Corning Inc. (NYSE:GLW)
Credit Suisse Technology, Telecom and Media Conference Call
November 29, 2016 6:30 PM ET
Jeffrey Evenson - Senior Vice President and Chief Strategy Officer
Farhan Ahmad - Credit Suisse
Good afternoon, everyone. I’m Farhan Ahmad. I’m analyst in the technology team at Credit Suisse. I’m happy to introduce Jeffrey Evenson, Chief Strategy Officer at Corning. We’ll have a brief introduction – introductory slides that Jeff is going to present and then we’ll host a fireside chat. Feel free to jump in anytime if you have any questions.
So that, Jeff, maybe you can start.
Thanks, Farhan. Today, I’d like to do three things. I’d like to briefly give you some context on our strategy overall. I’d then like to go on and discuss what we think is an exciting opportunity in the mobile consumer electronics space, and then I’d like to finish up with the bulk of the time taking questions from Farhan and from you.
But first, Safe Harbor. As a reminder that today’s presentation contains forward-looking information. If you would like to know more, there’s information on our website, and I will also be using some non-GAAP numbers in my discussion.
The core concept of Corning and its strategy is that glass-related innovation accelerates evolving industries. For 165 years, we’ve been inventing, making and selling components that serve as catalysts for evolving industries. Our innovations include the glass bulb for Edison’s light bulb, the material that at – is at the heart of the catalytic converter and the first low-loss optical fiber.
Now use the word catalyst quite deliberately. In chemistry, catalyst provide a pathway to get from one state to another that requires less energy, or is easier, or cheaper, or faster than alternatives.
Catalyst make more possible despite the constraints of the system. In the same sense, our technologies provide solutions, pathways to get from today’s world to our customers future vision that are better, easier, faster or cheaper than what exists without them. Our products make more possible.
Today, we see opportunities to deliver the next set of catalyst in poor broad areas. Faster, more efficient communication and computation, richer entertainment experiences, a cleaner, greener environment and longer healthier lives. Our track record and the distinctiveness of our capabilities attract the world’s top companies and position us to shape the ecosystems that will define what’s next.
We aspire to continue delivering products and processes to transform people’s lives and make new industries possible. We believe that glass components can be to the next 50 years with silicon components have been to the last 50. Today, we enjoy tremendous growth opportunities in financial strength. These opportunities result from a combination of our distinctive expertise and emerging needs in some large industries facing transition.
We believe that winning in these areas will be financially attractive. The problems are challenging and the solutions will likely require unique combinations of our world leading skills. We’ve also delivered a decade of double-digit profit growth that has built a cash engine that provide significantly more cash than required to fund our growth investments.
Given that we have tremendous growth opportunities close to our core and a powerful cash generation engine, two leadership priorities follow immediately; focus our portfolio and utilize our financial strength. These two priorities are central themes of the strategy and capital allocation framework that we introduced in October 2015.
Consequences of the framework include the strategic realignment of Dow Corning and the significant cash that we have already returned to investors. Overall, by 2019, we plan to return more than $12.5 billion to shareholders through share repurchases and dividends that will increase annually by, a least, 10% per share.
Now, the core of what we do is invent, make and sell. We create value by inventing category defining products using transformative manufacturing platforms and building strong trust-based relationships with customers who are leaders in their industries. That process has served us well for more than a 160 years and has provided a strong strategic foundation.
The framework focuses on a set of three reinforcing capabilities with strong interconnections. We’re best in the world at three core technologies, four manufacturing and engineering platforms, and five market-access platforms. We also believe that our focus will deliver significant growth and maximize returns on our innovation investments going forward. In addition to improving our probability of success, reducing the cost of innovation, and increasing the barriers to entry.
Notably, our cost of innovation declines, as we reapply our talent and repurpose our assets. For example, we have weighted approximately $800 million in capital spending by utilizing our existing fusion assets when we scaled up Gorilla Glass for the mobile consumer electronics opportunity, which we started in 19 – in 2007.
Focusing at this time in Corning’s history, however, is especially attractive, because we see so many opportunities that need capabilities where we are leaders. We do pursue opportunities less close to our capabilities, but the expected returns have to be significantly higher, because we know that the probability of success is lower.
Today, we’re performance in glass leaders in five major markets, markets where our ability to deliver when customers need us, has helped us build valuable relationships, brands and insights. We plan to focus 80% of our resources on leveraging opportunities related to each.
