Corning Incorporated

Ladies and gentlemen, thank you for standing by and welcome to the Corning, Inc. Second Quarter 2020 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. If you require any further assistance, please press star 0. I would now like to hand the conference to your speaker today, Ann Nicholson, Vice President of Investor Relations. Please go ahead, ma

'am. Thank you, Joelle, and good morning. Welcome to Corning's Second Quarter 2020 earnings call. With me today are Wendell Weeks, Chairman and Chief Executive Officer, Tony Trippany, Executive Vice President and Chief Financial Officer, and Jeff Evinson, Executive Vice President and Chief Strategy Officer. I'd like to remind you that today's remarks contain forward-looking statements that follow the meaning of the Private Securities Litigation Reform Act of 1995. Those 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 relate to GAAP data. Our core performance measures are non-GAAP measures used by management to analyze the business. Reconciliation of core results to the comparable GAAP 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, and they're also available on our website for downloading. Now, I'll turn the call over to Wendell.

Thank you, Ann. Ann, good morning, everyone. This morning, we reported second quarter 2020 results. Sales were $2.6 billion. Net income was $218 million. EPS was 25 cents. And free cash flow was $285 million. All increased sequentially. I have two primary observations on the quarter. First, we're effectively adjusting to this period of uncertainty with decisive action and operational execution. We're generating positive cash flow and maintaining a strong balance sheet. Second, even in these uncertain times, our strategy to deliver for our customers and outperform our markets is working. We're continuing to lead in the capabilities that make Corning distinctive. In fact, we advance multiple growth initiatives during the quarter. Let's consider the first observation in more detail. In the second quarter, we completed adjustments to our operating plan and continued to execute across the board by delivering operational improvements that will generate significant cost savings through 2021. We delivered sequential growth in sales, EPS, and free cash flow. We also completed the vast majority of our anticipated restructuring, including the reprioritization of R&D programs. We believe we're continuing to position Corning for strong long-term growth and improved profitability. Turning to my second observation, our long-term strategy is sound and our growth drivers are intact. As I said before, we're not just counting on everybody buying more stuff. We're putting more Corning into the products that people already buy. This provides a mechanism for us to outperform our end markets, even in challenging environments. The relevance of our focused and cohesive portfolio remains strong and is actually increasing. Some of the secular trends benefiting us could accelerate. As consumer lifestyles continue to adapt in a world with social distancing and as healthcare companies advance solutions to end the pandemic. There is a need for expanded network capacity and ubiquitous displays as people spend more time online. Safe, widespread delivery of vaccines are among society's top priorities and reduced fine particulate pollution appears to be helpful for reducing infection rates. All these needs fall directly within Corning's mission of improving lives through innovation. And we are well positioned to contribute. The progress we've made and the leadership position we leverage across our markets in the second quarter speaks for itself. Let's take a closer look. In life sciences, we're mobilizing our capabilities to combat the virus wherever we can. Glass packaging is critical to the COVID-19 vaccine effort and it is currently in short supply. Our valid glass innovation helps enable faster filling line speeds and increased patient safety. Valor glass was selected by the US Department of Health and Human Services and the Department of Defense to accelerate delivery of COVID-19 vaccines. And Corning was awarded $204 million in funding to expand Valor manufacturing capacity. Three leading COVID-19 vaccine producers have entered supply agreements for Valor glass. And we're also working with several other potential customers to capture additional opportunities. Additionally, we announced a long-term supply agreement with Pfizer to provide Valor glass for currently marketed drugs in their portfolio. Our life sciences segment entered several long-term agreements with major customers for COVID-19 molecular diagnostic testing and antibody detection kits in quarter two. We're seeing strong demand for these products currently and we expect to accelerate shipments further in the second half. In mobile consumer electronics, our specialty materials segment delivered 13% -over-year sales growth while the smartphone market declined -over-year. Our performance was driven by strong demand for premium products. And we announced two exciting milestones. Gorilla Glass has now been used on more than 8 billion devices worldwide. And we maintained our industry leadership with the launch of Gorilla Glass Victus. This is the toughest Gorilla Glass yet and features significantly better drop and scratch performance than any other Gorilla Glass or competitive glass from other manufacturers. Samsung will be the first customer to adopt Gorilla Glass Victus in the near future. In automotive, our environmental technology segment outperformed in a weak market. Strong adoption of our gasoline particulate filters continued driving their sales growth to more than 20% -over-year. Turning to optical communications, Corning do sales 12% sequentially driven by carrier network projects. We announced a collaboration with Enersys to speed 5G deployment by simplifying the delivery of fiber and electrical power to small cell wireless sites. We also announced that we're working with Qualcomm technologies to deliver indoor networks that are 5G ready, easy to install and affordable. The Corning systems are expected to be among the first designed to deliver 5G NR capability over a millimeter wave spectrum in the indoor segment. This includes enterprises such as offices, university campuses, hospitals, hotels, retail outlets and more. Our collaboration will enable a small footprint and low power consumption platform for true high bandwidth 5G for in-building networks. Customer deployment will begin in the fall. In display, Corning generated consistent sequential net income as customer demand remained steady. And large screen TV sales continue to drive demand supporting the opening of our Gen 10.5 facilities. Across our markets, you can see that we're successfully advancing our long-term growth initiatives. Additionally, near-term market conditions have improved. Auto factories are resuming operations in North America and Europe. And auto sales in China have returned to pre-pandemic levels. Telecommunications services are now available and service providers and data center operators have resumed sending their technicians into the field. And they're rethinking their network needs to address greater demand for their services. Life science labs are slowly reopening. We also expect television demand to remain resilient as in-home entertainment is more important than ever. And the demand for computing devices will be boosted by work and learn from home. So, we're seeing some encouraging developments across our industries. On the other hand, disruptive forces from the pandemic, the civil unrest to a worldwide recession and geopolitical struggles all remain in play. And they create uncertainty. We are united as a company to remain vigilant and adapt appropriately. We're rising to the challenge. I'll now turn the call over to Tony so he can give you some more detail on our quarter and our near-term outlook.

