Operator:

Welcome to the Corning Incorporated Quarter Two 2024 Earnings Call. [Operator Instructions] It is my pleasure to introduce to you, Ann Nicholson, Vice President of Investor Relations.

Wendell Weeks:

Thank you, Ann, and good morning, everyone. Today, we announced strong second quarter 2024 results. We returned to year-over-year growth, and we exceeded the sales and EPS guidance we shared going into the quarter in April. The outperformance was driven primarily by the strong adoption of our new optical connectivity products for generative AI. So why don't we start today with a quick explanation of why this application provides a great growth opportunity for our shareholders. Our traditional data centers contain a network of interconnected switches and CPUs. GenAI requires a second network within data centers to connect every GPU to every other GPU in the cluster, creating a neural network. Now because GPUs have more processing capacity than CPUs, they need higher bandwidth links connecting them. The result is about 10 times the number of fiber connections in this new network versus a traditional data center. Now this not only provides volume, which is great, but also the opportunity to innovate with the major players in this space. So, over the past four years, we've helped key customers design the optical links needed for this second network in their next-generation AI data centers. We invented new to the world, fibers, cables, connectors and custom integrated solutions. These new products dramatically reduce installation time and on-site labor, save space and lower embodied carbon. All while reducing installed cost and increasing the overall reliability of the network. As I noted, strong adoption of these Gen AI products primarily drove our outperformance in the second quarter. In fact, it drove record sales in the enterprise portion of our optical business. which grew more than 40% year-over-year. I've been talking about the Gen AI opportunity inside the data center. Gen AI also increases bandwidth requirements between data centers. We've reached an agreement with Lumen Technologies that reserves 10% of our global fiber capacity for each of the next two years to facilitate Lumen's build of a new network to interconnect AI-enabled data centers This will be the first outside plant deployment of Corning's new Gen AI fiber and cable system that will enable Lumen to fit anywhere from two to four times the amount of fiber into their existing conduit. Now, Gen AI is just one of the many growth opportunities we've included in the plan we call Springboard, which adds more than $3 billion in annualized sales with strong incremental profit and cash flow within the next three years. We've been sharing some of the key points on Springboard for the last few quarters. But today, I want to outline our plan in a more comprehensive way. We've built a tremendous opportunity for our shareholders, and we want to help you understand how we think about Springboard. Let's start with the core components. First, we previously shared with you that the first quarter would be the low quarter for the year and as our results show, we began our march up. Sales grew 11% sequentially to $3.6 billion in the second quarter, and we returned to year-over-year growth. And the third quarter guidance we provided in our release this morning shows that we expect to continue growing in the third quarter with sales of approximately $3.7 billion. Second, we expect to add more than $3 billion in annualized sales within the next three years as cyclical factors and secular trends converge and drive demand for our capabilities. Our market positions are strong, and we're seeing encouraging signs of markets improve. And we continue to innovate new product sets tied to secular trends to drive growth above market levels. Third, as we capture this growth, we expect to deliver powerful incremental profit and cash flow. We have the required capacity and technical capabilities in place to service that $3 billion in the three-year window, and the cost and capital are already reflected in our financials. Our second quarter results and third quarter guidance serve as a strong proof point of our powerful incrementals. We grew EPS 24% sequentially, more than double our sales growth rate. And as you can see in our guidance, we expect EPS to grow about three times faster than sales in the third quarter. Gross margin improved sequentially and year-over-year by 110 and 170 basis points, respectively. Operating margin expanded 190 basis points versus quarter one. We also generated strong free cash flow and with the success of Springboard, we expect to be able to accelerate the return of cash to shareholders. In fact, due our growing confidence in the plan, we began buying back shares in the second quarter and will do so in the third quarter. So I'd just walk through the core components of Springboard. Now I want to provide more context on our sales opportunity because this is an extraordinary time for the company. I've had a chance to talk with many of you recently, and you've probably heard me say, material science is really slow until it gets wicked fast. You hit these moments of inflection. For example, I just noted, our new product suite for GenAI. To do all that, we had a dedicated team that I've been part of for the last four years, capitalizing on our deep insight and customer relationships to develop these products long before they become a seemingly overnight success. Some strategies take even longer to come to fruition. Meaningful innovation takes time. And then you hit these critical milestones and everything starts happening in quick succession. We are one of these moments. Over the next several quarters, we expect to share a number of customer announcements. You'll see more commercialized innovations and a steady march up in our quarterly performance. So I want to give you a structure to help you put those coming milestones into the context of our total Springboard plan as they happen. I'm going to use this chart to explain our incremental sales opportunity. We introduced Springboard in quarter three last year using our quarter four projected sales of $3.25 billion as the starting point, which put us at a $13 billion annualized run rate. The Y-axis represents incremental sales above our quarter four 2023 run rate. And the X-axis simply represents time for the following five years. Now let's fill in some numbers. Here is our internal non-risk adjusted plan. Now there is a lot to take away from this slide. The first is 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. We expect growth across all our market access platforms, driven by a combination of upward cyclical and secular trends, and we'll provide insight behind the springs or drivers of that growth. Now this is our internal plan. When we say it's not risk adjusted, what mean is that the projections are based on a number of assumptions, including markets recovering back 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. That said, we've taken this opportunity and translated it into a high confidence plan to help inform investors. To do that first, we focused on the next three years. 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 and the potential that some of our markets may go through down cycles. And this is how we come to the high confidence Springboard plan for our shareholders to help inform their investment decisions. It's also important to note that we purposely drew this as a wedge. We weren't trying to guide every quarter for the next 12 quarters. It obviously, won't be a straight line. But we are also not dealing with a hockey stick, when we built the plan we expected to see strong growth this year. So how are we doing so far? We are off to a terrific time. Let me explain the $1.3 billion dot point you see on the chart here. Our quarter two 2024 sales were $3.6 billion. Our quarter four 2023 sales were $3.27 billion, the difference is $330 million. And when you annualize that, you get to $1.3 billion. And that trend continues into quarter three. The additional sequential growth increases our run rate in the third quarter by $1.7 billion. As you can see, we are running well ahead of our Springboard plan run rate. That being said, please remember, we're only two quarters into a 12-quarter plan. Springboard is a milestone-based plan evolving over the next three years. We have plenty of opportunity ahead of us, a lot of springs yet to activate. We'll update you as we hit significant milestones. Clearly, we're off to a very strong start, well above the run rates we need to deliver. So as I wrap up this morning, I think you can see why we're energized about Springboard. And we're pleased with our early progress, including, of course, the encouraging response to our Gen AI Products. We expect to have a lot more news over the next few months as milestones start to hit and we're scheduling around those. We're planning another investor event in September as well as a full Investor Day in early 2025. Also, it is important to note that as we proceed forward with Springboard, we'll continue to seek the guidance of our Board of Directors. To that end, we will be refreshing our Board composition to more closely align the skill set profiles of the Board with our Springboard plan. Now, let me turn it over to Ed for some more detail and perspective on the quarter and on Springboard.

Ann Nicholson:

Thanks, Ed. Okay. We're ready for our first question.

Asiya Merchant:

Great. Good morning. Thank you for the opportunity and congratulations on the strong results. On the optical side, if I may, especially on the Gen AI, if you could maybe double-click a little bit on this -- the customers who are demanding the Gen AI products that you've talked about and the visibility that you have over the next couple of quarters and even as you look into your Springboard plan, over the next 12 quarters, what kind of visibility do you have in sustaining this momentum that you have outlined? Thank you.

Asiya Merchant:

Yes, that's great. And so it's the competitive moat that maybe Corning has an optical on the enterprise side, much greater in your, as you think about the opportunity ahead versus let's say, a couple of quarters ago or even with your prior solution? Thank you.

Asiya Merchant:

Okay. Thank you.

Operator:

Thank you. Our next question comes from Samik Chatterjee from JPMorgan. Your line is open.

Wendell Weeks:

Well, to your first question, it is both in carrier and enterprise. But the majority is coming out of the enterprise piece as you see the fundamental change in compute-driven by Gen AI and its related networking requirements. And we can come back to that if you want. Lumen, let's just start with sizing, when we say 10% of our global fiber capacity, I think the way you can think about it, it's -- you won't be far off as you size it. If you just take your sort of expected view of what our total revenue will be in Opto and you take 10% of it, and that's going to get you in the zone Samik, right? What makes the Lumen transaction so exciting for us is that we've always had a significant business connecting data centers to each other in the network at large. Because that's how data gets in and out of the cloud, right? The technical question has been with the advent of a new GPU-based back-end network for Gen AI within data centers will there be a dramatic increase in the need for fiber to connect these Gen AI-enabled data centers to each other and the network. The answer is going to depend on where is the power located and how that interacts with the architecture of the large language model and how and where both inference and training are accomplished. It's exciting about the Lumen deal is that it is certainly a strong proof point in favor of a bull case for that segment of the network. Does that make sense to you, Samik, if I've been responsive your question.

Wendell Weeks:

I don't want to speculate at this time, right? What is great about what Lumen has done is they're going to be the first customer to apply our new tech sort of double the amount of fiber they can place in their existing conduit. And that is super exciting. I would believe that, that is so exciting that it will generate lots of interest.

Ann Nicholson:

Hey, next question.

Steven Fox:

Hi. Good morning. Maybe just one more question on optical for me also. Can you just -- Wendell, you guys mentioned the 25% CAGR for the enterprise business over the next few years. There's a lot of concern, I think, that while there's optimism for this type of growth rate that it could be more diversity in nature, have some puts and takes as you go through the quarters. How do we get comfortable with the idea that you have enough customer diversity, project diversity that this is sort of a steady type of growth prospect for Gen AI over the next few years? Thanks.

Steven Fox:

Yeah, it does. Maybe just to push that a little bit further, like do you see that happening over the next few quarters? Or are we so early stages that there's a consistent route to the growth around GenAI? Thank you.

Steven Fox:

Great. Thank you very much.

Martin Yang:

Hi. Tanks for taking the question. Just a quick confirmation on the 3Q guidance. Is it right to assume there's no price increase assumed or display in 3Q?

Martin Yang:

Got it. Thank you, Ed.

Operator:

Thank you. Our next question will be from Ruplu Bhattacharya [Bank of America Securities]. Your line is open.

Ed Schlesinger:

Yeah. Thanks. Great question. I think in general, the drivers for us on gross margin are we have the capacity and the technical capabilities in place to support a higher level of sales. So in general, we're not having to add fixed costs as our sales go up. So that is really what's going to drive both gross margin and operating margin for us as we go forward. And I do think there is room for our gross margin to continue go up as sales go up, I think our guide implies that for Q3.

Ed Schlesinger:

Yes. So, I'll take those, sort of, one at a time. So, I think on utilization, when we spoke about Q2, we expected it to increase significantly from Q1. It did that. It actually was even better than our expectations. They ran a little hot. I think as we think about Q3, they're likely to run at that level or a little lower to sort of average out for the year. We think they're running more or less in line to meet expected retail demand. And with respect to the core rate, right now, we have hedges in place for 2025 and beyond. We're in the middle of a currency-based price adjustment with our customers. We're going to come back when all that's complete and we'll share our thoughts on how all that will work. But I think the most important thing is that when you think about our profitability going forward, our goal is to get the combination of the price adjustments and our hedges to get a net income margin or net income percent of sales that averages out at about the last five years. And Ruplu, I apologize if you had -- did I miss any of your components of your question?

Ruplu Bhattacharya:

Okay. Thank you for all the details. Appreciate it.

Operator:

Thank you. Our next question will come from Mehdi Hosseini from Susquehanna International Group. Your line is open.

Ed Schlesinger:

Yes. Thanks Mehdi. So, I think stepping back, if you think about our sales growing 11% and EPS growing 21% in the second quarter and then our guide implying a sales growth rate in the low single-digits and EPS growing 3 times faster than that, I think we can continue to have EPS growth outpacing sales regardless of where that growth comes from, primarily because we have the cost, the technical capabilities, the capacity in place to support the growth. I also think that the margins are quite attractive in the Optical business and especially in the data center space and AI data center space, where we expect to see growth.

Ed Schlesinger:

I think it can be above 13%.

Ann Nicholson:

Next question.

James Cannon:

Hey, guys. This is James Cannon on for Josh. Congrats on the strong quarter of enterprise sales. I was just wondering if you could frame you called out a 10% decline in on the carrier side of that business? If you could just frame how that compares to what you did last quarter and maybe kind of what you're seeing in terms of the trajectory for the third quarter?

Wendell Weeks:

What we're seeing is that our carrier order rates are now starting to approach what we see as their deployment rates. And so that's also encouraging. So we have sort of that upward spring still in front of us when you begin to think of your year-over-year growth rates James.

Wendell Weeks:

Enterprise.

Wendell Weeks:

Yeah. Enterprise tends to be higher margin than carrier, primarily because it uses more of those customized connectivity systems. And so that is, as you move up the stack, in the degree of sophistication that we offer to our customers as that helps them reduce their installation cost, we end up sharing a portion of that value we create with those total passive optical systems that we do those. We'll have a higher degree of adoption in enterprise as a share of revenue than they do in carrier as a share of the total revenue.

Ann Nicholson:

Great. Next question.

