Corning Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
January 30, 2024

There are 12 speakers on the call.

Operator

Welcome to the Corning Incorporated Quarter 4 2023 Earnings Call. It is my pleasure to introduce to you Ann Nicholson, Vice President of Investor Relations.

Speaker 1

Thank you, Shannon, and good morning, and welcome to Corning's 4th Quarter 2023 Earnings Call. With me today are Wendell Weeks, Chairman and Chief Executive Officer Ed Schlessinger, 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.

Speaker 1

You should also note that we'll be discussing our consolidated results using core performance measures unless we specifically indicate our comments related to GAAP data. Our core performance measures are non GAAP measures used by management to analyze the business. For the 4th quarter, the difference between GAAP and core EPS primarily reflected constant currency adjustments, realized gains and unrealized non cash mark to market losses on translated earnings contracts and non cash translation losses on Japanese yen denominated debt as well as restructuring and asset write off charges. As a reminder, these mark to market accounting has no impact on our cash flow. A reconciliation of core results to the comparable GAAP value can be found in the Investor Relations section of our website at You may also access core results on our website with downloadable financials in the interactive analyst center.

Speaker 1

Supporting slides are being shown live on our webcast we encourage you to follow along. They're also available on our website for downloading. And now, I'll turn the call over to Wendell.

Speaker 2

Thank you, Anne. Good morning, everyone. Today we reported 4th quarter and full year 2023 results. Sales for the Q4 were $3,300,000,000 and EPS was $0.39 in line with expectations. Free cash flow was $500,000,000 Gross margin was 37% consistent with the 3rd quarter despite lower sequential sales.

Speaker 2

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 have 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.

Speaker 2

This creates an opportunity for us to increase our sales by more than $3,000,000,000 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 $3,000,000,000 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 Q1 to be our low quarter of the year.

Speaker 2

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.

Speaker 2

When you look at our 4th quarter results on a year over year basis, the evidence of our progress is quite clear. We increased gross margin by 3.30 basis points and free cash flow by $110,000,000 to $500,000,000 despite sales being down by more than 3 $50,000,000 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.

Speaker 2

As I previously mentioned, we have an opportunity to increase our sales by more than $3,000,000,000 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 have been utilizing this inventory to continue deploying their networks.

Speaker 2

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 twenty twenty four 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 2nd 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 outline why we expect our sales to get back on trend.

Speaker 2

I'd now like to update you on progress during

Speaker 3

the Q4.

Speaker 2

Here you see Corning's fiber shipments measured in fiber kilometers since the beginning of 2,007. 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 Q3 call, our fiber shipments in quarter 1 of 2023 were basically in line with expected market trends, but started to drop below our trend line in quarter 2 and even more so in quarter 3 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.

Speaker 2

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 Q4 and we're seeing the earliest edge of AI related network builds in our order books.

Speaker 2

Returning to trend adds more than 40% to our revenue run rate for optical communications and we are laser focused I'm 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.

Speaker 2

Display provides another example of how our sales will spring back. Retail sales during the Q4 selling season were softer than industry expectations. Panel makers responded by reducing their 4th 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 Q1 of 2024, we expect the glass market and our volume to be down by a mid single digit percentage sequentially.

Speaker 2

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 Q1 to meet the expected retail demand. As a result, we expect our financial performance to significantly improve from our Q1 run rate.

Speaker 2

Longer term, we expect continued volume growth at 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. 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 size TVs 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.

Speaker 2

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 Moore Corning content opportunities across the company. In Mobile Consumer Electronics and Automotive, we see Moore 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%.

Speaker 2

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 Moore Corning opportunity. We are the market leader for the photo mask and mirror materials of choice for GPUs and other advanced semiconductors.

Speaker 2

In automotive, proposed U. S. 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 2 to 3 times the content opportunity in ICE vehicles. This would mean Significant growth in our environmental business even in the face of global BEB adoption.

Speaker 2

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.

Speaker 2

We are confident that our markets will normalize. And As they do, we have an opportunity to increase our annual sales by more than $3,000,000,000 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 Q1 It's our low quarter of the year.

Speaker 2

Wow, it's Difficult to call the 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.

Speaker 2

We drive durable multiyear growth by inventing category defining products, developing scalable manufacturing platforms in 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.

