Corning Incorporated

Ladies and gentlemen, thank you for standing by, and welcome to the Corning, Inc. Fourth Quarter 2020 Earnings Conference Call. At this time, all participants are in the 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 Investment Relations. Please go ahead, ma'am.

Thank you, and good morning, and welcome to Corning's Quarter 4 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 Evenson, Executive Vice President and Chief Strategy Officer. I'd like to remind you that today's remarks contain forward-looking statements that fall within the meaning of the Private Securities Litigation Reform Act of 1995. These statements involve risks, uncertainties, and other factors that could cause actual results to differ materially. These factors are detailed in the company's financial reports. You should also note that we'll 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. For the fourth quarter, the largest difference between our GAAP and core results stem from restructuring charges, which are primarily non-cash, as well as non-cash mark-to-market losses associated with the company's currency hedging contracts. With respect to mark-to-market adjustments, GAAP accounting requires earnings translation hedge contracts and foreign debt settling in future periods to be mark-to-market and recorded at current value at the end of each quarter, even though these contracts will not be settled in the current quarter. For us, this reduced GAAP earnings in Q4 by $63 million. To be clear, this mark-to-market accounting has no impact on our cash flow. Our currency hedges protect us economically from foreign exchange rate fluctuations and 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. 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 contract since their inception more than five years ago. A reconciliation of core results to the comparable gap value can be found in the investor relations section of our website at Corning.com. You may also access core results on our website with downloadable financials in the Interactive Analyst Center. Supporting slides are being shown live on our webcast, and we encourage you to follow along, and you can download them from our website. And now I'll turn the call over to Wendell.

