Corning Incorporated

Welcome to the Corning Incorporated Quarter 1 2021 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, and good morning, everybody, and welcome to our first quarter 2021 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 report contains important-looking statements and the meaning of the Private Securities Litigation Reform Act of 1995. These statements involve risks, uncertainties, and other factors that could cause actual results to differ materially. These factors are detailed in the company's financial reports. You should also note that we will be discussing our consolidated results using core performance measures unless we specifically indicate our comments relate to GAAP data. Our core performance measures are non-GAAP measures used by management to analyze the business. For the first quarter, the largest difference between our GAAP and core results stemmed from non-cash mark-to-market gains 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 those contracts will not be settled in the current quarter. For us, this increased GAAP earnings in Q1 by $308 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 contracts 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. 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 a strong start to what we expect to be an outstanding year. For the first quarter, We grew sales 29% year over year to $3.3 billion. We grew EPS by 125% to 45 cents. Free cash flow of $372 million builds on the momentum we established in the second half of 2020. All five of our segments delivered double-digit sales and net income growth year over year, with sales growth rates ranging from 15% for display to 38% for environmental. But last year was an easy compare. So I think it's worth noting that total company sales are up 14% since the first quarter of 2019. No question, we're in a strong position. This morning, I want to take a closer look at how all our businesses are achieving key milestones and contributing to Corning's success. I'll frame my remarks around three points. First, invention is fundamental to our long-term strategy. Through our relentless commitment to R&D, we develop category-defining products that transform industries and enhance lives. Second, as we partner closely with our customers to move their industries forward, we unlock new ways to integrate more Corning content into their ecosystems. This is a powerful growth mechanism. And finally, we continue to build a stronger, more resilient company, one that is committed to rewarding shareholders while supporting our customers, our people, and our communities. Now, let me expand on my first point. We're living in a world that Corning anticipated exactly a decade ago in our video, A Day Made of Glass. It's a world where technology underpins every facet of human life, a world of communication and connection, where massive bandwidth facilitates real-time information and on-demand connections. And people stay connected through a virtual environment that is literally at their fingertips. Let's think about what it means as displays and touchscreen devices make their way to the very center of daily life. The demands we're putting on today's screens and the expectations we have for tomorrow's imply a very specific set of properties. The requirements for precision glass and ceramics become more and more exacting. We need a material that is strong, yet thin and lightweight, flexible and conformable, durable, damage-resistant, and impermeable, stable enough to withstand hostile weather, extreme temperatures, and cleaning agents. It needs to be touch-friendly, and look elegant. It must scale for very large applications and yet be useful in the palm of your hand or on your wrist. The material must also be operable with a world of technical capabilities that lie just below the surface, enabling complex electronic circuits and nanoscale structures. And it must be mindful of the environment. When it comes to the critical components that enable high technology systems in multiple markets that we serve, the bar just keeps getting higher. This leads to a world where precision glass and ceramics win. And we have been winning. When we examine the growth in all our business today, we see key trends converging around our capabilities at a very exciting pace. In short, we're vital to progress. We succeed through sustained investments in R&D and years of material science and process engineering knowledge. Everything begins with our cohesive portfolio. Corning is one of the world's most proficient innovators in material science. We combine our unparalleled expertise in glass science, ceramic science, and optical physics with our proprietary manufacturing and engineering platforms to develop category-defining products that transform industries and enhance lives. Today, our inventions clean the air we all breathe, connect people to information and each other, provide the window through which we access information and entertainment, and they help facilitate the discovery and delivery of new medicines. And we're building in each of these areas. We're helping our customers move toward a world with nearly infinite and ubiquitous bandwidth, with large lifelike displays, where cars are cleaner, autonomous, and connected, where medicines are individualized, effective, and safe, and where you can do more right from your mobile device, protected by cover materials that can withstand even greater abuse. That leads me to my second point. As we work closely with our customers to advance these visions, we find ways to solve their toughest technology challenges. Our probability of success increases as we apply more of our world-class capabilities, and our cost of innovation declines as we reapply talent and repurpose our existing assets. As we apply our focused portfolio, we invent solutions that add even more value to our customers' offerings. And this provides a powerful growth mechanism. We aren't exclusively relying on people just buying more stuff. We're putting more corning into the products that people are already buying. Now through that lens, let's look at our progress across our market access platforms. In mobile consumer electronics, we continue to help transform the way people interact with and use their devices. And we're capturing significant growth by increasing the value we offer on each of those devices. As we advance state-of-the-art recover materials, we drive sustained outperformance across up and down markets. We've grown specialty sales every year. from 2016 to today, despite smartphone unit sales being roughly flat or down each year. Over that five-year period, we've added more than $750 million in sales on a base of more than a billion dollars. Fast Company recently recognized our achievements in this space. noting both Ceramic Shield and Gorilla Glass Victus, the magazine name-corning the most innovative company in consumer electronics for 2021. We see a similar growth story playing out in automotive. Since 2017, the peak year for car sales, our auto sales are up more than 40%. while global car sales are down 20%. We're helping customers navigate an industry that is expected to change more in the next 10 years than it has in the past 