Q4 2020 Corning Inc Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the Corning, Inc. Fourth quarter 'twenty 'twenty earnings Conference call. At this time, all participants are in a listen only mode. After the speaker presentation. There will be a question and answer session ask a question. During this session you will need to press star one on your telephone.
If you acquire any further assistance. Please press star Zero I would now like to hand, the conference your speaker today, and Nicholson Vice President of Investor Relations. Please go ahead ma'am.
Thank you and good morning, welcome to Corning's quarter for 2020 earnings call with me today are Wendell weeks, Chairman and Chief Executive Officer, Tony trip, any executive Vice President and Chief Financial Officer, and Jeff, Even send executive Vice President and Chief strategy Officer I'd.
I'd like to remind you that today's remarks contain forward looking statements that fall within the meaning of the private Securities Litigation Reform Act of 1995.
These statements involve risks uncertainties and other factors that could cause actual results to differ materially. These factors are detailed in the company's financial reports you should also note that we'll be discussing our consolidated results using core performance measures unless we specifically indicate our comments relate to GAAP data our core performance measures are non-GAAP.
Measures used by management to analyze the business.
For the fourth quarter, the largest difference between our GAAP and core results stemmed from restructuring charges, which are primarily noncash as well as noncash mark to market losses associated with the company's currency hedging contracts with respect to mark to market adjustments GAAP accounting requires earnings translation hedge contracts and foreign debts settling in future.
To be mark to market and recorded at current value at the end of each quarter, even though these contracts will not be settled in the current quarter for us. This reduced GAAP earnings in Q4 by $63 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 our 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 us.
You're lying transactions.
We're very pleased with our hedging program and economic certainty. It provides we've received $1 $7 billion in cash under our hedge contracts since their inception more than five years ago.
A reconciliation of core results to the comparable GAAP value can be found in the Investor Relations section of our website at Corning Dot Com you May also access core results on our website with downloadable financials in the interactive analyst Center.
Supporting slides are being shown live on our webcast and we encourage you to follow along and you can download them from our website.
And now I'll turn the call over to Wendell. Thanks.
Thank you Ann and good morning, everyone.
Today, we reported an outstanding finish to the year.
Each of our segments grew sales and profits year over year, and we continue to progress our strategic initiatives.
For the fourth quarter sales were $3 $3 billion up 11% sequentially and 17% year over year.
Our operating margin expanded 500 basis points year over year to 19, 4%.
Operating income grew 18% sequentially and 58% year over year.
EPS of <unk>, 52 cents was up 21% sequentially and 13% year over year.
We generated $464 million of free cash flow in the fourth quarter $948 million for the full year and we finished the year with $2 $7 billion in cash on our balance sheet.
It goes without saying 'twenty 'twenty was an incredibly difficult year.
We joined the rest of the world to confront the pandemic economic uncertainty and social unrest.
Throughout the year, we focused on our customers and executed on strategic priorities.
While protecting our people.
For more perspective on our performance I'll share three observations.
First.
We demonstrated our ability to adapt rapidly and remain resilient in the face of uncertainty.
Second.
More Corning content strategy, clearly contributed to our growth and our performance against our end markets.
And finally.
Throughout this difficult period, we're embracing the opportunity to make a difference.
We are with what we had to contribute.
Now I'll expand on my first observation.
Our decisive actions and strong operational execution have resulted in continued leadership in the capabilities that make corning distinctive.
Like many companies we.
We focused on bolstering our financial strength.
<unk> production levels, and operating costs carefully managing inventory, reducing capital expenditures and pausing share buybacks.
However, it's not about what we cut.
But what we can't.
While we adjusted production, we didn't reduce capacity keeping us positioned to meet increasing demand when the economy improves.
We continued to make strategic investments and advanced major innovations with our customers to capture the growth playing out across our market access platforms.
And we develop multi faceted programs to protect our talent and preserve our capabilities.
Our first half actions generated significant cost savings in the second half of the year and as the economy started showing signs of green shoots we effectively adjusted our operations keeping pace as demand started to recover in many of the markets we serve.
Our results.
Tell the story.
Sales were down 12% in the first half as most economies were impacted by pandemic related lockdowns.
But in the second half, we improved sales, 24% over the first while growing operating income, 122% returning to year over year growth and generating very strong free cash flow.
For the year, we generated almost $1 billion of free cash flow.
And our balance sheet remains very strong.
We expect this strong momentum to continue heading into 2021.
We will continue to adapt and focus on execution as we have proven that our approach.
His work.
Turning to my second observation.
In all the industries, we serve important market trends continue to offer new challenges that Corning is just uniquely qualified to address.
And new opportunities to integrate more corning content into our customers' products.
In this difficult year, we have proven that this is an especially powerful value creation lever.
We aren't relying exclusively on people buying more stuff, we're putting more corning into the products that people are already buying.
In the fourth quarter. This strategy paid off as we grew sales year over year in every one of our businesses.
