Corning Incorporated

welcome to the corning incorporated fourth quarter 2022 earnings call to place yourself into the q a q 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 crystal and good morning everybody welcome to corning's fourth quarter 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 are related to GAAP data. Our core performance measures are non-GAAP measures used by management to analyze the business. For the fourth quarter, the difference between GAAP and core EPS stemmed primarily from restructuring charges as well as non-cash mark-to-market adjustments associated with the company's currency hedging contracts and foreign debts. In total, these increased core earnings in the fourth quarter by $256 million. As a reminder, the 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, and we encourage you to follow along. They're also available on our website for downloading. And now I'll turn the call over to Wendell.

Thank you, Anne, and good morning, everyone. Today, we reported fourth quarter and full year 2022 financial results. Throughout the year, a series of pandemic driven effects continued to ripple across the global economy. Nevertheless, we executed well to grow sales and advance strategic initiatives while addressing the implications that the current environment poses for margins and cash generation. For the fourth quarter, sales of $3.6 billion and EPS of 47 cents were both at the high end of our guided range. And for the full year, building on our strong 2021, we grew sales by 5% to $14.8 billion, and EPS by 1% to $2.09. Gross margin was 36%. Free cash flow was $1.24 billion. I'm pleased with the sales growth we continue to deliver despite confronting what is essentially Recession level demand in markets that constitute about half of our sales, cars, televisions, smartphones, laptops, and tablets are all well below what we estimate as the normal range. Now we've offset this week consumer demand with the strength of our positions in the growing optical communications and solar markets. as well as ongoing outperformance by our businesses versus our end markets. That said, profitability and free cash flow are not where we need them to be. So I'd like to deviate from our usual format for these calls, in which I focus on our progress across our market access platforms. Today, I want to give you some insight and perspective on the external dynamics driving our financial results. And I'll discuss what we're doing to address those dynamics. Since 2020, the external environment has been characterized by the sweeping impact of the pandemic, including supply chain disruptions, depressed productivity, large swings in consumer spending, and inflation. When the pandemic hit, our core priorities were protecting our people and delivering for our customers. So throughout 2022, we operated with elevated staffing and higher than normal inventory levels. In addition, persistent and sometimes quite unpredictable inflation added to the cost of raw materials we purchased, the cost to produce and ship our products, and the inventory we maintained. As a result, our growth in profitability and cash flow have lagged our sales growth. While we took action to improve profitability and cash generation throughout 2022, and made good progress during the first half of the year, it became clear that more was needed. So we took additional and significant actions in the fourth quarter, including raising prices again in optical communications and life sciences to more appropriately share the inflationary cost with our customers. Adjusting our productivity ratios to get closer to historical metrics without impacting our ability to supply and capture future growth. And normalizing inventory. Because our productivity and supply chains have improved, in the near term, we expect to maintain reliable supply for our customers at current inventory levels or below. all of these actions will improve our margins and cash flow throughout 2023. Now, as you may have already inferred from our press release this morning, we expect both first quarter sales and profitability to be anomalous from an historical perspective. Typically, Our first quarter sales declined about 5% sequentially, and margins declined about 1 to 2 points. This year, we expect first quarter sales to decline by more than normal seasonality. In contrast, we expect our margins to increase sequentially due to the benefits of our recent actions. What's driving our below seasonal outlook for the first quarter sales is the situation unfolding in China, where consumer sentiment was already low. In December, China shifted its approach to the pandemic and a significant wave of COVID outbreaks ensued. This resulted in lower consumer spending and workforce shortages. which have in turn impacted the demand for our products as well, particularly in display, environmental, and specialty materials. We expect China to overcome these issues and demand to improve, but it's too early to call the specific timing of improvements in consumer sentiment and demand. We'll keep you posted as we learn more. In the interim, we continue to be well-positioned to capture growth and drive innovation. And as our sales grow, we expect to benefit from operating leverage and our profitability to improve further. Given that it's too early to call the rebound in China, it's difficult to be definitive on our full year results. Here's what I can say. First, our quarter one sales are not an indication