Corning Incorporated (NYSE:GLW) Q1 2023 Earnings Call Transcript

Corning Incorporated (NYSE:GLW) Q1 2023 Earnings Call Transcript April 25, 2023

Corning Incorporated beats earnings expectations. Reported EPS is $0.41, expectations were $0.39.

Operator: Welcome to the Corning Inc. Quarter 1 2023 Earnings Call. . It is my pleasure to introduce to you, Ann Nicholson, Vice President of Investor Relations.

Ann Nicholson: Thank you, and good morning, everybody. Welcome to Corning’s First Quarter 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 will 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 primary differences between GAAP and core EPS stemmed 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 increased core earnings in Q1 by $97 million. 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. They’re also available on our website for downloading. And now I’ll turn the call over to Wendell.

Wendell Weeks: Thank you, Ann, and good morning, everyone. Last quarter, we told you that markets constituting about half of our sales. We’re experiencing recession-level demand that are first quarter sales would decline by greater-than-normal seasonality due to pandemic-related disruptions, China that we would raise prices again to offset additional inflation and also begin to restore our productivity ratios to pre-pandemic levels. And as a result, our margins would increase 1 to 2 percentage points sequentially despite lower sales. And that is exactly how the first quarter played out. First quarter sales were $3.4 billion, and EPS was $0.41. Our actions to raise prices and restore productivity ratios began delivering notable results.

Despite a 7% sequential sales decline. Gross margin expanded 160 basis points sequentially to 35.2%. And operating margin expanded 150 basis points from the prior quarter to 15.5%. Although conditions remain weak in multiple markets, we expect our results to improve in the second quarter. We remain focused on profitability and cash flow, and we will continue to align our cost structure to demand. Now I wanted to provide some context on the dynamics we’re experienced in our key markets. And then I’ll discuss how we’re continuing to build our long-term growth opportunities across our business. So let’s dive in. In Display Technologies, sales declined 3% sequentially as both volume and glass price declined slightly. In March, panel maker utilization increased, and we expect our volume in the second quarter to increase significantly from the first quarter.

As conditions continue to improve, we’re optimistic the panel maker utilization is beginning to move beyond correction levels and little return to more normal levels in the coming quarters. In Optical Communications, sales declined 6% sequentially. Our pricing actions partially offset a greater-than-normal seasonal volume decline in connectivity solutions, which is associated with the pacing of several large customer projects. Our pricing and productivity actions resulted in net income improving 22% sequentially despite the lower sales. Government commitments to connect the unconnected are contributing to robust cable and fiber demand, and we continue to advance our leadership. Last month, we officially opened an optical cable manufacturing campus in North Carolina to help provide U.S. network operators with the cable they need to bring high-speed optical connectivity to underserved communities, particularly in rural America.

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Commerce Secretary, Gina Raimondo said, “It is past time that every American be connected with affordable Internet no matter where they live. We could not do it without the folks at Corning. We wouldn’t have the fiber, the innovation or the cable.” Finally, in Environmental Technologies, we saw increased adoption of gasoline particulate filters in the quarter, which helped drive a 9% sequential improvement in sales despite the languishing car market. Net income grew 19% in the segment based on our productivity actions and growing sales. To sum up the short term, we’re seeing improvement in some of our markets, but a series of challenges continues to ripple across the global economy. Nevertheless, we expect to grow sequentially in the second quarter and to improve our key financial metrics.

For the back half of the year, I’d be disappointed if we didn’t grow from second quarter levels. Longer term, we will continue to innovate and capture growth opportunities as they materialize. We’re energized about Corning’s future. And I’d like to review some of the reasons why. It all starts with our focused and cohesive portfolio. We maintain clear leadership in three core technologies, and four proprietary manufacturing and engineering platforms that are viable to solving a broad range of significant challenges in shaping to industries. We apply new combinations of our assets and capabilities to advance important secular trends in tandem with our customers. And by reapplying and repurposing our insights and assets across multiple opportunities in markets, we increase our profitability.