At the top where specialty materials with sales up 20% year over year, and environmental technologies up 19% year over year, both significantly outperforming their end markets.
Last quarter I described our innovations in mobile consumer electronics looking at how we're investing to create additional revenue streams and capture content opportunities.
Today, I'll focus on our automotive market access platform.
The auto industry is undergoing major disruptions.
Aldo makers of designing cleaner and safer vehicles, while featuring technology that provides immersive experiences.
We are uniquely suited to address these trends.
And for Us.
Opportunity as large in the range of $100 per car and Corning content.
We're collaborating with more Oems and we're offering more solutions to help move the industry flow.
Let's look at two of our biggest successes right now.
Starting with our automotive glass solutions business.
We're building strong momentum.
Our advantaged solutions are enabling the very rapid shift towards in vehicle displays that are interactive.
They're integrated and shaped.
We're collaborating with industry leaders across the auto ecosystem, including Visteon L. J P, Italy and via Optronics to accelerate the adoption of our patented three D cold form technology, which enables lower cost shaped auto interiors.
<unk>.
Our large scale facility in Hefei, China is now fully operational.
And servicing our growing demand.
And we continue to see strong adoption of our technology by auto Oems.
A recent proof point is the new Mercedes Benz hyper screen dashboard display.
Which features a gorilla glass cover nearly five feet wide.
Similarly.
In environmental technologies in a year when a global pandemic temporarily shut down OEM production, our proprietary gasoline particulate filter business still grew sales year over year.
When we introduce GPS we said our technology increased our content opportunity per car by three to four times.
Like most of our innovations it started with the customer challenge.
Europe, and China are addressing fine particulate pollution with.
With new emissions regulations.
We applied our expertise in ceramic science with our advanced manufacturing capabilities and extrusion to rapidly develop filters that are sufficiently trap by in particular.
And today, we're effectively helping automakers reduce these harmful emissions meet new regulations and produce some of the cleanest gasoline vehicles you can buy.
Demand for our GPS has grown quickly and with our market leading product. We continue to win the majority of platforms awarded to date.
We're well on our way to building a half a billion dollar business. We're actually ahead of schedule.
And the content opportunity continues to grow.
We expect our GPS technology to migrate beyond Europe, and China as other regions focus on improving air quality and.
And many new car models will soon be required to get even closer to near zero particulate emissions.
In response, we recently introduced our next generation GPS featuring enhanced filtration capabilities.
They're launching in upcoming models as automakers prepare for the next wave of regulations.
Across our markets, we see a similar content story, playing out as we respond to key industry challenges with more Corning solutions.
Let me share some other accomplishments across our market access platforms.
In life Sciences pandemic related demand has highlighted our strength in the industry.
And we achieved major milestones towards building a significant valor glass franchise in 2020.
At the start of the year, we entered a long term supply agreement to provide valor glass vials for a portion of the currently marketed Pfizer drug products. Soon after we were awarded $204 million and funding from the U S government.
To substantially expand domestic manufacturing capacity for valor vials.
Today, we're supplying valor glass to several leading COVID-19 vaccine manufacturers.
We produce millions of valor vials and shipped enough for more than 100 million doses supporting multiple vaccine developers.
In our life Sciences segment, the global Health flight is driving strong demand for our consumable products.
We're supporting the development of treatments and vaccines as well as mass testing efforts.
We received $15 million from the U S government to expand domestic capacity for robotic pipette tips, which are used for COVID-19 diagnostic testing.
By on Tech recently recognized our contribution to their successful Covid vaccine development.
Turning to mobile consumer electronics, we launched the toughest gorilla glass yet victors.
And it's already featured on six Samsung devices.
Corning also invented the world's first transparent color free glass ceramic which is featured on the front cover of the latest iPhone.
Apple and Corning partnered to develop and scale manufacturing of ceramic shield.
It offers unparalleled durability and toughness.
I noted the specialty materials sales were up 20% year over year and quarter four.
They were up 18% for the full year.
In a smartphone market that declined 7%.
In optical communications, we returned to growth and we expect this growth to continue as customers increase spending to support growing bandwidth requirements.
In 2020, we introduced new and innovative solutions that help speed the deployment of five G. We launched our outdoor <unk> ready connectivity solutions, featuring compact easy to install terminals that can be deployed in any conceivable architecture.
Operators can actually save up to $500 per terminal location dramatically lowering installation costs and speeding up deployment.
We're also collaborating with Verizon to enable five G millimeter wave indoor deployment for their enterprise customers.
We're also working with Qualcomm technologies to deliver indoor networks that are <unk> ready easy to install and affordable.
And we're collaborating with enersys to simplify the delivery of fiber and electrical power to small cell wireless sites.
Turning to display.
Retail demand for TV and it products remained strong.
Demand for large size Tvs continues to grow.
75 inch sets were up more than 60% for the full year.
Large Tvs are most efficiently made on Gen 10, five fabs.
Corning is well positioned to capture that growth with its gen 10, five plants in China, including the two newest Gen 10, five facilities in Wuhan and Guangzhou.
