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spk03: Welcome to the Corning Incorporated Quarter 2, 2023 Earnings Call. To place yourself into the Q&A queue, please push star 1-1. It is my pleasure to introduce to you Ann Nicholson, Vice President of Investor Relations.
spk05: Thank you and good morning, everybody. Welcome to Corning's Second Quarter 2023 Earnings Call. With me today are Wendell Weeks, Chairman and Chief Executive Officer of 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 second quarter, the difference between GAAP and core EPS stemmed primarily from restructuring charges and from non-cash mark-to-market adjustments associated with the company's currency hedging contracts and Japanese yen-denominated debt. In total, these decreased core earnings in the second quarter by $19 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 on our webcast. We encourage you to follow along. They're also available on our website for downloading. And now I'll turn the call over to Wendell. Thank you, Anne.
spk14: Good morning, everyone. Today we reported second quarter results to demonstrate strong progress on the priorities we've outlined to improve profitability and cash flow in the current weak end market environment. Sales were $3.5 billion. EPS was 45 cents. Gross margin and operating margin increased sequentially to 36.2% and 17.5% respectively. And free cash flow improved to $310 million. Now Ed will give you the details on each of these in just a few minutes. Our results reflect solid execution on our plan to deliver financial and operational improvements in response to the significant aftereffects of the pandemic still rippling across the global economy. Now, we've been discussing this plan with you for several quarters, so let me just briefly recap the primary factors we've been addressing. For one, supply chain disruptions caused higher logistics, freight, and input costs. Additionally, inflation led to interest rate hikes, then a spike in the U.S. dollar. And consumers shifted spending from goods to services as the pandemic abated. Against this backdrop, demand moved below historic trends in end markets that constitute the vast majority of our sales. Further, as supply chains started to normalize again over the last year, our customers began to draw down inventory to facilitate their transition from just in case back to their typical just in time approach. Consequently, we're seeing a synchronization of lower sales across our portfolio that is highly unusual. Now, this is because while our three core technologies and four manufacturing platforms do apply to all of our markets, the demand drivers in the different markets we serve are fundamentally uncorrelated. TV sales don't move with automotive production. The life sciences market isn't correlated. with fiber optic deployments and so on. Over the past several quarters, I've noted how all the factors I just outlined have taken a toll on profits and cash. And that's why we introduced a comprehensive plan to improve both profitability and cash flow at our current sales run rate, while also innovating to generate additional near and longer-term revenue streams. I would like to now walk you through the elements of our plan and the strong results we're delivering. We're taking pricing actions. Most recently in display, we expect these actions will contribute to overall profitability improvement in the third quarter. We've reduced our staffing levels to align with demand and we are returning our productivity ratios to historic levels. And we're bringing inventory down across the company because we no longer require buffer inventory as supply chains are improving. These sets of actions are delivering the intended results In the first quarter, we improved gross margin by 160 basis points. And in the second quarter, we improved by another 100 basis points. Collectively, we've improved gross margin by 260 basis points to 36.2% versus where we ended 2022. As I said earlier, we also improved our free cash flow. to $310 million in the quarter. As we move into the second half, we're not counting on a strong recovery in our end markets or a significant increase in our sales, but we do expect our profitability and cash generation to continue going up. Importantly, our actions will further improve profitability and cash generation when our markets recover, our volume returns, and our sales increase. The products and services we enable, smartphones, cars, TVs, broadband, these are central to many facets of daily life, so we're confident that volume in our markets will recover to historical trend lines. In display, for example, we believe the volume recovery has already begun. When we last spoke, panel makers had started to increase utilization at the end of the first quarter. Improvement continued in the second quarter, and we grew sales more than 20% sequentially, driven by higher volumes. When we couple this volume return with the display pricing actions I mentioned earlier, we expect to show additional profitability improvement in the third quarter. Now, our goal is to return display to pre-pandemic profitability levels as we exit the third quarter. Let me now turn to how we intend to increase our profitability and grow our sales beyond our pre-pandemic run rates. Across our markets, we expect demand to normalize and our volume to return. As we drive more corning content into those markets, we will further increase our profit as we create additional revenue streams. Now, here are just a few examples Exciting examples of more corning innovations that are arriving in the near term. In optical communications, leaders in large language models are building data centers with what is essentially a second optical network, which is increasing connectivity by up to five times within individual data centers. So we're commercializing a Gen2 high-density data high-value optical interconnect system designed to enable the requirements and capture the growth driven by AI. In mobile consumer