Q2 2020 Corning Inc Earnings Call
All participants I know listen only mode.
After the speaker presentation, there will be a question and answer session.
Good question. During this session you wouldn't be the press star one on your telephone if you're quite anywhere this system is that star zero.
I'd now like to hand, the conference your speaker today, and Nicholson Vice President of Investor Relations. Please go ahead ma'am.
Thank you well and good morning, welcome to Corning second quarter 2020 earnings call with me today are Wendell weeks, Chairman and Chief Executive Officer, Tony Tripeny, Executive Vice President and Chief Financial Officer, and Jeff, Even said executive Vice President and Chief strategy Officer, I'd like to remind you that today's remarks contain forward looking.
Statements that ball within the meaning of the private Securities Litigation Reform Act as 90 95.
Those statements involve risks uncertainties and other factors that could cause actual results to differ materially. These factors are detailed in the Companys financial reports.
I'd also note that we will be discussing our consolidated results using core performance measures unless we specifically indicate our comments relate to gap data our core performance measures. Our non-GAAP measures used by management to analyze the business reconciliation of core results. So the comparable GAAP value can be found in the Investor Relations section of our website.
At Corning Dotcom.
You May also access core results on our website with downloadable financials in the interactive analysts center.
Supporting slides are being shown live on our webcast. We encourage you to follow along and they're also available on our website for downloading now I'll turn the call over to window.
Thank you and.
And good morning, everyone.
This morning, we reported second quarter 2020 results.
Sales were $2.6 billion net income was $218 million.
Yes was 25 cents and free cash flow was $285 million.
Oh increased sequentially.
I have two primary observations on the quarter.
First.
Well, we're effectively adjusting to this period of uncertainty.
With decisive action and operational execution.
We're generating positive cash flow and maintaining a strong balance sheet.
Second.
Even in these uncertain times, our strategy to deliver for our customers and outperform our markets is working.
We're continuing to lead in the capabilities that make Corning distinctive.
In fact, we advance multiple growth initiatives during the quarter.
[noise], let's consider the first observation in more detail.
In the second quarter, we completed adjustments to our operating plan and continued to execute across the board by delivering operational improvements that will generate significant cost savings through 2021.
We delivered sequential growth in sales Cps in free cash flow.
We also completed the vast majority of our anticipated restructuring.
Including the Reprioritization of R&D program.
We believe we're continuing to position Corning for strong long term growth and improved profitability.
Turning to my second observation.
Oh long term strategy is sound.
No growth drivers are intact.
As I've said before.
We're not just counting on everybody buying more stuff.
We're putting more corning into the products that people already by this provides a mechanism for us to outperform our end markets.
Even in challenging environments.
The relevance of our focus and cohesive portfolio remains strong and is actually increasing.
Some of the secular trend benefiting us could accelerate as consumer lifestyles continue to adapt in a world the social distancing and as health care companies advanced solutions and the pandemic.
[noise] there was a need for expanded network capacity and ubiquitous displays as people spend more time online.
Safe widespread delivery of vaccines are among societies top priorities.
And reduce fine particulate pollution appears to be helpful for reducing infection rates.
All these needs fall directly within Corning's mission of improving lives through innovation.
And we are well positioned to contribute.
The progress we've made.
And the leadership position, we leveraged across our markets in the second quarter.
Speaks for itself.
Let's take a closer look.
In life Sciences, we're mobilizing our capabilities to combat the virus, what Apple we can.
Glass packaging is critical to the co bid 19 vaccine effort.
And it is currently in short supply.
Our valid glass innovation helps enable faster filling line speeds increased patient safety.
Valid glass was selected by the U.S. Department of health and human services.
And the department of defense to accelerate the Liberty of co bid 19 vaccines and Corning was awarded $204 million in funding to expand valor manufacturing capacity.
Three leading Kobin 19 vaccine producers have entered supply agreements for valid glass.
And we're also working with several other potential customers to capture additional opportunities.
Additionally.
We announced a long term supply agreement with Pfizer to provide valor glass for currently marketed drugs in their portfolio.
Our life Sciences segment entered several long term agreements with major customers for cobot 19, molecular diagnostic testing and anti body detection kids in quarter two.
We're seeing strong demand for these products currently and we expect to accelerate shipments further in the second half.
In mobile consumer electronics.
Our specialty materials segment delivered 13% year over year sales growth, while the smartphone market decline year over year.
