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spk08: Good day and thank you for standing by. Welcome to the Cornyn Incorporated Quarter 3, 2024 earnings conference call. At this time, all participants are in a listen-only mode. After the speakers' presentations, there will be a question and answer session. To ask a question during the session, you will need to press star 1-1 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 1-1 again. Please be advised that today's conference is being recorded. It is my pleasure to introduce you to Ann Nicholson, Vice President of Investor Relations. Please go ahead.
spk07: Thank you, Dillem, and good morning, everybody. Welcome to Cornyn's third 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 third quarter, the difference between GAAP and core EPS primarily reflected non-cash -to-market adjustments associated with the company's translated earnings contracts and Japanese yen-denominated debt, constant currency adjustments, and non-cash asset write-offs and charges. As a reminder, the -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 cornyn.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. Now, I'll turn the call over to Wendell.
spk13: Thank you, Ann. Ann, good morning, everyone. Today, we announce strong third quarter 2024 results. Year over year, sales grew 8% to $3.73 billion, and EPS grew 20% to 54 cents. Our quarter three outperformance was led by optical communications, where continued strong adoption of our new optical connectivity products for generative AI drove 55% year over year growth in the enterprise portion of the segment. Our momentum continues as we close out the year. In the fourth quarter, we expect year over year sales growth to accelerate and EPS to continue growing faster than sales. And Ed will elaborate more on that in a moment. Overall, our results and outlook show we're making strong progress on our springboard plan to add more than $3 billion in annualized sales with powerful incremental profit and cash flow, and to achieve an operating margin of 20% by the end of 2026. So before Ed and I get into the details, let me just briefly recap the primary elements of springboard. First, this chart reflects our internal, non-risk adjusted springboard plan. This is what our business operators are focused on delivering. There's a lot to take away from this slide. We have a significant sales opportunity. We're looking at potential growth of $8 billion in annualized sales run rate by the end of 2028, with $5 billion by the end of 2026. Now remember, this is our internal plan. When we say it's not risk adjusted, what we mean is the projections are based on a number of assumptions, including markets recovering to historical trend lines with continued growth thereafter. Successful adoption of new innovations across a number of markets and platforms, and successful execution of all our operational milestones for productivity and for price. But what we wanted to do was take our $8 billion opportunity and translate it into a high confidence plan for our shareholders. To do that, first we focused on a three year time period. Second, we probabilistically adjusted for different potential outcomes in each of our market access platforms, including market dynamics, timing of secular trends, successful adoption of our innovations, as well as volume, pricing, and market share across all our businesses, as well as the potential that some of our markets may go through down cycles. And this is how we come to the high confidence springboard plan to add more than $3 billion in annualized sales and achieve operating margin of 20% by the end of 2026. It's also important to know that we purposely drew this as a wedge. We weren't trying to guide every quarter for the next 12 quarters. It obviously will not be a straight line, but we're also not dealing with a hockey stick. When we built the plan, we expected to see strong growth this year. And that's exactly what you're seeing in our results. So I'd like to take a moment to share two important observations about our performance. First, we're significantly improving our return profile. In the third quarter, we again drove sales growth while demonstrating our ability to deliver the powerful incrementals embedded in springboard. In the third quarter, sales grew 8% year over year. EPS grew more than twice as fast as sales. Operating margin expanded 160 basis points year over year to 18.3%. And gross margin expanded 220 basis points to 39.2%. We also generated strong free cash flow of $553 million. And we continued buying back shares in the third quarter. Second, we're reaching key strategic milestones that underscore the significant progress we've made against our high confidence plan. Let