Corning Q3 2022 Earnings Call Transcript

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Provided by Quartr
October 25, 2022

Key Takeaways

  • Corning reported Q3 sales of $3.7 billion, flat year-over-year, as optical communications (+16%) and solar (+33%) growth offset weakness in Display Technologies.
  • Display Technologies saw a ~25% sequential volume decline with panel maker utilization at its lowest since 2008; stable glass pricing and refreshed manufacturing assets should drive a sharp profit rebound when demand recovers.
  • Optical Communications sales rose 16% to $1.3 billion, fueled by broadband and passive optical network investment; a new Arizona facility was announced to support multiyear growth.
  • Specialty Materials sales fell 7% as smartphone and tablet unit demand dropped mid-teens, though premium glass and advanced optics outperformance support resilience; Q4 segment sales and profit are expected to decline sequentially.
  • Hemlock & Emerging Growth (solar and polysilicon) sales grew 33%, backed by long-term take-or-pay solar contracts, capacity ramps and anticipated benefits from U.S. infrastructure incentives.
AI Generated. May Contain Errors.
Earnings Conference Call
Corning Q3 2022
00:00 / 00:00

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Operator

Welcome to the Corning Incorporated third quarter 2022 earnings call. To place yourself into the Q&A queue, please press star one one on your telephone. It is my pleasure to introduce to you Ann Nicholson, Vice President of Investor Relations.

Ann Nicholson
Ann Nicholson
VP of Investor Relations at Corning

Thank you and good morning. Welcome to Corning's Q3 2022 earnings call. With me today are Wendell Weeks, Chairman and Chief Executive Officer, Ed Schlesinger, Executive Vice President and Chief Financial Officer, and Jeff Evenson, Executive Vice President and Chief Strategy Officer. I'd like to remind you that today's remarks contain forward-looking statements that fall within the meaning of the Private Securities Litigation Reform Act of 1995. These statements involve risks, uncertainties, and other factors that could cause actual results to differ materially. These factors are detailed in the company's financial reports. You should also note that we'll be discussing our consolidated results using core performance measures, unless we specifically indicate our comments relate to GAAP data. Our core performance measures are non-GAAP measures used by management to analyze the business.

Ann Nicholson
Ann Nicholson
VP of Investor Relations at Corning

For the third quarter, the primary difference between GAAP and core EPS was from primarily non-cash charges associated with capacity optimization and non-cash mark-to-market adjustments associated with the company's currency hedging contracts. This increased core earnings in the third quarter by $234 million. To be clear, these charges and mark-to-market accounting have no impact on our cash flow. Reconciliation of core results to the comparable GAAP value can be found in the investor relations section of our website at corning.com. You may also access core results on our website with downloadable financials in the Interactive Analyst Center. Supporting slides are being shown live. They're also available on our website for downloading. Now I'll turn the call over to Wendell.

Wendell Weeks
Wendell Weeks
Chairman and CEO at Corning

Thank you, Anne. Good morning, everyone. Today we reported solid third quarter results that demonstrate strong execution. We continue to operate each of our businesses 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 want to set some context on what we're facing across our markets.

Wendell Weeks
Wendell Weeks
Chairman and CEO at Corning

On our last call, we told you that end markets in multiple businesses were down. Smartphone sales in the second quarter declined 8% year-over-year. Panel maker utilization in June 2022 was at its lowest level since 2009. Yearly automotive production was 10-15 million vehicles below its pre-COVID rate. Several of these dynamics continued or even intensified in the third quarter. 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. Annual automotive production is still 10-15 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.

Wendell Weeks
Wendell Weeks
Chairman and CEO at Corning

2 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. Let's take a deeper look at 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 multi-year growth. I'll start with display. In the third quarter, the glass market and our volume both decreased almost 25% sequentially, 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.

Wendell Weeks
Wendell Weeks
Chairman and CEO at Corning

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. 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. 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.

Wendell Weeks
Wendell Weeks
Chairman and CEO at Corning

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.

Wendell Weeks
Wendell Weeks
Chairman and CEO at Corning

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 make 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.

Wendell Weeks
Wendell Weeks
Chairman and CEO at Corning

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 ColdForm 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, design-oriented cabins and enhanced driver assistance features. Let's move to Optical Communications, which was the largest contributor to third quarter sales.

