that fall within the meaning of the Private Securities Litigation Reform Act of 1995. These statements involve risks, uncertainties, and other factors that could cause actual results to differ materially. These factors are detailed in the company's financial reports. You should also note that we will be discussing our consolidated results using core performance measures unless we specifically indicate our comments are related to GAAP data. Our core performance measures are non-gap measures used by management to analyze the business. A reconciliation of core results to the comparable gap value can be found in the Investor Relations section of our website at Corning.com. You may also access core results on our website with downloadable financials in the Interactive Analyst Center. Supporting slides are being shown live on our webcast. We encourage you to follow along. They're also available on our website for downloading. And now I'll turn the call over to Wendell.

Thank you, Anne, and good morning, everyone. This morning, we reported first quarter 2020 results. Sales were $2.5 billion, net income was $177 million, and EPS was 20 cents. We accomplished much of what we set out to do in the quarter, despite the evolving health crisis and its impact on the global economy. That said, The situation is creating uncertainty in our sales. As a result, we are adjusting our operating plan to reduce cost and capital spending. We are committed to preserving the financial strength of the company. We have essentially no debt coming due over the next two years, and we expect to maintain a strong cash balance and generate positive free cash flow for the year. We also plan to maintain our dividends. Because of the heightened uncertainty, we will not be providing our normal guidance at this time. We are all confronting profound challenges as a result of COVID-19. Our thoughts are with those directly affected by the pandemic and the many people fighting it on the front lines. Our company has been facing this human health crisis head on since day one. The first cases of the disease to draw attention from medical officials and the media occurred in Wuhan, where Corning is opening a display plant. Responding to these early cases in Wuhan in greater China put us to the test, and we rose to the challenge. Our core teams and our factories gave their all. They kept our people safe and delivered on customer commitments. Our experience at the start of the outbreak informed the blueprint deployed in all our facilities as the virus spread across the globe. All Corning sites maintain comprehensive preparedness plans and are operating under our best practices playbook. From China to South Korea, Italy, India, the U.S., the challenges are unique in each location, but our actions have been compassionate, systematic, and based on facts and experience. So what does this response tell you about Corning? Even in periods of uncertainty, we are certain that we'll protect and support our employees and our communities, we'll deliver for our customers, and we'll preserve our financial strength to sustain excellent stewardship on behalf of all of our stakeholders. Beginning with SARS, Corning has designed procedures to keep our employees safe during pandemics. From the start of the outbreak, we've been ahead of the curve, safeguarding our people and workplaces according to the very highest standards. And we support our communities. We're launching unity campaigns in partnership with local business owners, medical professionals, food banks, and other human services organizations in all of the communities where we operate. Together, we're supplying basic needs, aiding vulnerable populations and easing burdens caused by the crisis. From upstate New York to India, Corning is supporting hunger relief and helping secure essential food supplies for people undergoing lockdowns and other disruptions. We donated 150,000 surgical masks to regional hospitals in New York, North Carolina, New Jersey, and Virginia. We've stepped forward with pharmaceutical glass packaging to meet surge capacity, and we've accelerated the commercialization of Valor to assist in developing vaccines and other treatments. In Italy, we coordinated the donation of laboratory supplies to mitigate the impact of medical supply networks. And in China, We supported production of antiviral sprays with our advanced flow reactors. We also donated, according to Guardian, antimicrobial particles for an antiviral paint, which was specially produced and deployed for frontline hospital use in the Wuhan area. We are now working with regulatory agencies to seek approval for other applications and other geographies. Corning is in this critical human health fight. We're doing our best to make a difference wherever we are with what we have to contribute. The same resolve applies to our customer commitments. We've maintained our operational excellence throughout the crisis, and we continue to meet or exceed customer expectations in this difficult operating environment. To share a recent example, Customers in China needed to produce antimicrobial sprays to combat the spread of the virus. They urgently needed use of our advanced flow reactor product. We knew our technology and the global supply chain system could make a difference. So our teams executed within days on a project that normally would take weeks to design, make, ship, and deploy production scale systems. We're rising to the call in similar ways around the world. We're also committed to preserving the financial strength of the company. To that end, we are adjusting our operating plans to reduce cost and capital spending, all while meeting our customer commitments. We have essentially no debt due over the next two years. We ended the first quarter with $2 billion of cash. We expect to maintain a strong cash balance and generate positive free cash flow for the year. We plan to maintain our current dividend. I want to take a moment to talk about our strong balance sheet. In addition to $2 billion of cash, we have a debt structure that is conservative by design and relatively unique. it is built for times like these. We deliberately issue debt with 30, 50, and even 60-year maturities so that there is very little debt due in any given year, and the total maturity is spread out over a very long time. Today, our average debt maturity is about 25 years, the longest in the S&P 500. Over the next two years, we have under $70 million of debt coming due. Less than half of our total debt is due within the next 20 years. And during this time, there is no single year with debt repayments over $500 million. Investors often evaluate credit and financial health based on total debt to EBITDA. For the S&P 500, the average company has a weighted average debt maturity of roughly 10 years, and more than 80% of debt is due within 20 years. Consequently, when investors calculate debt to EBITDA, they are implicitly focusing mostly on debt due in the next 20 years. Corning's 20-year debt to EBITDA is 1.1, consistent with