Thank you, Wendell, and good morning. We came into this economic downturn with a balance sheet built for times like these. And we took actions during the quarter to ensure we have the financial resources needed for the duration. We generated $285 million in free cash flow, exited the quarter with $2.2 billion in cash, and are on track to generate positive free cash flow for the year. Our financial position is strong. We are becoming more efficient and we have the capacity in place to meet expected growth with minimal investment. We expect improved profitability and return on invested capital as we grow sales. As the quarter progressed, demand and visibility improved. We maintained our leadership across all of our market access platforms. As a result, we expected growth sales and profits in the third quarter. As we said on our first quarter call, we've made aggressive adjustments to align our cost and operating plan with the lower anticipated sales. These actions were essentially completed in the second quarter and fall into four broad categories. Reducing production levels across most of our businesses, adjusting operating expenses with the majority of the savings to be realized in the second half, modifying inventory plans, and reducing capital expenditures. As a result, we expect $200 million in annualized cash savings. We reduced inventory by $120 million in the second quarter and we reduced our capex by half versus Q1 to $288 million. We expect Q3 and Q4 capex to be consistent with the second quarter. We had strong operational performance with sequential improvement in sales, net income, EPS, and free cash flow. Second quarter sales were $2.6 billion, up 2% quarter over quarter. Net income was $218 million, up 23% quarter over quarter. And EPS was 25 cents, up 25% sequentially. And free cash flow was $285 million. Now, before I get into further details of our performance and results, I want to note that the largest difference between our GAAP and core results stem from restructuring charges of $254 million, which was primarily non-cash and included the reassessment and reprioritization of R&D programs. Other differences between our GAAP and core results come from a non-cash -to-market adjustment for our currency hedge contracts. With respect to -to-market adjustments, GAAP accounting requires earnings translation hedge contracts and foreign debt settling in future periods to be -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. To be clear, this -to-market accounting has no impact on our cash flow. Our currency hedges protect us economically from foreign exchange rate fluctuations and provide higher certainty for our earnings and cash flow, 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. So we're very pleased with our hedging program and the economic certainty it provides. We received $1.7 billion in cash under our hedge contracts since their inception more than five years ago. Now let's review the business segments. In display technologies, second quarter sales were $753 million and net income was $152 million, both consistent with the first quarter. The display glass volume grew by a low single-digit percentage sequentially as our Gen 10.5 customers bought more glass. Sequencer price declines were moderate and as expected. As Wendell said, we expect that television demand will remain resilient as in-home entertainment is more important than ever and that demand for IT products will be boosted by work and study from home trends. In the second quarter, worldwide TV sell-through units in Q2 increased slightly year over year, better than Q1 and better than the industry anticipated. Additionally, demand for notebook PCs was strong in the second quarter. Preliminary retail sell-through data for June and July indicate that demand recovery in China has held and that demand in North America and Europe remains robust while emerging regions remain weak. While uncertainty exists around retail demand in the back half of the year, we remain confident that TV screen size will continue to grow in 2020 and beyond. TV's 65-inch or larger grew almost 40% year over year in the first half. And we are well positioned to capture the majority of that growth with Gen 10.5, which is the most efficient gen size for large TV manufacturing. We continue to expect display pricing to decline by a -single-digit percentage in 2020. We believe that three factors drive a favorable glass pricing environment. 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 investment in existing capacity to maintain operations. Glass prices must support acceptable returns on those investments. In optical communications, second-quarter sales grew 12% sequentially to $887 million as major carriers increased spending on cable deployments and access network projects. Net income grew by $52 million to $81 million on the higher volume and actions taken to align cost and capacity. The -over-year decline in sales was consistent with the passive optical market decline. We maintain our view that the long-term trend in optical is strongly positive. Bandwidth demand has accelerated during the pandemic, consuming network headroom capacity. Evidence of that demand includes AT&T's report that Wi-Fi calling increased 100%, Verizon's report that VPN connections are up 72% over pre-COVID levels, and Zoom surpassing 300 million users from 10 