Which are now expanding production to meet customer demand.
Ramping these sites has been no small feat in the midst of a pandemic.
We are very proud of our innovative and dedicated expert engineering teams that rose to a host of unprecedented challenges.
To start up tanks in both facilities.
Looking ahead.
Corning is long term growth drivers and content opportunities are strong in.
In each of our markets.
And we believe some secular trends could accelerate as consumer lifestyles continue to change in the aftermath.
The health crisis.
And that leads to my third observation.
Yeah.
We're living through the kind of moment.
That tends to bring true care it to light.
At Corning.
Our values are evident in our actions.
We've unleashed our capabilities to help combat the virus.
And we're proud to be creating life changing technologies that contribute to keeping people safe.
And helps society address the challenges of the pandemic.
We also recognize in these unprecedented times that we have the opportunity to share resources and leadership on a range of important issues.
We've launched racial and social equality programs.
And our unity campaigns support vital human services and emergency relief in our communities around the world.
In conclusion.
On all fronts Corning is executing well.
We are delivering outstanding results and making important progress across our strategic priorities.
I am confident.
That we are entering the year with solid momentum and we expect to grow in 2021.
Our more Corning strategy will continue to drive outperformance across the diverse industries that we serve.
We're not just counting on consumers buying more cars Tvs or smartphones to grow.
And I am excited about how we're bringing our capabilities to bear and optical in life Sciences as operators expand their networks and we continue to support vital drug and vaccine development.
Now I'll turn the call over to Tony.
So that he can provide additional insight on our results and expectations.
Thank you Wendell and good morning, everyone.
We feel good about our fourth quarter results on a year over year basis, we grew sales and earnings we expect to grow again in the first quarter and we expect to grow for the full year driven by improving markets and are more Corning strategy.
We are building a bigger stronger company that delivers sustainable results, while remaining agile in our ability to respond to changing market factors.
Now, let me walk you through our fourth quarter performance in.
In the fourth quarter, we grew sales, 11% sequentially and 17% year over year to $3 $3 billion exceeding expectations.
Excluding the consolidation of hemlock semiconductor.
Sales grew 11% year over year with every segment growing sales and net income spec.
Specialty materials, and environmental technologies to deliberate, particularly strong year over year sales growth.
Up 20% and 19% respectively.
Both outperforming their underlying markets.
Optical communications returned to year over year growth and we expect that growth to continue.
Our operating margin was 19, 4%.
That is an improvement of 500 basis points on a year over year basis.
We grew operating income, 18% sequentially and 58% year over year.
EPS of <unk>, 52 cents was up 21% sequentially and 13% year over year.
We generated $464 million of free cash flow in the quarter.
Cumulative free cash flow for the full year was $948 million.
We ended the year with a cash balance of $2 $7 billion.
We entered 2021 and an excellent financial position.
Now, let's review the business segments in display technologies fourth quarter sales were $841 million up 2% sequentially and 6% year over year.
And net income was $217 million up 11% sequentially and 21% year over year.
Retail demand for TV and it products remained strong during the promotional season in Q4.
Displace full year sales were $3 $2 billion and net income was $717 million.
Our full year price declines in 2020, we're mid single digits.
The glass market and our glass volume were up mid single digits for the year.
The retail market was more robust than the industry than the industry expected, resulting in panel supply being tight for the second half of 2020.
Panel makers ran at high Utilizations in the industry drew down inventory to satisfy demand.
These dynamics also resulted in glass supply being tight.
And more recently in shortage due to a power outage at our competitors' glass plant.
Now, let's look at 'twenty 'twenty, one we expect the TV and.
Retail markets to remain strong we remain confident that large size Tvs will continue to grow and we are well positioned to capture that growth with Gen 10, and a half which is the most efficient gen sized for large T V manufacturing.
We expect the glass market to grow mid single digit percentage in 2021.
We expect glass supply to remain tight in the upcoming quarters.
As a result of these supply demand dynamics, we are experiencing a very favorable pricing environment.
We expect Q1, 'twenty 'twenty, one glass prices to be flat with Q4 2020.
This is significantly better than the sequential declines we've seen in any other first quarter over the last decade.
Glass prices for some customers in some gen sizes may actually see a sequential increase.
We believe the following three factors will continue to drive the favorable pricing environment for the upcoming quarters.
First we expect glass supply to continue to be tight.
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 acceptable returns on these investments.
In optical communications fourth quarter sales were $976 million up 8% year over year and 7% sequentially.
Our year over year growth can be attributed to broad improvements in demand for both carrier and enterprise customers.
Fourth quarter coordinate income of $141 million was up 127% year over year and 23% sequentially.
The improvement was driven by the incremental volume and favorable cost performance.
We have returned to growth in optical communications, and we expect that growth to continue.
Bandwidth demand is increasing and users are demanding higher performance connections, we're seeing positive statements from customers and increasing investments in their optical networks are sales and order rates are picking up and we're ready to capture demand as it materializes.
