Corning Incorporated

Welcome to the Corning Incorporated Quarter 3 2021 Earnings Call. To place yourself into the Q&A queue, please press star then 1. It is my pleasure to introduce to you Ann Nicholson, Vice President of Investor Relations.

Thank you and good morning, everybody. Welcome to Corning's Quarter 3 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. Those statements involve risks, uncertainties, and other factors that could cause the 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 third quarter, the largest differences between our GAAP and core results stem from non-cash mark-to-market losses associated with the company's currency hedging contracts and non-cash impairment charges. With respect to mark-to-market adjustments, GAAP accounting requires earnings translation hedge contracts and foreign debt settling in future periods to be marked to market and recorded at current value at the end of each quarter, even though these contracts will not be settled in the current quarter. For us, this decreased GAAP earnings in Q3 by $16 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 more than $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 strong third quarter results that continue a year of outstanding sales growth, margin expansion, and significant cash generation. Sales grew 21% year over year to $3.6 billion, a new all-time high. Gross margin expanded 50 basis points sequentially and 70 basis points year-over-year to 38.3%. EPS grew 30% year-over-year to 56 cents. And free cash flow of half a billion dollars brought cumulative free cash generation for the first nine months. of 2021 to $1.3 billion. Our outstanding results in this period of global disruption are due to excellent execution at all levels of the company. And they're driven by a compelling set of long-term growth opportunities that we're capturing through our innovations and broad market access. as we strengthen our commercial relationships and scale operations to meet demand. Like everyone, we're dealing with numerous factors caused by the pandemic and the resulting inflation. In this quarter, the largest macro impact was constraints in the automotive industry, stemming from chip and component shortage. Auto production in the third quarter is estimated to be down nearly 20% year over year and 9% sequentially. As a result, we step down in light-duty sales. Across our businesses, we prioritize delivering for our customers in a complex inflationary environment. And we have delivered. despite incurring extra costs. Now we're taking additional actions, including pricing, to address these costs and maintain our ability to invest and support our customers. And you'll hear more from Tony on this in just a few minutes. Against this backdrop, we feel really good about our performance. In the quarter, announcements with industry leaders illustrated the power of our portfolio, demonstrating not only our relevance across multiple markets, but also our role as a key innovation partner. Our strong position stems from a complementary set of three core technologies, four proprietary manufacturing and engineering platforms, and five market access platforms. We're leaders in each. We generate growth opportunities by delivering combinations and new applications of these capabilities to help our customers to ride their industries forward. And in doing so, we drive more Corning content into the products People are already buying. Let me share some highlights from the quarter. In optical communications, the industry is in the early innings of large deployments in support of 5G, broadband, and the cloud. Momentum is building, and we see it confirmed by multiple sources. First is network need. demand on networks is significantly higher than pre-pandemic levels. Broadband usage for September was up 32% versus pre-pandemic levels and up 9% versus September 2020 when remote work and school were largely in play. Global 5G subscriptions have grown to almost half a billion this year. More applications are moving to the cloud, and global data creation is expected to grow at 23% compound annual growth rate from 2020 to 2025. Versus 2020, cloud revenue industry-wide is up nearly 50%. The second confirmation of strong industry momentum can be seen in the announcements from leading companies. On AT&T's earnings call last week, their CEO said they're on a march to deploy fiber at scale. They're working toward passing 5 million homes per year. In the quarter, we... announced a strategic investment to support their growth plans. Speaking about our expanded collaboration, AT&T said the expansion of fiber infrastructure is central to the growth of broadband reach for consumers as well as business customers. Friends recently shared that they plan to reach 10 million more homes with fiber by the end of 2025, with their CEO saying, quote, Our future is fiber, end quote. Cloud deployments are also expanding. Microsoft's CEO said that over the past year, they've added new data center clusters in 15 countries across five continents in support of their cloud business. The third confirmation is our substantial increase in sales and continued order book momentum. This is perhaps the most important indicator of growth over the next few quarters. We are full. We are ramping capacity, and we are energized. Across the business, we're driving strong year-over-year sales growth, and we're outperforming the optical market as we continue to commercialize innovations that extend our competitive advantage. and as we provide more solutions to more customers at both the regional and national levels. During the quarter, we introduced the newest additions to our Evolve portfolio, which includes solutions designed to support rural deployments. We also introduced our Everon millimeter wave indoor small cell systems which deliver 5G ready coverage in high density environments, including office