Meta Marshall:

Great. Thanks. I appreciate commentary on Carrier that you guys are getting towards a better inventory position or that orders are getting more aligned with deployments. But just any latest update in terms of -- of when you expect carriers to kind be through their inventory or orders to be aligning with deployments? And then maybe a second question, just in terms of the price increases on the display side or those negotiations? Is that something you expect to kind of have completed by Q3? And just as we think about that going forward, as you're going through those negotiations, is there any hope of kind of moving that to more USD-based pricing? Or just, do you expect that to be more dynamic with currency going forward? Thanks.

Ed Schlesinger:

Yes. Meta, on carrier, I think it's customer-by-customer the inventory situations are different. We're not quite there yet on people being completely at their -- buying at their deployment rates. I think we'll make progress on that as we go into the third quarter. We'll keep you updated, but I don't know that will necessarily be through all of it.

Meta Marshall:

Okay. Thank you.

Operator:

Thank you. Our next question will come from Tim Long from Barclays. Your line is open.

Wendell Weeks:

To take your questions in order. To the first part, the revenue that you see us reporting today is basically the fiber optic connections between the switches. Okay. Doesn't work exactly like this, but the way people talk about sort of top of the rack switches that then connect to other switch layers, which enable us to connect every GPU to every other GPU. There is work as you are reflecting on what will happen then within the server racks whether those will end up becoming optical connections as well. Historically, they have been copper. And then once the bit rate distance rises above sort of 100 gigabit per meter second, you end up going to optical. So as distance climbs, fickle tends to become the technology that is dominant use of the tech. That same dynamic because of density and complexity is now starting to work its way. We're beginning that long-term material science is slower work, right, on what happens within the server rack. And that tends to get at the architecture as you're speaking about more fully. To the part two of your question is what happens with influence, there's a bunch of different opinions on how inference architectures will work. It tends to be largely driven by what that particular players market position is and different arguments around data gravity, right? So I would say it's too early for us to have a point of view on which architectures will become the predominant ones, for inference, Tim. As our understanding evolves and we developed a more converged view of how that evolves, we'll be happy to share with you. Does that address your questions, Tim?

Ann Nicholson:

Great. I think we can take one more question.

George Notter:

Hi, guys. Thanks a lot for squeezing me in. I guess I wanted to just go back to the question of your competitive differentiation in the optical business. I guess for starters, I'm just curious about how much of this Gen AI solution is customized from Corning. Curious about how many customers you're doing customization work for? And then also, I know there are other suppliers making smaller diameter fiber cables. I know there's a bunch of work folks are doing on connectors, higher-density racks. I guess I'm just hoping to drill down into what's precisely unique to Corning versus some of those other guys. Thanks.

George Notter:

Great. Thank you very much.

Operator:

Thank you. This concludes today's conference call. Thank you for your participation. You may now disconnect. Everyone, have a wonderful day.

Operator:

Welcome to the Corning Incorporated Quarter 1 2024 Earnings Call.

Wendell Weeks:

Thank you, Ann. Good morning, everyone. Today, we announced first quarter 2024 results. Sales were nearly $3.3 billion and EPS was $0.38. 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, but 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.

The framework has 3 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 3 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.

Operator:

[Operator Instructions]

Wamsi Mohan:

If I could, one for Wendell, one for Ed. Wendell, on the commentary around the data center opportunity around AI. I was wondering if you could just share some color on when you think these incremental orders and revenue will flow into Corning. And these hundreds of -- low hundreds of dollars per GPU, can you just break that down into maybe just a little bit more color on where exactly that's coming from? Is this rack-to-rack connections in optical and data center? And how large do you think the TAM for that is? And I have a follow-up for Ed please.

Wendell Weeks:

So you -- that is a great observation, and it is in line with the sort of secular trend that we see that basically says we have plenty of innovation we have to get done because density continues to increase as well as the bandwidth requirements increase. And so what that does is it reduces the amount of distance with which you can travel in an electron and therefore pushes the photons closer and closer to sort of the beachfront of those GPUs, which is opening up an entire new set of categories for us -- for our flat glass, for our ability to couple light into various formats. And so in a way what you're describing is what's leading to a whole new family of innovations upon which we are working diligently, Wamsi.

Operator:

Our next question comes from the line of Meta Marshall with Morgan Stanley.

Meta Marshall:

Yes, that's helpful.

Martin Yang:

I would like to ask about your opinion regarding newly announced subsidy programs for home appliance trading in China. I know your retail estimates on PV sales this year hasn't changed. Do you think this could be a new catalyst to drive upside to retail TV market and your glass volume in '24?

Operator:

Our next question comes from the line of Samik Chatterjee with JPMorgan.

Samik Chatterjee:

And any thoughts on 2Q, the step-up from 1Q, 2Q just given the exit run rate was higher in 1Q.

Operator:

Our next question comes from the line of Tim Long with Barclays.

Wendell Weeks:

The answer to your question is yes. It is an interesting opportunity. And it is -- coming back to [ enhancing ], hey, capability we have that others don't, which is this ability for us to actually respond globally across a really big geographic footprint, not only in the U.S. but across the globe. Because this search for energy is more than just finding the exact right communities here. And so yes, it does offer a significant opportunity for us for both innovation as well as volume. But it's too early to factor that in because they haven't found all the energy sources yet that will be required, and they're still dealing with the infrastructure ramifications therein.

Asiya Merchant:

Great. And apologies if this question has been answered. But I did notice inventory was a little higher this quarter and OpEx tracked a little bit higher as well. Just if you can provide some clarity on that.

Edward Schlesinger:

Yes. No apologies necessary, Asiya. Yes, what I shared earlier was the most important thing is to think about the return we generate in this business, our goal is to generate an appropriate return. You could think of that as what we will deliver in 2024 or what we delivered in 2023. And we're going to use yen hedging and raising price in combination to generate that economics or those economics to generate that return.

Operator:

Our next question comes from the line of Joshua Spector with UBS.

Edward Schlesinger:

Yes. Thanks for the question. I think the way to think about it is if you go back to Q2 of -- I'm sorry, Q4 of 2022, that was our low point. We've expanded our gross margin 300 basis points while our sales have come down almost $400 million. We've done that by improving our productivity ratios, running our factories better and by raising price.

James Cannon:

Okay. I guess just another way to think about it is, as that $3 billion comes through, like I think 40 has typically been your target. Like has that changed? Or is that where you think -- that's where you think you can get to?

Operator:

Our next question comes from the line of Steven Fox with Fox Advisors.

Edward Schlesinger:

Yes. I think it was more or less in line with how we would have expected it. I think it's a business that will grow as we add more Corning content. That's the way we think about it for the year. We don't see smartphone market being up that much in units maybe a point or 2 for the year. There certainly can be some growth in the IT space, but even that is single digit, maybe mid-single-digit level.

Wendell Weeks:

And we just don't see a lot of that happening this year. Steve, we'll be -- this is most of our newest innovation will be aimed at the model year following this. So we're not looking at MC as being a big catalyst for near-term growth in terms of versus Q1, right, for this year, but future it will be.

Operator:

Our next question comes from the line of George Notter with Jefferies.

Wendell Weeks:

The appropriate level of profitability would include any cost of hedging. We're long yen, right? And so the -- you heard, and Ed was pointing out sort of over the sweep of time, we generated on the order of $2.5 billion of cash, positive cash arising from our hedges, right? That or us hedging that long end position. And the way we think about this is that position is coming from the fact we sell in yen. And so we will resolve this either in the currency market should the yen come back to more sort of reasonable levels, right? And we'll be opportunistic about that.

George Notter:

It does. I assume it's still fair to say that the cost of the hedging program is pretty minimal to shareholders, we're pretty balanced in terms of the 2 sides.

Ann Nicholson:

Thanks, George, and thank you, everybody, for joining us today. Before we close, I wanted to let you know that we will hold our Annual Meeting of Shareholders on May 2. In addition, we'll also attend the JPMorgan Technology Conference on May 21. And finally, we'll be hosting management visits to investor offices in [ select cities ].

Operator:

This concludes today's conference call. Thank you for your participation. You may now disconnect.

Operator:

Welcome to the Corning Incorporated Quarter Four 2023 Earnings Call. [Operator Instructions] It is my pleasure to introduce to you Ann Nicholson, Vice President of Invest Relations.

Wendell Weeks:

Thank you, Ann. Good morning, everyone. Today we reported fourth quarter and full year 2023 results. Sales for the fourth quarter were $3.3 billion and EPS was $0.39, in line with expectations. Free cash flow was $0.5 billion. Gross margin was 37%, consistent with the third quarter despite lower sequential sales. As I shared with you last quarter, demand in most of our markets is temporarily depressed due to supply chain corrections and macroeconomic factors, therefore our sales are well below long term trends. Nevertheless, the actions we took to improve our profitability and cash flow generation throughout 2023 are evident in our financial performance. And based on detailed assessments, we are confident that we've extended our leadership positions across our markets While our current sales are below trend, we expect that to change in the midterm as our markets begin to normalize. This creates an opportunity for us to increase our sales by more than $3 billion when that happens. As we capture that growth, we expect to deliver powerful incrementals because we already have the required production capacity and technical capabilities in place and the cost is already reflected in our financials. The incremental profit and cash flow annuity created by increasing sales by $3 billion plus is a terrific opportunity for our shareholders, and we expect to start making progress towards realizing that opportunity in 2024. Now it's difficult to call the specific timing of a recovery, but we continue to see signs that it will occur in 2024. As a result, we expect the first quarter to be our low quarter of the year. So, that's a summary of where we are and how we seek to create value in the medium term. I'd like to provide some additional facts and perspective. At the start of 2023, we introduced plans to improve profitability and cash flow in this lower-demand environment. Throughout the year, we took action to restore our productivity ratios to historical levels and to raise price to more appropriately share inflation with our customers. I'm happy to report we delivered on our plans. When you look at our fourth quarter results on a year-over-year basis, the evidence of our progress is quite clear. We increased gross margin by 330 basis points and free cash flow by $110 million to $0.5 billion despite sales being down by more than $350 million. Our profitability and productivity improvements led to significantly improved free cash flow conversion and we expect to continue converting profit to cash at attractive rates going forward. Overall, our results in the quarter and throughout 2023 demonstrate that we continue to make solid progress advancing our market leadership, strengthening our profitability and improving our cash flow generation even in the lower demand environment we're experiencing. As a result, we're entering this year operationally strong. Now we intend to build on this strength. As I previously mentioned, we have an opportunity to increase our sales by more than $3 billion in the medium term. Let's take a deeper look as to why we believe this. I shared a bit of how we're thinking about Optical Communications on the last call. I'll start there again today because it's a significant part of our opportunity. We anticipate Optical Communications sales will spring back because we believe and our carrier customers have confirmed that they purchased excess inventory during the pandemic and that they've been utilizing this inventory to continue deploying their networks. We believe these carriers will soon deplete their inventory and execute on the increased broadband deployment plans they've communicated to us over the last several months. As a result, we expect them to return to their normal purchasing patterns to service their deployments. We also continue to expect speed funding for network builds in underserved areas to begin in the second half of 2024 and continue adding to our addressable market for several years. Additionally, we expect to grow hyperscale sales in support of the growing role of cloud computing and the need to build the second optical network necessary to directly connect the GPUs that drive artificial intelligence. Last quarter, I shared trend lines for fiber shipments, which showed that we are significantly below trend and outlined why we expect our sales to get back on trend. I'd now like to update you on progress during the fourth quarter. Here you see Corning's fiber shipments measured in fiber kilometers since the beginning of 2007. The trend line shows a 7.3% compound annual growth rate over the last decade compared to a 6.6% CAGR for industry fiber shipments over the same period. As I explained during our third quarter call, our fiber shipments in quarter one of 2023 were basically in line with expected market trends, but started to drop below our trend line in quarter two and even more so in quarter three, with our shipments more than 30% below trend line, primarily due to elevated carrier inventory levels. We now have another quarter of data to share. In the Q4, we saw a small uptick in fiber shipments, but they remain more than 30% below trend. More importantly, our regular sit downs with key customers indicate that they are deploying at a higher rate than they are purchasing as they continue to make progress on drawing down inventory. Additionally, they have plans to increase deployments in 2024. We look forward to updating you on takeaways from our next round of sit downs. We're also seeing encouraging signs in hyperscale. Overall orders grew in the fourth quarter and we're seeing the earliest edge of AI related network builds in our order books. Returning to trend adds more than 40% to our revenue run rate for Optical Communications and we are laser focused on doing just that. Beyond that, we expect the strong underlying growth trend to continue far into the future and our sales to grow faster than the market through more Corning innovations. Optical fiber remains the ascendant technology with growing applications in wireless, cloud computing including AI and broadband efforts to connect the unconnected. As those applications grow, we have new product innovations in each that will increase our revenue per installed fiber. Government incentives to ensure everyone has Internet access also extend the long term trend line. Display provides another example of how our sales will spring back. Retail sales During the fourth quarter selling season were softer than industry expectations. Panel makers responded by reducing their fourth quarter utilization levels. Additionally, industry reports indicate that panel makers plan to run at lower utilization levels in the first quarter as they continue to align panel supply to demand with fab shutdowns planned during the Lunar New Year holidays in February. For the first quarter of 2024, we expect the glass market and our volume to be down by a mid-single digit percentage sequentially. For the full year of 2024, our expectations are in line with the industry. We anticipate relatively flat television unit volume, another year of TV screen size growth, and some recovery in PC demand. Combined, this adds mid-single digit growth in glass volume at retail versus 2023. We expect panel maker utilization to increase after the first quarter to meet the expected retail demand. As a result, we expect our financial performance to significantly improve from our first quarter run rate. Longer term, we expect continued volume growth in retail to be mainly driven by television screen size growth as it has the past several years and for some improvement in units as consumer demand normalizes. Well, we expect to win in this market because we are the undisputed technology leader. Our successful development and capability in Gen 10.5 aligns with the continued move to larger sized TVs produced on the lowest cost platforms for large displays. Life Sciences is another segment where market normalization contributes significantly to our expected growth. Customers in North America and in Europe are completing their inventory drawdowns. We are continuing our productivity and operations improvements, and we're refocusing our commercial and production efforts on drug discovery and production as the market returns. We also continue to evolve our products and business model for vials in our pharmaceutical technologies business. In addition to markets returning to normal, we continue to execute our more Corning content opportunities across the company. In Mobile Consumer Electronics and Automotive, we see more Corning as the primary growth mechanism. Let's look first at Mobile Consumer Electronics. Since 2016, handhelds have declined 21%, while our sales of Gorilla Glass have increased 41%. Now, we've done this by advancing the state-of-the-art for cover materials. And this is just 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 content per device. You saw a great example of this earlier in January in our announcement with Samsung about Corning Gorilla Armor, which dramatically enhances sunlight readability and scratch resistance. Extreme ultraviolet lithography, or EUV, a market we serve with our advanced optics products, is another great, more Corning opportunity. We are the market leader for the photo mask and mirror materials of choice for GPUs and other advanced semiconductors. In automotive, proposed US EPA regulations would require adoption of gasoline particulate filters and provide an incremental driver of demand for our market-leading GPF offerings. In terms of more Corning, GPF adds two to three times the content opportunity in ICE vehicles. This would mean significant growth in our environmental business, even in the face of global BEV adoption. Additionally, we're winning both interior and exterior auto glass business, as customers increasingly view our solutions to be system enabling components. As I wrap up, here's what I'd like to leave you with. A majority of our markets are operating below trend. And as a result, our 2023 full year sales are down from the prior year. In this lower demand environment, we have successfully taken actions to improve our profitability and cash flow, and we believe we have extended our leadership positions across our businesses. We are confident that our markets will normalize. And as they do, we have an opportunity to increase our annual sales by more than $3 billion. As we capture that growth, we expect to deliver powerful incrementals since 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. We expect to make progress on this opportunity in 2024 and we believe the first quarter is our low quarter of the year. While it's difficult to call this specific timing of a recovery, we will continue our regular engagements with our large optical customers to review their recent deployments in detail and better understand their plans for deployments in 2024 and beyond. Following the Lunar New Year, we'll have similar meetings with our display customers. And we look forward to updating you in the next few months at investor conferences on our learnings and our progress. As I conclude, I'd like to remind you that the essence of what we do here at Corning is invent, make, and sell. We drive durable multi-year growth by inventing category defining products, developing scalable manufacturing platforms, and building strong trust-based relationships with our customers who are the leaders in their industries. Now, I'll turn the call over to Ed, so that he can get into the details of our results and our outlook.