of our 2023 run rate. Second, I'd be disappointed if sales didn't grow sequentially in the second quarter and we didn't see year-over-year growth in the second half. Finally, the benefits of our fourth quarter profit and cash flow actions will be significant throughout 2023. As we see consumer demand return and our revenues increase, we expect to see our profitability increase. Now, having shared our near-term perspective, I want to underscore how great we feel about our focused portfolio and long-term prospects. As we evaluate our trajectory, given the uncertainties, and there are a lot of them, one thing that is certain is the relevance of our leadership capabilities to secular trends. Across each of our markets, We are capturing a compelling set of long-term growth opportunities with more to come. In optical communications, we're building on a record $5 billion 2022. And we believe we are still in the early phases of a multi-year build cycle driven by broadband, 5G densification, and cloud computing. Cable and fiber demand remains especially robust. If we could make more, we could sell more. In solar, we continue to capture significant upside tied to growth in the renewable energy industry. And we see excellent growth potential as we contribute to a sustainable US-based solar supply chain and benefit from the inflation reduction end. In display, we maintain stable price and a very strong market position throughout the ongoing industry correction. We expect to emerge from the correction with strengthened customer relationships, a refreshed manufacturing fleet, and increasing sales and profit. In mobile consumer electronics, we anticipate ongoing strong adoption of our innovations, and we expect to continue outperforming the markets we serve through our product leadership, our more corning approach, and our ongoing collaboration with industry leaders. Moving to automotive. We've been outperforming the market throughout a period of industry constraint. We remain focused on building our $100 per car content opportunity and we're pleased by our progress as evidenced by our strong growth in automotive glass solutions in 2022. And we'll be ready to capture even more growth as adoption of our technology continues and car sales return. Finally, in life sciences, we're focused on delivering differentiated tools to support the discovery and delivery of cell-based medicines and modern drugs. Our operations are improving as the industry completes its correction from the unprecedented demand shifts caused by COVID. So now I've gone through the macro uncertainty that characterizes the near-term And I've told you what we're doing to deal with those uncertainties. I've also outlined the rich set of growth opportunities we're capturing over the long term. And I believe our progress so far is a testament to what we can achieve going forward. Let's take a look back at the 2020 to 2023 strategy and growth framework that we introduced in 2019. shortly before the onset of the pandemic. Our goals included sales growth at a compound annual growth rate of 6% to 8%. From 2019 through 2022, we grew at greater than 8% CAGR, even in the face of the ongoing and universally experienced external challenges. Over the past four years, we've advanced significant strategic initiatives. We delivered key fiber-to-the-home and data center solutions to meet surging demand and facilitate a period of strong growth in optical communications. We delivered on our gasoline particulate filter content opportunity in automotive, and we introduced Ceramic Shield with Apple. both of which have driven strong outperformance versus depressed end markets. We ran our Gen 10.5 plans to extend our leadership in the glass for large televisions. And we made major progress on our emerging innovations. We gained significant traction in our automotive glass solutions business, and our pharmaceutical packaging portfolio leaped forward to play a central role in the global health fight over the past three years. Our vials and tubing have supported the delivery now of more than 8 billion COVID-19 doses in more than 50 countries. In sum, We've delivered multi-year sales growth in a challenging environment. We've extended our leadership positions across our markets, and we have paved the way for future growth. I think these are outstanding achievements. Now, as I wrap up my remarks, here's what I'd like to leave you with today. Since the start of the pandemic, We've protected our people and, as evidence in our sales growth, delivered for our customers. We've now completed significant additional actions to improve our profitability and cash generation. The unfolding situation in China certainly impacts our sales in the short term. But despite this, we expect to see the benefits of these recent pricing, Productivity actions take hold in the first quarter. Overall, we will continue to focus on operating each of our businesses well and adjusting to meet the needs of the moment while simultaneously advancing growth initiatives and capabilities that will drive success as the global economy stabilizes. Our focused and cohesive portfolio provides strategic resilience that is evident in our results, even in the current environment. And we remain confident in our ability to deliver durable multi-year growth with improved margins and cash generation. Now, I'll turn the call over to Ed so he can get into the details of our financial priorities alone. with our results and outlook.

