Corning Q2 2023 Earnings Call Transcript

Participants

Corporate Executives

• Ann H.S. Nicholson, Vice President, Investor Relations
• Wendell P. Weeks, Chairman and Chief Executive Officer
• Edward A. Schlesinger, Executive Vice President and Chief Financial Officer

Analysts

• Samik Chatterjee, JPMorgan Chase & Co.
• Meta Marshall, Morgan Stanley
• Asiya Merchant, Smith Barney Citigroup
• Mehdi Hosseini, Susquehanna International Group
• Wamsi Mohan, BofA Securities
• Shannon Cross, Credit Suisse Group AG
• Matthew Niknam, Deutsche Bank Aktiengesellschaft
• Steven Fox, Fox Advisors
• Joshua Spector, UBS Group AG
• George Notter, Jefferies Financial Group Inc.

Presentation

[Operator]

Welcome to the Corning Incorporated Quarter two, 2023 Earnings Call. [Operator Instructions]

It is my pleasure to introduce to you, Ann Nicholson, Vice President of Investor Relations.

[Ann H.S. Nicholson, Vice President, Investor Relations at Corning]

Thank you, and good morning, everybody. Welcome to Corning's Second Quarter 2023 Earnings Call. With me today are Wendell Weeks, Chairman and Chief Executive Officer; Ed Schlesinger, Executive Vice President and Chief Financial Officer; and Jeff Evenson, Executive Vice President and Chief Strategy Officer.

I'd like to remind you that today's remarks contain forward-looking statements that fall within the meaning of the Private Securities Litigation Reform Act of 1995. These statements involve risks, uncertainties and other factors that could cause actual results to differ materially. These factors are detailed in the Company's financial reports.

You should also note that we'll be discussing our consolidated results using core performance measures, unless we specifically indicate our comments relate to GAAP data. Our core performance measures are non-GAAP measures used by management to analyze the business. For the second quarter, the difference between GAAP and core EPS stemmed primarily from restructuring charges and from non-cash mark-to-market adjustments associated with the Company's currency hedging contracts and Japanese yen-denominated debt. In total, these decreased core earnings in the second quarter by $19 million. As a reminder, the mark-to-market accounting has no impact on our cash flow. A reconciliation of core results to the comparable GAAP value can be found in the Investor Relations section of our website at corning.com. You may also access core results on our website with downloadable financials in the Interactive Analyst Center. Supporting slides are being shown on our webcast, we encourage you to follow along. They're also available on our website for downloading.

And now, I'll turn the call over to Wendell.

[Wendell P. Weeks, Chairman and Chief Executive Officer at Corning]

Thank you, Ann. Good morning, everyone. Today, we reported second quarter results to demonstrate strong progress on the priorities we've outlined to improve profitability and cash flow in the current weak end market environment. Sales were $3.5 billion. EPS was $0.45. Gross margin and operating margin increased sequentially to 36.2% and 17.5%, respectively. And free cash flow improved to $310 million. Ed will give you the details on each of these in just a few minutes.

Our results reflect solid execution on our plan to deliver financial and operational improvements in response to the significant aftereffects of the pandemic still rippling across the global economy. Now, we've been discussing this plan with you for several quarters. So let me just briefly recap the primary factors we've been addressing. For one, supply chain disruptions caused higher logistics, freight and input costs. Additionally, inflation led to interest rate hikes than a spike in the U.S. dollar. And consumers shifted spending from goods to services as the pandemic abated. Against this backdrop, demand grew below historic trends in end markets that constitute the vast majority of our sales. Further, as supply chains started to normalize again over the last year, our customers began to draw down inventory to facilitate their transition from just in case back to their typical just in time approach.

Consequently, we're seeing a synchronization of lower sales across our portfolio that is highly unusual. Now, this is because that while our three core technologies and four manufacturing platforms do apply to all of our markets, the demand drivers in the different markets we serve are fundamentally uncorrelated, TV sales don't move with automotive production. The life sciences market isn't correlated with fiber-optic deployments and so on. Over the past several quarters, I've noted how all the factors I just outlined have taken a toll on profits and cash. And that's why we introduced a comprehensive plan to improve both profitability and cash flow at our current sales run rate, while also innovating to generate additional near- and longer-term revenue streams.

I would like to now walk you through the elements of our plan and the strong results we're delivering. We're taking pricing actions most recently in display. We expect these actions will contribute to overall profitability improvement in the third quarter. We've reduced our staffing levels to align with demand, and we are returning our productivity ratios to historic levels. And we're bringing inventory down across the Company because we no longer require buffer inventory and supply chains are improving. These sets of actions are delivering the intended results. In the first quarter, we improved gross margin by 160 basis points. And in the second quarter, we improved by another 100 basis points. Collectively, we've improved gross margin by 260 basis points to 36.2% versus where we ended 2022. As I said earlier, we also improved our free cash flow to $310 million in the quarter.

As we move into the second half, we're not counting on a strong recovery in our end markets or a significant increase in our sales, but we do expect our profitability and cash generation to continue going up. Importantly, our actions will further improve profitability and cash generation when our markets recover. Our volume returns and our sales increase. The products and services we enable smartphones, cars, TVs, broadband, these are central to many facets of daily life. So we're confident that volume in our markets will recover to historical trend lines.

