Corning Incorporated

Welcome to the Corning Incorporated Quarter 2 2022 Earnings Call. To place yourself into the Q&A queue, please press star 1 1 on your telephone. 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 Q2 2022 Earnings Call. With me today are Wendell Weeks, Chairman and Chief Executive Officer, Ed Schlesinger, Executive Vice President and Chief Financial Officer, and Jeff Evenson, Executive Vice President and Chief Strategy Officer. I'd like to remind you that today's remarks contain forward-looking statements that fall within the meaning of the Private Securities Litigation Reform Act of 1995. These statements involve risks, uncertainties, and other factors that could cause actual results to differ materially. These factors are detailed in the company's financial report. 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 second quarter, the largest difference between GAAP and core results stemmed from non-market, non-cash mark-to-market gains associated with the company's currency hedging contracts. This increased GAAP earnings in Q2 by $203 million. To be clear, this mark-to-market accounting has no impact on our cash flow. 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. They're also available on our website for downloading. And now I'll turn the call over to Wendell.

Thank you, Anne. And good morning, everyone. Today we announced strong second quarter results. We captured additional content opportunities across our markets despite an extremely challenging external environment. And we delivered on growing demand in optical and solar. Sales were $3.8 billion, up 7% year over year. And EPS was 57 cents, up 8% year over year. Free cash flow was $440 million and total first half free cash flow was $611 million. Gross margin and operating margin expanded 90 basis points and 120 basis points respectively from the first quarter 2022 levels. Now, our improved profitability was primarily driven by the benefits of pricing actions that we took to more appropriately share the impact of inflation with our customers. In total, we delivered in line with our expectations, even though dynamics in three of our largest markets played out at the lower end of our assumptions. In the last month of the quarter, panel maker utilization rates declined to the lowest levels since the first quarter of 2009, when we were at the height of the financial crisis. Auto production continued significantly below normal, with virtually no cars sold in Shanghai in April due to COVID-19 restrictions. with European new car registrations for June at the lowest levels since 1996. In the second quarter, smartphone sales declined 11% year over year, primarily stemming from COVID lockdowns in China. In the face of these industry dynamics, we delivered outstanding results. in line with our guidance. We did what we said we were going to do, including continued growth and improved profitability. We view the resilience we've demonstrated as a strong proof point that our strategy is working. In the third quarter, We expect the challenges in these three markets to continue. At the same time, we expect an ongoing benefit from secular trends in optical and solar. Both factors are reflected in our guidance. We now expect third quarter sales to be roughly consistent sequentially and to grow year over year. We expect full year sales to slightly exceed $15 billion and to grow in a range of 6% to 8%. Now, Ed will elaborate more in just a moment. Now, with that in mind, I want to expand on our path to $15 billion and look at the dynamics playing out in four critical markets, display, optical communications, solar, and mobile consumer electronics. And I'll address what we're experiencing, how it is reflected in our financials, and how we're driving our performance. Let's start with display. We are executing well against our strategy. We have been updating you on the panel maker utilization correction for a year now. Panel makers accelerated reductions in the second quarter. The sharpest reduction was in June. And our volume declined in line with panel maker utilization and the market. We expect June's low production level to continue throughout the entire third quarter. and our volume to again decline in line with the market. Our guidance reflects our view of panel makers' second half production, and we expect our second half volume to be lower than the first half. At the same time, we have always said we expect to maintain price stability through this correction. That is exactly what happened in the second quarter. As expected, price was up sequentially. And we expect third quarter price to be consistent with the second quarter. As panel makers lower utilization, we are seeing glassmakers idle their tanks to perform maintenance and repairs and thereby lower capacity. We are managing our own tank repairs and restarts to align our supply to demand after running flat out for a very, very long time. As a result, we expect glass supply and demand to remain in balance. We feel good about our execution and strategy and display as we continue to operate from a position of strength. We are the industry leader with a global manufacturing footprint, cost advantages, distinctive capabilities, and leadership in Gen 10 and a half where we are well positioned to capture long-term growth. in large size TVs. Let's move to optical communications, which was the largest contributor to our second quarter growth. We believe the industry is at the beginning of a large multi-year wave of growth for passive optical networks, and we're well positioned to capture that growth. We're pursuing three significant secular trends, broadband, 