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spk03: Welcome to the Corning Incorporated Third Quarter 2022 Earnings Call. To place yourself into the Q&A queue, please press star 11 on your telephone. It is my pleasure to introduce to you Ann Nicholson, Vice President of Investor Relations.
spk04: Thank you and good morning. Welcome to Corning's Q3 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 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 primary difference between GAAP and core EPS was from primarily non-cash charges associated with capacity optimization and non-cash mark-to-market adjustments associated with the company's currency hedging contracts. This increased core earnings in the third quarter by $234 million. To be clear, these charges and mark-to-market accounting have no impact on our cash flow. 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. They're also available on our website for downloading. And now I'll turn the call over to Wendell.
spk10: Thank you, Anne, and good morning, everyone. Today, we reported solid third quarter results that demonstrate strong execution. We continue to operate each of our businesses well, and our focus on leadership and distinctive capabilities allow us to capitalize on important secular trends and drive our more corning approach Sales were $3.7 billion, up slightly, versus a strong third quarter last year, and EPS was 51 cents. We were able to offset a sales decline in display technologies with growth in optical communications and solar. While we believe that display panel maker production bottomed in September, we would like to see additional positive evidence before guiding a significant recovery in glass demand. In total, we performed well despite the economic environment. Before we get into the details, I want to set some context on what we're facing across our markets. On our last call, we told you that end markets in multiple businesses were down. A smartphone sales in the second quarter declined 8% year over year. Panel maker utilization in June 2022 was at its lowest level since 2009. And yearly automotive production was 10 to 15 million vehicles below. its pre-COVID rate. Several of these dynamics continued or even intensified in the third quarter. A smartphone unit sales declined 14% year over year in the quarter, with tablet and notebook demand down 17%. Panel maker utilization decreased even further from its June level, with September being the lowest month of the quarter. And annual automotive production is still 10 to 15 million cars short due to continued component shortages. Nevertheless, we delivered results within our guidance range and expectations. We continue to benefit from infrastructure investments in broadband and clean energy. Two secular trends were strategically positioned to address. We delivered 16% year-over-year growth in optical communications, and we captured ongoing demand in the solar market, which contributed to 33% year-over-year growth in hemlock and emerging growth businesses. So let's take a deeper look at what we're seeing in some of our key markets, how we're responding, and why we're confident that our strategy continues to position us to deliver profitable multi-year growth. I'll start with display. In the third quarter, the glass market and our volume both decreased almost 25% sequentially, which significantly reduced our sales and profitability. In September, panel maker utilization reached the lowest level since the fourth quarter of 2008. More than a year ago, we said we expected a correction in the display industry during 2022. In the second quarter, panel makers began reducing production levels with accelerated reductions in June. In the third quarter, panel maker production reached an even lower level. And we believe that panel maker production reached the bottom in September. So now the question is, when will the glass market recover? Now, our answer is that we would like to see additional positive evidence before we guide a robust recovery in glass demand. We've maintained stable price and market position during this whole correction. Consequently, We expect our volume and profitability to increase sharply when panel maker utilization rebounds. And we expect to exit the correction with strengthened customer relationships and, importantly, a refreshed manufacturing fleet. As always, we will keep you informed as we progress. Overall, we feel very good about our execution in display. In mobile consumer electronics, customer product launches and strength in semiconductor drove sequential growth in specialty materials. But as I noted, smartphone and IT retail unit sales declined significantly in the quarter. We now expect smartphones to be down about 12% for the year. And we expect notebook and tablet demand to decline 15%. We expect the year-over-year decline in smartphones, notebooks, and tablets to be greater in the second half than in the first half. This will limit the growth we normally see in our second half sales relative to the first half. Now that said, we continue to