Wendell Weeks
Wendell Weeks
Chairman and CEO at Corning

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. 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 Evolve connectivity portfolio, which helps operators streamline permitting, accelerate field installation, and optimize network testing.

Wendell Weeks
Wendell Weeks
Chairman and CEO at Corning

Optical sales have grown 22% for the first 3Q 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 re-energized 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.

Wendell Weeks
Wendell Weeks
Chairman and CEO at Corning

We believe that Corning's broader technical and manufacturing capabilities are 3 and 4 will prove to be highly relevant in 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 multi-year growth, and we'll continue to execute with discipline. We'll invest where we see strength and we'll 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 sciences markets for 100 years, display for 80 years, telecommunications for 50, and mobile consumer electronics since the inception of smart devices.

Wendell Weeks
Wendell Weeks
Chairman and CEO at Corning

The basis of our ongoing success is our distinctive set of capabilities and long track record of life-changing, and even life-saving inventions. That's 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.

Ed Schlesinger
Ed Schlesinger
EVP and CFO at Corning

Thanks, Wendell. Good morning, everyone. Let me start by emphasizing that we're executing well in a challenging environment. Our performance in the third quarter was a proof point of the inherent balance of our cohesive portfolio and the fact that our More Corning approach is working. We're built to be resilient even in a downturn. Now, let's look at our financial results for the third quarter. Sales were $3.7 billion, up 1% from a strong third quarter in 2021. Optical Communications, Environmental Technologies, Life Sciences, and Hemlock and Emerging Growth Businesses all delivered year-over-year growth. In September, Display Technologies experienced the lowest panel maker utilization levels since 2008, resulting in a 28% year-over-year decline in sales for the segment in the third quarter. In Specialty Materials, we outperformed the smartphone market, which was down double digits year-over-year.

Ed Schlesinger
Ed Schlesinger
EVP and CFO at Corning

Turning to profitability, gross margin was 36.1% and operating margin was 16.9%, down sequentially 140 and 190 basis points respectively, driven by the lower volume in Display Technologies. In the third quarter, free cash flow was $255 million, and year to date it was $866 million, keeping us on pace for another year of healthy cash generation. Despite the challenging environment during the quarter, we were able to offset significantly lower volume in Display Technologies, and we outperformed our underlying markets overall. Now let's turn to the segment results. In Optical Communications, sales grew 16% year over year, reaching $1.3 billion. Our year-over-year growth was driven by network operator investments in 5G, broadband, and the cloud.

Ed Schlesinger
Ed Schlesinger
EVP and CFO at Corning

Net income was $183 million, up 32% year-over-year, driven by leverage from strong incremental volume. Passive Optical Networks continue to experience a large multiyear wave of growth. We believe that this demand is strongly supported by private and public infrastructure investments to help connect the unconnected and bring broadband to a much larger share of the population. We continue to secure customer commitments, and we're investing to appropriately scale production to serve our incremental demand from current and new customers. We're also taking further pricing actions to more appropriately share recent cost increases in energy and certain raw materials with our customers. As we've mentioned in the past, this business can be lumpy from quarter to quarter, and you'll see that play out in the fourth quarter as we expect optical sales to be down sequentially based on the timing of customer projects.

Ed Schlesinger
Ed Schlesinger
EVP and CFO at Corning

Now moving to display. As we updated you in September, panel makers reduced their production levels below our already low expectations. The lower volume resulted in display sales declining 28% year-over-year and 22% sequentially. We saw a 46% year-over-year and 41% sequential decline in net income due to the high fixed cost nature of glass manufacturing. In the third quarter, glass price was once again consistent sequentially, and we believe the glass pricing environment will remain favorable. Factors that continue to drive that favorable pricing include glass supply-demand balance. As panel makers reduce production, Corning and other glass makers took additional tanks offline for maintenance and repairs after an extended period of glass tightness. We're also taking this opportunity to upgrade some of our fleet with our latest technology, which enables us to reduce cost and extend the life of new tanks.