We are confident we will grow sales in optical communications for the year, we continue to monitor and evaluate market demand signals to determine the magnitude of growth.
We will keep we will continue to keep you updated as we go through the year.
In environmental technologies fourth quarter sales were $445 million up 19% year over year and 17% sequentially.
Ahead of expectations as markets continue to improve and G. P. F adoptions continued in China.
Net income was $93 million up 45% year over year, and 35% sequentially driven by strong operational performance globally and successful ramping of additional GPS capacity in China.
For the full year sales were $1 $4 billion and our performance was better than the underlying market net.
Net income was $197 million.
While our full year 2020 sales were certainly impacted by COVID-19, we are recovering faster than the market by increasing our content for both the automotive and diesel end markets.
Despite severely severely challenged markets, we saw year over growth and GPS sales.
Strong GP F adoption continues in Europe, and in China, where the China six day regulation is being implemented nationwide. This month. We are ahead of our original timeframe to build a $500 million G. P F business.
Specialty materials had an outstanding fourth quarter and full year Q4 sales of $545 million were up 20% year over year.
All year sales were $1 $9 billion up 18% year over year, Despite a 7% decline in the smartphone market.
Driven by strong demand for our premium cover materials and our other innovations.
Net income was $423 million up 40% from 2019 on higher sales volume and strong cost performance.
The importance of computing and connectivity were amplified during the pandemic, our new product innovations, including ceramic shielding gorilla Vik this as well as our E V products in the semiconductor market were important contributors to our strong performance.
Now before I get to our life Sciences results I'd like to note something of great importance to us throughout the pandemic our life Sciences market access platform has applied it's broad capabilities and full product portfolio to help the world combat the pandemic.
From our traditionally research focused consumables to our bio production products to our transport media and of course, our valor glass, we're playing a vital role in the development and supply of test kits and vaccines.
Now, let's look at our segment results life Sciences' fourth quarter sales were $274 million up 7% year over year, and 23% sequentially driven by strong demand for COVID-19 related products, including bio production products used in clinical trials net.
Net income was $42 million up 11% year over year and 50% sequentially.
In summary, we successfully navigated a very challenging year, we strengthened our balance sheet established growth in the second half and generated free cash flow of $948 million for the year.
As we look ahead, we have strong momentum coming into 2021 and expect year over year growth to accelerate in the first quarter.
Specifically, we expect core sales of three point all of the $3 $2 billion compared to $2 5 billion in the first quarter last year and.
And EPS of 40 to 44 cents, which is double last year's first quarter EPS at the low end of the range.
For the full year, we expect growth in sales and earnings and we anticipate generating more free cash flow in 2021 than in 2020.
And we will share more with you as the year progresses.
Let's turn to our commitment to financial stewardship and prudent capital allocation.
Our fundamental approach remains the same we will continue to focus our portfolio and utilize our financial strength.
We generate very strong operating cash flow and we expect that to continue going forward.
We will continue to use our cash to grow extend our leadership and reward shareholders.
Our first priority for our use of cash is to invest in our growth and extend our leadership. We do this through our D and the investments capital spending and strategic M&A.
Our next priority is to return excess cash to shareholders in the form of dividends and opportunistic share repurchases.
In 2021, we expect Capex similar to 2020 as we have capacity in place to meet higher sales.
Now, we'll invest more if we require capacity to support additional growth.
Any additional capital investment would be supported by our customer commitment.
We will keep you updated as we go throughout the year.
Given our expected strong free cash flow generation in 2021, we expect to increase our distributions to shareholders.
That includes reinstating opportunistic share repurchases sometime this year.
In closing, we're very pleased with our strong close to 2020 highlighted by growing sales and profitability. We continue to focus on a rich set of opportunities our businesses are fundamental to the long term growth drivers in the industries they serve and.
Our more Corning strategy continues to deliver sales outperformance relative to our end markets.
And I look forward to sharing our progress as the year goes on.
With that let's move to Q&A Ann Thanks, Tony.
Operator, we're ready for the first question.
Thank you as a reminder to ask a question you will need to press star one on your telephone to withdraw your question press the pound key please standby, while we compile the Q&A roster.
Our first question comes from Tim Long with Barclays. Your line is now open.
Thank you.
A two parter if I cut on display.
First you talked about the pretty strong pricing environment into Q1 could you talk a little bit, it's obviously, a little bit different supply die.
<unk> dynamic and that's normally a tough quarter for pricing. So how do you think about that as it kind of impacts the rest of the year the cadence of normal pricing throughout the year and secondly can you talk a little bit about.
The move of some of the big providers from Korea to China. Its been on hold a little bit. So curious what your thoughts are what that would mean to to either the supply side of the equation or the pricing side. Thank you.
Sure I mean, I think it's important to think about what's happened over the last year from a display standpoint.
The market overall was more robust than what we'd expected.
And what the industry expected, which meant that panel makers ran tight in the second half of 2020.
Not only did those higher utilizations, but the industry also brought down inventory to meet that demand.