Thank you, Ann, and good morning, everyone. Today we reported an outstanding finish to the year. Each of our segments grew sales and profits year over year, and we continued to progress our strategic initiatives. For the fourth quarter, sales were $3.3 billion, up 11% sequentially and 17% year-over-year. Our operating margin expanded 500 basis points year-over-year to 19.4%. Operating income grew 18% sequentially and 58% year-over-year. EPS of 52 cents was up 21% sequentially and 13% year-over-year. We generated $464 million of free cash flow in the fourth quarter, $948 million for the full year, And we finished the year with $2.7 billion in cash on our balance sheet. Hit those without saying, 2020 was an incredibly difficult year. We joined the rest of the world to confront the pandemic, economic uncertainty, and social unrest. Throughout the year, we focused on our customers and executed on strategic priorities. while protecting our people. From more perspective on our performance, I'll share three observations. First, we demonstrated our ability to adapt rapidly and remain resilient in the face of uncertainty. Second, our more corny content strategy clearly contributed to our growth, and our performance against our end markets. And finally, throughout this difficult period, we're embracing the opportunity to make a difference, wherever we are, with what we have to contribute. Now I'll stand on my first observation. Our decisive actions and strong operational executions have resulted in continued leadership in the capabilities that make Corning distinctive. Like many companies, we focused on bolstering our financial strength, reducing production levels and operating costs, carefully managing inventory, reducing capital expenditures, and pausing share buybacks. However, it's not about what we cut, but what we kept. While we adjusted production, we didn't reduce capacity, keeping us positioned to meet increasing demand when the economy improved. We continued to make strategic investments and advance major innovations with our customers to capture the growth playing out across our market access platforms. And we developed multifaceted programs to protect our talent and preserve our capabilities. Our first half actions generated significant cost savings in the second half of the year. And as the economy started showing signs of green shoots, we effectively adjusted our operations, keeping pace as demand started to recover in many of the markets we serve. Our results tell the story. Sales were down 12% in the first half, as most economies were impacted by pandemic-related lockdowns. But in the second half, we improved sales 24% over the first, while growing operating income 122%, returning to year-over-year growth and generating very strong free cash flow. For the year, we generated almost a billion dollars of free cash flow, And our balance sheet remains very strong. We expect this strong momentum to continue heading into 2021. We will continue to adapt and focus on execution as we have proven that our approach is working. Turning to my second observation. In all the industries we serve, important market trends continue to offer new challenges that Corning is just uniquely qualified to address. And new opportunities to integrate more Corning content into our customers' products. In this difficult year, we have proven that this is an especially powerful value creation lever. We aren't relying exclusively on on people buying more stuff. We're putting more corning into the products that people are already buying. In the fourth quarter, this strategy paid off as we grew sales year over year in every one of our businesses. At the top were specialty materials with sales up 20% year over year and environmental technologies up 19% year over year. both significantly outperforming their end markets. Last quarter, I described our innovations in mobile consumer electronics, looking at how we're investing to create additional revenue streams and capture content opportunities. Today, I'll focus on our automotive market access platform. The auto industry is undergoing major disruptions. Automakers are designing cleaner and safer vehicles while featuring technology that provides immersive experiences. We're uniquely suited to address these trends. And for us, the opportunity is large. In the range of $100 per car in Corning content. We're collaborating with more OEMs and we're offering more solutions to help move the industry forward. Let's look at two of our biggest successes right now. Starting with our automotive glass solutions business. We're building strong momentum. Our advantage solutions are enabling the very rapid shift towards in-vehicle displays that are interactive, that are integrated and shaped. We're collaborating with industry leaders across the auto ecosystem, including Visteon, LGE, BOE, and VIA Optronics to accelerate the adoption of our patented 3D cold form technology, which enables lower cost shaped auto interiors. Our large scale facility in Hefei, China is now fully operational. and servicing our growing demand. And we continue to see strong adoption of our technology by auto OEMs. A recent proof point is the new Mercedes-Benz hyper-screen dashboard display, which features a gorilla glass cover nearly five feet wide. Similarly, in environmental technologies, In a year, when a global pandemic temporarily shut down OEM production, our proprietary gasoline particulate filter business still grew sales year over year. When we introduced GPS, we said our technology increased our content opportunity per car by three to four times. Like most of our innovations, it started with the customer challenges. Europe and China are addressing fine particulate pollution with new emissions regulations. We applied our expertise in ceramic science with our advanced manufacturing capabilities in extrusion to rapidly develop filters that efficiently track fine particulates. And today, we're effectively helping automakers reduce these harmful emissions, meet new regulations, and produce some of the cleanest gasoline vehicles you can buy. Demand for our GPS has grown quickly, and with our market-leading product, we continue to win the majority of platforms awarded to date. We're well on our way to building a half-a-billion-dollar business. We're actually ahead of schedule, and the content opportunity continues to dwell. We expect our GPF technology to migrate beyond Europe and China as other regions focus on improving air quality. And many new car models will soon be required to get even closer to near zero particulate emissions. In response, we recently introduced our next generation GPS featuring enhanced filtration capabilities. They're launching in upcoming models as automakers prepare for the next wave of regulations. Across our markets, we see a similar content story playing out as we respond to key industry challenges with more corning solutions. Let me share some other accomplishments across our market access platforms. In my sciences, Pandemic-related demand has highlighted our strength in the industry, and we achieved major milestones towards building a significant Valor Glass franchise in 2020. At the start of the year, we entered a long-term supply agreement to provide Valor Glass vials for a portion of the currently marketed Pfizer drug products. Soon after, we were awarded $204 million in funding from the U.S. government to substantially expand domestic manufacturing capacity for Valor vials. Today, we're supplying Valor glass to several leading COVID vaccine manufacturers. We've produced millions of Valor vials and shipped enough for more than 100 million doses, supporting multiple vaccine developers. In our life sciences segment, the global health fight is driving strong demand for our consumable products. We're supporting the development of treatments and vaccines, as well as math testing efforts. We received $15 million from the U.S. government to expand domestic capacity for robotic pipette tips, which are used for COVID diagnostic testing. BioNTech recently recognized our contribution to their successful COVID vaccine development. Turning to mobile consumer electronics, we launched the toughest gorilla glass yet, Victus. And it's already featured on six Samsung devices. Corning also invented the world's first transparent, color-free glass ceramic, which is featured on the front cover of the latest iPhone. Apple and Corning partnered to develop and scale manufacturing of Ceramic Shield. It offers unparalleled durability and toughness. I noted that specialty material sales were up 20% year-over-year in quarter four. they were up 18% for the full year in a smartphone market that declined 7%. In optical communications, we returned to growth, and we expect this growth to continue as customers increase spending to support growing bandwidth requirements. In 2020... We introduced new and innovative solutions that help speed the deployment of 5G. We launched our outdoor 5G-ready connectivity solutions, featuring compact, easy-to-install terminals that can be deployed in any conceivable architecture. Operators can actually save up to $500 per terminal location, dramatically lowering installation costs and speeding up deployment. We're also collaborating with Verizon to enable 5G millimeter wave indoor deployments for their enterprise customers. We're also working with Qualcomm Technologies to deliver indoor networks that are 5G ready, easy to install, and affordable. And we're collaborating with Enersys to simplify the delivery of fiber and electrical power to small cell wireless sites. Turning to display. Retail demand for TV and IT products remains strong. Demand for large-sized TVs continues to grow. 75-inch sets were up more than 60% for the full year. Large TVs are most efficiently made on Gen 10.5 fast. Corning. is well positioned to capture that growth with its Gen 10.5 plants in China, including the two newest Gen 10.5 facilities in Wuhan and Guangzhou, which are now expanding production to meet customer demand. Ramping these sites has been no small feat in the midst of a pandemic. We are very proud of our innovative and dedicated expert engineering teams that rose to a host of unprecedented challenges to start up tanks in both facilities. Looking ahead, Corning's long-term growth drivers and content opportunities are strong in each of our markets. And we believe some secular trends could accelerate as consumer lifestyles continue to change in the aftermath of the health crisis. And that leads to my third observation. We're living through the kind of moment that tends to bring true character to light. At Corning, our values are evident in our actions. We've unleashed our capabilities to help combat the virus. And we're proud to be creating life-changing technologies that contribute to keeping people safe and help society address the challenges of the pandemic. We also recognize that in these unprecedented times, that we have the opportunity to share resources and leadership on a range of important issues. We've launched racial and social equality programs, and our unity campaigns support vital human services and emergency relief in our communities around the world. In conclusion, On all fronts, Corning is executing well. We're delivering outstanding results and making important progress across our strategic priorities. I am confident that we are entering the year with solid momentum and we expect to grow in 2021. Our more Corning strategy will continue to drive outperformance across the diverse industries that we serve. We're not just counting on consumers buying more cars, TVs, or smartphones to grow. And I'm excited about how we're bringing our capabilities to bear in optical and life sciences as operators expand their networks and we continue to support vital drug and vaccine development. Now, I'll turn the call over to Tony so that he can provide additional insight on our results and expectations.