electronics, we're launching two products this fall and next year, featuring innovations that significantly increase our value per device. in automotive. We continue to increase the amount of corning content in vehicles across the industry as we pursue our $100 per car content opportunity. We recently commercialized a solution in our auto glass exterior business that takes a significant step to achieving this goal in electric vehicles. And for ICE vehicles, adoption of our gasoline particulate filter technology is now expanding to India. And the U.S. EPA has proposed regulations that would boost our content in the very large domestic market. In life sciences, we just launched viridian vials. to address the growing need for sustainable products in the pharmaceutical supply chain. Viridian cuts the CO2 emissions from biomanufacturing by about a third, and reduces glass by 20%, all while improving filling line efficiency by 50%. We're expanding our collaboration with West Pharmaceuticals, a leader in drug packaging, to accelerate adoption. Now, these are just a few examples of innovations and new product sets that you can expect to see in the near term. Additionally, we're scaling our solar business, which we expect to add hundreds of millions of dollars in annual profits and cash flow beginning in a couple of years. We expect all of these opportunities to further increase our profits as we create additional revenue streams across our markets. Whether it's in automotive, cloud computing, broadband, 5G, solar, pharmaceutical packaging, next generation displays and cover materials, augmented reality, or semiconductors, our role in key secular trends is material and compelling. We've built a robust opportunity set that will drive durable long-term growth. So before I turn things over to Ed, here's what I'd like to leave you with today. The world is working through some significant after effects of the pandemic, and they're not trivial. for our company. Our approach in this environment is not to count on conditions in our end markets or our sales improving significantly from the second quarter. And that's why we're guiding based on our current order rates. When we see our orders increase, we'll reflect these developments in our operating plans and of course, our guidance. For now, Corning is executing well on a comprehensive plan to improve profitability and cash flow throughout this low volume period and to emerge stronger. Our efforts are already demonstrating significant results. In the first half of the year, we improved profitability and cash flow despite lower sales. Even in a muted sales environment, our pricing and productivity actions will continue to drive improvement in the second half. At the same time, our more according approach is driving new product launches that will create additional revenue streams. Altogether, as our end markets recover and our volume returns to historic levels, We're positioned to deliver improved profitability and cash flow with significant operating leverage on sales that will grow faster than our markets. In total, we feel good about our execution. We're taking the right steps to improve our performance today and further improve our results when volume returns. And I look forward to updating you on our progress. Now I'll turn the call over to Ed so he can get into the details of our results and outlook. Ed.
spk09: All right. Thank you, Wendell. Good morning, everyone. As expected, in the second quarter, we improved profitability and cash flow in an overall weak demand environment. Second quarter sales were $3.5 billion. up 3% sequentially. EPS was 45 cents, increasing 4 cents from the prior quarter. Gross margin and operating margin increased sequentially by 100 basis points to 36.2% and 200 basis points to 17.5%, respectively, reflecting progress on our pricing and productivity improvement actions. These results demonstrate the progress on and benefits from our comprehensive approach to improve profitability and cash flow, including continued actions to offset inflationary costs, return productivity ratios to historical levels, and reduce inventory. Now let's turn to our segment results. Let me start with optical communications. I shared with you back in May that we were not seeing the typical seasonal uptick in our orders. Near-term demand for passive optical network products remains weak. And as the quarter progressed, orders came in at the low end of our expectations. As a result, sales in the second quarter were $1,066,000,000, down 5% sequentially and 19% year over year. As I'm sure you're hearing across the industry, carriers and enterprise operators are pushing projects into 2024 due to high inflation and rising interest rates. For now, we're sizing our operational plans based on the orders in our books. Net income was $140 million, down 12% sequentially and 23% year over year. The decline on lower volume was moderated by productivity improvements, as I shared in the first quarter. We raised price in this segment to more appropriately share inflationary costs with customers. While the demand for passive optical network products remains weak, longer term we remain confident that the industry's underlying growth drivers are intact. we're pursuing four significant secular trends, broadband, 5G, the cloud, and the paradigm shift in computation necessary to train large language models and other advanced AI. We've got major innovation programs underway for each category, and our connectivity solutions offer economic advantages for a broader range of customers than ever before. And demand for optical networks is strongly supported by trends in computation, as well as by private and public infrastructure investments to help connect the unconnected and bring broadband to a much larger share of the population. Turning to display technologies, sales in the second quarter were $928 million, up 22% sequentially and 6% year over year. Net income was $208 million, up 30% sequentially, primarily driven by higher volume. Second