Thank you, Wendell. Good morning, everyone. Building on last year's strong performance, we grew full-year sales 5% to $14.8 billion and EPS 1% to $2.09. We outperformed our consumer-facing end markets. We continued to capture growth in solar, and we delivered record sales of $5 billion in optical communications. In total, we had a solid year, and our results reflect our resilience in the face of ongoing external challenges. As you heard from Wendell, our profitability and cash flow have lagged our strong sales growth. To address this, we took further actions, including Raising prices again in optical communications and life sciences to more appropriately share the inflationary costs with our customers. Adjusting our productivity ratios closer to historical metrics without impacting our ability to supply and capture future growth. And reducing inventory by $115 million in the fourth quarter. We will start to see the benefits of these actions in the first quarter. despite suppressed sales from the disruption and low consumer sentiment in China that Wendell described. With that, I will turn to our fourth quarter performance. Sales in the fourth quarter were $3.6 billion and EPS was 47 cents, both coming in at the high end of our guidance. Fourth quarter gross margin was 34%, down 250 basis points sequentially, and operating margin was 14%, down 290 basis points sequentially, both including the impact of reducing inventory. EPS was favorably impacted by 3 cents due to a tax adjustment. Through the third quarter, our estimated tax rate was 20.5%. Our actual 2022 tax rate was 19.3%. The required adjustment resulted in an unusually low 15% core tax rate in the fourth quarter. Now, let's take a closer look at our segment results for the fourth quarter and full year, beginning with optical communications. Fourth quarter sales were $1.2 billion, down $122 million sequentially. reflecting the slower pacing of customer projects that we discussed on our last call. Net income was $130 million, down $53 million sequentially on lower volume and the impact of reducing inventory. The strength of the first three quarters of 2022 drove annual sales to an all-time high of $5 billion, reflecting a 15% increase while net income grew 20% year-over-year to $661 million. Moving to display. On our last call, we said we believed panel maker utilization had reached bottom in September, but it was too early to call the timing or the shape of the recovery. We were then very encouraged to see panel maker utilization levels climb in October and then again in November, indicating a recovery had begun. However, in December, China reopened and a significant wave of COVID outbreaks ensued. Panelmaker utilization leveled off in December and has since decreased in January. We believe that panelmaker utilization will resume its recovery. In January, panel makers are operating below the current reduced rate of demand. I'll cover more on our display outlook in a moment. Display sales in the fourth quarter grew 14% sequentially to $783 million. Net income was $171 million, up 28% sequentially on strong execution and the additional volume. Fourth quarter glass price was consistent with the third quarter, as expected for the full year sales were 3.3 billion and net income was 769 million dollars both down year over year reflecting the impact of the industry correction in the second half glass price for the full year was consistent with 2021. We anticipate glass price in the first quarter of 23 to be consistent with the fourth quarter, and we expect the favorable glass pricing environment we experienced over the last few years to continue, driven by two factors. First, glass makers continue to align supply to demand. Corning and other glass makers have been taking additional tanks offline for maintenance and repairs after an extended period of glass tightness. As we've told you before, we are taking this opportunity to upgrade our fleet with the latest technology. And we are actively managing the timing of tank restarts to align our supply to demand. Another factor is glassmakers' profitability. It is challenging for glassmakers who have high fixed costs to maintain profitability during this period of low volume and high inflation. We have maintained stable price and market position through this industry correction and, as demonstrated in the fourth quarter, when the market recovers, incrementals from our increased volume will be meaningful. In specialty materials, fourth quarter sales of $505 million were down 3%, but We outperformed our markets driven by customer product launches and continued strong demand for premium glasses and advanced optics products. Full year sales were $2 billion, flat year over year. Gorilla Glass sales were down 5%, outperforming the smartphone market, which was down 11%, and IT market, which was down 15%. Advanced optics grew sales 12% driven by the strength of our next generation semiconductor equipment materials. Full year net income was $340 million, down 8% year over year, due to continued investment in next generation materials for consumer electronics and semiconductor equipment, as well as new markets, such as bendable devices and augmented reality. In environmental technologies, fourth quarter sales were 394 million, up 