Q3 2020 Corning Inc Earnings Call
[music].
It is my pleasure to introduce your <unk> and Nicholson Vice President of Investor Relations.
Thank you Catherine and good morning, and welcome to our third quarter 2020 earnings call with me today are one to weep, Chairman and Chief Executive Officer, Tony Tripeny, Executive Vice President and Chief Financial Officer, and Jeff Even sales 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 Oh.
Those 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 will be discussing our consolidated results using core performance measures unless we specifically indicate our comments relate to GAAP data.
Core performance measures are non-GAAP measures used by management to analyze the business reconciliation of core results to comparable GAAP value can be found in the Investor Relations section of our website at Corning Dot com.
They also access core results on our website with downloadable financials and the interactive analysts center.
Supporting slides are being shown live on our webcast. We encourage you to follow along they're also available on our website for downloading and now I'll turn the call over to Wendell.
Thank you and good morning, everyone.
Today, we reported third quarter results demonstrating that the company is strong.
Financially healthy and well positioned for growth sales.
Sales were $3 billion up 16% sequentially.
The P.S. grew 72% sequentially to 43 cents as higher sales and strong manufacturing execution resulted in operating margin expanding to 18.3%.
710 basis points sequentially, and 20 basis points year over year.
We generated $518 million or free cash flow and finished the quarter with $2.5 billion in cash.
Our financial performance has improved significantly since April.
And we expect a strong fourth quarter.
Nevertheless, we remain vigilant and continue to adapt appropriately to multiple disruptive forces playing out around the world from the pandemic the civil unrest to recession and geopolitical struggles.
We have been rising to the challenges since day, one and our priorities remain clear.
First.
We must make our values are evident in our actions.
Our commitment to the health safety and well being of our employees underlined every facet of our operations.
We're dedicating resources and providing leadership to support our communities around the world.
We've launched unity campaigns as well as racial and social to quality programs targeting the multitude of hardships people are confronting right now.
And when it comes to the global Health fight we're.
We're all in.
Mobilizing our capabilities to combat the virus directly.
We must also safeguard our financial health.
Our third quarter results show that our decisive actions are providing clear benefits as we leveraged cost savings and increase efficiencies across the company.
Regardless of the DAP or duration of global uncertainty.
We're doing everything in our power.
To keep the company strong.
And it's working.
Now to ensure that we emerge even stronger.
We're continuing to invest to create additional revenue streams.
We're inventing new to the world materials and manufacturing processes.
As well as co innovating new solutions in partnership with our customers.
The relevance of our portfolio puts corning at the heart of ongoing innovation with industry leaders.
And we continue to solve our customers' toughest technology challenges.
You may have seen Apple's recent promotion of ceramic shield for the iPhone 12.
They're featuring our new to the world material, which is the world's first highly transparent color free glass ceramic with performance that meets the rigorous demands quit on smart phone cover materials.
This latest innovation with Apple exemplifies our ongoing strategy of consistent long term value creation by combining our deep expertise in glass science ceramic sides and optical physics, with our unparalleled manufacturing and engineering capability.
Yes.
[noise] ceramic shield melds the attributes that we love about glass, great optics and retains strength with the attributes we love about ceramics, most notably its toughness.
Ceramic shield consist of ceramic crystals with in a glass matrix.
There were two big inventions here. The first was keeping the best damage resistant attributes of both glass and ceramics.
The second was ensuring high optical transparency by growing index matched nano crystals inside the glass matrix that are 110th the wavelength of light.
As you recall Apple made two investments in Corning totaling $450 million as part of their advanced manufacturing fund and their commitment to foster innovation among American manufacturers.
We thank Apple far long standing product development partnership and their investments in new manufacturing technology centered in our Harrodsburg, Kentucky facility.
We could not be prouder.
To be a key component in the iPhone 12.
Now it's important to note.
The I phone 12 in many other flagship phones that we are also proud to be part of it.
Support Fiveg.
Fiveg matters to us.
The density of fiber necessary to deliver its promise is yet another example.
You've seen us illustrate that up to 100 times more fiber is required to deploy fiveg in a city pinpoint GT.
This week, we announced a new product design to help operators dramatically boost the speed and reduce the cost of their outdoor deployments.
And we're embarking on new work to support varieties and efforts to extend Fiveg indoors.
The relevance of our portfolio and our deep customer relationships as illustrated by these advancements.
Keep us at the center of the inexorable shift optical.
Stepping back.
In all the industries, we serve.