5G, and the cloud. We've got major innovation programs underway for each category, and we're seeing robust traction with our customers. Momentum continues to build in this business. You can see this in our financials. Second quarter sales grew 10% sequentially, faster than we expected. and 22% year-over-year to reach $1.3 billion. And we expect to grow year-over-year again in the third quarter, and even faster than the market for the full year due to growing demand for our innovations. Take, for example, our Edge pre-engineered systems for cloud operators. Now, this product had its biggest quarter to date in the second quarter. These solutions, much like FlexNav for broadband, provide customers with a simpler, greener solution that minimizes the number of cables, cable trays, and hardware needed. The simple value prop is speed. We're helping get capacity installed much faster, eliminating labor bottlenecks in the industry. Our innovative manufacturing process, which completes splicing at a fraction of the cost and at much higher quality, dramatically reduces on-site labor. So we're accelerating our customers' ability to scale their networks and build cloud capacity all while driving more corning solutions into the market. visibility and confidence in the adoption of edge products is high because network planning decisions happen well ahead of deployment and we are winning now turning to solar the renewable energy industry is evolving rapidly and our ongoing growth suggests that that the market's behavior is more closely tied to a global imperative than simply current economic trends. We recently re-energized our participation in the solar market by turning on idle capacity and securing customer commitments through new long-term take-or-pay contracts for solar-grade polysilicon. In the quarter, sales grew significantly, which is reflected in our top-line growth. Looking ahead, we believe that Corning's broader technical and manufacturing capabilities, R3 and R4, will prove highly relevant in helping advance the industry. We expect year-over-year growth to continue in the second half, and we see excellent growth potential in this business. In mobile consumer electronics, smartphone and IT retail unit sales were down. However, we're outperforming in this market through our more corning approach, product leadership, and ongoing collaboration with true industry leaders. The benefits of our strategy are evident in our results. Specialty material sales were consistent with a strong second quarter of 2021 and net income grew 12% year over year. We expect to deliver growth in the back half in this down market as customers adopt our innovations for their product launches. Overall, Corneen is executing very well, commercially and technically. Despite all the temporary macro challenges, we delivered a solid quarter. We've added more than $700 million in sales in the first half, reflecting an increase of more than 10% year over year. And EPS has grown even faster, up 14% in the same time period, from $0.97 to $1.11. So you can see that strong secular growth in optical and solar and our more corning approach is offsetting weakness in the display, automotive, and mobile consumer electronics markets. We expect to continue performing well in a challenging environment to close out another strong year. Our cohesive and focused portfolio provides us with a strategic resilience that is playing out well in the current environment and will serve us well in the future. Tapping back. How we've been leading in the automotive and life science markets for 100 years, display for 80 years, telecommunications for 50, and mobile consumer electronics since the inception of smart devices. The basis of our ongoing successes are distinctive set of capabilities and long track record of life-changing and life-saving inventions. Now, this is particularly important in times like the present. We've made great progress building a more balanced and resilient company. We are structured to and focused on outperforming our markets consistently. Corning's deep relevance to secular trends, along with our ability to drive more content into our markets over time, will enable us to maintain our strength through this economic downturn and emerge stronger on the other side. As we look to both the immediate future and longer term, we're confident that our investments and our focused and cohesive portfolio, together with our financial discipline, will help us drive durable, profitable multi-year growth. In fact, our R&D engine has never been stronger. And a new generation of distinguished leaders has stepped up to drive us through our next exciting period of transformation. This quarter, we appointed Dr. Jamin Amin as our Chief Technology Officer. A 25-year Corning veteran, Jamin has worked with some of the company's most influential and innovative customers on groundbreaking advancements. including his work launching and commercializing Gorilla Glass. James' leadership, technical expertise, and experience with Corning's scientific capabilities will help take us to the next level of innovation. I'd also like to thank David Morse. I deeply appreciate his leadership and contributions over the years as one of our most accomplished technology leaders. He received his PhD from MIT when he was only 23 years old. And he retired last month after nearly 50 years with the company. David has created a strong foundation that Jamin will continue to build on, adding to my confidence that Corning's greatest contributions are yet to come. Now let me turn the call over to Ed. who will share more details on our results, financial priorities, and outlook.