Our performance was driven by strong demand for premium products, and we announced two exciting milestones.
Kurilla glass has now been used on more than 8 billion devices worldwide.
And we maintained our industry leadership with the launch of Gorilla glass is because.
This is the top is gorilla glass, yes, and features significantly better job and scratch performance than any other gorilla glass or competitive glass from other manufacturers.
Samsung will be the first customer to adopt gorilla glass victus in the near future.
In automotive our environmental technologies segment outperformed in a week more.
Strong adoption of our gasoline particulate filters continued driving their sales growth to more than 20% year over year.
Turning to optical communications.
According to sales, 12% sequentially driven by carrier network projects.
We announced a collaboration with Enersis to speed Fiveg deployment by simplifying the delivery of fiber and electrical power to small cell while the sites.
We also announced it we're working with Qualcomm technologies to deliver indoor networks that are fiveg ready easy to install and affordable.
The Corning systems are expected to be among the first designed to deliver fiveg and our capability over millimeter wave spectrum in the indoor segment.
This includes enterprises, such as offices University campuses hospitals hotels retail outlets.
And more.
Our collaboration will enable a small footprint and low power consumption platform for true high bandwidth Fiveg in building networks.
Customer deployment will begin in the fall.
In display.
Morning generated consistent sequential net income as customer demand remains steady.
And large screen TV sales continued to drive demand supporting the opening of our Gen 10, and a half facilities.
[noise] across all markets.
You can see there were successfully advancing our long term growth initiatives.
Additionally, near term market conditions have improved.
Auto factories are resuming operations in North America in Europe.
And auto sales in China have returned to pre pandemic levels.
Telecommunication service providers and datacenter operators have resumed sending their technicians into the field.
And they are rethinking their network needs to address greater demand for their services.
Life Science labs are slowly reopening.
We also expect television demand to remain resilient as in home entertainment is more important than ever.
And the demand for computing devices will be boosted by work and learn from home.
So we're seeing some encouraging developments across our industries.
On the other had.
Disruptive forces from the pandemic the civil unrest to a worldwide recession and she'll political struggles all remain in place and they create uncertainty.
We are United as a company to remain vigilant and adapt appropriately we are rising to the challenge.
I'll now turn the call over to Tony So he can give you some more detail on a quarter and our near term outlook.
Thank you Wendell and good morning.
We came into this economic downturn with a balance sheet Bill for times like these and we took actions during the quarter to ensure we have the financial resources needed for the duration.
We generated $285 million in free cash flow.
Exited the quarter with 2.2 billion in cash and are on track to generate positive free cash flow for the year.
Our financial position is strong we are becoming more efficient and we have the capacity in place to meet expected growth with minimal investment, we expect improved profitability and return on invested capital as we grow sales.
As the quarter progressed demand and visibility improved we maintained our leadership across all of our market access platforms.
As a result, we expect to grow sales and profits in the third quarter.
As we said on our first quarter call, we've made aggressive adjustments to align our cost an operating plan with the lower anticipated sales.
These actions, where essentially completed in the second quarter in fall into four broad categories.
Reducing production levels across most of our businesses adjusting operating expenses with the majority of the savings to be realized in the second half.
Modifying inventory plans.
And reducing capital expenditures.
As a result, we expect $200 million in annualized cash savings.
We reduced inventory by $120 million in the second quarter.
And we reduced our capex by half versus Q1 to $288 million.
We expect Q3 in Q4 capex to be consistent with the second quarter.
We had strong operational performance with sequential improvement in sales net income EPS and free cash flow second quarter sales were $2.6 billion up 2% quarter over quarter net income was $218 million up 23%.
Quarter over quarter, and EPS was 25 cents up 25% sequentially.
Free cash flow was $285 million.
Now before I get into further details of our performance and results I want to note that the largest difference between our GAAP and core results stem from restructuring charges of $254 million, which was primarily non cash and included the reassessment and re priority.
Position of R&D programs.
Other differences between our GAAP and core results come from a noncash mark to market adjustment for our currency hedge contracts.
With respect to mark to market adjustments, GAAP accounting requires earning translations hedge contracts and foreign debt settling in future periods to be mark to market and recorded a card value at the end of each quarter, even though those contracts will not be settled in the current quarter.
To be clear this mark to market accounting has no impact on our cash flow.
Our currency hedges protect us economically from foreign exchange rate fluctuations and provide higher certainty for earnings and cash flow our ability to invest for growth.