Ed Schlesinger
Ed Schlesinger
EVP and CFO at Corning

As we continue to work through these upgrades, we are actively managing restarts to align our supply to demand. Another factor is glass maker profitability. It is challenging for glass makers who have high fixed costs to maintain profitability during periods of low volume, and the current inflationary environment amplifies that challenge. We expect fourth quarter glass prices to be consistent with the third quarter and glass prices to be stable or up in subsequent quarters. Overall, we continue to operate from a position of strength in the display market. As Wendell noted, while we believe that panel maker utilization reached the bottom in September, we would like to see more evidence before we guide a significant recovery in glass demand. When glass demand grows, we expect our volume to increase and our profitability to improve.

Ed Schlesinger
Ed Schlesinger
EVP and CFO at Corning

In Specialty Materials, the market for smartphones was down 14%, and tablets and notebooks were down 17%. We outperformed the market with sales down only 7% year-over-year, driven by strong demand for premium glasses and strength in semiconductor materials. Third quarter sales were up 7% sequentially, driven by demand for our premium cover materials to support customer product launches. Adding to our resilience in the segment, advanced optics delivered record sales for the second quarter in a row, and we are bringing additional capacity online at our facilities in Fairport and Canton, New York. Net income for the segment was $96 million, down 10% year-over-year, due to lower volume and continued development expense related to next generation products.

Ed Schlesinger
Ed Schlesinger
EVP and CFO at Corning

The weakness in the smartphone, tablet, and notebook markets intensified in the quarter, and we expect fourth quarter sales and profitability to be down sequentially and year-over-year. Long-term, we expect to outperform the market as we continue to develop and launch new premium glasses and optical treatments. Turning to Environmental Technologies, in the third quarter, sales were $425 million, up 10% year-over-year and 19% sequentially. Automotive production improved from a very low second quarter as China demand recovered after second quarter COVID lockdowns. However, vehicle production remains constrained due to the continued component shortages. In addition to our sales growth, we improved profitability with net income up 45% year-over-year. Our content-driven strategy is working. Gasoline particulate filters remain a critical component of that strategy, driving revenue even in a weakened market.

Ed Schlesinger
Ed Schlesinger
EVP and CFO at Corning

Our next generation filters are now shipping to customers as emission standards reach near zero levels and require enhanced filtration performance. In Life Sciences, sales were $312 million, consistent sequentially and up 2% year-over-year. Lower demand for COVID-related products was offset by growth in research products. Net income was $43 million. We continued to commercialize innovations, including a new cell and gene therapy production platform. Looking ahead, we expect to see continued growth in both research and bioprocess. Finally, in Hemlock and Emerging Growth Businesses, sales were $407 million, up 33% year-over-year and down 3% sequentially. We continue to see increased demand for semiconductor-grade polysilicon and strong demand for solar materials, and we continue to ramp solar capacity and sign up new customers with long-term take-or-pay contracts.

Ed Schlesinger
Ed Schlesinger
EVP and CFO at Corning

In September, Corning Pharmaceutical Technologies announced that it was awarded $104 million in additional funding from BARDA to support our planned capacity expansion for advanced high-quality pharmaceutical glass tubing and vials. These expansions are designed to help the healthcare industry rapidly scale manufacturing to address current and future public health challenges. Now, I want to take a minute to talk about currency exchange rates. As you know, the dollar has been strengthening over the past year. As a reminder, we have actively hedged our foreign currency exposure over the past decade. This serves as an effective tool to reduce earnings volatility, protect our cash flow, enhance our ability to invest, and provide shareholder returns. Our largest exposure is the yen, and we have most of next year hedged. We expect our core rate to remain the same in 2023.

Ed Schlesinger
Ed Schlesinger
EVP and CFO at Corning

We're very pleased with our hedging program and the economic certainty it provides. We've received more than $2 billion in cash under our hedge contracts since their inception. Now, let's turn to the outlook for the fourth quarter. We expect sales in the range of $3.45 billion-$3.65 billion and EPS in the range of $0.41-$0.47. Now, our fourth quarter guidance reflects several factors. In Optical Communications, pacing of customer projects will impact sales for the quarter. In Specialty Materials, we expect a sequential decline driven by lower demand in the smartphone, notebook, and tablet markets. Of course, the biggest element in our guidance is display. As I noted, we do not yet have enough positive evidence to guide significant improvement in glass demand from September levels.