12% year over year, and net income was 69 million, up 28% year over year. Sequentially, fourth quarter sales were down 7%, impacted by a decline in China OEM production levels in December, driven by similar COVID dynamics I mentioned in display. Full year sales of $1.6 billion were flat versus 2021 as light and heavy duty markets in China remain weak and global auto market growth was restricted. Net income for the full year increased 9% to $292 million as we improved our productivity and raised prices. Turning to life sciences, fourth quarter sales were $294 million, down sequentially and year over year. impacted by lower demand for COVID-related products. Fourth quarter net income was down, driven by lower sales and the impact of reducing inventory. Full-year sales of $1.2 billion were consistent with a strong 2021, while net income was $153 million, down 21%, as the unexpected shift in demand away from COVID-related products led to a significantly lower productivity in our manufacturing operations. And finally, in Hemlock and emerging growth businesses, sales in the fourth quarter were $462 million, up 22% year-over-year and 14% sequentially. And full-year sales were $1.7 billion, up 34% year-over-year, reflecting strong demand for polysilicon as we continue to see robust demand for both semiconductor and solar-grade polysilicon. We also saw strong growth in automotive glass solutions and pharmaceutical technologies. To close out my segment recap, we're pleased that our more corning approach and secular trends in optical and solar enabled us to grow sales and outperform our markets. Turning to our outlook. We maintain an attractive long-term trajectory and are well positioned to capture growth. Looking at the near term, typically in the first quarter, our sales decline about 5% sequentially and margins decline about 1 to 2 points. This quarter, we expect a sequential sales decline of 6 to 11%. In contrast, With the recent price and productivity actions we've taken, we expect about a one to two point margin improvement in the first quarter. In total for the quarter, we anticipate core sales in the range of $3.2 billion to $3.4 billion and EPS in the range of 35 to 42 cents. Our first quarter sales outlook reflects the current dynamics in China since COVID restrictions were lifted in December. The situation has impacted consumer sentiment and labor availability, which is playing out across some of the industries we serve. For example, in display, as I mentioned, we saw panel maker utilization decline in January back to October levels. With that, we now believe the display industry recovery has been delayed by at least a quarter. And in environmental, we expect the lower OEM production levels we saw in December to remain in the first quarter. We will have a better feel for the situation in China after the Lunar New Year, and we'll share more with you as we go through the quarter. As a reminder, the first quarter is usually our lowest volume quarter of the year, so we expect sales to grow sequentially in the second quarter. And I'll also note that we expect 2023 full year capital expenditures to be consistent with 2022. Before I close, I want to cover two other topics. First, I want to take a minute to address currency exchange rates. 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 protect shareholder returns. Our largest exposure is the Japanese yen. As we've previously shared with investors, we have most of 2023 hedged. We now also have most of 2024 hedged. We expect to keep our core rate at 107 at least through the end of 2024. 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. Second, as CFO, in addition to investing for organic growth, my top priorities include maintaining a strong and efficient balance sheet and returning excess cash to shareholders. Examples include creating one of the longest debt tenors in the S&P 500. Our current average debt maturity is 25 years with only $1 billion in debt coming due in the next five years and no significant debt coming due in any given year. And our interest rate exposure is very low because essentially all our debt instruments are fixed rate. Additionally, Over the last four years, we have consistently returned excess cash to shareholders, even throughout the pandemic. And one of the ways we do that is through dividends. We have grown our dividend 35% since 2019, and we have increased our dividend for 12 consecutive years. Our dividend yield is top quartile in the S&P 500 at 3%. As we enter 2023, we will recommend that our Board approve an increase in the quarterly dividend, raising the annual rate from $1.08 to $1.12 per share. Stepping back, our long-term growth drivers all remain intact. As markets recover, sales growth will resume. and we're well positioned to continue capturing growth tied to key secular trends such as optical and solar. In the face of ongoing macroeconomic challenges, we grew our sales 5% in 2022 and delivered a CAGR of greater than 8% since 2019. We have adapted to meet near-term needs, taking actions throughout this period. And while our profitability and cash flow have been impacted, we expect to see the benefits of additional actions we took in Q4 in our Q1 results and throughout the year. With that, I'll turn it back over to Ann for Q&A.