And our future shareholder distributions.
Our non gap or core results provide additional transparency into operations by using a constant currency rate aligned with the economics of our underlying transactions.
So we're very pleased with our hedging program and the economics certainty it provides.
We've received $1.7 billion in cash under our hedge contracts since their inception more than five years ago.
Now, let's review the business segments.
In display technologies second quarter sales were $753 million and net income was $152 million, both consistent with the first quarter.
Display glass volume grew by a low single digit percentage sequentially as our gen tended to have customers bought more glass.
Sequential price declines were modeling.
And as expected.
As Wendell said, we expect that television demand will remain resilient.
As in home entertainment is more important than ever.
And that demand for IP products will be boosted by work and study from home trends.
In the second quarter worldwide TV sell through units in Q2 increased slightly year over year, better than Q1 and better than the industry anticipate.
Additionally, demand for notebook Pcs was strong in the second quarter.
Preliminary retail sell through data for June and July indicate that demand recovery in China has held and that demand in North America and Europe remains robust.
Well emerging regions remain weak.
Well uncertainty exists around retail demand in the back half of the year, we remain confident the TV screen size will continue to grow in 2020 and beyond.
TV is 65 inch or larger grew almost 40% year over year in the first half.
And we are well positioned to capture the majority of that growth with Gen 10, and a half which is the most efficient gen size for a large TV manufacturer.
We continue to expect display pricing to decline by mid single digit percentage in 2020.
We believe that three factors drive a favorable glass pricing environment.
First we expect glass supply to continue to be balanced to demand.
For Corning, we're aligning our capacity with demand.
We're also pacing our gen 10, and a half capital projects to align with panel makers schedule.
Second our competitors continue to face profitability challenges at current pricing levels.
And third display glass manufacturing requires periodic investment in existing capacity to maintain operations.
Glass prices must support acceptable returns on those investments.
In optical communications second quarter sales grew 12% sequentially to $887 million as major carriers increased spending on cable deployments and access network projects.
Net income grew by $52 million to $81 million on the higher volume and actions taken to align costs and capacity.
The year over year decline in sales was consistent with the passive optical market decline.
We maintain our view that the long term trend in optical is strongly positive.
Bandwidth demand has accelerated during the pandemic consuming network headroom capacity.
Evidence of that demand includes 18 Tees report that wife, I, calling increased 100%.
Arises report the DPN connections are up 72% over pre pulpwood levels.
In zoom, surpassing 300 million users from 10 million in December.
We expect carriers to expand capacity to meet growing bandwidth in the future.
But the current environment makes timing uncertain.
Well network operators remain committed to their original capital plans for 2020.
Deployments are constrained by pandemic related labor insight access constraints.
We expect these factors to continue.
In the third quarter.
Environmental technologies faced a challenging market.
During the quarter Oems temporarily halted production in both the automotive and diesel markets.
To mitigate the impact we swiftly adjusted our operations the pace with customer demand and reduce costs.
Environmental technologies second quarter sales were $226 million.
And profitability was impacted by lower sales and production volumes.
Our auto sales were down 31% year over year.
Beating the global auto production decline of 41, 45% year over year through continued adoption of gasoline particulate filters.
The good news is that by the ended the quarter auto sales in China returned to pre lockdown levels, while North America, and Europe Oems began ramping production.
In these though the anticipated cyclical downturn in North America heavy duty truck market was made worse by shutdowns.
With vehicle production dropping 73% year over year.
Overall, we remain confident in our content and innovation driven strategy in environmental and expect to return to growth as markets improve through the second half and into next year.
Specialty materials sales were $417 million in the second quarter up 13% year over year and in sharp contrast to the smartphone market, which declined year over year net income was $90 million up 34.
Percent year over year.
Sales growth was driven by three factors.
First premiums less demand increase in support of second half customer launches.
Second work and steady from home trends drove growth in our products for tablets and laptops.
And third the demand for advanced chips drove sales for our semiconductor equipment products.
Looking ahead, we expect our outperformance relative to the 2020 mobile consumer electronics markets. The come from further adoption of our innovations.
In life Sciences second quarter sales declined 7% year over year to $243 million.
Net income was $31 million down $9 million versus last year on the lower sales volume.
The business was impacted by the prolonged closure of non essential laboratories, such as universes University research labs, particularly in the North America market.
The impact has been somewhat offset by increased demand for consumables using cobot night 19 testing applications.