50. And as we do, we're working to capture and expand $100 per car content opportunity across emissions, auto glass solutions, and other technical glass products, including our patented 3D cold form technology. We were thrilled to see the world premiere event for the all-electric EQS from Mercedes. Its hyperscreen features a gorilla glass cover almost five feet wide. We've also launched a new generation of GPS. They're helping vehicles, including hybrids, achieve even lower levels of fine particulate emissions. And they're helping us exceed a $500 million GPF business ahead of our original timeframe. In life sciences, we're delivering growth on two fronts. First, demand is growing based on COVID-19 vaccines and diagnostics. Second, we're becoming increasingly relevant as we help the industry move towards cell and gene-based therapies. And that shift translates into more of our content for Drunk Sold. Looking longer term, we're making significant strides toward building a Valor Glass franchise, addressing a multi-billion dollar content opportunity in pharmaceutical packaging markets. We doubled ValorVial production in quarter one versus quarter four. And to date, the company has shipped enough ValorVials for hundreds of millions of doses of COVID-19 vaccines. Corning also expanded its agreement with the U.S. government to boost capacity for vials to $261 million, a $57 million increase from our initial June 2020 agreement. Turning to display. We're leveraging our competitive advantages to deliver stable returns. I'm pleased to note that in quarter one, We experienced the most favorable first quarter pricing environment in more than a decade. And we announced a moderate increase to our display glass substrate prices for the second quarter. Stepping back, we're the lowest cost producer of display glass, which makes us significantly more profitable than our competitors. Our superior products, innovation capabilities, and deep customer relationships enable us to maintain our leadership position. And our flexible fusion manufacturing platform allows us to match operating capacity with demand. Meanwhile, the emergence of Gen 10.5 has given us a unique opportunity. Demand for large-sized TVs continues to grow. 75-inch sets were up more than 60% last year. These TVs are most efficiently made on the largest fabs, and Corning is well-positioned to drive more content into the market in 2021 with its Gen 10.5 plans in China. Finally, let's look at optical. I'm energized by the outlook for this business. We gauged the market by three indicators. First is network need, and we can all see that demand on the network is only increasing. Second is customer statements. Broadly, network operators are making encouraging announcements on capital investment for 5G and hyperscale data center deployments. And there's also good news on fiber to the home. AT&T CEO John Stanky recently said that fiber underpins the connectivity we deliver, serving both wired and wireless. His company announced plans to increase its fiber-to-the-home footprint by an additional 3 million customer locations across more than 90 metro areas in 2021. Verizon CFO Matt Ellis said that fiber serves as the critical backbone to our 5G deployment. Our commitments with our vendor partners such as Samsung, Nokia, Ericsson, and Corning represent key strategic agreements to drive innovation in 5G. And finally, the third indicator that we watch is our order book. We're seeing orders and sales increase. And we're also seeing multiple governments starting to shape policy that asserts broadband is a basic right. They're developing action plans to take optical solutions to many more homes. The White House is calling for more than $120 billion to bring high-speed Internet to every American. Just looking at the two biggest efforts, the Rural Opportunity Development Fund and the President's Infrastructure Plan, we see a multi-billion dollar opportunity for Corning. Additionally, the UK launched its five billion pound Project Gigabit. The plan is to bring next generation broadband to more than a million hard-to-reach homes and businesses. And the European Commission is is calling for 135 billion euros to support the rollout of rapid broadband services to all regions and households starting in 2021. In addition, we remain the unquestioned technology and market leader. We consistently create new products and extend our lead by delivering solutions that help our customers realize their network visions Faster, better, and cheaper. Simultaneously, we're driving productivity improvements to increase capacity and lower our cost. In total, we're feeling very good about optical. So, I've talked about how we invest to create and make innovations that solve tough challenges, deliver for our customers, and grow. Now, I want to end on my final point. As we effectively build our strength as a company, we will continue to reward our shareholders. The strength of our businesses results in significant cash generation. Our first priority is to invest for growth, and we are committed to return excess cash to shareholders in the form of dividends and opportunistic buybacks. In the first quarter, we announced a 9% increase to our dividend. And earlier this month, we seized a great opportunity to resume share buybacks. Through our recent transaction with Samsung Display, we repurchased 4% of our outstanding shares. This is is a great deal for our shareholders. And it's great news for Corning that Samsung retained a 9% long-term ownership stake in the company. We see their investment as validation of Corning's innovation roadmap and the value of our capabilities. As we look ahead, this only adds to our confidence. Shifting to a broader view of our stakeholder base, we're committed to sharing resources and leadership on a range of important issues. We continue to support vital human services and emergency relief in our communities around the world. Our Office of Racial Equality and Social Unity has made significant strides, In North Carolina, we've established a five-year partnership with NCA&T, the largest historically black university in the United States, to provide scholarships through 2026. The funding focuses on enhancing STEM education, helping students become community classroom teachers, and boosting the number of graduates in other fields critical. to the nation's workforce. In New York, we're providing hands-on support on police reform. We're also energized around our sustainability efforts. The US EPA has once again named Corning an Energy Star Partner of the Year. Recently, Verizon publicly recognized our sustainable practices. And I am pleased to announce that we'll publish our first sustainability report in the coming months. On all dimensions, Corning is operating exceptionally well. And our capabilities are vital to progress on multiple fronts. We're succeeding at building a stronger, more resilient company I want to thank our incredibly dedicated employees around the world for their commitment to our company, to the communities we serve, and to each other. And I look forward to updating you on our progress throughout the year. Now I'll turn the call over to Tony so he can give you some more insight on the quarter.