Important market trends offer new challenges the Corning is uniquely qualified to address.
And new opportunities to integrate more corn in content and the products.
This is an especially powerful value creation lever in times of economic uncertainty, but.
Because we are exclusively relying on people buying more stuff.
We're putting more Corning ended the products that people are already buying.
[noise], we're clearly seeing the benefits of this lever in today's result, as innovation adoption drove specialty materials sales up 23% year over year.
Despite a declining smartphone market.
This type of outperformance is not unique from 2016 to 2019, we added $500 million in sales or 42% cumulatively.
Wow smartphone sales actually went down.
And we're extending that growth streak this year.
In environmental technologies, we grew sales, 16% in 2019 much faster than the underlying unit demand as automakers added gas particulate filters to cars.
And we again saw outperformance this quarter was sequential sales up 68%.
These are additional examples of the more corning's strategy at work and why the content story is so powerful for us.
I want to stress one additional point.
You often hear us say that our core technologies enable life changing capabilities.
In these times, we're increasing focus on life saving innovations.
Safe widespread vaccine delivery is one of societies top priorities and glass packaging is critical our view.
Oliver innovation will help enable faster filling line speeds and increased patient safety.
Right now, we're expanding capacity and supplying glass files for vaccines as part of operation Warp speed.
All while leveraging our leadership in life Sciences to help support the diagnostic testing and virus research efforts.
Additionally rig.
Reduce fine particulate pollution, the objective of our filtration products appears to be helpful for reducing infection rates.
And we're excited about recent University lab test showing that our guardian anti microbial glass particles kill bacteria and viruses, including Sars cold too.
[noise], we're also well positioned to contribute as consumers continue to adapt to a world with social distancing.
For example fiber.
Fiber increases the capacity and performance of networks and glass provides the primary window to information and entertainment.
We're confident that.
We can bring further innovations to bear in many vital areas as the world addresses.
And recovers from its current challenges.
Overall, we had a very strong quarter on almost every dimension.
From an innovation perspective, I just reviewed our significant advancements.
Financially, we grew sales at double digit rates sequentially and expanded margins to grow profitability even faster.
Operationally, we performed well and I'd like to share a few examples.
In the midst of a pandemic redeployed expert engineering teams to start up our Gen 10.5 melting operations in both Wuhan and Guandjo.
These facilities are positioning us well.
To capture the fast growing demand for large Tvs.
In mobile consumer electronics, we successfully scaled up a new to the world manufacturing process and product to meet apples iPhone launch.
In automotive, we flex our operations to adjust to the fast pace ramp up at Oems after they significantly reduce production in quarter two.
In optical communications, we successfully adjusted our cost to the current market environment, resulting in significant profitability expansion despite flattish sales.
On a quarter over quarter basis.
We also remain vigilant in our actions to safeguard the company's financial strain.
We're proud of our execution, especially given the current global uncertainties.
Clearly.
Our employees around the world are dedicated to living our values and giving their best everyday.
Now I'll turn the call over to Tony So he can give you some more insights on the quarter.
Thank you Wendell.
Good morning.
We had very strong third quarter as.
As Wendell highlighted we executed effectively and we bolstered our healthy balance sheet. Despite the ongoing macroeconomic challenges.
Sales growth and cost actions led to strong sequential margin expansion further demonstrating that our operational adjustments are working.
We've made significant adjustments to align our cost and operating plan with the lower anticipated sales.
In total Corning continues to demonstrate that it has the resources to deliver on our commitments and extend our leadership as we continue to focus on operational excellence cash flow generation and prudent capital allocation.
Before I get into the details of our performance and results I want to call out the changes at hemlock during Q3 and cover the differences between GAAP and core results.
On September nine Hemlock semiconductor group redeemed Dupont, 40.25% ownership interest in the company, which transformed Cornings long time ownership and headlong into a majority position.
In the second transaction hemlock purchase certain manufacturing assets from Dupont and gain control of a critical raw material, thereby becoming a leading low cost producer of Ultrapure poly silicon to the semiconductor industry.
M. wants the leadership position is backed by attractive long term take or pay customer contracts with upfront payments.
Now we're very excited about these transactions. They are good for him was good for Corning and good for our shareholders. We didnt put any money into the transaction and hemlock generates a lot of cash. So its debt is mostly paid back in one year.
Corning improves its financials by adding sales and earnings in the third quarter, we recognized $31 million of sales from the newly consolidated hemlock.
And hemlock will add approximately $150 million in annual cash flow.