Ann Nicholson:

Thanks, Ed. Shannon, we're ready for our first question.

Mehdi Hosseini:

Yes, thanks for taking my question. I joined the call late. So I apologize if you already covered this on the prepared remarks, but can you give us an update on the CapEx clearance for this year? And how you see your cash flows are shaping up throughout the year? And to what extent, when should we expect the company to become more active in buyback program? And I have a follow-up.

Mehdi Hosseini:

Okay. Sorry for multi-part first question, but just if I may quickly squeeze the second question. In the optical business, have you seen any change to increasing broadband access? Is there any update on the BEADS program you can share with us? Or BEADS contribution?

Mehdi Hosseini:

Got it. Thank you.

Wamsi Mohan:

Yes, thank you. I was wondering, Wendell, if you could characterize sort of midterm as you think about the $3 billion opportunity that you're talking about incrementally. And can you give us some sense of how you see that opportunity across your segments? Sounds like you're -- probably most of that is going to be optical, given the magnitude of inventory correction there, but would love any color you can share on that.

Wamsi Mohan:

Yeah, yeah, that's helpful. And, Wendell, just -- is there -- would you say that the off the $3 billion incremental, half of it is optical, more than that is optical? How would you define sort of how do you can break that out across your segments?

Wamsi Mohan:

Thanks, Wendell. Sorry, if I could just ask one clarifying question…

Wamsi Mohan:

…on your comment around price or Ed’s comment on price as a lever to offset potentially the currency movement. You've done a great job using your contracts with some of your customers on display such that you've been a price taker and it's kind of eliminated a lot of the price competition for share reasons. Should we think that that regime has sort of ended and now we're in a new regime where you are willing to force pricing and not be a price taker anymore? Thank you.

Wamsi Mohan:

Yeah, yeah it does, Wendell. Thank you so much.

Operator:

Our next question comes from the line of Asiya Merchant with Citi. Your line is now open.

Wendell Weeks:

Thanks, really excellent question. So first, that tick-up you see, right, in our data, isn't big enough yet for us to go, oh yeah, it's happening the way we expect. Right? It's encouraging, but it's too small for us to over-conclude something analytically. Anecdotally, the conversations with our customers and what we can see from their data is that they are deploying at higher rates for carrier customers, to get to your question of where is it. They continue to deploy in those numbers at higher rates than their purchases. So they continue to draw down numbers in that piece. I think the other -- now moving beyond just that fiber shipment data, right, what else are we seeing? We are beginning to see the tick up already in hyperscale in our order book, not yet in those shipments that you see in that data. So there's an area where we're starting to get nice confirmatory to our anecdotal understanding of what will need to happen with these new Generative AI networks. And we're seeing sort of the cloud and the beginning, the leading edge of that second optical network that will need to get built to do these Generative AI programming. So that is what we're seeing in more of the detail. It's just too early yet for us to over-conclude and call timing. We'll know more in the coming months. Ed and Jeff and Ann are out there speaking with you all, they will make sure they share as we learn more. Does that work for you?

Ed Schlesinger:

Yeah. Asiya, I'll take that one. And I won't give you a specific quarter. I think that's hard to call. But if you think about the Q1 panel maker utilization levels and a mid-single digit glass market for the year, you would need to see a double digit increase from their current levels in Q1 to achieve that glass market. And even if the glass market were lower than that, let's just say even flat, you would still need to see a double digit increase from their Q1 level. So I think the answer to the sharp part of your question is yes, the timing is obviously harder to call.

Ann Nicholson:

Next question.

Meta Marshall:

Great, thanks. Maybe doubling down on Wamsi’s question, just around whether you've seen with the pricing increases on the display business, any changes in share or has it largely played out as expected? And then maybe just second question, on the gross margin stability that you expect into Q1, is that from kind of efficiencies that you found in the business over the last year that are just starting to play in or kind of the pricing increases on the display business or is that from a mix of the business? Just how to think about that stability in Q1 over Q4? Thanks.

Wendell Weeks:

I understood the first question. I think what...

Wendell Weeks:

Did our price increase lead to a disturbance of our market position. And we see no significant change in our market position as a result of our pricing actions to share more appropriately where the yen is at and where inflation is at.

Ann Nicholson:

Next question.

Martin Yang:

Hi, good morning. Thank you for taking our question. First question on display. Have you ever done an analysis similar to the chart that presented optical fiber thinking of a normal trendline for display volume in relation to current weakness on retail, particularly in China? China has been weak for quite a few years now. Are we significant below the trend line if there is such a more normal retail demand?

Martin Yang:

Yeah, definitely. Thank you. Another question on specialty, given that the semi-exposure within specialty has been pretty strong, has that changed that segment's seasonality a little bit, where it was more exposed to smartphone cycle, and now do you think that has shifted a little bit?

Martin Yang:

Got it. Thank you. That's all from me.

Operator:

Our next question comes from the line of Samik Chatterjee with JPMorgan. Your line is now open.

Wendell Weeks:

Thank you. I think perhaps, my emphasis was a little wrong in talking about BEAD. We expected to start, this is what I was trying to say, it's not going to be a big mover in 2024. I think your understanding is correct. It starts to become a much bigger mover in 2025. So if I created any dissonance with that understanding that you had, I didn't mean to. I think you have a correct understanding of it. It's just that it actually, it has been not there and now it's going to be there beginning in 2024. But the bulk of it starts after that.

Samik Chatterjee:

Yes, no, thank you. Thanks for the color. Thank you for taking the questions.

Josh Spector:

Yeah, hi, good morning. Two quick ones. First, just on the FX side of it, understanding you're hedging at a lower spot rate today when you look out to ‘25 and you have some industrial options. Is there really a timing or milestone we should be looking at, at some point this year where you would know what the impact might be in 2025, be it you're doing some pricing action, you have hedging locked in, and then you might communicate what that impact would be to us?

Josh Spector:

You're not willing to share roughly what that timing would be?

Josh Spector:

I'll push a little further.

Josh Spector:

All right, fair enough.

Josh Spector:

Got it. Appreciate that. And just quickly on free cash flow, in the first quarter your guidance of up a few hundred million, it would seem that's a pretty low bar given that there was about $0.5 billion of working capital use last year and your expectation on margins are relatively flat. So are there any offsets we should be considering in the first half of the year that maybe make that a little bit less favorable from what we could see otherwise?

Josh Spector:

Okay. Thank you.

Operator:

Our last question comes from the line of Matt Niknam with Deutsche Bank. Your line is now open.

Ed Schlesinger:

Yeah, I'll go first, Matt, on your first question. So I'll start off with, we have the capital in place or the capacity in place to deliver the sales. So first, from a cash flow perspective, typically we would add CapEx as we add sales. So that's a positive for free cash flow as we go forward. We also have the depreciation in our P&L for those assets. And then we also have some fixed cash costs that run through our P&L to support those assets. So generally speaking, the fixed costs are already in our P&L. So you would expect our gross margin to accrete at a higher level than our current gross margin level. So that's one operating leverage point or leverage point, if you will. And then I think on OpEx, we can also grow without adding OpEx much from these levels and that creates a second leverage point for us. So that should accrete both gross margin and operating margin from our current levels, and you should start to see that as the volume comes back.

Matt Niknam:

Very helpful. Thank you both.

Operator:

This concludes today's conference call. Thank you for your participation. You may now disconnect.

Operator:

Welcome to the Corning Incorporated Quarter Three 2023 Earnings Call. [Operator Instructions] It is my pleasure to introduce to you, Ann Nicholson, Vice President of Investor Relations.

Wendell Weeks:

Thank you, Ann. Good morning, everyone. Today we reported our third quarter results. As expected, sales were $3.5 billion and EPS was $0.45. Gross margin expanded sequentially to 37% and free cash flow improved to $466 million. Our results demonstrate solid progress on the programs that we have 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 continue 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 for the quarter. I will 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 have 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 extended 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 long-time customer AUO to accelerate the production of their industry-leading large format curved Automotive display modules using our patented ColdForm technology. Stepping back, we are 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 in Optical. So although we have 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 are 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 assess 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, the 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 am 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 are projecting for quarter four. First thing to notice is, the trend line for our shipments has a 7.3% CAGR over the same 10-year period. We have been growing faster than the market. Now this just makes sense with everything we have 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 quarter four. Currently, our shipment run rate is at least 30% below 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 are 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 will 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 are 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 will win as they bounce back. Are we maintaining our leadership position in advancing opportunities to grow faster? In short, yes, are we have 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 More Corning 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 are building on our undisputed global cost and technology leadership position, along with our market leadership in North America. In Automotive, new U.S. 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 2 times to 3 times the content opportunity for ICE vehicles in the U.S. This means significant growth in our environmental business even in the face of global BEV adoption. In fact, we will 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 in 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 reassure 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 will continue to guide one quarter at a time based on our order entry models until visibility improves. We 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. 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 are steering our way through this period and I look forward to updating you on our progress. Now I will turn the call over to Ed so we can get into the details of our results and outlook.

Ann Nicholson:

Thank you, Ed. Operator, we are ready for the first question.

Asiya Merchant:

Great. Thank you. If I could just dive a bit on Display and I apologize to jumped on the call later, I had another call at the same time. But if you can just talk to us a little bit about how you kind of see the Display environment improving in the -- as you guys look ahead, not just the fourth quarter, but due to 2024 as well and how we should think about the margin trajectory there? Thank you.

Asiya Merchant:

Yeah. And if I may just...

Ed Schlesinger:

Yeah. We think that what’s happening in the fourth quarter is a temporary situation as panel makers and set makers work through their pricing environment. As you know, panel prices have increased throughout 2023. That said, we think the inventory levels, we exit the year with healthy inventory levels and retail doesn’t really have to improve for panel maker utilization to go up at some point in 2024, we think that’s relatively early in the year.

Ann Nicholson:

Our next question.

Martin Yang:

Good morning. Thank you for taking my question. On Display, do you feel that you have achieved what you set out to regarding pricing increase with your customers and do you expect additional benefits in 4Q from the price -- pricing change relative to 3Q?

Martin Yang:

Thank you, Wendell. I have another question relating to Display and Automotive. I think the agreement you have, are new customers as AUO for ColdForm technology is an interesting one as AUO itself acquired a Tier 1 supplier recently in Automotive. Maybe can you talk about the cost and effect there is Corning having a bigger presence in Automotive triggered the AUO due the same or AUO’s entry into Automotive led to a deeper collaboration between Corning and AUO Automotive Glass.

Martin Yang:

Thank you.

Operator:

Our next question comes from the line of Meta Marshall with Morgan Stanley. Your line is now open.