Ed Schlesinger
Ed Schlesinger
EVP and CFO at Corning

We expect free cash flow to be strong in the fourth quarter, and for the full year, we expect free cash flow in the range of $1.3 billion-$1.5 billion. Now, I'd like to wrap up with a few key takeaways. As I noted at the opening of my remarks, we're executing well. Because of our inherent balance of our cohesive portfolio and our More Corning approach, we're built to be resilient even in a downturn, as evidenced by the performance of Specialty Materials and Environmental Technologies this quarter. Our long-term growth drivers all remain intact, and we're well-positioned to continue capturing growth tied to key secular trends, such as optical communications and solar. In the meantime, we will continue to maintain our strong balance sheet and employ a highly disciplined approach to capital allocation.

Ed Schlesinger
Ed Schlesinger
EVP and CFO at Corning

Given the external environment, we're taking actions to preserve profitability, tightly manage capital expenditures, and prioritize cash flow. With that, I'll turn it back over to Anne for Q&A.

Ann Nicholson
Ann Nicholson
VP of Investor Relations at Corning

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

Operator

Thank you. As a reminder, to ask a question, please press star one one on your touchtone phone. Once again, that is star one one to ask a question. Please stand by while we compile the Q&A roster. Our first question will come from Mehdi Hosseini from Susquehanna. Your line is open.

Mehdi Hosseini
Mehdi Hosseini
Senior Equity Research Analyst at Susquehanna

Yes, Ed. Thanks for taking my question. 2 things that I wanna dig into. Is there minimum OpEx that you can offer us? I understand there are a lot of moving parts, especially with macro headwind, and I'm just trying to better understand how flexible you are with managing expenses. The same thing with CapEx. There's no visibility as to when display will show a rebound. Should we assume that the CapEx trend into next year will show a decline on a year-over-year basis?

Ed Schlesinger
Ed Schlesinger
EVP and CFO at Corning

Yeah. Hi, Mehdi. What I would say on OpEx, we're certainly taking actions to pause spending in this current environment. As I mentioned, our goal is gonna be to protect profitability and to protect our cash flow. I don't think, you know, given the fact that we feel good about our long-term growth drivers, we're gonna take significant actions, at least at this point in time. With respect to CapEx, we're definitely pausing spending here as we go into the fourth quarter, and you should see the rate of our spending coming down a little bit.

Mehdi Hosseini
Mehdi Hosseini
Senior Equity Research Analyst at Susquehanna

All right. Thank you.

Wendell Weeks
Wendell Weeks
Chairman and CEO at Corning

Next question.

Operator

Thank you. One moment for our next question, please. Our next question comes from Steven Fox from Fox Advisors. Your line is open.

Steven Fox
Steven Fox
CEO and Founder at Fox Advisors

Hi, good morning. 2 questions on optical, if I could. First of all, in terms of some of the project pauses or push-outs 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? 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 in the next year and what the offset is with the build-out for Arizona? Thanks.

Wendell Weeks
Wendell Weeks
Chairman and CEO at Corning

Steven, first as to the macro, and you follow it all pretty closely. Macro demand in opto is incredibly strong. But as you know, what we do is we try to make sure that we're supporting those customers that are gonna be big long-term players. The nature of telecommunications is that it's a pretty concentrated industry. That all that tends to happen is when some of our bigger customers end up changing their timing or altering their timing, that's what leads to the lumpiness of our revenue. We're highly confident in the demand drivers here in opto. As you know, I tend to be pretty pessimistic on opto. But you know, just sort of overwhelming evidence that demand's very strong.

Wendell Weeks
Wendell Weeks
Chairman and CEO at Corning

Now, as to how long these timing moves can happen, I think you're right to say, you know, what can happen during the winter, which tends to be a little bit slower time for us, just seasonality-wise. In opto, that's legitimate. You know, whether it'll last 3 months or a little longer than 3 months, that's hard to tell. What's easy to tell, though, is demand for opto is super strong.

Steven Fox
Steven Fox
CEO and Founder at Fox Advisors

Thanks. On the new plant impact?

Ed Schlesinger
Ed Schlesinger
EVP and CFO at Corning

Steve, I was gonna say, you know, I think the plants that we recently opened are ramping fine. I feel like we've added some capacity. We'll be able to use that as we go forward. It takes a little while for all the cost drag to kinda go away and, you know, we should see that sort of fully ramped and the financial impact in 2023.

Steven Fox
Steven Fox
CEO and Founder at Fox Advisors

Yeah. Great. That's all helpful. Thank you.