million in December. We expect carriers to expand capacity to meet growing bandwidth in the future, but the current environment makes timing uncertain. While network operators remain committed to their original capital plans for 2020, deployments are constrained by pandemic-related labor and site access constraints. We expect these factors to continue in the third quarter. Environmental technologies faced a challenging market. During the quarter, OEMs temporarily halted production in both the automotive and diesel markets. To mitigate the impact, we swiftly adjusted our operations to pace with customer demand and reduce costs. Environmental technology second quarter sales were $226 million, and profitability was impacted by lower sales and production volumes. Our auto sales were down 31% year over year, beating the global auto production decline of 45% year over year through continued adoption of gasoline particulate filters. The good news is that by the end of the quarter, auto sales in China returned to pre-lockdown levels, while North America and Europe OEMs began ramping production. In diesel, the anticipated cyclical downturn in North America heavy-duty truck market was made worse by shutdowns, with vehicle production dropping 73% year over year. Overall, we remain confident in our content and innovation-driven strategy in environmental and expect to return to growth as markets improve through the second half and into next year. Specialty material sales were $417 million in the second quarter, up 13% year over year, and in sharp contrast to the smartphone market, which declined year over year. Net income was $90 million, up 34% year over year. Sales growth was driven by three factors. First, premium glass demand increased in support of second half customer launches. Second, work and study from home trends drove growth in our products for tablets and laptops. And third, the demand for advanced chips drove sales for our semiconductor equipment products. Looking ahead, we expect our outperformance relative to the 2020 mobile consumer electronics market to come from further adoption of our innovations. In life sciences, second quarter sales declined 7% year over year to $243 million. Net income was $31 million, down $9 million versus last year, on the lower sales volume. The business was impacted by the prolonged closure of non-essential laboratories, such as university research labs, particularly in the North American market. The impact has been somewhat offset by increased demand for consumables used in COVID-19 testing applications. Life science lab reopenings picked up in late May and lab utilization has been steadily increasing since then. Going forward, we are confident in the opportunities ahead for life sciences and valor, especially as we prepare for upcoming vaccine demand. Equity earnings were positively impacted in the second quarter as our Hemlock JV settled a contract with the solar customer. Going forward, Hemlock will largely sell products in the semiconductor industry. Hemlock's leadership position is backed by attractive, long-term take or pay customer contracts with upfront payments. This creates stable revenue and profits and strong cash flow generation. Let's move to the balance sheet and our commitment to strong financial stewardship. We generated $285 million of free cash flow, a significant increase from the first quarter. We have $2.2 billion of cash and we have a debt structure that is conservative by design and relatively unique. Our balance sheet is built for times like these. Today, our average debt maturity is about 25 years, the longest in the S&P 500. Over the next 18 months, we have under $70 million 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 the debt to EBITDA, they are implicitly focusing mostly on debt due in the next 20 years. Corning's 20-year debt to EBITDA is 1.2 times consistent with an A credit rating in the illustrative of the conservatism of our balance sheet. 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. And we have paused share buybacks and do not expect to add material debt in 2020. So in total, we have a very strong balance sheet and we have the financial resources needed for the duration of the economic downturn. To wrap up, we had strong operational performance in the second quarter with sequential improvements in sales, net income, EPS and free cash flow. As the quarter progressed, demand and visibility improved. This improvement has continued throughout July. As a result, we expect to grow sales and profits in the third quarter. However, we remain aware of the potential impact from the pandemic, the global recession, civil unrest and geopolitical tensions. So how much growth will depend on in-market demand and economic activity during August and September? We will keep you updated as we move through the quarter. Stepping back, our underlying growth drivers are intact and we're successfully navigating this crisis. As we grow sales, we expect improved profitability. Furthermore, we have the capacity in place to be able to meet the sales growth with minimal investment, which we expect to result in capital efficiency gains, including ROIC improvement. Altogether, this reaffirms our confidence that Corning is positioned to emerge from this crisis stronger than ever. Now I'll turn the call back over to Wendell. Thanks, Tony.