outperform the market through our product leadership, our more corning approach, and our ongoing collaboration with industry leaders. Over the long term, our content strategy and mobile consumer electronics will help us grow. As we continue to develop and launch premium glasses, and optical treatments for existing and new form factors. Additionally, we're executing our more according approach in the semiconductor industry. In July, Senator Chuck Schumer and New York Governor Kathy Hochul joined us to announce government funding that supports an expansion of our advanced optics facilities, which make Equipment and materials vital to semiconductor manufacturing. Of course, semiconductors are fundamental to virtually all technology we interact with today. We've helped advance the industry for more than 50 years, and our expansion will keep us well positioned to support nearly every step of the chip manufacturing process and to respond to new customer needs, including products, for EUV technology. Let's turn to automotive. In environmental technologies, we delivered sales and profit growth despite the constraints on vehicle production, and we're outperforming the market for the year. We continue to adjust our operations to effectively navigate the variability in auto production, and we are prepared to meet demand when industry production increases to normal rates. We're also generating significant wins in our automotive glass solutions business. Polt is strong for our technical glass and optics innovations. During the quarter, CarUX, a leading car display company owned by Intelluxe, announced its use of our patented hold-form technology to help drive the future of auto interior displays. Corning continues to be well-positioned to further grow its automotive business as the industry offers more advanced, design-oriented cabins and enhanced driver assistance features. Let's move to optical communications. which was the largest contributor to third-quarter sales. The industry continues to experience a large multi-year wave of growth for passive optical networks, and we continue to increase our capacity to support this growth. In August, U.S. Secretary of Commerce Gina Raimondo joined AT&T CEO John Stankey and me to announce a new manufacturing facility in Arizona. You may recall Secretary Raimondo's leadership helped pass infrastructure legislation dedicated to the idea of Internet for All. Our new plant will boost optical cable capacity to meet record demand. In September, we opened a new optical fiber manufacturing plant in Poland to serve committed demand. And we're innovating to support every phase of broadband deployment as network access is increasingly viewed as a fundamental human right. In the quarter, we announced additions to our evolved connectivity portfolio, which helps operators streamline permitting, accelerate field installation, and optimize network testing. Optical sales have grown 22% for the first three quarters of the year, setting us up for another strong year of growth. However, we expect fourth quarter sales to be down sequentially due to the timing of customer projects. Turning to solar. The renewable energy industry is evolving rapidly and our ongoing growth continues to indicate that the market's behavior is more closely tied to a global imperative than the current economic trends. We re-energized our participation in the solar market by starting up idle capacity and securing customer commitments through new, long-term, take-or-pay contracts for solar-grade polysilicon. Third quarter sales grew significantly year over year, and we will benefit from the state of Michigan's infrastructure investment program, which will help us expand operations to meet increasing global demand for polysilicon. We believe that Corning's broader technical and manufacturing capabilities, our three and four, will prove to be highly relevant in helping advance the renewable energy industry. And we see excellent growth potential in solar. Now, as I conclude my remarks, here's what I'd like to leave you with today. We remain very well positioned to deliver profitable multi-year growth. And we'll continue to execute with discipline. We'll invest where we see strength and will pace to meet demand. Our cohesive and focused portfolio provides strategic resilience that is playing out well in this current environment. We've established a deep relevance to secular trends, along with the ability to drive more content into our markets over time. We've been leading in the automotive and life science markets for 100 years, display for 80 years, telecommunication for 50, and mobile consumer electronics since the inception of smart devices. The basis of our ongoing success is our distinctive set of capabilities and long track record of life-changing and even life-saving inventions. And that's what enables us to power through moments like the present while maintaining an attractive long-term growth trajectory. Now, let me turn the call over to Ed, who will share more details on our results, financial priorities, and outlook.