Life Science lab reopening picked up in late May and lab utilization has been steadily increasing since then.
Going forward, we're confident in the opportunities ahead for life Sciences and valor.
Especially as we prepare for upcoming vaccine demand.
Equity earnings were positively impacted in the second quarter as our hemlock JV settled a contract with the solar customer.
Going forward hemlock will largely sell products in the semiconductor industry.
Hemlocks leadership position is backed by attractive long term take or pay on customer contracts with upfront payments. This creates stable revenue and profit and strong cash flow generation.
Let's move to the balance sheet and our commitment to strong financial stewardship.
We generated $285 million of free cash flow.
Nipigon increase from the first quarter.
We have $2.2 billion of cash and we have a debt structure that is conservative by design and relatively unique.
Our balance sheet is built for times like these.
Today, our average debt maturity is about 25 years the longest in the S&P 500.
Over the next 18 months, we have under $70 million coming due.
Less than half of our total debt is due within the next 20 years and during this time there is no single year with debt repayments over $500 million.
Investors, often evaluate credit and financial health based on total debt to EBITDA.
For the S&P 500, the average company has a weighted average debt maturity of roughly 10 years and more than 80% of debt is due within 20 years.
Consequently, when investors calculate the debt to EBITDA. They are implicitly focusing mostly on debt due in the next 20 years.
Corning's 20 year debt to EBITDA is 1.2 times consistent with an eight credit rating and illustrative of the conservatism of our balance sheet.
We expect to maintain a strong cash position and to maintain our dividends.
As I previously mentioned, we expect to generate positive free cash flow for the year.
And we have paused share buybacks and do not expect to add material debt in 2020.
So in total we have a very strong balance sheet and we have the financial resources needed for the duration of the economic downturn.
To wrap up we had strong operational performance in the second quarter with sequential improvements in sale net income EPS and free cash flow.
As the quarter progress demand and visibility improves.
This improvement has continued throughout July.
As a result, we expect to grow sales and profits in the third quarter.
However, we remain aware of the potential impact from the pandemic, the global recession civil unrest and geopolitical tensions.
So how much growth will depend on end market demand and economic activity during August and September.
We will keep you updated as we move through the quarter.
Stepping back our underlying growth drivers are intact and were successfully navigating the correct. This crisis.
As we grow sales, we expect improved profitability.
Furthermore, we have the capacity in place to be able to meet the sales grow with minimal investment.
Which weve, which we expect to resulting capital efficiency gains.
Including ROI see improvement.
Altogether. This reaffirms our confidence that Corning is positioned to emerge from this prices.
Stronger than ever.
Now I'll turn the call back over to window.
Thanks, Tony during the second quarter, we made great strides in positioning according to emerge stronger from the global health crisis, and resume growth sales net income EPS and free cash flow all increased sequentially.
Current events multiple initiatives throughout the second quarter, including the launch of Corning Gorilla glass fit this and continued innovation with Fiveg industry leaders.
On the Cobot 19 fraud, we continue to seek ways to leverage our deep technology manufacturing and engineering capabilities to combat the pandemic directly.
We were delighted that valor glass was selected by the U.S. Department of health and human services and the department of defense to accelerate delivery of covert 19 vaccines.
Overall, our decisive action operational execution resulted in positive free cash flow and continued leadership in the capabilities that make corning distinctive.
We're delivering for our customers, we're outperforming our markets and we're preserving our financial strength.
I'll conclude with an additional important development.
For nearly 170 years, our company has been dedicated to creating innovations that have a positive impact on the world.
While conducting business in a way that has positive impact on our people and our communities.
Now we have an opportunity to make additional contributions.
We're setting up an office to further build racial insulza unity with in the walls of Corning and in our communities.
Louis Steve Anderson, our chief legal and administrative officer will lead this office.
With that let's move to Q anyway and.
Thanks, Wendy operator, we are ready for the first question.
Thank you as a reminder to ask a question press Star one telethon switch or your question comes to come key.
Please standby compared to Q1 day roster.
Okay question comes from.
Chatterji with JP Morgan.
Your line is now open.
Thank you hi, good morning, Thanks for taking my question.
Start off with this.
[music].
Welcome to vote.
<unk> being resilient.
But as we look.
Points from me because.
It was substantially.
And.
This quarter on quarter.
Thank you something in the magnitude.
So.
The sense of what you're seeing in terms of or hearing in terms of demand for me.
Laws.
Does it have been pretty Stein.