an A credit rating and illustrative of the conservatism of our balance sheet. In sum, We have a very strong balance sheet and we have the financial resources needed for the duration of the economic slowdown. We don't know how deep it will be or how long it will last, but we are financially strong coming into it and we're going to come out of it even stronger and ready to return to growth. Let's turn to our long-term growth drivers, which remain intact. In fact, some of the secular trends could accelerate as consumer lifestyles continue to adapt to the drastic circumstances being experienced across the globe. A world of physical distancing and remote work requires expanded network capacity and sophisticated communication solutions. Reduced fine particulate pollution appears to be helpful for reducing infection rates. Drug discovery and safe, widespread delivery of vaccines are among society's top priorities. All these needs fall directly within our mission of improving lives through innovation, and Corning is ideally positioned to contribute. Many of the lifestyle changes we're adjusting to today will not be temporary, and our products and technologies across our market access platforms are more important than ever. Of course, The data continues to come in, and we're busy on all fronts assessing and collecting information on what exactly the new normal will be. Looking at optical communications, bandwidth demand is surging. Let's start with usage reports published over the last two months. At one major carrier, Wi-Fi calling has increased almost 90 percent. Collaboration tool usage is up almost 90 percent at another. And one cable TV company reported that voice over IP and video conferencing traffic increased 228% since March 1st. A major social media company said live streams were up 50% and group video calls were up 70%. A popular cloud video conference service reported that they spiked from 10 million users in December to 300 million in April. For a long time now, our personal technology has been intrinsic to our day-to-day experience. We take it wherever we go. With social distancing, that technology has become where we go to work, learn, and connect. All this points to the need for continuously scaling network capacity and making investments in technologies like 5G, fiber to the home, and cloud computing. And our physical distancing and remote living is being mediated through displays on TVs, laptops, and mobile consumer electronics. Corning's industry-leading glasses are essential for displays and touch interfaces. Turning to our automotive market, our clean air technologies have captured or neutralized billions of tons of pollutants over the past four decades and helped billions of people breathe easier. Today's health crisis is heightening the importance of this corning technology. A study by the Harvard School of Public Health connects fine particulate air pollution with higher death rates from COVID-19 in the U.S. The researchers stated that their study results underscore the importance of continuing to enforce air pollution regulations to protect human health both during and after the COVID-19 crisis. Many countries around the world have regulations to address fine particulate emissions from mobile sources, and Corning's technology is an essential part of the solution. Corning's diesel particulate filters have been used for many years to remove particles from diesel exhaust. More recently, Corning introduced gasoline particulate filters, GPFs, to cut down on particulates from gasoline exhausts while enabling the most efficient use of fuel and horsepower. As the Harvard study reinforces, a body of research ties dirty air to illness, including the most severe COVID-19 outcomes, and makes our solutions more relevant than ever. There are also multiple ways we've mobilized our innovation capabilities to combat the pandemic more directly. Consider our Valor glass. There is a worldwide shortage of pharmaceutical glass packaging and vaccine fill finish capacity is limited. We need successful COVID vaccines and we need next generation pharmaceutical packaging and processes to produce and protect them. We believe corning ValorGlass is the answer. In addition to offering a safer package, we believe that the faster filling line speeds enabled by our Valor technology are particularly critical for a pandemic response when every hour counts and every extra dose delivered makes a difference. ValorGlass vials are being used for COVID-19 vaccine clinical trials right now. We're also supporting several other leading companies developing treatments for the disease. Our support includes Valor, other Corning Life Science products, and technical support to accelerate solutions and ensure availability across the globe. We're supplying our traditional lab products for both RNA and antibody testing to combat the spread of the coronavirus. And we're exploring applying our technology in other ways. For example, using our advanced flow reactors to scale production of small molecule antivirals to treat the virus. GPF substrates for fixed systems that remove fine particles from outdoor air to reduce disease transmission. And Guardian to create smart surfaces that kill coronavirus before it infects people. Overall, we're confident we can make significant contributions as the world addresses and recovers from these challenges. And as we've recently announced, we're taking the next organizational steps to tap the full power of our potential. We're centering operations around our market access platforms, positioning Corning to become even more relevant in our markets. We're working to capture more customer insight. further leverage our distribution channels, and open up new opportunities for innovation with industry leaders who already trust us deeply and appreciate our unique set of capabilities. The new organization comes with a new generation of leaders moving as steadily forward as we pursue our next 169 years of life-changing innovation. We've also established a new leadership position that will drive operational excellence and appointed Eric Musser, President and Chief Operating Officer. Eric's a coining veteran with a strong track record for leadership and execution. He will enhance process consistency and ensure we hit our targets across the company. Before turning it over to Tony, I'll close with a final thought. Corning is no stranger to difficult times. Across three centuries, we've tackled some of our customers' toughest problems by creating some of the most consequential material inventions in history. We've navigated to world wars, natural disasters, and economic catastrophes. Our job, as always, is to rise to the challenge of today and lead. We're keeping our company strong. We're innovating on some of the most pressing problems of the moment, and we're built to last, regardless of the duration of the current crisis. Our people are dedicated. Our resolve is total. Our capabilities are more relevant than ever. Now let me turn the call over to Tony for more details.