Wendell Weeks:

The simplest way to answer that is yes.

Wendell Weeks:

30% gap versus our long-term trend lines, that includes sort of what’s going on in cloud and so does our run rate, right, and the other apps. So, yes, that is giving you -- you have a good understanding that the gap in that one area is even more dramatic than the 30% gap we are showing you in total.

Wendell Weeks:

Is that what you were asking?

Wendell Weeks:

Not that we are seeing. Now remember, cloud went through their own cycle sort of during the pandemic, right, and then adjusting to what they have to do with their value chains. And they are struggling now -- not struggling, but the reaming a lot of their CapEx is being aimed to do a large language model training and that basically adds a second network on the back end, adds even more fiber optic connections. So we have yet to start experiencing the rapid growth that, that represents in our run rate, right? But cloud has been pretty stable.

Operator:

Thank you. Our next question comes from the line of Matt Niknam with Deutsche Bank. Your line is now open.

Ed Schlesinger:

Hey, Matt. This is Ed. I will take a first question. So, first of all, the most important thing for us has been focused on improving our profitability and cash flow, obviously, if we improve our profit, that also improves our cash flow and I think we have done a nice job of that over the last several quarters. Our cash flow conversion was up nicely in Q2 and Q3 and we expect it to be up again here in Q4. So I think that’s first things first. And then I think if you remember back earlier this year, we made the last payment to Samsung on the buyback we did back in 2021. So as we go forward, we will certainly have more firepower to do things like share buybacks. We haven’t need any announcements. So we will come back and we will talk a little bit more about our plans next year, but I think you should feel good about where we are from a balance sheet and a cash flow perspective.

Matt Niknam:

It does. It does. Thank you.

Matt Niknam:

Appreciate it. Thank you both.

Operator:

Thank you. Our next question comes from the line of Wamsi Mohan with Bank of America. Your line is now open.

Wendell Weeks:

Okay. So first, where we are seeing the inventory draw down right now is primarily the carriers. I think you said cloud, but I think it’s just misspoke. It’s in carriers where we are seeing the drawdown occur, okay? Cloud is operating now more in balance. Does that make sense to you?

Wendell Weeks:

Okay. Good. So what drives those trend lines is, you are right, you would see that through the industry, it dipped above the line in 2022 and then you are seeing that adjustment below the line now, right? And you will see that throughout the entire time cycle and you are just looking at the fit against that, that gives you the CAGR. And what actually makes up that will always be sort of slightly different pieces of the network will be being built out at one point in time or another. We don’t see anything that is reducing the application space for fiber. Everything we are seeing is increasing the application space for fiber, right? And that’s just because rates, right, so I think line rates of how much bandwidth you need is going up. And that’s across even short distances in places like hyperscale cloud, right? And because of that, you are seeing from a technology perspective, links which used to be copper or low fiber count, okay, become high fiber count all optical. And even going down to now our latest technology work, you see glass packaging, right, to be able to get right from the ASIC to optics as fast as possible, mainly because that’s the most economical way to handle that communications to get to photon as quick as possible and we see this in market after market. So I don’t see a collapsing market opportunity, I see a growing market opportunity and that’s what drives those long-term CAGRs. So I would -- that’s how we think about it. To your notebooks and PCs, I mean that’s an interesting analogy. We could have done that market here because we track that. Our CAGRs, right, would have had that surge up, but we would have integrated the decades of experience we have in notebooks would have taken our forward projection rather than the -- what it did rather than the towards long-term at 300 basing [ph] 350. We would have been because of the way these trend lines work, we would have been well below because you don’t have enough cumulative time at that 300 level, the 350 level to offset all that time that you have had well below that. Does that make sense to you?

Wendell Weeks:

Please do.

Wendell Weeks:

So right now and I think did last quarter or maybe the quarter before, we are hedged through the end of next year, right? And beyond that, right, we have -- we don’t have a significant amount of hedge in that time period. Ed, would you like to add?

Wendell Weeks:

Yes.

Wamsi Mohan:

Yeah. But it’s going to lowest [ph]. Thanks, Ed.

Wamsi Mohan:

Okay. Thank you so much.

Steven Fox:

Hi. Good morning. Wendell, I was wondering if you could talk a little bit more about some of the comments you made around the new revenue platforms and also some of the cyclicality in the business from two aspects. One, it seems like thinking about your comments that as you have instituted more technology, more value add into some of your served markets, you have created more cyclicality as well. I wonder if you would agree with that. And then, secondly, from my perspective, it seems like the $3 billion has somewhat disappointed over the last few years and especially as you think about how dynamics are changing maybe around demand for some of your COVID products, et cetera. Is it time to maybe look at that $3 billion and even though it has a lot of leverage, maybe pair back some of those products or see if they are better off in other places or with other companies? Thanks.

Steven Fox:

Okay.

Steven Fox:

Okay.

Steven Fox:

Yeah. It does. You answered everything except for the one question on just sort of the cyclicality of the business now…

Steven Fox:

…your current stack?

Steven Fox:

Right.

Steven Fox:

Great. Appreciate all the color. Thank you.

Steven Fox:

Okay.

Steven Fox:

No. No. That’s really interesting. That gave me a list of thought to…

Steven Fox:

I appreciate it. Thank you.

Operator:

Our last question comes from the line of Josh Spector with UBS. Your line is now open.

Wendell Weeks:

I will start and then Ed can go after me, right? That’s why we use the term minimal cash investment, right? We have got in place the capabilities and the capacity we need to support that $3 billion, right? So we do believe that you should see very muted CapEx and very high free cash flow conversion. But Ed, why don’t you add?

Wendell Weeks:

And what we are -- you are looking at here is, again, it’s very unusual, which is sort of weird cycle with the pandemic and post-pandemic times is, I can’t think of a time, right, where we had the opportunity to generate as much revenue with capability sets that we have got ready to go in such a fast time period. I mean it’s -- so the incrementals here, they are a lot of set new records for us. That’s what we are going to be seeking to do and that’s the balance we are seeking to strike as we adjust to the run rate of today, we want to maintain that opportunity, because the power of that to create value for our shareholders is really, really powerful and interesting.

Operator:

This concludes today’s conference call. Thank you for participating. You may now disconnect.

Operator:

Welcome to the Corning Incorporated Quarter 2 2023 Earnings Call. [Operator Instructions] It is my pleasure to introduce to you, Ann Nicholson, Vice President of Investor Relations.

Wendell Weeks:

Thank you, Ann. 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 $0.45. Gross margin and operating margin increased sequentially to 36.2% and 17.5%, respectively; and free cash flow improved to $310 million. 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 after effects 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 than a spike in the U.S. dollar. And consumers shifted spending from goods to services as the pandemic abated. Against this backdrop, demand grew 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 drawdown inventory 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 and 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 volume. 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 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 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 Gen 2, high-density, high-value optical interconnect system designed to enable the requirements and capture 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 vial manufacturing 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 the 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, will reflect these developments in 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 Corning 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 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?

Ann Nicholson:

Thanks Ed. Operator, we're ready for our first question.

Samik Chatterjee:

Hi. Thanks for taking my question. I guess maybe if I can get your insights and what you're seeing in the market rate to optical, which you're guiding down sequentially into the third quarter. Have you seen more incremental weakness given we've seen certainly telcos pulled back on spending a bit more? Or as you sort of look think of -- look at your 3Q guidance is being driven by both telcos and enterprise? And just a quick second part there. I mean, any discovery discussions in terms of what this lead cable replacement opportunity or whether it's an opportunity as well for Corning in the long run? Thank you.

Samik Chatterjee:

Any thoughts on the lead cable replacement opportunity, whether you see that as an opportunity?

Samik Chatterjee:

Yeah. Okay. Thank you. Thanks for taking the questions.

Meta Marshall:

Great. Thanks. You noted that the pricing negotiations you're already starting to see traction on those. I just wanted to kind of get more detail there. Is this being accompanied by long-term supply agreements? Just how should we think about share in terms of kind of how these pricing increases impact revenue? Just -- I realize they're probably all not done, but any additional commentary there would be helpful. Thanks.

Meta Marshall:

Great.

Meta Marshall:

Yes. That's helpful. I appreciate it. Thank you.

Asiya Merchant:

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 2024? Or is it the first part 2024? Is it the end of 2023? Do you guys have any more visibility into how we should think about as we exit this year into 2023 and into 2024 based on discussions with your customers right now? And if you could provide some color by segment, that would be even more helpful. Thank you.

Asiya Merchant:

We could start with Display because it seems like optical -- there is some weakness and then Specialty 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 as we exit 2023 and into 2024.

Asiya Merchant:

That’s very clear.

Asiya Merchant:

Yeah.

Edward Schlesinger:

Yeah. Sure. I'll build on Wendell's comments. Thanks Asiya. So, 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 marching up 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 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?

Wendell Weeks:

When we start piling up more and more cash flow every quarter as we are aiming at. So that's 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 heart. 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.

Operator:

Thank you. Our next question comes from the line of Mehdi Hosseini with SIG. Your line is now open.

Edward Schlesinger:

Yeah. He, Mehdi, 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 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.

Edward Schlesinger:

Yeah. Hey, Mehdi. So, I'll take that one also. So, a couple of things. Just a reminder, in that segment, you have you have Hemlock, our auto glass business and you have our Corning Pharmaceutical Technologies business, think Valor or 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.

Wendell Weeks:

I think 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 realize that expanded value footprint.

Wendell Weeks:

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. Do we wanted to make sure that we had provided for you a rough idea on how to think about it financially? So, that's what I think you have a good question here. But -- so, we're trying to -- we've given you the answer without all the inputs. Does that make sense?

Wendell Weeks:

I think that there's a lot going on in that segment. And you are right to think that a significant amount of the growth which we have 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, because I think you're right to think about it that way. I think concluding much more than that from the statement sort of runs the risk of -- you're not being exactly in line with what our strategic plan is. So, I'd ask for a little bit of patience, and it will be forthcoming in the not too distant future.

Operator:

Thank you. Our next question comes from the line of Wamsi Mohan with Bank of America. Your line is now open.

Edward Schlesinger:

Yeah. I'll take the first part of your question first, Wamsi. So, the main reason we are taking a 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.

Wamsi Mohan:

So, whether 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?

Wamsi Mohan:

Yeah. It does. I appreciate the response, Wendell. Thank you.

Ann Nicholson:

Thanks Wamsi. Next question?

Shannon Cross:

Thank you very much for taking my questions. I have two. The first, just sort of a follow-up on pricing, but looking at optical. I'm just wondering what the carriers are seeing 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, both some of the broadband as well as benefit on the poly side from the IRA? Thank you.

Shannon Cross:

Do you think it's -- I mean, do you see it delayed, or just progressing along what you had expected?

Shannon Cross:

Yeah. Thank you very much.

Matthew Niknam:

Hey, thanks for taking the question. 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 hikes. 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 million you posted this quarter. Thanks.

Edward Schlesinger:

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 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 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 -- a meaningful room for improvement in the back half.

Edward Schlesinger:

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's good. And we're going to continue to keep chipping away at that. So that should help us as well.

Operator:

Thank you. Our next question comes from the line of Steven Fox with Fox Advisors, LLC. Your line is now open.

Edward Schlesinger:

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.

Edward Schlesinger:

Got it. Yeah. I think 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 really low levels in January. But when I think about the margin, 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.

Wendell Weeks:

Well, what we've said here is that we expect, say, versus Q2 -- I'm sorry, Steve, do that again, how successful pricing is.

Wendell Weeks:

So, we expect double-digit -- to close on a double-digit price increase.

Wendell Weeks:

So, our guide today is our guide today, Steve, it's a double-digit price increase. And when we get to the end of third quarter, I think it will be a little more evident where in double-digit that ended up being.

Wendell Weeks:

Relatively consistent with Q1.

Operator:

Thank you. Our next question comes from the line of Josh Spector with UBS. Your line is now open.

Wendell Weeks:

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 the amount of interconnects required to do the AI/ML compute. It needs more glass within that data center. A lot more of it is happening within the data center, a lot of connections within the data center that are going out just because of the way those large language models are trained and then you do influence 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 deliver this new compute package.

Wendell Weeks:

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 you to think about 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 Ann will get back to you.

Operator:

Thank you. Our last question comes from the line of George Notter with Jefferies. Your line is now open.

Edward Schlesinger:

Yeah. 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?

Wendell Weeks:

Well, that happens daily. One way or the other. Pull aheads to -- I don't really need it then, I need it now, because they're executing pretty complicated 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 which 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 it's such an important part of what they do, and we have to plan it. And that 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 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 some because 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.

Wendell Weeks:

Yeah.

Ann Nicholson:

Thanks George, and thank you, everybody for joining us today. Before we close, I want to let you know that we will attend Citi's 2023 Global Technology Conference on September 7, 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.

Operator:

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

Wendell Weeks:

Thank you, Ann, and good morning, everyone. Last quarter, we told you that markets constituting about 1/2 of our sales were experiencing recession-level demand; that our first quarter sales would decline by greater-than-normal seasonality due to the pandemic-related disruptions in 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 businesses. 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 will 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. 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 through 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 3 of our core technologies and 4 of our manufacturing and engineering platforms. And we will continue to apply these capabilities to help build a more connected world over the next 50 years. In Display, by leveraging all 3 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 lifelike and ubiquitous displays. In Mobile Consumer Electronics, we invented the cover glass category and redefined it by integrating glass with ceramics and by combining fusion with vapor deposition. 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 and bendable devices, which we expect to contribute to long-term growth. In Automotive, we're helping build a world where vehicles are increasingly green and where software and displays are enabling new in-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 and distinctive capabilities have placed us at the center of secular trends touching many facets of basic life. And we believe we will continue to develop category defining products to transform industries and enhance lives. 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 just 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's what I'd like to leave you with today. Moving forward throughout 2023, we'll continue to focus on operating each of our businesses 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 some 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?