Thank you. And good morning, everyone. I am pleased to reiterate that Corning had another excellent quarter. We closed 2020 with strong momentum and built on that momentum by delivering sales, EPS, and cash flow above our expectations. We are off to a great start, and we expect that strong demand and positive momentum to continue throughout the year. Now let me walk you through our first quarter performance. Sales were $3.3 billion, which translates to a year-over-year increase of 29%. We posted double-digit sales and net income growth year-over-year across all of our segments. Environmental technologies and specialty materials delivered particularly strong year-over-year growth. posting sales increases of 38% and 28%, respectively, and net income gains of 111% and 78%, respectively. Optical Communications posted its second quarter of year-over-year growth, and we expect to see that trend continue. And notably, display experienced the most favorable first quarter pricing environment we've seen in more than a decade. During the quarter, multiple events disrupted global supply chains. Like many other companies, we experienced elevated freight and logistics costs across our businesses, and we expedited shipments to meet our customers' expanding demand. This ultimately reduced profits by approximately $50 million. As a result, our margins were below normalized levels. This was most pronounced in our environmental technologies, optical communications, and display businesses. We will continue to do what it takes to deliver for our customers, but we'll also take steps to mitigate these costs, and we expect to see them begin to decline in the second quarter and normalize longer term. Operating margin was 17.1%. That's an improvement of 730 basis points on a year-over-year basis. We grew operating income 125 percent year-over-year. EPS came in at 45 cents, which is more than double year-over-year. Free cash flow of $372 million was up $691 million versus first quarter 2020. and it equates to 39 percent of our 2020 total. This adds to our confidence that we will generate significantly more free cash flow than 2020. So, even with the disruptions from the Suez to storms to continued COVID challenges, it was a very strong quarter. Now, let's take a closer look at the performance of each of our businesses. In display technologies, first quarter sales were $863 million, up 3% sequentially, and up 15% year-over-year. Net income was $213 million, up 40% year-over-year. Net income declined slightly sequentially because of the timing and flows of incentives associated with expansions in China. Corning's volume grew by a low single-digit percentage sequentially, and Q1 sequential prices remained consistent with Q4 levels. Now, we continue to see strong in-market demand. Retail demand for large-size TVs and IT products, including notebook PCs, are both on track for another year of double-digit growth. As a reminder, growth in large-size TVs is the most important driver for us, as we are well positioned to capture that growth with Gen 10.5, which is the most efficient gen size for large TV manufacturing. Panel makers are running at high utilizations, and glass demand is robust. And we continue to expect the glass market to grow by a mid-single-digit percentage in 2021. Against this backdrop, issues at our competitors have created glass shortages in an already tight supply environment. Our primary operational focus is to supply our customers' demand. Corning experienced the most favorable first quarter glass pricing environment in more than a decade, and we had increased costs in logistics, energy, raw materials, and other operational expenses. As a result, we are moderately increasing glass prices in the second quarter. We believe the pricing environment will remain favorable going forward. Three factors will continue to drive this. First, we expect glass supply to remain short to tight in the upcoming quarters. 