quarter panel maker utilization played out in line with the expectations I described three months ago. After reaching historic lows in 2022 and as recently as January, panel maker utilization has increased consistently, driving significant sequential volume increases. We believe that the display industry recovery is underway. Now, let me update you on what has happened since our display price increase announcement in May. Since then, We've engaged with our customers and they understand our need to offset elevated costs. We expect to finalize agreements for double-digit price increases that will begin to go into effect in the third quarter. We expect our profitability to improve and to return to pre-pandemic levels as we exit the quarter. Moving to specialty materials, Second quarter sales were down 13% year over year. This reflects continued end market softness. Sales increased 4% sequentially on higher Gorilla Glass sales. Net income was $33 million, down 15% sequentially, impacted by continued development costs for new product launches. Looking ahead, We believe that there are new innovation opportunities for us in emerging trends like augmented reality, bendable devices, and AI that will extend our more corning opportunities far into the future. For example, our world-leading optical materials and systems in our advanced optics business power UV lithography technology. We enable the manufacturing of smaller, faster, more powerful chips, including GPUs. Global AI initiatives are accelerating demand for GPUs and for our EUV-related products. In environmental technology, second quarter sales were $457 million, up 6% sequentially and 28% year over year. Net income increased to $107 million on stronger sales and improved productivity. In automotive, our sales were up 8% sequentially driven by the ramp of GPF sales in China based on regulations that are now in effect. We do not expect to see this level of GPF sales in China in the third quarter. Auto production levels remain steady quarter over quarter in North America and Europe. Year over year, our automotive sales were up 40% driven by the GPF ramp in China that I just mentioned and versus low auto sales in China during the 2022 COVID shutdowns and 2022 supply chain issues for automakers globally. In diesel, our sales were up 13% year over year driven by heavy duty demand in North America and Europe, which more than offset languishing demand in China. Turning to life sciences second quarter sales were $231 million down 10% sequentially and 26% year over year. Both the sequential and year over year sales declines resulted from lower demand for COVID related products in China and by customers continuing to draw down inventory. Net income increased sequentially to $11 million with productivity improvements more than offsetting lower sales. We expect our sales and profitability to improve as the industry corrects and as we continue to restore productivity ratios back to pre-pandemic levels. Finally, in Hemlock and emerging growth businesses, sales in the second quarter were $377 million, consistent with the first quarter. Sales were down 10% year over year, partly associated with a decline in solar-grade polysilicon spot prices. We are seeing continued strong demand for solar grade polysilicon required to meet the need for transparent, sustainable and traceable solar supply chain in the US market. And we have long term take or pay contracts with our customers that have floor price mechanisms built in to help mitigate the impacts of spot market dynamics. Net income increased sequentially to $26 million, up 4% year-over-year, driven by productivity improvements. Now, let me spend a minute on our outlook for the third quarter. As we've been sharing with you, we are planning our operations based on our current order run rate, and we're continuing to take pricing and productivity actions to improve profitability and cash flow. we're adopting the same philosophy for our guidance. Based on our current order run rate, we expect our sales to come in roughly in line with quarter two, approximately $3.5 billion. When orders begin to increase, we'll let you know. On roughly flat total company sales, we expect improved profitability and cash flow. we expect EPS to come in about the same or slightly better than the second quarter. And this factors in sequentially higher interest expense and a slightly higher tax rate. Of course, there are differing dynamics in each of our businesses. At a high level, we expect improvements in display and specialty materials to be offset by declines in optical communications driven by the dynamics I previously mentioned, as well as declines in environmental where we expect lower sales for GPF in China as the ramp is largely complete and we expect lower demand for heavy duty. We continue to expect 2023 full-year capital expenditures to be slightly lower than 2022. Now, I'd like to wrap up with a few key takeaways. As CFO, I am pleased with our execution on many dimensions. Our second quarter results demonstrate the benefits of our comprehensive approach to address after effects of the pandemic. We're sharing inflationary costs with our customers. We're returning our productivity ratios to pre-pandemic levels, and we are on track to normalize inventory. Additionally, we're undertaking initiatives to capture our next wave of growth opportunities. In the near term, to enhance shareholder value, we remain focused on improving cash flow and profitability in the second half, even at our current sales run rate, and advancing innovations to outperform our end markets. We're seeing the recovery play out and display. and we expect to see it play out across our other markets because the underlying fundamental drivers remain intact. Longer term, we are well positioned to continue capturing growth tied to key secular trends and expect to grow faster than our markets driven by our more corning approach. So I look forward to updating you on our progress. Now I'll turn things back over to Anne.