me just briefly summarize the recent milestones in display and in optical. In display, our springboard plan is centered on maintaining stable US dollar net income. To achieve this, we are raising glass prices. Our price actions, in combination with the hedges we have in place through 2026, will deliver consistent profitability in the segment. We expect to deliver net income of $900 to $950 million next year and to deliver net income margin of 25%, consistent with the last five years. Simply put, our price increases offset the weaker yen in our hedges and we expect to maintain the same profitability. Most importantly, we will continue to be the low cost technology and market leader in display. Overall, we're providing a strong base in display for our springboard growth. In optical communications, our springboard plan is about revenue growth as cyclical and secular trends converge to drive demand for our unique capabilities. When we introduced our Gen. AI products in June, we said we expected to grow our enterprise business at a 25% compound annual growth rate over the next four years. Looking back to the second quarter, strong demand for our new Gen. AI products drove outperformance and our enterprise business grew by 42% year over year. As I noted, outperformance continues. Enterprise grew by 55% in the third quarter versus last year. That growth reflects the Gen. AI opportunity inside the data center. We've also introduced a set of innovations to help our customers build a new network to interconnect AI enabled data centers. As part of an agreement with Lumen Technologies, which reserves 10% of our global fiber capacity for each of the next two years, we recently launched the first outside plant deployment of Corning's new Gen. AI fiber and cable system that enables Lumen to fit anywhere from two to four times the amount of fiber into their existing conduit. This is an exciting new space and we expect to capture other large opportunities. Optical is also marking important developments with other important carrier customers, Verizon and AT&T. At their broadband strategy event last week, Verizon highlighted their partnership with Corning. Instead, we're delivering technologies to make it easier for them to reach their deployment goals. They plan to significantly expand their fiber footprint from 25 million fiber passings to more than 30 million fiber passings by 2028. We also just announced a multi-year purchase agreement with AT&T to provide next generation fiber, cable and connectivity solutions to support the expansion of AT&T's fiber network and help bring high speed internet to more Americans. The agreement, valued at more than $1 billion, builds on a decades long collaboration between our companies. AT&T is expanding its network to bring world class fiber to more people and places across the country. By using Corning's newest pre-connectorized solutions, AT&T can accelerate its network expansion and enhance network performance while minimizing deployment costs. They'll leverage our latest additions to our portfolio of connectivity solutions which are fully compliant with the Build America, Buy America provisions of the Broadband Equity, Access and Deployment Program. The program, known as BEAD, is part of the government's efforts to bring high speed internet to rural communities. Stepping back. As you can see, we're three quarters into our three year springboard plan and we're making significant progress. Our third quarter results demonstrate the sales growth and the powerful incremental profit and cash flow we expect to deliver as we improve our return profile and march steadily toward our 20% operating margin target by the end of 2026. And we're marking significant milestones along our springboard journey. And we have plenty of milestones ahead. In optical communications, we expect carriers to return to buying at deployment rates and for their deployment rates to increase and drive growth in 2025. And we expect the BEAD program to gather momentum starting in the second half of 2025. We have a triple digit automotive glass business today and we expect sales in that business to almost triple by 2026. We expect recently announced US EPA regulations to force gas particulate filter adoption and drive hundreds of millions of dollars of growth for us in the US alone with sales starting in 2026. Finally, we plan to launch a new solar market access platform. Overall, we positioned our businesses to benefit from a convergence of cyclical and secular trends to drive growth across the company through 2026 and beyond. We'll continue to update you as we hit significant milestones. Now, let me turn it over to Ed for some more detail and perspective on the quarter as well as springboard.