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. Looking ahead, we expect that glass supply will continue to be short to tight, and we will continue to partner with our customers to maximize our glass supply. In optical communications, first quarter sales were $937 million, up 18% year over year. Sales were up in both enterprise and carrier networks, driven by the accelerated pace of data center builds and increased capital spending on network capacity expansion and fiber-to-the-home projects. Net income was $111 million, up 283%. The improvement was driven by incremental volume and strong cost performance. There are some extremely encouraging announcements coming from leading network operators as well as governments around the world that point to the start of a strong investment phase across the industry. Clearly, there is a lot of excitement surrounding network deployment and optical fiber in role in delivering both basic and next-generation services to end customers. We are well positioned to capture a significant amount of that upside in the market. Corning is the industry leader and the only large-scale end-to-end manufacturer of optical solutions, which allows us to innovate on important dimensions not available to competitors. This puts us squarely at the center of growth trajectories in fiber to the home, 5G, and hyperscale data centers. We've returned to growth in optical communications, and we remain confident that we will continue to grow. In environmental technologies, first quarter sales were $441 million, up 38% year over year. Net income was $74 million, up 111% year-over-year. Diesel sales grew 44% year-over-year, driven by customers continuing to adopt more advanced after-treatment in China and by a stronger-than-expected North America heavy-duty truck market. Automotive sales were up 34% year-over-year as the global auto market improved and GPF adoption continued in Europe and China. And we are well on our way and ahead of our original time frame to build a $500 million gas particulate filter business. European regulations are in full effect and adoption in China continues as China's 6A implementation of the regulations began during the first quarter. In specialty materials, first-quarter sales of $451 million were up 28 percent year-over-year due to strong demand for premium cover materials, strength in the IT market, and demand for semiconductor-related optical glasses. Net income was $91 million, up 78 percent from 2020 as a result of higher sales volumes and lower manufacturing costs. Connectivity and computation continues to grow in importance, creating strength and resilience in the smartphone, IT, and semiconductor markets. And we outperformed that strong market. Our premium glasses and surfaces supported new phones and IT launches, including more than 25 smartphones and 12 laptops and tablets featuring Gorilla Glass. and we are capturing high demand for our industry-leading advanced optics materials, which are essential for deep and extreme ultraviolet, or EUV, lithography. In 2020, EUV systems accounted for more than 30 percent of all semiconductor lithography equipment expenditures. Our customers believe these systems will grow significantly over the next five years. So we see growth for our semiconductor-related materials well beyond resolution of the current and well-publicized capacity tightness. Life Sciences' first quarter sales were $300 million, up 16% year-over-year and 9% sequentially, driven by continued strong demand for diagnostics, growth in bioproduction, and recovery in lab research markets. Net income was $48 million, up 26% year-over-year and 14% sequentially, driven by the higher sales and solid operating performance. Now I'd like to turn to our commitment to financial stewardship and 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 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 RD&E investments, capital spending, and strategic M&As. Our next priority is to return excess cash to shareholders in the form of dividends and opportunistic share repurchases. In February, we announced a 9 percent increase to our quarterly dividend. In April, we resumed share buybacks by repurchasing 4 percent of our outstanding common shares from Samsung Display. We are pleased that Samsung will remain a significant shareholder. Their ownership demonstrates confidence in the value of Corning's capabilities, our ongoing technology collaborations, and our combined innovation leadership. The repurchases will be immediately accretive to EPS starting in Q2. We will remain opportunistic during the year surrounding additional share repurchases. In closing, we had an excellent quarter relative to both 2020 and to 2019. Demand is high across our businesses. Our more querying strategy is working, and we are operating very well with all segments growing year over year. We are growing our top and bottom line and generating strong free cash flow. For the second quarter, we expect core sales of $3.3 to $3.5 billion and earnings per share of 49 to 53 cents. And for the rest of the year, we expect that momentum to continue. I look forward to sharing our progress with you as the year goes on. With that, let's move to Q&A. Ann?