Please see our web disclosure for helpful consolidation details.
Now on to get the largest differences between our third quarter GAAP and core results are a non cash gain associated with the hemlock transaction.
Ongoing restructuring charges, which are primarily non cash.
In a mark to market adjustment for currency hedge contracts.
Now with respect to the Mark to market adjustments GAAP accounting requires earnings translation hedge contracts and foreign debt settling in future periods to be mark to market and recorded a current value at the end of each quarter, even though those contracts will not be settled in the current quarter.
For us this reduced GAAP earnings in Q3 by $103 million.
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-GAAP or core results provide additional transparency into operations by using a constant currency rate aligned with the economics of our underlying transactions.
We're very pleased with our hedging program and the economic certainty it provides.
We have received $1.7 billion in cash under our hedge contracts since their inception more than five years ago.
Now I'll walk through our third quarter performance.
At the outset of the pandemic, we committed to preserving our financial strength and positioning the company to emerge even stronger.
In Q1 and Q2, we told you we were responding to economic uncertainty by making significant operational adjustments.
We said, we reduce cost and capital spend to align with lower anticipated sales.
And while ramping down production and reducing inventory impacts margins, we said that when sales growth resumed we expect improved profitability.
Now looking at the third quarter, we grew 16% sales grew 16% sequentially to $3 billion and our operating margin expanded by 710 basis points sequentially to 18.3%.
This resulted in net income of $380 million and EPS of 43 cents up 72% sequentially.
We also said we would maintain a strong cash balance and generate positive free cash flow for the year.
In the third quarter free cash flow grew to $518 million.
Cumulative free cash flow for the first three quarters was $484 million.
We ended the quarter with a cash balance of $2.5 billion and expect to generate additional positive free cash flow in the fourth quarter as we continue to reduce cost control inventory and execute well overall.
As a result, I am confident that we will succeed on our free cash flow goal.
These actions the actions we're taking are clearly working we have delivered great operational improvements, which started to show results in Q2 and really accelerated in Q3.
We expect the benefit of these actions to continue in Q4 contributing to another strong quarter.
Now, let's review the business segments.
In display technologies third quarter sales were $827 million up 10% sequentially and net income was $196 million up 29% sequentially.
Display glass volume grew approximately 10% sequentially as panel makers increased utilization, resulting in strong incremental sales.
Sequential price declines were moderate as expected.
From an end market perspective, it appears that the impact from COVID-19 has been a positive.
In developed markets consumers are prioritizing in home entertainment.
Globally working study from home trends are growing.
This is increasing demand for TV and IP products.
On the other hand smartphone demand has been down.
In total the retail market as measured in square feet. A glass is up mid single digits year to date through August.
Of course, the upcoming holiday retail season will be a big factor and how the market actually plays out for the full year.
Longer term, we remain confident that TV screen size will continue to grow.
He said 65 inches or larger grew 40% year to date through August and.
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 manufacturing.
We continue to expect display pricing to decline by a mid single digit percentage in 2020.
We believe the three factors drive a favourable glass pricing environment.
First we expect glass supply demand to be balanced to tight.
For Corning, we are ramping our gen 10, and a half tank to align with panel makers schedules.
Second our competitors continue to face profitability challenges at current pricing levels.
And third display glass manufacturing requires periodic investments in existing capacity to maintain operations.
Glass prices must support an acceptable returns on those investments.
In optical communications third quarter sales grew 10% sequentially to $909 million as carrier spending and deployments remain stable and enterprise sales grew slightly.
Net income grew by $34 million or 42% to $115 million driven by improving cost performance.
Looking forward demand on the network is at an all time high and we are seeing positive statements on capacity expansion from network operators.
Currently kobin related factors hampered the ability to invest broadly in networks and operators are focusing efforts on addressing capacity bottlenecks.
We believe operators will begin additional yvette investments to reestablish normal network headroom and expand offerings.
Large carrier and enterprise capital projects are inevitable.
But as we've said before it's always hard to predict the time.
Environmental technology sales in the third quarter were $379 million up 68% sequentially as markets recovered and Oems continued to adapt GPS in Europe and China.
We effectively adjusted our operations the pace with the market recovery and delivered net income of $69 million compared to breakeven in the second quarter.
The business team did a great job over the last six months in reacting to the rapid shutdown and restart of auto production by controlling cost and maintaining flexibility.
Automotive sales increased 1% year over year as continued strong adoption of GPS helped us exceed vehicle production, which declined 6% year over year.