Thank you, Wendell, and good morning, everyone. We feel good about our fourth quarter results. On a year-over-year basis, we grew sales and earnings. We expect to grow again in the first quarter, and we expect to grow for the full year. driven by improving markets and our more corning strategy. We are building a bigger, stronger company that delivers sustainable results while remaining agile in our ability to respond to changing market factors. Now let me walk you through our fourth quarter performance. In the fourth quarter, we grew sales 11% sequentially and 17% year over year, to $3.3 billion, exceeding expectations. Excluding the consolidation of Hemlock Semiconductor, sales grew 11% year-over-year, with every segment growing sales and net income. Specialty materials and environmental technologies delivered particularly strong year-over-year sales growth, up 20% and 19%, respectively, both outperforming their underlying markets. Optical communications returned to year-over-year growth, and we expect that growth to continue. Our operating margin was 19.4%. That is an improvement of 500 basis points on a year-over-year basis. We grew operating income 18% sequentially and 58% year-over-year. EPS of 52 cents was up 21 percent sequentially and 13 percent year-over-year. We generated $464 million of free cash flow in the quarter. Cumulative free cash flow for the full year was $948 million. We ended the year with a cash balance of $2.7 billion. We enter 2021 in an excellent financial position. Now let's review the business segments. In display technologies, fourth quarter sales were $841 million, up 2% sequentially and 6% year over year. And net income was $217 million, up 11% sequentially and 21% year over year. Retail demand for TV and IT products remained strong during the promotional season in Q4. Displays four-year sales were $3.2 billion and net income was $717 million. Our four-year price declines in 2020 were mid-single digits. The glass market and our glass volume were up mid-single digits for the year. The retail market was more robust than the industry expected, resulting in panel supply being tight for the second half of 2020. Panel makers ran at high utilizations and the industry drew down inventory to satisfy demand. These dynamics also resulted in glass supply being tight and more recently in shortage due to a power outage at a competitor's glass plant. Now let's look at 2021. We expect the TV and IT retail markets to remain strong. We remain confident that large-size TVs will continue to grow, and we are well-positioned to capture that growth with Gen 10.5, which is the most efficient gen size for large TV manufacturing. We expect the glass market to grow a mid-single-digit percentage in 2021. We expect glass supply to remain tight in the upcoming quarters. As a result of these supply-demand dynamics, we are experiencing a very favorable pricing environment. We expect Q1 2021 glass prices to be flat with Q4 2020. This is significantly better than the sequential declines we've seen in any other first quarter over the last decade. Glass prices for some customers in some gen sizes may actually see a sequential increase. We believe the following three factors will continue to drive the favorable pricing environment for the upcoming quarters. First, we expect glass supply to continue to be tight. Second, our competitors continue to face profitability challenges at current pricing levels. And third, display glass manufacturing requires periodic investments in existing capacity to maintain operations. Glass prices must support acceptable returns on these investments. In optical communications, fourth quarter sales were $976 million, up 8% year-over-year and 7% sequentially. Our year-over-year growth can be attributed to broad improvements in demand for both carrier and enterprise customers. Fourth quarter coordinate income of $141 million was up 127% year-over-year and 23% sequentially. The improvement was driven by the incremental volume and favorable cost performance. We have returned to growth in optical communications and we expect that growth to continue. Bandwidth demand is increasing, and users are demanding higher performance connections. We're seeing positive statements from customers on increasing investments in their optical networks. Our sales and order rates are picking up, and we're ready to capture demand as it materializes. We are confident we will grow sales and optical communications for the year, We continue to monitor and evaluate market demand signals to determine the magnitude of growth, and we'll continue to keep you updated as we go through the year. In environmental technologies, fourth quarter sales were $445 million, up 19% year-over-year and 17% sequentially, ahead of expectations as markets continue to improve and GPF adoptions continued in China. Net income was $93 million, up 45% year-over-year and 35% sequentially, driven by strong operational performance globally and successful ramping of additional GPF capacity in China. For the full year, sales were $1.4 billion, and our performance was better than the underlying market. Net income was $197 million. While our full-year 2020 sales were certainly impacted by COVID-19, we are recovering faster than the market by increasing our content for both the automotive and diesel end markets. Despite severely challenged markets, we saw year-over growth in GPF sales. Strong GPF adoption continues in Europe and in China, where the China 6A regulation is being implemented nationwide this month. We are ahead of our original timeframe to build a $500 million GPF business. Specialty Materials had an outstanding fourth quarter and full year. Q4 sales of $545 million were up 20% year-over-year. Full-year sales were $1.9 billion, up 18% year-over-year, despite a 7% decline in the smartphone market. driven by strong demand for our premium cover materials and our other innovations. Net income was $423 million, up 40% from 2019 on higher sales volume and strong cost performance. The importance of computing and connectivity were amplified during the pandemic. Our new product innovations, including Ceramic Shield and Gorilla Glass Victus, as well as our EUV product in the semiconductor market, were important contributors to our strong performance. Now, before I get to our life sciences results, I'd like to note something of great importance to us. Throughout the pandemic, our life sciences market access platform has applied its broad capabilities and full product portfolio to help the world combat the pandemic. from our traditionally research-focused consumables to our bioproduction products to our transport media and, of course, our Valor glass. We're playing a vital role in the development and supply of test kits and vaccines. Now, let's look at our segment results. Life Sciences' fourth quarter sales were $274 million, up 7% year-over-year and 23% sequentially, driven by strong demand for COVID-related products, including bioproduction products used in clinical trials. Net income was $42 million, up 11% year-over-year and 50% sequentially. In summary, we successfully navigated a very challenging year. We strengthened our balance sheet, established growth in the second half, and generated free cash flow of $948 million for the year. As we look ahead, we have strong momentum coming into 2021 and expect year-over-year growth to accelerate in the first quarter. Specifically, we expect core sales of $3.0 to $3.2 billion compared to $2.5 billion in the first quarter last year and EPS of 40 to 44 cents, which is double last year's first quarter EPS at the low end of the range. For the full year, we expect growth in sales and earnings, and we anticipate generating more free cash flow in 2021 than in 2020. And we will share more with you as the year progresses. Let's turn to our commitment to financial stewardship and prudent capital allocation. Our fundamental approach remains the same. We will continue to focus our portfolio and utilize our financial strength. We generate very strong operating cash flow, and we expect that to continue going forward. We will continue to use our cash to grow, extend our leadership, and reward shareholders. Our first priority for our use of cash is to invest in our growth and extend our leadership. We do this through our D&E investments, capital spending, and strategic M&A. Our next priority is to return excess cash to shareholders in the form of dividends and opportunistic share repurchases. In 2021, we expect CapEx similar to 2020 as we have capacity in place to meet higher sales. Now, we'll invest more if we require capacity to support additional growth, Any additional capital investment would be supported by a customer commitment. We'll keep you updated as we go throughout the year. Given our expected strong free cash flow generation in 2021, we expect to increase our distributions to shareholders. That includes reinstating opportunistic share repurchases sometime this year. In closing, We're very pleased with our strong close to 2020, highlighted by growing sales and profitability. We continue to focus on a rich set of opportunities. Our businesses are fundamental to the long-term growth drivers in the industries they serve, and our more corning strategy continues to deliver sales outperformance relative to our end markets. And I look forward to sharing our progress as the year goes on. With that, let's move to Q&A.