spk09: Thank you, Wendell. Good morning, everyone. As you just heard, we had an outstanding quarter. Year over year, Q3 sales grew 8% to $3.73 billion and EPS grew 20%, more than twice the rate of sales to 54 cents with operating margin expanding 160 basis points to 18.3%. We also generated free cashflow of $553 million. Our outperformance was led by optical communications. Sales grew 36% year over year and sales in the enterprise business grew 55% driven by continued strong adoption of our new optical connectivity products for generative AI. We expect our momentum to continue. In the fourth quarter, we anticipate year over year sales growth to accelerate and EPS to again, grow faster than sales with sales up about 15% to approximately $3.75 billion and EPS up approximately 40% in the range of 53 to 57 cents. Today, I'll provide more detail on our Q3 results and Q4 outlook as well as put them into the context of our overall springboard plan. As a reminder, a key component of our plan is to deliver powerful incrementals. We have the capacity and technical capabilities in place to add more than $3 billion in annualized sales by the end of 2026 with minimal cash investment and the cost and capital are already reflected in our financials. This means that we expect to grow profit significantly faster than sales and that's exactly what we're seeing in our third quarter results. So let's dive in. In optical communications, sales for the third quarter were $1.2 billion up 36% year over year and net income for the quarter was $175 million up 92% year over year as we delivered strong incremental profit on the higher volume. In our enterprise business, sales were up 55% year over year driven by continued strong adoption of AI related connectivity solutions. This marks another record quarter in this business and adds to our confidence in our plan to grow enterprise at a 25% compound annual growth rate from 2023 to 2027. We also grew year over year in our carrier business in the third quarter. We're encouraged by new customer agreements including our recent announcements with AT&T and Lumen. Overall, we expect both cyclical and secular drivers in optical communications to sustain growth in 2025 and beyond. Moving to display technologies, third quarter sales were $1 billion consistent with the second quarter. Net income was $285 million up 10% sequentially. Our third quarter volume was down sequentially as panel makers began to lower their utilization rates in the quarter. We expect panel makers to continue managing their operations to maintain healthy inventory levels. As a result, we expect the glass market and our volume to decline sequentially in the fourth quarter. Longer term, we expect the display glass market to grow at a low single digit rate supported by stable TV unit sales and average screen size growing about one inch per year. As we shared with you at our September investor event, we are raising glass prices to ensure we can maintain stable US dollar net income. Specifically, we implemented currency based price increases in Q3. Overall, our customers are experiencing a double digit price increase in the second half of 2024. In total, our price increases offset the weaker yen in our hedges and therefore we expect to maintain the same profitability. As a result, when we move to our new yen core rate in 2025, we do not plan to recast our 2024 financials. As a reminder, we have the majority of our yen exposure hedged for 2025 and 2026 and we also have hedges in place beyond 2026. Our hedges are not at the 2024 core rate of 107, but they're much better than the current spot rate. We expect to deliver net income of 900 to 950 million next year and net income margin of 25%, consistent with the last five years. Turning to specialty materials, sales in the third quarter were $548 million, up 9% sequentially, primarily driven by premium glass for mobile devices. Net income was $72 million, up 14% sequentially, reflecting higher volume. In environmental technologies, third quarter sales were $382 million, down 11% sequentially, reflecting the continued impact of the class VIII truck down cycle in North America, as anticipated. Net income of $75 million was down sequentially, reflecting lower volume. We expect the heavy duty market weakness to continue and sales and environmental to remain muted in the fourth quarter. In life sciences, sales in the quarter were $244 million, up 6% year over year. Net income was $15 million, up 15% year over year. Turning to Hemlock and emerging growth businesses, sales in the third quarter were $298 million, consistent sequentially. Finally, I'd like to touch on operating expenses. As we've told you in the past, our pay is tied directly to our financial performance. As our performance has accelerated this year, we have increased our variable compensation accruals accordingly. This leads to temporarily higher operating expenses in the back half of 2024. With that, I'd like to shift gears and put our third quarter results and Q4 guidance in context of springboard and update you on how we are tracking against the plan. This chart shows both our non-risk adjusted $5 billion sales plan and our $3 billion high confidence sales plan. So, how are we doing? Let me first explain the $1.84 billion dot point you see on the chart. Our Q3 2024 sales were $3.73 billion. Our Q4 2023 sales, which is our springboard starting point, were $3.27 billion. So, our sales were $460 million higher in Q3 2024 than in Q4 of 2023. And when you annualize that, you get to $1.84 billion. Therefore, we're currently tracking at a $1.84 billion incremental annual sales run rate against our $3 billion plus target. And