Wendell Weeks
Wendell Weeks
Chairman and CEO at Corning

All right. Next question, please.

Operator

Thank you. One moment for our next question. Our next question comes from Martin Yang from Oppenheimer. Your line is open.

Martin Yang
Martin Yang
Executive Director and Senior Analyst at Oppenheimer

Hi, good morning. Thank you for taking my question. First, can you maybe share with us 1 or 2 most closely monitored reliable leading indicators for display segment, where you will be more comfortable calling a recovery after seeing changes in those indicators?

Wendell Weeks
Wendell Weeks
Chairman and CEO at Corning

Great question, Martin. 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. They're very good at doing things like calling a bottom because we can tell sort of where our panel makers are operating or what exactly is happening with their inventory, et cetera. They're not as good at calling the exact timing of a turn. For instance, our analytics would have said the panel maker industry should have started its correction in a much more robust way in Q4 of last year in turn 2, but they didn't actually start until Q2, and then accelerated into Q3.

Wendell Weeks
Wendell Weeks
Chairman and CEO at Corning

Though we're really comfortable with our analytics that we're at bottom, the call on when that upswing comes now really gets into sort of what is the psychological behavior of buyers in this industry. 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. Not so much what the absolute level is, but when do they turn. That is actually a buy signal for buyers, right. A sell signal for panel makers. How does 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 gonna drive their buy behavior. Finally, it's just how tight things are becoming in the value chain overall.

Wendell Weeks
Wendell Weeks
Chairman and CEO at Corning

As we look at all those things, what we'd say is, you know, we can't tell yet what exact month we see the sharp recovery, right? We'll need to see more of that accumulate. We can say with pretty high confidence that September was a bottom, and now it's just a question of when do we pop up.

Martin Yang
Martin Yang
Executive Director and Senior Analyst at Oppenheimer

Got it. Thank you very much. I don't have any other questions.

Wendell Weeks
Wendell Weeks
Chairman and CEO at Corning

Thanks, Martin. Next question.

Operator

Thank you. One moment for our next question, please. Our next question will come from Wamsi Mohan from Bank of America. Your line is open.

Wamsi Mohan
Wamsi Mohan
Senior Equity Research Analyst at Bank of America

Yes, thank you. 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. Ed, if I could, I appreciate the fact that you guys are largely hedged for 2023, but the yen's obviously moved to 149. Your core rate is 107. 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. Thank you.

Wendell Weeks
Wendell Weeks
Chairman and CEO at Corning

Thanks, Wamsi. Value chain inventory, we would say right now is at the healthy range and is starting to approach sort of a little bit tight for healthy. So that's like one of the analytics where we can say, okay, right, that the correction has done what it's supposed to do. That's how we're feeling about that, about overall value chain inventory, Wamsi. Does that answer your question on that item?

Wamsi Mohan
Wamsi Mohan
Senior Equity Research Analyst at Bank of America

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

Wendell Weeks
Wendell Weeks
Chairman and CEO at Corning

The pandemic sort of changed what is healthy and what's not healthy and all the challenges in the supply chain. You know, what we should do is we should probably update you if this is a question that you have, sort of how we view it overall. Dan will follow up with you and give you the benefit of our thinking of how we analyze the industry.

Wamsi Mohan
Wamsi Mohan
Senior Equity Research Analyst at Bank of America

Thanks, Wendell.

Ed Schlesinger
Ed Schlesinger
EVP and CFO at Corning

Wamsi, on the yen, or on currency in general, I'll make a couple comments. I think you know we're obviously long the yen. We're short in other currencies. Most currencies are weak or weakening versus the dollar. You know, 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? 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. You know, with respect to the yen, we continue to look for ways to protect ourselves beyond 2023.

Ed Schlesinger
Ed Schlesinger
EVP and CFO at Corning

We do have some hedges in place beyond 2023, and the farther out you go, the forward rate is below where the current spot rate is, and, you know, that affords us some opportunity to do things farther out. We'll keep investors updated. We understand, you know, how people are thinking about it and, you know, we're gonna be opportunistic and try to protect ourselves at this current forex rate level.

Wamsi Mohan
Wamsi Mohan
Senior Equity Research Analyst at Bank of America

Thanks.

Wendell Weeks
Wendell Weeks
Chairman and CEO at Corning

Thanks, Ed. Next question?