spk05: Thanks, Ed. Operator, we're ready for our first question.
spk03: Thank you. As a reminder, to ask a question, please press star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1-1 again. Please stand by for our first question. Our first question comes from the line of Sumit Chatterjee with J.P. Morgan. Your line is now open.
spk07: Hi. Thanks for taking my question. I guess maybe if I can get your insights on what you're seeing in the market related to optical, which are guiding down sequentially into the third quarter, have you seen more incremental weakness given we've seen certainly telcos pull back on spending a bit more, or as you sort of look look at your 3Q guide. Is it being driven by both telcos and enterprise? And just a quick second part there. I mean, any early discussions in terms of what this lead cable replacement opportunity or whether it's an opportunity as well for conning in the long run? Thank you.
spk09: Hi, Samik. Appreciate the question. So, you know, I think I'm going to go back to what we said a little bit as we shared our perspective on the second quarter. When we were together in May, I talked mostly about us not seeing an inflection in our order rates, and that was driving how we saw the second quarter playing out. Normally, we would have a pretty big seasonal uptick in the second quarter relative to the first quarter. As it turned out, our orders were actually even lower than we thought at that time, and therefore the second quarter came in down from the first quarter, and we're guiding the third quarter to be down sequentially again. And that's primarily driven by what we're seeing in our order book. I think that's the best way for us to describe the way we see the optical market playing out versus what might happen in the future. For sure, as you hear and see in the industry, we're seeing it in both the carrier and the enterprise space. Customers are pushing projects out into 2024.
spk07: Any thoughts on the lead cable replacement opportunity, whether you see that as an opportunity?
spk14: Well, I'll add a little to Ed's and then talk briefly about the lead cables. I think the right way to think about how we're approaching demand in our optical market is our historic models that we would normally use to predict future revenue streams from what we're experiencing in one quarter to then be able to build out a year plan and our direct customer inputs on their plans for the year, have proven to not be as reliable as we like. And so what you're really seeing in our guide is really a shift in our operating philosophy, which is we're going to plan our operations based on what we see in our order book, and we're going to improve our productivity to historic rates based on that broad load, and we're going to increase our prices and carry the appropriate inventory so that our profitability and cash flow is going to increase in a very reliable manner despite the lower sales volume. And so that's all you're really seeing in our guide is we're just carrying our operating philosophy forward to our guide. As to lead cables, I think a complicated issue The good news is the glass is entirely inert to the environment and is better, lower cost. All the things that make it the right side of the secular trend would mean that this is why it's an ascendant technology on really every metric you can name. But I have no further insight to offer on the lead cable problem or opportunity.
spk07: Thank you. Thanks for taking the questions.
spk03: Thank you. Our next question comes from the line of Mita Marshall with Morgan Stanley. Your line is now open.
spk00: Great. Thanks. You noted that the pricing negotiations, you know, you're already starting to see traction on those. I just wanted to kind of get more detail there. You know, is this being accompanied by long-term supply agreements? You know, just how should we think about share in terms of kind of how these pricing increases impact revenue? Just, you know, I realize we're probably all not done, but any additional commentary there would be helpful. Thanks.
spk14: Thanks for the question, Meeta. I think you're right on all the dimensions, right? This price increase is a very significant and complicated strategic move that is done in a backdrop, as most of our businesses are, on well-established long-term agreements, yet we are redoing the value proposition between ourselves and our customers. So it's complicated. So the good news is it's progressing well. Our customers understand our need to offset elevated cost. We expect to successfully execute a double-digit price increase in the third quarter and do so in a manner that does not negatively impact our market share. Great. Very significant and compelling. Now, this also leads, I also understand the challenge in modeling such a large strategic move, especially in the backdrop of what's going on in the end markets. So let me just share for a moment the way we think about it. The way we think about the financials is that what we're seeking to do is to return display profitability, so to think NPAT percent of sales, right, how much net income, what's the percent of net income on top of our sales revenue, back to the historic levels in the mid to high 20s. And we've been operating the past year closer to 20%. Now, we expect to hit that level of profitability as we exit the third quarter. So that's the way we tend to think about the financial modeling. Is that helpful, Amita?
spk00: Yes, that's helpful. I appreciate it. Thank you.
spk03: Thank you. Our next question comes from the line of Asiya Merchant with Citi. Your line is now open.
spk02: Great. Thank you. Thanks for the incremental color, Wendell and Ed. In terms of returning the business back to sort of pre-pandemic levels, how much confidence that you have that this is something that could possibly maybe happen during 24? Or is it the first part of 24? Is it the end of 23? Do you guys have any more visibility into how we should think about as we exit this year into 23 and into 24? based on discussions with your customers right now. And if you could provide some color by segment, that would be even more helpful.