Thank you, Wendell, and good morning. As Wendell said, our results for the first quarter were solid. given the significant changes in market conditions in most of the industries we serve. Because we are in a period of uncertainty, our sales are hard to predict. Therefore, we are withdrawing our full year 2020 guidance. My remarks today will give you a sense of what we're seeing in each of our businesses and a summary of the actions we're taking to address the situation. Now, before I get into the details of our performance and results, I want to note that the largest difference between our GAAP and core results is associated with non-cash charges related to capacity realignment and cash severance payments. Other differences between our GAAP and core results come from a non-cash mark-to-market adjustment for our currency hedge contracts. With respect to mark-to-market adjustments, GAAP accounting requires earning translation hedge contracts and foreign debt settling in future periods to be marked to market and recorded at current value at the end of each quarter, even though those contracts will not be settled in the current quarter. For us, this resulted in a $50 million gap earnings gain in the quarter. To be clear, this mark-to-market accounting has no impact on our cash flow. Our currency hedges protect us economically from foreign exchange rate fluctuations and provides higher certainty for our earnings and cash flows, our ability to invest for growth, and our future shareholder distributions. Our non-GAAP or core results provide additional transparency into operations by using a constant currency rate aligned with the economics of our underlying transactions. We're very pleased with our hedging program and the economic certainty it provides. We've received $1.7 billion in cash under our hedge contracts since their inception more than five years ago. Shifting to results, first quarter sales were $2.5 billion. Net income was $177 million, and EPS was 20 cents. In display technologies, first quarter sales were $751 million, and net income was 152 million. Display glass market first quarter volume grew by a low single-digit percentage sequentially, and Corning's volume was down a low single-digit percentage, both as expected. Sequential price declines were moderate, also as expected. Stay-at-home policies in multiple economies, starting in China, impacted in-market demand for televisions in Q1. As a result, preliminary Q1 worldwide TV sell-through units are reported to be down low single digits year over year. Now, for Q2, early data indicate TV sell-through units could decline more than in Q1. Weak TV demand will likely be partially offset by pockets of strength for some IT products. Now based on our experience in prior economic events, we expect TV demand to recover to its longer-term growth trajectory as the economy recovers. In addition, we expect increasing screen size to drive continued growth in glass demand. How the full year plays out for glass demand and retail will depend on the duration of stay-at-home policies and the health of global economies throughout the year. Now, China is the first major economy to experience the shutdown and reopen cycle, and we'll be watching its TV retail demand recovery closely in the upcoming months. Although demand declined year over year in the first quarter, it is encouraging to note that China TV sell-through in March increased by over 50% versus February. We are adjusting our production levels to a lower level of demand. As you may have seen reported in the news recently, Samsung Display is accelerating their exit plans for LCD panel manufacturing. While this is happening faster than we originally expected, the fundamental shift from Korea to China is not a surprise to us. We have been working closely with Samsung as we move through this transition and we are well prepared. As panel makers shift from Korea, our three Chinese Gen 10.5 plants position us well. Ultimately, in-market demand drives glass demand, and with retail area growth primarily driven by large TVs, which are most efficiently manufactured on Gen 10.5 fabs, we will capture the majority of that growth. We expect temporary impact on our volume relative to the market driven by specific timing of Samsung Display's exit versus the ramp of our Gen 10.5 plans. Our Korea operation is a low-cost manufacturing organization that we will use to serve our global customer base. Finally, we continue to expect display pricing to decline by a mid-single-digit percentage in 2020. We believe that three factors continue to drive the favorable glass pricing environment we've been experiencing. First, we expect glass supply to continue to be balanced to demand. For Corning, we are aligning our capacity with demand. We are also pacing our Gen 10.5 capital projects to align with panel makers' schedules. Second, our competitors continue to face profitability challenges at current pricing levels. And third, display glass manufacturing requires periodic investments in existing capacity to maintain operations. Glass prices must support the acceptable returns on those investments. In optical communications, first quarter sales were $791 million. As Wendell said, long-term growth drivers are intact. We are seeing positive statements from telecom operators regarding network constraints, increased demand for bandwidth, and continued investment in 5G and data centers. But we are also seeing negative impact as carriers and enterprise customers face site access, health and safety concerns, supply chain interruptions, and cash constraints. The business continues to adjust its cost structure and aligned capacity to match near-term sales. Environmental technologies first quarter sales were $320 million, and net