buildings, factories, hotels, hospitals, and classrooms. Let's turn to mobile consumer electronics. Here, we're helping transform the smartphone experience. As we help our customers deliver new value to their users, we drive more of our content into each device sold. This played out well during the quarter with the launch of Samsung's Galaxy Z Fold 3 and Galaxy Z Flip 3. Both devices feature Gorilla Glass Victim. Now, they also utilize our new Gorilla Glass with DX on the lenses of the rear cameras. This is more corny in action. We've expanded our capabilities into a new category, device cameras. Even though the lens is a fraction of the surface area we address with our cover materials, the value we add is high. And we're capturing a very attractive opportunity to increase our revenue per device. Samsung is also featuring Gorilla Glass with DX on the new Galaxy Watch 4. Turning to automotive. OEMs are designing cleaner, safer vehicles and distinguishing themselves with technologies that enhance the driving experience. Corning is uniquely suited to address these trends. And we're pursuing a $100 per car content opportunity across emissions and auto glass solutions. In the quarter, Jeep announced a product that brings our top technical glass into their iconic vehicles. The new Jeep Performance Parts windshield featuring Gorilla Glass is now a factory installed option on the 2021 Wrangler and Gladiator. We're making the windshields lightweight, durable, and up to three times more impact resistant than regular windshields. Additionally, tighter emissions regulations continue to provide a strong content opportunity for our environmental solutions. OEMs need higher filtration performance, and we've responded with a new generation of gasoline particulate filters. The importance of our GPF business drives home my ongoing point. It's not about more cars. It's about more corning in those cars. Since 2017, our auto sales are up more than 40%, while global car sales are down 20%. Turning to display, we're in a position of strength for two reasons. First, significantly more profitable than our competitors. Second, the market for large-sized TVs is projected to grow at a double-digit compound annual growth rate through 2024. And we're the leader in Gen 10.5, which is the most economical approach for larger sets. Stepping back, we've all seen the declines in panel pricing, and we're beginning to see panel maker utilization adjustments. Now, Lower demand provides us an opportunity to minimize expedited freight and to rebuild tanks that have operated beyond end of life. Taking these actions will allow us to keep our supply balanced to demand. We expect the overall glass supply to remain tight. and the glass pricing environment to remain attractive. Tony will give you more details on our industry position and our outlook. Finally, in life sciences, we're delivering growth on multiple fronts. We're seeing ongoing demand in support of the global pandemic response. And our inventions are helping advance the transition to cell and gene-based therapies. Additionally, we're making progress on our multi-billion dollar content opportunity in pharmaceutical packaging. We're expanding our comprehensive portfolio, advancing key partnerships, and building our custom base. Corning continues to support the pandemic response, and its portfolio of advanced vials and pharmaceutical glass tubing has enabled the delivery of more than 3 billion doses of COVID-19 vaccines. Our high-volume manufacturing facility in North Carolina is now operational, which will help us scale with demand. In total, we believe our efforts to address the pandemic are enabling permanent industry shifts. That means a future pharmaceutical packaging landscape defined by enhanced patient safety, lower cost, minimal regulatory hurdles, and increased capacity for life-saving drugs. Other efforts that have gained increased attention during the pandemic are finding broader long-term applications. We introduced Corning Guardian, a paint additive that uses a glass matrix to trap copper ions, a powerful and long-used antimicrobial material. Paint with Guardian has been proven to kill 99.9% of bacteria and viruses, including the one that causes COVID-19. This month, PPG announced that their copper armor paint, powered by Guardian, received EPA registration and will be available in major U.S. retail and home improvement stores. PPG noted that it's the first virus-killing paint in the United States. And our collaboration builds on an EPA statement asserting that public health would benefit from surfaces with built-in antimicrobial capabilities. Stepping back, I am proud of the many ways our people unleashed the power of our portfolio in the quarter. And when our performance says about Corning's strong position today, key trends are converging around our capabilities as we become more and more vital to industry transformations driving the world forward. This provides a compelling set of long-term growth opportunities. And we're executing well to bring those opportunities to life and make a difference wherever we can. So I want to thank our dedicated employees for their contributions. Now I'll close by briefly looking back at 2019 when we outlined our priorities for growth and shareholder returns for the next several years. We provided attractive targets as we laid out our plans to build an even bigger, stronger company that delivers sustainable results. Today, the growth drivers we laid out remain intact, and we're delivering on our goals. We are a bigger, stronger company than we were in 2019, and we are continuing to grow. Tony will get into more specifics, but I feel really good about our position and the progress that we've made. I look forward to updating you when we close out a strong year and as we grow again in 2022. Now, I'll turn the call over to Tony so that he can give you some more insight on the quarter.