spk05: Thanks, Wendell. Good morning, everyone. Let me start by emphasizing that we're executing well in a challenging environment. Our performance in the third quarter was a proof point of the inherent balance of our cohesive portfolio and the fact that our more corning approach is working. We're built to be resilient, even in a downturn. Now, let's look at our financial results for the third quarter. Sales were $3.7 billion, up 1% from a strong third quarter in 2021. Optical communications, environmental technologies, life sciences, and hemlock and emerging growth businesses all delivered year-over-year growth. In September, display technologies experienced the lowest panelmaker utilization levels since 2008, resulting in a 28% year-over-year decline in sales for the segment in the third quarter. In specialty materials, we outperformed the smartphone market, which was down double digits year over year. Turning to profitability, gross margin was 36.1% and operating margin was 16.9%, down sequentially 140 and 190 basis points, respectively, driven by the lower volume in display technologies. In the third quarter, free cash flow was $255 million, and year to date, it was $866 million, keeping us on pace for another year of healthy cash generation. And despite the challenging environment during the quarter, we were able to offset significantly lower volume in display technologies, and we outperformed our underlying markets overall. Now let's turn to the segment results. In optical communications, sales grew 16% year over year, reaching $1.3 billion. Our year-over-year growth was driven by network operator investments in 5G, broadband, and the cloud. Net income was $183 million, up 32% year over year, driven by leverage from strong incremental volumes. Passive optical networks continue to experience a large multi-year wave of growth. We believe that this demand is strongly supported by private and public infrastructure investments to help connect the unconnected and bring broadband to a much larger share of the population. We continue to secure customer commitments and we're investing to appropriately scale production to serve our incremental demand from current and new customers. And we're also taking further pricing actions to more appropriately share recent cost increases in energy and certain raw materials with our customers. As we've mentioned in the past, this business can be lumpy from quarter to quarter, and you'll see that play out in the fourth quarter as we expect optical sales to be down sequentially based on the timing of customer projects. Now moving to display, as we updated you in September, panel makers reduced their production levels below our already low expectations. The lower volume resulted in display sales declining 28% year-over-year and 22% sequentially, and we saw a 46% year-over-year and 41% sequential decline in net income due to the high fixed cost nature of glass manufacturing. In the third quarter, glass price was once again consistent sequentially. And we believe the glass pricing environment will remain favorable. And factors that continue to drive that favorable pricing include glass supply demand balance. As panel makers reduce production, Corning and other glass makers took additional tanks offline for maintenance and repairs after an extended period of glass tightness. And we're also taking this opportunity to upgrade some of our fleet with our latest technology, which enables us to reduce costs and extend the life of new tanks. As we continue to work through these upgrades, we are actively managing restarts to align our supply to demand. Another factor is glassmaker profitability. It is challenging for glassmakers who have high fixed costs to maintain profitability during periods of low volume. And the current inflationary environment amplifies that challenge. We expect fourth quarter glass prices to be consistent with the third quarter and glass prices to be stable or up in subsequent quarters. So overall, we continue to operate from a position of strength in the display market. And as Wendell noted, while we believe that panel maker utilization reached the bottom in September, we would like to see more evidence before we got a significant recovery in glass demand. But when glass demand grows, we expect our volume to increase and our profitability to improve. In specialty materials, the market for smartphones was down 14% and tablets and notebooks were down 17%. We outperformed the market with sales down only 7% year over year, driven by strong demand for premium glasses and strength in semiconductor materials. Third quarter sales were up 7% sequentially driven by demand for our premium cover materials to support customer product launches. And adding to our resilience in the segment, Advanced Optics delivered record sales for the second quarter in a row, and we're bringing additional capacity online at our facilities in Fairport and Canton, New York. Net income for the segment was $96 million, down 10% year over year, due to lower volume and continued development expense related to next generation products. The weakness in the smartphone, tablet, and notebook markets intensified in the quarter, and we expect fourth quarter sales and profitability to be down sequentially and year over year. Long term, we expect to outperform the market as we continue to develop and launch new premium glasses and optical treatments. Turning to environmental technologies, in the third quarter, sales were $425 million, up 10% year over year and 19% sequentially. Automotive production improved from a very low second quarter as China demand recovered after second quarter COVID lockdowns. However, vehicle production remains constrained due to the continued component shortages. In addition to our sales growth, we improved profitability with net income up 45% year over year. Our content driven strategy is working. Gasoline particulate filters remain a critical component of that strategy, driving revenue even in a weakened market. Our next generation filters are now shipping to customers as emission standards reach near zero levels and require enhanced filtration performance. In life sciences, sales were $312 million, consistent sequentially and up 2% year over year. Lower demand for COVID-related products was offset by growth in research products. Net income was $43 million. We