Anne? Thanks, Tony. Operator, are we ready for the first question?

Thank you. As a reminder, to ask a question, you will 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 Tim Long with Barclays. Your line is now open.

Thank you. A two-parter, if I could, on display. First, you talked about the pretty strong pricing environment into Q1. Could you talk a little bit – it's obviously a little bit different supply dynamic, and that's normally a tough quarter for pricing. So how do you think about that as it kind of impacts the rest of the year, the cadence of normal pricing throughout the year? And second, can you talk a little bit about the move of some of the big providers from Korea to China? It's been on hold a little bit, so – Curious what your thoughts are, what that would mean to either the supply side of the equation or the pricing side. Thank you.

Sure. I mean, I think it's important to, you know, think about what's happened over the last year from a display standpoint. You know, the market overall was more robust than what we'd expected and what the industry expected, which meant that panel makers ran tight in the second half of 2020. You know, not only did those higher utilizations, but the industry also brought down inventory to meet that demand. And that meant that, you know, glass was tight throughout the year. And as you, you know, we remain confident that things will remain tight on a, over the next several quarters because of where we think demand is. And as that demand, you know, continues to be met, there's also a need to, you know, replenish what's happened from a supply chain standpoint in some of the tightness has happened from a supply chain standpoint. So, you know, that's obviously led to very favorable pricing in the first quarter. And as we look out over the next several quarters, you know, we think that that environment continues, that tight environment continues.