In the quarter, we saw continued strong market performance in China up slightly year over year.
North America, and European Oems more than doubled production sequentially, but declined 5% on a year over year basis.
Diesel sales improved 49% from the second quarter, but were still down 15% year over year.
The North American heavy duty truck market improved but remains in a cyclical downturn with vehicle production down 46% year over year.
Third quarter sales of heavy duty vehicles in China. However continued to exceed 2019 levels and adoption of advanced content increased in preparation for China's six regulations.
No doubt this has been a challenging year for our automotive market access platform.
However, we are recovering faster than the market due to increasing content, primarily GPS and advanced heavy duty products are.
Our content driven strategy continues to drive strong results.
Specialty materials sales were $570 million in the third quarter up 23% year over year and in sharp contrast to the smartphone market which declined.
Net income grew 59% year over year to $146 million.
Sales growth was driven by ceramic shield are new to the world glass ceramic on the iPhone 12, as well as premium glass sales.
In tablet glass sales in support of work from home trends and strength in our advanced optical products.
In brief strong adoption and commercialization of our innovations produced strong year over year results for the third quarter for specialty materials, and we expect that to be true for full year 2020 as well.
In life Sciences, North America lab utilization is increasing and the pandemic is driving demand for laboratory diagnostic testing consumables.
As a result, we are seeing increased demand for our products.
In July we carried out our long term plan to ramp a new larger distribution center needed to support our growth and enhance our ability to address our customers' increased needs around the world.
Starting up this center in the middle of a pandemic proved to be more difficult than we expected.
Which constrain third quarter sales.
Sales declined 8% sequentially net income declined 10% in line with the lower volume.
We have added resources wherever require implemented recovery plans and are confident that operations will support the required output in Q4.
As a result, we expect strong sequential life science growth in the fourth quarter.
Now I'll turn to our balance sheet and our dedication to financial stewardship.
As I mentioned at the outset of the pandemic, we committed to preserving our financial strength and positioning the company to emerge even stronger.
I've discussed the operational improvements, we have implemented and our strong free cash flow generation.
It is also important to note that we continue to maintain a conservative balance sheet with a strong cash position that ended the quarter at two and a half billion dollars.
And we have a debt structure that is conservative by design and relatively unique.
Today, our average debt maturity is about 25 years the longest in the S&P 500.
Over the next 15 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 repayment over $500 million.
Our balance sheet is bill for times like these.
As I've previously mentioned, we expect to generate positive free cash flow in the fourth quarter and for the year we.
We also expect to maintain a strong cash position and to maintain our dividend.
We have the financial resources needed for the duration of the economic slowdown.
In closing, we demonstrated outstanding operational performance in the quarter with significant sequential improvement in sales.
Net income EPS and free cash flow.
We are successfully carrying out the operational and financial goals, we set up the stay strong during the crisis.
We expect another solid quarter to end the year.
We remain aware of potential impacts from the pandemic, the global recession civil unrest and geopolitical tensions.
Regardless of how long or what shape. The recovery takes Corning is effectively safeguarding its financial strength.
Our growth drivers are intact, and we continue advancing important growth initiatives with leaders in industries, we serve.
We are confident that our execution and market leadership positions us to emerge from the current global uncertainty even stronger.
With that let's move to couponing and.
Okay, Catherine we're ready for our first question.
Thank you.
Just to ask a question you'll need to press star one on your telephone. Our first question comes from a sea of merchants with Citigroup. Your line is open.
Great. Thank you everyone. Good morning, and thank you for the opportunity to ask your question.
Well good.
Our spending has been very strong year to date, obviously, we've seen that.
Our company.
How do you guys kind of look into the next couple of quarters do you feel like visibility is good based on discussions with customers that consumer spending could continue at these levels.
It's really just smart phones Tvs.
Notebooks et cetera that use up all your products and then simultaneously on the optical side clearly starting to see some positive trends here I know, it's lumpy, but just as you look out. The next couple of quarters do you feel like you have good visibility at this point into how these quarters unfold.
And demand continues in the next couple of quarters. Thank you.
C.
I think thats an excellent.
Question, and I don't disagree with any of your observations.
On.
Some of the macro data.
On both consumer and statements from network operators.
Hi.
That being said.
We expect a really solid quarter for.
And we're just.
And we're off to a really good start this month.
But that's really the extent of the guidance that we want to give at this time.
Like last quarter.
Our business segments as you just highlighted.
Continue to flat screen.