income was $35 million. Sales were down 12% year-over-year, and below our expectations of up mid-single digits, as car and truck manufacturers implemented shutdowns in key markets. Profitability was impacted by the lower volume. We believe the economic impact on the auto industry will be significant, especially over the next two to three quarters. Auto assembly plants are beginning to resume operations, with China starting to run, Europe beginning to open back up, and North America expect it to reopen soon. How the recovery will play out for our business will ultimately depend on global car sales. In diesel, we anticipated a cyclical decline in North America heavy-duty truck market from its peak in 2018 and 2019. We now anticipate that decline will be even faster and steeper. Global demand was down 25 percent in Q1. Now, despite the impact we are experiencing, we expect our full-year sales to be less significantly impacted than the overall market, and we remain confident in our content-driven growth strategies. OEMs continue to adopt gasoline particulate filters in Europe and China, and emerging market heavy-duty regulations are driving adoption of more advanced products. As markets recover and improve, we expect to resume our growth trajectory. Specialty materials sales were $352 million, up 14 percent year-over-year, versus our expectations of a mid-single-digit increase. Net income of $51 million was also up year-over-year. We exceeded expectations due to strong sales of premium glasses, other Gorilla Glass innovations, and advanced optics products. We expect the global economic slowdown to reduce smartphone sales. In the first quarter, units were down 19% as store closures and stay-at-home restrictions, particularly in China, impacted phone sales. Social distancing policies are now underway in many countries, so we expect these lower in-market demand levels to continue in the second quarter. As countries begin to emerge from lockdowns, we expect to see increasing in-market demand. Looking ahead, we expect our outperformance relative to the 2020 mobile consumer electronic market to come from further advancements and adoption of our premium glasses and our other innovations. In life sciences, first quarter sales were up 6% year over year to $258 million. Net income was $38 million. Life sciences is being impacted by the prolonged closure of non-essential laboratories. However, this is somewhat offset by increased demand for consumables used in COVID-19 testing applications. As Wendell said, we are confident in the opportunities ahead for life sciences and valor, especially as we prepare for upcoming vaccine demand. So that is what we are seeing in each of our businesses. Clearly, the world and our outlooks have changed significantly. Anticipating lower sales, we are aggressively adjusting our operating plan and taking actions that will maintain our financial strength and result in positive free cash flow for the full year. We initiated actions in Q1, and we will continue in Q2. These actions fall into several broad categories, reducing production levels across all of our businesses, adjusting operating expenses with the majority of the savings realized in the second half, modifying inventory plans, and reducing capital expenditures. Our actions impacted gross margins in Q1, and we expect additional impact in Q2. Gross margin in the first quarter was 33.4 percent and below our expectations driven by lower than expected volume in environmental, and the impact of lowering production across several businesses. Most of our businesses have high fixed costs. In fact, more than half of our manufacturing costs are fixed, and a significant portion of that is non-cash depreciation. This results in very high operating leverage. However, in times when volumes are dropping, our fixed costs do not change and the impact on our margins is significant. The impact is more dramatic when we are lowering inventory. In Q2, we will be further ramping down production and bringing down inventory. Therefore, we expect the Q2 gross margin percentage to be lower than Q1. So our factory utilizations are low today. On the other hand, the capital is in place when sales growth returns. When this happens, gross margins will expand. Let's move to the balance sheet and our commitment to strong financial stewardship. We have under $70 million in debt due over the next two years and no year with more than $500 million due over the next 20 years. Our 20-year debt-to-ebit ratio is 1.1 times, and that's outstanding. We expect to maintain a strong cash position and to maintain our dividend. As I previously mentioned, we expect to generate positive free cash flow for the year. We have paused share buybacks. and do not expect to add material debt in 2020. To wrap up, we expect that continued economic uncertainty and related in-market weakness will affect most of our businesses. The current situation poses many unknowns for people, for families, for companies, and for governments. What we know at Corning is that our underlying market drivers are intact and that we fully expect to resume growth. And when the expected growth resumes, most of the capital is already in place. We're operating on the strong financial foundation we built under the strategy and capital allocation framework, and we're adjusting our operating plan and taking actions to position ourselves to come out of this slowdown even stronger. We certainly look forward to the end of this health crisis and the related hardships being experienced by so many people around the world. Until then, our priorities focus on coordinating stakeholders as we maintain disciplined stewardship that will steer us back to growing sales and profitability. With that, let's move to Q&A. Ann?