Speaker 4

Thank you, Wendell, and good morning, everyone. I will start by summarizing a few key takeaways and then I'll move to the 4th quarter results. Our full year sales were $13,600,000,000 down 8%, reflecting our markets being well below long term trends. Despite the lower sales, we improved profitability and cash flow by restoring productivity ratios back to historical levels and offsetting inflation by raising prices. As a result, in the Q4 of 2023, we expanded gross margin by 330 basis points versus the Q4 of 2022, despite sales being down by more than $350,000,000 And we grew free cash flow sequentially every quarter from 1st quarter levels.

Speaker 4

As you heard from Wendell, We have an opportunity to increase our sales by more than $3,000,000,000 in the medium term as our markets normalize. And we have in place the necessary production capacity and technical capabilities to service that growth. Our operations and finance teams are collaborating closely on processes and tools to ensure that we capture the growth and operating leverage required to deliver significant incremental profit and cash flow. We expect to make progress during 2024. Moving to 4th quarter results.

Speaker 4

Sales were $3,300,000,000 gross margin was 37%, EPS was $0.39 and free cash flow was $487,000,000 Now let me provide some details on our segment results. In Optical Communications, sales for the Q4 were $903,000,000 down 2% sequentially, primarily reflecting temporarily lower demand from carrier customers as they continue to draw down inventory. Net income for the quarter was $88,000,000 down 3% sequentially on the lower volume. Longer term, we remain confident that optical communications market will normalize. We believe that the industry's underlying growth drivers are intact, specifically broadband, 5 gs, cloud computing and advanced AI.

Speaker 4

We will also benefit from public infrastructure investments to help connect the unconnected and bring broadband to a much larger share of the U. S. Population. And from an order rate perspective, we are beginning to see green shoots in the hyperscale data center space. Moving to Display Technologies, 4th quarter sales were $869,000,000 down 11% sequentially.

Speaker 4

The remainder of our second half price increases partially offset a sequential volume decline that was consistent with the market. Retail results during the 4th quarter selling season were softer than industry expectations. Panel makers responded by reducing their 4th quarter utilization levels. Additionally, industry reports indicate that panel makers plan to run at lower utilization levels in the Q1 as they continue to align panel supply to demand with fab shutdowns planned during the Lunar New Year holidays in February. For the Q1 of 2024, we expect the glass market and hour volume to be down by a mid single digit percentage sequentially.

Speaker 4

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. This adds mid single digit growth in glass volume at retail versus 2023. We expect panel maker utilization to increase after the Q1 to meet the expected retail demand growth. As a result, we expect our financial performance to significantly improve from our Q1 run rate.

Speaker 4

Moving to pricing. We successfully executed a double digit price increase at our customers in the second half of twenty twenty three. We expect the pricing environment to remain favorable with glass supply balanced to demand as display glassmakers reduced capacity in 2023. We expect our Q1 twenty twenty four glass prices to be consistent with Q4 of 2023. In Specialty Materials, Sales in the 4th quarter were $473,000,000 down 16% sequentially following strong 3rd quarter sales of our smartphone cover materials in support of customer product launches.

Speaker 4

Net income was $58,000,000 down 19% sequentially reflecting the lower volumes. 4th quarter sales were $429,000,000 down 4% sequentially reflecting normal seasonality. Net income was $98,000,000 consistent sequentially. For the full year, sales increased 11% to $1,800,000,000 outpacing the automotive market recovery. Our content driven growth strategy An increased GPF adoption due to mid year implementation of China VI regulations led to our outperformance.

Speaker 4

In Life Sciences, sales in the 4th quarter were $242,000,000 up 5% sequentially. Customers in North America and Europe are completing their inventory draw downs. Additionally, productivity improvements allowed us to improve service levels to better supply the market as it normalizes. Net income improved sequentially to $17,000,000 up 31%, resulting from higher volume and productivity improvements. Turning to Hemlock and Emerging Growth Businesses.

Speaker 4

Sales in the 4th quarter were $356,000,000 up 9% sequentially, primarily reflecting higher semiconductor polysilicon volume. Now let's turn to our outlook. We expect Sales in the Q1 of approximately $3,100,000,000 We expect EPS in the range of $0.32 to $0.38 The improvements we made in profitability and cash flow will continue to deliver benefits in 2024. We expect gross margin in the Q1 of 2024 to be similar to the Q4 of 2023 despite lower sales and to improve 1st quarter free cash flow by $200,000,000 to $300,000,000 versus the Q1 of 2023. We expect the Q1 to be our low quarter.

