Corning Incorporated

Welcome to the Corning Incorporated Order 3, 2020 earnings call. To place yourself into the Q&A queue, please press star 1. It is my pleasure to introduce you to Ann Nicholson, Vice President of Investor Relations.

Thank you, Catherine, and good morning. And welcome to our third quarter 2020 earnings call. With me today are Wanda Weeks, Sherman and Chief Executive Officer, Tony Trippany, Executive Vice President and Chief Financial Officer, and Jeff Evanson, 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. 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 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. They're also available on our website for downloading. And now, I'll turn the call over to Wendell. Thank you, Ann, and good morning, everyone.

Today we reported third-quarter results demonstrating that the company is strong, financially healthy, and well positioned for growth. Sales were $3 billion, up 16% sequentially. EPS grew 72% sequentially to 43 cents, as higher sales and strong manufacturing execution resulted in operating margin expanding to 18.3%, up 710 basis points sequentially and 20 basis points year over year. We generated $518 million of free cash flow and finished the quarter with $2.5 billion in cash. Our financial performance has improved significantly since April, and we expect a strong fourth quarter. Nevertheless, we remain vigilant and continue to adapt appropriately to multiple disruptive forces playing out around the world, from the pandemic to civil unrest to recession and geopolitical struggles. We've been rising to the challenges since day one, and our priorities remain clear. First, we must make our values evident in our actions. Our commitment to the health, safety, and well-being of our employees underlines every facet of our operations. We're dedicating resources and providing leadership to support our communities around the world. We've launched unity campaigns as well as racial and social equality programs targeting the multitude of hardships people are confronting right now. And when it comes to the global health fight, we're all in, mobilizing our capabilities to combat the virus directly. We must also safeguard our financial health. Our third quarter results show that our decisive actions are providing clear benefits, as we leverage cost savings and increase efficiencies across the company. Regardless of the depth or duration of global uncertainty, we're doing everything in our power to keep the company strong and it's working. Now, to ensure that we emerge even stronger, we're continuing to invest to create additional revenue streams. We're inventing -the-world materials and manufacturing processes, as well as co-innovating new solutions in partnership with our customers. The relevance of our portfolio puts coordinate at the heart of ongoing innovation with industry leaders, and we continue to solve our customers' toughest technology challenges. You may have seen Apple's recent promotion of Ceramic Shield for the iPhone 12. Their featuring our -the-world material, which is the world's first highly transparent, color-free glass ceramic with performance that meets the rigorous demands put on smartphone cover materials. This latest innovation with Apple exemplifies our ongoing strategy of consistent, long-term value creation by combining our deep expertise in glass science, ceramic science, and optical physics with our unparalleled manufacturing and engineering capabilities. Ceramic Shield melds the attributes that we love about glass, create optics and retain strength, with the attributes we love about ceramics, most notably its toughness. Ceramic Shield consists of ceramic crystals within a glass matrix. There were two big inventions here. The first was keeping the best damage-resistant attributes of both glass and ceramics. The second was ensuring high optical transparency by growing index-matched nanocrystals. Inside the glass matrix, there are one-tenth the wavelength of light. As you recall, Apple made two investments in Corning, totaling $450 million as part of their Advanced Manufacturing Fund and their commitment to foster innovation among American manufacturers. We thank Apple for our long-standing product development partnership and their investments in new manufacturing technology centered in our Harrodsburg, Kentucky facility. We could not be prouder to be a key component in the iPhone 12. Now, it's important to note, the iPhone 12 and many other flagship phones that we