that trend continues into quarter four. The additional sequential growth implied in our Q4 guidance increases our run rate in the fourth quarter to $1.9 billion. As we shared in September, our springboard plan includes an operating margin target of 20% by the end of 2026. This target leads to an improving return profile with profitability growing significantly faster than sales. You can see this in our third quarter results where EPS grew 20% year over year more than twice as fast as the sales growth rate. Additionally, our operating margin was 18.3%. This represents a 200 basis point improvement from our starting point of .3% in Q4 2023. Stepping back, we've made great progress against our sales and operating margin targets to date. But please remember we're only three quarters into a 12 quarter plan. Springboard is a milestone based plan evolving through 2026. And finally, we expect to generate significant cash flow over the springboard timeframe because we already have the capacity and technical capabilities in place to add more than $3 billion in annualized sales by the end of 2026. For the year, we've reduced our capital expenditures to approximately $1.1 billion. So let me spend a minute on capital allocation. Our priorities remain the same. We prioritize investing for organic growth opportunities. We believe this creates the most value for our shareholders over the longterm. We also seek to maintain a strong and efficient balance sheet. And we're in great shape here. We have one of the longest debt tenors in the S&P 500. Our current average debt maturity is about 23 years with only $1 billion in debt coming due over the next five years. And we have no significant debt coming due in any given year. Finally, we expect to continue our strong track record of returning excess cash to shareholders. And because of our growing confidence in springboard, we started to buy back shares in the second quarter and we continue to do so in the third quarter. So as I wrap up today, I'd like to reiterate that we had an outstanding third quarter. We're tracking ahead of our springboard plan we expect continued strong performance in Q4 with year over year sales growth accelerating and EPS again growing faster than sales. And we expect to sustain our momentum in 2025 and beyond. We look forward to updating you as we continue to make progress. With that, I'll turn it back to Ann.
spk07: Great, thank you, Ed. We're ready for our first question.
spk08: Thank you. As a reminder, to ask a question, you will need to press star 1-1 on your telephone to withdraw your question. Please press star 1-1 again. Please stand by while we compile the Q&A roster. And I share the first question, comes from the line of Sameek Chatterjee from JPMorgan. Please go ahead.
spk02: Hi, thank you for taking my questions. And I guess for the first one, if I can start with the agreement that you signed with AT&T. And Vendel, you spoke about the opportunity there, but if you can just more sort of dive into the details in relation to how much of that is sort of an incremental opportunity that you're seeing relative to some of the existing business that you do with AT&T on an ongoing basis. And sort of a broader question to the Fiber opportunity is, is there something that's fundamentally changed? The question we're getting a lot from investors is in terms of fiber utilization, is there something that's fundamentally changed that is going to drive a significant cycle on the fiber side just because fiber utilization has changed over the last few years? Can you help us think about that more on a longer term basis as well? Thank you.
spk13: And Sameek, a question for you on clarification. When you say fiber utilization, you mean?
spk02: In the more telecom networks, but in relation to the investment in fiber over the years, has something changed in relation to being a lot more congested on fiber or very high fiber utilization already and seeing that drive a significant cycle or are we sort of extrapolating just the amount of announcements, not really looking at the utilization which is still probably low?
spk13: Totally understand, thank you, Sameek. I would divide this really into two major sections. The first, let's address the AT&T announcement. That's really our carrier segment and it's part of the cyclical upward trend that we identified as part of our springboard plan that we're viewing this to be very much in line with springboard and an encouraging sign for us that we can expect the carrier spring to activate sometime here in the near future. We're not calling that yet because we'd like to see a couple more quarters of the actual order rate and the actual deployment rates, but it's certainly encouraging and this is what we mean by one of the cyclical trends in our springboard plan for optical. So encouraging, but we're not yet calling the spring activated. To your next question, one of the things you've seen with a lot of the announcements sort of has to do with GenAI and interconnecting GenAI enabled data centers. That we are seeing really a different link have to get activated and therefore using your terminology, fiber utilization on those links between GenAI data centers are relatively full and that's what you saw with the Lumen announcement. We'll have to see how GenAI develops and how they end up splitting the very large clusters, but that could develop into a very significant growth driver for us going forward, Saneek.
spk10: Thank
spk02: you,
spk13: thank
spk02: you, El Paso.
spk07: Thanks for taking my questions. Next question.
spk08: Thank you. I show our next question comes from the line of Matt Nicknam from Deutsche Bank, please go ahead.