The global uncertainties, just remind us.
To be very humble and our ability to precisely predict the future.
Exactly how our customers.
It's going to work their way through this uncertainty.
On the opto side.
Yeah.
I totally get where you're coming from.
Because we've all heard from our customers.
From the network operators that they're experiencing very strong demand.
On their network.
And then there's some great examples I mean, they publish this all the time, it's great website by the way.
The Internet television Association reports upstream growth.
So growth from your home.
Up back into the network.
That's up 37%.
And also just kind of just recently seen the Microsoft teams.
Set a new single day record of 4.1 billion minutes.
Unbelievable right.
And you also hear really strong statements from them.
That they want to build more capacity.
To be able to deal with this new baseline of demand, it's gone up and whether its ATM tenderize, Ed or cable TV.
Companies or public cloud players.
They're all quite public.
That they're planning increases in their capacity.
That being said.
Predicting the exact quarter when these plans turned into deployment at scale.
That's just challenging.
So once again I, just think we should be very humble.
In predicting that exact quarter and wait until we see that surge in shipments.
Out of our factories to claim a rebound.
And the optical segment.
Great. Thank you and if I may for Tony.
Tony given you.
You guys are kind of managing your capex and inventory levels.
Very prudently should.
Should we expect the cafe.
Trends.
Over the last few quarters to sort of continue here.
Are we expecting an upsurge in capex.
Over the next couple of quarters. Thank you.
You know I think is.
As we've talked about before.
We have an ongoing amount of capital spending that we expand you know that we spend on kind of the expanding our product lines and creating new innovations, but where we really spend a lot of money is when we get into the build cycle and we're not currently in one of those build cycles and we don't see ourselves in a build cycle over the next.
Last year or so.
Of course, we want to eventually get to a build cycle because when we get to a build cycle that means there is a lot of growth coming and we always get that with some commitments from customers and we actually saw the benefit of that in the <unk>.
Third quarter with our work with Apple.
But as we look out over the next several quarters now we don't we won't be in a build cycle. So we won't see a lot of change from a capex standpoint.
Great. Thank you.
Thank you. Our next question comes from Steven Fox with Fox Advisors. Your line is open.
Thanks, Good morning, I'm, just following up on the optical question.
Maybe this is wrong, but my perception is that there wasn't a lot of.
Content growth and in the revenues based on what.
Your customers are spending on right now window can you just sort of talk about the outlook for content growth in optical as you eventually it's whatever points it is see and optical spending.
George Thanks.
Once again really good observations team.
Most of them.
Our operators have been dealing with this year is how do they eliminate some of the bottlenecks in the network.
In these challenging times, but while they're being because you say quite public on that they're planning to expand their networks. So I think the content play is coming.
And I believe.
That it will be quite strong.
Quite strong whether it's in cloud because there's been such a huge shift in the cloud during this time.
Or whether it's in our carriers on networks or just straight and operators don't want to be in a spot where they're running close to red line.
And they need to establish that base is higher so I feel really good.
Ed it's inevitable.
Right, but.
That being said I call on the corridor Buddy.
No I wasn't asking it but just to be clear and the capital capacity expansion.
Ramp is is what would start.
Sort of your content growth coming back is that correct or am I thinking about it. Thank you know yeah. I think that is correct. That's when you'll really see it you're asking actually a super subtle question.
Which is we have a sort of more Corning play that's going on here as capacity comes in place more optical and then we have particular set of innovations that reduced the cost of deployment pretty significantly in the efficacy of it and those have a higher revenue.
Content for us so in that saw no question that you're asking will begin to see that with out an acceleration in capacity growth, but you're not really going to feel it we're not all going to feel great about it until that.
Those technologies get deployed in new capacity expansions.
Great. That's very helpful. Thank you.
Thank you and our next question come from.
Chatterji with JP Morgan Your line is open.
Great.
Thank you for taking my question if I can just have a.
Got it Ferguson for Reid.
Both lights flashing Green I, just wanted to make sure I'm reading it correctly.
All the segments.
Positive backdrop, but it can improve sequentially from Threeq to Fourq, you, including life Sciences for which you're seeing pretty key was the trough.
And then in terms of just drilling down a bit on the deal.
That you're seeing how much of this is driven by an increase.
As wider adoption.
Clause and if we can drill down a bit on the different deals on a smartphone you're getting.
Speak could you as a favorite for me could you repeat the second part of that question I'm not sure that I understand it exactly.
And that again for me.