are also proud to be part of support 5G. 5G matters to us. The density of fiber necessary to deliver its promise is yet another example. You see this illustrate that up to 100 times more fiber is required to deploy 5G in a city than 4G. This week, we announced a new product designed to help operators dramatically boost the speed and reduce the cost of their outdoor deployments. And we're embarking on new work to support Verizon's efforts to extend 5G indoors. The relevance of our portfolio and our deep customer relationships as illustrated by these advancements keep us at the center of the inextricable shift to optical. Stepping back. In all the industries we serve, important market trends offer new challenges that Cording is uniquely qualified to address and new opportunities to integrate more Cording content into products. This is an especially powerful value creation lever in times of economic uncertainty because we aren't exclusively relying on people buying more stuff. We're putting more Cording into the products that people are already buying. We're clearly seeing the benefits of this lever in today's results. As innovation adoption drove, specialty material sales up 23% year over year, despite a declining smartphone market. This type of outperformance is not unique. From 2016 to 2019, we added $500 million in sales, or 42% humoratively, while smartphone sales actually went down. And we're extending that growth streak this year. In environmental technologies, we grew sales 16% in 2019, much faster than the underlying unit demand, as automakers added gas particulate filters to cars. And we again saw outperformance this quarter with sequential sales up 68%. These are additional examples of the more Cording strategy at work and why the content story is so powerful for us. I want to stress one additional point. You often hear us say that our core technologies enable life-changing capabilities. In these times, we're increasing focus on life-saving innovations. Safe, widespread vaccine delivery is one of society's top priorities, and glass packaging is critical. Our valor innovation will help enable faster filling line speeds and increased patient safety. Right now, we're expanding capacity and supplying glass vials for vaccines as part of Operation Warp Speed. All while leveraging our leadership in life sciences to help support COVID diagnostic testing and virus research efforts. Additionally, reduced fine particulate pollution, the objective of our filtration products, appears to be helpful for reducing infection rates. And we're excited about recent University lab tests showing that our guardian antimicrobial glass particles kill bacteria and viruses, including -CoV-2. We're also well positioned to contribute as consumers continue to adapt to a world with social distancing. For example, fiber increases the capacity and performance of networks, and glass provides the primary window to information and entertainment. We're confident that we can bring further innovations to bear in many vital areas as the world addresses and recovers from its current challenges. Overall, we have a very strong quarter on almost every dimension. From an innovation perspective, I just reviewed our significant advancements. Financially, we grew sales at double digit rates sequentially and expanded margins to grow profitability even faster. Operationally, we performed well, and I'd like to share a few examples. In the midst of the pandemic, we deployed expert engineering teams to start up our Gen 10.5 melting operations in both Wuhan and Guangzhou. These facilities are positioning us well to capture the fast growing demand for large TVs. In mobile consumer electronics, we successfully scaled up a new to the world manufacturing process and product to meet Apple's iPhone launch. In automotive, we fleshed our operations to adjust to the fast-paced ramp-up at OEMs after they significantly reduced production in quarter two. In optical communications, we successfully adjusted our costs to the current market environment, resulting in significant profitability expansion despite flattish sales on a -over-quarter basis. We also remain vigilant in our actions to safeguard the company's financial strength. We're proud of our execution, especially given the current global uncertainties. Clearly, our employees around the world are dedicated to living our values and giving their best every day. Now I'll turn the call over to Tony so he can give you some more insight on the quarter. Thank you,