In Optical Communications, we’ve been leading in the industry for more than 50 years. This business is the most fully evolved example of Corning’s focused portfolio using all three of our core technologies and four of our manufacturing and engineering platforms. And we will continue to apply these capabilities to help build the more connected world over the next 50 years. In display, by leveraging all three of our core technologies and evolving our fusion platform, we have achieved large scale and broad capabilities that have advanced our leadership position. As our customers evolve, we’re helping them create a world with richer and more lifeline in ubiquitous displays. In mobile consumer electronics, we invented the cover glass category and redefine it by integrating glass with ceramics and by combining fusion with vapor depiction.

We continue to advance the state-of-the-art with our leading cover materials, which have been deployed on more than 8 billion devices to date. And we’ve recently entered new product categories that provide opportunities for more of our content. For example, the camera lens covers on devices like the Samsung Galaxy S22 and S23 series. These advancements are excellent examples of our more Corning approach. We’re also innovating in emerging technologies like augmented reality bendable devices, which we expect to contribute to long-term growth. In automotive, we’re helping build the world where vehicles are increasingly green and where software and displays are enabling new and vehicle experiences. Our inventions are enabling industry leaders to meet stringent upcoming EU7 emissions regulations and achieve near 0 emissions levels.

And we’re collaborating with LG Electronics, a global technology and vehicle component solutions innovator to advance in-car connectivity. Overall, we’re helping to solve more and more of our customers’ challenges in design, connectivity and autonomy. And at CES, we continue to generate strong industry excitement about how our technical glass and optics capabilities can expand the boundaries of what’s possible. Finally, in Life Sciences, we’re using Corning’s core glass and optical physics technologies along with our expertise in vapor deposition, precision forming and extrusion to help support the discovery and delivery of new medicines, including biological treatments, that are personalized, effective and safe. So as you can see, our investments in distinctive capabilities have placed us at the center of secular trends putting many facets of baseline.

And we believe we will continue to develop category defining products to transform industries and enhance labs. I’m also excited by our growth opportunities in the renewable energy industry, where I believe we can make significant additional contributions to a sustainable U.S.-based solar supply chain. We’re proud to make the world here is still a little bit better wherever we can, and that extends to all of our stakeholders, especially in these uncertain times. We recently released our DE&I and sustainability reports, which capture the great progress we’ve made and underscore our commitment to helping move the world forward. So as I wrap up my remarks, here is what I’d like to today. Moving forward throughout 2023, we’ll continue to focus on operating each of our business as well and adjusting to meet the needs of the moment, including aligning our cost structure to the demand environment.

At the same time, we’re advancing growth initiatives and capabilities that will drive long-term success. We remain well positioned to continue capturing a very rich set of long-term opportunities that we’ve built across our market access platforms. 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 financial priorities, along with our results and outlook. Ed?

Edward Schlesinger: Thank you, Wendell. Morning, everyone. For the first quarter, we delivered results at the higher end of our expectations. Sales were $3.4 billion and EPS was $0.41. Gross margin was 35.2% and operating margin was 15.5%, both meaningful improvements from the fourth quarter. Our free cash flow for the quarter was negative $383 million. The first quarter is typically negative due to cash flow cyclicality. This quarter, free cash flow was also impacted by lower sales, reflecting the recession-level demand we saw several of our markets and overall weakness in China. Looking forward, we expect positive free cash flow starting in the second quarter and for the remainder of 2023. Overall, our team demonstrated operational rigor during the quarter.

We continue to make progress on improving our profitability by raising prices to help offset inflation and by adjusting our productivity ratios closer to historical levels, and we will continue to align our cost structure to successfully weather the demand environment. We remain confident in our relevance to long-term secular trends and our more Corning approach, and we are well positioned to capture durable profitable growth as the global economy improves. Now let’s turn to our first quarter segment results. In Optical Communications, sales were $1.1 billion, down 6% sequentially as price increases partially offset a greater-than-normal seasonal volume decline associated with the pacing of customer projects. Despite the decline in sales, net income grew 22% sequentially to $159 million, primarily driven by pricing in productivity actions taken in late 2022.