Ann Nicholson:

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

Matthew Niknam:

Congrats on the quarter. Just 2 if I could on optical. If you can just talk about the latest you're hearing from your customers and maybe speak a little bit more in terms of expectations of 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?

Matthew Niknam:

That's great. Yes. Very much appreciated. And I'll hand it over just others can get in the Q&A.

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?

Operator:

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

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 described 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 could play out, you could see growth there as well.

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, seen second half up 7% over 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?

Wamsi Mohan:

Yes. Yes, it does, Wendell. Maybe just to step back for a second, if I could. Like do you feel that the macro environment, relative to 90 days ago, for your end markets is getting better or worse?

Edward Schlesinger:

Yes. And, Wamsi, you had asked about Display second quarter, what we've incorporated in our second quarter guide versus the prior year. So just a couple of thoughts. One, remember last year, the way Display played out is the first half was really strong. We started to see panel makers drop their utilization at the end of the second quarter, right? So Q3 and Q4, they ran at much lower rates. Q1 and Q2, they ran at much higher rates, right? And if you think about the way we typically do our guide, we always have a range of outcomes, right? So if I think about the second quarter this year for display, we think will run -- so now I'm going to go back to sequential for a second. We think panel makers will run sequentially higher in the second quarter than they did in the first quarter. And so it's possible they get to the same place as they did last year. That's certainly in the range of outcomes. I don't know that that's necessarily the most likely outcome.

James Cannon:

This is James Cannon on for Josh. I just wanted to touch on some of the dynamics with Display pricing. As you talked about some supportive dynamics, but if I think about what played out in the first quarter, it seemed like you had demand trending sort of in line with weak January, improving in March. And I was just wondering if you'd give some color on what happened with pricing that you had guided to being flat and came in down? And how that plays into what we should expect for the second quarter?

Operator:

Our next question comes from the line of Asiya Merchant with Citi.

Edward Schlesinger:

Yes. Asiya, I'm going to build a little bit on the way Wendell described the way we're thinking about sales and what could happen in the second quarter and the second half, right? I think there's certainly in a high-end case, yes, cash flow should follow our growth through the year. And if we grow at the higher end of the second quarter, and we continue to grow from there, yes, there's certainly a case to be made that, that would happen. I think we're taking a little bit more moderate view of what might happen. So again, capital slightly down and free cash flow improving as sales improves, and just our normal cycling of cash flow, it's stronger in the second quarter and in the second half.

Edward Schlesinger:

No update on stock repurchases. We'll just continue to remain opportunistic there. And maybe I'll make one other comment on your cash flow statement. As I think about inventory, we talked about a lot of the dynamics that have driven it up through 2022 with respect to a very challenging supply chain environment and inflation. And our goal is to continue to drive it down. And I think in Q1, it stayed relatively flat, down a little bit. But remember, sales were really low. So we actually feel really good about that.

Samik Chatterjee:

Ed, if I can just follow up on your comment about growth in Specialty Materials in the second half. When I go back and look at it historically, it's been a wide range of as low as 5%, I think, last year to as high as 45%. So just trying to sort of get a better color there in terms of what should we think about in terms of content growth with some of your customers into the second half? What's that magnitude? And what's also sort of from a macro perspective? Are you expecting to sort of from the first half versus second half variance there, just to be able to rightsize sort of what that magnitude looks like? And, Wendell, one for you, in terms of have you been able to digest Biden's recent plans about pushing electric vehicle adoption to 50% by 2030? How does that impact overall sort of growth outlook for Environmental?

Samik Chatterjee:

Wendell, any thoughts on the electrification plans of Biden from the current comment?

Samik Chatterjee:

Yes. No, that's interesting.

Meta Marshall:

Maybe a question on the gross margin improvement that you saw in Q1 over Q4, clearly on down volumes. Just how much more fuel is there some of these activities to improve gross margin throughout the year, maybe kind of with or without volume improvement? I guess I'm just trying to see how some of the pricing actions or efficiency actions kind of fully reflected in what we see in Q1? Or just how much of that can carry throughout the year and improve margins even if we don't see kind of meaningful improvements in volumes?

Meta Marshall:

Great. And just does the opening of the North Carolina facility kind of impact optical profitability in the near term? Or can you guys still get efficiencies? Or does that plant even add more efficiencies that can help margins there?

Operator:

Our next question comes from the line of George Notter with Jefferies.

Wendell Weeks:

George, what an outstanding question and what an interesting debate, right? So you've seen the amount of inventory is how much they put in the ground determines how fast they burn through their inventory and of course, supply chain folks really across the globe. since they couldn't get everything they needed for sure, over ordered and did all sorts of things, right? And as supply chain times start, that is certainly part of it. George, there's no question. And I could even -- if I was less cynical, right, I could even explain most of the change as being that. But then I look on the other side, and I'm looking at the pace of the actual ground getting moved via actual data centers getting built, right? And in that, there's a little bit of a disconnect there for me too in that if I took my customer statements of their deployment goals and integrated that with inventory, then I'd say, yes, we have a very strong bounce back starting to feel it pretty soon. But we're still going to take a little bit more of a conservative view. So I don't know if any of that was helpful, George. You made an excellent point. You could be absolutely right. We're just going to play out a little bit more conservatively and not plan on sort of a big jump up in the back half, driven by the fact that inventory came in line with deployments.

Wendell Weeks:

It's probably more fiber to the plan prem, okay? Though hyperscale's definitely slower, right? But it's more fiber to the prem as it's those great big civil works builds that just aren't moving fast enough yet for us to feel comfortable to call it a strong recovery in that business. Now that being said, that can happen quick, right? That can happen quickly because they haven't come off their stated goals yet, but we're just not seeing it yet, George.

Timothy Long:

Just wanted to go back to Display for 2, if I could. First, Ed, could you talk a little bit about, obviously, a good recovery coming in the second quarter. I know you guys, you said, took a lot of tanks offline and did some retrofitting. So can you talk about kind of how much margin lift we're going to see not just from the volume, but from some of the changes? And then just, Wendell, I mean I just want to go back to kind of visibility in this business. Obviously, there was some head takes last quarter on utilization going up and then going down. So what level of visibility do you have into those utilization? I'm assuming you see well into this month, but how far out can you go with that?

Wendell Weeks:

And I think our visibility will help us improve as we get to the end of this month, beginning of next. We have pretty good visibility, but our negotiations really are still going on given the pretty sharp upward inflection we're seeing in customers' volume requests. So that dynamic is still sort of playing out, but should get pretty clear over the next week or two.

Operator:

Our last question is from the line of Martin Yang with Oppenheimer.

Wendell Weeks:

Martin, could you repeat the question? I lost you a little bit in the middle of that.

Wendell Weeks:

I got it now. So it's not a jump up to glass ceramic. It's a pretty significant improvement at the glass level, and we're seeing really wide adoption but you're not seeing that fundamental very big jump in our value-add per device that you see from switching to a fundamentally new material set with very different manufacturing dynamics as well as drop dynamics. So pretty significant improvement, but in the same glass material set doesn't have as much of a pop in terms of how much our sales revenue is profound as something like the Ceramic Shield.

Operator:

This concludes today's conference call. Thank you for participating. You may now disconnect.

Operator:

Welcome to the Corning Incorporated Fourth Quarter 2022 Earnings Call. [Operator Instructions]. It is my pleasure to introduce to you, Ann Nicholson, Vice President of Investor Relations.

Wendell Weeks :

Thank you, Ann, and good morning, everyone. Today, we reported fourth quarter and full year 2022 financial results. Throughout the year, a series of pandemic-driven effects continued to ripple across the global economy. Nevertheless, we executed well to grow sales and advanced strategic initiatives, while addressing the implications that the current environment poses for margins and cash generation. For the fourth quarter, sales of $3.6 billion and EPS of $0.47 were both at the high end of our guided range. And for the full year, building on our strong 2021, we grew sales by 5% to $14.8 billion and EPS by 1% to $2.09. Gross margin was 36%. Free cash flow was $1.24 billion. I'm pleased with the sales growth we continue to deliver, despite confronting what is essentially recession level demand in markets that constitute about half of our sales. Cars, televisions, smartphones, laptops and tablets are all well below what we estimate as the normal range. Now we've offset this weak consumer demand with the strength of our positions in the growing optical communications and solar markets as well as ongoing outperformance by our businesses versus our end markets. That said, profitability and free cash flow are not where we need them to be. So I'd like to deviate from our usual format for these calls, in which I focus on our progress across our market access platforms. Today, I want to give you some insight and perspective on the external dynamics driving our financial results, and I'll discuss what we're doing to address those dynamics. Since 2020, the external environment has been characterized by the sweeping impact of the pandemic, including supply chain disruptions, depressed productivity, large swings in consumer spending and inflation. When the pandemic hit, our core priorities were protecting our people and delivering for our customers. So throughout 2022, we operated with elevated staffing and higher-than-normal inventory levels. In addition, persistent and sometimes quite unpredictable, inflation added to the cost of raw materials we purchased, the cost to produce and ship our products and the inventory we maintained. As a result, our growth in profitability and cash flow have lagged our sales growth. While we took action to improve profitability and cash generation throughout 2022 and made good progress during the first half of the year, it became clear that more was needed. So we took additional and significant actions in the fourth quarter, including raising prices, again, in optical communications and life sciences to more appropriately share the inflationary cost with our customers. Adjusting our productivity ratios to get closer to historical metrics without impacting our ability to supply and capture future growth and normalizing inventory. Because our productivity and supply chains have improved, in the near term, we expect to maintain reliable supply for our customers at current inventory levels or below. Now all of these actions will improve our margins and cash flow throughout 2023. Now as you may have already inferred from our press release this morning, we expect both first quarter sales and profitability to be anomalous from a historical perspective. Typically, our first quarter sales declined about 5% sequentially and margins declined about 1 to 2 points. This year, we expect first quarter sales to decline by more than normal seasonality. In contrast, we expect our margins to increase sequentially due to the benefits of our recent actions. What's driving our below seasonal outlook for the first quarter sales is the situation unfolding in China, where consumer sentiment was already low. In December, China shifted its approach to the pandemic and a significant wave of COVID outbreaks ensued. This resulted in lower consumer spending and workforce shortages, which have, in turn, impact the demand for our products as well, particularly in Display, Environmental and Specialty Materials. We expect China to overcome these issues and demand to improve, but it's too early to call the specific timing of improvements in consumer sentiments and demand. We'll keep you posted as we learn more. In the interim, we continue to be well positioned to capture growth and drive innovation. And as our sales grow, we expect to benefit from operating leverage and our profitability to improve further. Given -- I think it's too early to call the rebound in China, it's difficult to be definitive on our full year results. Here's what I can say. First, our quarter 1 sales are not an indication of our 2023 run rate. Second, I'd be disappointed if sales didn't grow sequentially in the second quarter, and we didn't see year-over-year growth in the second half. Finally, the benefits of our fourth quarter profit and cash flow actions will be significant throughout 2023. As we see consumer demand return and our revenues increase, we expect to see our profitability increase. Now having shared our near-term perspective, I want to underscore how great we feel about our focused portfolio and long-term prospects. As we evaluate our trajectory, given the uncertainties, and there are a lot of them, one thing that is certain is the relevance of our leadership capabilities to secular trends. Across each of our markets, we are capturing a compelling set of long-term growth opportunities with more to come. In Optical Communications, we're building on a record $5 billion 2022. And we believe we are still in the early phases of a multiyear build cycle driven by broadband, 5G densification and cloud computing. Cable and fiber demand remains especially robust. If we could make more, we could sell more. In solar, we continue to capture significant upside tied to growth in the renewable energy industry, and we see excellent growth potential as we contribute to a sustainable U.S.-based solar supply chain and benefit from the Inflation Reduction Act. In display, we maintained stable price and a very strong market position throughout the ongoing industry correction. We expect to emerge from the correction with strengthened customer relationships of refreshed manufacturing fleet and increasing sales and profit. In mobile consumer electronics, we anticipate ongoing strong adoption of our innovations, and we expect to continue outperforming the markets we serve through our product leadership, our more Corning approach and our ongoing collaboration with industry leaders. Moving to automotive. We've been outperforming the market throughout a period of industry constraint. We remain focused on building our $100 per car content opportunity, and we're pleased by our progress as evidenced by our strong growth in Automotive Glass Solutions in 2022. And we'll be ready to capture even more growth as adoption of our technology continues and car sales return. Finally, in Life Sciences, we're focused on delivering differentiated tools to support the discovery and delivery of cell-based medicines and modern drugs. Our operations are improving as the industry completes its correction from the unprecedented demand shifts caused by COVID. So now I've gone through the macro uncertainty that characterizes the near term, and I've told you what we're doing to deal with those uncertainties. I also outlined the rich set of growth opportunities we're capturing over the long term. And I believe our progress so far is a testament to what we can achieve going forward. Let's take a look back at the 2020 to 2023 strategy and growth framework that we introduced in 2019, shortly before the onset of the pandemic. Our goals included sales growth at a compound annual growth rate of 6% to 8%. From 2019 through 2022, we grew at greater than 8% CAGR, even in the face of the ongoing and universally experienced external challenges. Over the past 4 years, we've advanced significant strategic initiatives. We delivered key fiber-to-the-home and data center solutions to meet surging demand and facilitate a period of strong growth in optical communications. We delivered on our gasoline particulate filter content opportunity in automotive, and we introduced ceramic shield with Apple, both of which have driven strong outperformance versus depressed end markets. We ran our Gen 10.5 plants to extend our leadership in the glass for large televisions, and we made major progress on our emerging innovations. We gained significant traction in our Automotive Glass Solutions business, and our pharmaceutical packaging portfolio leaped forward to play a central role in the global health fight over the past 3 years. Our vials and tubing have supported the delivery now of more than 8 billion COVID-19 doses in more than 50 countries. In sum, we've delivered multiyear sales growth in a challenging environment. We've extended our leadership position across our markets, and we have paved the way for future growth. I think these are outstanding achievements. Now as I wrap up my remarks, here's what I'd like to leave you with today. Since the start of the pandemic, we protected our people and, as evidenced in our sales growth, delivered for our customers. We've now completed significant additional actions to improve our profitability and cash generation. The unfolding situation in China certainly impacts our sales in the short term. But despite this, we expect to see the benefits of these recent pricing and productivity actions take hold in the first quarter. Overall, we will continue to focus on operating each of our business as well and adjusting to meet the needs of the moment, while simultaneously advancing growth initiatives and capabilities that will drive success as the global economy stabilizes. Our focused and cohesive portfolio provides strategic resilience that is evident in our results even in the current environment. And we remain confident in our ability to deliver durable, multiyear growth with improved margins and cash generation. 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.