Thank you, Wendell, and good morning, everyone. Strong execution resulted in another outstanding quarter. we are on track to reach $14 billion in sales and over $2 in EPS. We're making significant progress extending our market leadership while scaling operations to meet demand, and we expect to grow again in 2022. During the third quarter, sales increased 21 percent year-over-year to $3.6 billion led by the strength in optical communications and the strong performance in our other businesses. EPS grew 30% year-over-year to 56 cents. Sales and earnings reflect lower production levels in the automotive industry due to the semiconductor chip shortage. The impact that Corning's results was approximately $40 million in sales and 2 cents of EPS. Gross margin percent expanded 50 basis points sequentially and 70 basis points year over year to 38.3%, despite a net impact of 150 basis points from supply chain challenges and inflationary headwinds. Free cash flow grew to $497 million, with cash generation of $1.3 billion for the first nine months, of the year. These achievements are particularly noteworthy because we are operating in the face of unprecedented logistical challenges and component shortages. Delivering for customers in this complex environment requires both decisive action and agility. Our ability to sense disruption and act quickly has been key to running our plants well and meeting our customers' needs. and we're leveraging our diversified global supply chain to continue to meet customer demand. In fact, I'd be remiss if I didn't recognize the efforts of our global supply management and operations teams that have allowed us to maintain a steady supply of raw materials while finding creative shipping strategies. Their actions have enabled us to effectively deliver for our customers and they're providing actionable insight into the current dynamic environment. At the same time, we continue to incur additional costs as we work to meet strong customer demand. And while we've been taking actions to mitigate them, certain costs continue to elevate in the third quarter. For example, we were able to offset a significant portion of elevated freight costs, but resin prices increased again. Therefore, our margin is temporarily muted. Given this ongoing inflationary environment, we have price increases underway across all of our businesses. We saw some benefit from these actions in the third quarter, and their impact should accelerate in the fourth quarter and into 2022. Now, we don't expect the environment to improve in the short term. but our digital supply chain capabilities enable real-time visibility into emerging situations, allowing us to proactively address issues. We remain focused on meeting demand, expanding our margins, and protecting our ability to invest for customers. Now let's take a closer look at the performance in each of our businesses during the third quarter. In display technology, sales were $956 million, up 2% sequentially and 16% year over year. Corning's glass volume grew slightly, and glass prices increased moderately sequentially as expected. Glass supply continues to be tight, and we continue to do everything we can to meet customer demand. We expect fourth quarter glass prices to be consistent with the third quarter. Now, we know there's a lot of discussion about the display industry. Briefly, we expect the pricing environment to remain favorable as glass supply remains tight to balance throughout 2022. Now, as we've discussed previously, we base our perspective on what will happen in the display market on three main factors. retail demand, panel makers' production, and glass makers' ability to supply the panel makers. With those factors in mind, I'll start with what I said about retail demand on our last earnings call in July. Since LCD televisions emerged as a mainstream technology in 2004, LCD TV units have only been down three times. and never two years in a row. Since 2014, TV sell-through units are typically range-bound between 225 and 235 million, which average screen size grows about 1.5 inches a year. In 2020, global television units increased 4% above the trend line to about 242 million. screen size growth was about 1.2 inches, about 20% below trend. A lot of smaller TVs sold, probably to accommodate more people living, working, and studying from home. Entering this year, we expected and continue to expect the market to revert the trend, implying a decrease in TV units, especially smaller televisions, and for normal screen size growth, of an inch and a half inches to return. We now have nine months of retail data under our belts, and it is confirmatory. Television units declined by about 10 percent year over year, while average screen size growth is in line with the one and a half inches per year trend. Unit volume for TVs 65 inches and larger increased by a mid-teen percentage. And smaller TVs were down by a mid-teen percentage. So three-quarters through the year, our expectation for TV units being down year over year and screen size growing approximately an inch and a half are playing out. Now looking ahead to 2022, we think TV units and screen size will continue to follow historical trends and retail glass demand will be up. That means television units will be within the typical range of 225 to 235 million units and average screen size will grow about an inch and a half. Now remember, television units, which are declining this year, have never declined two years in a row. And next year is a World Cup year and TV units have never declined in a World Cup year. Finally, the biggest driver of retail glass growth in most years is the increase in screen size. We would expect the average screen size to once again grow 1.5 inches next year. In summary, we expect glass demand at retail to be up by a high single-digit percentage in 2022 as measured in square feet. Now, let's move from retail to panel makers. After a period of high production in 2020 and 2021 to meet strong demand, we are now seeing panel makers temporarily reducing their utilization given the lower 2021 retail demand that we've told you about all year. And that is happening just as we would expect. Now, finally, let's move to the glass industry. which struggled to meet demand in 2020 and 2021 as glass has remained tight. Like other glassmakers, we've depleted our inventories, expedited shipping, and operated tanks beyond their targeted into life. We will use this period of temporarily lower panel maker utilizations to shut down into life tanks and rebuild them with our latest technology. We will also take the opportunity to work our way out of expedited shipping. These actions keep our supply balanced to demand and will improve our operating costs going forward. But rest assured, we will still have capacity to supply all of our customers anticipated glass demand. When panel maker production ramps to meet the expected high single-digit retail demand growth in 2022, we will be fully prepared with our revitalized fleet of tanks. Overall, we believe glass supply will be tight to balance throughout 2022. And since glass pricing is primarily driven by glass supply demand balance, We expect the pricing environment to remain favorable in Q4 and also throughout 2022. Moving to optical communications, we