In display, for example, we believe the volume recovery has already begun. When we last spoke, panel makers had started to increase utilization at the end of the first quarter. Improvement continued in the second quarter, and we grew sales more than 20% sequentially, driven by higher volume. When we couple this volume return with the display pricing actions I mentioned earlier, we expect to show additional profitability improvement in the third quarter. Now, our goal is to return display to pre-pandemic profitability levels as we exit the third quarter.

Let me now turn to how we intend to increase our profitability and grow our sales beyond our pre-pandemic run rates. Across our markets, we expect demand to normalize and our volume to return. As we drive more Corning content into those markets, we will further increase our profit as we create additional revenue streams. Now, here are just a few exciting examples of more Corning innovations that are arriving in the near term. In Optical Communications, leaders in large language models are building data centers with what is essentially a second optical network, which is increasing connectivity by up to 5 times within individual data centers. So we're commercializing a Gen 2, high-density, high-value optical interconnect system designed to enable the requirements and capture the growth driven by AI.

In Mobile Consumer Electronics, we're launching two products this fall and next year, featuring innovations that significantly increase our value per device.

In Automotive, we continue to increase the amount of Corning content in vehicles across the industry as we pursue our $100 per car content opportunity. We recently commercialized a solution in our auto glass exterior business that takes a significant step to achieving this goal in electric vehicles. And for ICE vehicles, adoption of our gasoline particulate filter technology is now expanding to India. And the U.S. EPA has proposed regulations that would boost our content in the very large domestic market.

In Life Sciences, we just launched Viridian Vials to address the growing need for sustainable products in the pharmaceutical supply chain. Viridian cuts the CO2 emissions from biomanufacturing by about a third and reduces glass by 20%, all while improving filling line efficiency by 50%. We're expanding our collaboration with West Pharmaceuticals, a leader in drug packaging to accelerate adoption. Now, these are just a few examples of innovations and new product sets that you can expect to see in the near term.

Additionally, we're scaling our solar business, which we expect to add hundreds of millions of dollars in annual profits and cash flow beginning in a couple of years. We expect all of these opportunities to further increase our profits as we create additional revenue streams across our markets. Whether it's in automotive, cloud computing, broadband, 5G, solar, pharmaceutical packaging, next-generation displays and cover materials, augmented reality or semiconductors, our role in key secular trends is material and compelling. We've built a robust opportunity set that will drive durable long-term growth.

So before I turn things over to Ed, here's what I'd like to leave you with today. The world is working through some significant aftereffects of the pandemic, and they're not trivial for our Company. Our approach in this environment is not the count on conditions in our end markets or our sales improving significantly from the second quarter. And that's why we're guiding based on our current order rates. When we see our orders increase, will reflect these developments in our operating plans and, of course, our guidance. For now, Corning is executing well on a comprehensive plan to improve profitability and cash flow throughout this low volume period and to emerge stronger. Our efforts are already demonstrating significant results. In the first half of the year, we improved profitability in cash flow despite lower sales. Even in a muted sales environment, our pricing and productivity actions will continue to drive improvement in the second half. At the same time, our more Corning approach is driving new product launches that will create additional revenue streams. Altogether, as our end markets recover, and our volume returns to historic levels, we're positioned to deliver improved profitability and cash flow with significant operating leverage on sales that will grow faster than our markets. In total, we feel good about our execution. We're taking the right steps to improve our performance today, and further improve our results when volume returns. And I look forward to updating you on our progress.

Now, I'll turn the call over to Ed, so he can get into the details of our results and outlook. Ed?

[Edward A. Schlesinger, Executive Vice President and Chief Financial Officer at Corning]

All right. Thank you, Wendell. Good morning, everyone. As expected, in the second quarter, we improved profitability and cash flow in an overall weak demand environment. Second quarter sales were $3.5 billion, up 3% sequentially. EPS was $0.45, increasing $0.04 from the prior quarter. Gross margin and operating margin increased sequentially by a 100 basis points to 36.2% and 200 basis points to 17.5%, respectively, reflecting progress on our pricing and productivity improvement actions. These results demonstrate the progress on and benefits from our comprehensive approach to improve profitability and cash flow, including continued actions to offset inflationary costs, return productivity levels to -- return productivity ratios to historical levels and reduce inventory.

Now, let's turn to our segment results. Let me start with Optical Communications. I shared with you back in May that we were not seeing the typical seasonal uptick in our orders. Near-term demand for passive optical network products remains weak. And as the quarter progressed, orders came in at the low end of our expectations. As a result, sales in the second quarter were $1,066 million, down 5% sequentially and 19% year-over-year. As I'm sure you're hearing across the industry, carriers and enterprise operators are pushing projects into 2024 due to high inflation and rising interest rates. For now, we are sizing our operational plans based on the orders in our books. Net income was $140 million, down 12% sequentially and 23% year-over-year. The decline on lower volume was moderated by productivity improvements, as I shared in the first quarter. We raised price in this segment to more appropriately share inflationary costs with customers. While the demand for passive optical network products remains weak, longer-term, we remain confident that the industry's underlying growth drivers are intact. We're pursuing four significant secular trends: broadband, 5G, the cloud and the paradigm shift in computation necessary to train large language models and other advanced AI. We've got major innovation programs underway for each category. And our connectivity solutions offer economic advantages for a broader range of customers than ever before, and demand for optical networks is strongly supported by trends in computation, as well as by private and public infrastructure investments to help connect the unconnected and bring broadband to a much larger share of the population.