The question was about specialty performance that you're seeing especially the mosquitoes.
The outperformance like smart.
It is.
These forces wider adoption love field.
And.
The idea that a smartphone you're gaining content if you can just.
Okay. So let me start with your second question first so.
The bulk of that growth.
That you see.
His content increase.
It's basically.
A beating players adopting our latest innovations.
That is driving that revenue in.
Increase.
So that is the primary driver cemig.
To your first question just to be precise on on what I mean by flashing Green I said, the same thing all last quarter and what I'm trying to get at here is.
Not that we're going to have sequential growth there not that this one particular business is going to continue to do in a certain thing what I'm trying to get at is.
Sort of the dissonance that we feel between.
The demand that our customers are putting on us and versus sort of the uncertainty we see in and around the world.
And so what I'm trying to do is give you the insight that we see.
Which is our businesses are doing well.
We've got a good order book.
And we're operating well.
That being said, we still exist in the world that we existed.
We just got to be humble about given exact guidance.
So it makes sense to Cemig Yep no.
Fabs.
Okay. Thank you.
Thank you. Our next question comes from Rod Hall with Goldman Sachs. Your line is open.
Yes. Thanks for the question I wanted to start off with ceramic shield and just well first of all congratulations on being named on apples stage I think I was reversed so congrats on that.
[music].
I wanted to Wendell just ask you, whether that's an exclusive deal and.
If it is exclusive does that is there a duration on that or are there. Other Oems you could sell to eventually just kind of how are you thinking about exclusivity versus not on phone materials like that.
And also maybe I doubt, you'll tell me, but I'd be interested in the pricing differential with gorilla.
And then I have a second question for Tony I noticed the inventory days jumped up a little bit in Q3, Tony could you give us some maybe color on.
What drove that increase is it related to the smartphone cycle or something else. Thanks.
Let's start with yeah, why don't I start with the inventory one it's a pretty easy answer.
During the quarter, we did the hemlock transaction and we had to consolidate their balance sheet, which is.
Increase the inventory for toward Corning in total but of course that just comes from that transaction itself is great transaction. We're really excited about hemlock. It generates a lot of cash it pays we didn't put any money and it pays back the debt.
In within most of it within a year, we have $150 million of ongoing free cash flow generation.
So what we'll make sure is clear and we talk about it in our call. Later today that you know how much of the inventory came from that versus our own build if you look at the cash flow statement, we actually lowered our inventory by $187 million during the quarter. So our inventory is actually came down during the quarter, but it.
It's because of the hemlock consolidation that you see it a little bit different on the balance sheet.
Okay. Thanks.
And Rob to your question.
Questions for me.
First your statement. Thank you for the congratulations.
We were really proud of that ceramic shielded there's a lot of work.
I have to tell you it feels.
But not quite right to use Apple's name out last [laughter] I don't think I've ever done that like the inside the company. We have a code name for Apple and like we never even say Apple inside the company.
So if you could see me sound like turning a little pick and I'm, having an exciting is that correct.
Hey, Bob.
So if I stumbled a little risky assets be forgiving.
Oh, sorry.
With Apple made me look quite good.
Great.
[laughter] [laughter], so ceramics yield that's apples.
Yes, Thats simple thats apples sales.
They helped us develop it the.
The best that in us manufacturing for it.
Thats, a dash and it should be theirs, and so thats the way that is.
Now.
As we take a look at other players.
We got a whole stream of innovations.
For them as well I think what we're.
What we would love to see our ideal scenario.
Would be that Apple has so ray I can't believe I, just said Apple again has so raised the bar on performance for everybody.
That.
All of the players will be coming to us to say, we need to have a way to compete with incredible performance.
And if that happens that's just going to all be good for us we will not do ceramic shield for them.
But we've got a lot of great ideas and we've got a lot of great products to help them raise their game to the new level.
That was just said I've got a river.
In Cupertino so.
The next one got to how much that you didn't think I would answer.
What's the what's the price Delta I would say once again, Rob you have effectively predicted the future I am not going to answer it.
All right. Thanks, a lot why wasn't it used on the back of a phone too expensive.
You have exhausted.
My ability to get myself to answer any questions. Okay.
About that particular company I, just I'm reverting back to Mimo did it very soon we're going to go back into using Codewords. So alright. Thank you very much I appreciate it.
Thank you. Our next question comes from Wamsi Mohan with Bank of America. Your line is open.
Yes. Thank you.
Just to stay on this.
Specialty for a second on the content increase that your effort to Wendell can you talk about whether you meant.