Thank you, Wendell. Good morning, everyone. I'd like to preface my remarks today with three key takeaways on the quarter. We're executing well and successfully navigating the current environment. We're driving top-line growth, improved profitability, and strong cash flow. with high single-digit year-over-year sales and EPS growth, and we're employing a highly disciplined approach toward investing for the long term. With that said, let's walk through the details on the quarter. Total company sales reached nearly $3.8 billion, growing 7% year-over-year. Highlights included sales growth of more than 20% in optical, and strong growth in solar. We met our goal of improving gross margin and operating margin sequentially, driven by previously announced pricing actions across the organization. Gross margin grew 90 basis points, and operating margin grew 120 basis points. Net income was $489 million, up 7% year over year, and EPS was 57 cents which represents an 8% increase year over year. We generated $440 million of free cash flow in the quarter, keeping the company on pace for another year of strong cash generation. And we invested 353 million in CapEx. I'd also like to comment on the impact of currency. We have actively hedged our foreign currency exposure over the past decade. This serves as an effective tool to reduce earnings volatility, protect cash flow, enhance our ability to invest, and provide shareholder returns. Our largest exposure is to the yen, which has been weakening. We have most of next year hedged, and we expect our core rate to remain the same in 2023. We're pleased with our hedging program and the economic certainty it provides. We've received more than $2 billion in cash under our hedge contracts since their inception. Overall, I'm pleased with the operational rigor our teams displayed during the quarter. We successfully raised prices to more appropriately share the impact of higher inflation with our customers. We successfully navigated extended COVID-19 lockdowns in China, a sharp correction in panel maker utilization in the display market, lower demand for smartphones, and an additional temporary step down in China automotive production. And we're capitalizing on our market leadership and strong secular growth in optical and solar. Second quarter results reflect the benefits of our focused and cohesive portfolio, particularly the balance it provides. Now let's go through the segments. In optical communications, sales grew 22% year over year, reaching $1.3 billion for the second quarter. Year over year sales growth was driven by 5G, broadband, and the cloud. Net income was $182 million, up 23% year over year, primarily driven by strong volume and price increases. We believe we're in the early phases of a multi-year build cycle across multiple segments in the passive optical market. We're responding to this demand by ramping up production and opening new facilities. As always, we de-risk these investments by requiring meaningful commitments from customers, often including funding, before beginning construction. In the second quarter, display technology sales were $878 million down 8% sequentially. Panelmakers have been reducing their utilization rates for the last few quarters. In June, we saw a significant decline in panelmaker production versus April and May, and our volume declined in line with this change and the market. Importantly, glass price was up slightly sequentially. This, coupled with solid execution, resulted in net income declining 3% sequentially, less than half the sales decline. In the third quarter, we expect June's low panel maker production levels to continue and our volume to decline in line with the market and lower average utilization, resulting in our glass volume down mid-teens sequentially. We expect third quarter glass price to be consistent with the second quarter. The factors we use to assess the pricing environment in the display glass market continue to support a favorable pricing environment. First is glass supply-demand balance. Currently, glassmakers are taking tanks offline for maintenance and repairs after an extended period of glass tightness. are actively managing tank repairs and restarts to align our supply to demand. These actions result in lower glass capacity in the market. Additionally, after running flat out for so long, we need to replenish our inventory toward optimal levels to reduce excess logistics costs. And lastly, glassmaker profitability also supports favorable pricing. In this inflationary environment, it is challenging for glassmakers who have high fixed costs to maintain profitability during periods of low volume. Additionally, our customers depend on us for our market leading supply reliability, enabling us to build on our strong competitive position. So overall, we feel good about our execution against our goal to stabilize returns in display. The pricing environment is stable. We have maintained our pricing and when volume returns, our sales and profitability will improve. In specialty materials, sales were consistent with a strong second quarter 2021. Net income was 91 million, up 12% year over year. We achieved these results despite the smartphone and IT markets being down. Our more corning approach, product leadership, and ongoing collaboration with industry leaders are enabling our outperformance in this market. Specifically, we maintained revenue and profitability driven by the adoption of our premium cover materials. We also continue to benefit from the strength of the semiconductor equipment industry. In fact, we expect to see continued investments in the industry to meet rapidly growing demand and to support increased stability in the supply chain. To ensure we are prepared to capture growth, we just announced an expansion of our advanced optics operations in New York State. And as Wendell mentioned, we expect specialty materials sales growth in the back half, driven by customer product launches. In environmental technologies, second quarter auto production experienced constraints. due to prolonged chip shortages, the Russia-Ukraine war, and COVID-19 lockdowns in China. As a result, second quarter sales were $356 million, down 13%, both sequentially and year over year. In the automotive industry, this will be the third year in a row production has been unable to meet end market demand. Since 2019, auto markets have declined around 16%. In contrast, we have outperformed the market and our sales were up about 5% over the same period. We're pursuing content opportunities that generate sales beyond end market demand, such as additional adoption of GPFs in new regions. We expect an uptick in sales in the third quarter, driven primarily by a resumption of auto production in China following COVID lockdowns. We remain prepared to serve demand globally as supply constraints ease, and auto production increases. In life sciences, sales of 312 million remained consistent year over year and sequentially, and net income of 37 million was down. Lower demand for COVID-related products was offset by growth in research and bioproduction products. Additionally, COVID lockdowns in China impacted sales and profitability. Looking ahead, We expect to see continued growth in research and bioproduction, and we're well positioned to meet that demand with recent capacity investments designed to improve efficiency and enable us to better support global customers. Finally, in Hemlock and emerging growth businesses, sales reached 418 million, a 45% increase year over year and an 11% increase sequentially. This strong performance was largely driven by our production ramp to meet new long-term solar take-or-pay contracts. During the quarter, Corning Pharmaceutical Technologies also contributed to strong sales as we saw continued adoption of our pharmaceutical packaging solutions for critical drugs. And automotive glass solutions delivered year-over-year growth as well, During the quarter, Continental recognized the business as one of its suppliers of the year for our auto-grade Corning Gorilla Glass technology, another proof point on our progress toward a $100 per car opportunity. In sum, the multiple growth drivers and our market leadership across our portfolio create an inherent resiliency that enables us to consistently outperform our markets. Now turning to our outlook. For the third quarter, we expect sales roughly consistent with the second quarter in the range of $3.65 billion to $3.85 billion. We expect continued strong sales in optical communications, hemlocks, solar products, and specialty materials to offset lower display volume which is expected to be down mid-teens from the second quarter, as I noted earlier. We expect EPS in the range of 51 cents to 55 cents for the third quarter. While we expect the benefits of our pricing actions to continue, the lower volume in display will impact profitability. Our most likely outcome for the full year is to slightly exceed 15 billion in sales. as we shared with you in April. We now expect sales to be up six to eight percent, and we expect to grow EPS in line with sales. Our guidance factors in a range of probabilities for the market challenges that we've outlined this morning. As I wrap up my remarks today, I'll end by saying we're very pleased with the results of the quarter and the first half of the year. We're growing profitably. And we remain highly disciplined in our approach to investment decisions, while maintaining a strong balance sheet and delivering solid free cash flow. This gives us the ability and flexibility to address evolving market conditions. We're also expanding capacity to support committed customer demand, all while carefully monitoring the external environment to pace appropriately. We're confident in the many levers at our disposal to manage through any environment and come out the other side stronger while advancing our long-term growth initiatives. With that, I'll turn it back over to Ann for Q&A.

