Corning's (GLW) Management Presents at 2021 Morgan Stanley Technology, Media and Telecom Conference (Transcript)

Corning Incorporated (NYSE:GLW) 2021 Morgan Stanley Technology, Media and Telecom Conference March 1, 2021 9:30 AM ET

Company Participants

Jeff Evenson – Executive Vice President and Chief Strategy Officer

Ann Nicholson – Investor Relations

Conference Call Participants

Meta Marshall – Morgan Stanley

Meta Marshall

Hi everybody. I'm Meta Marshall. I head up the networking coverage here at Morgan Stanley. We're pleased here today to have Corning with us. We have Jeff Evenson, Head of Strategy at Corning; and Ann Nicholson is also present as well, who heads up IR. I'm going to start with a disclosure. For important disclosures, please see the Morgan Stanley research disclosure website at morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley sales representative.

With that, Jeff, is there any disclosure you wanted to brief briefly?

Jeff Evenson

Thanks Meta. I just wanted to remind everybody that I will be making forward-looking statements. We have various disclosures on those on our website and unless I say, otherwise, I'm probably talking about core sales and EPS.

Meta Marshall

Great, perfect. Well, I appreciate you being here virtually with us here today as we kick off the conference. So maybe starting with, Corning has been committed to your three, four, five strategy for going on probably five plus years now. How has that clarified some of the investments that you've made over the past five years and as time passes, how is that strategy maturing?

Jeff Evenson

Yes, three, four, five is both an economic model for us and an innovation model. As I think most people know the three is three core technologies, four is four manufacturing and engineering platforms. Those go together because at Corning, we're innovating just as much on processes as we are on the materials formulations. Those are often go together to produce some of the distinctive properties. The economic part of it comes because we can repurpose, reapply, reuse, and we believe over time, that's going to increase our probability of success, reduce our cost of innovation and allow us to bring really distinctive combinations to our customers.

Right now, we're focused on applying those in five market access platforms, but we are really good at pivoting to bring new combinations to bear on behalf of our customers. I think auto glass is a great example. In auto glass, we're now bringing our optical physics, our glass science, fusion processes, how we strengthened glass precision forming, in a unique combination for the industry that addresses the real need that auto designers have as they move toward differentiating their cars based on the interior and making them more like smartphones.

So I think that's a great example, what we were able to do with Guardiant, using our glass ceramic innovations. And IDEXX change to bring an anti-microbial that we've now shown kills SARS-COVID-2 as well as many other bacteria and viruses. And we're offering that in a paint formulation. That's something that we were really able to focus on as part of the world's response to the current pandemic.

Meta Marshall

Got it. Some of your smaller markets or maybe kind of what you would consider not your largest markets, like life sciences have really come to the forefront as a relative opportunity. How does that inform kind of the investment priorities between maintenance, sure-fire growth and kind of longer term bets?

Jeff Evenson

Yes, I think that right now, we are fortunate to be addressing multiple important trends really in each of our market access platforms. I think the good news is that because of the relevance of the three and four that I just talked about, we can often make it very far on innovations for relatively low investments. And that gets around some of the prioritization decisions that you might have to make very early.

Instead, our prioritization decisions come more at the point that we have to build capacity because we've been so successful that demand has increased. The way we de-risk that decision is we really require a customer commitment. And we're very disciplined around that. You saw us announce in the fourth quarter that we had received $15 million to expand pipette production for COVID-19 diagnostics. And $15 million is not a lot of money, but I think that it shows the philosophy and the rigor with which we're applying it.

And I think one of the things that people don't really recognize about us is how adherence to the focus portfolio using combinations of the three and the four has changed our ability to pursue long-term growth initiatives in a much more cost-effective way than Corning could do 20 years ago when I was starting as a consultant at Corning. I’ll give you a couple of examples of that. One is quantum communications, where I think that's an exciting opportunity long-term, but there are not a lot of sales today. Pretty much every quantum communications record has been set on our fiber. And we have a very active research program. We're working with lots of the leading groups in both quantum computing and quantum communications.

We're able to do that because the work that you need to do fits exactly with what we're doing in ultra-low loss fiber and work we've done for quantum communications has helped us make advances that we're selling commercially today. Similarly, carbon capture is offers huge benefits for the world. I hope it's a long-term successful program. We are a leader in supplying the substrates for carbon capture technologies. We supply that using extra capacity we have during downtimes in our environmental technology accounts.

So those are a couple examples of how we are able to go after long-term opportunities that give us benefits in the short-term and when we can do that, it's a win for everybody. And that was part of the thinking behind introducing three, four, five. So we're trying to get rid of what used to be a big decision and a mutually exclusive choice is we can do kind of both.