And that meant that the glass was tight throughout the year and as you know we remain confident that things will remain tight on a over the next several quarters because of where we think demand is and it is is that demand.
<unk> continues to be met Theres also a need to.
Replenish what's happened from a supply chain standpoint, and some of the tightness that's happened from a supply chain standpoint. So that's obviously led to very favorable pricing in the first quarter and as we look out over the next several quarters.
We think that that environment continues that tight environment continues.
Yeah, just building on Tony's because I think here, you're obviously, a close watch or the industry.
We were tight.
Glass was tight and glass is going to stay tight.
For as far as we can see right now.
Then with <unk>.
Competitor, having a power outage and.
The planned shutdown of the Korean operations that tip everything being delayed because the market was so strong that tipped everything into shortage. So we went from being very tight to go into shortage.
And that's what led to that.
Very very strong quarter, one pricing environment.
But we're going to stay tight even as we address those I think the Koreans will still ultimately.
Continue the shift to those big Gen 10, five plants, just because it's more economical.
But right now they continue to press us to be able to help them supply their Korean operations and theyre not providing a firm end date.
For Wendell transfer those over primarily because they continue to see this end market as being very strong.
Does that make sense to does that answer your question.
Yeah, Yeah, great I'm, just curious if it if in any way it changes kind of the longer term view of most of the production moving to China, if that if the delay here in the cranes moving makes that does that change the overall outlook of the impact of your China position.
I think because these gen 10, five plants produce panels.
Lee at about a 30% cost advantage, especially when they're integrated with our glass operations.
The fastest.
Pretty powerful microeconomic force, so that you're just seeing the behavior set that when demand as well.
This is more than that.
Those ultimate low cost production assets than less productive capacity stays fall.
And so as that continues to grow I still think the right bet is continuing movement towards those big Gen 10, five plants.
Great. Thank you very much.
Thank you. Our next question comes from Shannon Cross with Cross Research. Your line is now open.
Alright. Thank you very much for your <unk> for taking my question.
I wanted to dig a bit further into the opportunity for value over the next 18 to 24 months and I'm just curious how maybe conversations have changed with partners.
Given the strong uptake I know, it's from a small small base, but.
All our glass vials related to Covid and just how maybe have your thoughts changed around.
The timing of investment and the ability to grow this business. Thank you.
So the way we view Valor Shannon is this is an opportunity to help make all of the safer.
So we'll go with virtue first.
Rather than any one of our previous plans.
And so now we are full on accelerating as fast as we can.
We're also looking at other ways that our valor technology can help.
Fill and finish operations because as the world shifts to try to address this.
Really need for billions of doses.
Want to make sure that other lifesaving medicines can be.
Produced.
And so that bottleneck is going to increasingly shift towards fill and finish.
And we are uniquely qualified to do that many of the vaccines very complicated thermal cycles that our technology is once again uniquely.
Positioned to do.
So soon.
Simple answer to your question is it's all hands on deck.
Trying to increase our production.
A valor to increase.
The applicability of our technology across this platform I personally have now switched to leading.
Key engineering program.
To help.
Address.
This upcoming bottleneck.
That's a long answer really I could have simply just said how has it changed our view.
We need to make a lot more vials.
Is the short answer to your question Shannon.
Sure.
Thank you.
Yeah.
Thank you. Our next question comes from <unk> Mohan with Bank of America. Your line is now open.
Yes. Thank you good morning.
So optical grew in the quarter on a year on year basis, and you you're expressing confidence on the fact that the world is going to continue.
Maybe help us think about sort of the rate and pace of recovery in optical and how the conversations with your customers have changed through the course of the quarter. That's now giving you this confidence on on growth and you seem to be really firing across all cylinders here I'm curious if you can maybe share some high level.
Your point on 2021 versus 2020, which segment would you say is going to be the largest contributor of growth and profitability. Thank you.
Well, let me first start with from an optical standpoint.
I think the last several calls we've really focused in on.
Our fundamental belief that as bandwidth demand is increasing and users' demand higher performance <unk>.
<unk> that this was going to be positive from a business standpoint.
And in reviewing talked about I think in the last quarter about how our customers were beginning to.
Talk more about that in their conference calls and you know there are plenty of examples of that I think what's really happened over the last three or four months is that you know our sales and order rates have started to pick up and it's really that pick up in the sales and order rates, which is what drove our growth on a year over year basis, and why we're confident that that growth is going to happen.
I think the question before was was this one wasn't going to happen and I think the answer is is that it's happening now and so I think that's how we think about it there.
And then I think from a from an overall economic standpoint.
Clearly as we entered the year, we had a very strong fourth quarter and we expect to have a strong first quarter.
But there's still a lot of uncertainty in the world and.
No we're not.
The greatest position to sort through how that uncertainty is actually going to play out.
We think Theres two places where we can provide unique insights one was optical that we just talked about and the other was to you know.
Better understand what's happening from a display standpoint.
But that's the areas that we focused on during the call.