Thank you, Tony. Okay, Tony, we are ready to take questions.

Thank you, ladies and gentlemen. If you wish to ask a question, please press 1 then 0 on your touchtone phone. Thank you once again for questions. It's 1 then 0 at this time. Our first question comes from the line of Rod Hall with Goldman Sachs. Please go ahead, Rod.

Yeah, hi, guys. Thanks for the question. And, you know, let me just say our thoughts are with you guys. We know it's difficult to run a business in an environment like this. So let me start off, I guess, with one for Wendell, and then I'll jump on to one for Tony or Wendell, whoever wants to answer it. Wendell, there's an increased amount of discussion of onshoring, and I know there's been some movement toward potentially producing displays in the U.S., Just wonder if you could talk a little bit about your thoughts on where that debate is right now and how Corning's costs look in an onshoring environment. Would you need additional capital? I guess you might look to the government for that, etc. Just whatever color you can give in terms of your thinking there. And then my second question relates to inventory and what you guys think is going on with both display and and smartphone component inventory. Are people, we've heard that there's some inventory build out in the channel. Maybe if people worry that, you know, production would be affected on through the year by this and so on. So just curious what's going on with inventory levels out there. Thanks.

Okay. Well, first, Rod, thank you for your thoughts. With regards to onshoring, sort of, I think the priority set with policymakers is going to start with life science products. What they're trying to address is that a huge number of the active pharmaceutical ingredients that we use to preserve human health are manufactured overseas, often starting in China and India. So one of their top priorities is that as we seek to confront this particular health crisis, that we build that infrastructure in the US. That is what you heard me talk about in my opening, and it's where Valor begins to play a very large role. More to come on that topic. Next in order would be the other critical parts of infrastructure. Of course, you have defense, which already has significant on-shoring implications to it, as does aerospace. But telecom is now increasingly becoming an issue. We already are built because of our value set to support all of our different customers regionally. I think display and consumer electronics will tend to fall relatively low on our societies around the world's priority list for critical infrastructure that governments want to control in their country or in their particular trading block. So that's my current point of view on it. Of course, it's political, so that is always subject to change as opposed to necessarily logic. Does that make sense, Rob?

Yeah, that's great, Wendell. Thank you.

On the inventory question, whenever you have situations where different elements of the supply chain can be shut down at different times, it makes calculation of value chain inventory quite challenging. So what we do instead is we're looking directly to the end market And then we're trying to use that to guide our internal operational thoughts around what we expect revenue will be in total for the year, and then sort of just work out the map that's in between. I'll be interested when you publish on your own thoughts around smartphone demand. You've been relatively accurate in the past.

Great. Okay, thanks. And do you think, Wendell, there's anything to this idea that maybe people have built up more inventory in the channel just thinking that they can't count on supply necessarily? Or do you think that's probably not such a big issue?

Well, for sure they're doing the behavior that you're noticing. You see it in our numbers, Rod. You see the very strong revenue growth in our guerrilla business, right? And throughout this time period, we've been having very strong requests from our customers. But what you would have heard from us is that we'd say we wouldn't take a look directly at our revenues as being the most accurate view of what's going to happen in the end market. So I think without doubt that's happening. How big a deal it is totally depends on What happens as people emerge from shelter in place? For that, what we're looking to is what's happening in China because they are now earliest to sort of return. There's other countries like that throughout Asia where we're going to look at what's happening in those markets and use that to inform what it is we think will happen as other regions open up. So without doubt, you're noticing something that is a true thing. How much of a problem is really the key thing to solve is what happens to demand, sir.

Great. Okay. Thank you, Wendell.

Thank you. Our next question comes from the line of Tim Long with Barclays. Please go ahead.

Thank you. I just wanted to of the display business a little bit. You mentioned the, you know, the move from Korea to China and some potential disruptions as that happens in the 10.5G plants ramp. Could you talk a little bit about kind of the magnitude and the timeframe for that period of maybe second related to that? Once we're kind of much more China-based in this part of the market, what do you think the kind of the pricing or margin implications of this move will be and market share longer term as the supply chain moves more into the China business? Thank you.

I'll take the start of it and then Tony can add. So With the shift from the Korean Peninsula to China, as you heard from Tony, this was something we were anticipating. It's just happening faster than what we originally anticipated. So what the interaction with our revenues will be is how fast the Korean Peninsula turns down versus how rapidly the Gen 10.5 plants come up, and in what order? Our current point of view is that it will play itself out so that we'll feel the pain this year as Korea will tune down a little faster, given COVID-19, that our Gen 10.5 plants will come up. But then we'll have a strong game next year. In total, what will drive this thing is what happens to television demand, of course. But given that that plays out how we would expect, I think that will be the pattern of how it will play out in our numbers. A little bit of pain this year and a strong gain next year.

The only thing I would add to that is that essentially you saw some of that happen in Q1 where the market sequentially grew a little bit and we We're down a little bit, and that's really the explanation there. Not a surprise. It's as we guided, but it's a good example of what Wendell is. It's a good example of seeing what playing out what Wendell just described.