Ann Nicholson :

Thank you, Ed. Crystal, we're ready for our first question.

Wamsi Mohan:

I have one for Ed, one for Wendell. Ed, you said your core rate will be 107 through 2024, but I would imagine your transactions are increasingly happening away from this core rate. How should we think about the impact of the yen as we think about 2023 and 2024 if the hedge rate is significantly away from the core rate? And for Wendell, can you talk about Corning's role in both bendable and augmented reality since Ed mentioned it in the script? I'm kind of curious on the technology that you're bringing. And b, any thoughts on commercial availability for these products, particularly by flagship customers?

Wamsi Mohan:

It is -- sorry, Ed, if I could just follow up on that. Is the cost to hedge significantly different in '23 and '24?

Wendell Weeks:

Thanks for your question on bendable and augmented reality. For bendable, we have 2 significant opportunities, one of which is we're relatively matured in, which is we make the mother glass upon which the displays are manufactured to be able to do a bendable display. Actually to make one of those displays consumes more glass than sort of a typical LCD does. Second, where the bulk of our innovation investment -- new innovation investment has been is in the cover material for bendables. This effort has led to many of the bendable devices that you see today. It still is not a product that we believe is meeting the true needs of the customer. So we have a whole series of new innovations that we're doing to try to take that technology and make it be able to be mainstream rather than just a novelty. This effort is going to continue for the next number of years, and you can expect to see us introduce new products in that space. In augmented reality, 2 major efforts. One has, once again, be COVID-related, and I don't want to talk about that in too much detail. And then two, is we make the material and sometimes the wave guys that create that digital light field in front of your eyes. And so we have significant efforts in both these areas, augmented reality, embryonic industry, but quite exciting for the long term.

Martin Yang:

My first question is about the guidance. Can you talk about the sequential growth in EPS? I think implied from the guidance adjusting for the tax benefit, EPS decline more sequentially comparing to core revenue. Is there anything else we should be looking for, for OpEx knowing that the margin -- gross margin is likely to improve sequentially?

Wendell Weeks:

So Martin, yes, I think you're doing your math correctly. You're seeing a pretty significant increase for us in our profitability at both the gross and operating margin lines and somewhat muted by the delta in tax rate from quarter 4 to quarter 1. I think you've got it.

A –Wendell Weeks:

The bulk of our current revenues are in the interior set of products. The growth rate is highest in our exterior. What’s – you’ve seen all the trends on the interior with these very large curved displays being introduced in more and more products. And when that happens, that is by and large us with our patented ColdForm technology. But as well, especially with electric vehicles, because they are so quiet, you experience them as noisy, at least the outside world is more noisy. And so as a result of that and the amount of energy it takes to maintain the HVAC system within an electric vehicle, we’re seeing the adoption of laminated technologies beyond the windshield in sidelights, [rooms], backlights. And quite often, that is leading to adoption of one of our new technologies, which we pair with Gorilla to create a unique laminate structure that is both performance, weight and cost advantage. And we’re seeing very nice take-up of that as well.

Samik Chatterjee:

I actually had a question or a 2-part question on display. I know you outlined your thoughts around display and the lower panel maker utilization you're seeing in 1Q. Could you just give us a bit more color on sort of what are the range of sort of volume changes you're expecting sequentially into 1Q? What sort of typical seasonality there in terms of volume? How much of a difference or variance to the normal seasonality are you expecting in display in 1Q? And sir, the second part to that, I know you outlined China consumer spending as a sort of a watch point here, but any thoughts on TV sales or TV unit sales for the year, even if it's markets outside of China at this point?

Samik Chatterjee:

Within the quarter, panel maker utilization and volumes related to normal seasonality in 1Q?

Operator:

And our next question will come from Shannon Cross from Credit Suisse.

Wendell Weeks:

So our goal, Shannon, we'd like to build about $1 billion solar business for us here at the company, and it could take a variety of different product forms. It's too early right now for us to make any specific announcements. But given the IRA, we see many opportunities to both grow and enhance the profitability of this business.

Operator:

And our next question will come from Steven Fox from Fox Advisors.

Ed Schlesinger:

Yes. Thanks, Steve. Maybe the way to think about it is as we talk about what our priorities were through the pandemic, one of them was serving our customers. And we disproportionately erred on the side of being able to do that, right? In the beginning, when inflation was coming in, we made sure that we got our customers what they needed over time, we were able to raise price and offset that. And similarly, in the production space, we did whatever we needed to do to ensure that we have the products available to ship to our customers, in a very difficult supply chain environment in a very difficult pandemic environment where being able to staff your factories, have all the materials you need and be able to make the products you need was very difficult over this sort of long sweep of time starting in '21 and running through the end. So we've been able to improve the way we operate, improve our yields, improve our staffing levels and in some cases, take some adjustments and realign our capacity allow us to get back to what we would consider to be our benchmark or our historical productivity metrics. So making sure we have the right output at the right cost at every level in all of our factories. That's our objective. We're not completely there yet, but we've taken a lot more action in the fourth quarter, and we've made a significant amount of progress that will improve our cost and therefore, improve our gross margin.

Ed Schlesinger:

Well, I think longer term, it almost if you think about it, it gets us back to being able to operate like we did pre-pandemic, right? Pre all of the supply chain disruption, we are humble, at least I will be humble here that we have been surprised by a lot of things, including this recent change in the way China has operated during the pandemic, which clearly impacts us and our customers and our suppliers. But putting that aside, I feel like we now are able to run more like we did pre-pandemic levels, which then allows us to grow as our demand comes back and our margin should get back closer to our historical levels.

Josh Spector:

I was just curious in specialty. Is there a way to think about the pace of new content wins over this next year? So you shared you grew almost 10 percentage points greater than the market in '22. How would that metric look in '23 based on what you know now?

Josh Spector:

Okay. And if I could just follow up on the cost side of things. So you talked about your productivity. Is there anything we should be considering energy or otherwise flowing through differently for you guys given your hedging strategies over the past couple of years?

Wendell Weeks:

I think, Josh, that we're -- we've been able to -- with the actions we took in the fourth quarter, which is pretty significant. We've been able to catch up to the inflation that we have experienced, like looking in the rearview mirror. And that's one of the reasons that we're able to have the step up in our profitability in quarter 1 or sequentially from quarter 4. I think where we still have work to do is really in the area of what you're asking about, which is how accurately we see what's coming at us from an inflation standpoint and sort of getting ahead of the game. We're still working through that. Got a great team on supply chain who's trying to help us do it, but I think we need to improve there some more, Josh.

Tim Long:

Yes, I'd like to ask kind of a 2-parter on the optical coms business. First, kind of on the revenue side. It felt like last quarter or through the quarter, it was mostly like one large carrier that was part of the weakness. Now it seems like it's a little more distributed. It looked like enterprise was kind of weak in the quarter, and a lot of folks are worried about cloud spending into next year. So can you just talk a little bit about kind of the maybe enterprise telco mix there or how you see the dynamics differently in those 2 markets? And then secondly, obviously, profitability was weak in the quarter. Could you talk about that? Is that just component cost or is there something else going on? There's a pretty big dip in profitability there.

Ed Schlesinger:

Yes. And I'll take the cost one or the margin one, profitability one. I think Opto is a good example of sort of all of the things we've talked about, inflation impacting the segment significantly, productivity levels impacting the segment significantly. Those things are depressing margins in optical. And the fourth quarter volumes also came down, and we also took inventory down in the fourth quarter in optical. And all of those things impacted our margins. So it's sort of a good example of all the things we've talked about. However, on the positive side, the actions we've talked about significantly impact optical as well. So as we go into 2023, that's a place where we would expect to see profitability improvement.

Matt Niknam:

Just 2 if I could. One, maybe bigger picture. As we think about maybe a slower start to the year, EPS, I think, is implied to be about $0.38 at the midpoint in 1Q. Is there any framework to use when thinking about the trajectory for EPS in 2Q onwards? And really what I'm getting at is any visibility you have towards when you get back to maybe a $2 a share sort of annualized EPS run rate? And then maybe just a follow-on to the last question. On Optical, have you seen any inflections or resumption of activity in 1Q? And then maybe when you would anticipate a more meaningful bounce back this year?

Matt Niknam:

That does. That does. And then just on Optical, have you seen any sort of resumption or bounce back yet in 1Q?

Operator:

Our next question will come from Asiya Merchant from Citi.

Ed Schlesinger:

Yes, sure, Asiya. I mean I think on capital, I shared our view that we expect to hold CapEx similar in 2023 as we did to 2022, and that was sort of similar to the prior year as well. And I think what you saw in 2022 that really impacted our operating cash flow the most was the inventory build. We built about $500 million of inventory in the year. So obviously, that negatively impacts our operating cash flow. Our goal is to make inventory go the other way. We made a small step in the fourth quarter here. And even not building inventory, just holding inventory flat helps our cash flow going forward. So our goal is to make our operating cash flow go up, keep our CapEx flattish, and so that should make free cash flow go up. But we've got work to do to be able to do that, and it's primarily in the inventory space.

Ed Schlesinger:

Yes, I'm not going to guide that specifically. But what I would say is our priorities are investing for organic growth, and we will continue to do that. We believe there's a lot of opportunity out there. That's sort of the highest priority for our operating cash flow, and then we want to return cash to shareholders. We shared what we plan to do on the dividend. And then, of course, buybacks are important to us. As a reminder, we did a very large buyback in 2020 -- I'm sorry, 2021 with Samsung's conversion of their preferred shares. We bought back about 4% of our outstanding shares, and that sort of is still -- we're still paying for that. We've got one more tranche to pay for that in April of 2023. And then we'll have that behind us. That should give us more flexibility. And buybacks, of course, will remain important.

Operator:

Thank you. This concludes today's conference call. Thank you for your participation. You may now disconnect. Everyone, have a wonderful day.

Operator:

Welcome to the Corning Inc. Third Quarter 2022 Earnings Call. [Operator Instructions]. It is my pleasure to introduce to you, Ann Nicholson, Vice President of Investor Relations.