Okay, great. Thanks, and if I could quickly follow up on the pricing front I mean as you noted this is very unusual for our first quarter typically you reset price contracts in Q1 on LCD glass.
Wendell obviously articulated all the all the reasons why.
We're seeing this better pricing.
And you're also saying that this is the market is going to stay relatively tight but as you ramp your gen 10, and a half capacity.
Should we expect the pricing cadence to change through the course of the year normally you have a big step down in Q1, and then you have very moderate.
And through the rest of the year. This year, you're not really seeing a step down in fact, some customers are you seeing a step up so should we expect that.
Pace of pricing.
To remain.
As it has in past years, just very very moderate or should we take that as more capacity ramps with tenant at Gen 10, and a half.
Gee, you're actually going to see.
More more maybe accelerated pricing pressure as you as you go through the course of the year.
I think you should think of it wont be as we'd expect that.
Moderation in.
Environment for moderation continues.
I totally get your question, though because the pattern.
Of pricing sort of is a little different than normal we had the best pricing in quarter. One that we've had in a decade in terms of relative move.
Relative decrease.
And so the pattern questions like totally legit, but we do expect.
To remain tight how the exact pattern plays out.
And let's take a quarter at a time and right now we see quota one the way we see it and we.
I kind of look into quarter two is as Tony said.
Looks pretty favorable to us and continued moderation.
Thanks, guys congrats on the quarter.
Thank you. Our next question comes from Lucia merchant with Citi. Your line is now open.
Great. Thank you for the opportunity a couple of quick questions. One specialty clearly a very strong performance here in the face of smartphone.
Under growing.
Yeah, and declining actually but with a strong recovery ahead.
If you can like dialed down a little bit deeper into your expectations for special fee that would be great.
And then for Tony as well on Opex.
These are talking about them.
At recent conferences about kind of a very well managed on the Opex can you just talk to us about what are some of the changes that you've done internally that day.
The growth that you're seeing on the secular demand trends that you're thinking.
Thing about into 'twenty and 'twenty one.
Opex should be well maintained here.
Oh, well contained here or I should say thank you.
Great.
Let's start with Opex, and then I'll touch briefly on specialty and I would like to make a little more macro comment on how we see the year.
Yeah, I think from an Opex standpoint ICF.
Clearly when we got into the early parts of 2020 and things were changing we did a number of things to adjust our operating cost some of them or.
Set up so that we would be able to as is.
The economy's recovered being able to respond to that some of them were compensation related for example, furloughs and things like that certainly to the degree that the business has returned of course those costs will also return but from an overall standpoint, we've remained very focused from an opex standpoint to make sure that we're getting.
<unk> leverage as we grow and that we don't grow.
Our opex over a longer period of time as fast as we grow our sales and that's that's really our underlying philosophy from an opex standpoint, I think what's structurally makes it possible for us to do is.
When you see us lay out 345 framework.
What that allows us to do as we build on our market access platforms is that ability to sort of re use and share those platforms. Both the liar we've seen.
That both in our technology side as well now in our customer facing organizations and so that should allow us to more efficiently address the growth that we see and overtime, we do expect that.
Operating margin leverage to be sort of a more powerful.
Generate a force than just at the manufacturing gross margin level, so youre going to see us really addressing that more because that's where we're seeing the synergy really start to drive across our portfolio.
Let's touch briefly on.
Specialty for you.
We would expect.
Our outperformance versus the smartphone market to continue.
And that's sort of.
And not calling what happens with Despiteful bucket, so that kind of things, we would have a sort of a broader point and I'd be really interested in and <unk>.
Feedback from investors.
Sell side and buy.
Which is.
We saw the strong momentum we knew it was coming.
But we saw the strong momentum in really strong order book in Q4.
And that continues into this quarter.
So and that increasing clarity enables us to provide the sales and EPS guidance that we just did for quarter one.
Now, we listen to our investors and made it simple and clear by providing sales and EPS for the entire company.
Rather than the more complicated and detailed market by market guidance.
We previously provided.
Now as we turn to the total year.
Simply put we expect our momentum and our outperformance.
First is our markets to continue.
So then the question really becomes what happens in the macro environment now you all have your own experts and.
Opinions on what's going to happen in the macro.
At Corning, we approach our ability to predict.
Macroeconomic and geopolitical events intentions.
With great humility.
Hans.
We don't think it's helpful for us at this time to predict these forces and therefore, what exactly our revenue for the year will be up what we are confident of is that we're going to outperform these market. So as you pick your geopolitical or macroeconomic scenario.
Well.
For our various markets.
But you can count on is we're going to better than that.
That may be more than you wanted to know a cm, but that's how we think about it.
That's great. Thank you.
Thank you. Our next question comes from Mehdi Hosseini with <unk>. Your line is now open.
Yes, thanks for taking my question.
Just as a follow up on the specialty material window. When do you think we actually going to see enough of a penetration into other industries. So for.
Particularly for Gorilla.
You would have a more of a day bundling from a smartphone market and I have a follow up.