Just building on Tony's, because I think you're obviously a close watcher of the industry. We were tight. Glass is tight. And glass is going to stay tight. for as far as we can see right now. Then with a competitor having a power outage and the planned shutdown of the Korean operations, that tipped everything being delayed because the market was so strong. That tipped everything into shortage. So we went from being very tight to going to shortage. And that's what led to the very, very strong quarter one pricing environment. But we're going to stay tight even as we address those. I think the Koreans will still ultimately continue their shift to those big Gen 10 and a half plants, just because it's more economical. But, you know, right now they continue to press us to be able to help them supply their Korean operations, and they're not providing a firm end date for when they'll transfer those over. primarily because they continue to see this end market as being very strong. Does that make sense to you? Does that answer your question?

Yeah, yeah, great. I'm just curious if in any way it changes kind of the longer-term view of most of the production moving to China, if the delay here in the Koreans moving, does that change the overall outlook of the impact of your China position?

Well, I think because these Gen 10.5 plants produce panels roughly at about a 30% cost advantage, especially when they're integrated with our glass operations, that that's just a pretty powerful microeconomic force so that you're just seeing the behavior set that when demand is more than those ultimate low-cost production assets, then less productive capacity stays full. And so as that continues to grow, I still think the right bet is continuing movement towards those big gen 10.5 plants.

Okay, great. Thank you very much.

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

Thank you very much for taking my questions. I wanted to dig a bit further into the opportunity for Valor over the next 18 to 24 months. And I'm just curious how maybe conversations have changed with partners given, you know, the strong uptake. I know it's from a small, small base, but of Valor's last vials related to COVID. And just, you know, how maybe have your thoughts changed around the timing of investment and the ability to grow this business? Thank you.

So the way we view Valor, Shannon, is this is an opportunity to help make all of us safer. And so we're going with virtue first, you know, rather than any one of our previous plans. And so now we are full-on accelerating as fast as we can. We're also looking at other ways that our Valor technology can help us fill and finish operations, because as the world shifts to try to address this really need for billions of doses, we want to make sure that other life-saving medicines can be produced. And so that bottleneck is going to increasingly shift towards fill and finish, and we are uniquely qualified to do that. Many of the vaccines have very complicated thermal cycles, that our technology is once again uniquely a position to do. So, sort of simple answer to your question is it's all hands on deck, trying to increase our production of valor, to increase the applicability of our technology across this platform. I personally have now switched to leading a key engineering program, to help address this upcoming bottleneck. Is that the wrong answer? I could have simply just said, how has it changed our view? We need to make a lot more miles is the short answer to your question, Shannon.

Thank you.

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

Yes, thank you. Good morning. So optical grew in the quarter on a year-on-year basis, and you're expressing confidence on the fact that the growth is going to continue. Can you maybe help us think about sort of the rate and pace of recovery in optical and how the conversations with your customers have changed through the course of the quarter that's now giving you this confidence on growth. And you seem to be really firing across all cylinders here. I'm curious if you can maybe share some high-level viewpoint on 2021 versus 2020. Which segment would you say is going to be the largest contributor of growth and profitability? Thank you.

Well, let me first start with from an optical standpoint. You know, I think the last several calls we really have focused in on, you know, our fundamental belief that as bandwidth demand is increasing and users demand higher performance connections, that this was going to be positive from a business standpoint. And we've even talked about, I think in the last quarter, about how our customers were beginning to, you know, talk more about that in their conference calls. And, you know, there are plenty of examples of that. I think what's really happened over the last, you know, three or four months is that, you know, our sales and order rates have started to pick up. And it's really that pickup in the sales and order rates which is, you know, what drove our growth on a year-over-year basis and why we're confident that that growth is going to happen. So I think the question before was when was it going to happen? And I think the answer is that it's happening now. And so I think that's how we think about it there. You know, and then I think from a, you know, from an overall economic standpoint, you know, clearly as we enter in the year, we had a very strong fourth quarter and we expect to have a strong first quarter. But, you know, there's still a lot of uncertainty in the world and, you know, we're not, you know, in the greatest position to sort through how that uncertainty is actually going to play out. You know, we think there's two places where we can provide unique insights. One was optical that we just talked about and the other was to better understand what's happening from a display standpoint. And that's the areas that we focused on during the call.

Okay, great. Thanks. If I could quickly follow up. On the pricing front, I mean, as you noted, this is very unusual for a first quarter. Typically, you reset price contracts in Q1 on LCD glass. Wendell obviously articulated all the reasons why we're seeing this better pricing here. And you're also saying that this is – the market's going to stay relatively tight. But as you ramp your Gen 10.5 capacity, should we expect the pricing cadence to change through the course of the year? Normally, you have a big step down in Q1, and then you have very moderate through the rest of the year. This year, you're not really seeing a step down. In fact, with some customers, you're seeing a step up. So should we expect that pace of pricing to remain – as it has in past years, just very, very moderate, or should we take that as more capacity ramps with Gen 10.5? Gee, you're actually going to see, you know, more maybe accelerated pricing pressure as you go through the course of the year.