We continue to believe the industry’s underlying growth drivers are intact. Long-term demand for optical networks is strongly supported by trends in computation and by private and public infrastructure investments to help connect beyond connected and bring broadband to a much larger share of the population. We’re pursuing three significant secular trends: Broadband, 5G and the cloud. 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. Display technology sales in the first quarter were $763 million, down 3% sequentially as both volume and glass price declined slightly. Net income was $160 million, down 6% sequentially on lower sales.

On our last call, I updated you on panel maker utilization dynamics. At the beginning of Q4, utilization began to increase from its low point, but it leveled off in December due to pandemic-related disruptions in China. And in January, the disruptions persisted driving utilization back down and below retail demand. Subsequently, conditions in China improved. In March, panel makers increased their utilization. And as a result, our volume increased from January and February levels. We’re expecting panel makers to run at higher utilization levels in the second quarter than they did in the first quarter. And therefore, we anticipate our sequential glass volume to increase significantly. Favorable pricing is primarily driven by two factors. The first factor is the improving flash supply and demand balance.

Glass makers have been taking additional tanks offline for maintenance and repairs. As we’ve noted previously, we are taking this opportunity to upgrade our fleet with our latest technology, and we’re actively managing the timing of tank restarts to align our supply to demand. The second factor is glassmakers profitability. In Q4, our two major competitors reported net losses, reinforcing our view that it is challenging for glassmakers who have high costs to remain profitable at current pricing levels. Moving to Specialty Materials. Demand for our long lead time semiconductor equipment products remains strong. However, smartphone and IT end market demand remains weak. First quarter sales were $406 million, down 20% sequentially, consistent with typical seasonality.

Net income was $39 million, down sequentially due to the lower sales. We expect the continued adoption of our latest glass innovations such as Gorilla Glass Victus 2 and the introduction of new glass formulations in the second half of 2023 to help offset continued softness in the smartphone and IT markets. Additionally, we believe that new innovation opportunities and emerging technologies like augmented reality and bendable devices will contribute to long-term growth. Environmental Technologies, first quarter sales were $431 million. We saw increased GPF adoption in the quarter, which helped drive a 9% sequential improvement in sales. Net income increased 19% sequentially, driven by higher sales and improved productivity. We are not projecting a recovery in the automotive market in the second quarter and our current view of the full year is that auto sales remain below pre-pandemic levels, but our content-driven growth strategy continues to help us outperform the market.

Turning to Life Sciences. First quarter sales were $256 million, down 13% sequentially, driven by lower demand for COVID-related products and the impact customers drawing down their inventory. Net income was $9 million, driven by lower sales and our actions to reduce production levels in the quarter. Let me take a minute to describe the market dynamics impacting this business and what we expect for the year. In 2021 and the first half of 2022, growth was largely driven by pandemic-related demand and customers over ordered due to supply chain challenges. Pandemic-related demand began tapering in the second half of 2022 and the industry was left with elevated inventory levels. We expect our sales and profitability to improve as the industry corrects, and we restore productivity ratios back to pre-pandemic models.

Finally, in Hemlock and emerging growth businesses, sales in the first quarter were $386 million, up year-over-year and down sequentially, driven primarily by seasonally lower volumes in semiconductor polysilicon. Net income increased sequentially. We are seeing continued strong demand for solar-grade polysilicon to meet the need for a transparent, sustainable and traceable solar supply chain in the U.S. market. And we continue to see strong growth in automotive glass solutions and additional opportunities in pharmaceutical technologies. Now let’s turn to our outlook. For the second quarter, we expect total company sales to grow sequentially led by display as the industry continues to recover. We’re not planning on strong second quarter sales sequential sales improvements in optical communications, web sciences or specialty materials.