Thanks, Ed. Crystal, we're ready for the first question.

Thank you. And as a reminder, to ask a question, you will need to press star 11 on your telephone. And our first question will come from Stephen Fox from Fox Advisors, and your line is now open.

Hi. Good morning. Good morning.

Can you hear me?

Yes. Hi, Steve.

Hi. I guess I was wondering if you can go back and talk about the optical business a little bit more. It's obviously got a lot of new product momentum and has had extremely strong growth. Some of your carrier customers have recently called out some weakness on subscribers and other consumer demand. How do we think about sort of optical, maybe not just for the next couple quarters, but say if we think about it for the next year in the face of macro pressures, how confident are you in its ability to continue to grow? Thanks.

Thanks for the question, Steve. Yes, we've seen all those comments, and of course, we talk directly to leadership of all of our major carrier customers. Here's what we're hearing. And then let's just step back and talk about just what some of the other macro forces are behind it. So what we're hearing from them is their investment in fiber optics is their top strategic priority. And so that even as they take a look at what they can do with different elements of their capital spending plans and their investment plans, that they're prioritizing their investment in our product sets, and they're actually asking us to commit to supply more into next year and beyond. So we're in the midst of that type of discussion with our customers. It's a little early to tell exactly where that all will turn out, but we'll be public as that gets a little bit closer. So I would say right now, all of our demand signals continue to be quite robust. And if we could make more fiber and cable, we could sell more fiber and cable And we're seeing continued strong demand as we look into next year, sir. Did that answer your question, Steven?

It did. And then I just probably should have thrown this into the question, which is, could you just maybe expand that window to talk about cloud demand as well? And I'll pass it on from there. Thanks.

In cloud, they continue to see pretty strong revenue performance in cloud, as I'm sure you've seen. In general, the pandemic put some of those major infrastructure programs a little bit behind where they would like them. So we're continuing to see demand there that's very robust. The main thing that's providing any volatility in our cloud-based demand tends to be their ability to actually get their installations done on time. to actually get all the labor that they need, to actually get the construction going. And it also plays very nicely into some of our new innovations that use tremendously less labor. And so that's one of the reasons we're seeing strong take-up of our new innovations in cloud. So although cloud is, you know, will always go with sort of how can they run their construction projects, Overall, we're seeing nothing but a strong demand signal out of our customers there. Great. That's very helpful. Thank you.

Next question.

Thank you. Our next question will come from Wamsi Mohan from Bank of America, and your line is now open.

Yes. Thank you so much. I was wondering if you can update us around your assumption for TV units for 22 and maybe an initial look into 23. Are you expecting growth or decline of glass at retail at this point, given what's happening at panel makers? And if I could, on specialty materials profitability, if we look at that both on a year-on-year or on a sequential basis, on roughly flat revenues, you have significant improvement in profitability, and I was wondering if you could talk about the drivers there. Thank you.

On display, as you would have heard in our opening, we expect our volume to be in line with where panel makers are taking their utilization. and down some 15% in quarter three. As we take a look at retail, what we'd say is we'd expect TV units to probably be down this year now, especially given what has happened with the China shutdowns. But you know, it could be flat. And I think it's just too early for us to talk about next year. This is a pretty significant correction that we're working our way through. And the real critical spot for us is we want to be able to continue to execute our strategy and have that, our price be stable, have our market position stay stable. And then, you know, we'll be there as television unit demand and panel maker utilization comes up. You know, we'll see our profitability climb in line.