In Optical Communications, we will pursue access and cloud data center opportunities to grow sales to $5 billion in 2020 from $3 billion in 2015. In mobile consumer electronics, our goal is to double sales over the next several years through innovative, products that capture premium prices and new device wins. I’ll give more color on that segment in a moment.
In Display, we’re focusing on stabilizing our returns and building a new business on Iris, which introduces a third piece of glass into the display stack. In automotive, we have two large opportunities; Gorilla Glass for automotive and the gas particulate filter emerging opportunity. In Life Sciences, we’re addressing a $12 billion opportunity in pharmaceutical packaging.
Our financial strength allows us to pursue our innovation and growth objectives, while simultaneously rewarding shareholders with significant distributions. To sum up our framework in terms of capital, we’re confident in our ability to generate and deploy $26 billion to $30 billion over the next three years. We will invest $10 billion in growth initiatives and distribute, at least, $12.5 billion to investors.
And as you can see, since introducing the framework, we’ve made significant progress on many aspects of our portfolio. But today, I want to talk more about the mobile consumer electronics business. We introduced Gorilla Glass to the mobile device market in 2007, and today are used on more than 4.5 billion devices worldwide.
Gorilla is the covered glass of choice by more than 40 OEMs. We hold a very favorable market position versus other aluminosilicate manufacturers. Today, nearly 75% of all phones are smartphones, with remaining being feature phones that don’t use any cover material. The rate of growth in smartphones is slowing, but we think and want to double our sales over the next few years in this category, so how do we do that?
Beyond increasing high-end smartphone penetration and expansion of that market segment, we see three options to drive sales growth. One, get onto new devices; two, get more sales dollars per device by capturing a price premium, increasing the content per device, or both; and three, gaining share. We’re already pursuing multiple initiatives across these categories.
I won’t cover them all in detail, but improving the performance and functionality of the Gorilla Glass is key across the opportunity set. So the real key for us is innovation. It should come as no surprise that today the mobile consumer device designer faces design challenges in associated trade-offs that have lasted historically. For example, usually when you make something thinner that loses strength. When you improve performance, it typically costs more to make.
At Corning, our unique combination of material and process innovation and close collaboration with customers solves tough technology challenges like these. The result is that our innovations can overcome these challenges. What’s exciting about these innovations is that, material and design trade-offs instead of being an either or become an end. Gorilla Glass 5, the latest generation of the Gorilla Glass is much stronger at any given thickness than the previous generation.
We’ve been able to improve its durability without sacrificing its thinness and designers can also choose how they want to deploy this capability. They could choose to keep the same durability and move to thinner designs, or stay the same thickness and increase the drop performance.
Improved performance also opens up additional design space on the device. For example, without a drop performance, Gorilla Glass 5 could be used for all-glass enclosures, which could become much more significant, as 5G networks are deployed. Importantly, Gorilla Glass 5 with its dramatically improved drop performance is commanding a price premium over Gorilla Glass 4.
Reflectance may be a less familiar trade-off faced by designers historically. The more reflective the material, the more sunlight is bounced back into your eyes making it difficult to read your screen when outside.
Sapphire, for example, is very scratch resistant material, but it’s also highly reflective. We designed Gorilla Glass SR+ to deliver the scratch performance of Sapphire, while retaining the optical performance and drop performance of the Gorilla Glass 5. This positions us very well to enter the wearable market.
These two examples require all three of our core technologies and three of the four manufacturing and engineering platforms. By combining more of our distinctive capabilities into a single product, we create a wider competitive moat by increasing the barriers to entry and reducing risks and costs by reusing our existing capabilities.
So, in summary, we think we can grow the mobile consumer electronics business through innovation and strong commercial execution. Even with slowing unit sales, we think that we can double our segment sales in the mobile consumer electronics segment.
And with that, I’d like to take a few questions.
Thanks, Jeff, for the introduction. Please feel free to jump in if you have any questions at anytime. So, Jeff, my first question is on the display side, that’s about 35% of the revenues. What kinds are you seeing there, we’re seeing like increase in display pricing and improvement in second-half, how does that affect you, i.e. does that calculate into better pricing for glass, as well. Can you just talk about the dynamics there?
Yes, the dynamics in the display glass industry are dominated by moves to larger screen sizes and higher resolution technologies. This year, going into the year, we expect the diagonal size to increase by about an inch-and-a-half and be the largest driver of glass volume growth.