Thank you, Ed. Crystal, we're ready for our first question.

Thank you. At this time, we will conduct the question and answer session. As a reminder, to ask a question, you will need to press star 11 on your telephone. You will then hear an automated message advising you that your hand is raised. To withdraw your question, please press star 11 again. Please stand by while we compile the Q&A roster. And our first question will come from Wamsi Mohan from Bank of America. Your line is open.

Yes, thank you. Good morning. I have one for Ed, one for Wendell. Ed, you said your core rate will be 107 through 2024, but I would imagine your transactions are increasingly happening away from this core rate. How should we think about the impact of the yen as we think about 2023 and 2024 if the hedge rate is significantly away from the core rate? For Wendell, can you talk about Corning's role in both bendable and augmented reality since Ed mentioned it in the script? I'm kind of curious, you know, the technology that you're bringing and any thoughts on commercial availability for these products, particularly by flagship customers? Thank you.

Hi, Wamsi. This is Ed. I'll take your yen question first. Just for clarity, our hedges are actually close to our core rate in 23 and 2024, and we have most of our exposure hedged, and that's why we expect to keep our core rate at 107. With the recent strengthening in the yen in December and January, we were able to put more hedges in place for 2024. Is that costs?

Sorry, Ed, if I could just follow up on that. Is the cost of hedge significantly different in 23 and 24? No, not significantly different. Okay, thank you.

Thanks for the question on bendable and augmented reality. For bendable, we have two significant opportunities one of which is we're relatively mature in which is we make the mother glass upon which the displays are manufactured to be able to do a bendable display actually to make one of those displays consumes more glass than sort of a typical lcd does Second, where the bulk of our innovation investment, new innovation investment has been, is in the cover material for bendables. This effort has led to many of the bendable devices that you see today. It still is not a product that we believe is meeting the true needs of the customer. So we have a whole series of new innovations that we're doing to try to take that technology and make it be able to be mainstream rather than just a novelty. This effort is going to continue for the next number of years and you can expect to see us introduce new products in that space. In augmented reality, uh, two major efforts. Uh, one, uh, tends to once again, be cover related. And I don't want to talk about that in too much detail. And then two is we make the material and sometimes the waveguides that create that digital light field in front of your eyes. And so we have significant efforts in both these areas, augmented reality, embryonic industry, but quite exciting for the long term.

Next question.

Thank you. One moment for our next question, please. And our next question will come from Martin Yang from Oppenheimer. Your line is open.

Good morning. Thank you for taking my question. My first question is about the guidance. Can you talk about the sequential growth in EPS. I think it implies from the guidance adjusting for the tax benefit EPS decline more sequentially comparing to core revenue. Is there anything else we should be looking for from OPEX knowing that the gross margin is likely to improve sequentially?

Martin, I'll take that one. No, I think actually our margins, both gross and operating margins, should improve sequentially in the guidance we've given you. Obviously, we've given a range for both sales and earnings per share. And you're right, if you adjust for the tax rate, it's actually a reasonable level of incrementals on the lower sales. Remember, sales are going down 6% to 11% sequentially.

So, Martin, yes, I think you're doing your math correctly. You're seeing a pretty significant increase for us in our profitability at both the gross and operating margin lines and somewhat muted by the delta in tax rate from quarter four to quarter one. I think you've got it.

Got it. Thank you. And then the question on automotive glass, you highlight it as one of growth areas. Can you maybe talk about is it more in the infotainment side or are you seeing adoptions for windshield and or the external glasses?

The bulk of our current revenues are in the interior set of products. The growth rate is highest in our exterior. You've seen all the trends on the interior with these very large curved displays being introduced in more and more products, and when that happens, that is by and large us with our patented cold form technology. But as well, especially with electric vehicles, because they are so quiet, you experience them as noisy, or at least the outside world is more noisy. And so as a result of that and the amount of energy it takes to maintain the HVAC system within an electric vehicle, we're seeing the adoption of laminated technologies beyond the windshield, inside lights, roofs, backlights, And quite often, that is leading to adoption of one of our new technologies, which we pair with Gorilla to create a unique laminate structure that is both performance, weight, and cost-advantaged. And we're seeing very nice take-up of that as well.

Got it. Thank you very much.

Next question. Thank you. One moment for our next question, please. And our next question will come from Sumik Chatterjee from JP Morgan. Your line is open.

Hi. Thanks for taking my question. I actually had a question or a two-part question on display. I know you outlined your thoughts around display and the lower panel maker utilization you're seeing in one queue. Could you give us a bit more color on sort of what Are the range of sort of volume changes you're expecting sequentially into 1Q? What sort of typical seasonality there in terms of volume? How much of a difference or variance to the normal seasonality are you expecting in display in 1Q? And so the second part to that, I know you outlined China consumer spending as a sort of watch point here, but any thoughts on TV sales or TV unit sales for the year, even if it's markets outside of China at this point? Thank you.