saw strong growth across the business with sales exceeding $1.1 billion, up 24% year-over-year and 5% sequentially. Net income was $139 million, up 21% year-over-year. Net income declined 6% sequentially as increased raw material and shipping costs significantly impacted profitability. During the quarter, carriers spent more on 5G and broadband projects. This, along with the continued strong pace of enterprise cloud data center builds, drove our strong performance. Demand on networks is at an all-time high, setting the stage for significant investments in fiber infrastructure as operators expand network capacity, capabilities, and access. During the quarter, we announced a collaboration with AT&T. Our capacity expansion will allow AT&T to expand investments in fiber infrastructure, expand U.S. broadband networks, and accelerate 5G deployment. We are well positioned to capture significant ongoing growth as network and data center investment increases. Our solutions improve the speed and capital efficiency of deployments. Additionally, Corning is the only large-scale end-to-end manufacturer of optical solutions, which allows us to innovate on important dimensions not available to competitors. In environmental technologies, our third quarter sales were $385 million, up 2% year over year, and down 5% sequentially. As everyone knows, chip shortages is having a big impact on the auto industry. At the start of 2021, global vehicle production was expected to be about $88 million. By July, the industry was projecting below $85 million. and given continued chip and component constraints, forecasts now anticipate auto production around $75 million for the year. This pullback in production began to impact us in the middle of the third quarter, and we expect it to continue for the fourth quarter. We estimate an impact on EPS in the third quarter of about two cents, and we expect additional impact in the fourth quarter. The good news is that when component shortage is resolved, auto production will recover because the end market demand remains strong, and we will be prepared to meet the growing demand. Specialty materials delivered sales of $556 million, up 15 percent sequentially, and in line with the strong third quarter in 2020 when we introduced ceramic shield. We've grown specialty sales every year from 2016 to today, despite smartphone unit sales being roughly flat. Over that five-year period, we've almost doubled our sales on a base of more than $1 billion. Clearly, we're successfully executing our objective of driving more content into each device sold. And strong demand continues for our premium cover materials. During the quarter, our glass innovations were featured in 30 new devices, including smartphones, wearables, and laptops. Demand also remains strong for our advanced optics content used in semiconductor manufacturing as the broader end market continues to experience robust growth. In the quarter, investments in innovations that are moving towards commercialization resulted in lower net income than in 2020. As we've noted before, newer innovations can face high costs as we develop and scale our manufacturing process. We anticipate that profitability will improve as we come up the learning curve and improve utilization. Looking into the fourth quarter, we're seeing typical volume declines in Gorilla Glass following the build supporting flagship customer product launches. Life Sciences' third quarter sales were $305 million, up 37 percent year-over-year, driven by ongoing demand to support the global pandemic response, continued recovery in the academic and pharmaceutical research labs, and strong demand for bioproduction vessels and diagnostic-related consumables. Our life sciences segment is outpacing the overall industry, as evidenced by a sales category of 9 percent over the last three years. Stepping back, we have made strong progress across all of our businesses. We entered new product categories, announced collaborations with key industry leaders and contributed to significant industry advancements. We're building a strong foundation for future growth. This, combined with our consistent focus on innovation and deep commitment to RD&E, is what continues to fuel and sustain Corning's leadership position across its markets. As we look ahead to Q4, we expect core sales to be in the range of $3.5 to $3.7 billion and core EPS in the range of $0.50 to $0.55. Profitability is expected to decline sequentially due to the further reduction on automotive-related sales, as I mentioned, and lower Gorilla Glass sales following strong customer launches. That said, we expect to close out 2021 with both top and bottom line growth and another year of strong cash flow. And we expect our momentum to continue in 2022 with sales and EPS growth along with strong cash generation. Now I'd like to expand on Wendell's closing point. Back in 2019, we outlined our goals for growth and shareholder returns. We said we would leverage our focused and cohesive portfolio to extend our leadership and capture significant growth opportunities. And we said that key trends would continue to converge around our capabilities. What we said back in 2019 still rings true today, despite the pandemic and the resulting global disruptions. Our key growth drivers are all intact. Some are even accelerating. And we're on track or even ahead of the goals we laid out in 2019 in all our market access platforms. Since 2019, sales have grown at a 10 percent CAGR ahead of the 6 to 8 percent target. Now, we have been growing EPS at a rate consistent with sales, which puts us ahead of our target which puts us behind our target because inflationary pressures are clearly impacting profitability. But we do expect that our cost and pricing actions will deliver significant improvement over time. As we said we would do, we're also growing our return on invested capital. Today, our total company ROIC is in the double digits. Our most recent capacity expansions or as we like to call them, build investments, are fully ramped, have enabled the $2.5 billion of sales we've added since 2019, and are delivering more than 20% ROIC. Our aggregate free cash flow generation for 2020 and 2021 is expected to be more than $2.5 billion. Finally, we remain steadfast in our commitment to investing in growth and extending our leadership while returning excess cash to shareholders through share repurchases and a 10% annual increase in our dividend. As you might remember, we decided early in the pandemic to ensure the stability and flexibility of our financial position by building up our cash reserves. In April, we resumed share buybacks with the Samsung transaction, where we repurchased 4 percent of our fully diluted shares. Consistent with our strategy to opportunistically buy back shares, we plan to do more repurchases in Q4. In summary, we've built a strong foundation over the last several years. Our capabilities are relevant to major growth trends across our markets. Our more corning strategy is working, and we're executing through some very volatile end markets, expanding relationships and commitments with our customers, extending our leadership position, and generating outstanding sales, profits, and free cash flow. With that, let's move to Q&A. Ann?