Turning to Display Technologies. Sales in the second quarter were $928 million, up 22% sequentially and 6% year-over-year. Net income was $208 million, up 30% sequentially, primarily driven by higher volume. Second quarter panel maker utilization played out in line with the expectations I described three months ago. After reaching historic lows in 2022 and as recently as January, panel maker utilization has increased consistently, driving significant sequential volume increases. We believe that the display industry recovery is underway.

Now, let me update you on what has happened since our display price increase announcement in May. Since then, we've engaged with our customers and they understand our need to offset elevated costs. We expect to finalize agreements for double-digit price increases that will begin to go into effect in the third quarter. We expect our profitability to improve and to return to pre-pandemic levels as we exit the quarter.

Moving to Specialty Materials. Second quarter sales were down 13% year-over-year. This reflects continued end market softness. Sales increased 4% sequentially on higher Gorilla Glass sales. Net income was $33 million, down 15% sequentially, impacted by continued development costs for new product launches. Looking ahead, we believe that there are new innovation opportunities for us in emerging trends like: augmented reality, bendable devices and AI, that will extend our more Corning opportunities far into the future. For example, our world-leading optical materials and systems in our advanced optics business power EUV lithography technology. We enable the manufacturing of smaller, faster, more powerful chips, including GPUs. Global AI initiatives are accelerating demand for GPUs and for our EUV-related products.

In Environmental Technologies, second quarter sales were $457 million, up 6% sequentially and 28% year-over-year. Net income increased to $107 million on stronger sales and improved productivity.

In Automotive, our sales were up 8% sequentially, driven by the ramp of GPF sales in China based on regulations that are now in effect. We do not expect to see this level of GPF sales in China in the third quarter. Auto production levels remained steady quarter-over-quarter in North America and Europe. Year-over-year, our Automotive sales were up 40%, driven by the GPF ramp in China that I just mentioned and versus low auto sales in China during the 2022 COVID shutdowns and 2022 supply chain issues for automakers globally. In diesel, our sales were up 13% year-over-year, driven by heavy-duty demand in North America and Europe, which more than offset languishing demand in China.

Turning to Life Sciences. Second quarter sales were $231 million, down 10% sequentially and 26% year-over-year. Both the sequential and year-over-year sales declines resulted from lower demand for COVID-related products in China, and by customers continuing to draw down inventory. Net income increased sequentially to $11 million, with productivity improvements more than offsetting lower sales. We expect our sales and profitability to improve as the industry corrects and as we continue to restore productivity ratios back to pre-pandemic levels.

Finally, in Hemlock and Emerging Growth Businesses, sales in the second quarter were $377 million, consistent with the first quarter. Sales were down 10% year-over-year, partly associated with a decline in solar-grade polysilicon spot prices. We are seeing continued strong demand for solar-grade polysilicon required to meet the need for a transparent, sustainable and traceable solar supply chain in the U.S. market. And we have long-term take-or-pay contracts with our customers that have floor price mechanisms built in to help mitigate the impacts of spot market dynamics. Net income increased sequentially to $26 million, up 4% year-over-year, driven by productivity improvements.

Now, let me spend a minute on our outlook for the third quarter. As we've been sharing with you, we are planning our operations based on our current order run rate. And we're continuing to take pricing and productivity actions to improve profitability and cash flow. We're adopting the same philosophy for our guidance. Based on our current order run rate, we expect our sales to come in roughly in line with quarter two, approximately $3.5 billion. When orders begin to increase, we'll let you know. On roughly flat total Company sales, we expect improved profitability and cash flow. We expect EPS to come in about the same or slightly better than the second quarter, and this factors in sequentially higher interest expense and a slightly higher tax rate. Of course, there are differing dynamics in each of our businesses. At a high level, we expect improvements in Display and Specialty Materials to be offset by declines in Optical Communications, driven by the dynamics I previously mentioned, as well as declines in environmental, where we expect lower sales for GPF in China as the ramp is largely complete, and we expect lower demand for heavy-duty. We continue to expect 2023 full-year capital expenditures to be slightly lower than 2022.

Now, I'd like to wrap up with a few key takeaways. As CFO, I am pleased with our execution on many dimensions. Our second quarter results demonstrate the benefits of our comprehensive approach to address aftereffects of the pandemic. We're sharing inflationary costs with our customers. We're returning our productivity ratios to pre-pandemic levels and we are on track to normalize inventory. Additionally, we're undertaking initiatives to capture our next wave of growth opportunities. In the near-term, to enhance shareholder value, we remain focused on improving cash flow and profitability in the second half even at our current sales run rate and advancing innovations to outperform our end markets. We're seeing the recovery play out in Display, and we expect to see it play out across our other markets because the underlying fundamental drivers remain intact. Longer-term, we are well positioned to continue capturing growth tied to key secular trends and expect to grow faster than our markets, driven by our More Corning approach. So, I look forward to updating you on our progress.