Thank you, Tony. Operator, we're ready for the first question.

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

Thanks. Good morning, and thanks for all the color on the call so far. Wendell, I was wondering if you can maybe put some perspective on the current optical cycle from two points. One is the differences maybe in the markets served by region application and versus prior cycles, where you're strong, where you maybe have opportunities. And secondly, your own innovation, what could drive better content for you, market outgrowth, et cetera. And then, Tony, just on the other sales line, can you maybe break that out a little bit and give us some color on what was in that this quarter? Thank you.

Thanks, David. In terms of this build cycle, I think the most, interesting thing about it is how demand-driven it is. The nature of network builds is the big civil works projects and their big capital investments. And so they tend to be made with very long-term projects anticipation of growing demand. What's happened is during the pandemic, the networks sort of burned through their guardrail that they always tend to have. They always try to be about 18 months ahead of any demand. And so now you're feeling it. They're feeling the revenue opportunity even earlier as they build. So that provides a little more impetus. So that's like the first thing I think that's a little different than build cycles that you and I have seen in the past, Stephen. It's much less on spec, more on, hey, the baseline demand has just moved up. There's more work from home. There's more need for bandwidth. There's more cloud. And it's here today. And so I think that's one thing. I think the second thing is the entry of fiber optics in a significant way into wireless. Historically, in 4G systems, or 3G, they've been relatively fiber poor. They haven't been big consumers of fiber. But with 5G, those cells need to be so much closer to the consumer, to their customers, you need more densification, and that's driving a lot more glass into the wireless network. So it sort of put us in this position, Stephen, where sort of like whichever network wins, or whichever network they tend to emphasize, it'll be glass rich. Now if that wasn't already more than you wanted to know, I think the third thing is that operators are building more converged networks. Especially the big folks used to run a wireless network separate from wireline. There'd even be separation between what is aimed at consumers versus businesses. And now they're realizing that their very best returns are by putting in thick glass networks and then being able to serve as many different offerings off the tip of that fiber. So in general, this is both a pretty good bull case for the technology cycle continuing to move our way along with the build cycle. As you heard me say in the opening, one of the things we're doing when you sort of see that converged nature and you see more cloud, is it's driving our innovation wheel to be able to find ways for people to install networks and have them be able to go in faster, less expensively, and now greener using much less materials. And we have a whole suite of products that we're just starting to introduce that are going to help make this build cycle be a more effective investment for our customers.

And then, Steve, in terms of the other segment, sales were about $270 million, which is a couple hundred million dollars over last year. The vast majority of those sales were from Hemlock. Hemlock had a strong quarter. But we also saw a little bit of an increase in both our auto glass and in our Valor business on a year-over-year basis.

Great. I appreciate all that, Colin. Thank you very much.

Our next question comes from Simic Chatterjee with J.P. Morgan. Your line is open.

Hi. Thanks for taking my question. It was just on display. I wanted to understand the difference relative to when you talk about retail demand being strong, you talk about double-digit growth. But for the glass market, you're talking about mid-single-digit demand and that overall difference. the glass market outlook sounds very similar to what you've talked about in previous years, despite a much stronger market this year. So is that really just a capacity constraint that's limiting the glass market demand, and does that push some demand into next year? I just wanted to better understand that difference. Thank you.