I think you should think of it, Monzi, as we'd expect that moderation, the environment for moderation continues. Totally get your question, though, because the pattern of pricing sort of is a little different than normal. We have the best pricing in quarter one that we've had in a decade in terms of relative move, relative decrease. And so the pattern question is like totally legit, but we do expect it to remain tight. How the exact pattern plays out is, And, you know, let's take it a quarter at a time. And right now we see quarter one the way we see it. And, you know, our current look into quarter two, as Tony said, you know, looks pretty favorable to us and continued moderation.

Thanks, guys. We're after the quarter.

Thank you. Our next question comes from a CM merchant with Citi. Your line is now open.

Great. Thank you for the opportunity. A couple of quick questions. One on specialty. clearly a very strong performance here in the face of smartphone undergrowing, you know, and declining actually, but with a strong recovery ahead. If you can, like, dial down a little bit deeper into your expectations for specialty, that would be great. And then for Tony as well on OPEX, you know, you guys are talking about at recent conferences about kind of being very well managed on the OPEX. Can you just talk to us about what are some of the changes that you've done internally that, despite the growth that you're seeing and the secular demand strand that you're, you know, thinking about into 2021, OPEX should be well maintained here, or well contained here, I should say. Thank you.

Great. Let's start with OPEX, and then I'll touch briefly on specialty. And I would like to make a little more macro comment on how we see the year.

Yeah, you know, I think from an OpEx standpoint, Asya, you know, clearly when we got into the early parts of 2020 and things were changing, we did a number of things to adjust our operating costs. Some of them were, you know, set up so that we would be able to, as the economy has recovered, be able to respond to that. Some of them were compensation-related, for example, furloughs and things like that. You know, certainly to the degree – that business has returned, of course those costs will also return. But from an overall standpoint, you know, we've remained very focused from an OpEx standpoint to make sure that we're getting leverage as we grow and that we don't grow our OpEx over a longer period of time as fast as we grow our sales. And that's really our underlying philosophy from an OpEx standpoint.

I think what structurally makes it possible for us to do is, When you see us lay out our 3-4-5 framework, what that allows us to do as we build on our market access platforms is that ability to sort of reuse and share those platforms. We've seen that both in our technology side as well now in our customer-facing organizations. And so that should allow us to more efficiently address the growth that we see. And over time, we do expect that operating margin leverage to be sort of a more powerful generator for us than just at the manufacturing gross margin level. So you're going to see us really addressing that more because that's where we're seeing the synergy really start to drive across our portfolios. Let's touch briefly on a specialty for you. We would expect that our outperformance versus the smartphone market to continue. And that's sort of, I'm not calling what happens with the smartphone market. So that kind of takes me to sort of a broader point, and I'd be really interested in feedback from investors, both sell side and buy, which is, you know, we saw the strong momentum. We knew it was coming, but we saw the strong momentum and really strong order book in Q4, and that continues into this quarter. So then that increasing clarity enabled us to provide the sales and EPS guidance that we just did for quarter one. Now, we listened to our investors and made it simple and clear that, by providing sales and EPS for the entire company, rather than the more complicated and detailed market by market guidance that we previously provided. Now, as we turn to the total year, simply put, we expect our momentum and our outperformance versus our markets to continue. So then the question really becomes what happens in the macro environment? Now you all have your own experts and opinions on what's going to happen in the macro. At Corning, we approach our ability to predict macroeconomic and geopolitical events and tensions with great humility. Hence, We don't think it's helpful for us at this time to predict these forces and therefore what exactly our revenue for the year will be. What we are confident of is that we're going to outperform these markets. So as you pick your geopolitical or macroeconomic scenario for our various markets, you know, what you can count on is we're going to do better than that. That may be more than you wanted to know, but that's how we think about it.

That's great. Thank you.

Thank you. Our next question comes from Mehdi Hosini with SIG. Your line is now open.

Yes, thanks for taking my question. Just as a follow-up on the specialty material, Wendell, when do you think we're actually going to see enough of a penetration into other industries, specifically for Gorilla, that you would have more of a debundling from the smartphone market. And I have a follow-up.

Could you say more? I want to make sure I understand your question. Sure, sure. You always have very interesting ones, so let me make sure I understand. Sure.

Thank you. We have been anticipating diversification of Gorilla Glass into other markets like auto. And then you highlighted Mercedes-Benz. And I just want to see what instigated you to actually illustrate that case. And in that context, how should we think about diversification of gorilla and especially material in market? I totally understand.