During the second quarter, we made great strides in positioning Corning to emerge stronger from the global health crisis and resilient growth. Sales, net income, EPS and free cash flow all increased sequentially. Corning advanced multiple initiatives throughout the second quarter, including the launch of Corning Gorilla Glass Victus and continued innovation with 5G industry leaders. On the COVID-19 front, we continue to seek ways to leverage our deep technology, manufacturing and engineering capabilities to combat the pandemic directly. We were delighted that Valor Glass was selected by the US Department of Health and Human Services and the Department of Defense to accelerate delivery of COVID-19 vaccines. Overall, our decisive action and operational execution resulted in positive free cash flow and continued leadership in the capabilities that make Corning distinctive. We're delivering for our customers. We're outperforming our markets and we're preserving our financial strength. I'll conclude with an additional important development. For nearly 170 years, our company has been dedicated to creating innovations that have a positive impact on the world, while conducting business in a way that has positive impact on our people and our communities. Now, we have an opportunity to make additional contributions. We're setting up an office to further build racial and social unity within the walls of Corning and in our communities. Louis Stevenson, our Chief Legal and Administrative Officer, will lead this office. With that, let's move to

Q&A. Anne? Thanks, Wendell. Operator, we are ready for the first question.

Thank you. As a reminder, to ask a question, you'll need to press star 1 on your telephone. To withdraw your question, press the pound key. Please stand by while we compile the Q&A roster. Our first question comes from Simik Chatterjee with JP Morgan. Your line is now open.

Thank you. Hi, good morning. Thanks for taking my question. If I can just start off with display. You talked about demand being resilient on the TV side, but as we're looking at some of the data points from panel makers, they're guiding to a substantial improvement in panel shipments quarter on quarter, going to 3Q something in the magnitude of 20%. I want to look at a sense of what you're seeing or hearing in terms of demand from your panel customers and where does inventory stand. I think last quarter you were a bit concerned about the inventory level going in.

Yes, I think from an overall standpoint, TV demand has clearly been resilient. The data points that we saw in the second quarter was the fact that TV units were up on a -over-year basis. That was certainly better than Q1. It was also better than what most people were expecting as we went into the quarter. In addition to that, if you look at what happened in the preliminary data in June and July, that data was also very strong. In China, you didn't see a change in that data. That demand remained robust. In North America and Europe, it was strong during the whole quarter and that continued. Yes, we think TV demand is resilient. We also think the supply chain is perfectly healthy. We entered the year in a healthy supply chain situation. Of course, nobody knew exactly what was going to happen in the second quarter, but given what did happen in the second quarter and the way things are going now, we don't see any supply chain issues there.

