Corning Incorporated

Welcome to the Corning Incorporated Q3 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.

Thank you and good morning and welcome to Corning's Q3 2023 Earnings Call. With me today are Wendell Weeks, Chairman and Chief Executive Officer, Ed Schlesinger, Executive Vice President and Chief Financial Officer, and Jeff Evenson, Executive Vice President and Chief Strategy Officer. I'd like to remind you that today's remarks contain forward-looking statements that fall within the meaning of the Private Securities Litigation Reform Act of 1995. These statements involve risks, uncertainties, and other factors that could cause actual results to differ materially. These factors are detailed in the company's financial reports. You should also note that we'll be discussing our consolidated results using core performance measures, unless we specifically indicate our comments relate to GAAP data. Our core performance measures are non-GAAP measures used by management to analyze the business. Third quarter GAAP EPS reflected restructuring and asset write-off charges, realized gains and unrealized non-cash mark-to-market losses on currency hedging contracts, and non-cash mark-to-market adjustments associated with the company's Japanese yen denominated debt. As a reminder, 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. We encourage you to follow along. They're also available on our website for downloading. And now I'll turn the call over to Wendell.

Thank you, Ann. Good morning, everyone. Today we reported our third quarter results. As expected, sales were $3.5 billion and EPS was 45 cents. Gross margin expanded sequentially to 37% and free cash flow improved to $466 million. Our results demonstrate solid progress on the programs that we put in place to increase price and improve productivity while lowering inventory. These initiatives led to improved gross margin and cash flow in the quarter despite volume coming in at the low end of our expectations in optical communications as carriers continued to draw down inventory and in display technologies as panel makers lowered utilization at the end of the quarter. Now let me share a couple of highlights from the quarter. I'll start with gross margin. We drove an 80 basis point sequential expansion to 37% on consistent sales, driven primarily by our pricing actions in display. Additionally, If you compare the third quarter of this year to the fourth quarter of last year when we launched our comprehensive plan, sales are down almost $200 million, yet we've expanded gross margin percent by 340 basis points. Looking to the fourth quarter, we expect gross margin to be similar even with sales down sequentially. Moving to cash generation, free cash flow of $466 million grew sequentially by $156 million and grew year over year by $211 million, up 83% on lower sales. our gross margin improvements and our ability to run with lower inventory levels as well as lower capex levels are driving these results now this all leads to significantly improved free cash flow conversion and we expect to convert profit to cash at a strong rate going forward overall Our results in the quarter illustrate that we continue to make solid progress to reset our price and cost levels to enable an even stronger profit and cash flow cycle as our market volumes revert to mean. We also continue to demonstrate progress on our more corning technology efforts. We standard our market leadership by collaborating with Apple to deliver durable glass with infused color, a first for any smartphone for the back of the iPhone 15 and iPhone 15 plus devices. These devices also feature ceramic shield, which we collaborated on with Apple to deliver a cover material with unparalleled smartphone performance. We also recently announced corning viridian vials. This new technology can improve filling line efficiency by up to 50% while reducing vial manufacturing carbon dioxide equivalent emissions by up to 30%. And just yesterday, we announced an expanded collaboration with longtime customer AUO to accelerate the production of their industry leading large format curved automotive display modules using our patented cold form technology. Stepping back, we're on the right track, enhancing profits, improving cash generation, and delivering new products that capture more corning content opportunities, all while maintaining our leading market positions. The area that continues to be problematic is our customer demand, especially the weaker carrier sales and optical. So although we've hit our guidance to you, for 11 consecutive quarters. Weak customer demand has put us consistently at the lower end of our sales expectations over the last year, even as we're outperforming on price and productivity plans. More importantly, we are well below the trend line for our operations profile. we have the capacity and the capability to deliver $3 billion plus in additional sales with minimal additional cash investments. As a result, this revenue will have powerful incrementals as it returns, as long as we keep our capacity and our capabilities vibrant and ready to go. So as we sat Our operations profile, we ask ourselves two broad questions. Will our revenue return? And when? The first question is relatively straightforward to address. We simply ask ourselves, what are the long-term trends in our markets? And where are we now versus those long-term trends? And then, of course, we need to feel confident that we will win in those markets. Are we the clear market leaders with superior technology offerings, lowest cost platforms, and are we advancing more corning opportunities to increase our value capture for the same volume? So first, let's look at the trends in our markets. we build our capacity and capabilities around long-term trends. We then modulate our operations and staffing around current volume run rates. So we must understand where our volume run rates are versus trend at all times. We do this for each of our businesses. Let me give you just one example, optical fiber, as a good illustration. Here