Dollar content or unit content or both and if if both like what the relative split is and just sort of a little bit technical side of this.
Yes, it's a process similar to gorilla, where there was post processing done by finishers or something different that changes the margin structure of this product and I have a follow up on display.
Thanks for the question.
So starting with smartphones I think the right way to think about it is its content in dollars right. It's just we're introducing more valuable materials.
Right.
No.
Quite often with some of them like.
Vic This is a great example is.
It is a more valuable material that we're introducing but it also reduces finishing cost for our customers and.
And so as a result, their part costs can be really close to what they had for gorilla glass six so that's sort of the shape or the way, but you should think about it as it's brand new products that have a higher.
Price point is the primary way to think about it from your modeling perspective.
Thats smartphones.
Well I think you've also got this going on and laptops in the key piece is we're also bringing up more content. Once again, the right way to think about this is more value added.
In our product set rather than increasing a mass of glass.
Our ceramics on the products right now.
But its super interesting question to when you think about Fiveg.
Where you've seen smartphones evolved too which is this all glass structure pretty much.
Is driven by yes, we make lots of product and like glass is the best thing I mean put other than that is that they need the RF transparency.
And if you pop open.
Fiveg from any of them you will see how much antenna content is in there.
To be able to handle.
Fiveg and an ability to do for GE and to be able to do.
Different players depending on where you are in the world.
This same thing I believe is going to come to the IP products, if they're going to be big Fiveg use is we're going to have to see more massive our product more volume of our product.
On those devices to make them be truly great fiveg devices.
Okay. That's set for hope that answer your question Wamsi.
Yeah, Yeah. It does wendell thank you.
If I have a follow up can you talk about the incremental strength in display there. There are some concern in the market that there were some ramp issues.
And the China glass market, that's causing one of your competitors to take some share can you comment on that and maybe just talk about any changes on the pace of like Korea ramped down. Thank you.
So I think from an overall standpoint, what's really driving the strength in displays what's happening in the end markets and that's when always.
Matters from a display standpoint.
And as you know as we talked about clearly TV demand in the covered world has been pretty strong, but so has IP demand in particular notebooks and tablets and that's fundamentally what we're seeing there and you see it in terms of in a couple of ways. One is panel maker utilizations.
I've been high.
And I think that has slowed down a bit as the the exit of from Korea by some of the panel makers there but.
But in addition to that the value chain is pretty tight right. Now. So you know what is really driving his is in customer demand and you.
From a retail standpoint, as we mentioned.
You know as measured in glass, it's up mid single digits on a year over year basis and that feels good.
Next question.
Our next question comes from Peter That's key with Barclays. Your line is open.
Hi, This is Peter on for Tim long well congratulations on the quarter.
Wanted to ask a GPS part of the pandemic I think we were looking at.
At a target of about $350 million of sales in 2020, and given it looks like the ought to rebound has been probably a little stronger than expected can you give us an idea of how close you might get to that number for 20, and then maybe your thoughts on timing toward that $500 million target.
Yes, you know I think that.
Fundamentally what side is driving the sales from a GPS standpoint of course is the adoption in Europe and the adoption in China and it on a year over year basis. The European market is down in rebounded a lot in Q3, but is still down on a year over year basis, but China is actually up so I mean, I think we feel good.
At about where GPS sales are we certainly feel good that we are outperforming the market because of the content driven part of why GPM.
Thank you. Thank you.
<unk>.
Thank you our next question comes from.
Marshall with Morgan Stanley Your line is open.
Great a couple of questions on Valor glass you know understanding you know the FDA has had a a more.
Our fast track policy over the last year on vaccines, but just post any vaccines just progress you think valor glasses, making within the FDA did not need that drug by drug approval and then maybe second if there were any kind of administration change to come in the next year.
How quickly could emission standard changes flow through the environmental segment. Thanks.
Well I'll take the first one.
Second I will comment on if you'd like.
So Matt I think.
In valor.
We're feeling we're feeling the broader adoption.
As well as.
Strategies by our customers.
To make the regulatory burden.
Be less.
I think the way to think about the FDA is they'll react to the plans of our customers.
And that will end up providing a basis for how we will evolve in the treatment.
Valor vials.
In general what I would say is ease of qualification is getting.
Better for us is our customers get more sophisticated.
In it.
And how to do the regulatory moves you just have to remember this is the first change really.
In.
Beheld packaging.
Hundred years, so everybody was a little out of practice right. So I think when thats coming in place getting better.