Wendell Weeks:

Thank you, Ann, and good morning, everyone. Today, we reported solid third quarter results that demonstrate strong execution. We continue to operate each of our business as well and our focus on leadership and distinctive capabilities allow us to capitalize on important secular trends and drive our More Corning approach. Sales were $3.7 billion, up slightly versus a strong third quarter last year, and EPS was $0.51. We were able to offset a sales decline in display technologies with growth in optical communications and solar. While we believe that display panel maker production bottomed in September, we would like to see additional positive evidence before guiding a significant recovery in glass demand. In total, we performed well despite the economic environment. Before we get into the details, I wanted to set some context on what we're facing across our markets. On our last call, we told you that end markets in multiple businesses were down. A smartphone sales in the second quarter declined 8% year-over-year, panel maker utilization in June 2022 was at its lowest level since 2009. And yearly, automotive production was 10 million to 15 million vehicles below its pre-COVID rate. Several of these dynamics continued or even intensified in the third quarter. A smartphone unit sales declined 14% year-over-year in the quarter, with tablet and notebook demand down 17%. Panel maker utilization decreased even further from its June level with September being the lowest month of the quarter and annual automotive production is still 10 million to 15 million cars short due to continued component shortages. Nevertheless, we delivered results within our guidance range and expectations. We continue to benefit from infrastructure investments in broadband and clean energy, two secular trends we're strategically positioned to address. We delivered 16% year-over-year growth in Optical Communications, and we captured ongoing demand in the solar market, which contributed to 33% year-over-year growth in Hemlock and Emerging Growth Businesses. So let's take a deeper look. What we're seeing in some of our key markets, how we're responding. And why we're confident that our strategy continues to position us to deliver profitable multiyear growth. I'll start with display. In the third quarter, the glass market and our volume both decreased almost 25% sequentially and which significantly reduced our sales and profitability. In September, panel maker utilization reached the lowest level since the fourth quarter of 2008. More than a year ago, we said we expected a correction in the display industry during 2022. In the second quarter, panel makers began reducing production levels with accelerated reductions in June. In the third quarter, panel maker production reached an even lower level. And we believe that panel maker production reached the bottom in September. So now the question is, when will the glass market recover? Now our answer is that we would like to see additional positive evidence before we guide a robust recovery in glass demand. We've maintained stable price and market position during this whole correction. Consequently, we expect our volume and profitability to increase sharply when panel maker utilization rebounds and we expect to exit the correction with strengthened customer relationships and importantly, a refreshed manufacturing fleet. As always, we will keep you informed as we progress. Overall, we feel very good about our execution in display. In mobile consumer electronics, customer product launches and strength in semiconductor drove sequential growth in Specialty Materials. As I noted, smartphone and IT retail unit sales declined significantly in the quarter. We now expect smartphones to be down about 12% for the year. And we expect notebook and tablet demand to decline 15%. We expect the year-over-year decline in smartphones, notebooks and tablets to be greater in the second half than in the first half. This will limit the growth we normally see in our second half sales relative to the first half. Now that said, we continue to outperform the market through our product leadership, our more Corning approach and our ongoing collaboration with industry leaders. Over the long term, our content strategy in mobile consumer electronics will help us grow. As we continue to develop and launch premium glasses and optical treatments,for existing and new form factors. Additionally, we're executing our more Corning approach in the semiconductor industry. In July, Senator, Chuck Schumer and New York Governor, Kathy Hochul, joined us to announce government funding that supports an expansion of our advanced optics facilities, which made equipment and materials vital to semiconductor manufacturing. Of course, semiconductors are fundamental to virtually all technology we interact with today. We've helped advance the industry for more than 50 years, and our expansion will keep us well positioned to support nearly every step of the chip manufacturing process and to respond to new customer needs, including products for EUV technology. Let's turn to automotive. In Environmental Technologies, we delivered sales and profit growth despite the constraints on vehicle production, and we're outperforming the market for the year. We continue to adjust our operations to effectively navigate the variability in auto production and we are prepared to meet demand when industry production increases to normal rates. We're also generating significant wins in our Automotive Glass Solutions business. Pull is strong for our technical glass and optics innovations. During the quarter, CarUX, a leading car display company owned by Innolux, announced its use of our patented cold-form technology to help drive the future of auto interior displays. Corning continues to be well positioned to further grow its automotive business as the industry offers more advanced, designed-oriented cabins and enhanced driver assistance features. Let's move to Optical Communications, which was the largest contributor to third quarter sales. The industry continues to experience a large multiyear wave of growth for passive optical networks, and we continue to increase our capacity to support this growth. In August, U.S. Secretary of Commerce, Gina Raimondo, joined AT&T CEO, John Stankey, and me to announce a new manufacturing facility in Arizona. You may recall Secretary Raimondo's leadership helped pass infrastructure legislation dedicated to the idea of Internet for all. Our new plant will boost optical cable capacity to meet record demand. In September, we opened a new optical fiber manufacturing plant in Poland to serve committed demand. And we're innovating to support every phase of broadband deployment as network access is increasingly viewed as a fundamental human right. In the quarter, we announced additions to our Evolv connectivity portfolio which helps operators streamline permitting, accelerate field installation and optimize network testing. Optical sales have grown 22% and for the first 3 quarters of the year, setting us up for another strong year of growth. However, we expect fourth quarter sales to be down sequentially due to the timing of customer projects. Turning to solar. The renewable energy industry is evolving rapidly, and our ongoing growth continues to indicate that the market's behavior is more closely tied to a global imperative than the current economic trends. We reenergized our participation in the solar market by starting up idle capacity and securing customer commitments through new long-term take-or-pay contracts for solar grade polysilicon. Third quarter sales grew significantly year-over-year, and we will benefit from the state of Michigan's infrastructure investment program, which will help us expand operations to meet increasing global demand for polysilicon. We believe that Corning's broader technical and manufacturing capabilities, our 3 and 4, will prove to be highly relevant and helping advance the renewable energy industry, and we see excellent growth potential in solar. Now as I conclude my remarks, here's what I'd like to leave you with today. We remain very well positioned to deliver profitable multiyear growth and we'll continue to execute with discipline. We'll invest where we see strength and will pace to meet demand. Our cohesive and focused portfolio provides strategic resilience that is playing out well in this current environment. We've established a deep relevance to secular trends along with the ability to drive more content into our markets over time. We've been leading in the automotive and life science markets for 100 years, display for 80 years, telecommunication for 50 and mobile consumer electronics since the inception of smart devices. The basis of our ongoing success is our distinctive set of capabilities and long track record of life-changing and even life-saving inventions. In the past, what enables us to power through moments like the present while maintaining an attractive long-term growth trajectory. Now let me turn the call over to Ed, who will share more details on our results, financial priorities and outlook.

Ann Nicholson:

Thanks, Ed. Crystal, we're ready for the first question.

Mehdi Hosseini:

Two things I want to dig into. Is there a minimum OpEx that you can offer us? I understand there are a lot of moving parts, especially with macro headwinds. And I'm just trying to better understand how flexible you are with managing expenses. And the same thing with CapEx, there is no visibility as to when display will show a rebound. So should we assume that the CapEx trend into next year will show a decline on a year-over-year basis?

Ann Nicholson:

Our next question?

Steven Fox:

Two questions on Optical, if I could. First of all, in terms of some of the project pauses or push-ups you're seeing, what gives you confidence that it's not something worse and that you see more delays, especially as you get into the winter months and with some of the issues in Europe? And then secondly, can you give us a sense for how the ramping of the plants, the new plants for Optical has helped -- I assume it helped margins during the quarter and how that helps into next year and what the offset is with the build-out for Arizona.

Steven Fox:

And then on the new plant impact?

Operator:

And our next question comes from Martin Yang from Oppenheimer.

Wendell Weeks:

Great question, Martin. So our analytics are really good at being able to say, for instance, last year, we said there was going to be a correction in 2022. And then they're very good at doing things like calling a bottom because we can tell sort of where our panel makers are operating, and what exactly is happening with their inventory, et cetera. They're not as good at following the exact timing of a turn. So for instance, our analytics would have said the panel maker industry should have started. It's correction in a much more robust way in quarter 4 of last year in quarter 2, but they didn't actually start until quarter 2 and then accelerated into quarter 3. So though we're really comfortable with our analytics, they we're a bottom. The calling on when that upswing comes now really gets into sort of what is the psychological behavior of buyers in this industry. And so the way we tend to try to do that, it's a little softer but we do take a look at panel price inflection points. So that's where the absolute level is, but when do they turn and that is actually a buy signal for buyers, right, and it makes signal for panel makers. How is the retail and set maker commentary as we have interviews with them constantly? How are they actually feeling about what it is they're seeing because that's going to drive their behavior. And then finally is just how tight things are becoming in the value chain overall. So as we look at all those things, what we'd say is we can't tell yet what exact month we see the sharp recovery, right? We'll need to see more of that accumulate. But we can't say with pretty high confidence that September was a bottom. And now it's just a question of when do we pop up.

Wamsi Mohan:

Wendell to follow up on that prior question, would you say -- you guys have disclosed in the past levels of weeks of inventory in the display supply chain. I was wondering if you could characterize maybe not in absolute, but at least in relative terms where we are relative to past cycles in terms of weeks of inventory? And Ed, if I could, I appreciate the fact that you guys are largely hedged for 2023, but the yens obviously moved to . Your core rate is . Maybe you can give investors a little bit of a longer-term view on the yen hedging strategy and maybe some calibration on potential impact beyond 2023, how investors should think about it?

Wamsi Mohan:

Yes, it does, Wendell. I was just wondering if there was any -- like I think you guys have mentioned in the past 10 to 15 weeks, depending on various times in various cycles. And are we at the lower end of that or at the higher end of that? And does that give you some increased confidence that we're at the bottom of sort of where utilization rates could be?

Edward Schlesinger:

And Wamsi, on the yen or on currency in general, I'll make a couple of comments. So I think you know we're obviously long in the yen. We are short in other currencies. Most currencies are weak -- or weakening versus the dollar. So we are taking an opportunity during this time period in some of the currencies where we're short. And they're weakening against the dollar to put hedges in place farther out, right? So we're trying to be opportunistic despite the fact that the yen is weak and that obviously impacts our overall core rates as we think about them sort of as a basket of exposures. And then with respect to the yen, we continue to look for ways to protect ourselves beyond 2023. We do have some hedges in place beyond 2023 and the farther out you go, the spot rate or the forward rate -- sorry, the forward rate is below where the current spot rate is, and that affords us some opportunity to do things further out. So we'll keep investors updated. We understand how people are thinking about it, and we're going to be opportunistic and try to protect ourselves at this current core rate level.

Tim Long:

Two questions, if I could, on the Optical segment. First, could you talk a little bit about -- you talked about the timing deals happens a lot in this industry. Maybe just looking at the next few quarters, are you seeing that a little bit more in the telco side or the data center side? Maybe if you can just parse out how those 2 splits are looking in the pipeline. And then on the telco side, we're increasingly hearing throughout the world about pressures on macro and energy costs and whatnot potentially affecting fiber builds, which have been obviously really strong over the last few years. Are you starting to hear more caution from the customer base looking out maybe a little bit on the telco side because of macro? Or do you think there's enough government initiatives and just push for broadband to make that still a spending priority for the telco vertical?

Tim Long:

Yes, that does. Very, very helpful.

Joshua Spector:

Just two quick ones, if I can. So just curious on your level of confidence on the pricing comments in display. A little bit surprised talking about up pricing there still into next year. It seems a little bit early at this point. So I'm curious if that depends on utilization rates increasing or is that something you see playing out potentially regardless of that scenario? And then just a follow-up on the restructuring charges in the quarter. Can you just provide some comments on kind of what was restructured within the Emerging Growth Businesses?

Edward Schlesinger:

And Josh, I'll make a comment on the restructuring charges. So what you saw this quarter was primarily related to sort of an early-stage business, moving more towards commercialization. Oftentimes, we have Gen 1 assets. And as we move into like a high-volume manufacturing state, we advance our technology. Our cost goes down significantly and we sort of obsolete those Gen 1 assets, and that's the primary driver of what happened in the third quarter.

Shannon Cross:

I wanted to ask a bit about solar. Can you talk about what you're thinking may be the contribution from the IRA and a backlog or how we should think about orders and then potential for additional capacity over time? Because it seems to me like this could be a big opportunity for Hemlock, especially if you start bringing more capacity back to the U.S.

Wendell Weeks:

Shannon, you're right to look at it and say, "Gosh, I think this is probably really good for Corning." And we'll update you as we turn into the year on what we think that will mean.

Matthew Niknam:

Just two, if I could. First, more on the macro and demand backdrop. I know there was a question asked about Optical. But more broadly across your end markets, are you seeing tighter financial conditions impacting your customers' propensity to invest heading into next year? And then secondly, on pricing, I know you've talked a little bit about pricing increases, it sounds like there's a little bit more that could be coming in Optical. Just wondering if you've seen any sort of pushback or hesitancy to digest these increases in light of maybe some of the tighter financial conditions.

Operator:

And our next question will come from Samik Chatterjee from JPMorgan.

Wendell Weeks:

Great question. Most of our More Corning plays tend to reduce our customers' cost or improve their ability to deliver a vital customer function that they see. So in macro, I'd say, no, that we're not seeing a reduction in their capability. Let me give you a good example on cloud-based players. So on our latest set of innovations basically involve us being able to deliver totally engineered connectivity systems so that we save 40% of materials for them we can say, months and installation time. We improved the quality of everything. And so that in total, you give us a lot more price, a lot more revenue but it saves you money in time. That is like a typical angle for us in More Corning, and we're continuing to see good adoption of those. Your question. Interesting is when you move into mobile consumer electronics is you're seeing some differing strategies. There's just some clear power winners that have happened there who continue to invest really strongly in improving the product attributes that they offer to their customers. And some of our other mobile consumer electronics players, particularly in China, sort of have lost in that premium battle and are doing a little bit less of our key innovations. But in total, the winners are investing more with us. So -- and [indiscernible] still think that fundamental More Corning strategy is playing out well, very strong heartbeat. So that is still playing out. But I do understand the question. It's an interesting question. It's unique.

Meta Marshall:

Maybe first question on Optical. I know it's been asked a couple of times, but just to kind of circle around it, that it's a couple of Americas-based service providers? Or is it more global in just what we're seeing? I know you said it was mostly within the telcos, but just wanted to get a sense is that largely concentrated within the U.S. or international? And then maybe a second question for me. Inventories have been a pretty big use of cash this year. Just wanted to get a sense of major drivers of that and if that's part of what you would expect to revert in Q4 to help with the -- achieve free cash flow generation targets.