Speaker 4

We believe we are going to grow from these levels for the following reasons. In Optical Communications, we expect carriers to complete inventory drawdowns and increased deployments throughout the year. We also see orders increasing from hyperscale data center customers. In display, we expect panel maker utilization to increase from 1st quarter levels to meet expected full year retail demand. In Life Sciences, we expect markets to continue normalizing And we plan to deliver more Corning content opportunities in mobile consumer electronics and environmental technologies.

Speaker 4

Now I'd like to take a minute to address currency exchange rates. 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 protect shareholder returns. We're very pleased with our hedging program and the economic certainty it provides. We have received more than $2,500,000,000 in cash under our hedge contracts since their inception.

Speaker 4

Our largest exposure is the Japanese yen. As we've previously shared with investors, we have most of our 2024 yen exposure hedged. We plan to keep our yen core rate at 1.07 through the end of 2024. As we look ahead, we are actively working to improve our hedge coverage for 2025. The yen forward curve works in our favor.

Speaker 4

If you go out 1 year, The forward yen rate is about 7 yen stronger than today's spot rate. Out 2 years, it's about 12 yen stronger and so on. Also, the current yen spot rate is significantly weaker than the 30 year average of approximately 110 yen So we believe there will be an opportunity to place additional long term hedges at more attractive rates. And in combination with hedging, we can institute an industrial solution like pricing increases for display glass. The first step of which we took in 2023.

Speaker 4

So that's how we think about it. It will either solve in the currency markets in a reasonable timeframe or we'll move to an industrial solution. Now before I wrap up, I want to spend a minute on our priorities to maintain a strong and efficient balance sheet and return excess cash to shareholders. We ended the year with $1,800,000,000 in cash. We've created one of the longest debt tenors in the S and P 500.

Speaker 4

Our current average debt maturity is 23 years with only $1,400,000,000 in debt coming due in the next 5 years and no significant debt coming due in any given and essentially all of our debt instruments are fixed rate. Additionally, we prioritize returning excess cash to shareholders. We have consistently done this including throughout the pandemic. And one of the ways we do that is through dividends. We have grown our dividend 40% since 2019 and our dividend yield is top quartile in the S and P 500.

Speaker 4

We will propose that our Board maintains a quarterly dividend of $0.28 in the first quarter and we will continue to be opportunistic on share repurchases. Now here's what I want to leave you with today. We are entering the year operationally and financially strong. We expect the Q1 to be the low quarter of the year. We have an opportunity to capture $3,000,000,000 plus in sales over the medium term as markets normalize and we capture more Corning content opportunities.

Speaker 4

As we do, we are positioned to capture significant incremental profit and cash flow because we have the capacity and capabilities in place and the costs are already in our financials. I look forward to updating you on our progress. And now I will turn things back over to Anne.

Speaker 1

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

Operator

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

Speaker 5

Yes, thanks for taking my question. I joined the call late, so I apologize If you already covered this on a prepared remark, but can you give us an update on 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.

Speaker 4

Sure. Thanks Mehdi for your question. So first of all, we expect our CapEx in 2024 to be about $1,200,000,000 below our 2023 levels. As we mentioned, we have the capacity in place to deliver what we expect to be a significant sales opportunity, so we don't necessarily need to add a lot of CapEx. With respect to cash flow, what I shared was that we are guiding Q1 to be about $200,000,000 to 300,000,000 better than the prior year, better than Q1 of 2023 and we expect to continue to make progress on profitability and cash flow as our sales come back.

Speaker 4

And then I think your last question was around buybacks. Okay, yes. So we'll we Of course, we always prioritize in returning cash, excess cash to shareholders and we will continue to look to do that through both our dividend and buybacks. I don't have anything specific to report right now on buybacks.

Speaker 5

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 any update on the Beats program you can share with us For Beeb's contribution?

Speaker 2

So we continue to expect Beeb funding really to start to translate into demand, the beginning of it, sort of late this year. They are progressing with awarding The grants and it will just take a bit for those to turn into real programs. So we expect sort of late this year.