Let me make sure I understand your first question. I understand your second one. So you're asking how we expect to see beyond quarter one in panel maker utilization or within the quarter?

Within the quarter panel maker utilization and volumes relative to normal seasonality in one queue.

Ah, okay. So I think... To answer the Q1 one, I'm actually gonna start a little bit, I'm gonna go back in time, talk a little bit about Q4. You will remember on our last quarterly conference call, what we talked about was that we called that panel maker utilization was at bottom in September. But it was too early to tell the sort of timing and shape of the recovery. As we entered into quarter four, we saw a significant increase in panel maker utilization in October, and then another significant increase in panel maker utilization in November. And we, our models were telling us that that information along with panel price increases and what we were seeing in order behavior in the industry, meant that the recovery was underway and that recovery would continue to arc upwards after adjusting for seasonality through Q1 and throughout this year. In December, when China changed its approach to the pandemic, We saw panel maker utilization, rather than continue its next step up, sort of level off. And then as we look at January, it looks to us, like as they reduced it back really about to the levels we saw in October, that the recovery is sort of delayed a quarter, is the way we would tend to think about it, adjusting for seasonality. And then that ties to your retail piece. So we would expect camera maker utilization to grow through the year because as Ed shared with you, this UT now, the production rate is below the even relatively depressed level of set demand that we see in the end market. Which takes us to the next part of your question, which is we would expect to see the retail market recover as the year goes on. And it doesn't have to be much. You know, even relatively flattish set demand year over year, given the state of panel maker utilization, will still result in pretty significant growth for us at the glass level.

Thank you. One moment for our next question, please. And our next question will come from Shannon Cross from Credit Suisse. Your line is open.

Thank you very much. I wanted to talk about Hemlock, which was an outperformer this quarter. Wendell, can you talk a bit about the long-term opportunity that you see for polysilicon and sort of the trajectory, especially with the IRA, and then Ed, maybe could you talk about the margin potential for this segment? Because I would assume there's a fair amount of scale leverage that's there as you're able to utilize some of the excess manufacturing capacity that you have. Thanks.

So our goal, Shannon, we'd like to build about a billion dollar solar business for us here at the company. And it could take a variety of different product forms. It's too early right now for us to make any specific announcements, but, you know, given the IRA, we see many opportunities to both grow and enhance the profitability of this business.

Yeah, Shannon, I would add two things. One, you know, sort of Hemlock's overall gross margin is similar to our corporate average in the same zone, sort of in normal circumstances. Half the business or more is semiconductor and you've got solar, so you've got those both product sets in there. That's all within our Hemlock and emerging growth segment. And then the second thing I would add is that we have added solar capacity which was, as we described, a very inexpensive capacity because it was previously mothballed. We were able to turn it back on. As we think about the next phases of growth, there may be some cost to do that, and there may be just some impacts to gross margin as we go along that journey. But in the current state it's in, think of it as around the average for corning.

Next question. Thank you. And our next question will come from Stephen Fox from Fox Advisors. Your line is open.

Hi, good morning. I was just wondering if you can maybe explain the productivity ratio improvements or the adjustments that you talked about in terms of what kind of costs were involved and what exactly you were doing there from both a near-term standpoint and what it implies for your ability to maybe control your own destiny on the cost side should end markets remain tough this year. Thank you.

Yeah, thanks, Steve. You know, maybe the way to think about it is, you know, as we talk about what our priorities were, you know, through the pandemic, one of them was serving our customers, and we disproportionately erred on the side of being able to do that, right? You know, in the beginning, when inflation was coming in, we made sure that we got our customers what they needed over time, we were able to raise price and offset that. And similarly, in the production space, we did whatever we needed to do to ensure that we had the products available to ship to our customers. And in a very difficult supply chain environment, in a very difficult pandemic environment where, you know, being able to staff your factories, have all the materials you need and be able to make the products you need was very difficult over this sort of long sweep of time, starting in 21 and running through the end of 2022. So we've been able to improve the way we operate, improve our yields, improve our staffing levels. And in some cases take some, you know, adjustments and realign our capacity to allow us to get back to what we would consider to be our benchmark or our historical productivity metrics. So making sure we have the right output at the right cost at every level, you know, in all of our factories, that's our objective. We're not completely there yet, but we've taken a lot more action in the fourth quarter. and we've made a significant amount of progress, that will improve our cost and therefore improve our gross margin.