spk14: Hey guys, congrats on the quarter. Thanks for taking the question. I guess first on the 4Q revenue guide, if there's any additional color or context you can share in terms of unpacking expectations across the different segments. And then one follow-up on optical, can you clarify whether there was any contribution from the Lumen deal in the third quarter, whether that is expected to kick in in the fourth quarter? Just kind of get a sense of that ramp up to the run rate.
spk09: Thanks. Yeah, hey Matt, it's Ed, thanks for the question. So first on Lumen, no impact in the third quarter and I would say minimal to no impact in the fourth quarter expected. We see that as a 2025, 2026 opportunity. And with respect to our guide, as we always do, we factor in a number of potential outcomes across all of our different segments. I think the one thing that's maybe a little noteworthy about the fourth quarter guide is typically we're not seasonally up Q4 versus Q3. We're typically flat to slightly down. So we're seeing a lot of positive momentum in general, in particular in optical communications, but in general, I think that's what's driving us to guide ourselves a little bit above normal seasonality.
spk08: Great, thank you.
spk02: Next
spk09: question.
spk08: Thank you. Our next question comes from the line of Stephen Fox from Fox advisor LLC, please go ahead.
spk12: Hi, good morning guys. Two questions from me if I could. Real quick on the cash flows, can you put a little bit of context around the free cash flows you generated in the quarter? I think it was the best I've seen from you guys since 2018 in the third quarter. How do we put that in perspective with future free cash flows? Was there any one-time things we should think about? And then from an optical standpoint, just on the cloud side of the business, can you give us a little more perspective on the relative momentum versus enterprise and how you think about that momentum into next year?
spk09: Thanks. Hey Steve, let me do the free cash flow one first. So yeah, we agree Q3 was a great free cash flow quarter, very strong, nice call out on the last time we were at that level. I think if you think about Springboard and the way we've positioned ourselves, we're not adding capacity, so we're not spending capital at a level where you would have seen us potentially do that in the past and we're converting our income, which is growing into cash. So I don't know that every quarter is gonna be at this level of conversion, but I do expect us to continue to generate strong free cash flow as we go forward.
spk08: Thank you.
spk13: And on the cloud, Steve, as you'll recall, when we looked at the Gen. AI driver, what we said is we would expect that to drive a 25% compound annual growth rate through 27 on that enterprise portion of our optical segment. Obviously, we are growing a lot faster than that at this time and our momentum is very strong. We'll be reflecting more on that and when we get together at the investor event in quarter one of next year, we'll update with our latest architectural thoughts and our various modeling to see how we feel about that long-term guidance.
spk08: Fair
spk12: enough, thank you.
spk08: Thank you. Thank you. And I sure our next question comes from the line of Wamsi Mohan from Bank of America, please go ahead.
spk15: Yes, thank you so much. Similar to cash flows, growth margins also were very impressive in the quarter north of 39%. I'm wondering if you can unpack that a little bit in terms of the drivers there, how much of that was mixed versus leverage, given the strength and optical relative to display, you'd think that that would put some mixed pressure but would be helpful to get some context around that and how we should think about that going into fourth quarter, are we now renormalizing at a higher rate in general for gross margin, thank you so much.
spk09: Yeah, thanks Wamsi. So I think what's really driving it is operating leverage consistent with how we've been sharing our view on springboard, we have the cost and the capacity in place, technical capabilities to deliver the higher sales. So as our sales go up, we're experiencing a higher gross margin, 39% plus is a great place. I would say my only caution on thinking about it going forward is that not every quarter is necessarily gonna be up, but we do think we can go higher from where we are at these levels.
spk13: And all I would add to that Wamsi is this, we do expect to see a return profile to continue to improve and that's how we hit our operating margin target of 20% by the end of 2026.
spk07: Great, next question.
spk08: Thank you. Our next question comes from the line of John Roberts from Mizuho, please go ahead.
spk10: Thank you, Hemlock received a CHPSAC award during the quarter here. How are you thinking of, it was all in the semiconductor side I think, so how are you thinking about semiconductor versus solar in terms of the outlook for Hemlock?