Yeah, no, I think from an overall standpoint, you're right. I mean, we're expecting the demand this year to be similar to what's happened in past years, and that – of course, is really driven by what happens with large screen-sized TVs. And so what we're pointing out is how important not only those are, but that's where we've seen a lot of good demand. I think one of the other changes that have happened over the last couple of years is IT is also having stronger demand than what we've seen the last couple of years. And given the work from home and study from home, environment, we expect that to continue. So, I mean, we'd expect our, you know, what really drives this market, as you know, Sameek, is what happens from a screen size standpoint, and we'd expect our screen size to be up, you know, in that one and a half inch plus, just like it has in the past, and that would drive that marketplace. You know, the one thing I would note is that the one market where demand isn't as strong from a TV standpoint is in China, And, you know, China hasn't been as strong in the last couple of years. And we would expect that that to change over time. And when that changes, we do think that that will be additional demand that isn't in the marketplace today. You know, whether that happens in the back half of this year or next year, you know, we'll just have to wait to see.

And, Suneet, what you're basically noting, and I think it's an astute observation, is that demand above sort of our normal screen size growth is getting met by a reduction in the value chain downstream of us. So your question of, you know, does that basically put more demand out into next year? That's a good one. It all depends on how that supply chain ends overall, but I think it's a very good observation.

Thanks for the column. Thank you.

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

Yeah, thanks for the question. I wanted to ask two, I suppose. One would be the inventory levels on TVs. I know that, you know, Wendell, you talked just a second ago about the supply shortages and, you know, how that mixes with demand. I'm just curious, when you guys think the inventory levels out there will be back to something like a new normal, whatever that is. And then secondly, I wanted to ask on C-band auctions and the optical business, whether you've detected any delays in deployment of optical fiber around some of that C-band spectrum build-out and 5G build-out, or do you think that the deployment of all that starts maybe this summer, just kind of trying to figure out what the timing is expectation for that optical demand, particularly in the U.S., is around C-band and 5G. Thanks.

So, you know, I think in terms of the TV inventory levels is, you know, as Wendell said, we did see, you know, significant demand last year, and that definitely, and continue to see good demand in the first quarter, and that clearly is impacting, you know, what's happening from an inventory level standpoint, and that is where we're seeing the you know, continued reduction in those areas. And, you know, whether that sorts itself out by the end of the year or into next year really depends on, you know, what level of demand continues on a going forward basis. And, you know, not only on these large-sized TVs and IT, but also on IT products and then, you know, whatever eventually happens from a standpoint in China also.

And on the CBAD piece, Take your question divided into those two pieces. First, just look at the value of that C-band auction run. One of the things I take away from that is the value of densification. Because the way you increase the returns on those relatively big amounts they spent on Spectrum is... you can split it up and you can reuse the same basic spectrum as long as you increase the densification of your network and decrease the serving area of that particular spectrum. So I think it really provides powerful economic interest in sort of fiber-rich wireless networks over time. So I think that's good news. As far as the actual timing goes, because of the converged nature of the networks, I don't know off the top of my head, Rod. Let us check into it, and we'll get back to you if we have any deep insight, okay?

Great. Okay. Thanks, guys. Appreciate it.

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

Thank you. Are any of the baby businesses in the other segment graduating to the adult segments anytime soon, say Autoglass or Valor Glass, or when do you think those businesses grow up?

Don't make me laugh on my earnings call, buddy. Yeah, I think that's an excellent question. We're arguing about just that. And When do they move fully into our map structures, our market access platforms? We're not quite ready to have them graduate yet, but we're in the midst of that exact dialogue, sir.

I think, as I said, we saw growth on a year-over-year basis in both of those businesses, and we feel good about that. I think there's definite benefit of having them in the other segment in terms of the real focus that we get, but then we also leverage our market access platforms at the same time. So we will definitely continue to debate that internally. Thank you.

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

Yes, thank you. Wendell, I was hoping you could talk more broadly about if the constraints in the semiconductor space are creating any particular challenges for Corning across its business lines. And if I could, Tony, could you talk about the gross margins in the quarter? I understood your comment around the $50 million headwind because of some of the increased logistical freight costs, energy costs. Can you talk about why we're not seeing potentially better gross margins given the pricing and volumes that you're seeing in display in particular? And maybe underlying that, what is actually happening with like-for-like margins across the segments? Any color there would be helpful. Thank you.