Speaker 5

Got it. Thank you.

Operator

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

Speaker 6

Yes, thank you. I was wondering, Wendell, if you could characterize sort of midterm as you think about the $3,000,000,000 opportunity that you're talking about incrementally. And can you give us some sense of how you see that opportunity across your segments? It 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.

Speaker 2

Sure. Thanks, Wamsi. So as you would expect, We expect the markets to normalize at a different rate depending on the market. And then we expect our more Corning pieces to come in timing with the particular innovation. So those will have some markets that will begin this year And we'll have some, which will make even more progress as time goes on.

Speaker 2

When we say midterm, By and large, we mean that within the next 3 years that we will see all of it, Right. But we'll start to see it beginning to happen sooner in different markets. Does that make sense, Wamsi? Is that responsive to your question?

Speaker 6

Yes, yes. That's helpful. And Wendell, just is there Would you say that the of the $3,000,000,000 incremental half of it is optical more than that is optical? How would you define sort of do you break that out across your segments?

Speaker 2

Okay. So it's a little harder to answer that because the actual opportunity between our markets returning to normal and our more corning activities is larger than the 3. So and then we discount back to what we're talking to you about, right? And so therefore, when you do the relative shares, it gets nontrivial to figure out. But I think, Wamsi, your fundamental grasp that the biggest individual mover will be that 40% up opportunity in optical.

Speaker 2

I think your own thought processes here are really solid.

Speaker 3

Thanks, Welo. Sorry, if I could

Speaker 6

just ask one clarifying question 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 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.

Speaker 2

So, I'm not positive I understand your question. But let me tell you how we tend to think about pricing and display, right. And really sort of ties back To Ed's commentary around the yen, you've seen us do in really across our whole platform that we have sought to share inflation more appropriately with our customers. And that has led us to be a price increaser across our company and that has helped us improve our profitability. In display, we've been doing that.

Speaker 2

Perhaps more importantly is almost the reverse of that. What has happened with the yen being so well below, it's sort of 130 year. I mean it's a 30 year average is that our customers are getting a lower price real in yen, right, Why they sell in dollars? And we're fundamentally seeking to share that more appropriately with our customers. And so what we say is like either the yen will come back sometime here in a reasonable point of time, Right?

Speaker 2

Or we will raise price to provide an industrial solution to have us be in a position where we can continue to earn the appropriate return on our invested capital in display that our shareholders expect rightly. So What Ed's commentary there on pricing has to do with is really tying around the totality of that situation and how our customers experience their price since we price Does that make sense to you, sir?

Speaker 6

Yes, it does Wendell. Thank you so much.

Speaker 1

All right, next question.

Operator

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

Speaker 7

Great. Thank you for taking my question. On optical, if I may, it seems like there was an order uptick or some sort of a demand uptick that you mentioned in 4Q. If you could drill down One more into that, if that was from your service provider or cloud customers. And then looking ahead into 1Q, what should we be expecting for optical here better than seasonal trends.

Speaker 7

And again, if you could drill down if you're seeing that from your service provider or cloud customers? Thank you.

Speaker 2

Really excellent question. So First, that tick up you see, right, in our data isn't big enough yet For us to go, oh, yes, it's happening the way we expect, right? It's encouraging, but it's Too small for us to over conclude something analytically, right? 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.

Speaker 2

Okay. 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.

Speaker 2

In our order book, not yet in those shipments that you see in that data. So there is 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

Speaker 5

to over conclude

Speaker 2

in call timing. We'll know more in the coming months and as Ed and Jeff and Anne are out there speaking with you all. They'll make sure they share as we learn more. Does that work for you?

Speaker 7

Yes, great. And if I may on display as well, I think it's Tough to call when these panel makers come back with their utilization levels of the 1Q downtick that you guys have talked about and I think the industry has talked about. But if the retail volume happens to be, let's say, mid to high single digits from a glass perspective and you're already starting the year with healthy inventory levels. Is it reasonable to assume like a sharp snapback in 2Q and 3Q, any color there would be helpful. Thank you.

Speaker 4

Yes, Assi, 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.

Speaker 4

So I think the answer to the sharp Part of your question is yes, the timing is obviously harder to call.