That's always a really good question. So we highlighted that for two reasons. First, our momentum in auto glass systems is increasing, and it's not yet. at the point where we would say, okay, in your models, you better start providing for this play, because it's going to change your macro numbers. But we can totally feel it, and you will feel it more going forward. We're also seeing Gorilla find its way into more and more of our maps. What we're going to do is really talk about that in the form of those market access platforms, as the various forms that that technology takes, serves multiple of our customers. Believe it or not, it's even finding its way into Opto. So let's take that note, and as that becomes more important, we'll make sure we share a little bit more on it, Matty.

Sure. Thank you. And maybe I just, as a follow-up to that, To that question, thank you for providing detailed opportunities in the auto industry. You highlighted $100 of content per car. I want to better understand what are some of the key assumptions. How are you thinking about the evolution of electric vehicle as that segment grows? Is your $100 content... accounts for that change in auto industry? And does that also account for, like, gorilla penetrating auto industry? And, again, how should we think about variability in that $100 content? Yes, I think the short answer to your question is yes.

So I think what we should do, what I recommend we do is – Why don't you follow up with Ann and let us share just the way we think about the map, and it would probably be an excellent report for you to do. We'll be helpful and lay that all out because you've got a great question, and we have the build, and we'd be happy to share. Okay. Okay. Can I ask what... I think Tony has something that he's looking at me like he has something that... No, I mean, Eddie, I think that would be great.

Why don't we... I think we talk to you later today, and we can talk about next steps on this. And the only thing I wanted to point out as the CFO is that any glass that's sold to the automotive industry right now shows up in our other segment, not in our specialty materials segment, but that That was just more of a reporting point.

Well, thank you very much.

You're welcome.

Got it. Thank you, guys. I appreciate it.

Thank you. Our next question comes from Samik Chatterjee with J.P. Morgan. Your line is now open.

Hi, guys. This is Joe Cardozo on for Sonic. Just one follow-up question for me on the optical side. Obviously, the return of your goals and guide for foliar growth is great to hear, but I just want to take a moment and focus on the profitability initiatives that have been done in that business specifically. Can you walk us through what you've been doing on the optical side, particularly as it relates to the temporary versus permanent measures, as well as if there's any weighting towards carrier versus the enterprise portions of those businesses? And as we see revenues come back in that business, is there any way you can gauge expectations relative to the profitability now versus, let's say, a year ago, assuming an apples-to-apples revenue profile?

You know, I think from an overall standpoint, we're seeing both growth in the carrier and in the enterprise business. Of course, the enterprise piece is a lot of what, you know, being grown from cloud computing, hyperscale data centers. You know, some of the traditional enterprise pieces, you know, are more impacted by the economy. You're not seeing that as much, but We're really seeing growth in both parts of those businesses. And from an operational standpoint, I mean, I think what's important to note is that even though, you know, our revenues were down, we didn't change our ability to supply that because we always knew it was going to come back. You know, there's costs that you carry. during those kind of periods, and then when you fill those factories back up, you see expansions from a margin standpoint, and we saw that in the third and fourth quarter of this year, and we'd expect to see that going forward.

Yes, and also, Joe, another dynamic, Tony nailed it, which is you expect revenues, as revenues expand, we would expect our margins to expand. There's another factor, and I'll throw it, that can always impact your quarter-to-quarter type of variability, which is what precisely are the operators or the enterprise players buying. When they buy our more complicated, highly engineered solutions, when they buy those, our profitability is higher, right, than... if you're just buying bare fiber and cable. It depends what specific fiber or cable. And so mix starts to play a real role in opto when you think about it from quarter to quarter. But if you step back, I think Tony has nailed the fundamentals here, which is as we fill, we would expect the incrementals to be good.

Thanks, guys. I appreciate the insights and congrats on the results.

Thank you. Our next question comes from John Roberts with UBS. Your line is now open.

Thanks. Nice quarter and glad to be active on the stock again.

John, welcome.

It's so good to hear your voice, John.

You've had another quarter to think about the strategy in semiconductors. You've got the lens business and specialty materials and it's benefiting from EUV and you put Hemlock in other and It doesn't really benefit from any, I think, special trends going on in the semiconductor market. So it just looks like an opportunistic good deal at this point. Is there more to it than that?

So first, I'm just having flashbacks to almost a decade ago when you were telling me what we needed to do to make sure we ended up with Hemlock because it fits so much better with us and the – And the silicone side fit so much better with Dow. And so we finally got it done, John. It just took us a while. So, yeah, we feel good about it. For sure, the economics on that deal are incredibly good. And we really like that. But actually, your insight from, you know, all those years ago, I think is right. And we're going to run some experiments here to try to see, can we make more of a difference to Hemlock? Can we, with our capabilities, make it accelerate? Or, you know, vice versa. You know, we really are interested in Can we address some of the significant issues there are with lack of domestic production of solar here in the U.S.? So there's a number of, I think, there's a number of significant opportunities. It's too early to say will they work out or not. And sometime, and I'd love to have a conversation with you about any ideas that you have on it as well, given how long you've advocated for this.