Now, I'll turn things back over to Ann.

[Ann H.S. Nicholson, Vice President, Investor Relations at Corning]

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

Questions and Answers

[Operator]

Thank you. [Operator Instructions] Our first question comes from the line of Samik Chatterjee with JPMorgan. Your line is now open.

[Samik Chatterjee, Analyst at JPMorgan Chase & Co.]

Hi. Thanks for taking my question. I guess, maybe if I can get your insights and what you're seeing in the market relative to optical, which you're guiding down sequentially into the third quarter. Have you seen more incremental weakness given we've seen certainly telcos pulled back on spending a bit more? Or as you sort of look -- think of -- look at your 3Q guidance, it being driven by both telcos and enterprise?

And just a quick second part there, I mean, any discovery discussions in terms of what this lead cable replacement opportunity or whether it's an opportunity as well for Corning in the long run? Thank you.

[Edward A. Schlesinger, Executive Vice President and Chief Financial Officer at Corning]

Hi, Samik. I appreciate the question. So, I think I'm going to go back to what we said a little bit as we shared our perspective on the second quarter. When we were together in May, I talked mostly about us not seeing an inflection in our order rates, and that was driving how we saw the second quarter playing out. Normally, we would have a pretty big seasonal uptick in the second quarter relative to the first quarter. As it turned out, our orders were actually even lower than we thought at that time, and therefore, the second quarter came in down from the first quarter, and we're guiding the third quarter to be down sequentially again, and that's primarily driven by what we're seeing in our order book. I think that's the best way for us to describe the way we see the optical market playing out versus what might happen in the future. For sure, as you hear and see in the industry, we're seeing it in both the carrier and the enterprise space, customers are pushing projects out into 2024.

[Samik Chatterjee, Analyst at JPMorgan Chase & Co.]

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

[Wendell P. Weeks, Chairman and Chief Executive Officer at Corning]

I'll do both. I'll add a little to Ed's and then talk briefly about the lead cables. So I think the way think -- the right way to think about how we're approaching demand in our optical market is, our historic models that we would normally use to predict future revenue streams from what we're experiencing in one quarter to then be able to build out a year plan. And our direct customer inputs on their plans for the year haven't have proven to not be as reliable as we like. And so, what you're really seeing in our guide is really a shift in our operating philosophy, which is, we're going to plan our operations based on what we see in our order book, and we're going to improve our productivity to historic rates based on that broad load and we're going to increase our prices and carry the appropriate inventory so that our profitability and cash flow is going to increase in a very reliable manner despite the lower sales volume. And so, that's all you're really seeing in our guide is, we're just carrying our operating philosophy forward to our guide.

As to lead cables, make it complicated issue. The good news is, is the glass is entirely inert to the environment and is better, lower cost, all the things that make it the right side of the secular trend would mean that this is why it's an ascendant technology on really every metric you can name. But I have no further insight to offer on the lead cable problem or opportunity.

[Samik Chatterjee, Analyst at JPMorgan Chase & Co.]

Thank you. Thanks for taking my questions.

[Operator]

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

[Meta Marshall, Analyst at Morgan Stanley]

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

[Wendell P. Weeks, Chairman and Chief Executive Officer at Corning]

Thanks for the question, Meta. I think you're right on all the dimensions, right? This price increase is a very significant, a complicated strategy move that is done in a backdrop, as most of our businesses are on well-established long-term agreements, yet we are redoing the value proposition between ourselves and our customers. So it's complicated. So the good news is, it's progressing well. Our customers understand our need to offset elevated cost. We expect to successfully execute a double-digit price increase in the third quarter, and do so in a manner that does not negatively impact our market share. So that's very significant and compelling.

Now, this also leaves -- I also understand the challenge in modeling, like specialized strategic move, especially in the backdrop of what's going on in the end markets. So let me just share for a moment the way we think about it. The way we think about the financials is that, what we're seeking to do is to return display profitability, sort of think NPAT percent of sales, right, how much net income was the percent of net income on top of our sales revenue back to the historic levels in the mid- to high-20s. And we've been operating the past year closer to 20%. Now, we expect to hit that level of profitability as we exit the third quarter. So that's the way we tend to think about the financial modeling.

Is that helpful, Meta?

[Meta Marshall, Analyst at Morgan Stanley]

Yes, that's helpful. I appreciate it. Thank you.

[Operator]

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

[Asiya Merchant, Analyst at Smith Barney Citigroup]

Great. Thank you. Thanks for the incremental color, Wendell and Ed. In terms of returning the business back to sort of pre-pandemic levels, how much confidence that you have that this is something that could possibly maybe happen during '24? Or is it the first part of '24? Is it the end of '23? Do you guys have any more visibility into how we should think about as we exit this year into '23 and into '24 based on discussions with your customers right now? And if you could provide some color by segment, that would be even more helpful. Thank you.

[Wendell P. Weeks, Chairman and Chief Executive Officer at Corning]

Can I ask a clarifying question? Are you speaking about Display or the broader Company? Just so I can make sure I can answer your question specifically.