Thanks, Tony. Michelle, we're ready for our first question.

As a reminder, to ask a question, please press star then 1. If your question hasn't been answered and you'd like to remove yourself from the queue, please press the pound key. Our first question comes from Matt Nicknom with Deutsche Bank. Your line is open.

Hey, guys. Thank you for taking the questions. Just two, if I could. First, on the price increases, you mentioned increases across all units. I'm just wondering if you can give us maybe a little bit more color in terms of how we should anticipate that to flow through. I know you initiated some of these in 3Q, but I'm wondering how to think about the cadence and the flow through there, order of magnitude, and then just wondering, you know, if this is really intended to effectively pass through the entirety of some of the cost pressure you're facing or whether it's just a portion of that. And then just secondarily, as we think about capital allocation, Tony, maybe to your last point around capital, doing a little bit more on buybacks and 4Q. I'm just wondering if you can refresh us in terms of how you're thinking about leverage, where you'd like to be, and, you know, ultimately how you see Corning sort of getting closer to that 2X leverage target you've laid out in the past. Thanks.

So first on in terms of the price increases, I mean, you know, clearly our priorities over the last several years last year or so with the pandemic is to protect our people and protect our customers. And we have been doing a great job on that, on those priorities. And, you know, we saw it in Q3, which is an incredibly challenging environment. But, you know, it required decisive action and agility, and we had to act quickly, and we've done that. And, you know, I'm personally very proud of what all the work we've done as a company and is what you'd expect, you know, at Corning. But, you know, what tends to happen in this environment is that you see some places where we've made improvements from a cost and freight standpoint and others that have gone up, and all of this comes at a cost. So, you know, our goal here is to increase prices across all of our businesses. You know, we've had about 150 basis points impact for the last several quarters. I'd expect that to continue increasing. in the next quarter and then for it to get better over time. But the actual timing and prediction of that is just hard to know because there's so many moving pieces.

So what we tried to do, Matt, on pricing here is you have a range of what could happen with inflationary pressures. And then we have a range of what could happen with our pricing in each of our different businesses and even in each of our different products. And what we've tried to do is capture those within the guidance that we just gave for quarter four. And as we continue to gain experience on both, we would expect to get better and better at being able to narrow those ranges and improve our ability to give you a good idea on how this will impact your models.

And then in terms of from a balance sheet standpoint, I mean, you know, clearly we have a very, you know, strong set of goals from a balance sheet standpoint in what amount of leverage we're comfortable with, and in particular, very long maturities from a leverage standpoint. You know, we do have the longest maturity in the SME 500. And, you know, that overall approach has not really changed. But we're still being impacted by what's happening from a global economic standpoint. So we're going to continue to kind of work through where things go. And the good news is that we're generating a tremendous amount of free cash flow. And with that free cash flow, that gives us the ability to invest in the business, but also to return cash to shareholders.