And I'll take your second question, Wamsi, on specialty materials. So a couple of things. One, first, I think, you know, we're performing well in this segment, right? The market's down and we're flattish. It's a great more corning story for us. So we're outperforming the market there. And then secondly, I think on the profitability side, it's primarily about the continued adoption of our new cover materials and us adding content into the market. That's really what's driving the profitability relative to the flat sales.

Okay. Thank you so much.

Next question. Thank you. And our next question will come from Sameek Chatterjee from J.P. Morgan. And your line is now open.

Yes. Hi. Thank you. Thanks for taking my question. I guess my question was just on the 4Q guide here. The implied earnings guide does represent a recovery from the 3Q levels, and I'm just curious about what's the driver for the increase in earnings going from 3Q to 4Q that you're embedding, and I would assume that you're expecting display to contribute to that, just given the sort of relevance of the segment itself, and hence what's driving the expectation that display rebounds from 3Q to 4Q as well. Thank you.

So I think maybe stepping back a little bit on the guide, you know, if I think about both the third quarter and the full year, what we've tried to do is reflect the highest probability range that we can for sort of all the dynamics we're seeing across all of our markets. And, you know, as we talked about in display, it's, you know, there was a pretty sharp correction down in June. We're expecting that to continue into the third quarter, but, you know, we have a range of how we see that playing out. And then the same thing holds true related to demand in China, which obviously impacts automotive in the back half of the year. It'll impact potentially smartphones and maybe even life sciences, right? So if you think about our guide, there's a high end and a low end and sort of our view of a most probable outcome. And so, yes, we're expecting the fourth quarter to probably be a little bit better than the third quarter, depending on where you pick within that range we've given you for the third quarter. And it's certainly possible if sort of things play out as they normally do, you would see an uptick in display. That's definitely in the range of probabilities, you know, in terms of how we've thought about it. Thank you.

Thank you. And our next question will come from Rod Hall from Goldman Sachs. And your line is now open.

Yeah, thank you for the question. I wanted to start with a high-level question for Wendell, and then I have a question on solar as well. I just – Wendell, what we've seen in consumer is deterioration of the low end and maybe the mid-range as well a little bit, you know, the smartphone industry, et cetera. I'm wondering if you think that the higher-end consumer – do you see any evidence that that is not still hanging in there? Or, you know, what are your expectations for the higher-end consumer in the back end of the year and some of your exposure there? And then I'll follow up with the solar question after that answer, if it's okay.

Well, Rod, I would agree with your observation. I think it's an insightful observation that the more premium end is doing better than the low end, and the largest deterioration has been in that piece of the market. We think that relative outperformance will be there, but we don't, like in our guide, we're not reflecting a belief that it's just going to be bivotal, right? We think everybody's going to get impacted, and it's a timing question. But you'll still have relative outperformance in the premium end. And that's the way we look at it. Is that the question you were asking, Matt?

Yeah, I think I just was curious to see whether you thought, because you, of course, have a lot more data sometimes than we do, you know, whether that high end would follow the low end or, you know, I think it probably will, but I was just curious what your opinion of that was.

Yeah, we're seeing the impact of that being below where we would have thought it would be. really driven, I think, primarily by this combination of China shutdowns and inflation. So, you know, it's below what we would have normally expected it to be, but it is, we are still seeing outperformance.

Right. Okay. Thanks, Wendell. And then on solar, we had estimated about a third of the Hemlock and emerging growth business revenue with solar last year. And I'm wondering if, Maybe, Ed or Wendell, if you guys could double-click on that a little bit for us this year. Talk about what you think the proportion of those total revenues might look like for solar this year. And I'm also curious how gated that is by supply. In other words, are you just selling everything you can make? Could you sell more if you were able to turn on even more supply? Just curious kind of how that all is shaping up right now. Thank you.

Yeah, thanks, Rod. So on solar, I think the way to think about it is through the year last year and into sort of the second quarter of this year, we continued to ramp our solar sales. We were originally selling out of inventory, and we sort of sold all that out, and then we started production back up in the fourth quarter. And so it has become a greater part of the sales in Hemlock and emerging growth segment. In addition to that, what I would say is we are getting to be capacity constrained. I mean, we're selling for the most part, what we can make, you know, we'll, we'll get a little better at making and, you know, we'll have a little more capacity, um, you know, in the back half. And as we go into 2023, but not a lot of capacity. And I think the important thing to think make, you know, we'll, we'll get a little better at making and, you know, we'll have a little more capacity, um, you know, In the back half. And as we go into 2023 but not a lot of capacity. And I think the important thing to think about is we've signed customers up for multi year take or pay contracts to essentially sell out that capacity. So we feel really good about that demand and our ability to supply it. We have more capacity that we could turn on. It would be a decision we'd have to make based on the dynamics in the market and our ability to continue to get, you know, customers to take that volume either by giving us cash or signing up for long-term commitments.