In reality, we’re seeing performance a bit above that for the year. And we’re also seeing strong demand in televisions that’s lead to a moderate pricing environment. Unfortunately, for glass players, a moderate pricing environment means low single-digit declines on a quarterly basis. As our third quarter results demonstrated, however, if we get volume growth that approaches 10%, we can deliver our strong year-over-year profit growth because of productivity improvements we have in our business.
Looking forward, we expect the trend toward use of larger displays to continue. We think that the lower cost of large displays will lead to novel uses of the display technology ranging all the way from large touchscreens used in offices and garages for startups, because it’s so good for collaboration, to collaboration cables, to new technologies that could be used in the fitness space. And you’ll see some of those technologies demonstrated in our booth at CES. So I invite you to come and see us there.
Thanks. So in terms of optical communications, you’re targeting to grow revenues from $3 billion to $5 billion by 2020.
Can you talk about some of the initiatives there to grow the revenue?
Sure. We think that trends are very attractive in the optical space, because advances that have been made in path of components not only give our customers greater capability, but actually can reduce their costs because of the way that we’re delivering them to take out installation.
An example of that would be in fiber-to-the-home, where our content has gone up significantly over the last decade. But we’ve reduced the cost for our customers to install fiber-to-the-home by approximately a factor of two. So a way that we’ve done that is, we’ve leveraged advances in fiber that makes a bend insensitive fiber that we brand name ClearCurve. We’ve made that, so installation is less finicky, but we’ve also used our coupling technology and process improvements to eliminate field displaces.
So our revenue can go up, spending can go up, and our customers end up saving money. So we can grow in those segments much faster than optical, the – much faster than overall telecom CapEx. So that’s the carrier side.
The enterprise side is an interesting space for us. Historically, we’ve sold the enterprise through catalogs and distributors. Each sale was relatively small, often associated with the riser network between floors in a large office building, or to the most powerful aggregation switches in an enterprise data center.
What’s begun to happen over the last few years is that, the size and bandwidth intensity of cloud data centers have necessitated a move to optical technology. The rough rule of thumb is that, if you take the bit rate of a transition – transmission and multiply it by the distance and get a number that’s greater than or equal to one 100 gigabit meters per second, optical is the more economic choice.
As you see datacenters move toward 40 gigabits per second or even 100 gigabits per second technology, that’s not a very long connector that demands the use of optical. So these large cloud data centers have created a really new exciting category for us. It’s still early days, but we think we’re well-positioned for that to be a growth driver for Corning for many, many years.
As we look forward, we see those trends continuing. We’re also optimistic about the potential impact of upgrades to the metro and long haul network related to cloud computing and potentially more fiber intensive wireless deployments as we move towards 5G. So our work is strong in that segment. We’ve begun to spend capital to expand our capacity on both the fiber production side and the cable production side in our factories in North Carolina.
Got it. And just in terms of Gorilla Glass opportunity models, you introduced Gorilla Glass on one of the models of phone last year, or earlier this year in terms of like what the opportunities for cloud maybe and what’s needed really to drive a much broader adoption if you can talk about that?
Sure. In the automotive space, we introduced Gorilla Glass solutions for car windows primarily, because we believe that the lighter weight of Gorilla Glass would lead to better fuel economy. When we began working with auto manufacturers, we discovered that not only do you get better fuel economy, but the performance of the car goes up, it accelerates faster, the braking distance is shorter, the center of gravity drops, so turning performance is better.
We have gone through all the government safety tests on this. We’re now on six cars. We found and we did that that rock-strike performance improves by a factor of two. We also found that it’s the optimal surface for head-up displays, it gives tremendously more capability. So the value proposition for this product has expanded significantly from where we started, that’s usually a good sign for technology adoption.
On the six cars that we are on are very excited – exciting for us, we’re honored to be on all of them. But in terms of volume, all of them sell for more than a $100,000 each, they’re fairly low volume vehicles. We are now in the process of scaling manufacturing capacity. We formed a joint venture with Saint-Gobain Sekurit, a leader in automotive glass. This way, we don’t have to recapitalize in industry. We can build on each other’s strengths to create a great business, and we’re looking forward to scaling that business and being on a mass-market car.