Meta Marshall

Got it. And we got a chance – the sell-side community got a chance to see that carbon capture technology last year. And it really was pretty fascinating. So shifting back to display, there's been a lot of confusion on the demand side over the past year as Korean makers shut down panel facilities, BOE kind of stopped some investment in LCD. And then on the supply side, there's been a competitor experience in production, disruption. What is the secondary impact to glass demand beyond just kind of normal seasonality, right now?

Jeff Evenson

Well, I would say, glass supply is very tight that that in the first quarter, we expect pricing to be flat with the fourth quarter of 2020. And if you look at that in a historical context or the last decade or so, right now is the most attractive first quarter pricing environment that we've seen. So I think that demand stronger than normal seasonally because glass supply is so tight and pricing environment more attractive than you would expect from historical averages as well.

Meta Marshall

Okay, perfect. And so we've heard – we've had a year of kind of macro disruption due to COVID obviously, but there's still been a lot of demand for TVs, for screens, what do you see with volumes in 2021? Do you still expect kind of a normal year where size, kind of – size of devices, kind of mandates, kind of how much greater the volume increases will be or just kind of what type of seasonality could we see on the volume front in 2021?

Jeff Evenson

We expect glass to be up in the mid single-digits year-over-year that results from continued strength in unit demand for TVs. We expect diagonal size to keep increasing. I think diagonal sizes in the mid-40s overall. Do you know the number from 2020, Ann?

Ann Nicholson

I think it's actually 48.

Jeff Evenson

48 inches, I think as we move to 4K and 8K, significantly larger sets are very attractive. And also there is just the supply chain capacity and inventory situation that probably keeps demand up throughout the year kind of, regardless of what happens at the retail level. So I think we have multiple drivers of continued tightness and growth in 2021.

Meta Marshall

Great. Turning to optical, investors realize that networks need to get more fiber rich. However, kind of the timing of that demand has kind of created some questions in the market. How do you think about how visibility is changed as we start to emerge from COVID and how have the disruption over the past 18 months kind of informed how you forecast that business?

Jeff Evenson

Yes. Growth has returned in optical, and we think it's here for the foreseeable future. Sort of middle of last year, we started seeing comments from customers on their expectations for increasing investment in their optical networks. The difference is starting in the fourth quarter, we saw those statements begin to materialize as new orders on our books and a higher run rate for optical communications. That continues the nature of our conversations has changed pretty fundamentally over the last six months with multiple optical customers. And we're seeing good demand on both the carrier side and the cloud data center portion of enterprise.

Meta Marshall

And just in terms of visibility, do you feel like you have a greater sense of visibility than maybe you did 18 months ago, or in terms of the timeline or is it still you feel better about it, but visibility is still kind of difficult to determine on a quarter-on-quarter basis?

Jeff Evenson

Yes, I think – so visibility in optical communications is good early in programs because they're early in programs. As you get to the end of a program exactly when they stopped, it tends to be hard to call. And I think what it started sort of in the fourth quarter is that we've seen customers get back into their programs. So we feel good about them, sustaining them for some longer period of time. So I do feel visibility is better than it was 18 months ago.

And I think that you always have the context in optical communications of their good underlying long-term demand because bandwidth is growing, the shift to cloud continues. Customers are asking for more capable access connections, all that good news for us. And I don't see that slowing down anytime soon, exactly how that translates to what customers are doing in their networks is the question. And I think right now visibility is better and we're in the early stages of programs, which is usually good news for sustained growth.

Meta Marshall

Got it. And I just want to remind the audience that if you have any questions, send them through the GlobalMeet platform. And I have them up on the screen here and can ask them throughout the call. Maybe turning back to Valor for a second, there's been a lot of interest right now on vaccine glass, your glass pre-pandemic was set to be approved kind of on a drug-by-drug basis by the FDA. Just how do you see kind of the Valor Glass business developing post-vaccine and kind of over this vaccine timeline?

Jeff Evenson

There's been no change in the way that our packaging gets approved. It has to be done on a drug-by-drug basis. I think that becomes easier as regulatory agencies get more familiar with our technology. The value proposition of Valor has been illustrated to the pharmaceutical and biotech industry. As a result of COVID, I think that bodes well for us long-term. We are expanding our capacity with a significant portion of that expansion getting funded by the U.S. government.