But I just, with energy prices where they are, wouldn't it make sense to, it would seem solar demand is only going to go one way. Would you agree with that?

We need to supply it. We have more capacity that we could turn on. It would be a decision we'd have to make based on the dynamics in the market and our ability to continue to get, you know, customers to take that volume either by giving us cash or signing up for long-term commitments.

But I just, with energy prices where they are, wouldn't it make sense to, it would seem solar demand is only going to go one way. Would you agree with that?

Yeah, I think the good, the demand is high. I do agree. I, you know, I think, you know, we're cautious in this space and we want to make sure that we've got good commitment for any additional demand that we would turn on. And, you know, we'll update you as that plays itself out in the back half of this year and into 2023.

Just to add some comment, Rod, I think your instincts are right that you have a bull case for solar. What makes us a can really insist on committed demand from our customers and to make sure that our customers are taking on more of the risk under their shareholders than ours would take is because geopolitics also plays a role. So energy always has geopolitics play a role and solar is no different. And so given that piece is why we want to make sure that if we add, if we bring on more capacity, that our shareholders basically are getting a nice free shot on goal.

That's great. Thanks a lot, guys. I appreciate all the color.

Thank you. And our next question will come from Josh Spector from UBS. And your line is now open. Mr. Spector, please make sure your line is not on mute.

Oh, sorry. For some reason, it cut out. I didn't hear my name. Thanks for taking my question. Just as a high level, curious, I mean, you seem relatively bullish on optical. Maybe those expectations are roughly unchanged. Clearly, display expectations moved a bit. In the rest of the portfolio, would you say your second half expectations have changed significantly? Or are they relatively similar to how you saw things a few months ago? And trying to think about that relative in terms of the medium to longer term growth for some of those segments as well. Thanks.

Yeah, I would say, you know, the biggest change probably going back a quarter is what happened in China with respect to lockdowns in the second quarter. That impacted, you know, demand and, you know, the supply chain in that part of the world significantly. And obviously it impacted us. And, you know, I think in the range of how we see the back half, a lot of that is what happens in China, you know, across the board, sort of in all of our markets for the most part, other than optical. And I would say that there aren't any significant changes other than that. The one thing I'd add is in auto in general, we were expecting a higher auto market at the beginning of the year, both in China, but in totality. And I think our view of that market is that it's still constrained. You know, we think end market demand is there, but the industry is constrained and therefore, you know, our expectations are a little lower than maybe they were, you know, a quarter ago.

Okay. Thank you.

And I'd say also make it the trends, the big secular trends that we are behind and we're investing for, as well as sort of the more according strategy that looks to us like it is holding up quite well, even in these sort of challenging macro environment. And we would expect that to continue. There's other little things that are moving around in our range that have to do with our ability to bring up capacity. Optical, we're running maybe about a quarter behind on some of the capacity that we would have thought we would have had available to sell this year, and that growth will now push into next year. There's a lot of puts and takes, but in total, we're feeling quite good about where we placed our bets and the efficacy of our content-driven strategies.

Next question. Thank you. And we'll take our next question from Mehdi Hosseini from SIG.

And your line is now open. Yeah, thanks for taking my question.

I want to go back to the display and want to get your thoughts on your customers' ability to to produce panels, especially since panel prices are the cash costs. Why shouldn't the glass market enable lower costs and improve affordability by lowering key material costs like glass, unless you tell me that the market is not elastic? Any thoughts here would be great, and I have a follow-up.

Well, it's a good question. Our main contribution to panel makers' cost structure is the ability of our innovations to dramatically lower the overall production cost of panel making. For instance, a Gen 10.5 facility can manufacture panels roughly at a 30% lower cost for large-sized TVs. than the Gen 8.5 that preceded it. And so for us to deliver those type of innovations also requires us to invest and we require a return on that investment. So we believe Glass is already a great buy for our customers and the best way that we can help them be successful is to continue to be very reliable suppliers and continue to innovate and help the fact that they add way more cost downstream of us than the cost that re-represented their total, and as we can improve their productivity, life gets better for them. Price elasticity-wise, panel prices are already plenty low, and we would expect that to help flow in to television set manufacturers and that to, in turn, help activate in consumers who are quite sensitive to pricing. But nothing we can do is going to make a significant delta in that overall market price elasticity, sir.

Got it. Thank you. Thanks for the detail. And just a quick follow-up on cash flow. Inventories are up a cubicle year over year. Should I assume that that 110 days of inventory would turn down into the second half of the calendar year?