Wendell, and good morning. We had a very strong third quarter. As Wendell highlighted, we executed effectively and we bolstered our healthy balance sheet despite the ongoing macroeconomic challenges. Sales growth and cost actions led to strong sequential margin expansion, further demonstrating that our operational adjustments are working. We made significant adjustments to align our cost and operating plan with the lower anticipated sales. In total, Quarantine continues to demonstrate that it has the resources to deliver on our commitments and extend our leadership as we continue to focus on operational excellence, cash flow generation, and prudent capital allocation. Before I get into the details about performance and results, I want to call out the changes at Hemlock during Q3 and cover the differences between gap and poor results. On September 9, Hemlock's semiconductor group redeemed DuPont's .25% ownership interest in the company, which transformed Quarantine's long-time ownership in Hemlock into a majority position. In the second transaction, Hemlock purchased certain manufacturing assets from DuPont and gained control of a critical raw material, thereby becoming a leading low-cost producer of ultra-pure polysilicon to the semiconductor industry. Hemlock's leadership position was backed by attractive, long-term, -up-pay customer contracts with upfront payments. Now, we're very excited about these transactions. They are good for Hemlock, good for Quarantine, and good for our shareholders. We didn't put any money into the transaction, and Hemlock generates a lot of cash, so its debt is mostly paid back in one year. Quarantine improves its financials by adding sales and earnings. In the third quarter, we recognized $31 million of sales from the newly consolidated Hemlock. And Hemlock will add approximately $150 million in annual cash flow. Please see our web disclosure for helpful consolidation details. Now on the GAAP. The largest differences between our third quarter GAAP and Quar results are a non-cash gain associated with the Hemlock transaction, ongoing restructuring charges, which are primarily non-cash, and a -to-market adjustment for our currency hedge contracts. Now with respect to the -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. For us, this reduced GAAP earnings in Q3 by $103 million. 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 Quar 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. Now I'll walk through our third quarter performance. At the outset of the pandemic, we committed to preserving our financial strength and positioning the company to emerge even stronger. In Q1 and Q2, we told you we were responding to economic uncertainty by making significant operational adjustments. We said we reduced cost and capital spend to align with rather anticipated sales. And while ramping down production and reducing inventory impacts margins, we said that when sales growth resumed, we expect improved profitability. Now looking at the third quarter, we grew %- we've sales grew 16% sequentially to $3 billion and our operating margin expanded by 710 basis point sequentially to 18.3%. This resulted in net income of $380 million and EPS of $0.43 up 72% sequentially. We also said we would maintain a strong cash balance and generate positive free cash flow for the year. In the third quarter, free cash flow grew to $518 million. Cumulative free cash flow for the first three quarters was $484 million. We ended the quarter with a cash balance of $2.5 billion and expect to generate additional positive free cash flow in the fourth quarter as we continue to reduce cost, control inventory, and execute well overall. As a result, I am confident that we will succeed on our free cash flow goal. These actions- the actions we're taking are clearly working. We have delivered great operational improvements, which started to show results in Q2 and really accelerated in Q3. We expect the benefit of these actions to continue in Q4, contributing to another strong quarter. Now let's review the business segments. In display technology, third quarter sales were $827 million up 10% sequentially and net income was $196 million up 29% sequentially. Display glass volume grew approximately 10% sequentially as cattle makers increased utilization, resulting in strong incrementals. Sequential price declines were moderate, as expected. From an end-market perspective, it appears that the impact from COVID-19 has been a positive. In developed markets, consumers are prioritizing in-home entertainment. Globally, welcome studies from home trends are growing. This was increasing demand for TV and IT products. On the other hand, spot-bomb demand has been down. In total, the retail market, as measured in square feet of glass, is at mid-finger visits -to-date through August. Of course, the upcoming holiday retail season will be a big factor in how the market actually plays out for the four years. Longer term, we remain confident that TV screen size will continue to grow. TVs 65 inches or larger grew 40% -to-date through August. 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 displayed pricing to decline by -single-visit percentage in 2020. We believe that three factors drive a favorable glass pricing environment. First, we expect glass supply demand to be balanced to tight. For coin, we are ramping our Gen 10.5 tanks to align with panel makers' schedules. Second, our competitors continue to face profitability challenges at current pricing levels. And third, displayed glass manufacturing requires periodic investments in existing capacity to maintain operations. Glass prices must support acceptable returns on those investments. In optical communications, third-quarter sales grew 10% sequentially to $909 million as carrier spending and deployments remained stable and enterprise sales grew slightly. Med income grew by $34 million or 42% to $115 million, driven by improving cost performance. Looking forward, demand on the network is at an all-time high, and we are seeing positive statements on capacity expansion for network operators. Currently, COVID-related factors hamper the ability to invest broadly in networks, and operators are focusing efforts on addressing capacity bottlenecks. We believe operators will begin additional investments to reestablish normal network headroom and expand offerings. Large carrier and enterprise capital projects are inevitable, but as we've said before, it's always hard to predict the time. Environmental technology sales in the third quarter were $379 million, up 68% sequentially, as markets recovered and OEMs continued to adopt GPS in Europe and China. We effectively adjusted our operations to pace with the market recovery and delivered net income of $59 million, compared to break even in the second quarter. The business team did a great job over the last six months in reacting to the rapid shutdown and restart of auto production by controlling cost and maintaining flexibility. Automotive sales increased 1% year over year, as continued strong adoption of GPS helped us exceed vehicle production, which declined 6% year over year. In the quarter, we saw continued strong market performance in China, up slightly year over year. North America and European OEMs more than doubled production sequentially, but declined 5% on a year over year basis. Diesel sales