Could you say more I want to make sure I understand your question Matthew.
Betty you always have you always have very interesting one so let me make sure I understand.
Thank you.
And we have been anticipating diversification of gorilla glass into other.
Markets like auto and then you highlighted.
Mercedes Benz and and I just wanted to see what.
Instigator used to actually illustrate that.
Case and in that context, how should we think about diversification of gorilla.
And especially if the material end market.
I totally understand.
As always really good question. So we highlighted that for two reasons.
First.
Our momentum in auto glass systems is increasing.
It's not yet at the point, where we would say okay. In your model you better start providing for this play.
Because it's going to change your macro numbers, but we can totally peel it.
And you will feel it more going forward.
We're also seeing gorilla find its way into more and more of our maps.
What we're going to do is really talk about that in the form of those market access platforms as the various forms that that technology takes serves multiple of our customers believe it or not it's even finding its way into.
<unk>, So we'll take that note.
And as that becomes more important we'll make sure we share a little bit more on it.
Sure. Thank you.
I just that.
As a follow up.
To that question. Thank you for providing detail opportunities in the auto industry. You highlighted 100 dollar of content per car I wanted to better understand whether some of the key assumptions, how you're thinking about.
Evolution of electric vehicle and.
That segment grow is zero hundred dollar content.
Accounts for that change in the auto industry and its.
Does that also accounts for like Gorilla penetrating auto industry and again, how should we how should we think about variability in that 100 dollar content.
Yes, So I think the short answer to your question is.
Yes, John.
So I think what we should do what I would recommend we do.
Is.
Why don't we why don't you follow up with Ann and let us share.
Way, we think about the map and it would probably be an excellent report for you to do.
Well will be helpful and lay that all out because you have got a great question and we have the builds and we'd be happy to share.
Okay.
Can I ask what I think Tony has something to add he is looking at me like he hadn't behind that and then maybe I think that would be great. Why don't we I think we talked to you later today and we can talk about next steps on this and the only thing I wanted to point out as the CFO is that any glass that sold to the automotive industry right now shows up as that.
In our automotive or into our other segment not in our specialty materials segment, but that that was just more of a reporting well. Thank you very much youre welcome.
Got it. Thank you guys appreciate it.
Thank you. Our next question comes from semi Chatterji with Jpmorgan. Your line is now open.
Hi, guys. This is Joe Cardoso on for Sonic just one follow up question for me on the optical side, obviously, the return of your goals and guide for full year growth is great to hear but I just wanted to take a moment and focus on the profitability initiatives that has been done in that business. Specifically can you walk us through what you've been doing on the optical side, particularly.
As it relates to temporary versus permanent measures as well as if there is any weighting towards carrier versus the enterprise portions of those businesses and as we see revenues come back in that business is there any way you can gauge expectations relative to the profitability.
Now versus let's say a year ago, assuming an apples to apples revenue profile.
I think from a.
Overall standpoint, we're seeing both growth in the carrier and in the enterprise business of course, the enterprise piece is a lot of work being grown from cloud computing Hyperscale data centers in some of the traditional enterprise pieces.
More impacted by the economy youre not seeing that as much but we're really seeing a.
Growth in both parts of those businesses and from an operational standpoint, I mean, I think what's important to note is that even though our.
Our revenues were down we didn't change our ability to supply that because we always knew it was going to come back.
And there's cost that you carry.
During those kind of periods and when you fill those factories back up you see expansions from them from a margin standpoint, and we saw that in the third and fourth quarter of.
Of this year and we'd expect to see that going forward.
Yes.
Joe.
Another Dino I think Tony nailed it which is as you expect revenues as revenues expand we would expect our margins to expand there's another factor in auto.
There can always impact quarter to quarter type of variability, which is what precisely are the operators or.
Enterprise players buying.
When they buy our more complicated highly engineered solutions.
When they buy those our profitability is higher.
Right.
If you're just buying their fiber fiber and cable it depends what specific type of cable and so mix starts to play a real role in up though when you think about it from quarter to quarter, but if you step back I think Tony has nailed the fundamentals here, which is as we felt we would expect the incrementals.
<unk> two.
Good.
Thanks, guys I appreciate the insights and congrats on the results.
Thanks.
Thank you. Our next question comes from John Roberts with UBS. Your line is now open.
Thanks, nice quarter and glad to be active on the stock again.
John.
It's so good voice John long time no fee.
You've had another quarter to think about the strategy and semiconductors.
You've got the lens business in specialty materials, and it's benefiting from <unk> being put hemlock.
Other than that it doesn't really benefit from any I think special trends going on in the semiconductor market. So it just looks like an opportunistic good deal at this point or is there more to within that.
So first I'm, just having flashbacks to almost a decade ago. When you were telling me what we needed to do is make sure that we ended up with hemlock because it fits so bench better with us and the.
And the silicon side.
So much better.
With.
<unk> down.
And so we finally got it done John It just took us.
Uh huh.
So yeah, we feel good about it for sure.
Economics on that deal are incredibly good.