Yeah, hi, Mehdi. I think a couple of things to think about. First, it's a difficult supply chain environment. We want to make sure we can supply our customers, so we probably have a little more inventory than we might otherwise have. You know, that will eventually go back to normal, hard to call the timing on that. I think the second thing is if you think about the inflationary impacts we see, and we talk about them mostly in the context of our P&L, they also sit in inventory, right? So you have higher raw material costs and higher costs to produce. And so some of the higher balance sheet you see, the higher dollars, is related to inflation as well. Now, that gets passed along in the form of price, so the profitability is the same, but you're carrying a little bit more of that on your balance sheet.

Got it. Thank you.

Next question.

Thank you. And our next question will come from Martin Yang from Oppenheimer. Your line is now open.

Hi, good morning. Thank you for taking my question. So can you maybe give us a bit more insight into specialty materials, especially the part excluding advanced semiconductor material? Have you observed a more of a consistent increase of mix either for new products or exposure to premier customers in the past few years for specialty materials?

Yes, I think you correctly identified the dynamic, Martin. It is sort of our content-driven strategy has been in mobile consumer electronics, like a number of our markets, is not just to count on people buying more stuff, buying more phones, but to put more corning content into the smart devices that people already buy. And so each of those new innovations tend to have more value to it and therefore add to our content. And that's why despite a flat to down smartphone market, you know, we've grown our revenues some 40% or more, is it's basically that content strategy.

Got it. I think there are a couple of products in the past we can sort of point to to support this view. But, you know, let's say looking into the next two years, do you see a more regular schedule release of new products that will carry on the trend?

You know, we, yes, we have new innovations that we have lined up that we're seeing good, strong interest in and adoption of. So, yes, you know, we continue to see that strategy be able to play out successfully in the years to come. Now, at the same time, all of that innovation, all of that new technology adoption is does happen in a broader macroeconomic context, right? So how that will impact our customers' launch plans and the like I think remain to be seen. But the fundamental structure of the strategy is in place.

Got it.

Thank you very much.

Thank you. We'll take our next question from Matt Nicknam from Deutsche Bank. Your line is now open. Mr. Nicknam, your line is now open. Please make sure you're not on mute.

Hi. Sorry, I had the same cut out of my name when you were calling it out. Thanks for taking the question. So in the past, you've talked about 6% to 8% growth CAGR between 2020 and 2023. And I think, Ed, you may have mentioned it's somewhat relevant still at a recent industry conference. So I'm just curious, in light of recent macro events, any updates you can share and maybe more broadly, any expectations on when we could see an updated long-term guide? And then just a quick follow-up in terms of operating leverage. I think last quarter you talked about EPS growth maybe outpacing top line by a bit. it looks like we're maybe lacking some of that operating leverage. I'm wondering, is that entirely just display trends or anything else maybe to consider in terms of that mixed shift on the margin side? Thanks.

Yeah. Thanks for the questions. So, you know, on the sales side, I think, you know, we gave you our guide for the year and, you know, we're in that we're in that zone and, you know, we're not going to give new long-term guidance right now, you know, primarily just because of all the challenges we articulated on the call. It's a very dynamic process. external environment, you know, at some point we'll certainly update you about 2023 and perhaps longer term. But I think the, you know, as Wendell said earlier, the secular growth trends are all intact and we feel really good about them over the long term, despite sort of this current challenging environment. And then on the operating leverage side, I think the primary driver for sure this year is what's happening in display. You know, volume going down, you know, panel maker utilization going down, the market going down, and our volume following is just a significant impact on our profitability. So that's the real primary driver on the earnings per share side this year.

And for gross margins, I know in the past you've talked about 1Q being the trough. Is that still the case as you get the benefit of positive pricing actions going forward?

Yeah, you're right. We did say that, and we still for sure believe the first quarter was the trough. You know, as you saw in our results, we stepped up about a point in the second quarter. That's really all about the pricing actions we had talked about. We feel great about those actions. And although the inflationary environment is still with us, we'll continue to raise price. And, you know, so over a period of time, that should be a favorable position. tailwind to margins, I would just caution that it will be a slow march in this environment.

Perfect.

Thank you.

Great. Next question.

Thank you. And we'll take our next question from Asaya Merchant from Citi. Your line is open.

Great. Thank you for the question. I apologize if it's been asked before as I was switching between a couple of calls. Just on the optical side, you know, anything you can share about the demand that you're seeing from the hyperscalers versus the telco operators? You know, we've been hearing some rumblings about hyperscalers, you know, stepping down some CapEx investments. And so if you can share any color on that, that would be great. Thank you.

So we continue to see... demand from both. Without doubt, carrier demand has been highly stimulated by everything that's going on with both public policy as well as them having to catch up to sort of everything that happened in the pandemic. We went into the pandemic, actually, they lowered their CapEx spend, you know, maybe by about two-thirds for both safety and just cash preservation terms, all while during the pandemic, demand soared with, like, broadband use up some 50% cloud revenue. up some 60%, 70%. And during that time period, both hyperscalers and carriers were pretty constrained. Now, all of them build ahead of demand. They tend to want to have about 18 months of supply at least in place to be able to take in the volatility of their customers' bandwidth demands. So we sort of went through that, and we have to reestablish that. So in all of them, we have felt that sort of pull, as well as if they look ahead, they see strong growth. So in general, things are still flashing green. You're right that we'll have certain of the hyperscalers at different times back off some of their stronger megawatt projections. But in all of them, we pretty much have a range on how many megawatts we think they can get in. and where we're aimed, if that makes sense to you.