If I could just follow up on the cash flow here. You had a strong cash flow quarter through the working capital improvements that you're driving. Just help me think about how sustainable those are as you start to go through the recovery in terms of revenue, how much of that improvement is something you have to get back as you went working capital. Just trying to think about how does this impact your free cash flow conversion in the long run.

Certainly, a lot of that was by reducing inventory. We reduced inventory over $100 million during the quarter. If you recall over the last 18 months or so, as we thought our sales were going to be more stronger than they actually turned out to be, we actually built up a fair amount of inventory. We think there's the opportunity to continue to reduce inventory. Then just from an overall operational standpoint, one of our real focus areas of the company is on inventory management and how to get better at that. I think that at least that is sustainable for at least a couple more quarters. Know that when we grow again, we'll have to consume working capital. The other thing that was a big improvement during the quarter, of course, was what happened on capital spending. As you know, in the first quarter, a lot of that was the expansion capital wrapping up on some of our biggest projects, such as Gen 10.5. Although we still have some of that that's going on, we reduced it significantly in Q2, and we'd expect Q3 and Q4 to be at those same levels.

I think stepping back and looking at free cash flow conversion, fundamentally, when we're not in a build cycle, our free cash flow conversion is excellent. That's where we are right now. It's less really about the specific programs and the specific things we're doing. It's more just since it takes us a couple, three years to build one of our major low-cost factories, there's a cycle where we invest for the future. It is that investment that drives down our free cash flow conversion. We're in a period right now where we've gotten ahead of that. We're in a spot where we're just in a reinvestment stage. When we're like that, we're going to have really high free cash flow conversion. You can expect that to continue.

All right. Thank you.

Thank you. Our next question comes from Stephen Fox with Fox Advisors. Your line is now open.

Thanks. Good morning. Wendell, I was wondering if you could maybe step back and give us a bigger picture view on the new optical cycle. You talked about network headroom basically going away. Sounds like site access is still an issue, but not as big of an issue. If you wanted to think about maybe the next four to six quarters versus how you performed in the year or two before the downturn in optical, how do we think about that under the new world we're living in? Thank you.

Steve, I think that's an excellent question. Let's sort of balance up the known versus the unknown and then try to come to the conclusion. On the known side, both our cloud providers as well as our network service providers all are experiencing very strong growth, as you heard from Tony, and you've heard from me during this call. That's strong growth and they see an opportunity for more revenue production going forward and they see that fiber-based networks are just lower cost. You're starting to see some commentary, especially from the network providers, about how they can combine and merge all the various services onto one high-capacity fiber network and therefore open up lots of avenues towards revenue creation all off one capital investment. All that is stacking up for powerful forces to put optical communications back in a cycle of growth. On the unknown side, real people have to install these networks. Real people have to show up to put in place these massive cloud-based data centers. Even though people are resuming putting technicians in the field, it is at a much less rate than what would be needed to support historical build cycles. We still have the pandemic here. That makes actual prediction just quarter to quarter what will happen to be difficult. But I think as you said, Steve, because that's what's behind the question, the fundamentals look really strong, our market position looks really strong, we should be entering a growth cycle. Now we just got to see how the world deals with the pandemic.

That's helpful. Thank you.

Thank you. Our next question comes from a Sia Merchant with Citigroup. Your line is now open.

Great. Thank you for taking my question and congratulations on a good quarter. A couple of questions. One just on optical, there was commentary that, the optical segment performed in line with the passive optical market decline. Randall just talked about all the labor constraints, etc. that's going on. How should we think about, Corning's always maintained their leadership across their end markets. When should we expect Corning to, again, resume growth that outpaces the broader market? Then I have another follow-up on capacity and margins. Thank you.

This year, if we're doing our job. That's the way we think about it. We should be outpacing the market and we will get on with that post-haste.

Okay. And then just on margins, if I think about, obviously, you guys are making some progress here sequentially in the third quarter, that's the commentary. And typically, TweekU is up 5% or so. On the top line and as the top line folds through the margins, etc. There's some investor confusion around how idling capacity should help margins. If somebody can walk us through the dynamics there, typically idling capacity would lead to perhaps a hit on margins. And how should we think about the margin improvements in the back half? Thank you.