Operator

Thank you. One moment for our next question, please. Our next question comes from Tim Long from Barclays. Your line is open.

Tim Long
Tim Long
Managing Director at Barclays

Thank you. Yeah, 2 questions, if I could, on the optical segment. First, could you talk a little bit about, you know, you talk about the timing deals that happens a lot in this industry. Maybe just, you know, 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, you know, we're increasingly hearing throughout the world about, you know, pressures on macro and energy costs and whatnot, potentially affecting fiber builds, which have been obviously really strong over the last few years.

Tim Long
Tim Long
Managing Director at Barclays

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, you know, government initiatives and you know, just push for broadband to make that a still spending priority for the telco vertical? Thank you.

Wendell Weeks
Wendell Weeks
Chairman and CEO at Corning

Good. I'd say that it is for our numbers, like our posts, 'cause when you've got a environment that's really strong, and then all that's really happening is customer timing. It really ends up being us being able to answer from our order book what's going on. In our order book, it would basically be some key telcos is just what's affecting our project timing more than anything else, right? Those are long-term projects. They kick off one, they conclude one, they start another, and so those can be lumpy.

Wendell Weeks
Wendell Weeks
Chairman and CEO at Corning

In terms of the macro, I don't know that we're the right ones to ask because there's so much demand, and we're still short, especially in fiber and cable. That we'll tend to get more signals that they want more and more, and they share how aggressive their plans are. We're probably getting a lot more of that than we are the sort of macro, are they cautious? The combination of major government programs around the world that don't really start to kick in for almost another year, right? As well as catching up to all the demand that happened during the pandemic and how much of their capacity, basic, their guardrail capacity got consumed by demand, as well as just 5G, cloud, all the broadband initiatives. All these things are really sort of positive, bullish signal to us.

Wendell Weeks
Wendell Weeks
Chairman and CEO at Corning

That doesn't mean that you're not right, that you know, they may be experiencing something in macro. We're just not hearing it. Does that make sense?

Tim Long
Tim Long
Managing Director at Barclays

Yes, that does. Very, very helpful. Thank you, Wendell.

Ann Nicholson
Ann Nicholson
VP of Investor Relations at Corning

Okay, next question.

Operator

Thank you. One moment for our next question, please. Our next question comes from Josh Spector from UBS. Your line is open.

Josh Spector
Josh Spector
Director of Equity Research at UBS

Yeah. Hi. Thanks for taking my question. Just 2 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. Seems a little bit early at this point. So I'm curious if that depends on utilization rates increasing or if that's something you see playing out potentially regardless of that scenario. Just a follow-up on the restructuring charges in the quarter. Can you just provide some comment on kind of what was restructured within the emerging growth business? Thanks.

Wendell Weeks
Wendell Weeks
Chairman and CEO at Corning

Our confidence on price really has been driven by our performance throughout this correction and going into it, where our prices have been up or stable throughout every single stage of it, including here in this last quarter. You heard from Ed sort of the dynamics that have led to this. We feel good about where we're at. We expect pricing to continue to be stable as we exit the correction, as it has been up or stable throughout going into the correction and through the bottom of the correction.

Ed Schlesinger
Ed Schlesinger
EVP and CFO at Corning

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

Josh Spector
Josh Spector
Director of Equity Research at UBS

Okay, thank you.

Ann Nicholson
Ann Nicholson
VP of Investor Relations at Corning

Okay, next question, please.

Operator

Thank you. One moment for our next question. Our next question will come from Shannon Cross from Credit Suisse. Your line is open.

Shannon Cross
Shannon Cross
Managing Director and Senior Equity Research Analyst at Credit Suisse

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

Ed Schlesinger
Ed Schlesinger
EVP and CFO at Corning

Yeah. Hi, Shannon. First, I would say we feel great about our solar business. You know, that was a great part of our ability to offset the lower volume of display in the third quarter. You know, our orders are strong, and we continue to sign customers up and sell out the capacity we've brought online. We see that as a secular growth trend going forward. I think as we've shared, we have more capacity that we can bring online, and we're in the process of evaluating that and the exact timing of when all that will happen. We're certainly taking a look through all of the legislation that recently passed and how that impacts us.