Speaker 7

Okay. Thank you.

Speaker 1

Next question?

Operator

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

Speaker 8

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 efficiencies that you found in the business over the last year that are just starting to play in or kind of the pricing on the display business or is that from a mix of the business?

Speaker 8

Just how to think about that stability in Q1 over Q4? Thanks.

Speaker 4

Yes. Hi, Meta. I'm going to I'll start with your second question on gross margin. So I think if you think about what we've done throughout 20 we improved our productivity across all of our factories significantly And back to historical levels, best demonstrated levels, that's improved our gross margin. We've also raised prices And we're now sort of right side up versus inflation, so that's improved gross margin.

Speaker 4

And we've certainly taken out some costs as well. So we're able to run at a much more efficient level even at a lower volume in a lower volume environment. That's allowed us to hold our gross margin and we're also managing OpEx well, so that actually helps on the operating margin line. And that's what's allowed us to increase gross margin through the year despite sales falling and that's why we feel confident around the gross margin or operating margin or both as we go into 2024. And I

Speaker 2

I understood the first question. Did our I think what

Speaker 8

Just share on as it evolves the price increase.

Speaker 2

The 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.

Speaker 8

Great. Thank you.

Speaker 1

Next question?

Operator

Our next question comes from the line of Martin Yang with Oppenheimer. Your line is now open.

Speaker 9

Hi, good morning. Thank you for taking my question. First question on display. Have you ever done an analysis similar to The chart you presented on optical fiber, thinking of a normal trend line 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?

Speaker 2

Excellent question. The answer is yes. We have done those. And we'd be happy to share this. We'll put that on our list to do at some point in time this year.

Speaker 2

To be a little more Sponsored to the specifics of your question, China is just behaving a little differently than what you would normally expect on display demand As a country goes through its development cycle and you are right, It seems to be net underperforming. We are not counting on in the Dialogue that we've been having with you about the $3,000,000,000 spring that we have, We are not counting on China sort of reverting to a more traditional demand cycle. We're continuing to expect that to be Relatively below trend for the foreseeable future. Does that make sense to you, Martin?

Speaker 9

Yes, definitely. Thank you. I have another question on specialty. Given that the semi exposure within has been pretty strong. Has that changed that segment seasonality a little bit, where it was more exposed to smartphone cycle and now do you think that has shifted a little bit?

Speaker 2

I still think That the biggest thing that drives seasonality or The different demand in different I don't even know what to call it seasonality. The different demand in different quarters is major product launches and also major product launches not only of our customers, but also Of us introducing a major new category defining product and Any sort of real analysis of this sort of points to it's the product, Right. So, I don't know that we can over conclude much beyond that yet, Mark.

Speaker 9

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

Speaker 1

Great. Thank you. Next question?

Operator

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

Speaker 3

Thanks for taking my questions and thanks for all the color today on the call. Maybe just the way I'm interpreting your comment about $3,000,000,000 opportunity that you have in front of you is, let's say, hypothetically, the markets do recover by 4Q of this year or your exit run rate on a Quarterly revenue will be somewhere close to $4,000,000,000 And maybe just help us sort of then range bound some of the Sort of the revenue opportunities here in terms of if you don't see a macro improvement by the end of the year, what is sort of the exit run rate for the year, if you just have the seasonal improvements that you've talked about from 1Q onwards without a material macro improvement That hopefully gives us some sense of where the potential outcomes are here in terms of exiting the year. And then a quick follow-up, I guess Wendell, you mentioned bead A few times in the visibility here that it starts late in 2024. One of the suppliers reporting this morning as well is pushing out some of that expectation to early 2020 5, saying things are a bit looking a bit more delayed than usual.

Speaker 3

Just any more color on what's sort of driving the confidence that it's more 2024 than 2025?

Speaker 2

Thank you. I think perhaps my Emphasis was a little wrong in talking about beat. So we expected to start is what I was trying to say. It's not going to be a big mover in 2024. I think your understanding is correct.

Speaker 2

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.