Did that address your question, Tim, or did you have an additional one?

Yes. Yeah, that's it. And just maybe if you can just kind of the overall AST dynamic will be once we're more China-based than Korea-based.

I think from an ASP standpoint, I mean, we are very confident in our strategy that we have talked about in the past in terms of our price declines being moderate. I mean, this is already a global pricing market, and for the three reasons that I mentioned earlier, we still feel confident, and we don't think there's really a change relative to this shift.

And if you're asking a more subtle question about generational mixed pricing, I think that's a very astute question. And we like Gen 10 and a half, but I wouldn't let it overwhelm my analysis at this point. What I would really focus on is what's going to happen with television demand in this economic and health cycle. If we get that right, then I think the business is going to continue to age gracefully and will continue to like it from a profitability and cash generation standpoint.

Great. Thank you very much.

Thank you. Our next question comes from the line of Wamsi Mohan with Bank of America. Please go ahead.

Yes, thank you. Wendell, when you did the SEP transaction back in 2013, there was a long-term supply agreement that was struck between Corning and Samsung. What is the impact of the long-term supply agreement that you have with Samsung as Samsung winds down its LCD operations? And Tony, maybe any update on Samsung's intent on handling the convertible stock? Thank you.

Why don't you start and then I'll do the next on the convert. Do you want me to do both? Go ahead. So we have no new information on the convert. In my previous discussions with people who run Samsung, right from the very beginning, what they believed in was they have a deep understanding of our technology roadmap and they believe that in that roadmap and they want to be a long-term holder. We've had nothing that would change that. It didn't drive their investment in us originally was display technology. It was the totality of the technology portfolio and what they thought even was coming next for displays. Now, to the purchase. First, on the long-term supply agreement, of course, it changes the – who do we sell our glass to if they shut down their LCD panel-making plants in Korea? And you'll see some of that in our financials. I think we had a write-up of about $100 million, something like that. Yeah, that's right.

If you look at our reconciliation from Gap to Core, there was about $105 million, and that was the asset that was set up when we first did the transaction that was being amortized over the length of the contract and So that was written off in the quarter.

If we take a look at the deal overall, sort of depending on how you would address what the original purchase price was and some of the original balance sheet moves, basically our acquisition of SEP into the entity nominal and according to precision materials has already paid itself back two or three times. So we feel really good about that transaction. I think where we're now, I think the key thing to focus on what Samsung is doing is because we've seen some reports that people don't totally understand what Samsung's plans are in the display area. So perhaps I can take a moment and discuss those. Basically what they're exiting is just the manufacturing of LCD panels. They remain very dedicated. The problem they faced was simple, and it was accentuated by COVID-19 and the challenges that provides to the economy, which is they have a lack of competitive cost position versus the Chinese Gen 10.5 plants built with Chinese subsidized capital. So basically, it's cheaper for them to source those panels rather than make them in Korea. It's not much more complicated than that. Instead, what they're going to turn their Korean resources towards is next-generation television and display technologies. You saw some of those recently be introduced at Last Consumer Electronics. a zero-bezel LCD TV that actually uses three pieces of glass, a quantum OLED TV, which combines quantum dot and OLED technology, which is a two-piece of glass technology, microLED technology, once again, with some of our advanced glass technologies will be used, and continued emphasis on the polyimid OLED built on our glass substrates. So our deep relationship with Samsung on display technology continues, in some ways accelerates, and we just have to follow their panel sourcing as it works its way around the globe. Was that helpful, sir?

Yes, it is, Wendell. And just to follow up on Tony's comment on the $105 million in the quarter, you view that as a one-time, or is there going to be additional impact in the subsequent quarters on that particular element? Thank you.

No, that's just one time.

Great. Thank you.

Thank you. Our next question comes from the line of Stephen Fox with Fox Advisors. Please go ahead.

Thanks very much. Good morning, everyone. I had two questions. First of all, Wendell, you've mentioned a couple of times antimicrobial coatings that are now being used. It sounds like more so given some of the health crisis issues. Can you just give us a little more of a tutorial on, you know, the opportunities for that to be used as a surface coating in hospitals and other places? I think you've talked about that in the past. And then you mentioned sprays as well, and I'm not quite sure I understood that part. And then I had a quick follow-up.