Should we start with that, Tony? Sure. I mean, Wamsi, as you know, our stated goal is to expand our operating margins and improve our return on invested capital And, you know, the good news is we're doing just that. And, you know, we believe these results are very good. You know, and we think operating margin is the right place to judge our profitability. And the reason we focus on it, it's where we're utilizing our focus portfolio to capture synergies across our businesses. And you saw this, you know, expansion in operating margin. You saw it in Q3 and Q4 last year on a year-over-year basis. And you see it again in Q1. You know, our Q1 operating margin was 17.1%, which was up considerably from last year. And our operating margin in terms of dollars was up 125%. So, I mean, this is good performance and in line with where we were actually from a pre-pandemic standpoint. But as you noted, it was also included 150 basis points of cost from the $50 million of freight and logistics cost. And when you adjust for that, then it's extremely strong performance from a margin standpoint. And the good news is these costs will start to decline in Q2. They're going to normalize longer term. And as that happens, you know, you'd expect to see continued expansions from a margin standpoint. Now, one question we get a lot is, well, what does Hemlock do to our margins? And this is a really good example of why we think if you're going to judge our profitability operating margins is the right place to judge it. It's actually a drag on our gross margin percentage. On average, it's about 50 basis points. But in Q1, because we had a little bit stronger business in Hemlock, it was actually greater than that. But it is slightly accretive on an operating margin standpoint. And You know, that's why we think it's important to think about things from an operating standpoint. So, you know, from where we sit, you know, we think there was really good performance in Q1, and you'd expect to see improved profitability as we turn to a more normalized environment.

Thanks.

Thanks. Wendell, could you follow up on the SEMI side?

Sure. You know, it's definitely impacting auto, display, and our mobile consumer electronics industries. But really in all three of those, our backlog's been strong enough that we're not feeling it in our sales. So we're watching it really closely. But so far, you know, we're not, we're just not feeling it in our revenue, although we know that it is, you know, definitely impacting the industry like auto is or in IT, you know, they can't get it up. But, you know, we're still growing really strongly into that. So more to come. We'll look at it closely. And any insights that you pick up along the way, we would appreciate as well, sir.

Thanks, Manuel.

Thank you. Our next question comes from Asia Merchant with Citi. Your line is open.

Great. Thank you for the color, and thanks for all the incremental comments thus far. I just have a couple questions, one on CapEx. It came in a little bit shorter than what I was expecting. Should we expect this run rate to continue for the remainder of the year, or was there any one time this quarter? And then just, you know, the commentary so far on demand, backlog, order pipeline seems really strong. I know Corning did use to provide annual guidance or at least annual color across the various segments. Any reason why that's not the case this particular quarter? And should we expect that in the future quarters? Thank you.

Yeah, you know, I think from a CapEx standpoint, you know, what we said Back in January, we thought CapEx would be pretty similar to what occurred in 2020, and we still think that's likely to be the case. As you noted, our demand is very strong, and so as we get out further into the year, is it possible we'd spend a little bit more CapEx in order to meet that demand? That's certainly always a possibility, but I think from an overall standpoint, you know, where we were back in January is still the right place. And if for some reason that were to change in a big way, of course, that always comes with committed customer demand, and so that's a good thing. And then in terms of our four-year guidance, I mean, clearly we're very happy about the momentum that we've experienced in Q4 and in Q1, and with the guide we gave, we expect to continue from a Q2 standpoint. There's just still a lot of uncertainty in the world, and a lot of, you know, general uncertainty. And so, you know, we're very just focused right now on, you know, delivering in the near term and keeping that momentum going.