[Asiya Merchant, Analyst at Smith Barney Citigroup]

We could start with Display because it seems like Optical, there is some weakness and then Specialty, if you guys can talk about what you see in the back half? But it was more a broader commentary as well about confidence in getting to kind of pre-pandemic levels of profitability as we exit '23 and into '24.

[Wendell P. Weeks, Chairman and Chief Executive Officer at Corning]

Okay. Great. So let me start with Display and then I'll have Ed add some color on the total Company. So in Display, we expect to return to pre-pandemic levels this year as we exit Q3. And then we would expect that level of profitability, what our plan is, is that we'll continue to carry forward into next year.

Is that -- does that address your question on this point?

[Asiya Merchant, Analyst at Smith Barney Citigroup]

Yeah. That's very clear. Yeah.

[Wendell P. Weeks, Chairman and Chief Executive Officer at Corning]

Okay. Good. Ed, do you want to speak to the...

[Edward A. Schlesinger, Executive Vice President and Chief Financial Officer at Corning]

Yeah, sure. I'll build on Wendell's comments. Thanks, Asiya. So, first, I want to sort of start with where we are in Q2. If you think about where our gross margin and operating margin in Q2 are, we've made a significant move up from where we were at the end of the year. Gross margin at 36%, operating margin at about 17.5%. So 260 basis point improvement from the fourth quarter and 300 basis point improvement, I think, on operating margin from the fourth quarter. So, as we've sort of talked about, our goal is to continue to marching up -- to march up profitability-wise. Now, our sales are muted, so they're at a lower level, and that obviously impacts overall profitability.

Now, as we go forward, Display, we shared our view, we expect to continue improving overall profitability for Corning, yes, led by display, but also across all of our segments. And then when sales return, I think it is possible for us to get back to real pre-pandemic historical levels at some point in the future. So that's kind of the way you think about it. I think of it as a continued march upward. Display, very specific, given where we are, and we've seen this volume recovery and then our pricing and productivity actions will continue to take effect in the third and fourth quarter.

Does that help?

[Asiya Merchant, Analyst at Smith Barney Citigroup]

Yeah. And then just in terms of share buyback, at what point -- now that preferred shares, the payments that you had for the purchase from Samsung, I mean, those have hopefully come to an end now. When would you expect to turn on share repurchase?

[Wendell P. Weeks, Chairman and Chief Executive Officer at Corning]

When we start piling up more and more cash flow every quarter as we are aiming at. So that's improving in our profitability and cash flow even at this muted sales level, we want to see that first before we think deeply about our capital allocation model. As always, you can expect us to hold our shareholders near and dear in our heart. But the first step is, we've got to restore that profitability and cash flow to our pre-pandemic levels even at these muted sales levels.

[Asiya Merchant, Analyst at Smith Barney Citigroup]

Great. Thank you.

[Operator]

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

[Mehdi Hosseini, Analyst at Susquehanna International Group]

Yes. Thanks for taking my question. Actually, I have one clarification. Wendell, you talked about the pre-pandemic margin profile for Display business. I'm a little bit confused. You exited 2019 with a 24% net income margin for Display. And in the prior year, it was like 26% to 27%. When you reference pre-pandemic, how far back should we go, given the net margin difference in 2018 and 2019?

[Edward A. Schlesinger, Executive Vice President and Chief Financial Officer at Corning]

Yeah. Hey, Mehdi, this is Ed. So I think the way to think about it is, we've been running closer to 20% and we think of pre-pandemic closer to 30%, right? So, I think it's a big delta that we seek to achieve. So not the end of 2019 levels, but more like the back half of 2018, maybe the front half of 2019 and maybe even earlier than that, depending on how successful we are.

[Mehdi Hosseini, Analyst at Susquehanna International Group]

Okay. Very helpful. And then you highlighted opportunities with polysilicon. I'm trying to understand how the Hemlock and other emerging growth revenue could scale without significant or material increase in capex. You did $377 million in Q2 and $386 million the prior quarter. And then in the latter part of last year, you were doing higher revenue. Should I assume that you can actually do like closer to $500 million without significant capex?

[Edward A. Schlesinger, Executive Vice President and Chief Financial Officer at Corning]

Yeah. Hey, Mehdi. So I'll take that one also. So, a couple of things. Just a reminder, in that segment, you have Hemlock, you have our auto glass business and you have our Corning Pharmaceutical Technologies business, I think Valor, Velocity. I think all of those businesses will grow their sales. So I definitely think the level you're thinking about is very achievable for us. In Hemlock, we're currently working through additional capacity so that we can expand that business. There will be some capital spending, but I don't think you need to think of it as significant at this point.

[Mehdi Hosseini, Analyst at Susquehanna International Group]

Okay. Thank you.

[Wendell P. Weeks, Chairman and Chief Executive Officer at Corning]

I think when -- we're not quite ready yet to discuss sort of the precise way in which we expect to expand our profit streams in solar. So what we're trying to do is to provide you some insight as to how much more income we expect in that segment and a rough idea of the timing of that without yet fully disclosing the details of our plan to be able to realize that expanded value footprint. So, we will be more forthcoming as this finalizes and it is in our benefit to come out of the more stealthy mode that we are in. But at the same time, it is significant enough. Do we wanted to make sure that we had provided for you a rough idea on how to think about it financially? So that's what -- I think you have a good question here. But -- so we're trying to -- we've given you the answer without all the inputs. Does that make sense?

