Corning Incorporated

Welcome to the Corning Incorporated Quarter 1, 2024 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, everyone. Welcome to Corning's First Quarter 2024 Earnings Call. With me today are Wendell Weeks, Chairman and Chief Executive Officer, and Ed Schlesinger, Executive Vice President and Chief Financial 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 first quarter, the difference between GAAP and core EPS primarily reflected constant currency adjustment, translated earnings contract gains, and translation gains on Japanese yen denominated debt. As a reminder, the mark-to-market accounting has no impact on our cash flow. A reconciliation of core results to the comparable GAAP 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 and they're also available on our website for downloading. And now I'll turn the call over to Wendell.

Thank you, Anne. Good morning, everyone. Today we announced first quarter 2024 results. Sales were nearly $3.3 billion and EPS was 38 cents. Year over year, gross margin grew 160 basis points to 36.8% and free cash flow improved by $300 million. These results were at the high end of our guidance. More importantly, we're seeing encouraging signs of improving market conditions. We continue to expect that the first quarter will be the low quarter for the year. We are executing our plans to add more than $3 billion in annualized sales within the next three years, and we already have the required capacity and capabilities in place. As a result, we're poised to deliver powerful incremental profit and cash flow and generate substantial shareholder value. Last quarter, we outlined a framework under which we expect to drive stronger returns on our existing innovation and capacity investments. And we shared our expectation that these returns will begin in 2024. The framework has three primary components. First, we believe that the first quarter will be the lowest quarter for the year. We will improve from here. Second, we expect to grow by more than $3 billion in annualized sales in the midterm, which we define as within the next three years. The outlook in each of our markets remains positive and our market positions are quite strong. Third, As we capture this growth, we expect to deliver powerful incrementals. We already have the required production capacity and technical capabilities in place, and the cost and the capital are already reflected in our financials. This is a tremendous opportunity for our shareholders. In the three months since our last call, our confidence in these three components has only increased. We expect our sales to grow from here, and we have reflected this in our second quarter guidance. Today, I'd like to review each component of the framework and share some of the reasons why our confidence has grown. Let me begin with the first component, our expectation that quarter one will be the lowest quarter of 2024. Near term, we expect optical and display to be the biggest drivers of our improvement. In optical communications, carrier inventory drawdowns have been the primary source of our below-trend sales. Once carrier inventory starts returning to more normal levels and our customers resume purchasing to support their deployment rates, we would expect to see our order book growth. And that's exactly what is happening. Our order book grew nicely from fourth quarter levels. This and our regular conversations with large carrier customers indicate that the gap between our sales and customer deployments is moderating. As a result, we expect carrier sales to increase from first quarter levels. Additionally, in the enterprise portion of our optical business, we expect that our recent wins for AI data centers will translate into orders and sales during the year. In display, panel makers increased their utilization rates late in the first quarter, and we expect the higher utilization to continue into the second quarter, driven by expected growth in retail demand resulting from mid-year promotions. For the full year 2024, our expectations for the retail glass market remain unchanged from our January view and consistent with industry expectations. We anticipate relatively flat television unit volume, another year of television screen size growth, and some recovery in PC demand. This leads to mid single digit percent growth in glass volume at retail versus 2023. As a result, we expect our financial performance in display to improve significantly from our first quarter run rate. Ed will share more details on that in just a few moments. Now, let's move to the second component of our framework. our expectation that we will add more than $3 billion in annualized sales within the next three years. Our positive outlook for each of our market opportunities results from our leadership positions and the power of the secular trends that we're addressing through innovation and close collaboration with customers. There's a lot more corning to be had in our markets. In optical communications, fiber is the ascendant technology, and we're the clear market leader. As I've covered in the last two calls, fiber shipments are more than 30% below trend. We fully expect that gap to close, adding more than 40% to our overall optical communications sales. In conversations with our large carrier customers during the quarter, they reinforced their commitment to increasing fiber deployments in 2024 and beyond. Additionally, we expect bead-related projects for network builds in underserved areas to add to our addressable market for the next several years. The industry expects funding approvals to begin late this year, leading to spending in 2025. Next, generative AI is an especially attractive opportunity for us. It creates significant demand for passive optical connectivity solutions. and strengthens our value proposition and our competitive advantages. All data centers consist of a front-end network connecting racks of CPUs. To meet the computational demands of AI, customers are building a new