spk14: Thank you. Can I ask a clarifying question? Are you speaking about display or the broader company? Just so I can make sure I answered your question specifically.
spk02: We could start with display because it seems like optical, you know, there's some weakness. And then specialty... you know, if you guys can talk about what you see in the back half, but it was more a broader commentary as well about confidence in getting to kind of pre-pandemic levels of profitability as we exit 23 and into 24. Okay, great.
spk14: So let me start with display and then I'll have Ed add some color on the total company. So in display, we expect to return to pre-pandemic levels this year as we exit Q3. And then we would expect that level of profitability, what our plan is, is that we'll continue to carry forward into next year. Does that address your question on this one? That's very clear. Okay.
spk06: Yeah.
spk09: Good. Now, Ed, do you want to speak to the... Yes, sure. I'll build on Wendell's comments. Thanks, Asya. You know, first I want to sort of start with where we are in Q2. If you think about where our gross margin and operating margin in Q2 are, we've made a significant move up from where we were at the end of the year. Gross margin at 36%, operating margin at about 17.5%, so 260 basis point improvement from the fourth quarter and 300 basis point improvement, I think, on operating margin from the fourth quarter. So as we've sort of talked about, our goal is to continue to march up profitability-wise. Now, our sales are muted, so they're at a lower level, and that obviously impacts overall profitability. Now, as we go forward, display, we shared our view, We expect to continue improving overall profitability for Corning, yes, led by display, but also across all of our segments. And then when sales return, I think it is possible for us to get back to real pre-pandemic historical levels at some point in the future. So that's kind of the way you think about it. I think of it as a continued march upward trend. display very specific given where we are and we've seen this volume recovery and then our pricing and productivity actions will continue to take effect in the third and fourth quarter. Does that help?
spk02: Yep. And then just in terms of share buyback, at what point, you know, now that preferred share, the payments that you had for the purchase from Samsung, I mean, those have hopefully come to an end now. When would you expect to turn on share repurchase?
spk14: when we start piling up more and more cash flow every quarter as we are aiming at. So this improving in our profitability and cash flow, even at this muted sales level, we want to see that first before we think deeply about our capital allocation model. As always, you can expect us to hold our shareholders near and dear in our hearts. But the first step is we've got to restore that profitability and cash flow to our pre-pandemic levels, even at these muted sales levels.
spk03: Great, thank you. Thank you. Our next question comes from the line of Mehdi Hosini with SIG. Your line is now open.
spk10: Yes, thanks for taking my question. Actually, I have one clarification. Wenger, you talk about the pre-pandemic margin profile for display business. I'm a little bit confused. You exit 2019 with a 24% net income margin for display. And the prior year, it was like 26% to 27%. When you reference pre-pandemic, how far back should we go, given the net margin difference in 2018 and 2019?
spk09: Yeah, hey, Matty, this is Ed. So I think the way to think about it is we've been running closer to 20%, and we think of pre-pandemic closer to 30%, right? So I think it's a big delta that we seek to achieve. So not the end of 2019 levels, but more like the back half of 2018, maybe the front half of 2019, and maybe even earlier than that, depending on how successful we are.
spk10: OK, very helpful. And then you highlight opportunities with polysilicon. I'm trying to understand how the hemlock and other emerging growth revenue could scale without significant or material increase in capex. You did 377 Q2 and 386 the prior quarter. in the latter part of last year, you were doing higher revenue. Should I assume that you can actually do closer to $500 million without significant capex?
spk09: Yeah. Hey, Mehdi. So I'll take that one also. So a couple of things. Just a reminder, in that segment, you have Hemlock, you have our auto glass business, and you have our Corning Pharmaceutical Technologies business. Think Valor, Velocity. I think all of those businesses will grow their sales, so I definitely think the level you're thinking about is very achievable for us. In Hemlock, we're currently working through additional capacity so that we can expand that business. There will be some capital spending, but I don't think you need to think of it as significant at this point. Okay, thank you.
spk14: I think, Gwyn, we're not quite ready yet to discuss sort of the precise way in which we expect to expand our profit streams in solar. So what we're trying to do is to provide you some insight as to how much more income we expect in that segment. and a rough idea of the timing of that without yet fully disclosing the details of our plan to be able to realize that expanded value footprint. So we will be more forthcoming as this finalizes and it is in our benefit to come out of the more stealthy mode that we are in. But at the same time, it is significant enough that we wanted to make sure that we had provided for you a rough idea on how to think about it financially. That's why I think you have a good question here. So we're giving you the answer without all the inputs. Does that make sense?