[Mehdi Hosseini, Analyst at Susquehanna International Group]

Absolutely. And the reason I ask is, your margin -- net margin profile for this business unit has continued to improve. And I attribute that to poly. So would it be fair to say that poly, the much better margin profile than other sub-segments within that business unit?

[Wendell P. Weeks, Chairman and Chief Executive Officer at Corning]

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

[Mehdi Hosseini, Analyst at Susquehanna International Group]

Great. Thanks so much.

[Operator]

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

[Wamsi Mohan, Analyst at BofA Securities]

Yes. Thank you so much. Good morning. When I look at Display revenue in the quarter was up 6% year-on-year, but profitability is down 9% year-on-year. You're obviously calling for an inflection in Display and expecting significant profit improvement, as you just answered in prior questions. So I was wondering how much of your cost actions benefit did you already realized in the second quarter. And as you think about the margin improvement, how much of that would you say is going to come from pricing actions versus continued benefit from productivity initiatives that you're undertaking? That's the first part of the question.

And the second part of it is, as you think about the improvement in Display, would you say that this pricing sort of supersedes any of the prior market-based pricing agreements that you had with some of your customers? Is this a new paradigm? Or is that like old paradigm still intact? Thank you.

[Edward A. Schlesinger, Executive Vice President and Chief Financial Officer at Corning]

Yeah, I'll take the first part of your question first, Wamsi. So, the main reason we are taking a price action is the point you're making. We are absorbing higher costs. We have elevated costs in this business, and we expect the price to offset those costs. And I think about that as being the most significant driver of our profitability improvement as we go forward.

[Wendell P. Weeks, Chairman and Chief Executive Officer at Corning]

I agree with that. I mean, the right way to think about it, Wamsi is, if you take a look at our quarter two results, and it's a great example of why we need to increase our prices, right? So, then there is -- this is a paradigm, a new paradigm move. This is significant enough, Wamsi, that it's going to take a little time to settle into what this does to the overall dynamic in the industry. So this type of significant move does represent a new paradigm for us. It is still going to be based on our same fundamental principles that, unlike many of the other players of our competitors in this industry, we are the most reliable supplier. We are going to be able to continue to maintain our position in this business and be the technology leader. If you follow the space closely, you'll see significant announcements in the glass industry here actually capacity being taken out of the system because of the profitability challenges in glass.

So, the core reason that we are the leader in this business is our reliability, the advantages inherent in our technology to play itself out in both cost advantage and product leadership. And those will still underpin the new paradigm, but it is a new pricing paradigm, so.

[Wamsi Mohan, Analyst at BofA Securities]

So, Wendell, if I could just follow up on that? In the past, you guys obviously went through a period where price decline was in the mid-teens, and that stabilized down to low-single digits given that you guys did something really interesting with locking in market share or volume at some of your largest customers, which created an incentive to not take price down. I understand that we're in a recovery phase in the display market at the moment. But if you think over the next two, three years, why should we not think that the competitive response would go back to the historical ways of maybe trying to gain incremental share through pricing?

[Wendell P. Weeks, Chairman and Chief Executive Officer at Corning]

Well, let me get through this quarter in a reset of double-digit increase in our prices, while we maintain our share and keep in place our long-term agreements, right? And after we get done executing this, I'd love to sit down with you and let's talk it through and maybe bring in some of our Display leaders, and we'll talk it through. But right now, what we're focused on is getting this strategic move completed. Does that make sense, Wamsi?

[Wamsi Mohan, Analyst at BofA Securities]

Yeah, yeah, it does. I appreciate the response, Wendell. Thank you.

[Wendell P. Weeks, Chairman and Chief Executive Officer at Corning]

All right.

[Ann H.S. Nicholson, Vice President, Investor Relations at Corning]

Thanks, Wamsi. Next question?

[Operator]

Our next question comes from the line of Shannon Cross with Credit Suisse. Your line is now open.

[Shannon Cross, Analyst at Credit Suisse Group]

Thank you very much for taking my questions. I have two. The first, just sort of a follow-up on pricing, but looking at Optical. I'm just wondering what the carriers are seeing given weakness in demand in relation to some of the pricing that you were putting in place earlier. Is it holding in, or is there any softness there?

And then, Wendell, can you just give us an update on how you're thinking about the timing and rollout of government stimulus, both some of the broadband, as well as benefit on the poly side from the IRA? Thank you.

[Wendell P. Weeks, Chairman and Chief Executive Officer at Corning]

Our pricing continues to hold in Optical.

As far as the timing, IRA and that is happening, right, as we speak. And I think it's a little early, though there's plenty of news and there has been awards out to the states. And you're beginning to see the first of the tech place on being [Phonetic]. I think it's a little early for us to be able to call here's when it's happening, do you expect to start to see that in our demand next year.