Ed Schlesinger
Ed Schlesinger
EVP and CFO at Corning

You can view that as all positive for us and, you know, we'll come back over time and talk a little bit about it more in detail.

Wendell Weeks
Wendell Weeks
Chairman and CEO at Corning

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

Shannon Cross
Shannon Cross
Managing Director and Senior Equity Research Analyst at Credit Suisse

Thank you.

Ann Nicholson
Ann Nicholson
VP of Investor Relations at Corning

Great. Next question, please.

Operator

Thank you. One moment for our next question. We'll take our next question from Matthew Niknam from Deutsche Bank. Your line is open.

Matthew Niknam
Matthew Niknam
Director of Equity Research at Deutsche Bank

Hey, guys. Thanks for taking the questions. Just 2, 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. Thanks.

Wendell Weeks
Wendell Weeks
Chairman and CEO at Corning

We're seeing the economic conditions really play out in our end markets. As I shared in my opening, that whether it's in smartphones, notebooks, panel maker utilization, automotive, we're seeing those markets that are highly consumer electronics related or highly consumer related to be down significantly already. As of yet, that has definitely caused our customers, though they pace, we haven't seen them come off their long-term ideas about what they have to invest in. Much like us, our customers take a long time to build a productive capacity and develop new technologies. So far, we haven't seen a reduction in their long-term appetite. Most people see that the economic concerns are already happening to them.

Wendell Weeks
Wendell Weeks
Chairman and CEO at Corning

The real question is, when does it come out as opposed to getting ready for it? I'd say that's sort of the animal spirits we're experiencing so far. On price, yes, we are saying that in opto we've experienced some more inflation, and we will be approaching our customers to more appropriately share that in this coming quarter. Throughout the year, we have done actually quite a good job of being able to share the inflation we experience with our customers with price increases really across our business base. So far, we've been able to do that successfully. You know, ask me the question again next quarter, and I'll tell you how this latest round went.

Matthew Niknam
Matthew Niknam
Director of Equity Research at Deutsche Bank

Excellent. Thanks, Wendell.

Wendell Weeks
Wendell Weeks
Chairman and CEO at Corning

For next question.

Operator

Thank you. One moment for our next question, please. Our next question will come from Samik Chatterjee from JPMorgan. Your line is open.

Samik Chatterjee
Samik Chatterjee
Executive Director of Networking Equipment and IT Hardware Senior Analyst at JPMorgan

Hi. Thanks for taking my question. I guess I had a similar macro question for you, Wendell, which is, I mean, for a long time, you've been outperforming most of the underlying markets you participate in, and the driver there has been more Corning content in every end market. I'm just thinking as we sort of go into next year and the macro is tougher, have you seen in past down cycles any change in customer willingness to sort of continue to increase Corning content, particularly in sort of a challenging macro? Any sort of pushback that you're seeing on pricing as well at this time, given that inflation is obviously something you need to pass through, but at the same time, the macro is starting to worsen a bit more than expected.

Samik Chatterjee
Samik Chatterjee
Executive Director of Networking Equipment and IT Hardware Senior Analyst at JPMorgan

Are you starting to see any hesitation from customers as well in those negotiations? Thank you.

Wendell Weeks
Wendell Weeks
Chairman and CEO at Corning

Great question. Most of our More Corning plays tend to reduce our customers' costs, or improve their ability to deliver a vital customer function that they see. In macro, I'd say, no, that we're not seeing a reduction in their capability. Let me give you a good example. Cloud-based players. Our latest set of innovations basically involve us being able to deliver totally engineered connectivity systems so that we save about 40% of materials for them. We can save months in installation time. We improve 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 and time. That is like a typical angle for us in More Corning, and we're continuing to see good adoption of those.

Wendell Weeks
Wendell Weeks
Chairman and CEO at Corning

What makes 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. Some of our other mobile consumer electronics players, particularly in China, you know, are sort of have lost in that premium battle and, you know, are doing a little bit less of our key innovations. But in total, the winners are investing more with us. You know, in macro, I still think that fundamental More Corning strategy is playing out well, very strong heartbeat. That is still playing out. But I do understand the question. It's an interesting question, Samik.

Ann Nicholson
Ann Nicholson
VP of Investor Relations at Corning

Thanks, Samik. Okay, we'll take the next question, please.

Operator

Thank you. One moment for our next question. Our next question will come from Meta Marshall from Morgan Stanley. Your line is open.