spk10: Absolutely. And the reason I ask is your margin, the margin profile for this business unit has continued to improve. And I attribute that to Polly. So would it be fair to say that Polly is a much better margin profile than other sub-segments within that business unit?
spk14: I think that there's a lot going on in that segment. And you are right. Do you think that a significant amount of the growth to which we've outlined here, and we've given in our sort of longer term what happens in a couple of years, is rolling out of our fundamental capabilities in solar? I think you're right to think about it that way. I think concluding much more than that, from the statements sort of runs the risk of you not being exactly in line with what our strategic plan is. So I ask for a little bit of patience, and it will be forthcoming in the not-too-distant future.
spk10: Great. Thanks much.
spk03: Thank you. Our next question comes from the line of Wamsi Mohan with Bank of America. Your line is now open.
spk13: Yes, thank you so much. Good morning. When I look at display, revenue in the quarter was up 6% year on year, but profitability is down 9% year on year. You're obviously, you know, calling for an inflection in display and expecting significant profit improvement as you just answered in prior questions. So I was wondering how much of your cost actions benefit did you already realize in the second quarter? And as you think about the margin improvement, how much of that would you say is going to come from pricing actions versus continued benefit from productivity initiatives that you're undertaking? That's the first part of the question. And the second part of it, is as you think about the improvement in display, would you say that this pricing sort of supersedes any of the prior market-based pricing agreements that you had with some of your customers? Is this a new paradigm or is that like old paradigm still intact? Thank you.
spk09: Yeah, I'll take the first part of your question first, Wamsi. So, you know, the main reason we are taking the price action is the point you're making. We are absorbing higher costs. We have elevated costs in this business, and we expect the price to offset those costs. And I think about that as being the most significant driver of our profitability improvement as we go forward.
spk14: I agree with that. I mean, the right way to think about it, Wamsi, is to take a look at our quarter two results, and it's a great example of why we need to increase our prices, right? So then there is, this is a paradigm, a new paradigm move. This is significant enough, Wamsi, that, you know, it's going to take a little time to settle into what this does to the overall dynamic in the industry. So this type of significant move does represent a new paradigm for us. It is still gonna be based on our same fundamental principles that unlike many of the other players of our competitors in this industry, We are the most reliable supplier. We are going to be able to continue to maintain our position in this business and be the technology leader. If you follow the space closely, you'll see significant announcements in the glass industry here, actually capacity being taken out of the system because of the profitability challenges in glass. So the core reason that we are the leader in this business is our reliability. The advantages inherent in our technology to play itself out in both cost advantage and product leadership. And those will still underpin the new paradigm, but it is a new pricing paradigm, sir.
spk13: So Wendell, if I could just follow up on that. In the past, you guys obviously went through a period where price decline was in the mid-teens and that stabilized down to low single digits. Given that, you guys did something really interesting with locking in market share or volume at some of your largest customers. which created an incentive to not take price down. I understand that we're in a recovery phase in the display market at the moment, but if you think over the next two, three years, why should we not think that the competitive response would go back to the historical ways of maybe trying to gain incremental share through pricing?
spk14: Well, let me get through this quarter. in a reset of double-digit increase in our prices while we maintain our share and keep in place our long-term agreements, right? And after we get done executing this, I'd love to sit down with you and let's talk it through and maybe bring in some of our display leaders and we'll talk it through. But right now, what we're focused on is getting this strategic move Does that make sense, Lamzi?
spk13: Yeah, yeah, it does. I appreciate the response, Wendell. Thank you.
spk05: Thanks, Lamzi. Next question?
spk03: Our next question comes from the line of Shannon Cross with Credit Suisse. Your line is now open.
spk04: Thank you very much for taking my questions. I have two. The first, just sort of a follow-up on pricing, but looking at opticals, I'm just wondering what the carriers are saying given weakness in demand in relation to some of the pricing that you were putting in place earlier. Is it holding in or is there any softness there? And then, Wendell, can you just give us an update on how you're thinking about the timing and rollout of government stimulus, you know, both some of the broadband as well as benefit on the poly side from the IRA? Thank you.
spk14: Pricing continues to hold in optical. As far as the timing, IRA and that is happening, right, as we speak. And I think it's a little early, though there's plenty of news and there's been awards out to the states, and you're beginning to see the first of them take place on B. I think it's a little early for us. to be able to call, here's when it's happening. Do you expect to start to see that in our demand next year?