Okay. What we call our guardian technology, which I think is what you're talking about, Steve, is we developed a number of years ago because we saw folks going into hospitals and basically getting sicker than what they came in with because of infections arising from viruses, bacterias, and spores. So what Guardian is is our answer to that. It is a copper-based solution where we capture a particular ionic state of copper in a glass ceramic that we then turn into very small particles that can be used in paints, coatings, potentially fabrics, and plastics. What we're seeking to do with that is do two things at once. One, provide good antimicrobial and antiviral surfaces, but also because of the particular way in which this ionic form of copper kills, prevent the development of any form of superbugs. Now, as you would imagine, the introduction of such a technology needs to go through a number of regulatory barriers. We are approved for use under the EPA as an antifungal right now, right? But we're going to have to work our way through various regulatory agencies to be able to effectively make the claim that we can kill these coronaviruses. We're quite confident we can. Now, for countries who felt a very pressing health need, like China in the Wuhan area, They leapt on the opportunity for us to be able to provide this to help in those new hospitals that they built. And we're just going to work our way through all the various regulatory agencies accordingly. Also in China, they had a sudden need for sprays, antiviral sprays, right? Now, things that they use in these sprays They tend to be chemical production. We have a particularly modular, small, super safe way to produce those type products called advanced flow reactors that we manufacture in China. And so that was the example that we talked about there. In general, as we look at what are the pressing needs for us all as a society to get a handle on this and potentially future pandemics. Vaccinations are important, therefore pharmaceutical packaging. We believe smart services make a lot of sense and we're continuing to use our core technology to solve that problem. And then as well, there'll be all sorts of treatments and or protective spraying. If that happens, that could use some of our production capabilities that we have built for life sciences and also for small molecule chemistry, sir.

That's really helpful. And then just as a quick follow-up, Tony, you guys are withdrawing guidance, which obviously makes sense here, but you sounded confident about generating positive free cash flows for the year. Can you just sort of give us some sense for how we get to positive free cash flows given Q1 cash flows are negative? Thanks.

Bill Meyer- Sure. I mean, you know, we're really focused on four areas of improvement, both in terms of from a cost standpoint and from a lowering capital spending standpoint. And, you know, that includes, you know, our cost at our manufacturing operations, but it also includes our operating expenses. And then in addition to that, we're re-looking at our working capital, in particular our inventory plans, And we're planning to also reduce that. So when you add those four things together, you know, that gives me pretty good confidence that we will be able to generate positive free cash flow for the year.

Thank you very much. Yep.

Thank you. And our next question comes from the line of Asiya Merchant with Citigroup. Please go ahead.

Great. Thank you. And thank you for the opportunity. Just a quick question. The near-term spending by carriers and enterprises is obviously cloudy, but as we come out of the pandemic, do you see any structural changes in demand for 5G spend from the carriers relative to where it was pre the pandemic, where a lot of carriers seem to be burdened with debt and, you know, certain capital allocation plans, et cetera. So as we come out of that, are there any structural changes in demand that you're seeing for 5G spend? from the carriers. And then I just have another quick follow-up on free cash flow for Tony. Thank you.

So, Asiya, the way I would, A, it's early, okay? And you're seeing a number of things come up in the data, but it's too early to make any sort of conclusive statement. That being said, in general what we're seeing, and then I'll get specific on 5G, in general what we're seeing is the way telecommunications companies work is because it's a capital good, they build ahead of perceived demand. Depending on the company, they use different algorithms for how they figure it out. But in general, they try to be about 18 months ahead of where they think demand will be. And that's the reason that the telecom network has held up pretty well as we face this surge in traffic, is they basically went through that excess that they carry to prepare for the next 18 months. So in general, what we're hearing from our customers is assuming the human health crisis comes under management, that they believe they will continue to to invest pretty strongly in infrastructure so that they can make sure that they reestablish that safety net. The real question is what's baseline? Are we on a new baseline? If we're on a new baseline, then everybody's plans aren't aggressive enough so that it's more than just the catch-up of the period you went through. It's too early to tell that. On 5G, that will just be part of the overall mosaic of network solutions that gets played. If someone's primarily technological thrust was 5G, witness some major carriers that you could name, they will press on the accelerator for that. Now, I think one of the most interesting things that I have seen in terms of innovation because we were working super closely with them during this time, is their ability to do even things like fiber-to-the-home installations without going inside people's homes. It's been a tremendous amount of innovation around being able to do that. And I've been quite impressed with their installation teams and what they've done. So I'm looking at this overall as reinforcing to us all how important telecommunications infrastructure is, but I don't know and I don't think it will trump various financial constraints that some carriers feel. But without doubt, it's made people believe that they need to have infrastructure.

Great. Thank you. And then, Tony, on the cash flow, I think you mentioned, obviously, positive free cash flow. And if I heard you correct, no new or no material debt raised to support your dividends. I just wanted to clarify that given your dividend and, you know, sort of positive free cash flow generation expectations for the year, that we wouldn't be raising any debt to support these dividends for the remainder of the year. Thank you.

Yeah, that's correct. I mean, you know, I'm always interested in opportunities to take advantage of different markets that we participate in, like in China. And when you see the cash flow statement, you'll see we raised a little bit of debt in China, which is great because it's a natural hedge for all of our businesses in China. And if I could raise more money in Japan, I would at least take a look at that. But we don't really, we're not counting on that on a going forward basis in the projections that I gave.