improved 49% from the previous year's Preparation for China 6 regulations.

No doubt this has been a challenging year for our automotive market access platform. However, we are recovering faster than the market due to increasing content, primarily GPS, and advanced heavy duty products. Our content-driven strategy continues to drive strong results. Specially material sales were $570 million in the third quarter, up 23% year over year, and in sharp contrast to the smartphone market, which declined. Net income moved 59% year over year to $146 million. Sales growth was driven by Ceramic Shield, our new to the world glass ceramic on the iPhone 12, as well as premium glass sales, IT and tablet glass sales in support of work from home trends, and strength in our advanced optic products. In Brie, strong adoption and commercialization of our innovations produced strong year over year results for the third quarter for specialty materials, and we expect that to be true for fall year 2020 as well. In life sciences, North America lab utilization is increasing, and the pandemic is driving demand for laboratory diagnostic testing consumables. As a result, we are seeing increased demand for our products. In July, we carried out our long-term plan to ramp a new, larger distribution center, needed to support our growth and enhance our ability to address our customers' increased needs around the world. Starting up this center in the middle of a pandemic proved to be more difficult than we expected, which constrained third quarter sales. Sales declined 8% sequentially. Net income declined 10% in line with the lower value. We have added resources where required, implemented recovery plans, and are confident that operations will support the required output in Q4. As a result, we expect strong sequential life science growth in the fourth quarter. Now I'll turn to our balance sheet and our dedication to financial stewardship. As I mentioned, at the outset of the pandemic, we committed to preserving our financial strength and positioning the company to emerge even stronger. I discussed the operational improvements we've implemented and our strong free cash flow generation. It is also important to note that we continue to maintain a conservative balance sheet with a strong cash position at the end of the quarter at $2.5 billion. And we have a debt structure that is conservative by design and relatively unique. Today, our average debt maturity is about 25 years, the longest in the S&P 500. Over the next 15 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. Our balance sheet is built for times like these. As I previously mentioned, we expect a generally positive free cash flow in the fourth quarter and for the year. We also expect to maintain a strong cash provision and to maintain our dividend. We have the financial resources needed for the duration of the economic slowdown. In closing, we've demonstrated outstanding operational performance in the quarter with significant sequential improvement in sales, net income, EPS, and free cash flow. We are successfully carrying out the operational and financial goals we set up to stay strong during the crisis. We expect another solid quarter to end the year. We remain aware of potential impacts from the pandemic, the global recession, civil unrest, and geopolitical tensions. Regardless of how long or what shape the recovery takes, economy is effectively safe-growing its financial strength, our growth drivers are intact, and we continue advancing important growth initiatives with leaders in industries we serve. We are confident that our execution and market leadership positions ask to emerge from the current global uncertainty even stronger. With that, let's move to Q&A.

Anne? Thanks, Tony. Okay, Catherine, we're ready for our first question.

Thank you. As a reminder to ask a question, you'll need to press star 1 on your telephone. Our first question comes from Asea Merchant with Citigroup.

Your line is open. Great. Thank you, everyone. Good morning and thank you for the opportunity to ask a question. When, Tony, given the consumer spending has been very strong -to-date, obviously we've seen that in some of the results of our companies, how do you guys kind of look into the next couple of quarters? Do you feel like visibility is good based on discussions with customers that consumer spending could continue at these levels, as it relates to smartphones, TVs, notebooks, et cetera, that use up all your products? And then simultaneously on the optical side, clearly starting to see some positive trends here. I know it's lumpy, but just as you look at the next couple of quarters, do you feel like you have good visibility at this point into how these quarters unfold and demand strength continues in the next couple of quarters? Thank you.