You're correct. In fact, I think when we idle capacity, that does hurt the margins, especially if you're having less production than you're actually selling, you also take down inventory, which is of course what we did in Q2 and Q3. On the other side, though, we did a lot of cost reduction efforts and that ends up helping margins. And so, we ended up in Q2 with margins very similar to what we had in Q1 on a gross margin level and then on an operating margin level. Of course, we did better than that. So, as we look forward, the key here is to increase sales. And if we print more sales through our factories and more sales through our op-ed structure, we'll see expansion in margins.

Okay, thank you.

Thank you. Our next question comes from George Nauter with Jeffreys. Your line is now open.

Hi, thanks a lot. I guess I wanted to ask about just the fundamentals in the display business. I'm thinking more strategically. There's a lot of moving parts there, of course. You guys are pacing some of your investment in Gen 10 and a half. You've got pending exits of some of the LCD panel making facilities in Korea. Certainly, we hear about CDC rumored to be for sale. Can you just talk about what you're seeing over there and how that kind of plays into your dynamic strategically as you look forward? Thanks.

Thanks for the question. What you've heard from us in the past really remains, those fundamental drivers remain in place, which is we have been preparing for a number of years for the ascendancy of the Chinese panel making infrastructure. Because of the particular way that economy works, that would leave what was the strongest region in terms of production, Korea, at a cost disadvantage. Once they made the decision not to go to Gen 10 and a half, that sort of was the die was cast. That's why we have been on our investment cycle in China with three quarters of the support coming from our customers or the Chinese government in one form or another. Those trends look like they continue to move in our direction. It all just happened a little bit faster than we were planning because Korea ended up, Samsung specifically, ended up making decisions a little faster than what was their original plan. We don't really have all of our Gen 10 and a half facilities up to support all that demand yet, and that's what we're working through. CC, of course, is a strong customer of ours. We would expect our market position to continue to grow as the trends towards China continue and the trends towards our long-term strategic partners continue.

Did that answer your question, George? Very well, yes, thank you.

Thank you. Our next question comes from Shannon Cross with Cross Research. Your line is now open.

Thank you very much. I was just curious, given the vaccine, and obviously you've gotten some funding from the government, but just in general, this push to move manufacturing back to the US and clearly a significant amount of government dollars that are out there right now, if this has changed really your thought process on timeline for valor to provide meaningful contribution to the business? Thank you.

The simple answer, Shannon, is yes.

Any idea of the magnitude of the pull-in of timeline?

We have an excellent idea. How do we think

about

it? Yes, we have an excellent idea. We're not disclosing it yet. Here's the challenge really and why we're not giving specific guidance here on that. We are putting a significant amount of our effort behind the specific human health need that we have to protect our people and the people around the globe with the vaccine. That's where we're aiming our efforts. Any prediction on the specific sales as they evolve would have to involve what is going to be the success and timing of the vaccine. What you can see, the way to think about it is we're now accelerating the building of our high-volume manufacturing facility. We're in the midst of pouring concrete on the floor to inside that shell. We're in the midst of quickly ramping our equipment. We're doubling the output of our Big Flats New York facility. We're going very fast. But so are our customers going very fast. It's really hard to pick winners and losers. Here's the way I think about it financially. I still don't think if you're primarily focused on the near term you should worry much about valor driving our numbers. If you're worried about the long term, this is an excellent sign for us. All the stuff that we bet on, which is you needed US-based manufacturing, that you needed a new pharmaceutical package, that we needed to have more full-line capacity and we could do that through our packaging, that we needed to make patients safer, all those bets look like they're coming true. But that's really about the long term. It'll be a big driver. Meanwhile, we just want to make you safe and we want to do our part. Does that make sense, Shannon?

It does. Can you talk a bit about any competitive moves that you've seen from some of the others out in the industry? It seems like you guys are in a really good position, but I'm wondering if you've seen anything pop up recently. And then thank you.

Well, in this industry, remember, we're an attacker. So, historically, we haven't had much of a position in pharmaceutical packaging. It was only when we saw significant issues with the packaging of today that we developed the valor of innovation and decided we needed to do this to make patients safer. And we needed to bring our capabilities to that fight. So, we're really the attacker. We're just getting started. But I think you're right. I think we're off to a robust enough start to give our competitors a heck of a wake-up call.