spk09: Yeah, thanks John. So yes, we did receive a CHPS grant award and we are looking at what it would take to build out additional semiconductor capacity. I think it's a great opportunity for us to do that. We will figure out sort of the timing. I don't think you should think about it as necessarily having an impact in the springboard window of time here that we've been talking about through 2026. We've sort of factored in the cost and capacity that we need to support the sales in that window of time, but it's certainly an upside opportunity to that as we go forward.
spk08: Thank you. And I show next question comes from the line of a CF, merchant from Citi, please go ahead.
spk06: All right, thank you too, if I may. Just on display, you've put in some pricing actions here, just if you could help us understand how your customers are responding to that and expectations for further price increases in calendar 25. And if I may just on off-ex, I know you talked a little bit about elevated levels here, variable compensation. How should we think about these off-ex levels to moderate in the fourth quarter? I think the assumption implies or the guidance by some moderation here. Thank you.
spk13: We remain confident that our customers will experience a double digit price increase in the second half of this year. Our goal as we have shared is for us to deliver consistent profitability in display, a 25% net income margin next year and generate net income of between 900 and $950 million. As time goes forward, we continue to be quite confident and being able to deliver that.
spk09: Yeah, and off-ex, I think the only thing that I would note other than what I shared is that when we book our accrual in the third quarter, we did have a catch up for the first nine months of the year. So as our performance has accelerated and we've increased our accrual, we've done that in a catch up. We don't have to book that catch up in the fourth quarter, but I would expect our off-ex to be temporarily elevated as well in the fourth quarter.
spk07: Next question.
spk08: Thank you. And I sure our next question comes from the line of Mita Marshall from Morgan Stanley. Please go ahead.
spk01: Great, thanks. Maybe kind of expanding upon on the gross margins. In the past, you guys have talked about 40% being a bogey, but then also said that 39, just given some of the price increases is kind of a more appropriate new bogey. I know you guys have talked more in terms of operating margin targets and kind of this 20% operating margin targets, but just how do you think about gross margin leverage into the next year? Maybe as a first question.
spk09: Yeah, so I would say 39% is a great place. We're happy we delivered that in the third quarter, but I think there's opportunity for us to go up from that level. I just would be cautious that it may not be up every single quarter as we go forward. And I think as Wendell pointed out, the 20% operating margin target as we exit the springboard plan is where we have high confidence, which implies we can do better on gross margin.
spk01: And then at the event earlier this quarter, you guys had mentioned kind of a lot of kind of key milestones that may be coming on kind of the Hemlock business or just how to think about incrementals on the project springboard. I noted that you guys got the TIPS Act funding kind of earlier this week, but just anything else or any updates that we should be thinking of in terms of timing there or kind of TBD?
spk13: We continue to make progress on hitting the milestones we need to to launch a new solar map for us. And that will add significantly to the significant part of our springboard plan, especially the non-risk adjusted portion of it. We would expect to be able to provide you with a relatively detailed explanation of the various pieces. And we would expect to have the major milestones in place around the timing of our IR event, our investor event in the first quarter of next year.
spk01: Thank you.
spk08: Thank you. And I show our next question comes from the line of Martin Yang from Oppenheimer. Please go ahead.
spk11: Hi, good morning. Thank you for taking the question. One question on CAPEX. Can you talk about some of the puts and takes and what led to the slight reduction in CAPEX guidance for the year?
spk09: I would say we're not necessarily adding much capacity. We have some small capital projects that we're finishing up. I don't think there was anything specific to note in the guidance reduction, mostly just where we're running. So we wanted to make sure people understood that. And we continue to believe we have the capacity in place to support at least the three billion in sales. If that changes or we have any other plans, we'll certainly share that.
spk11: Thanks,
spk07: Ed. Next question.
spk08: Thank you. And I show next question comes from the line of Josh Spector from UBS. Please go ahead.
spk03: Hey guys, this is James Cannon, I'm for Josh. I just wanted to say congrats you guys are still tracking well ahead of that three billion dollar plan. But I just wanted to ask on kind of going along with the CAPEX thing. At what point in terms of sales growth would you need to start ramping CAPEX back up? If you guys continue on this trajectory, should we be assuming that you'll have to start ramping up sooner than kind of 2026?