Thanks. And just longer term implications for all that?

Well, I think longer term, it almost, if you think about it, it gets us back to being able to operate like we did pre-pandemic, right? Pre all of the supply chain disruption You know, we are humble, at least I will be humble here, that we have been surprised by a lot of things, including this recent change in the way China has operated during the pandemic, which clearly impacts us and our customers and our suppliers. But putting that aside, I feel like we now are able to run more like we did pre-pandemic levels, which then allows us to grow as our demand comes back and our margins should get back closer to our historical levels.

Great. That's really helpful. Thank you.

Yep.

Next question. Thank you. Our next question will come from Josh Spector from UBS. Your line is open.

Yeah, thanks for taking my question. I was just curious in specialty, is there a way to think about the pace of new content wins over this next year? So you shared, you know, you grew almost 10 percentage points greater than the market in 22. How would that metric look in 23 based on what you know now? Thanks.

We have a number of significant new content, new value-added products that will begin to be introduced for upcoming model launches. So we would expect to have sort of a more corning dynamic happen again. the actual degree of overperformance will really depend upon the success and pace of adoption of those new innovations. So I'd like to see both how our product does and sort of our customers' unique products using this technology does before I would characterize a specific numeric level of outperformance.

Okay, thanks. And if I could just follow up on the cost side of things. So you talked about your productivity. Is there anything we should be considering energy or otherwise flowing through differently for you guys, given your hedging strategies over the past couple of years?

Yeah, Josh, I think with respect to inflation, you know, as we've shared sort of throughout the year, we continue to be surprised primarily to the negative on all the things that we, you know, consider sort of input costs to run our business. Things have normalized a little bit as we come to the back half. And I think our price increases are allowing us to get to, you know, close to sort of neutrality as we go into 2023. you know, energy is certainly a cost that remains elevated relative to pre-pandemic levels, as do many other costs, by the way. I mean, I think even though the rate of inflation has slowed and in some cases retracted, we're not back to pre-pandemic levels of costs, you know, for inputs. So I think energy is certainly one to watch, but nothing specific that I'd call out as we go into 2023.

I think, Josh, that where we're We've been able to, with the actions we took in the fourth quarter, which were pretty significant, we've been able to catch up to the inflation that we have experienced, like looking in the rear view mirror. And that's one of the reasons that we're able to have the step up in our profitability in quarter one or sequentially from quarter four. I think where we still have work to do is really in the area of what you're asking about, which is how accurately we see what's coming at us from an inflation standpoint and sort of getting ahead of the game. We're still working through that. We've got a great team on supply chain who's trying to help us do it. But I think we need to improve there some more, Josh.

Thank you. Our next question will come from Tim Long from Barclays. Your line is open.

Thank you. Yeah, I'd like to ask kind of a two-parter on the optical comms business. First, kind of on the revenue side, it felt like last quarter or through the quarter, it was mostly like one large carrier that was part of the weakness. Now it seems like it's a little more – distributed and it looked like enterprise was kind of weak in the quarter and a lot of folks are worried about, you know, cloud spending into next year. So can you just talk a little bit about kind of the, you know, maybe enterprise telco mix there or how you see the dynamics differently in those two markets? And then secondly, you know, obviously profitability was weak in the quarter. Could you talk about that? Is that just component costs or is there something else going on? It's a pretty big... dip in profitability there. Thank you.

So I think that perhaps it was other industry players who would have just said this was one player, but I've always said it is in the carrier space. We had a number of carriers who were pacing their projects and also relative to what they've been doing to manage their supply chains one way or the other. Yes, you know, clouds had a ton of activity as well, but by and large, we still think this is a carrier story and we expect to work through that as we go through quarter one and then get the benefits of elevated demand levels as we go through the rest of the year.

Yeah, and I'll take the cost one or the margin one, profitability one. I think opto is a good example of sort of all of the things we've talked about. Inflation impacting the segment significantly. Productivity levels impacting the segment significantly. Those things are depressing margins in optical. And the fourth quarter volumes also came down. And we also took inventory down. in the fourth quarter in optical, and all of those things impacted our margins. So it's sort of a good example of all the things we've talked about. However, on the positive side, the actions we've talked about significantly impact optical as well. So as we go into 2023, that's a place where we would expect to see profitability improvement.