On a per car basis, I think, there are two sets of opportunities for us. There are, obviously, the exterior windows. We think that we’re a good choice particularly for the sunroof and the windshield. We think that on some cars were also an excellent choice for the side windows and the back panel. Depending on the designs for cars that have an acoustic separator, we were in a large number of those. So we think that it can be a very a significant opportunity for us on the exterior.
But also, as cars become more connected, the demands on the interior and the nature of the designs changes significantly. And we think those changes for durability, better sunlight readability, curves play directly to the value propositions that we developed in the mobile consumer electronics space, and we can appropriate much of those capabilities over and begin attacking in the interior space of cars, as well.
And we think that we can sell our technology on the exterior based on the value created in fuel economy alone. And that, as we ramp up with Saint-Gobain, we will be able to sell windows at a price comparable to other mass saving technologies that are commonly used in standard cars.
Got it. Just in terms of the OLED transition in smartphones and also maybe on the TV side, how does that affect you?
So the OLED transition on the smartphone side, we think that the value proposition of OLED is very powerful. We began a number of years ago with that belief in mind and developed a piece of glass that’s optimized for manufacturing small form factor of flexible OLEDs, the glass is called Lotus NXT. When companies choose to make polymeric OLEDs, which when the consumer buys that, there’s no glass involved in it at all.
They typically and almost always use a piece of Lotus NXT Glass deploying the polymer on and do all the processing then the polymeric displays are cut and removed from the piece of glass that consumes roughly the same amount of glass as an A5 display today. Our market share in Lotus NXT is affected to be dramatically higher than our share in the glass that’s used to make A5 handheld. So overall, that’s a great long-term trend for us. We’re excited about it.
In the TV space, our expectation is that advances in LCD continue at a strong pace and keep the value proposition of advanced LCDs significantly more attractive than OLED TVs, and OLEDs will remain a pretty small part of the overall TV market.
Okay. There is some chatter off like all glass form, can you talk about like have you evaluated that?
Sure. The – as I mentioned in my prepared remarks, a big push for us is to tap into the fundamental theoretical strength of glass and deliver phones that simply don’t break when they’re dropped. And the closer we get to that goal, the more attractive it is to use phone – to use glass all around the phone. And at the highest level just from a reductionist design philosophy, reducing the number of material is a good thing.
But from a performance standpoint, it can also be incredibly attractive, particularly as we move towards higher performance wireless systems, there’s a school of thought that believes the back of a phone will need to be completely RF transparent for optimal phone performance, glass and the closely related cousin of glass ceramics, where we’re also a leader, our ideal lead – our ideal material if RF transparency is required.
So we believe that if we can deliver the drop performance that we’ve seen starting to happen with Gorilla Glass 5, that using thin glass or glass ceramic materials on the backs of phones is an incredibly attractive choice for designers. And from a very naive perspective, if every phone had two pieces of glass, our revenue does, so that’s a great opportunity for us.
So just in terms of talking about your capital returns program….
You have laid out a pretty aggressive program over the last – next five years of $12.5 billion…
Yes, through 2018.
Through 2018, how do you see that progressing like what’s the base that you’re thinking about? Is that like pretty…?
Yes. So over – through the end of 2019 from the fourth quarter of 2015, we expect to generate $26 billion to $30 billion that we can deploy. We estimate that we will need $10 billion of that to fund what we think are a set of extremely attractive growth initiatives, I talked about a few of those today, we have others that we aren’t talking about yet. But we also expect to return, at least, $12.5 billion to investors. Those of you who are rapid at math may notice that $10 billion plus $12.5 billion is $22.5 billion. We expect to generate, at least, $26 billion.
We put a cushion in there for two reasons. One, when we make a comment like we expect to generate – to deliver, at least, $12.5 billion, we take that goal extremely seriously and we want to make sure, there’s an extremely high probability of even in recessionary, or much weaker economic environments that we can still do it. We believe that that’s the case.
We also think that there are opportunities that would be even more positive than the ones that we’ve built into our $10 billion case through 2019 that will require a bit more capital expenditures. If that happened, we would communicate it very loudly and proudly and you will understand it. But we are committed to following through our strategy and capital allocation framework. And I’d point out that that $12.5 billion is approximately half of our current market cap. So that is a very aggressive plan. By the end of 2016, we will return $6 billion of that plan.
Great. Thanks a lot, Jeff. We’re running short of time. Thanks.
Thank you very much. Thanks for coming, everybody.
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