See, I think that's an excellent question, and I don't disagree with any of your observations on some of the macro data on both consumer and statements from network operators. That being said, we expect a really solid quarter for her. And we're just, and we're off to a really good start this month. But that's really the extent of the guidance that we want to give at this time. Like last quarter, our business segments, as you just highlighted, continue to flash green. The global uncertainties just remind us to be very humble in our ability to precisely predict the future and exactly how our customers are going to work their way through this uncertainty. On the optical side, I totally get where you're coming from. Because we've all heard from our customers, from the network operators, that they're experiencing very strong demand on their network. And there are some great examples. I mean, they publish this all the time. This is a great website, by the way. The Internet and Television Association reports upstream growth. So go from your home, up, back into the network. It's up 37%. And also, just recently we've seen the Microsoft Teams set a new single-day record of 4.1 billion minutes. Unbelievable, right? And we also hear really strong statements from them that they want to build more capacity to be able to deal with this new baseline of demand and economy. Whether it's AT&T, Verizon, or cable TV companies, or the public cloud players, they're all quite public, but their planning increases in their capacity. That being said, predicting the exact quarter when these plans turn into deployment at scale, that's just challenging. Just so once again, I just think we should be very humble in predicting that exact quarter and wait until we see that surge in shipments out of our factories to claim a rebound in the optical segment.

Great, thank you. And if I may for Tony, as a follow-up, Tony, given you guys are kind of managing your capex and inventory levels very prudently, should we expect the capex trends that we have been seeing over the last few quarters to sort of continue here? Are we expecting any upsurge in capex at least over the next couple of quarters? Thank you.

I think, actually as we've talked about before, we have an ongoing amount of capital spending that we spend on kind of expanding our product lines and creating new innovations. But where we really spend a lot of money is when we get into the build cycle, and we're not currently in one of those build cycles, and we don't see ourselves in a build cycle over the next year or so. Of course, we're going to eventually get to a build cycle because when we get to a build cycle, that means there's a lot of growth coming, and we always get that with some commitments from customers, and we actually saw the benefit of that in the third quarter with our work with Apple. But if we look out over the next several quarters, we will be in a build cycle, so we won't see a lot of change from a capex standpoint.

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

Thanks. Good morning. Just following up on the optical question, maybe this is wrong, but my perception is that there wasn't a lot of content growth in the revenues based on what your customers are spending on right now. Wendell, can you just sort of talk about the outlook for content growth in optical as you eventually at whatever point it is see an optical spending surge?

Once again, really good observations, Steve. Most of our operators have been dealing with this year is how do they eliminate the bottlenecks in their network in these challenging times? But while they're being, as you say, quite public on that they're planning to expand their networks. So I think the content play is coming, and I believe that it will be quite strong, quite strong, whether it's in cloud, because there's been such a huge shift in the cloud during this time, or whether it's in our carriers. Our networks are just strained, and operators don't want to be in a spot where they're running close to red line, and they need to establish that base that is higher. So I feel really good that it's inevitable. But that being said, I ain't

all on the

court already.

No, I was going to ask you too, but just to be clear, a capacity expansion ramp is what would start sort of your content growth coming back. Is that correct, or am I thinking about it wrong? Thank you. Yeah, I think that is correct.

That's when you really see it. You're asking actually a super subtle question, which is we have a sort of more corning play that's going on here. Capacity comes in place more optically, and then with a particular set of innovations that reduce the cost of deployment pretty significantly, and the efficacy of it, and those have a higher revenue content for us. So in that subtle question that you're asking, we'll begin to see that without an acceleration in capacity growth. But you're not really going to feel it. We're not all going to feel great about it until those technologies get deployed in new capacity expansions. Great. That's very helpful. Thank you.

Thank you. And our next question comes from Simic Chatterjee with JP Morgan. Your line is open.

Great. Thank you for taking my question. If I can just have a quick clarification. First, I've read up to your comment, Vental, about lights flashing green. I just want to make sure I'm reading it right. All segments are here in a positive backdrop where they can improve sequentially from 3Q to 4Q, including life sciences, for which you're saying 3Q is the graph. And then in terms of just drilling down a bit on the specialty or performance that you're seeing, how much of this is driven by content increase versus wider adoption of the cover class? And if you can drill down a bit on the different areas of a smartphone, you're gaining content.

Could you repeat the second part of that question? I'm not sure that I understand it exactly. Could you do that again for me?

Yeah. The question was about specialty or performance that you're seeing in specialty materials, and how much of the outperformance relative to the underlying smartphone market is content increase versus wider adoption of your cover class? And which are the areas on a smartphone you're gaining content, if you can just outline that.