spk04: Do you think it's, I mean, do you see it delayed or just progressing along what you had expected?
spk14: You know, we started with a pretty cynical view, right, of how long it would take. So we may not be the right people to ask, but We expected really not to start feeling it until next year, and, you know, that really hasn't changed. Once again, it's a very large program that's got to flow from the federal government out to the states, and they have to do awards that our various customers are competing for, right? And then... those customers have to put orders in. And so we've always thought that it wouldn't start to make a big impact until we got into next year. I believe that is still our belief. I will double-check, Shannon, and Ann and Ed will get back to you if I'm wrong, okay?
spk04: Yes, thank you very much.
spk03: Thank you. Our next question comes from the line of Matt Nickham with Deutsche Bank. Your line is now open.
spk11: Hey, thanks for taking the questions. Just one follow-up on optical, and I have one on cash flow as well. On the optical side, are we at a point now where higher rates and macro dynamics are driving more of a sustained lull in spend relative to the sort of inventory digestion that was being messaged a couple quarters back? And then just on cash flow, so I think you're slightly negative for the first half of the year. Obviously, there's some gross margin tailwind from the display price hike. So maybe, Ed, if you can help us frame expectations for the second half of the year and how meaningful the quarterly improvements can be relative to the 300 mil you posted this quarter. Thanks.
spk14: So I'll take the first one. Maybe, Ed, you take the second. So, yes. that was really broadly reported throughout all the different people who serve into the telecom space that there was inventory buildup at the various customers. As you recall, sort of our feedback for that is, yes, we're seeing that too, but You know, I think it's a more complicated question than just working our way through what the sort of just-in-case inventory build is at our telecom customers and that move to just-in-time like normal. It's certainly part of it, but we don't feel at this point in time confident enough in our forecasting models for telecom to say, yeah, we see that consumption of the inventory, it's behind us, and then we're going to start to see that recovery and a return to sort of our normal seasonality and recovery in the back half. So we just think there's more going on here. The fundamental drivers are in place in Opto, but the exact timing on when it pops back, I think it's difficult to call that. And that's why we're not planning on it, and why we're just taking a look at what's in our order book right now, and why you heard Ed guide you sequentially down in OPTA, despite the fact this would normally be an up quarter if everything was sort of operating in a normal cycle. So that's the way we tend to think about that part, Matt, and Want to turn to cash flow, Ed?
spk09: Yes, sure. Thanks, Matt. So I would say on cash flow a couple of things. Our goal is to improve our operating cash flow with the actions we're taking. We made a significant move from Q1 to Q2, as you articulated, and I think we have room to continue to increase operating cash flow in the back half relative to what we did in the second quarter. And on capital, we've spent a good bit in the first half. We expect our full year to be slightly down from last year. So I think you should also see a slight decline, you know, half over half on capital spending. So I think the combination of improving operating cash flow and slightly less capital spending should mean The back half is stronger than what you saw in the second quarter. So I definitely think there's room, you know, a meaningful room for improvement in the back half.
spk11: Just anything to note on working cap in the second half of the year at all?
spk09: No, I mean, the thing I think that's most notable for us, and we've talked about it over the last several quarters, is we built a significant amount of inventory during the supply chain disruption period, and our goal is to work that down. I think the good news is we've made a little bit of progress in the first half on lower sales, which is hard to do. So I think that that's good, and we're going to continue to keep chipping away at that. So that should help us as well. Thank you.
spk03: Thank you. Our next question comes from the line of Stephen Fox with Fox Advisors LLC. Your line is now open.
spk12: Hey, good morning. Sorry, another question on just the display price increases. So you're seeing volume increases into the second half of the year. So can you isolate the margin accretion just from increasing display prices for 23 and 24? And how successful is While you versus that original bogey, you put that in the press release at 20%. And then just one last housekeeping thing. Can you just describe what prices did in Q2? Thanks.
spk09: Yes. So, Steve, I just want to make sure I understand. Can you repeat the first part of your question again? I wasn't 100% sure I followed it.
spk12: Yeah. So, you're saying display margins are going to go up. But volumes are also going up into the second half of the year, I assume. It seems like that's what you're also signaling. So if we just think about the price increases, what is that impact on the margin improvement?
spk09: Got it. Yeah, I think, you know, I'm not sure we're necessarily signaling volume increase from the second quarter relative for the back half. Certainly the first quarter was lower given panel maker utilization levels at, you know, really low levels in January. But when I think about the margin, the net income margin improvement in the second half relative to, say, second quarter, pricing is really the predominant driver that we see taking us there. And remember, it's offsetting costs that we're absorbing in our income statement.