continue to commercialize innovations, including a new cell and gene therapy production platform. And looking ahead, we expect to see continued growth in both research and bio process. Finally, in Hemlock and emerging growth businesses, sales were $407 million, up 33% year-over-year and down 3% sequentially. We continue to see increased demand for semiconductor-grade polysilicon and strong demand for solar materials, and we continue to ramp solar capacity and sign up new customers with long-term take-or-pay contracts. In September, Corning Pharmaceutical Technologies announced that it was awarded $104 million in additional funding from BARDA to support our planned capacity expansion for advanced, high-quality pharmaceutical glass tubing and vials. These expansions are designed to help the healthcare industry rapidly scale manufacturing to address current and future public health challenges. Now, I want to take a minute to talk about currency exchange rates. As you know, the dollar has been strengthening over the past year. As a reminder, we have actively hedged our foreign currency exposure over the past decade. This serves as an effective tool to reduce earnings volatility, protect our cash flow, enhance our ability to invest, and provide shareholder returns. Our largest exposure is the yen, and we have most of next year hedged. We expect our core rate to remain the same in 2023. We're very 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. Now let's turn to the outlook for the fourth quarter. We expect sales in the range of $3.45 billion to $3.65 billion. and EPS in the range of 41 to 47 cents. Now our fourth quarter guidance reflects several factors. In optical communications, pacing of customer projects will impact sales for the quarter. In specialty materials, we expect a sequential decline driven by lower demand in the smartphone, notebook, and tablet markets. And of course, the biggest element in our guidance is display. As I noted, we do not yet have enough positive evidence to guide significant improvement in glass demand from September levels. We expect free cash flow to be strong in the fourth quarter, and for the full year, we expect free cash flow in the range of 1.3 to 1.5 billion dollars. Now, I'd like to wrap up with a few key takeaways. As I noted at the opening of my remarks, we're executing well. And because of our inherent balance of our cohesive portfolio and our more corning approach, we're built to be resilient, even in a downturn, as evidenced by the performance of specialty materials and environmental technologies this quarter. Our long-term growth drivers all remain intact, and we're well positioned to continue capturing growth tied to key secular trends, such as optical communications and solar. In the meantime, we will continue to maintain our strong balance sheet and employ a highly disciplined approach to capital allocation. Given the external environment, we're taking actions to preserve profitability, tightly manage capital expenditures, and prioritize cash flow. With that, I'll turn it back over to Ann for Q&A.
spk04: Thanks, Ed. Crystal, we're ready for the first question.
spk03: Thank you. And as a reminder, to ask a question, please press star 1-1 on your touch-tone phone. Once again, that is star 1-1 to ask a question. Please stand by while we compile the Q&A roster. And our first question will come from Mehdi Hosini from Susquehanna. Your line is open.
spk13: Yes, thanks for taking my question. Two things I want to dig into. Is there minimum OPEX that you can offer us? I understand there are a lot of moving parts, especially with micro headwind. I'm just trying to better understand how flexible you are with managing expenses. And the same thing with CAPEX. There is no visibility as to when this play will show a rebound. So should we assume that the CapEx trend into next year will show a decline on a year-over-year basis?
spk05: Yeah. Hi, Mehdi. What I would say on OpEx, we're certainly taking actions to pause spending in this current environment. As I mentioned, our goal is going to be to protect profitability and to protect our cash flow. I don't think, you know, given the fact that we feel good about our long-term growth drivers, we're going to take significant actions, at least at this point in time. And with respect to capital, we're definitely pausing spending here as we go into the fourth quarter, and you should see the rate of our spending coming down a little bit. All right.
spk03: Thank you. Next question. Thank you. And one moment for our next question, please. Our next question comes from Steven Fox from Fox Advisors. Your line is open.
spk11: Hi, good morning. Two questions on optical, if I could. First of all, in terms of some of the project pauses or push outs you're seeing, what gives you confidence that it's not something worse and that you see more delays, especially as you get into the winter months and with some of the issues in Europe? And then secondly, can you give us a sense for how the ramping of the plants, the new plants for optical has helped, I assume it helped margins during the quarter and how that helps in the next year and what the offset is with the build out for Arizona. Thanks.
spk10: So Steve, first is to the macro and you follow it all pretty closely. Macro demand in opto is incredibly strong. And so, but as you know, what we do is we try to make sure that we're supporting those customers that are going to be big, long-term players. And the nature of telecommunications is that it's a pretty concentrated industry. So that all that tends to happen is when some of our bigger customers end up changing their timing, are altering their timing, that's what leads to the lumpiness of our revenue. So we're highly confident in the demand drivers here in Opto. And as you know, I tend to be pretty pessimistic on Opto. But it's just sort of overwhelming evidence that demand's very strong. Now, as to how long these timing moves can happen, I think you're right to say You know, what can happen during the winter, which tends to be a little bit slower time for us just seasonality-wise in opto, that's legitimate. You know, whether it lasts three months or a little longer than three months, that's hard to tell. What's easy to tell, though, is demand for opto is super strong. Thanks. And then on the new plant impact? Yeah.