spk13: So to deliver the springboard plan, we don't anticipate a significant sort of increase in our capital investments. If of course the eight billion dollar begins to look more probable, that could generate some more investment on our part in terms of capacity. What you see in our capital today is much more aimed at continued productivity improvement, as well as reconfiguring some of our factories to produce some of our new gen AI product sets. So it's cost a lot less for us to tailor our equipment and to upgrade than it does to put in place a significant new plant and equipment. So unless we start really moving towards that eight billion dollar non risk adjusted revenue run rate, I would say we have an appropriate amount of property plant and equipment in place and that our capital plans will continue to be relatively modest.
spk08: Yeah, thank you.
spk00: Next question.
spk08: Thank you, our next question comes from the line of George Nutter from Jeffries LLC, please go ahead.
spk04: Hi guys, thanks very much. I guess I just wanted to ask about the display price increases. I think as you guys were hedging the business at 107 on the yen, those hedges were in place through the end of this year, yet you're able to institute price increases here at Q3. I thought that was quite impressive. Could you give us a sense for how that conversation went with customers, what kind of leverage you have in the relationship, anything you can tell us about your ability to institute price increases even ahead of the hedges running off, thanks.
spk13: Our price increase is aimed at maintaining stable US dollar net income. And that's exactly what we're doing and that's what you see with our customers experiencing a double digit price increase in the back half of this year. And what that is meant to do is that price increase will offset the weaker yen in our hedges for 2025 and 2026, delivering after that move a stable display net income percent of around 25% and the 900 to $950 million expectation we have for the net income. Remember, all we're doing here is more appropriately sharing the benefits that our customers get from buying at that yen rate. So of course, anytime you increase prices with customers, it is always challenging. But we've been able to do it successfully and that's what you see in our guide.
spk04: Got it, and then any sense for where the new hedge rate will wind up as we roll into next year, thanks.
spk13: I guess, but we will plan to share that as we turn the year. We just want to make sure everything is in place in all of our commercial agreements before we are too forthcoming on where our hedges are at.
spk08: Okay, thank
spk04: you very much, appreciate it.
spk08: Thank you. And I share our last question in the queue, comes from the line of Tim Long from Barclays. Please go ahead.
spk05: Thank you, two-parter if I could on optical. First, looks like obviously a good recovery going on here. On the carrier side, still meaningfully below the levels we saw a few years ago. Could you talk about that piece? Will these new agreements, do you think, get you back to those 2021, 2022 levels for the carrier piece over the next year or two? And then secondly, you just talk a little bit about the op margin, despite being a little overall based in what we saw in those peak years, margins are pretty comparable. So is this all mixed and does that mean if we move higher from here that we could see above historic margins for that optical business going forward as the business scales further from here? Thank you.
spk13: Okay Tim, let me start with carrier. I think it's too early, first your observation is correct. We are seeing carrier still at a relative cyclical low as we have talked about before. I think it's still a little too early for us to be able to confidently call the turn. But you are quite right in observing that all of these customer announcements show carriers leaning into, we have to increase deployments. And they're established in with their lead technology, a partner who is us, the necessary capacity reservations to facilitate those builds. So you're right, it's very encouraging, but we just don't have enough evidence yet, Tim, to reach a conclusion on that spring is activated. And we'll keep you posted as we go forward.
spk09: Yeah, and Tim, on your margin question, I just wanna clarify, you're specifically talking about optical?
spk05: Yeah, just in the optical business,
spk09: correct. So I think the thing to think about is it ties a little bit with what you asked in terms of your first question, right? So our sales are starting to get back close to the peak level, but we haven't yet filled all of our capacity, right? We have capacity in place to support a higher level. So I actually think we can improve our margins in optical as we fill that capacity and grow from here, which we expect to do. So I do think our margins accrete up in optical.
spk03: Okay, thank you.
spk07: Thank you, Tim. Thank you, Dilem, and thank you everybody for joining us today. Before we close, I wanted to let you know that we are going to attend the UBS Global Technology Conference on December 3rd, and we'll be scheduling 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. Dilem, that concludes our call. Please disconnect all lines.
spk08: Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.
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