you see industry shipments measured in fiber kilometers since the beginning of 2004. The trend line shows a 6.6% compound annual growth rate over the last decade. As you can see, industry has been operating below trend line in the first half of 2023. Because industry shipments are reported with at least a quarter or two delay, I'm going to switch to our own shipment data so that we can bring you up to real time. What we saw over the last few quarters and what we're projecting for quarter four. first thing to notice is the trend line for our shipments has a 7.3 percent CAGR over the same 10-year period we've been growing faster than the market now this just makes sense with everything we've shared with you about our more corning strategy quarter one of 2023 was basically on track And our shipments started dropping away from the 7.3% CAGR line in quarter two. And even more so in quarters three and four. Currently, our shipment run rate is at least 30% below the trend line. You can think about the 30% plus gap is carrying through all of our optical revenues. Remember that fiber accounts for only a portion of our sales. We have significant value to our fiber with our cabling and connectivity solutions. So this gap to trend ripples through our entire optical product portfolio. We feel the demand drop. in our fiber sales, cable sales, and equipment sales. We're confident that we will return to the long-term trend line. We believe that as customers deplete their inventories, the industry and our sales will resume growth. Just returning to trend adds more than 40% to our revenue run rate for optical communications. So that's what we mean when we say we'll revert to mean. And fiber is just one example. We use a similar methodology for key product lines in each of our maps, automotive, display, mobile consumer electronics, and life sciences, all of them. are showing a gap versus long term trend lines. Right now, because we're operating well below long term trend lines, we see an enormous opportunity as our markets revert to mean. Now, as I noted a moment ago, because we anticipate this recovery across our markets, we need to know we'll win as they bounce back. Are we maintaining our leadership position and advancing opportunities to grow faster? In short, yes. We've built a more advantaged position for 80% plus of our revenues over the last few years. We are the technology leader as well as the lowest cost producer, and we have built more opportunities to capitalize on growth in our markets, increasing our value capture with our Morcorning approach. Let's look at a few examples. In optical communications, fiber optics remains the ascendant technology, with growing applications in wireless, cloud computing, including AI, and government efforts to connect the unconnected. Within each of these applications, we have new product innovations that will increase our revenue per installed fiber as those applications grow. We're building on our undisputed global cost and technology leadership position, along with our market leadership in North America. In automotive, new US EPA regulations go into effect starting in 2027. These new regulations force adoption of gasoline particulate filters, and we are the inventor and clear market leader in GPS. We expect to see sales as early as 2026. In terms of more corning, this adds two to three times the content opportunity for ICE vehicles in the US. This means significant growth in our environmental business, even in the face of global BEV adoption. In fact, we'll still grow environmental sales up until BEV adoption reaches 40% of all vehicles globally. And that is not forecast to happen until the next decade. Keep in mind, We have also built new revenue platforms with the successful introduction of our auto glass for interiors, which is being widely adopted in BEVS and offers hundreds of millions of dollars of growth opportunity for us. In display, we have been and continue to be the undisputed leader in technology quality and cost. Our successful development and capability and Gen 10.5 technology aligns with the continued move to larger size TVs with the lowest cost platforms for large displays. We continue to improve productivity, which allows us to free up assets to serve Gorilla Glass, glass ceramics, and our growing automotive glass business. Finally, we continue to build entirely new product platforms that allow us to enter new categories for growth. Examples include pharmaceutical packaging, automotive exterior glass for high autonomy systems, and the rapidly growing opportunity to reshore U.S. solar capacity. In total, this amounts to a $3 billion plus incremental sales opportunity with minimal cash investment. Taken together, that's why we believe our revenues will recover. The next question is when? The answer to this question is less clear. Conventional wisdom is that customer demand in telecom, display, semiconductor, smartphones, tablets, and notebooks bounces back in the second half of 2024. That seems plausible to us. But rather than trying to predict the timing of the recovery, we'll continue to guide one quarter at a time based on our order entry models until visibility improves. will continue our programs to improve price, productivity, and cost so that we improve profitability and cash flow despite our muted sales outlook. This serves both the purpose of providing enhanced performance near term, and more importantly, providing a better price and cost springboard for profitability as our volume reverts to trend. Simply put, we have the ability to deliver another $3 billion plus in sales with powerful incrementals and minimal cash investments. Now, this represents such a significant opportunity for our shareholders that will maintain this powerful platform throughout this down cycle. all while we continue to improve our near-term profitability and cash flow. This is how we're steering our way through this period. And I look forward to updating you on our progress. Now I'll turn the call over to Ed so we can get into the details of our results and outlook.