spk05: And Steve, I was going to say, you know, I think the plants that we recently opened are ramping fine. I feel like we've added some capacity. We'll be able to use that as we go forward. But it takes a little while for all the cost drag to kind of go away. And, you know, we should see that sort of fully ramped and the financial impact in 2023. Yeah.
spk11: Great. That's all helpful. Thank you.
spk03: All right. Next question, please. Thank you. One moment for our next question. And our next question comes from Martin Yang from Oppenheimer. Your line is open.
spk09: Hi, good morning. Thank you for taking my question. First, can you maybe share with us one or two mostly closely monitored reliable leading indicator for display segment where you will be more comfortable calling a recovery after seeing changes in those indicators? Great question, Martin.
spk10: So our analytics are really good at being able to say, for instance, last year, we said there was going to be a correction in 2022. And then they're very good at doing things like calling a bottom because we can tell sort of where our panel makers are operating, what exactly is happening with their inventory, et cetera. They're not as good at following the exact timing of a turn. So for instance, our analytics would have said the panel maker industry should have started its correction in a much more robust way in quarter four of last year, but they didn't actually start until quarter two and then accelerated into quarter three. So though we're really comfortable with our analytics that we're at bottom, the calling on when that upswing comes now really gets into sort of what is the psychological behavior of buyers in this industry. And so the way we tend to try to do that, it's a little softer, but we do take a look at panel price inflection points. So much with the absolute level is, but when do they turn? And that is actually a buy signal for buyers, right? And it makes single signal for panel makers. How is the retail and set maker commentary as we have interviews with them constantly? How are they actually feeling about what it is they're seeing? Because that's going to drive their buy behavior. And then finally is just how tight things are becoming in the value chain overall. So as we look at all those things, what we'd say is, you know, we can't tell yet what exact month we see the sharp recovery, right? We'll need to see more of that accumulate, but we can say with pretty high confidence that September was a bottom, and now it's just a question of when do we pop up.
spk09: Got it. Thank you very much. I don't have any other questions.
spk04: Thanks, Martin. Next question.
spk03: Thank you. One moment for our next question, please. Our next question will come from Wamsi Mohan from Bank of America. Your line is open.
spk07: Yes, thank you. Wendell, to follow up on that prior question, would you say you guys have disclosed in the past levels of weeks of inventory in the display supply chain? I was wondering if you could characterize, maybe not in absolute, but at least in relative terms, where we are relative to past cycles in terms of weeks of inventory. And Ed, if I could, I appreciate the fact that you guys are largely hedged for 2023, but the yen's obviously moved to 149. Your core rate is 107. Maybe you can give investors a little bit of a longer-term view on the yen hedging strategy and maybe some calibration on potential impact beyond 2023, how investors should think about it. Thank you.
spk10: Thanks, Wansi. Value chain inventory, we would say right now, is at the healthy range and is starting to approach sort of a little bit tight for healthy. So that's like one of the analytics where we can say, okay, right, that the correction has done what it is it's supposed to do. So that's how we're feeling about that. about overall value chain inventory. Does that answer your question on that item?
spk07: Yeah, it does, Wendell. I was just wondering if, you know, there was any, like, I think you guys have mentioned in the past 10 to 15 weeks, depending on various times in various cycles, and are we at the lower end of that, at the higher end of that, and does that give you some increased confidence that we're at the bottom of sort of where you know, utilization rates could be.
spk10: So the pandemic sort of changed what is healthy and what's not healthy and all the challenges in the supply chain. But, you know, what we should do is we should probably update you if this is a question that you have, sort of how we view it overall. And Anne will follow up with you and give you the benefit of our thinking of how we analyze the industry.
spk07: Thanks, Manuel.