fiber-rich second network to connect GPUs, which increases our market opportunity. Now, will see this in our financials as customers begin to build large GPU clusters and adopt our latest high-density innovations. Customers want fast deployment. Our pre-connectorized structured cabling solutions offer big installation time advantages. And the GPU clusters, which pack a very large amount of computing power per rack, require smaller, denser cables making connector size and cable diameter important requirements. To meet these high-density requirements, we've introduced new-to-the-world fiber, cable, and connectivity products. At OSC, a few weeks ago, we introduced Rocket Ribbon Cable with Flow Ribbon technology that can reduce cable diameter by 60%, with fibers per cable approaching 7,000. A key part of delivering this innovation is our contour optical fiber, which has a 40% smaller cross-sectional area than legacy fibers. Now, our ability to integrate innovations across fiber, cable, and connectors to create end-to-end solutions is a unique competitive advantage, and we're accumulating significant customer wins for upcoming AI data center builds. In our recent customer wins, our revenue is low single-digit hundreds of dollars per GPU. We believe that customer density needs, combined with our technology's superior performance, will sustain these attractive sales attach rates long-term. Let's turn to automotive. The US EPA announced new multi-pollutant standards last month. They include a strong particulate emissions limit that will require gasoline particulate filter adoption on US gasoline vehicles, including hybrids, as early as 2026 for model year 2027. We are the inventor. and the clear market leader in GPF, and these standards increase our environmental technologies content opportunity by two to three times per U.S. ICE vehicle. This adoption offers hundreds of millions of dollars of growth for us in the U.S. alone, even in the face of BEV adoption. Keep in mind, we're also pursuing additional more corning content opportunities in the automotive industry introducing our automotive glass solutions, which are building success and momentum and are being adopted by both ICE and BEV platforms. In mobile consumer electronics, our goal is to outpace the market by increasing the content we provide for each device. Our sales have consistently outpaced the market over the last decade, and we expect that to continue to be the case going forward. We've done this by advancing the state of the art for cover materials and adding more content per device, a classic more corning play. We have a strong innovation portfolio in support of our close collaborations with leading OEMs, and we expect to continue delivering new products that increase our value per device. In display, we expect volume growth at retail to be driven mainly by television screen size growth. In fact, in the first quarter, sales of 85-inch TVs increased by more than 50% year over year. Overall, we expect to capture growth in display because we are the undisputed technology leader. Our successful development of Gen 10.5 and advanced capabilities align with the continued move to larger size TVs produced on the lowest cost platforms. for large displays. Finally, we continue to build entirely new product platforms to capture opportunities in new categories. Examples include automotive glass solutions to support high-autonomy systems, the growing opportunity to localize U.S. solar supply, and pharmaceutical packaging. In sum, we expect the power of our market leadership positions and more Corning innovations to allow us to go faster than our markets and advance our $3 billion plus opportunity. Now I'd like to move to the third component of the framework, our expectation for powerful incrementals as we add sales. In the fourth quarter of 2022, we initiated a set of actions to restore historic productivity ratios and also to raise price to share the impact of inflation more equitably with our customers. Since we initiated these activities, we have expanded our gross margin by 320 basis points, despite sales being down almost $400 million. Our actions have established a significantly stronger profitability and cash flow base, even while our P&L includes the costs and technical capabilities necessary to support $3 billion plus in additional sales. Importantly, we have put processes and governance mechanisms in place to generate operating leverage as we grow sales. So, as I close today, here's what I'd like to leave you with. Our first quarter results show encouraging signs of improving market conditions. We continue to expect that this quarter will be the lowest quarter for the year. Additionally, we've established a higher profitability and cash flow base. Finally, as our markets improve, we have the opportunity to increase our annualized sales by more than $3 billion. As we capture that growth, we expect to deliver powerful incrementals because the required capacity and technical capabilities are already in place and the costs are already in our financials. This represents a terrific opportunity for our shareholders. Our second quarter guidance reflects higher sales and strong incremental profit. And you'll hear more about this from Ed. We will continue making progress on this opportunity in 2024. Think of us as continuing to march up. I look forward to updating you at investor conferences in the next few months. Now, before I turn the call over to Ed, I'd like to take a moment to recognize Jeff Evenson. Executive Vice President and Chief Strategy Officer, who will retire from Corning at the end of May. I want to thank Jeff for his 13 years of outstanding leadership at our company. During his tenure, he's helped grow the company, developed frameworks that define our priorities and guide our actions, and raised awareness of glass as a key enabling material. He also increased Corning's focus on sustainability. Jeff, We wish you the very best. With that, I'll turn things over to Ed.