[Shannon Cross, Analyst at Credit Suisse Group]

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

[Wendell P. Weeks, Chairman and Chief Executive Officer at Corning]

We started with a pretty cynical view, right, of how long it would take. So we may not be the right people to ask. But we expect and really not to start feeling it until next year, and that really hasn't changed. Once again, it's a -- it is a very large program. It's got a flow from the Federal government out to the states, and they have to do awards that various customers are competing for, right? And then those customers have to put orders in. And so, we've always thought that it wouldn't start to make a big impact until we got into next year. And I believe that is still our belief, I will double check, Shannon, and Ann and Ed will get back to you if I'm wrong, okay?

[Shannon Cross, Analyst at Credit Suisse Group]

Yeah. Thank you very much.

[Operator]

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

[Matthew Niknam, Analyst at Deutsche Bank Aktiengesellschaft]

Hey, thanks for taking the questions. Just one follow-up on Optical, and I have one on cash flow as well. On the Optical side, are we at a point now where higher rates and macro dynamics are more of a -- driving more of a sustained lull in spend relative to the sort of inventory digestion? There was being message a couple of quarters back.

And then just on cash flow. So I think you're slightly negative for the first half of the year. Obviously, there's some gross margin tailwind from the Display price hikes. So maybe, Ed, if you can help us frame expectations for the second half of the year and how meaningful the quarterly improvements can be relative to the $300 million you posted this quarter? Thanks.

[Wendell P. Weeks, Chairman and Chief Executive Officer at Corning]

So I'll take the first one, maybe, Ed, you take the second. So, yes, that was really broadly reported throughout all the different people who serve into the telecom space that there was inventory buildup at the various customers. As you'll recall sort of our feedback for that is, yes, we're seeing that, too. But I think it's a more complicated question than just working our way through what sort of just in case inventory build is at our telecom customers and that moved to just in time like normal, certainly part of it. But we don't feel, at this point in time, confident enough in our forecasting models for telecom to say, yeah, we see that consumption of the inventory, it's behind us, and then we're going to start to see that recovery and a return to sort of our normal seasonality and a recovery in the back half. So we just think it's -- there's more going on here. The fundamental drivers are in place in Opta, but the exact timing on when it pops back, I think it's difficult to call, Matt. And that's why we're not planning on it and why we're just taking a look at what's in our order book right now and why you heard Ed guide you sequentially down in Opta despite the fact this would normally be an up quarter, if everything was sort of operating in a normal cycle. So that's the way we tend to think about that part, Matt.

And you want to turn to cash flow, Ed?

[Edward A. Schlesinger, Executive Vice President and Chief Financial Officer at Corning]

Yeah, sure. Thanks, Matt. So, I would say on cash flow a couple of things. Our goal is to improve our operating cash flow with the actions we're taking. We made a significant move from Q1 to Q2, as you articulated. And I think we have room to continue to increase operating cash flow in the back half relative to what we did in the second quarter. And on capital, we've spent a good bit in the first half. We expect our full-year to be slightly down from last year. So I think you should also see a slight decline half-over-half on capital spending. So I think the combination of improving operating cash flow and slightly less capital spending should mean the back half is stronger than what you saw in the second quarter. So I definitely think there's room -- a meaningful room for improvement in the back half.

[Matthew Niknam, Analyst at Deutsche Bank Aktiengesellschaft]

Just anything to note on working cap in the second half of the year at all?

[Edward A. Schlesinger, Executive Vice President and Chief Financial Officer at Corning]

No. I mean, the thing I think that's most notable for us, and we've talked about it over the last several quarters is, we built a significant amount of inventory during the supply chain disruption period. And our goal is to work that down. I think the good news is, we've made a little bit of progress in the first half on lower sales, which is hard to do. So I think that's good. And we're going to continue to keep chipping away at that. So that should help us as well.

[Matthew Niknam, Analyst at Deutsche Bank Aktiengesellschaft]

Thank you.

[Operator]

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

[Steven Fox, Analyst at Fox Advisors]

Hey. Good morning. Sorry, another question on just the Display price increases. So you're seeing volume increases into the second half of the year. So can you isolate the margin accretion just from increasing Display prices for '23 and '24? And how successful were you versus that original bogey you put out in the press release of 20%?

And then just one last housekeeping thing. Can you just describe what prices did in the -- in Q2? Thanks.

[Edward A. Schlesinger, Executive Vice President and Chief Financial Officer at Corning]

Yes. So Steve, I just want to make sure I understand. Can you repeat the first part of your question again? I wasn't 100% sure I followed it.

[Steven Fox, Analyst at Fox Advisors]

Yeah. So you're saying Display margins are going to go up, but volumes are also going up into the second half of the year, I assume it seems like that's what you're also signaling. So if we just think about the price increases, what is that impact on the margin improvement?

[Edward A. Schlesinger, Executive Vice President and Chief Financial Officer at Corning]

Got it. Yeah. I think I'm not sure we're necessarily signaling volume increase from the second quarter relative for the back half. Certainly, the first quarter was lower given panel maker utilization levels at really low levels in January. But when I think about the margin, the net income margin improvement in the second half relative to, say, second quarter, pricing is really the predominant driver that we see taking us there. And remember, it's offsetting costs that we're absorbing in our income statement.

[Steven Fox, Analyst at Fox Advisors]

And in terms of how successful pricing was versus -- and versus what Q2 pricing was?