Last quarter, you would've been concerned about the inventory levels.
Yes, I think from estimate from an overall standpoint.
TV demand has clearly been resilient you know the data points that we saw on the second quarter was effective either TV units were up on a year over year basis.
And then by you know that was certainly better than Q1, maybe there was also better than what most people were expecting as we went into the quarter.
In addition to that if you look at what happened in the preliminary data in June and July I mean that day. There was also very strong in China, you didn't see a change in that data those that demand remains robust and in North America in Europe. It was it was strong during the whole quarter in that continued so yes, we think TV demand is reserve.
We also think the supply chain is perfectly healthy I mean, we entered the year and the healthy supply chain situation course, nobody knew exactly what was going to happen in the second quarter, but given what did happen in the second quarter and the way things are going now we don't see any supply chain issues there.
Okay.
Following up on the gosh.
Strong.
Oh gosh portal.
Okay.
Craving just help me think about how sustainable do.
Going up.
Recovery in terms of revenue.
It is kind of something you have to get back as the one looking.
Just trying to think about kind of how does this impact your feedback.
Well certainly a lot of that was by reducing inventory reduced inventory over $100 million during the quarter and if you recall over the last 18 months or so as we filed our sales were going to be more let's stronger than they actually turned out to be we actually built up a fair amount of inventory so.
So we think there's the opportunity to continue to reduce inventory.
And then just from an overall operational standpoint, one of our real focus areas of the company.
He is on an inventory management and how to get better at that so I think that at least that is sustainable for at least a couple more quarters note that when we grow again, we'll have to consume working capital. The other thing that was a big improvement during the quarter of course was what happened on capital spending and as you know in the first quarter a lot of that was the expansion capital rap.
Not behind some of our biggest projects such as Gen 10, and a half and although we still have some of that that's going on we reduced significantly in Q2, and we'd expect Q3 in Q4 to be it's at those same levels I think stepping back and looking at free cash flow conversion.
Fundamentally when we're not in a build cycle.
Our free cash flow conversion is excellent.
And that's where we are right now.
Right. So it's less really about the specific programs in the specific things we're doing it's more just since it takes us.
A couple three years to build one of our major a low cost factories.
There are so there's a cycle, where we invest for the future and it is that investment.
The drives down our free cash flow conversion, we're in a period right now where we've gotten ahead of that so we're in a spot where we're just in a reinvestment stage and we were like that we're going to have really high free cash flow conversion you can expect that to continue.
Thank you.
Thank you Sir our next question comes Steven Fox with box Advisors. Your line is now open.
Thanks, Good morning, Wendell I was wondering if maybe step back and give us a bigger picture view on the new optical cycle.
You talked about network headroom basically going away and sounds like site access is still an issue, but not as big of an issue. So if you wanted to think about maybe the next four to six quarters versus how you performed in the year or two before the downturn in optical how do how do we think about that under the sort of new world. We're living in thank you.
Steve I think Thats an excellent question.
And.
The sort of balance up to known versus the unknown.
And then try to come to conclusion.
On the known side.
Both our cloud providers.
As well as our network service providers.
All are experiencing very strong growth as you heard from Tony.
And you've heard from me during this call.
That strong growth.
And.
They see an opportunity for more revenue production going forward.
And they see the fiber based networks have are just lower cost.
And you're starting to see some commentary.
Especially from the network providers about how they can combine emerge all the various services on two one high capacity fiber network and therefore open up lots of avenues towards revenue creation.
All off one capital investment so all that is stacking up for.
Yes are powerful forces to put optical communications pack in a cycle of growth.
On the unknown side.
Real people have to install these networks real people have to show up.
To put in place these massive cloud based datacenters.
And even though people are resuming putting technicians in the field. It is is at a much less rate did what it would be what would be needed to support historical build cycles.
So we still have the pandemic here.
And so that makes actual prediction just quarter to quarter, what will happen to be difficult.
But I think as you said, Steve because that's what's behind the question. The fundamentals look really strong our market position looks really strong.
We should be entering a growth cycle.
Now, we just got to see how the world deals with the pandemic.
That's helpful. Thank you.
Thank you and next question comes from merchant with Citigroup. Your line is now open.
Great. Thank you for taking my question and congratulations on a good quarter.
Quick question.
There was commentary that.
Segment performed in line with the passive optical market decline and Randall just talked about all the labor constraints et cetera, that's going on how should we think about Corning always maintained our leadership across their end markets. When do we expect or when should we expect pointing to again resume growth that out.