If I could just add to both, I think, as you think about cash flow, CapEx, and then our guide, fundamentally our cash flow is really strong when we're not in a big build cycle. And that's what you're seeing right now. as we are in the create and extend pieces of our value creation cycle. And you see it with our quarter one free cash flow conversion was 90%. And you should really expect this type of very powerful cash flow from us when we're not in a significant build cycle. It takes us about 18 months to get one of these big plants up and then it takes us a while to fill it. We're now benefiting from the wisdom of our past build cycles. And so that's going to continue to be strong. On guidance, you know, we've listened really closely to our investment communities. And what we've tried to do is the feedback we've gotten is sort of what would be most valuable would be to move to, you know, the more macro sales and EPS level. and, you know, to take it a quarter at a time for now. And then, you know, as we continue to progress under this method, if you or others have thoughts on how we could additionally improve our ability to communicate with investors, we'll be really open to it. So more conversation to come, and we look forward to your input.

Great. Thank you.

Thank you. Our next question comes from Martin Yang with Oppenheimer. Your line is open.

Hi. Good morning. Thank you for taking my question. Wendell, can you maybe comment on where we are in the hyperscale data center investments and maybe any additional comments on their action in the next 12 to 18 months would be appreciated. Thank you.

Great, so short version is they're increasing their investments in hyperscale, really across the board. Various folks are more vague versus more direct, right? But what you see is really across the board in hyper, folks are commenting that that they are going to continue to increase their investment in data centers as they're going forward here in this year. So we're actually in a build cycle for them as well. Good news is we have the capacity. We're ready to go. And we're seeing that demand, as you saw in quarter one, and we're going to continue to see it. And I'm really excited about some of our potential innovations in that space that will, once again, create that more corning, more of our content, why we reduce Hyperscale's carbon footprint. We reduce its cost and increase their ability to get them up fast.

Great. Thanks.

Operator, we'll squeeze in one more question.

Our last question comes from Tim Wong with Barclays. Your line is open.

Thank you. Thanks for getting me under the bell here. Two, if I could. Maybe, Tony, for you, could you talk a little bit about operating expenses? I get the focus on margin over gross margin. It looked like a pretty good number in Q1 last How do we think about the cadence there, given you guys have done some refocusing on the OPEX side, but also we should start seeing some return to travel and things like that and incentive payments and whatnot? And then second, on the life sciences business, could you talk a little bit about you've obviously had two really strong quarters there. Do you think there's been some pull forward, or do you think we're kind of at new higher levels for that business? Thank you.

Yeah, Tim, from an operating expense standpoint, you're right. You know, we remain very focused on that. During the pandemic, we took a lot of actions, which saved us, you know, roughly a couple hundred million dollars during the year. And we've, you know, said all along that those costs return as we return to normal. And, you know, I would expect to, you know, continue to see those increase somewhat as we go into the second and to the third quarter period. kind of the historic operating expense percentages that we've had, I think that's where you're going to end up from an overtime standpoint. Clearly, we remain very focused on it, but I do think that you do see increases as business goes up. But the thing to keep in mind is that, of course, with the leverage that we're getting from a margin standpoint, that we'd expect our operating margins to go up. just like the experiences we did on a year-over-year basis in Q1, and also as we saw in Q3 and Q4. Thank you. And then from a life sciences standpoint, I think that this is an ongoing business level. I mean, this is strength that we've seen across our businesses. Our orders are actually very strong. Our backlog is strong. And, I mean, this is, you know, a level of business that we'd expect going forward, and we'd expect to see continued growth in that business, actually.

Yes, I think you're quite rightly asking is because of the real crunch in the life sciences as people are trying to react to everything that was needed for the pandemic, you do create some high variability in supply chain And we'll experience some of that. But in general, because of where we're positioned with our products and our innovations, we're sort of going down a journey in life sciences that looks a lot like our other market access platforms where the areas that we've invested are going to grow faster than the underlying markets and our innovations are going to lead to a more courting story. And therefore, I believe we are in an elevated growth environment for life sciences going forward, as our innovation has just become more relevant to the secular trends in that industry.

Okay, thank you.

Thanks, Tim. Thank you, Wendell. And thanks, Operator. Thank you all for joining us this morning. Before we close, I wanted to let everyone know that we will attend the J.P. Morgan Virtual Tech and Internet Conference on May 26th and the Bernstein Conference on June 2nd. Finally, a web replay of today's call will be available on our site starting later this morning. Once again, thanks for joining us. And, Operator, you can disconnect all lines.

This concludes today's conference call. Thank you for participating. You may now disconnect.