Edward Schlesinger:

And Meta, on inventory, you're right. You can see it in our cash flow. We've definitely built a lot of inventory through September and we definitely need to make that reverse. That's what we're thinking, it will start to happen in the fourth quarter and as we go into 2023. I mean I think there are a few factors that drive it higher. And it's one of the reasons why we haven't been able to sort of slow it down and reverse it sooner. First and foremost, just in general, the supply chain has been difficult, and we want to make sure we can serve our customers, so we're carrying a little more inventory than we might otherwise have. And as we brought our sales forecast down for the back half of the year, we need to sort of catch up and digest a little bit of the inventory that we have and that we've produced. And then lastly, just the cost of the inventory, right? So as inflation hits us, it manifests itself in inventory, and then we get that back as we raise price when we sell that through. So there's a little bit of a delay in that. Those are really the factors that drive it up. And yes, our goal is to get it down starting here in the fourth quarter.

Mehdi Hosseini:

Just a quick follow-up. If I were to go back to late 2019, 2020, the last time that your Display revenue were declining, the averaged 20% net income. And if I fast forward to your Q3, your revenues are about $70 million less than that period, but you're still able to get almost to 20% net margin. Is it just a reflection of the trends that have come offline? Or is this something else that helps with relatively better margin given the lower revenue volume, an insight would be great.

Ann Nicholson:

Thanks, Mehdi and thanks, Wendell. Okay. Thank you all for joining us this morning. Before we close, I wanted to let you know that we will attend the Credit Suisse 26th Annual Technology Conference on November 29 and the Barclays Global Technology, Media and Telecommunications Conference on December 8. Additionally, we'll be hosting management visits to investor offices in select cities. Finally, a replay of today's call will be available on our site starting later this morning. So once again, thank you all for joining us. Operator, that concludes our call. Please disconnect all lines.

Operator:

Welcome to the Corning Incorporated Quarter Two 2022 Earnings Call. [Operator Instructions] It is my pleasure to introduce to you, Ann Nicholson, Vice President of Investor Relations.

Wendell Weeks:

Thank you, Ann, and good morning, everyone. Today, we announced strong second quarter results. We captured additional content opportunities across our markets, despite an extremely challenging external environment. And we delivered on growing demand in optical and solar. Sales were $3.8 billion, up 7% year-over-year. And EPS was $0.57, up 8% year-over-year. Free cash flow was $440 million and total first half free cash flow was $611 million. Gross margin and operating margin expanded 90 basis points and 120 basis points respectively from the first quarter 2022 levels. Now our improved profitability was primarily driven by the benefits of pricing actions that we took to more appropriately share the impact of inflation with our customers. In total, we delivered in line with our expectations, even though dynamics in three of our largest markets played out at the lower end of our assumptions. In the last month of the quarter, panel maker utilization rates declined to the lowest levels since the first quarter of 2009, when we were at the height of the financial crisis. Auto production continued significantly below normal with virtually no cars sold in Shanghai in April, due to COVID-19 restrictions and with European new car registrations for June at the lowest levels since 1996. In the second quarter, smartphone sales declined 11% year-over-year, primarily stemming from COVID lockdowns in China. In the face of these industry dynamics, we delivered outstanding results, in line with our guidance. We did what we said we were going to do including continued growth and improved profitability. We view the resilience we've demonstrated as a strong proof point that our strategy is working. In the third quarter, we expect the challenges in these three markets to continue. At the same time, we expect an ongoing benefit from secular trends in optical and solar. Both factors are reflected in our guidance. We now expect third quarter sales to be roughly consistent sequentially and to grow year-over-year. We expect full year sales to slightly exceed $15 billion and to grow in a range of 6% to 8%. Now, Ed will elaborate more in just a moment. Now with that in mind, I want to expand on our path to $15 billion and look at the dynamics playing out in four critical market

Ann Nicholson:

Thanks, Ed. Krystal, we’re ready for the first question.

Steven Fox:

Hi. Good morning. Good morning. Can you hear me?

Steven Fox:

Hi. I guess, I was wondering if you can go back and talk about the optical business a little bit more. It’s obviously got a lot of new product momentum and has had extremely strong growth. Some of your carrier customers have recently called out some weakness on subscribers and other consumer demand. How do we think about sort of optical maybe not just for the next couple quarters, but say if we think about it for the next year in the face of macro pressures, how confident are you in its ability to continue to grow? Thanks.

Steven Fox:

It did. And then I just probably should have thrown this into the question, which is, could you just maybe expand that Wendell to talk about cloud demand as well? And I’ll pass it on from there. Thanks.

Steven Fox:

Great. That’s very helpful. Thank you.

Operator:

Thank you. Our next question will comes from Wamsi Mohan with Bank of America. And your line is now open.

Wendell Weeks:

On Display, as you would’ve heard in our opening, we are – we expect our volume to be in line with where panel makers are taking their utilization and down some 15% in quarter three. As we take a look at retail what we’d say is we’d expect TV units to probably be down this year now, especially given what has happened with the China shutdowns. But it could be flat. And I think it’s just too early for us to talk about next year. This is a pretty significant correction that we’re working our way through and the real critical spot for us is we want to be able to continue to execute our strategy and have that our price be stable, have our market position stay stable. And then we’ll be there for as television unit demand and panel maker utilization comes up, we’ll see our profitability climb in line.

Wamsi Mohan:

Okay. Thank you so much.

Operator:

Thank you. And our next question will come from Samik Chatterjee from JPMorgan. And your line is now open.

Wendell Weeks:

Thanks, Samik. So I think maybe stepping back a little bit on the guide, if I think about both the third quarter and the full year, what we’ve tried to do is reflect the highest probability range that we can for sort of all the dynamics we’re seeing across all of our markets. And as we talked about in Display, it’s – there was a pretty sharp correction down in June. We’re expecting that to continue into the third quarter, but we have a range of how we see that playing out. And then the same thing holds true related to demand in China, which obviously impacts automotive in the back half of the year. It’ll impact potentially smartphones and maybe even Life Sciences, right? So if you think about our guide, there’s a high end and a low end and sort of our view of a most probable outcome. And so, yes, we’re expecting the fourth quarter to probably be a little bit better than the third quarter, depending on where you pick within that range we’ve given you for the third quarter and it’s certainly possible if sort of things play out as they normally do. You would see an uptick in Display. That’s definitely in the range of probabilities in terms of how we’ve thought about it.

Operator:

Thank you. And our next question will come from Rod Hall from Goldman Sachs. And your line is now open.

Wendell Weeks:

Rod, I would agree with your observation and concerned insightful observation that the more premium end is doing better than the low end and the largest deterioration has been in that piece of the market. We think that relative outperformance will be there, but we don’t like in our guide, we’re not reflecting a belief that it’s just going to be bimodal, right. We think everybody’s going to get impacted and it’s a timing question. But you’ll still have relative outperformance in the premium end and that’s the way we look at it. Is that the question you were asking Rod? [Ph]

Wendell Weeks:

Yes. We’re seeing the impact of that being below where we would’ve thought it would be really driven, I think primarily by this combination of China shutdowns and inflation. So it’s below what we would have normally expected it to be, but it is, we are still seeing outperformance run.

Wendell Weeks:

Yes. Thanks Rod. So on solar, I think the way to think about it is through the year, last year and into sort of the second quarter of this year, we continued to ramp our solar sales. We were originally selling out of inventory and we sort of sold all that out and then we started production back up in the fourth quarter. And so it has become a greater part of the sales in Hemlock and Emerging Growth segment. In addition to that, what I would say is, we are getting to be capacity constrained. I mean, we're selling for the most part, what we can make, we'll get a little better at making and we'll have a little more capacity in the back half and as we go into 2023, but not a lot of capacity. And I think the important thing to think [Technical Difficulty] make we'll get a little better at making and we'll have a little more capacity in the back half and as we go into 2023, but not a lot of capacity. And I think the important thing to think about is, we've signed customers up for multi-year take or pay contracts to essentially sell out that capacity. So we feel really good about that demand and our ability to supply it. We have more capacity that we could turn on. It would be a decision we'd have to make based on the dynamics in the market and our ability to continue to get customers to take that volume either by giving us cash or signing up for long-term commitments.

Wendell Weeks:

[Technical Difficulty] to supply it, we have more capacity that we could turn on. It would be a decision we'd have to make based on the dynamics in the market and our ability to continue to get customers to take that volume either by giving us cash or signing up for long-term commitments.

Wendell Weeks:

Yes, I think the good – the demand is high. I do agree. I think we're cautious in this space and we want to make sure that we've got good commitment for any additional demand that we would turn on. We'll update you as that plays itself out in the back half of this year and into 2023.

Rod Hall:

That's great. Thanks a lot, guys. I appreciate all the color.

Josh Spector:

Sorry. For some reason it cut out. I didn't hear my name. Thanks for taking my question. Just as a high level, curious, I mean, you seem relatively bullish on optical. Maybe those expectations are roughly unchanged, clearly display expectations moved a bit. In the rest of the portfolio, would you say your second half expectations have changed significantly? Or are they relatively similar to how you saw things a few months ago and trying to think about that relative in terms of the medium to longer term growth for some of those segments as well? Thanks.

Josh Spector:

Okay, thank you.

Ann Nicholson:

Next question?

Mehdi Hosseini:

Yes. Thanks for taking my question. Now, want to go back to the display and want to get your thoughts on your customers ability to produce panel, especially since panel process are the cash cost. Why shouldn't the glass market enable lower costs and improve affordability by lowering key material costs like glass. Unless you tell me that the market is not elastic, any thoughts here would be great. And I have a follow up.

Mehdi Hosseini:

Got it. Thank you. Thanks for detail. And just quick follow-up on cash flow inventories are up Q-o-Q and year-over-year. Should I assume that that 110 days of inventory would trend down into the second half of the calendar year?

Mehdi Hosseini:

Got it. Thank you.

Operator:

Thank you. And our next question will come from Martin Yang from Oppenheimer. Your line is now open.

Wendell Weeks:

Yes. I think you correctly identified the dynamic, Martin. It is sort of our content-driven strategy has been in mobile consumer electronics like a number of our markets is not just account on people buying more stuff, buying more phones, but to put more Corning content into the smart devices that people already buy. And so each of those new innovations tends to have more value to it and therefore add to our content. And that's why despite flat to down smartphone market, we've grown our revenues some 40% or more is it's basically that content strategy.

Wendell Weeks:

We – yes, we have new innovations that we have lined up that we’re seeing a good strong interest in and adoption of. So, yes, we continue to see that strategy be able to play out successfully in the years to come. Now at the same time, all of that innovation, all of that new technology adoption does happen in a broader macroeconomic context, right? So how that will impact our customers launch plans and the like. I think would remain to be seen. But the fundamental structure of the strategy is in place.

Operator:

Thank you. We’ll take our next question from Matt Niknam from Deutsche Bank. Your line is now open. Mr. Niknam, your line is now open please make sure you’re not on mute.

Ed Schlesinger:

Yes. Thanks for the questions. So, on the sales side, I think we gave you our guide for the year and we’re in that zone. And we’re not going to give new long-term guidance right now, primarily just because of all the challenges we articulated on the call. It’s a very dynamic external environment. At some point we’ll certainly update you about 2023 and perhaps longer-term. But I think the – as Wendell said earlier, the secular growth trends are all intact and we feel really good about them over the long-term, despite sort of this current challenging environment. And then on the operating leverage side, I think the primary driver for sure this year is what’s happening in display. Volume going down, panel maker utilization going down the market going down and our volume following is just a significant impact on our profitability. So that’s the real primary driver on the earnings per share side this year.

Ed Schlesinger:

Yes. You’re right. We did say that and we still, for sure, believe the first quarter was the trough. As you saw in our results, we stepped up about 1 point in the second quarter. That’s really all about the pricing actions we had talked about. We feel great about those actions. And although the inflationary environment is still with us, we’ll continue to raise price. And so over a period of time, that should be a favorable tailwind to margins. I would just caution that it will be a slow march in this environment.

Ann Nicholson:

Great. Next question.

Asiya Merchant:

Great. Thank you for the question. Apologize if it’s been asked before as I was switching between a couple of calls. Just on the optical side, anything you can share about the demand that you’re seeing from the hyperscalers versus the telco operators. We’ve been hearing some rumblings about hyperscalers stepping down some CapEx investments. And so if you can share any color on that that would be great. Thank you.

Asiya Merchant:

Okay. Thank you.

Operator:

Thank you. Our next question is going to come from Timothy Long from Barclays. Your line is now open.

Ed Schlesinger:

Yes. So thanks, Tim. So on capacity, we’ve been talking about adding capacity it’s fiber and cable capacity primarily this year. We have a little bit coming on in the third quarter and a little more in the fourth quarter. And as you heard Wendell say, we’re a little behind, probably a quarter or so relative to what we thought, maybe three, six months ago, so some of that capacity will help us more in the first half of 2023 versus in 2022. We did have a really strong quarter and we sell a mix of products and on the connectivity side where we have capacity that helped our quarter significantly in the second quarter. And I think on the operating leverage, you’re exactly right. Optical happens to be one of the businesses that has had a lot of inflation. We have raised prices successfully there and that has helped us kind of normalize our margins and slowly march them up there as well. And I think you can continue – you should continue to expect to see that, but again, just caution that it will be a slow march up in this environment.

Ann Nicholson:

We got time for one more question.

Meta Marshall:

Great. Thanks. Maybe to your guys’ comment at the end that you would be evaluating macro for any change in build plans. Just wanted to kind of verify, like, have you guys changed any build plans yet for 2022, even if that’s kind of moving within segments. And then maybe on the second question, you guys noted kind of a couple times labor being the gating item for kind of further optical business or rollouts. Just wanting to get a sense of, even when it comes to cloud, are there – is it really just still labor or are there other elements of the supply chain that need to kind of come into place to get further build activity there? Thanks.