Okay, thank you.

Next question.

Thank you. Our next question will come from Matt Nicknam from Deutsche Bank. Your line is open.

Hey, thanks for taking the question. Just if I could, one maybe bigger picture is we think about maybe a slower start to the year. EPS, I think, is implied to be about 38 cents at the midpoint in one queue. Is there any framework to use when thinking about the trajectory for EPS in two queue onwards? And really what I'm getting at is any visibility you have towards when you get back to maybe a $2 a share sort of annualized EPS run rate. And then maybe just to follow on to the last question on optical, have you seen any inflections or resumption of activity in 1Q? And then maybe when you would anticipate a more meaningful bounce back this year? Thanks.

So to the first question, what we've tried to do with our profitability actions is that to have that sort of run rate in EPS that you're talking about, that sort of $2 run rate, to be when we hit revenues that are like quarter four. That sort of three, six, three, seven level, that's when with our actions on productivity and pricing, that if they are effective, which we believe they are, then At that revenue level, that's when you should expect that type of EPS level. That's the way we're thinking about it, and that's the way we're modeling it. Does that answer your question, sir?

That does. That does. And then just on optical, have you seen any sort of resumption or bounce back yet in 1Q?

You know, quarter one is like no time to call optical. Right? So it's, you know, let me get another month or two into it, and we should be able to tell you how this all looks. We're, you know, we're very close with our customers. We're watching what they're doing. We're talking to them a lot on their project timing. And we just finished executing perhaps the most significant price increase, not perhaps, the most significant price increase in my 30-plus years of being associated with optical communications, and we did it successfully, which gives you an idea of the extent of planned demand in this business.

That's great. Thanks, Wendell.

Next question.

Thank you. Our next question will come from Asiya Merchant from Citi. Your line is open.

Great. Thank you for squeezing me in here. Just on free cash flow, Ed, I know a lot of questions have been asked on revenue, sales, and how you guys think about margin improvements. Can you shed some light on cash flow and your adjusted free cash flow post the levels in 22? Thank you.

Yeah, sure, Asya. So, I mean, I think on capital, I shared our view that we expect to hold CapEx similar in 2023 as we did to 2022. And, you know, that was sort of similar to the prior year as well. And I think what you saw in 2022 that really impacted our operating cash flow the most was the inventory build. We built about $500 million of inventory in the year. So, obviously, that negatively impacts our operating cash flow. Our goal is to make inventory go the other way. We made a small step in the fourth quarter here. And even not building inventory, just holding inventory flat, helps our cash flow going forward. So our goal is to make our operating cash flow go up, keep our capex flattish, and so that should make free cash flow go up. But we've got work to do to be able to do that, and it's primarily in the inventory space.

Okay, and are you expecting like a lot of resumption and share buyback here? I know you talked about dividends, an increase in dividends. How should we think about share repurchase in 23?

Yeah, I'm not going to guide that specifically, but what I would say is, you know, our priorities are investing for organic growth, and we will continue to do that. We believe there's a lot of opportunity out there. That's sort of the highest priority for our operating cash flow. And then we want to return cash to shareholders. We shared what we plan to do on the dividend. And then of course, buybacks are important to us. You know, as a reminder, we did a very large buyback in 2020, I'm sorry, in 2021. With Samsung's conversion of their preferred shares, we bought back about 4% of our outstanding shares, and we're still paying for that. We've got one more tranche to pay for that in April of 2023, and then we'll have that behind us. That should give us more flexibility, and buybacks, of course, will remain important.

Thanks, Ed. Thank you. Operator, I think we're out of time, so I'm just going to shut us down for today, and I want to thank everybody for joining us. Before we close, I want to let you know that we're going to attend the Susquehanna Financial Group 12th Annual Tech Conference on March 2nd, and on March 7th, we'll be attending the Morgan Stanley Technology Media and Telecom Conference. Additionally, we'll be hosting some management visits to investor offices in select cities. And finally, a web play of today's call will be available on our site starting later this morning. So once again, thanks for joining us, Operator, that concludes our call. You can disconnect all lines.

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