The broader market and then I have another follow up on.
Capacity in margins. Thank you.
This year, if we're doing our job.
Okay and Thats the way we take about it.
We should be outpacing the market and.
We will get on with that post haste.
Okay, and then just on margins if I think about.
You guys, you're making some progress.
Your sequentially.
In the third quarter, that's the commentary and typically Threeq you is up 5% or so on the topline and top line through the margins et cetera, There's some investor confusion around how idling capacity.
Should help margins if somebody can you walk us through the dynamics, there typically idling capacity would lead to.
I have to hit on margins and how should we think about the margin improvements into back half. Thank you.
Yes.
Your Akcea, you're correct I think when we idled capacity that does hurt the margins, especially if you're having less production and you're actually selling is you also take down inventory, which is of course, what we did in Q2 in Q3 on the other side, though we did a lot of cost reduction efforts in that ends up helping margins and so we.
Ended up in Q2 with margins very similar to what we had in Q1 on a gross margin level and then on an operating margin level of course, we did better than that so it's as we look forward. The key here is to increase sales and as we print more sales through our factories and more sales through our op.
Next structure with the expansion in margins.
Okay. Thank you.
Thank you.
Our next question comes from George Notter with Jefferies. Your line is how open.
Hi, Thanks, a lot I guess I wanted to ask about.
Just the fundamentals in the display business.
I'm thinking more strategically.
There's a lot of moving parts. There of course, you guys are pacing some of your investment in Gen tenant half.
You've got a pending exits of some of the LCD panel, making facilities in Korea certainly.
We hear about CVC rumored to be for sale. I mean can you can you just talked about what you're seeing over there and how you would that kind of plays into your dynamic strategically as you can look forward. Thanks.
Thanks for the question of.
What you've heard from us in the past really remains to those fundamental drivers remain in place.
Which is we have been preparing.
For a number of years for the ascendancy of the Chinese.
Panel, making infrastructure.
And because of that particular way that economy works that we believe what was the strongest region in terms of production Korea out of cost disadvantage. Once they made the decision not to go to Gen 10, and a half.
That said it was the to tie was cast.
So thats why we have been on our investment cycle in China.
With three quarters of the support coming.
From our customers are the Chinese government is one form or another.
So those trends look like they continue to move in our direction.
It's all just happened a little bit faster than we were planning.
Because Korea ended up Samsung specifics, we ended up making decisions a little faster than what was their original plan.
So we don't really have all of our Gen 10, and a half facilities up to support that demands yet and that's what we're working through.
C. C of course is a strong customer of ours, we would expect our market position to continue to grow.
As the trends towards China can continue and the trends towards our long term strategic partners continue.
Thank you did that answer your question George.
Very well yeah. Thank you.
Thank you Sir our next question comes from Shannon Cross with Cross Research. Your line is now open.
Thank you very much I was just curious given.
The vaccine and obviously you've gotten some funding from the government, but just in general sort of this push to move manufacturing actually the U.S. and clearly a significant amount of government dollars that are are out there right now if that sort of changed really your thought process on timeline for dollar to provide meaningful contribution to the business.
Thank you.
The simple answer Shannon is yes.
Any any idea if the magnitude of.
The Poland.
Timeline.
We have an excellent idea I think.
Yes, we have an excellent idea, we're not disclosing a had here's the challenge related why we're not giving specific guidance here on balance.
Is.
We are putting a significant amount of our effort.
Behind the specific human health need of we have to protect.
Our people in the people around the globe with the vaccine.
So that's where we're aiming our efforts so sort of any prediction on the specific sales as they evolve would have to involve like what is going to be the success and timing.
Both.
The vaccine so what you can see the way to think about it is we're now accelerating the building of our high volume manufacturing facility.
And we're in the midst of pouring concrete on the floor to inside that shell or in the midst of quickly ramping our ramping our equipment.
And we are doubling the output of our big flats, New York facility. So we are going very fast.
But so our customers going very fast and it's really hard to pick winners and losers.
So.
I still don't you choose way I think about a financially I still don't think if you're primarily focused on the near term.
You should worry much about valor driving our numbers right if you're worried about the long term. This is an excellent sign for us.
All the stuff that we bet on which as you needed you aerospace manufacturing that you needed a new pharmaceutical package that we needed to have more fill line capacity, we could do that through our packaging that we needed to make patient safer all those beds look like they're coming true.