spk05: And while I'm on the yen or on currency in general, I'll make a couple comments. So I think you know we're obviously long the yen. We're short in other currencies. Most currencies are weak or weakening versus the dollar. So, you know, we are taking an opportunity during this time period in some of the currencies where we're short. And they're weakening against the dollar to put hedges in place farther out. Right? So we're trying to be opportunistic despite the fact that the yen is weak and that obviously impacts our overall core rates. As we think about them sort of as a basket of exposures. And then, you know, with respect to the yen, we continue to look for ways to protect ourselves beyond 2023. We do have some hedges in place beyond 2023. And the farther out you go, the spot rate or the forward rate, sorry, the forward rate is below where the current spot rate is. And, you know, that affords us some opportunity to do things farther out. So we'll keep investors updated. We understand, you know, how people are thinking about it. And, you know, we're going to be opportunistic and try to protect ourselves at this current core rate level.
spk04: Thanks, Ed. Next question.
spk03: Thank you. One moment for our next question, please. And our next question comes from Tim Long from Barclays. Your line is open.
spk02: Thank you. Yeah, two questions if I could on the optical segment. First, could you talk a little bit about, you know, you talk about the timing that happens a lot in this industry. Maybe just, you know, looking at the next few quarters, are you seeing that a little bit more in the telco side or the data center side? Maybe if you can just parse out how those two splits are looking in the pipeline. And then on the telco side, you know, we're increasingly hearing throughout the world about, you know, pressures on macro and energy costs and whatnot potentially affecting fiber builds, which have been obviously really strong over the last few years. Are you starting to hear more caution from the customer base looking out maybe a little bit on the telco side because of macro, or do you think there's enough, you know, government initiatives and, you know, just push for broadband to make that still a spending issue? priority for the telco vertical. Thank you.
spk10: Good. So I'd say that it is for our numbers, like our posts, because when you've got a macro environment that's really strong, and then all that's really happening is customer timing, So then it really ends up being us being able to answer from our order book what's going on. And in our order book, it would basically be some key telcos is just what's affecting our project timing more than anything else, right? And so those are long-term projects. And so they kick off one, they conclude one, they start another. And so those... can be lumpy. In terms of the macro, I don't know that we're the right ones to ask because there's so much demand and we're still short, especially in fiber and cable, that we'll tend to get more signals that they want more and more and they share how aggressive their plans are. So we're probably getting a lot more of that. than we are the sort of macro, are they cautious? The combination of major government programs around the world that don't really start to kick in for almost another year, right? As well as catching up to all the demand that happened during the pandemic and how much of their capacity, basic, their guardrail capacity got consumed by demand. as well as just 5G, cloud, all the broadband initiatives. All these things still are really sort of positive, bullish signal to us. That doesn't mean that you're not right, that, you know, they may be experiencing something in macro. We're just not hearing it. Does that make sense?
spk02: Yes, that does. Very, very helpful. Thank you, Wendell.
spk04: Okay, next question.
spk03: Thank you. One moment for our next question, please. Our next question comes from Josh Spector from UBS. Your line is open.
spk06: Yeah, hi. Thanks for taking my question. Just two quick ones if I can. So just curious on your level of confidence on the pricing comments and display. A little bit surprised talking about up pricing there still. into next year. Seems a little bit early at this point. So I'm curious if that depends on utilization rates increasing or if that's something you see playing out potentially regardless of that scenario. And then just a follow-up on the restructuring charges in the quarter. Can you just provide some comments on kind of what was restructured within the emerging growth business? Thanks.
spk10: So our confidence on price really has been driven by our performance throughout this correction and going into it where our prices have been up to stable throughout every single stage of it, including here in this last quarter. So you heard from Ed sort of the dynamics that have led to this, but we feel good about where we're at and we expect pricing to continue to be stable as we exit the correction as it has been up to stable throughout going into the correction and to the bottom of the correction.
spk05: And Josh, I'll make a comment on the restructuring charges. So what you saw this quarter was primarily related to sort of an early stage business moving more towards commercialization. Oftentimes, we have Gen 1 assets, and as we move into, like, a high-volume manufacturing state, we, you know, advance our technology, our cost goes down significantly, and we sort of obsolete those Gen 1 assets, and that's, you know, the primary driver of what happened in the third quarter.
spk06: Okay, thank you.
spk04: Okay, next question, please.
spk03: Thank you. One moment for our next question. Our next question will come from Shannon Cross from Credit Suisse. Your line is open.