And we really like that.
But actually your insight from.
All those years ago.
I think is right.
And we're going to run some experiments here to try to see can we make more of a day mark.
John.
Can we with our capabilities make it accelerate or.
Vice versa.
We really are interested in.
Can we address some of the significant issues there are with lack of domestic production of solar.
Here in the U S. So there's a number of I think.
There's a number of significant opportunities, it's too early to say well they work out or not.
And some time and I would love to have a conversation with you about any ideas that you have on it as well given how long you've advocated for this and we will definitely do that John and we will get back with you on some of those ideas.
And all I would say is that in the short term all of the financial attractiveness of this deal is absolutely paying out as we expected it to.
As you know we didn't put any money into this transaction and hemlock generates a lot of cash and so what that they had they mostly start it will pay back within a year in fact pay back a lot of it in the fourth quarter, they generate approximately $150 million of annual cash flow. So we're very excited from a financial standpoint and also.
From a strategic standpoint.
Maybe just been easier financial question. So you guided for 2021 Capex roughly flat with 2020 do you still expect it to be relatively modest through 2023, which was your target I think at the Investor day.
Yeah, you know I think what happens through 2023 of course depends a lot on.
How much growth, we get and how much growth capital that we have to put in build capital that we have to put in over the next several years and the good news is any build capital I mean first of all it comes with growth and secondly, it comes with pretty significant.
Customer commitments.
Great. Thank you.
Thank you Tony.
Go ahead Sheila.
Our next question comes from Steven Fox with Fox Advisors. Your line is now open.
Thanks, Good morning, I just had two quick questions first on the 25 points of outperformance for our specialty materials vs.
Mobile device sales last year can you sort of put that in perspective, where maybe there's something unusual in this to the outperformance what maybe a normal rate of change would be versus markets et cetera, and then just as a follow up when you talk about the bullishness with optical how much are you factoring in the recent auctions on the rural side and the <unk> side.
Into that bullishness or is this before thinking about those things.
I think on the specialty side.
You can always expect us to outperform because of the more corning strategy, putting more content higher value content.
What that rate of that is.
You are quite wise to say well that could depend on <unk>.
Which particular products are working really well for our end customers and how much of that has our newest technology use different types of our technology and that gets a lot harder to predict.
Because you not only have to call the total market.
Then, which OEM sort of win in that market.
As well as switch of our technologies play, but I think overall you can think about it as we will outperform its just a little too early in the year to give you some insight as to like how much to outperform Steven I'm sorry on that.
And then on auto are you you're right to identify it it is definitely a positive.
But it is just one of the sort of number of positive impacts and announcements that youre seeing from.
Our key customers.
It's never been as Tony said, it's never been that we did it.
Believes strongly.
Our customers would have to build and invest two weeks to very strong demand, where we wanted to do though is before we predicted when it would come we wanted to see it.
And our sales we wanted to see it in our order book, we wanted to see the projects actually start and so that's what we're seeing and.
And that's why we're saying it.
That's helpful. Congrats on the quarter.
Okay.
Jo Ann will take one last question.
Thank you Ann that question is from Rod Hall with Goldman Sachs. Your line is now open.
Yeah. Thanks for sneaking me in I appreciate it I've just got one question.
That is mainly I guess aimed at Tony.
Tony we're looking at the cash flow conversion of EBITDA in the fourth quarter and it's lower than we anticipated.
We see the working capital release, a little lower than last year. So that's one of the drivers that normally we see pretty good conversion in Q4, I assume maybe there's COVID-19 related impacts et cetera, but I wonder if you could dig into the color on that a little bit more for us and help us understand the dynamics of cash flow conversion.
Whether it's one off in nature.
Some of those things go away as we move into the year here.
Yeah actually we were quite pleased with our cash flow conversion in the back half of the year.
Compared to and Pat which is the way a lot of people talk.
About the cash flow conversion I mean, our cash flow and our Empire was the same number in the fourth quarter than it was in our cash flow is a little bit better than that our impact in the third quarter. So I mean, we were real happy with the cash flow conversion in terms of some of the specifics there right. When we talk to you later today and be happy to walk through it with you but over.
Were all we were very excited about our cash flow conversion and frankly, that's a question that a lot of our investors have asked us over the last couple of years.
And it's something that we've been focused on in.
This is what happens when we're not in a build cycle, we generate a lot of operating cash flow, we generate a lot of free cash flow and we saw that in the back half of this year, we expect to see more of that in 2021.
Great. Okay. Thanks, Tony.
Yep, Thanks, Brad and thank you all for joining US. This morning before we close I just wanted to let you know that we will attend the Goldman Sachs 2021, virtual Tech and Internet Conference on February 11th UBS West Coast Conference on February 23rd and the Morgan Stanley Technology Media and Telecom conference on March 1st.
And a replay of today's call will be available on our site. Starting later this morning.
Later that concludes our call. Please disconnect all lines.
This concludes our call for today, Thank you for attending.
Okay.
Okay.
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