Thanks, Tony.

Next question.

Our next question comes from Sameek Chatterjee with JPMorgan. Your line is open.

Thanks for taking my question. I guess I wanted to ask you on off-the-cape communication and kind of what you're seeing from a demand perspective there. We've heard about a lot of the overall sentiment around demand coming from a lot of the broadband connectivity around the government subsidized plans. Is the delay on the government side driving any slowdown there? Just moving over to capacity there, you outlined expansion capacity as well recently. Just help us understand, if you can, the magnitude of that expansion and its potential impact on margin as you build that capacity up as well. Thank you.

So, Samig, I want to make sure that I understand your question. So you are asking how do we feel about the growth in the business and as that growth occurs, how do we feel about our margin expansion as that capacity ramps? Do I understand your question correctly, Sumit?

Yes, and the only addition to that is the delay in the government infrastructure plan driving any slowdown in terms of interest from customers.

Great. So first, as I laid out in my comments earlier, we feel that the growth here in the business is very strong. You saw it, I think, in the quarter, we did about $1.1 billion of revenue. Our order book was in excess of that, is stronger than that rate. So that gives you an idea of the demand that we're seeing right now, and that is before there's any passage that's in the bipartisan infrastructure bill on what it is the government wants to do with broadband. So that will layer on top of the demand that we're seeing that is largely already serving commercial and customer opportunities. So that's how we feel about demand. All those long-term trends that we see, they look like they're all continuing in both cloud and carrier networks. Now, margin. So, in margin expansion, this is a segment where, given the really strong demand, we have had a lot of expedited shipping, we've had a lot of challenges around freight, and we've had accelerating raw material costs. So we haven't been putting quite the increase in our margins that you would normally expect as we fill up, right? That's one of the reasons that we're going to be addressing price with our customers who we have done all these long-term build investments with. And hopefully what that's going to do is get the type of margin growth that you would expect with our rising revenue growth. Does that make sense to you, sir? Yes.

Thank you. Thank you for taking my question.

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

Thank you very much. Wendell, at the risk of continuing on this topic, I'm just curious, can we dig more into the inflationary environment? I'm trying to understand, and you guys have a really great perspective, I think, of how transitory versus permanent shift you're seeing out there? And what should we watch, given, you know, the impact to your margins? What specifically should we watch closely to see if things are starting to improve?

Great. So great question, Shannon. I would say if you had asked us when this all began, Sir Dan, quarter two, quarter three, like in that time period, we would have said, you know, this is probably transitory and our top priorities are protect our people and protect our customers and spend what it takes to make that happen. We want to keep our customers running, we want to keep our people safe. And this too shall pass. In our normal great job that we do, reducing costs will trigger in and we got this. And actually, it is mainly through conversations with our supply chain head as well as our investors that have led us to look at this and say, you know, this may last longer than we had thought. And that's This looks like we could continue to have challenged supply chains for the foreseeable future. And what we needed to do was add to our priorities that we also needed to protect our investors and our ability to invest for the future. which in turn allows us to once again protect our people and protect our customers. And so, as we've looked at it that way, that is what has led us to start to externalize that cost pressure. We began in quarter three. We've got a lot further to go. So, I think the thing to look at is pretty simply how do we do getting our profitability working in the way you would expect when we have revenue growth. Because we're expecting to grow, normal us, you know, as we grow, because we actually make things for a living, or you would expect our margins to improve. And so I think that's the key thing that we're looking at, is to see that as well as we have detailed plans, like by customer, product, by region, and all that is getting rolled out is already in motion.

Okay, and then I'm curious, what your initial conversations with some of the customers in areas where you're raising prices now, is the feeling out there that everything's going up in price, so they're absorbing it, or how much pushback are you getting from price increases? Thank you.

Well, it's a little early to tell, to generalize on that. A lot depends on the customer, right? You know, we've had some who have said, yeah, I was expecting this, right? You know, we have others who say, you know, thank you very much for sharing, but, you know, we'd rather you fix this on your own. But, you know... We'll work our way through it. I think the key thing always to understand about how we are with our customers is these are very long-term partnerships, right? And we invest for the long-term and we ask for strong commitments from them and they ask for strong commitments for us. But we face that future. All of us are looking at the future when we make these investments in innovation and our plans. that is a little uncertain. And so the way we always try to work through things with our customers is, okay, this is where we're at. This is reality. How do we work through it together in a way that allows you, our customer, to continue to succeed and allows us to continue to support that success? And that's sort of the tone and attitude that we bring to it and that our customers engage in that same dialogue. And, you know, it will all play out, and I'm certain that as we work our way through it, we'll reach a fair resolution of what happens if we operate in an inflationary environment, at least for a period of time, which neither our customers nor us have had a lot of experience with.