spk14: Thank you very much for taking my question. I wanted to ask a bit about solar. Can you talk about what you're thinking maybe the contribution from the IRA and, you know, maybe backlog or, or how we should think about orders and then potential for additional capacity over time, because it seems to me like this could be a big opportunity for Hemlock, especially if you start bringing more capacity back to the US. Thank you.
spk05: Hi, Shannon. So first, I would say we feel great about our solar business. That was a great part of our ability to offset the lower volume of display in the third quarter. And, you know, our orders are strong and we continue to sign customers up and sell out the capacity we've brought online. And we see that as a secular growth trend going forward. I think as we've shared, we have more capacity that we can bring online and we're in the process of evaluating that and the exact timing of when all that will happen. and we're certainly taking a look through all of the legislation that recently passed and how that impacts us. I think you can view that as all positive for us, and we'll come back over time and talk a little bit about it more in detail.
spk10: Shannon, you're right to look at it and say, gosh, I think this is probably really good for Corning. We'll update you as we turn into the year on what we think that'll mean.
spk14: Thank you.
spk04: Great. Next question, please.
spk03: Thank you. One moment for our next question. And we'll take our next question from Matt Nicknam from Deutsche Bank. Your line is open.
spk12: Hey, guys. Thanks for taking the questions. Just two, if I could. First, more on the macro and demand backdrop. I know there was a question asked about optical, but more broadly across your end markets, are you seeing tighter financial conditions impacting your customers' propensity to invest heading into next year. And then secondly, on pricing, I know you've talked a little bit about pricing increases. It sounds like there's a little bit more that could be coming in optical. Just wondering if you've seen any sort of pushback or hesitancy to digest these increases in light of maybe some of the tighter financial conditions. Thanks.
spk10: So we're seeing the economic conditions really play out in our end markets. So as I shared in my opening, that whether it's in smartphones, notebooks, panel maker utilization, automotive, we're seeing those markets that are highly consumer electronics related or highly consumer related to be down significantly already. As of yet, that has definitely caused our customers of a pace. We haven't seen them come off their long-term ideas about what they have to invest in. Much like us, our customers take a long time to build productive capacity. and develop new technologies. So, so far, we haven't seen a reduction in their long-term appetite. Most people see that the economic concerns are already happening to them, so the real question is, when does it come out, as opposed to getting ready for it? So I'd say that's sort of the animal spirits we're experiencing so far. On price, Yes, we are saying that in Opto, we've experienced some more inflation and we will go be approaching our customers to more appropriately share that in this coming quarter. Throughout the year, we have done actually quite a good job of being able to share the inflation we experience with our customers. with price increases really across our business base. So, so far we've been able to do that successfully. And, you know, ask me the question again next quarter, and I'll tell you how this latest round went.
spk12: Excellent. Thanks, Mondo.
spk04: Super. Next question.
spk03: Thank you. One moment for our next question, please. And our next question will come from Samik Chatterjee from JP Morgan. Your line is open.
spk08: Hi. Thanks for taking my question. I guess I had a similar macro question for you, Vendul, which is, I mean, for a long time you've been outperforming most of the underlying markets you participate in, and the driver there has been more conning content in every end market. I'm just thinking as we sort of go into next year and the macro is tougher, have you seen in past down cycles any change in customer willingness to sort of continue to increase content, particularly in sort of a challenging macro, and any sort of pushback that you're seeing on pricing as well at this time, given that inflation is obviously something you need to pass through, but at the same time, the macro is starting to worsen a bit more than expected. So are you starting to see any hesitation from customers as well in those negotiations? Thank you.
spk10: Great question. Most of our more corny plays tend to reduce our customers' costs or improve their ability to deliver a vital customer function that they see. So in macro, I'd say no, that we're not seeing a reduction in their capability. Let me give you a good example. Cloud-based players. So our latest set of innovations basically involve us being able to deliver totally engineered connectivity systems so that we save 40% of materials for them. We can save months in installation time. We improve the quality of everything. So that in total, you give us a lot more price, a lot more revenue, but it saves you money and time. That is like a typical angle for us in Moore Corning, and we're continuing to see good adoption of those. That makes your question interesting is when you move into mobile consumer electronics is you're seeing some differing strategies. There's just some clear power winners that have happened there. who continue to invest really strongly in improving the product attributes that they offer to their customers. And some of our other mobile consumer electronics players, particularly in China, are sort of lost in that premium battle and are doing a little bit less of our key innovations. But in total, the winners are investing more with us. So, you know, in that role, I still think that fundamental more according strategy is playing out well, very strong heartbeat. So that is still playing out. But I do understand the question. It's an interesting question, Sameek.