But that's really about the long term it'll be a big driver.
Meanwhile, we just want to make you, saying, we want to do our higher does that make sense Shannon.
It does can you talk a bit about any competitive moves that you've seen from from some of the others out in the industry.
It seems like you guys are in a really good position I'm wondering if you've seen anything pop up recently.
Yes.
Well this industry remember, we're an attacker.
So.
Historically, we havent, how much of position in pharmaceutical packaging.
And it was only when we saw significant issues with the packaging of today. The we developed the valor and innovation and decided we needed to do this to make patient safer.
And we needed to bring our capabilities to that fight. So we're really the attack or we're just getting started.
But I think you're right I think we're off to a robust enough start to give our competitors a heck of a wakeup call.
Great. Thank you.
Thank you.
And our next question comes from Tim line with Barclays. Your line is now open.
Hi, This is Peter.
Congratulations on a quarter.
I wanted to ask what the specialty materials outperformance.
South how significant the impact from work from home and strong semiconductor equipment. The Meg was relative to two smartphone premium products.
Maybe how sustainable you see that doesn't go into two age.
I think from an overall standpoint each of those items were.
Roughly about a third of the reason for the outperformance I mean, clearly what happened in the glass that we sell both the tablets in the parts that we sell the notebook computers that have gorilla glass on him was very important to us and we think it's a good example, the innovations that in and that we have that caused us to perform better than the underlying maher.
Okay.
And then semiconductor performance was also good I mean, the demand for advanced chipsets really have made a difference there and then from a glass standpoint, as we said weve.
As people get ready is our customers get ready to introduce new products in the back half of the year. They of course pull on those products early and we saw.
Demand there too.
Thanks.
Thank you and our next question comes from either Marshall with Morgan Stanley. Your line is now open.
Great. Thanks, maybe just a question for me on.
The optical segment picking up but just give a sense.
Of.
That pick up.
It's kind of one or two major customers are you seeing that kind of across the board and any commentary on a hyper scale customers in terms of there kind of default.
I think from an overall standpoint, we especially side in the carrier market I mean, it certainly more than one or two customers, but it was very much driven in the carrier market and we see our detailed numbers you'll see that those were the numbers that were up on a sequential basis.
In the enterprise market.
It was a little bit more mixed I think from a datacenter standpoint.
That's where a lot of a labor constraint really you know showed up in some data centers.
Less so than others, but I think thats one of the reasons that those sales were down on a quarter over quarter basis, but then also a lot of more enterprise customers are small and medium businesses and also corporate spending and we saw those areas were clearly impacted by what's happening in the outside world, but there was.
As a.
Broad said, especially in the carrier business.
Got it and then maybe just on the restructuring charge and you noted that it was due to report.
Reprioritization of some R&D projects are there any major projects to consider discontinued or just any commentary there.
Yes, I mean, it was very specifically self project that we hadn't really talked a lot about externally that had originally been initiated by a customer request and if you recall on our 345 strategy. There's the 20% that's outside of 345 capabilities, where they where we put our AR.
Energy and efforts into.
In its one of those projects in that 20% category and of course in this environment. It made sense for us to go back and look at that 20% and so thats what we did.
And you know we ended up restructuring impairing some of those assets.
Great. Thanks.
Thank you.
Our next question comes from Rod Hall with Goldman Sachs. Your line is now open.
Hi, Thank you for the question I wanted to start with the lack of guidance or the lower guidance for September and just see.
Interpreting this correctly it seems like your display commentary is positive.
And then off the gold always uncertain, so that leaves us with specialty as the sources increased uncertainty in September so I wanted to check and see.
Yeah, that's accurate or if that's the right where you interpret that and then if that is right what's driving out of that product.
Timing or is that demand uncertainty could you maybe double click on why the reduced guidance.
Number and also maybe tell us whether you in.
You are.
Going to continue to provide a lower level of products like.
The one off and then I have a follow up.
So let's start with your premise, okay, we're not providing lowered guidance for September.
Nor are we providing lower guidance for specialty or anything like this is Rob. This is I think.
You take your over thinking it.
Here's the situation really.
All lights are flashing green.
In our specific industries and in our performance of our units.
Our financial Exacq. It is our operational executives are strategic executives.
We're all for giving more specific guidance.
This quarter, Okay I'm the probable.
Ed it's not anything that we're seeing happening specifically and I industries.
It's just as I look at the World and I see pandemic.