Okay. So we start with your second question first. So the bulk of that growth that you see is content increase. It's basically beating players, adopting our latest innovations that is driving that revenue increase. So that is the primary driver, Samik. To your first question, just to be precise on what I mean by flashing green, I said the same thing our last quarter. And what I'm trying to get at here is not that we're going to have sequential growth, or not that this one particular business is going to continue to do a certain thing. What I'm trying to get at is sort of the dissonance that we feel between the demand that our customers are putting on us versus sort of the uncertainty we see around the world. And so what I'm trying to do is give you the insight that we see, which is our businesses are doing well. We've got a good order book, and we're operating well. That being said, we still exist in the world that we exist in. And we just got to be humble about giving exact guidance. Does that make sense to you, Samik? Yes, no. Sounds

fair given the current environment. Thank you.

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

Yes, thanks for the question. I wanted to start off with Ceramic Shield. First of all, congratulations on being named on Apple Stage. I think I was the first to make a progress on that. I wanted to, Wendell, just ask you, that's an exclusive deal. And if it is exclusive, is there a duration on that? Are there other OEMs you could sell it to eventually? Just kind of how are you thinking about exclusivity versus not on fun materials like that? And also maybe, I doubt you'll tell me, but I'd be interested in the pricing differential with Gorilla. And then I have a second question for Tony. I noticed the inventory days jumped up a little bit in Q3, Tony. Could you give us some maybe call on what drove that increase? Is it related to the smartphone cycle or something else?

I'm going to start with... Yeah, why don't I start with the inventory one, it's a pretty easy answer. During the quarter we did the Hemlock transaction. We had to consolidate their balance sheet, which is increase the inventory for Corning in total. But of course that just comes from that transaction itself. A great transaction. We were really excited about Hemlock. It generates a lot of cash. We didn't put any money in. It pays back the debt. Most of it within a year we have $150 million of ongoing free cash flow generation. So we'll make sure it's clear. And we talked about it on our call later today that how much of the inventory came from that versus our own growth. If you look at the cash flow statement, we actually lowered our inventory by $187 million during the quarter. So our inventory actually came down during the quarter, but it's because of the Hemlock consolidation that you see a little bit different on the balance sheet. Okay, thanks.

And now to your questions for me. First, your statement. Thank you for the congratulations. We're really proud of that, for Sarandic Shielding. It's a lot of work. I have to tell you that it feels like not quite right to use Apple's name out loud. I don't think I've ever done that. Like inside the company we have a code name for Apple. And like we never even say Apple inside the company. So like if you could see me, I'm like turning a little pink and I'm having an anxiety attack. I'm using your name out loud. So if I

stumble a little, it would be very forgiving. I'm not really liking it, but Apple's name would look right in the back. That's exactly right.

You

don't know what

could get in. So Sarandic Shield, that's Apple's. It's that simple. That's Apple's. They helped us develop it. They invested in U.S. manufacturing for it. That's theirs. And it should be theirs. And so that's the way that is. Now, if we take a look at other players, we got a whole stream of innovations for them as well. I think what we would love to see, our ideal scenario, would be that Apple has so raised, I can't believe I just said Apple again, has so raised the bar on performance for everybody, that all of the players will be coming to us to say we need to have a way to compete with this incredible performance. And if that happens, that's just going to all be good for us. We will not do Sarandic Shield for them, but we've got a lot of great ideas and we've got a lot of great products to help them raise their game to the new level. It was just sad I've got to revert in Cupertino. So the next one got to how much, you didn't think I would answer, was what's the price delta? I would say once again, Rod, you have effectively predicted the future. I am not going to answer that. All

right. Thanks

a

lot. Why wasn't it used on the back of the phone? It's too expensive. You have

exhausted my ability to get myself to answer any question about that particular company. I'm reverting back to my mode. Very soon I'm going to go back into using code words. All right. Well, thank you very much. Appreciate it.

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

Yes, thank you. Just to stay on this specialty for a second, on the content increase that you referred to, Wendell, can you talk about whether you meant dollar content or unit content or both, and if both, like what the relative split is? And just sort of a little bit technical side of this, is the process similar to Gorilla where there's post-processing done by finishers or something different that changes the margin structure of this product? And I have a follow-up on display.