spk04: Thanks, Sameek. Okay, we'll take the next question, please.
spk03: Thank you. One moment for our next question. And our next question will come from Mita Marshall from Morgan Stanley. Your line is open.
spk01: Great, thanks. Maybe first question on optical. I know it's been asked a couple of times, but just to kind of circle around it, that it's a couple of, you know, Americas-based companies. service providers or is it more global in just what we're seeing? I know you said it was mostly within the telcos, but just wanted to get a sense, is it largely concentrated within the U.S. or international? And then maybe second question for me, inventories have been a pretty big use of cash this year. Just wanted to get a sense of, you know, major drivers of that and if that's part of, you know, what you would expect to revert in Q4 to help with the achieve free cash flow generation targets. Thanks.
spk10: First question, North America-based, right, and relatively limited in terms of its – of the number of people that are involved. So telco North America based just timing, you know, and I think if you just talk to the industry more broadly, you'll see that, you know, by and large, the refrain from almost all of our customers is we can't get enough. And so that's still the backdrop. That's still the heartbeat. And it's just finding it in a few key customers.
spk05: Dan Mead on inventory, you're right. You can see it in our cash flow. We've definitely built a lot of inventory through September, and we definitely need to make that reverse. That's what we're thinking will start to happen in the fourth quarter and as we go into 2023. I mean, I think there are a few factors that drive it higher, and it's one of the reasons why we haven't been able to you know, sort of slow it down and reverse it sooner. First and foremost, just in general, the supply chain's been difficult and we want to make sure we can serve our customers. So we're carrying a little more inventory than we might otherwise have. And as we brought our sales forecast down for the back half of the year, you know, we need to sort of catch up and digest a little bit of the inventory that we have and that we've produced. And then lastly, just the cost of the inventory, right? So as inflation hits us, It manifests itself in inventory, and then we get that back as we raise price when we sell that through. So there's a little bit of a delay in that. Those are really the factors that drive it up. And, yes, our goal is to get it down starting here in the fourth quarter.
spk01: Great. Thanks. Appreciate it.
spk04: We've got time for one more question.
spk03: Thank you. One moment. And our last question will come from Mehdi Hosini from Susquehanna. Your line is open.
spk13: Just a quick follow-up. If I were to go back to late 2019, 2020, the last time that your display revenue were declining, you averaged 20% of income. And if I fast-forward to Q3, your revenues are about $70 million less than that period, but you're still able to get almost to 20% net margin. Is it just a reflection of the times that have come offline, or is it something else that helps with a relatively better margin given the lower revenue volume? Any insight would be great.
spk10: Awesome question. So first I'd say you're right, and that's one of the things that – why we feel good about our execution in display during this correction. So what you're seeing come through is all that tremendous improvement in productivity that our new technology brings. And the outstanding cost performance that we've been able to do with that, linked with a long period of time of prices being stable to up. And so that is what we've been trying to do in display. That has been our strategy in display as we build our strength through this time period, very stable pricing, a very stable market position, and then use our big technology lever to continue to drive our cost performance and drive up our profitability And it's one of the things we're excited about when we see the correction be over and the markets start to move up and glass demand to go up because the incrementals will be powerful and a beautiful thing to behold.
spk13: Thank you.
spk04: Thanks, Manny. Thanks, Wendell. Okay, thank you all for joining us this morning. Before we close, I wanted to let you know that we will attend the Credit Suisse 26th Annual Technology Conference on November 29th and the Barclays Global Technology, Media, and Telecommunications Conference on December 8th. Additionally, we'll be hosting management visits to investor offices in select cities. Finally, a replay of today's call will be available on our site starting later this morning. So once again, thank you all for joining us. Operator, that concludes our call. Please disconnect all lines.
spk03: Thank you. This concludes today's conference call. Thank you for your participation. You may now disconnect. Everyone have a wonderful day.
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