Yeah, we will definitely do that, John, and we will get back with you on some of those ideas. And, you know, all I would say is that in the short term, all the financial attractiveness of this deal is absolutely paying out as we expected it to. You know, as you know, we didn't put any money into this transaction, and Hemlock generates a lot of cash. And so what debt they had, they, you know, mostly, you know, started repay back within a year, in fact, paid back a lot of it in the fourth quarter. You know, they generate approximately $150 million of annual cash flow. So we're very excited from a financial standpoint and also from a strategic standpoint.

Maybe just an easier financial question. So you're guided for 2021 CapEx, roughly flat with 2020. Do you still expect it to be relatively modest through 2023, which that was your target, I think, at the investor day?

Yeah, you know, I think what happens through 2023, of course, depends a lot. on, you know, how much growth that we get and how much growth capital that we, you know, have to put in, you know, build capital that we have to put in over the next several years. And the good news is any built capital, I mean, first of all, it comes with growth, and secondly, it comes with pretty significant, you know, customer commitments. Great.

Thank you. Thank you. Go ahead, Joelle. Our next question comes from Steven Fox with Fox Advisors. Your line is now open.

Thanks. Good morning. I just had two quick questions. First, on the 25 points of outperformance for specialty materials versus mobile device sales last year, can you sort of put that in perspective where maybe there's some unusualness to the outperformance, what maybe a normal rate of change would be versus markets, et cetera? And then... Just as a follow-up, when you talk about the bullishness with optical, how much are you factoring in the recent auctions on the rural side and the 5G side into that bullishness, or just before thinking about those things? Thanks.

I think on the specialty side, you can always expect us to outperform because of the moral corning strategy, putting more content, higher value content in. What the rate of that is, I think you're quite wise to say, well, that could depend on which particular products are working really well for our end customers and how much of that has our newest technology or different types of our technology. And that gets a lot harder to predict, you know, because you not only have to call the total market, but then which OEMs sort of win in that market. as well as which of our technologies play. But I think overall you could think about it as we will outperform. It's just a little too early in the year to give you some insight as to, like, how much to outperform, Steve. I'm sorry on that. And then on opto, you're right to identify it is definitely a positive, but it is just one of the – sort of number of positive impacts and announcements that you're seeing from our key customers. It's never been, as Tony said, it's never been that we didn't believe strongly that our customers would have to build and invest to meet the very strong demand. What we wanted to do, though, is before we predicted when it would come, we wanted to see it in our sales. We wanted to see it in our order book. We wanted to see the project actually start. And so that's what we're seeing, and that's why we're saying it. That's helpful. Congrats on the quarter. Thank you.

Joe, we'll take one last question.

Thank you. And that question is from Rod Hall with Goldman Sachs. Your line is now open.

Yeah, thanks for speaking to me, and I appreciate it. I've just got one question, and that is mainly, I guess, aimed at Tony. Tony, we're looking at the cash flow conversion of EBITDA in the fourth quarter, and it's lower than we anticipated. We see the working capital release a little lower than last year, so that's you know, one of the drivers that normally we see pretty good conversion in Q4. I assume maybe there's COVID-related impacts, et cetera. But I wonder if you could dig into the color on that a little bit more for us and help us understand the dynamics of cash flow conversion, whether it's one-off in nature and, you know, kind of some of those things go away as we move into the year here.

Yeah, actually, we were quite pleased with our cash flow conversion in the back half of the year. you know, compared to NPAT, which is the way a lot of people, you know, talk about the cash flow conversion. I mean, our cash flow and our NPAT was the same number in the fourth quarter, and our cash flow was a little bit better than our NPAT in the third quarter. So, I mean, we were real happy with the cash flow conversion. And in terms of some of the specifics there, Rod, you know, when we talk to you later today, I'd be happy to walk through it with you. But overall, we were They're very excited about our cash flow conversion. And, frankly, that's a question that a lot of our investors have asked us over the last couple of years, and it's something that we've been focused on. And, you know, this is what happens when we're not in a build cycle. We generate a lot of operating cash flow, and we generate a lot of free cash flow, and we saw that in the back half of this year. We expect to see more of that in 2021.

Great. Okay. Thanks, Tony.

Yep. Thanks for having me. And thank you all for joining us this morning. Before we close, I just wanted to let you know that we will attend the Goldman Sachs 2021 Virtual Tech and Internet Conference on February 11th, the UBS West Coast Conference on February 23rd, and the Morgan Stanley Technology, Media, and Telecom Conference on March 1st. And a replay of today's call will be available on our site starting later this morning. I pray that that concludes our call. Please disconnect all lines. This concludes our call for today. Thank you for attending.