Thanks for the question. So starting with smartphones, I think the right way to think about it is it's content in dollars, right? It's just we're introducing more valuable materials, right? Now, quite often with some of them, like business is a great example, is it's a more valuable material that we're introducing, but it also reduces finishing cost for our customers. And so as a result, their part cost can be really close to what they had for Gorilla Glass 6. So that's sort of a shape of the way, but you should think about it as it's brand new products that have a higher price point is the primary way to think about it from your model perspective. That's smartphones. I think you've also got this going on in laptops and the IT piece, is we're also bringing up more content. Once again, the right way to think about this is more value added in our product set rather than increasing mass of glass or ceramics on the products right now. A super interesting question that when you think about 5G, where you've seen smartphones evolved to, which is this all glass structure pretty much, is driven by yes, we make awesome products and glass is the best thing. But other than that is that they need the RF transparency. And if you pop open a 5G phone, any of them, you will see how much antenna content is in there to be able to handle 5G and an ability to do 4G and to be able to do different players depending on where you are in the world. The same thing, I believe, is going to come to the IT products. If they're going to be big 5G users, we're going to have to see more mass of our product, more volume of our product on those devices to make them be truly great 5G devices. Okay, that's the answer for health. Does that answer your question, Wonsi?

Yes, it does, Wendell. Thank you. If I could follow up, can you talk about the incremental strength in display? There's some concern in the market that there were some ramp issues in the China glass market that's causing one of your competitors to take some share. Okay, can you comment on that and maybe just talk about any changes in the pace of the Korea ramp down? Thank you.

I think from an overall standpoint, what's really driving the strength in display is what's happening in the end markets. And that's what always matters from a display standpoint. And as we talked about, Korea TV demand in the COVID world has been pretty strong, but so has IT demand, in particular notebooks and tablets. That's fundamentally what we're seeing there. And you see it in terms of, in a couple of ways. One is Panamaker utilization has gone high. And I think that has slowed down a bit with the exit from Korea by some of the Panamakers there. But in addition to that, the value chain is pretty tight right now. So what is really driving this is in customer demand. And from a retail standpoint, as we mentioned, it's measured in glass. It's a mix of the digits on an annual basis, and that feels good.

Next question. Our next question comes from Peter Zepke with Barclays. Your line is open.

Hi, this is Peter. I'm for Tim Long. Congratulations on the quarter. One to ask about GPF. Prior to the pandemic, I think we were looking at a target of about 350 million of sales in 2020. And given that it looks like the auto rebound has been probably a little stronger than expected, can you give us an idea of how close you might get to that number for 20? And maybe your thoughts on timing toward that 500 million target?

Well, you know, I think that fundamentally what's driving the sales from the GPF standpoint, of course, is the adoption in Europe and the adoption in China. And on a -over-year basis, the European market is down. We've done it a lot in Q3, but we're still down on a -over-year basis. But China's actually up. So I think we feel good about where GPF sales are. And we certainly feel good that we are outperforming the market because of the content, you know, given part of GPF.

Thank you. Thank you.

Thank you. Our next question comes from MedUp Marshall with Morgan Stanley. Your line is open.

Great. A couple of questions. On Valor Glass, you know, understanding, you know, the FDA has had a more, you know, their fast-track policy over the last year on vaccines, but just post any vaccines, just progress you think Valor Glass is making within the FDA to not need a -by-drug approval? And then maybe second, if there were any kind of administration change to come in the next year, you know, just how quickly could emission standard changes flow through the environmental segment? Thanks.

Well, I'll take the first one. Maybe I can take the second. I'll come in on it if you'd like. So MedUp, I think in Valor, we're feeling with the broader adoption, as well as strategies by our customers to make the regulatory burden be less. And the way to think about the FDA is they'll react to the plans of our customers, and that will end up providing a basis for how it will evolve in the treatment of Valor Vials. In general, what I would say is ease of qualification is getting better for us as our customers get more sophisticated in how to do the regulatory moves. You just have to remember this is the first change, really, in vial packaging in 100 years. So everybody was a little out of practice. So I think that's coming in place and getting better. Our real focus, though, in Valor right now is to support the COVID-19 vaccine efforts. That's what we're about. And we have focused most of our energy now on supporting various vaccine candidates. And for them, it's a new drug. So the new drug is just qualified in our vial. So there's no real addition of regulatory burden. It's the redo that provides an extra burden, not the original. Our product is superior in every way from the current product. So that's where we're really focusing our capacity efforts. That's where we're focusing our technology efforts, is to use all of Corning's capabilities to make all of us and our children safer. And that's where we're aimed.