Doing what it's doing.
I see a very broad global recession.
I see civil unrest.
Really across the globe and I see an awful lot of global tensions.
Geopolitical sense and it is that macro area.
That makes me say I think there's just too much uncertainty.
Just to count on what we're seeing with our own to lives.
But if we just look at our data.
I think we'd be comfortable giving specific guidance and you would view that guidance is positive.
And I'm just more worried about the product uncertainty does that make sense to Ron I know of must disappoint.
As it makes sense to though no went very helpful color.
That's very helpful. So that that answers my question I appreciate that and then the second thing I wanted to drill into the working capital again Tony.
One of the.
For us with the days payable that came down quite a bit in June and wondering if that was sustainable level.
Got to bounce back to kind of more.
Historical average levels or and maybe can you tell us what drove that.
And I think from an overall standpoint, I mean, when those right I mean, you know where in a period of time, where our free cash flow conversions going to be strong.
Because we're not doing the investment capital that we've done the last several years and so you're on any given line item on the.
Cash flow statement, there's a variety of things that happened Adam London in month, App standpoint, but we are committed and we're going to deliver free cash flow for the year.
And.
That's what our focus is and we were thrilled with our performance in the second quarter.
I think it really helps investors understand our ability to generate that free cash flow.
Okay. Thank you.
Thank you Sir our next question comes from Wamsi Mohan with Bank of America. Your line is now open.
Hi, Thank you.
Window, you know you noted strong free cash flow margins coming off a build cycle I think Tony you just reference to.
I was wondering how long typically these post build cycles are.
Especially given the fact that display has being usually large source off that.
Historical perspective on that would be helpful and given coal, but now do you think that Don is extended for a longer period of time and I've a follow up.
Wamsi what excellent question.
In a way what you're asking is when will we be in our next build cycle.
Which usually is for revenue that's a couple of years now.
I think it's really hard to answer that question Wamsi.
Drove me up in the Middle Tonight, and asked me I'd say I think we're going to be in a period of.
Of really staying within more of.
The.
A reinvestment purpose pieces of our wheel.
Right.
Ben pieces of our wheel for.
Time period that in your normal models, you should be able to count on.
At the same time.
You know what we hope for.
Is that.
Things like our successful.
Help with the vaccine.
That.
There's the movement towards more optical networks and all those things put us into long term spot those mega trends.
Conversion of more value and auto to be back at our build cycle.
But I think we'll have plenty of warning wamsi, sorry, I don't have a more specific answer for you.
No no. Thank you thanks for the color Wendell.
And Tony if I could.
The funding the the government's providing for the 204 million that you alluded to expand valor manufacturing capacity.
How should we think of stop flowing through sort of your statements is that a.
Does that get reflected in capex right away or is it all in capex.
Okay can you give us any color on that thank you.
Yeah, I think the way to think about it Wamsi is is that is we spend this money this gets reimbursed and so.
Just gets netted out into our statements I mean, yes. It is for capacity. So most of it is in Capex, but there's also some operating expenses and they'll get reimbursed there too.
Okay. Thank you.
Thanks on the operator, we've got time for one more question.
Thank you and my question comes from Mehdi Hosseini with S&P. Your line is now open.
Yes, Thanks for taking my question two follow ups Tony.
Given all the changes going on within a company and increased focus on.
Reducing the cost should I expect your operating margin.
Expand from here on you have any revenues were to go flat just for the scenario analysis and I have a follow up.
Yes, I mean, clearly what we've done in the second quarter is reduce our operating cost.
And that will be reflected as we get into Q3 Q4, you know from our overall standpoint, as we've talked about before in our real focus areas is to get back to growing our sales and growing our profitability in you know when our sales growth is expect to see improved profitability too.
Okay, and then a window I just want to better understand the dynamics impacting the TV industry. I can you remind me what the mix of 65 inch TV as a person ups as the percentage of the overall TV demand or shipment.
Many off the top of my head on drawing a blank on that that's clearly where all the on a lot of the growth is going you is up over almost 40% on a year over year basis, but when we have a follow up call, we'll get to the answer that.
Thank you.
Thanks, Manny and thanks, everybody for joining us today before we close out just wouldn't let you know that we will attend the Jeffrey semiconductor IP hardware and communication infrastructure summit on September 2nd and City 2020 Global Technology Conference on September nine nine in both will be virtual conferences. So once again, thank you and joelle. Please.
Connect all lines.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
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