Speaker 4

And Sameet, I'll

Speaker 2

take the

Speaker 4

first part of your question. I'm going to start by just Talking a little bit, we did it in our prepared remarks and then a little in Q and A on the drivers of why we grow and why we think our Q1 is the low quarter. I think in optical, as carriers continue to deplete their inventory, that will come to an end even if They don't increase their deployment rates, which we think they will, but even if they don't, that is a good demand driver for us that will start at some point this year, Okay. In display, we talked about panel maker utilization being really low in the Q1 and needing sort of spring up from that level quite significantly. And then in life sciences, we're seeing market normalization in America and Europe and we actually started to see a little bit of that happening even in the Q4, right?

Speaker 4

So those drivers we expect to bring our run rate as we go through the year. The timing is really hard to call. And so I think sitting here today, I would not want to leave you with a specific guide for the Q4 or how we exit the year, but just that we believe Q1 is low. And if we got to levels like you spoke about, okay, that'd be awesome. And we would be well on our way to that $3,000,000,000 that Wendell talked about.

Speaker 4

But even if we don't, we still feel very confident in that window of time that Wendell shared earlier. Does that help?

Speaker 3

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

Operator

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

Speaker 10

Yes, hi, good morning. 2 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 some point this year where you would know what the impact might be in 2025, be it you're doing some pricing actions, You have hedging locked in and then you might communicate what that impact would be to us?

Speaker 2

Yes.

Speaker 10

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

Speaker 2

I thought the straight I thought you'd take yes.

Speaker 10

I'll push a little further.

Speaker 2

Yes. And no, we're not Going to share what timing we will

Speaker 10

All right, fair enough.

Speaker 2

It's too involved with our customers. I'm not being non responsive. That's why I really do think that yes, it's about right. This is super important with our customers. And so we want to get that pretty well advanced and have a high confidence Where we're going to end up before we share that with our shareholders, right?

Speaker 2

So that we can make sure we're as accurate as possible. And that's so I'm not going to give ourselves an exact timeline. But this year, you can expect us to do that.

Speaker 10

Got it. No, I appreciate that. And just quickly on free cash flow. In the Q1, your guidance of up a few $100,000,000 It would seem that's a Pretty low bar given that there was about $500,000,000 of working capital used 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 than what we could see otherwise?

Speaker 4

I don't think so. I think we expect to have a nice year on free cash flow for the year. Nothing specific I would call out.

Speaker 9

Okay. Thank you.

Speaker 1

Okay. We can do one more question.

Operator

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

Speaker 11

Hi, thanks for squeezing me in. I'll keep it Fairly brief. On the $3,000,000,000 incremental sales opportunity, maybe for a question for Ed, can you just walk us through the incremental gross and operating margin this would come in at? And is it safe to assume there's minimal incremental CapEx here? I'm just trying to understand, is this more opportunity scale past existing OpEx or is there a gross margin accretion opportunity as well?

Speaker 11

And then this may be a more open ended question, but on the macro relative to the last Call 3 months ago, maybe for Wendell, any material changes in customer demand or spending plans across key verticals, I. E, what's really changed, you say if at all over the last 3 months in terms of customer demands or customer conversations you're having? Thanks.

Speaker 4

Yes, 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 and L for those assets and then we also have some fixed cash costs that run through our P and L to support those assets.

Speaker 4

So generally speaking, the fixed costs are already in our P and 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.

Speaker 2

On your question of in our discussions with our customers, So what are the anecdotal? And it's really good question because sometimes Highly quantitative analysis and data points one way An anecdotal evidence points the other, right? And in those situations, That's telling you there's dissonance there and how do we dive deeper to make sure we have the right data set and how do we create an understanding of those things that are pointing differently. In this case, What we're seeing is the anecdotal are in support of what we're seeing in our deeper analytics and our understanding of being well below our long term trends and the need for that to revert back towards those underlying huge secular trends that drive our demand over time. So basically reinforcing the opinion of the data And that is what we tried to reflect in what we discussed with you today.

Speaker 11

Very helpful. Thank you both.

Speaker 1

Thanks, Wendell. Thanks, Matt. Thank you everybody for joining us Today, before we close, I wanted to let you know that we'll be attending the Susquehanna Financial Group 13th Annual Technology Conference on March 1 the Morgan Stanley Technology Media and Telecom Conference on March 5. Additionally, we will host 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.

Speaker 1

Once again, thank you. And operator, you can disconnect all lines.

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Earnings Conference Call
Corning Q4 2023
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