Okay. Thank you. Great. Next question.

Thank you. Our next question is going to come from Timothy Long from Barclays. Your line is now open.

Thank you. Just a two-parter back on optical comms, if I can. One, can you talk a little bit about, you mentioned capacity increases and maybe being a little bit behind where you need to be. Could you just, you know, give us a timeline there? Were there some capacity increases that helped Q2? And, you know, what's the cadence of kind of adding capacity to that business over the next few quarters? And then secondly, just on leverage there, you know, last year saw some very good margin leverage on the higher sales. It's just one quarter, but sequentially kind of flat margins there with the higher ASPs. Is that something we can expect to see, you know, unfold over the next few quarters as that business continues to do well, a little bit more operating leverage? Thank you.

Yeah, so thanks, Tim. So on capacity, we've been talking about adding capacity. It's fiber and cable capacity primarily this year. We have a little bit coming on in the third quarter and a little more in the fourth quarter. And as you heard Wendell say, we're a little behind, you know, probably a quarter or so relative to what we thought maybe, you know, three, six months ago. So some of that capacity will help us more in the first half of 23 versus in 2022. We did have a really strong quarter. And we sell a mix of products and on the connectivity side where we have capacity that helped our quarter significantly in the second quarter. And I think on the operating leverage, you're exactly right. Optical happens to be one of the businesses that has had a lot of inflation. We have raised prices successfully there, and that has helped us kind of normalize our margins and slowly march them up there as well. And I think you can continue You should continue to expect to see that, but again, just caution that it will be a slow march up in this environment.

Okay, thank you.

We've got time for one more question.

Thank you. And we'll take our final question from Meta Marshall from Morgan Stanley. Your line is now open.

Great, thanks. Maybe to your guys' comment at the end that you would be evaluating macro for any change in build plans, just wanted to kind of verify, like, have you guys changed any build plans yet for 22, you know, even if that's kind of moving within segments? And then maybe on the second question, you know, you guys noted kind of a couple times labor being the gating item for kind of further optical development. business or rollouts, just wanting to get a sense of, you know, even when it comes to cloud, is it really just still labor or are there other elements of the supply chain that need to kind of come into place to get further build activity there? Thanks.

Let me take the first one and then we'll go into the more detailed second one. So in the first one, I wouldn't characterize that we've been holding back on our investments due to the macro What we are doing is making sure first at the operating level, like for instance in display, we're taking the opportunity to take our tanks down for repair and putting in new technology packages. And we just simply won't restart them until such times as we have really nice clarity on our customers' demand. And in that way, we'll keep supply and demand in balance. And we have similar things like that as we can feather one way or the other. In opto, if you're aimed at that, in opto, in connectivity, we have now brought it, because when we think about opto, you need fiber, you need cable, and you need connectivity to build these passive optical networks. And in connectivity, we successfully brought up enough capacity in the first half so that we feel pretty good about our ability to meet a customer's ramps there that we see. In fiber and cable, if we could make more, we could sell more. And it was just that the way the supply chains worked, construction worked, we're just going a little bit behind where we would like to be on some of our ramps. And we'll pick those up next year. In every case where we do a significant investment, we have committed demand from a customer and we ask some substantial financial commitment from them. So we would expect to continue to build with them to the extent that they offer that type of commitment and therefore an appropriate sharing of risk with our shareholders. So that's sort of in macro. And then to your specific question, I would say, and without question, labor remains the top issue for installations, whether it's in hypers or it's in carriers. That remains one of the more tightly, one of the tightest pieces on the critical path. You know, at the same time, you're quite right to point out that you move in this economic situation, in this sort of odd moment we all find ourselves in, you move from one bottleneck to another to another. So I'm quite sure you're right. If we were able to resolve labor, you know, there'd be something else.

Great. Thanks. Appreciate the answer.

Thanks, Nina. Thanks, Wendell. And I want to thank you all for joining us this morning. Before we close, I'll let you know that we're going to attend Citi's Global Technology Conference on September 8th and Goldman Sachs Communicopia and Technology Conference on September 13th. Additionally, we'll be hosting some visits with investors in select cities over the quarter. A web replay of today's call will be available on our site starting later this morning. Thanks, everybody, for joining us. Operator, that concludes our call. Please disconnect all lines.

Thank you. This concludes today's conference call. Thank you for your participation. You may now disconnect. Everyone, have a great day.