spk12: And in terms of how successful pricing was and versus what Q2 pricing was?
spk14: Well, what we've said here is is that we expect, did you say versus Q2? I'm sorry, Steve, do that again. How successful pricing is? Yeah, so originally- We said we expect a double digit to close on a double digit price increase.
spk12: Right, but originally you said 20% price increases. So I'm just trying to gauge whether you got the full 20 part of it. I mean, you could have gotten 10.
spk14: So our guide today is our guide today, Steve. It's a double-digit price increase. And when we get to the end of the third quarter, I think it will be a little more evident where in double digits that ended up being.
spk12: Okay. And sorry to drag this out, but what was Q2 pricing like? What was Q2 pricing like?
spk14: Relatively consistent with Q1.
spk12: Okay. Thank you very much.
spk03: Thank you. Our next question comes from the line of Josh Spector with UBS. Your line is now open.
spk01: Yeah, thanks for squeezing in my question here. I was just wondering if you could expand some of your comments around data centers and AI and kind of what that means for Corning. And if possible, kind of quantify where things are today. So you've talked about more efficiency in some products. You've talked about more data transfer within AI versus other data centers. So is there a content opportunity you could scale? And again, what's the base that we should be thinking of that on today? Thanks.
spk14: The easiest way to think about this is that we'd expect our hyperscale revenue opportunity fundamentally to more than double for the same number of hyperscale data centers. And that is because of a combination of the amount of interconnects required to do the AIML compute. It needs more glass within that data center, a lot more of it is happening within the data center a lot more connections within the data center that are going out just because of the way those large language models are trained and then you do inference beyond with our new set of innovations adding to our content and so that's the way we tend to think about it how much more than doubling remains to be seen on how successful our innovations continue to be and what ends up being sort of the final architectures as we work through a variety of different wiring diagrams here to be able to deliver this new compute package.
spk01: Is there a way to think about your hyperscale revenues, what you're recognizing today?
spk14: So what we'll do is that's in our enterprise segment, right? Let us reflect a little, given the size and scale of these changes, and think through what is the right way to be helpful to you to think about you know, how that embeds in that piece of optical and how sizable is it? That's a good question, Josh. Let us reflect on that and Anne will get back to you.
spk05: We'll take one more question.
spk03: Operator, please. Thank you. Our last question comes from the line of George Nodder with Jefferies. Your line is now open.
spk08: Hi, guys. Thanks very much, and thanks for squeezing me in. I guess I have another question on the optical business. I'm just curious if you guys are enforcing delivery dates with customers or allowing folks to reschedule further out into the future. And then also, I'm just curious if you're seeing any incremental competition in fiber. I'm thinking more specifically about gray market fiber, people looking at selling excess inventory in the open market that would now compete with you. Any sense for that? Thanks a lot.
spk09: Yes, so, George, I just want to repeat back your question. You're asking if we're seeing customers ask to push their delivery dates out into the future. Is that the question?
spk14: Correct. Well, you know, that happens daily. One way or the other. Pull-aheads do, you know, I don't really need it then. I need it now. Because they're executing pretty complicated tasks. civil works projects. We're not seeing beyond what we've already guided in our sort of order rates sort of a new risk. The way maybe what you're getting at is that normally we're working with our customers on what they're going to take like the entire next year because we're such an important part of what they do and we have to plan it. And there certainly has been strong variation between what they told us last year, right, and what they're taking this year. So I think that's more of a play than, you know, to look through what is the fundamental heartbeat here rather than shifting delivery dates within any given quarter. It does happen, and it is what is behind sort of our operating shift. to just plan based on what we're seeing in our order book as opposed to what our customers are telling us for the year or as what our own stochastic models are telling us. As to gray fiber optic cable, we're not seeing that be any sort of significant play here. It'd be unusual. Are you hearing something? If you're hearing something, I will check back with the optical folks, but it would be the first I've been hearing about that if it's any sort of significant number.
spk08: Got it. Great. Okay. Thank you very much. I appreciate it, guys.
spk05: Thanks, George. And thank you, everybody, for joining us today. Before we close, I want to let you know that we will attend CITES 2023 Global Technology Conference on September 7th. and we'll be hosting management visits to investor offices in select cities. Finally, a web replay of today's call will be available on our site starting later this morning. Once again, thank you all for joining us, and operator, you can disconnect all lines.
spk03: Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.
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