Great. Thank you.

Our next question comes from Steven Fox with Fox Advisors. Your line is open.

Hi, good morning. I was wondering if maybe you could put some numbers around all that commentary. So, like, if I look at optical, for example, your revenues were up 5% quarter over quarter, but your margins were 12.3 versus 13.8 in the prior quarter. So how much exactly was the pressure from all those extra costs and adding new capacity hindering margins when volumes are going up? And then same question on pricing for display. You're saying it's consistent with prior quarter. I assume that's like flat 0% change in pricing, but last quarter you were able to pass through some costs. Does that mean you're not passing through costs this quarter? Thanks so much.

Great. So first in opto, that margin drag that you've rightly identified, Steve, that's the inflationary pressures that we have yet to offset with our customers. So I think you're right on it. And what we'd like to do is see that drag moderate. And as you know, our optical business is big with a lot of customers. So it's a lot of commercial work to get everything in place. Already began and already got rolling in this last quarter and will gain and accelerate in quarter four. So that's what thorough will be about in OPTO, and you're looking at the right numbers, and that's the numbers you should expect to improve. In display, we expect price to be consistent with our raised pricing in quarter three. And in quarter two. And in quarter two. So we're following sort of a couple of price raises, and we anticipate our price to be consistent in quarter four.

So that implies that you're still passing through some of these inflation costs in that price. Is that correct? That is correct. Great. Thank you so much.

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

Thanks, and congratulations on all the new product wins. You're now on OEM windshield options for a number of Jeep models versus primarily replacement before. Will the windshield option be packaged with other options? So if you want the better stereo and the better seats, you're going to get the Gorilla Glass windshield with that, or is it going to be a la carte? And you're on the replacement windshield in the Ford F-150, which is an even bigger model. Do you think that's going to go OEM anytime soon?

I think that's a great question. I need to follow up to see how is Jeep going to do that. I just need to follow up. Right now, just if you want a vehicle, you tend to get them highly bundled. But I don't know what the difference is between how they're seeking to optimize their very few chips and how much is really a long-term approach. So let me follow up on that, and we'll get back to you, John. On windshields, I think... Continue to watch this space. We've got a number of significant innovations going on to solve the glazing problems that EVs represent and that autonomy represents. It's too early, I think, John, for me to say definitively to you that we have this. start building in another large revenue generator for us. But, you know, it ought to resolve it. We ought to be able to say that, you know, within the coming 12 months because we're doing so much work in that space. And we're seeing uptake in a number of places of our laminated product and some other innovations that we have going on. So it's very right to identify it.

Just a little early for us to call the ball, John. And then could we get an update on Hemlock? It's ironic that we have such strong semiconductor demand, and you've got the contractual structures in place, really, that Hemlock's not participating.

So we're really happy that we are the owners of Hemlock, John. And I think you're one of the few companies people that we have this bond that really always understood Hemlock in depth and you always wanted us to be the owner of Hemlock. And finally, after all these years, we are. And we're happy to get it. As you know, semiconductor demand is strong. I think the other added revenue source that we're now seeing in Hemlock is in solar, which, as you know, we... a hunk of our capacity in solar as the U.S. supply chain sort of ended up downstream of us, becoming eroded with the intense competitive environment with China. We are now seeing really strong demand in solar, and we are doing what you would expect us to do, which is if A customer wants us to commit capacity to them in solar. We are putting in place those same type of very strong contractual arrangements to be able to make sure as we turn up some of that capacity that they buy it. And you'll see that in our revenues. And so we feel very good about it, John. Wish that we listened to you even earlier.

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

Yes, thank you. I was wondering when you talk about retail demand and loss of high single digits in 2022, Do you expect horning to grow inline or higher or lower than that, and then have some follow-ups, please?

Yeah, Wamsi, I mean, as you know, you know, where a lot of that growth is occurring is in the large-sized screen TVs, and that's where, you know, us having three out of the four Gen 10.5 factories you know, makes a big difference. So, you know, we would expect that to continue to positively impact our results in 2022, just like it has the last couple of years.

So the way we tend to think about – I'm sorry, you had an additional question, sir?

No, please, Wendell, go ahead, and I will follow up. Okay.