Our real focus though in valor right now is to support the COVID-19 vaccine efforts, that's what we're about.
And we have focused.
Most of our energy now.
On supporting various vaccine candidate and for them.
It's a new drug so is the new drug is just qualified in our vile.
So there's no real additional regulatory burden okay. It's the redo that provides an extra burden not the original hot product is superior in every way.
From the current product so that's where we're really focusing our capacity efforts, that's where we're focusing our technology efforts.
Is to use all corning's capabilities to make all of us and our children safer and Thats where were aimed.
Indeed, I think in terms of the environmental regulations, you know the way we look at it is and as at least from our business standpoint, and when we will start generating sales. It's not is how quickly the regulations change it's when the implementations happen and environmental regulations. They always take several years to occur.
They've got to change the automotive supply chain and the like so why the change in the regulations might be quick in terms of us actually seeing it in sales in North America that would that would clearly be a couple of years after that.
Great. Thanks.
Next question.
Our next question comes from Shannon Cross with Cross Research Your line is open.
Thank you very much.
I had a question.
April when you put in place the new operating structure I'm sort of centered around your maps and that what kind of benefits have you seen from that you know how.
How is how is it working just given where.
I don't know five months since it was launched another follow up thank you.
So we basically because our innovations have been successful in sort of outgrown our previous structures.
And so we put in place this new operating structure.
Derek Musser, as us President and COO and named new market access platform leaders.
On the next generation leadership.
To take each and every one of our major market access platforms.
And it's going great and.
My main evidence for that is look at the results.
I mean, it's it's really strong so I've got nothing but good things to say about that and I and we're all.
Quite helpful going forward that this type of outstanding operations performance continues.
Okay, and then I don't know Tony can you talk a bit about any operational improvements you could make the hemlock now that you know wholly owned just or is that where we should just assume it will be standalone and there's not much leverage to be had thank you.
You know I think there is plenty of operational improvements that we can make there.
We obviously based our as we thought about why we're excited about this is based on their current operating performance on those long term take or pay contracts that come with upfront cash payments.
Good control that they have over there cost both in terms of the assets that they bought from Dupont, but also some long term energy contracts that are very favorable rates and that's why we're confident in our ability to generate the $150 million of annual cash flow that being said, we will start working on other.
They are kind of operational improvements, we can make there and a good example of that is that we procure a lot more stuff as a as a company than they do and so I'm sure. There's opportunities there I think there's opportunities from a technology standpoint from a general manufacturing standpoint market access standpoint chances to.
Look at different markets than they've had before I mean, you know they will they will now get the whole power recording machine.
It to really drive that business, so I think on the whole.
We would expect improvements over time now how quickly they happen in the like all you know you were just at the beginning stages of that and the fact is going to have $150 million a year free cash flow generation is very exciting.
Thank you Sir.
Hey, Catherine we'll take one last question.
Our last question comes from Martin Yang with Oppenheimer and company. Your line is open.
Hi, Good morning, Thank you for squeezing me and my questions Bob.
Pricing.
Is there any opportunity for you to see.
Right.
War I understand that the current structure.
Touch or downside given the tight supplies.
Demand right now is there any way for you to raise price.
I would say that like is often heard me say Martin.
Display is the right way to think about it.
From an investment standpoint in my opinion I have so my operating folks who believe we can make this be back into a growth machine, but I continue to believe we should just count on it is aging gracefully generating tons of cash flow and pricing being moderate right.
Right and that we're just like normally in a maturing business it that.
At that rate of price decline to cleaning.
I think thats the way to think about it.
Yes, right now our primary focus is.
To make sure we bring up those gen 10, and a half plants.
Yes.
We have a.
Put in place and you can remember that was.
When we did this we did this.
With largely money support from various Chinese players why we kept 100% of the profit stream.
And that move when we did it was really a bet on the growth of large size TV and a bet on the Chinese LCD manufacturers that bed is playing out really well.
And.
The key for us is to grow that into its full capability as fast as we can.
Thanks.
Thanks Linda.
Great and thanks, everybody for joining us today before we close I wanted to let you know that will be at the Baird Virtual Global Industrial conference on November 10.
Morgan Stanley Virtual life after coded conference on November 11.
Credit Suisse annual Technology Conference on November Thirtyth, and the Barclays Global Technology Media and Telecom Conference on December 10. Finally, the replay of today's call will be available on our site. Starting later this morning, operator that concludes our call. Please disconnect all lines.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
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