Okay, thank you.

Thank you. And our next question comes from the line of Mayta Marshall with Morgan Stanley. Please go ahead.

Great, thanks. On optical, you noted the installation challenges with the telco customers, but just what have you seen from kind of your cloud or hyperscale customers as far as order continuity and, you know, was there any upside there? And then maybe second question, Just, you know, I would expect most of your facilities are deemed essential businesses, but just given adaptations to production, are there any areas of the business where you're concerned about production continuity or supply constraints? That's it. Thanks.

You made it. So on cloud, they're in a little bit different situation, in some ways similar, in some ways different than the telecom carriers. And different ones are playing different ways. Like telecom carriers, they try to be able to hold enough capacity to handle peak demands. And there's been an enormous surge of cloud usage here, and that is being absorbed up. At the same time, those are enclosed facilities, and some of the cloud carriers have decided to basically go on lockdown and not allow new materials to come in or installation crews to come in. So that has provided some downward momentum, just like it's done in some of the carriers given installation pieces. I think in general we would anticipate as around the globe, and we're seeing it, as those rules relax, as the human health crisis feels like it's under more management, then we'll see some of that return to normal order patterns. I think in telecom, the area where it is most difficult to figure out how it will play out will be the impact on small and medium businesses and their particular land networks and what demand they need for that. I think all that's ahead of us. But for base cloud and telecom businesses, They're seeing a reinforcement of their business model and everyone that I talk to, at least, continues to believe their need for long-term investment. So far, we've been able to maintain our business continuity at an outstanding level and have managed to do that and delight our customers. It will continue to be something that garners a lot of our attention because as they do things like restart automotive plants, we're experiencing worlds where, you know, situations that there's not a lot of experience in. I mean, restarting economies and whole plants and knowing what the safe return to work, this is going to continue to challenge supply chains. So, so far, so good. Uh, But historical performance does not necessarily guarantee future performance here.

Great.

Thank you. Thank you. Our next question comes from the line of Sameek Chatterjee with JP Morgan. Please go ahead.

Thank you for the question, guys. This is Joe Cardozo on for Sameek Chatterjee. Just one question for me. As for your operating plans, you highlighted reducing capital expenditures. Could you remind me of your maintenance capex level? and whether you guys think this type of macro backdrop calls for pointing to operate close to those levels?

Well, from a maintenance CapEx standpoint, you know, somewhere in the $800 to $1 billion range, you know, I think as we look at our capital for the rest of the year, in Q1 we were finishing up a number of projects, and that's why the capital was at the level it was. It'll be a little bit less, somewhat less in Q2, and then in the back half of the year will be less than that. So we're seeing the trajectory from a capital spending standpoint to go down as we go through the year. And it is one of the four things that we're focused on in terms of making sure that we have positive operating cash flow this year.

And if I could, just one follow-up. Relative to Samsung exiting the LCD manufacturing business, or panel business, do you guys have any indication relative to the cadence of the DRAM by Samsung as we go through the year?

Yes, we do, but it wouldn't be appropriate for me to share that.

Okay, no problem. Thanks, guys. Thank you.

Yeah, go ahead. I think this is the last one.

Okay, great. Thank you. Our last question comes from the line of Shannon Cross with Cross Research. Please go ahead.

Thank you very much for taking my question. Wendell, I wanted to ask about the organizational changes you made. Maybe if you could talk a bit more about what drove that, any changes that are being made in decision-making or customer relationships to provide a little bit more color on those shifts. Thank you.

Thank you, Shannon. three things drove it first our portfolio work has been successful serving our customer base with products and inventions from many of our different divisions and it has been successful enough now that rather than just count on sort of the soft systems we've used to do something like auto where we did our environmental products. Now we're seeing adoption of our different glass products and potentially some of our advanced sensor products and some of our advanced display products. We have used that primarily in our soft systems to be those customers know us well and to be able to bring together our capabilities. It's been successful enough now that instead we're going to start to put in hard systems and name market access platform leaders, which we've done, to be able to run that customer interface and our strategies to serve those platforms going forward. The second thing we sought to do was improve our operational excellence across an increasingly complicated global set of operations, and that's why We have named Eric as our COO. The third and final reason is we have a very talented next generation of leaders that we're able to put in more senior spots and get more experience, show their great leadership skills, as they will be the ones that will carry us into the next 169 years. Great.

Thank you very much.

Thank you, Wendell. And thank you all for joining us today. Before we close, I just wanted to let you know that we're going to attend the JPMorgan Global Technology Media and Communications Conference on May 13th and the Bank of America Global Technologies Conference on June 2nd. Both will be virtual conferences. So once again, thank you all for joining us. Operator, that concludes our call. Please disconnect online.

Thank you, ladies and gentlemen. Thank you for your participation. You may now disconnect.