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.