Great. Thank you.

Thank you. And our next question comes from Tim Long with Barclays. Your line is now open.

Hi, this is Peter Zetsky, honored for 10. Congratulations on the quarter. I wanted to ask about the specialty materials at Performance. Can you tell us how significant the impact from work from home and the strong semiconductor equipment demand was relative to smartphone premium products? And then maybe how sustainable you see that as we go into 2H? You

know, I think from an overall standpoint, each of those items were roughly about a third of the reason for the outperformance. I mean, clearly what happened with the glass that we sell, both the tablets and the parts that we sell, the notebook computers that have Gorilla Glass on them, was very important to us. And we think it's a good example of the innovations that we have that cause us to perform better than the underlying market. And then semiconductor performance was also good. I mean, the demand for advanced chipsets really had made a difference there. And then from a glass standpoint, as we said, as people get ready to, as our customers get ready to introduce new products, in the back half of the year, they of course pull on those products early. And we saw nice demand there, too.

Sorry, I'll put that in.

Thank you. And our next question comes from Mita Marshall with Morgan Stanley. Your line is now open.

Great, thanks. Maybe just a question for me on the optical segment picking up, but just whether you could give a sense of the breadth of that pickup. You know, is it amongst kind of one or two major customers, or are you seeing it kind of across the board? And any commentary on hyperscale customers in terms of their kind of optical demand?

You know, I think from an overall standpoint, we especially saw it in the carrier market. I mean, it's certainly more than one or two customers, but it was very much driven in the carrier market. And when you see our detailed numbers, you'll see that those were the numbers that were up on a sequential basis. In the enterprise market, it was a little bit more mixed. I think from a data center standpoint, you know, that's where a lot of the labor constraint really showed up. I mean, some data centers less so than others, but I think that's one of the reasons that those sales were down on a quarter over quarter basis. But then also a lot of our enterprise customers are small and medium businesses, and also corporate spending. And we saw, you know, those areas were clearly impacted by what's happening in the outside world. But, you know, there was a, you know, broad set, especially in the carrier business.

I got it. And then maybe just on the restructuring charge, and you noted that it was due to reprioritization of some R&D projects. Are there any major projects we could consider discontinued, or just any commentary there?

Yes, I mean, it was very specifically a stealth project that we hadn't really talked a lot about externally. That had originally been initiated by a customer request. And if you recall on our 345 strategy, there's the 20% that's outside of 345 capabilities where we put our energy and efforts into. I mean, it's one of those projects in that 20% category. And of course, in this environment, you know, it made sense for us to go back and look at that 20%. And so that's what we did. And, you know, we ended up restructuring and pairing some of those assets.

Great,

thanks. Thank you. Our next question comes from Rod Hall with Goldman Sachs. Your line is now open.

Yeah, hi. Thank you for the question. I wanted to start with the lack of guidance or the lower guidance for September. And just see if I'm interpreting this correctly. It seems like your display commentary is positive. And then optical is always uncertain. So that leaves us with specialty as the source of increased uncertainty in September. So I wanted to check and see if that's accurate or if that's the right way to interpret this. And then if that is right, what's driving that? Is it product timing or is it, you know, demand uncertainty? Could you maybe double-click on why the reduced guidance in September? And also maybe tell us whether you're going to continue to provide a lower level of guidance like this or is this just a one-off? And then I have a follow-up.

So let's start with your premise, okay? We're not providing lower guidance for September. Nor are we providing lower guidance for specialty or anything like this. Well, this is... I think you're overthinking it. Here's the situation. Really, all lights are flashing green in our specific industries and in our performance of our units. Our financial executives, our operational executives, our strategic executives, we're all for giving more specific guidance this quarter. Okay? I'm the problem. And it's not anything that we're seeing happening specifically in our industries. It's just as I look at the world and I see the pandemic doing what it's doing. I see a very broad global recession. I see civil unrest really across the globe. And I see an awful lot of global tensions in a geopolitical sense. And it is that macro area that makes me say, I think there's just too much uncertainty just to count on what we're seeing with our own two eyes. But if we just look at our data, I think we'd be comfortable giving specific guidance and you would view that guidance as positive. And I'm just more worried about the broadening of uncertainty. Does that make sense to you, Ron? I know I must disappoint you, but does it make sense

to you? No, no, no, Wendell. That's a very helpful color. I... You know, that's very helpful. So that answers my question. I appreciate that. And then the second thing, I wanted to drill into the working capital again, Tony. One of the standouts for us was the days payable that came down quite a bit in June and wondering, is that a sustainable level or do you expect that to bounce back to kind of more historical average levels? And maybe can you tell us what drove that?