So I think that we feel really good about our progress. I think in terms of material revenue that's more of 2023 expectation. And you just have to remember for right now we are scaling capacity and doing it as rapidly as we possibly can. We've already shipped vials sufficient for over 100 million doses of the COVID vaccines. But remember that each vial holds six to 10 doses. So there may be aren't as many as people would have in their back of the envelope calculation.

Meta Marshall

Okay. And is there opportunity for Valor Glass to kind of be used outside of the U.S. or just how do we think about it becoming more – maybe post-vaccine does being used kind of outside of FDA approval, kind of some of the other approvals you might need globally?

Jeff Evenson

Yes. We think Valor Glass and Valor Glass technology meet needs that apply globally. We began our regulatory filings in the United States. We have at the end of last year submitted the core regulatory filings in Europe, but so far we've only been approved in the United States.

Meta Marshall

Okay, got it. The Specialty Materials business has had a great year, not only just because we're in kind of an iPhone upgrade cycle, but the development of new materials for Apple, the Ceramic Shield. As we think about specialty growth going forward, how much of it is still just glass per devices and getting you on more devices versus kind of higher generation Gorilla Glass and kind of the additive properties there?

Jeff Evenson

I think both will still be powerful levers for us. I think that which one is the most powerful lever will depend on the year. Certainly, last year when unit volumes for smartphones were down mid single-digits and we were up 18%, a lot of that came from a very much higher performance product that we appropriately share in the value that we create for customers. I think as we look forward, Specialty Materials has the primarily covered glass oriented segment, where there are opportunities and wearables or opportunities in the IT segment. And we can just keep advancing the performance of our products for smartphones. I think 5G creates a need to have more glass or glass ceramics on the devices.

And then I think the other part of Specialty Materials, advanced optics, it has really interesting growth opportunities as well. Last year, EUV-related components were very attractive for us. We're the leader in the core materials for the lenses that go into EUV. And over time, I think augmented reality devices could be a really exciting segment and we have multiple products that go into augmented reality devices. So I think lots of interesting underlying growth potential in our Specialty Materials segment.

Meta Marshall

Got it. I think laptops and kind of some of these 5G devices that people just don't think about, like on a relative sense, how much is a, I guess, what is the content that goes into a laptop versus kind of your standard single-pane not double pane smartphone?

Jeff Evenson

I don't know the ratio – I’ll tell you how to think about it. One is, that a laptop has different strength requirements than a smartphone. And there is a lot more, so that would probably – those lower requirements would probably tend to reduce your ASP, but the area is much higher, which would increase your ASP. And you know how to give a better ratio, I know they're both attractive segments and it always depends what you're selling into them. Sometimes for laptops, we're actually making the part which would make a much more attractive overall ASP for us. But the steps that you go through to convert pristine piece of technical glass into a cover are more socialized than the piece that goes into making the glass itself. So it's a lower margin.

Meta Marshall

Okay, got it. I think yes, I thought one of your events at some point it seemed like it can be upwards of multiples of ASP difference ones you get into…

Jeff Evenson

But even within handsets there is meaningful differences in our price depending what generation of Gorilla we're selling, depending on the – whether they're using front and backs, so could you find a laptop where we do $20 of content, yes, absolutely. Could you find a handset where we're doing $20 of content, I can't think of one.

Meta Marshall

Yes. All right.

Jeff Evenson

Maybe by the end of [indiscernible] some of the ideas we have work out, maybe.

Meta Marshall

Yes, exactly. It'd be a very big phone and it'll be indestructible, all right. So autos has moved from maybe a future growth driver to a real growth driver or a material growth driver in 2019 as you're inside cabin business started to scale, this driver got lost a little bit in kind of the auto production disruptions in 2020. But how do you think about the scale and growth of this business? And what kind of additional visibility do you have just by the fact that these can kind of be three, four, five year platform cycles in autos?

Jeff Evenson

Yes, we were very happy with our progress in auto glass in 2020. We now have our plant in Hefei operating at close to full capacity, we're pleased with the way that ramped. And we are having good success commercially. So all the things that you'd want to see happening in a new business are happening there, despite the lower auto sales last year, we had very significant growth in auto glass, which in a way is demonstrating the power of more Corning that we aren't counting on people just buying more cars, we're counting on the cars that they buy having more Corning content.

The way I think of it is, in 2017, our addressable market per car was somewhere around $15. We were selling the substrate for catalytic converters, some were a little lower, maybe some were a little higher, but $15 was a pretty good opportunity. When gas particulate filters begin in at the end of 2018, that suddenly increases our addressable market per car to the mid-40s. And with the advent of center console, other materials that we – glass materials that we see for cars on exteriors, covers for LIDAR sensors and things like that, that adds more than $50 a car.