Meta Marshall
Meta Marshall
Executive Director at Morgan Stanley

Great, thanks. Maybe first question on optical. I know it's been asked a couple of times, but just to kinda circle around it, that it's a couple of, you know, 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 it largely concentrated within the U.S. or international? Maybe second question for me, inventories has been a pretty big use of cash this year. Just wanted to get a sense of, you know, major drivers of that and if that's part of, you know, what you would expect to revert in Q4 to help achieve the cash flow generation targets. Thanks.

Wendell Weeks
Wendell Weeks
Chairman and CEO at Corning

First question, North America-based. Right. Relatively limited in terms of its, the number of people that are involved. Telco North America-based, just timing, you know. I think if you just talk to the industry more broadly, you'll see that, you know, by and large, the refrain from almost all of our customers is we can't get enough. That's still the backdrop, that's still the heartbeat, and it's just timing and a few key customers.

Ed Schlesinger
Ed Schlesinger
EVP and CFO at Corning

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 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, you know, sort of slow it down and reverse it sooner. First and foremost, just in general, the supply chain's been difficult, and we wanna make sure we can serve our customers, so we're carrying a little more inventory than we might otherwise have.

Ed Schlesinger
Ed Schlesinger
EVP and CFO at Corning

As we brought our sales forecast down for the back half of the year, you know, we need to sorta catch up and digest a little bit of the inventory that we have and that we've produced. Then lastly, just the cost of the inventory, right? As inflation hits us, it manifests itself in inventory, and then we get that back as we raise price when we sell that through. 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.

Meta Marshall
Meta Marshall
Executive Director at Morgan Stanley

Great. Thanks. Appreciate it.

Ann Nicholson
Ann Nicholson
VP of Investor Relations at Corning

We've got time for 1 more question.

Operator

Thank you. One moment. Our last question will come from Mehdi Hosseini from Susquehanna. Your line is open.

Mehdi Hosseini
Mehdi Hosseini
Senior Equity Research Analyst at Susquehanna

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

Wendell Weeks
Wendell Weeks
Chairman and CEO at Corning

Awesome question. First, I'd say you're right, and that's one of the things that, why we feel good about our execution in display during this correction. What you're seeing come through is all that, tremendous improvement in productivity that our new technology brings and the outstanding cost performance that we've been able to do with that, linked with a, long period of time of prices being stable to up. That is what we've been trying to do in display. That has been our strategy in display as we build our strength through this time period. Very stable pricing, a very stable market position, and then use our big technology lever to continue to drive our cost performance and drive up our profitability.

Wendell Weeks
Wendell Weeks
Chairman and CEO at Corning

It's one of the things we're excited about when we see the correction be over, and the market start to move up and glass demand to go up, 'cause the incrementals will be powerful and a beautiful thing to behold.

Mehdi Hosseini
Mehdi Hosseini
Senior Equity Research Analyst at Susquehanna

Thank you.

Ann Nicholson
Ann Nicholson
VP of Investor Relations at Corning

Thanks, Mehdi. 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 29th and the Barclays Global Technology, Media, and Telecommunications Conference on December 8th. 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. Once again, thank you all for joining us. Operator, that concludes our call. Please disconnect all lines.

Operator

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

Executives
    • Ann Nicholson
      Ann Nicholson
      VP of Investor Relations
    • Ed Schlesinger
      Ed Schlesinger
      EVP and CFO
    • Wendell Weeks
      Wendell Weeks
      Chairman and CEO
Analysts
    • Josh Spector
      Director of Equity Research at UBS
    • Martin Yang
      Executive Director and Senior Analyst at Oppenheimer
    • Matthew Niknam
      Director of Equity Research at Deutsche Bank
    • Mehdi Hosseini
      Senior Equity Research Analyst at Susquehanna
    • Meta Marshall
      Executive Director at Morgan Stanley
    • Samik Chatterjee
      Executive Director of Networking Equipment and IT Hardware Senior Analyst at JPMorgan
    • Shannon Cross
      Managing Director and Senior Equity Research Analyst at Credit Suisse
    • Steven Fox
      CEO and Founder at Fox Advisors
    • Tim Long
      Managing Director at Barclays
    • Wamsi Mohan
      Senior Equity Research Analyst at Bank of America
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