And I think from an overall standpoint, I mean, Wendell's right. I mean, you know, we're in a period of time where our free cash flow conversion is going to be strong because we're not doing the investment capital that we've done in the last several years. And so, you know, on any given line item on the cash flow statement, you know, there's a variety of things that happen on a month in and month out standpoint, but, you know, we're committed and we're going to deliver free cash flow for the year. And, you know, that's what our focus is. And, you know, we were thrilled with our performance in the second quarter. And, you know, I think it really helps investors understand our ability to generate that free cash flow.

Okay. Thank you.

Thank you. Our next question comes from Juan Z. Mohan with Bank of America. Your line is now open.

Yes, thank you. Wendell, you noted strong free cash flow margins coming off a build cycle. I think, Tony, you just referenced that too. I was wondering how long typically these post-build cycles are, especially given the fact that, you know, display has been usually a large source of that. Historical perspective on that would be helpful. And given COVID now, do you think that that is extended for a longer period of time and have a follow-up?

Ramsey, what an excellent question. In a way, what you're asking is, when will we be in our next build cycle, which usually is for revenue that's a couple of years out? I think it's really hard to answer that question, Ramsey. If you open me up in the middle of the night and ask me, I'd say I think we're going to be in a period of really staying within more of the reinvestment, repurpose pieces of our wheel, right? And invent pieces of our wheel for a time period that in your normal models you should be able to count on. At the same time, you know, what we hope for is that things like our successful help with the vaccine, that the movement towards more optical networks, that all those things put us in a long-term spot, those mega trends are a conversion of more value in auto to be back in our build cycle. But I think we'll have plenty of warning, Ramsey. Sorry I don't have a more specific answer for you.

No, thank you. Thanks for the color, Wendell. And Tony, if I could, the funding that the government's providing, the $204 million that you alluded to to expand Valor manufacturing capacity, how should we think of that flowing through your statements? Is that a... Does it get reflected in CAPEX right away? Is it all in CAPEX? Can you give us any color on that? Thank you.

Yeah, I think the way to think about it, Ramsey, is that as we spend this money, this gets reimbursed, and so it just gets medded out into our statements. I mean, yes, it is for capacity, so most of it is in CAPEX, but there's also some operating expenses, and it'll get reimbursed there,

too. Okay, thank you.

Thanks, Alindy. Operator, we've got time for one more question.

Thank you. And that question comes from Mehdi Hosini with SIG. Your line is now open.

Yes, thanks for taking my question. Two follow-ups. Tony, given all the changes going on within a company and increased focus and effort in reducing the cost, should I expect your operating margin were to expand from here on, even if revenues were to go flat, just for the scenario analysis? And I have a follow-up.

You know, I mean, clearly what we've done in the second quarter is reduce our operating cost, and that will be reflected as we get into Q3 and Q4. You know, from our overall standpoint, as we've talked about before, in our real focus areas is to get back to growing our sales and growing our profitability. You know, when our sales grow, you'd expect to see improved profitability,

too. Okay. And then, Wendell, I just want to better understand the dynamics impacting the TV industry. Can you remind me what the next of 65-inch TV as a percentage of the overall TV demand or shipment?

Maybe off the top of my head, I'm drawing a blank on that. That's clearly where a lot of the growth is going. It was up over almost 40% on a -over-year basis. But when we have our follow-up call, we'll get you the answer to that. All right. Thank you.

Great. Thanks, Maddie. And thanks, everybody, for joining us today. Before we close out, just want to let you know that we will attend the Jeffries Semiconductor IT Hardware and Communication Infrastructure Summit on September 2nd and Citi's 2020 Global Technology Conference on September 9th. And both will be virtual conferences. So once again, thank you. And Joelle, please disconnect all lines.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.