Turning to profitability. We expect to build on our progress from the first quarter and further improved profitability driven by our efforts to offset inflation and return productivity ratios to historical levels. We expect sales in the range of $3.4 billion to $3.6 billion and EPS in the range of $0.42 to $0.49. And free cash flow will improve strongly due to normal cyclicality and higher sales. And as I said earlier, we expect positive free cash flow in the second quarter. The most likely case for the second half is that sales and earnings increase versus the second quarter. Although it’s too early to be definitive, given continued global economic uncertainty, and its impact on consumer demand and infrastructure spending. I’d also like to reiterate our capital allocation priorities.

We prioritize organic growth through research and development and capital expenditures. The investment opportunities we target generate a 20% ROIC or greater. We expect 2023 full year capital expenditures to be slightly lower than 2022. We are also prioritizing rewarding shareholders with our excess cash in two ways: First is dividends, which we’ve raised for 13 years in a row. Second is share buybacks. We bought back about 5% of our outstanding shares in 2021, and we’ll continue to be opportunistic. Preserving the financial strength of the company is always a top priority. We maintain a strong balance sheet that provides appropriate durability and flexibility. And I’m proud to say Corning maintained one of the longest debt tenants in the S&P 500.

Our average maturity is about 25 years with no significant debt in any given you. In some the actions we are taking position us to come out of this period of uncertainty, financially strong and well positioned for a return to growth. Now I’d like to wrap up with a few key takeaways. In the second quarter, we expect sales, profitability and cash generation to improve, driven by our profit improvement actions, cost controls, and continued recovery in display technologies. We’re executing a highly disciplined approach to our investment decisions while maintaining a strong balance sheet. We’re particularly focused on aligning our cost structure to the demand environment while maintaining the flexibility to address changing market conditions and capture upside as it occurs.

Our long-term growth drivers all remain intact, and we’re well positioned to continue capturing growth tied to key secular trends such as those playing out in the optical communications and solar markets. And with that, I’ll turn it back over to Ann for Q&A.

Ann Nicholson: Thanks, Ed. Hey, operator, we are ready for our first question.

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Q&A Session

Operator: . Our first question comes from the line of Matt Niknam with Deutsche Bank.

Matthew Niknam: Congrats on the quarter. If just could on optical. If you can just talk about the latest — your hearing from your customers and maybe speak a little bit more in terms of expectations and what’s embedded for the second quarter. And then secondly, on optical. I’m just trying to figure out in terms of where you’re seeing some of the pause or more near-term softness, is it broadly distributed? Or is it maybe more in the sort of subscale or smaller carriers, which may be facing tougher maybe financial conditions, which are impacting some of the longer-term investment plans.

Wendell Weeks: So here’s the dynamics we’re seeing Corning customers and how are we . So first, fiber and cable demand remains quite tight. And that’s really — you can see that with exhibited by the success of our recent price increase actions in that space. So for us, it’s really the connectivity sales. So think hardware, connectors in the engineered systems for fiber-to-the-home and large-scale fiber large-scale data centers are running below last year’s levels, largely due to customer project timing. Now what we hear from customers is the underlying drivers remains very robust: Cloud, AI/ML, 5G broadband connectivity. So we’re sort of facing this interesting economy, which is all the long-term drivers are made in place and they’re all speaking about very robust deployment plans.

At the same time, we’re just not seeing it, in our order book, nor are we seeing it in earth being moved in these large simple works projects. So we’re taking these words with a little grain of salt. And we’re just not reflecting in our forecast and our guide any renewal trust recovery yet until we see it. And it’s not — we’re seeing this in large players, not just small folks. Some, I think, are seeking to finance or resources as they deal with their own uncertainty. But at the same time, haven’t given up on their launch of strategic plans. Does it mean that we won’t see a strong bounce back to the run rate that you’d expect to match with their words on deployment plans in the back half? We could see it. We’re just not going to guide it to we have it in our hands.

Does that make sense, Matt?

Operator: Our next question comes from the line of Shannon Cross with Credit Suisse.