[Wendell P. Weeks, Chairman and Chief Executive Officer at Corning]

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

[Steven Fox, Analyst at Fox Advisors]

Yeah. So [Speech Overlap]

[Wendell P. Weeks, Chairman and Chief Executive Officer at Corning]

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

[Steven Fox, Analyst at Fox Advisors]

Right. But originally you said 20% price increase. So I'm just trying to gauge whether you got the full 20%, part of it. I mean, you could have gotten 10%.

[Wendell P. Weeks, Chairman and Chief Executive Officer at Corning]

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

[Steven Fox, Analyst at Fox Advisors]

Okay. And sorry to drag this out, but what was Q2 pricing like? What was Q2 pricing like?

[Wendell P. Weeks, Chairman and Chief Executive Officer at Corning]

Relatively consistent with Q1.

[Steven Fox, Analyst at Fox Advisors]

Okay. Thank you very much.

[Operator]

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

[Joshua Spector, Analyst at UBS Group]

Yeah. Thanks for squeezing in my question here. I was just wondering if you could expand some of your comments around data centers and AI, and kind of what that means for Corning. And if possible, kind of quantify where things are today? So, you've talked about more efficiency in some products. You talked about more data transfer within AI versus other data centers. So, is there a content opportunity you could scale? And again, what's the base that we should be thinking of that on today? Thanks.

[Wendell P. Weeks, Chairman and Chief Executive Officer at Corning]

The easiest way to think about this is that, we'd expect our hyperscale revenue opportunity fundamentally to more than double for the same number of hyperscale data centers. And that is because of a combination of the amount of interconnects required to do the AI/ML compute. It needs more glass within that data center. A lot more of it is happening within the data center, a lot more connections within the data center that are going out just because of the way those large language models are trained and then you do influence beyond with our new set of innovations adding to our content. And so, that's the way we tend to think about it. How much more than doubling, remains to be seen on how successful. Our innovations continue to be, and what ends up being sort of the final architectures as we work through a variety of different wiring diagrams here to be able deliver this new compute package.

[Joshua Spector, Analyst at UBS Group]

Is there a way to think about your hyperscale revenues, what you're recognizing today?

[Wendell P. Weeks, Chairman and Chief Executive Officer at Corning]

So, what we'll do is that, that's in our Enterprise segment, right? Let us reflect a little given the size and scale of these changes and think through what is the right way to be helpful to think about how that embeds in that piece of optical and how sizable is it. That's a good question, Josh. Let us reflect on that, and Ann will get back to you.

[Joshua Spector, Analyst at UBS Group]

Thank you.

[Ann H.S. Nicholson, Vice President, Investor Relations at Corning]

Thanks, Josh. We'll take one more question. Operator, please?

[Operator]

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

[George Notter, Analyst at Jefferies Financial Group]

Hi, guys. Thanks very much, and thanks for squeezing me in. I guess, I had another question on the Optical business. I'm just curious if you guys are enforcing delivery dates with customers or allowing folks to reschedule further out into the future. And then also, I'm just curious if you're seeing any incremental competition in fiber. And I'm thinking more specifically about gray market fiber, people looking at selling excess inventory in the open market that would now compete with you. Any sense for that? Thanks a lot.

[Edward A. Schlesinger, Executive Vice President and Chief Financial Officer at Corning]

Yeah. So, George, I just want to repeat back your question. You're asking if we're seeing customers ask to push their delivery dates out into the future. Is that the question?

[George Notter, Analyst at Jefferies Financial Group]

Correct.

[Wendell P. Weeks, Chairman and Chief Executive Officer at Corning]

Well, that happens daily, one way or the other. Pull aheads do -- I don't really need it then, I need it now, because they're executing pretty complicated civil works projects. We're not seeing beyond what we've already guided in our sort of order rates, sort of a new risk. The way maybe which you're getting at is that, normally, we're working with our customers on what they're going to take like the entire next year, because it's such an important part of what they do, and we have to plan it. And there certainly has been strong variation between what they told us last year, right, and what they're taking this year. So, I think that's more of a play than to look through what is the fundamental heartbeat here rather than shifting delivery dates within any given quarter. It does happen, and it is what is behind sort of our operating shift to just plan based on what we're seeing in our order book as opposed to what our customers are telling us for the year, or as what our own stochastic models are telling us.

As to gray fiber optic cable, we're not seeing that be any sort of significant play here. It'd be unusual. Are you hearing some? Because if you're hearing something, I will check back with the optical folks, but it would be the first I've been hearing about that if it's any sort of significant number.

[George Notter, Analyst at Jefferies Financial Group]

Got it. Great. Okay. Thank you very much. I appreciate it, guys.

[Wendell P. Weeks, Chairman and Chief Executive Officer at Corning]

Yeah.

[Ann H.S. Nicholson, Vice President, Investor Relations at Corning]

Thanks, George. And thank you, everybody, for joining us today. Before we close, I want to let you know that we will attend Citi's 2023 Global Technology Conference on September 7, and we'll be hosting management visits to investor offices in select cities.

Finally, a web replay of today's call will be available on our site starting later this morning.

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

[Operator]

[Operator Closing Remarks]