And I think in terms of the environmental regulations, the way we look at it isn't as, at least from our business standpoint, when we just start generating sales, it's not as how quickly the regulations change, it's when the implementations happen. And in environmental regulations, it always takes several years to occur. You've got to change the automotive supply chain when you like. So rather changing the regulations might be quick. In terms of us actually seeing these sales in North America, that would clearly be a couple years after that.

Great. Thanks.

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

you very much. I wonder, I had a question. You know, if we look back to April when you put in place the new operating structure, sort of centered around your maps and that, what kind of benefits have you seen from that? You know, how is it working, just, you know, given we're, I don't know, five months since it was launched and none of the follow-up? Thank you.

So we basically, because our innovations have been successful, we've sort of outgrown our previous structures. And so we put in place this new operating structure with Eric Nusser as our president and CLO and named new market access platform leaders, next generation leadership, to take each and every one of our major market access platforms. And it's going great. And my main evidence for that is look at the results. I mean, it's really strong. So I've got nothing but good things to say about that. And we are all quite hopeful going forward that this type of outstanding operations performance continues.

Okay. And then, I don't know, Tony, can you talk a bit about any operational improvements you could make to Hemlock now that it, you know, wholly owns? Or is it, or we should just assume that it will be standalone and there's not much leverage to be had? Thank you.

You know, I think there is plenty of operational improvements that we can make there. You know, we obviously based our, as we thought about, why we're excited about this is based on your current operating performance, those long-term -or-pay contracts that, you know, come with up-bought cash payments, the good controls that they have over their costs both in terms of the assets that they bought from DuPont but also some, you know, long-term energy contracts that are very favorable rates. And that's why we're confident in our ability to generate the $150 million of annual cash flow. That being said, we will start working on, you know, other kind of operational improvements we can make there. You know, a good example of that is that we procure a lot more stuff as a company than they do. So I'm sure there's opportunities there. I think there's opportunities from a technology standpoint, from a general manufacturing standpoint, and market access standpoint, you know, chances to, you know, look at different markets than we've had before. You know, we really now get the whole power of the recording machine to really drive that business. So, you know, I think on the whole, you know, we would expect improvements over time. You know, how quickly they happen, you know, like all, you know, we're just at the beginning stages of that. And the fact it's going to have $150 million worth free cash flow generation is very exciting.

Thank you,

sir.

Hey, Kathy, I'll take one

last question. Our last question comes from Martin Yang with Oppenheimer & Company. Your line is open.

Hi, good morning. Thank you for squeezing in. And my question has been to stay glass prices. Is there any opportunity for you to see price improvement even more? I understand that the current structure protects our downside, but given the tight supply demand right now, is there any way for you to raise price?

I would say that you often heard me say, Martin, about display. Is the right way to think about it, from an investment standpoint, in my opinion? I have some of my operating folks who believe we can make this be back into a growth machine. But I continue to believe, you should just count on it as ageing gracefully, generating a ton of cash flow, pricing being moderate, right? And that, just like normally in a maturing business, that way the price declined to clean. And I think that's the way to think about it. And right now, our primary refocus is to make sure we bring up those 10.5 plants that we have put in place. And you can remember that was when we did this. We did this with largely money support from various Chinese players while we kept 100% of the profit stream. And that move when we did it was really a bet on the growth of large-sized TV and a bet on the Chinese LCD manufacturers. That bet is playing out real well. And the key for us is to grow that into its full capability as fast as we can.

Thanks, Wendell. Great. And thanks, everybody, for joining us today. Before we close, I wanted to let you know that we'll be at the Baird Virtual Global Industrial Conference on November 10, the Nuggets Family Virtual Life After COVID Conference on November 11, Credit Seed's Annual Technology Conference on November 30, and the Barclays Global Technology Media and Telecoms Conference on December 10. And finally, the reset of today's call will be available on our site starting later this morning. Operator, that concludes our call. Please disconnect all lines.

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