So the way we tend to – I think you're on one of the real key points. So sort of as Tony said, like the two key factors – to keep in mind for display, and they really drive display, are the demand at the retail level, which we believe will be up single digits next year. And then glass supply demand balance, which we believe is going to be tight to balance in quarter four and throughout 2022. And as a result, as we believe the glass environment for pricing is going to continue to be favorable. When we say tight to balance, what we mean is that we're coming out of this time period, I don't even know if we're out of it yet, where glass has just been very tight, and we have been extending tanks beyond their planned life. We've had very high expediting costs, and we have delayed technology upgrades really for the last year plus. And so what our plan is, is to take any opportunity presented by lower panel maker utilization to take targeted tanks down for upgrades while improving service levels with lower expediting costs. Now, The timing for these is solely within Corning's control. So first goal is we plan to meet our customers' demand. We are going to continue to protect our customers and meet the demand that they think they need. But we're also going to get our fleet ready to lower cost and increase quality for years to come. And As a result, that's what we mean by tight to balance. Our customers get what they need, while we get our upgrades done whenever we can. So that's our approach here, and that's how we feel about display. And while we're providing some insight into next year as well, when we normally just would have told you what's going to happen next quarter,

That's helpful, Wendell. And if I could just follow up a clarification question, I think Tony mentioned that in Q4, you'd expect some seasonal softness in specialty, given some product launch timing in Q3. But I think he specifically said Gorilla Glass, and I was wondering if that was meant to be as specific as Gorilla Glass versus Ceramic Shield or Was that meant to be a comment about specialty cover glass in general?

So what a very deep question. Tony, what did you mean? I would have thought it men in total, but you tell me. Absolutely men in total. Okay. Okay. Yeah, so, Lomzi, I need you to help me ask some really interesting questions. I took it in total, but, you know, good question.

Thanks, Lomzi. Michelle, we've got time for one more question.

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

Thank you. Maybe just a two-parter on display here. Wendell, you just mentioned again the... you know, some of the moves you're doing with end of life things, some tanks and some new ones. Could you talk about, maybe Tony chime in as well, what are the kind of cash flow impacts, other near-term gross margin impacts that, you know, it sounds like ultimately it could be a better profitability dynamic. So can you just walk us through the cadence of what those changes mean to the model? And then second, you know, can you talk a little bit maybe more high level about PC and display impacts. Obviously, with pandemic, those probably became a little bit bigger part of the mix. What is the outlook there, and how do you see that impacting the overall volume dynamic as you look forward? Thank you.

I think for the first part of the question, I'll start and let Tony come in. I think from a modeling standpoint, as we do these upgrades, of course, we're doing it to increased quality and lower cost. But the right way to think about it through your next year would be how you feel revenue plays out. It'll pretty much just play out like that. You won't, you know, I don't think you'll see any added cost drag or things like that. I just think you're going to mainly see it with the revenue change. That's what I would say. What do you think, Tom?

Yeah, I think that's right. I mean, there are some things like the expedited freight costs, for example, that will go away. So you know, as we think about the 150 basis points as we go through next year, that will certainly help us to some degree against that. And you'll see those results in the financials. And then from a cash flow standpoint, I mean, you know, all of this is, you know, part of our ongoing, you know, cash flow capital spending. It's not part of a, you know, a build cycle or anything like that. So I don't think it will really stand out from a cash flow standpoint.

And I think great question on PCs and notebooks. As you quite rightly point out, our PC makers had a really strong demand during the pandemic. What we're seeing right now, we're hearing from them, is that demand is still quite robust, but it's shifting towards commercial rather than consumer demand. And that as a result, you know, those that are really strong in commercial still find things quite tight. And that's how they're seeing that play out. And, you know, we'd be happy to sit down with you, Tim, if you want, and share how we view, you know, total IT demand coming to play and how that plays out in glass. And we'd be happy to do that.

Yeah, just wondering if you think that's an additional headwind relative to TVs being kind of strong next year.

You know, not much. Because like I said, you're seeing consumer back off, right? And then we're seeing, which uses a certain type of display, which is too deep to go into here, right? And we're seeing commercial, I mean, you know, big companies with that return to work and those upgrade cycles turn in, you know, turn up. So I don't view it as a big headwind. one way or the other. But like I said, let's walk through the details with you, and that way you can know where our head's at and how that differs from where you see things.

Okay, great. Thank you. Great. Thanks, Tim, and I want to thank everybody for joining us today. Before we close, I wanted to let you know that we're going to be at the Baird Virtual Global Industrial Conference on November 10th. the Credit Suisse Annual Technology Conference on December 1st, and the Barclays Virtual Global Technology Media and Telecommunications Conference on December 7th. Finally, a replay of today's call will be available on our site starting later this morning. So thanks for joining us. Michelle, you can disconnect all lines. Thank you. This concludes the program. You may now disconnect. Everyone, have a great day.