Shannon Cross: Wendell, can you talk a bit more on the display rebound that you’re seeing, particularly what you saw in March? And how you expect that to trend through the year? What key points are you tracking to make sure that we are seeing a bit of a rebound there?

Wendell Weeks: So as you heard in Ed’s comments, good we originally started to see the recovery in quarter 4. The pandemic shock sits in — sets in, in China, sort of we go backwards and that we expected that we would work our way through it and then start to see the recovery start again, in quarter 1. And that’s what we saw in March. So we saw utilization start to decline. We’re seeing a continued decline through this month. So as — what we watch are what’s actually happening with panel maker utilization, how are we seeing the dynamics play out between set makers and panel makers is looking to us like we’re going to move beyond the recovery time, the correction time in this market and recovery is underway, and we would expect to see that build in the coming quarter.

That’s the way it looks to assess what it feels to us that’s what the data is telling us. But it’s still early, right? So we’re not coming out hard core and saying, yes, we’re back to normal. We’re not there yet. But we’re seeing the trends all move in the right direction, Shannon.

Operator: Our next question comes from the line of Steven Fox with Fox Advisors, LLC.

Steven Fox: A bit of a difficult question since it involves not guiding to the second half. But Wendell, you mentioned in your opening remarks that you thought you could grow in the second half. Where, where would you say that based on what you’re seeing today, that there’s opportunities for typical seasonality, where maybe we should capture expectations for seasonal improvements because the company is typically very back-end loaded in terms of their earnings growth half-over-half and the Street is looking for about 25% quarter-over-quarter improvement in earnings in Q3.

Edward Schlesinger: Steve, this is Ed. I’ll take that one. So maybe I’ll start with the second quarter, and then I’ll go to the second half. So as we think about the second quarter in our guide, we’re thinking about a significant improvement in display. I think that’s the primary driver. We’re not expecting significant sales growth in other businesses. We specifically called out optical, life sciences and specialty materials. When you think about the second half, I think the first thing I’d start with is in specialty materials. We typically see customer product launches happen in the second half into business where usually our second half is higher than our first half. I think that’s a dynamic that could play out. And in our thoughts about the most likely case being the second half greater than the first half or greater than the second quarter.

That’s a place that I would expect to see growth. I think additionally, Wendell describe the optical communications situation very well, and we could certainly grow from first to second quarter levels in optical communications. Life Sciences, you could see a small increase. And then depending on how display you could see growth there as well.

Operator: Our next question comes from the line of Wamsi Mohan with Bank of America.

Wamsi Mohan: Just a follow-up on Steve’s question, Wendell, when you said you would be disappointed if you did not see growth in second half from second quarter levels. Historically, you have on average been second half up 7% or first half. So it would be fairly dramatic for you to see not sequential growth. Would you say 2023, though, is shaping up in line with that kind of an expectation of second versus first half? Or is it more like recessionary years where maybe the dynamic track worse? And if I could, I know you mentioned sequential very strong sequential volume growth in 2Q in display, could you comment on how that looks on a year-on-year basis as well and where inventory levels are in display?

Wendell Weeks: Let’s take the second one. On the first one, once it’s an excellent question. So here’s the way the dynamics playing out with an even our own company is our operating groups are operating leaders. Sound very much like us, and they sound very much like our customers, all sort of pointing towards what you see normally and the behavior you would expect in our industries. And what’s happening is that’s running in the tension with us sort of in the center of the company who are looking at this and saying, I think this is a pretty unusual time we find ourselves in. And it’s unclear to us that following the historical cycles, we’re following what our customers are telling us is going to necessarily lead us to the right answer in the short term.

So you’re on top of attention, which is why sort of we’re working it the way we are, which is we do expect growth how much growth is under much debate within us, but it’s not, I think, what we know Wamsi, making us have that debate is the things that we don’t know. And that’s sort of the way it’s playing out and sort of each passing month brings us a little more clarity. So that’s where we are, Wamsi. Does that answer makes sense to you?