So we think right now the total addressable market per car we could argue is $100. And in fact, there is one car you can buy that has more than $100 of Corning content in it. So I think that, that is really showing our mindset of why we organized around market access platforms, because we want to take the knowledge that we have with customers, take their roadmaps and then understand how we can best support them by bringing unique combinations of R3 and R4 to bear. And I think we have lots to do in auto beyond the $100 that I talked about.

Meta Marshall

Got it. Okay. Just spending the last few minutes on financials. Corning along with a lot of other organizations underwent some cost cutting in 2020 to improve operations in light of kind of macro disruptions. Are there still areas where you believe you can create cost savings to improve leverage? And then how much that leverage continues as demand comes back?

Jeff Evenson

Sure. If I think about last year, our cost cutting probably decreased our expenses by about $200 million annualized. And about half of that was we cut compensation, cash compensation to most employees and that we've restored. So half of that is going to be reabsorbed this year, now I think we have – we'll have much higher sales this year, we're going to grow. So – but I think everybody should be aware of that. The other half, I think those were changes where we just got more efficient and while I think you should expect our operating expenses to grow more slowly over time and then our sales, so you'll see some leverage out of that.

Meta Marshall

Got it. Another area that you've caught in 2020, you cut CapEx a fair amount, removing some of the maybe growth projects or kind of longer-term projects. How did that change? How do you think about that investment returning? And just how have any of their ROI thresholds changed, if they have?

Jeff Evenson

So we expect CapEx in 2021 to be similar to the CapEx in 2020. It's possible that in the second half of the year, we would get additional customer commitments that we would need to build additional capital for. If that happens, we would come back and tell you what the nature of those customer commitments is and why we're doing it, I think that'd be a great news. When we build additional capacity, we are typically seeing at normal utilization that we would expect when the plant is full, that we would get ROIC on our new investments in the vicinity of 20% or a little bit higher.

We did not see those materialize in 2020 because utilizations were low. I guess the benefit of that is we don't need to invest significant capital at the moment to build. I don't think that our criteria for investing in new capacity have changed, other than our adherence to really get strong customer commitments and make them stronger the more bore limited, we think the customer demand for a product is. I talked about the pipette tips, the $15 million other prominent examples of that recently would be Verizon, Apple's investment for Ceramic Shield.

Meta Marshall

Okay. Great.

Jeff Evenson

While we – the capacity we built in display.

Meta Marshall

Okay, got it. You noted kind of at the – on Q4 earnings that you feel comfortable being opportunistic where share repurchases again in 2021 after pausing in 2020, just how do you think about current balance sheet utilization and just priorities set out in the 2020, 203 capital return plan?

Jeff Evenson

Yes. Our balance sheet continues to be very strong. We ended the year with $2.7 billion in cash after generating $948 million in operating cash flow last year. We expect operating cash flow to grow in 2021. We think we've reached a point where we can continue to meet our top priorities of investing in our organic growth and still return additional cash to shareholders. You saw last month, our board increased the quarterly dividend by $0.02 cents to $0.24 per quarter. And we'll give you updates on our plans with respect to share repurchases as the year moves along.

Meta Marshall

Got it. We got a question from the audience of just, of the 100 – you talked about the $200 million of cost savings, $100 million of that being kind of variable comp that's come back and then the other $100 million being areas where you could be more efficient. Is any of that, the question is just, are any of those volume related so that, if you're back to kind of 2019 volumes or 2018 volumes that in certain segments, that – part of that $100 million would come back,

Jeff Evenson

Some comes back, there is certainly some volume related things, our manufacturing facilities, for sure. But I think that we've made other changes in operating expenses at SG&A and RD&E that would be much, much slower to come back.

Meta Marshall

Okay. Got it. And then maybe just last question for me, free cash flow generation will likely be up in 2021 versus 2020. Just, how do you think about M&A? How do you think about just that piece of the kind of capital strategy and priority…

Jeff Evenson

We are always looking for bolt-on acquisitions, particularly in optical communications and life sciences, I'd say in the near-term that we may have some of those. And I think there are a few places that are small opportunities to increase the focus of our portfolio through divestitures. I wouldn't expect any, if we do a few small deals a year, either acquiring or divesting, I'd expect that to be the case for the next few years as well.

Meta Marshall

Got it. Perfect. Well with that, we’re at time. And so, Jeff and – thank you so much for being here today, and it was great to catch up.

Jeff Evenson

Nice to see you. Take care.

Ann Nicholson

Thanks, Meta.

Question-and-Answer Session

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