Q1 2021 Corning Inc Earnings Call
Welcome to the Corning incorporated quarter, one 2021 earnings call the place yourself into the Q&A queue. Please press star one it is my pleasure to introduce you to Ann Nicholson, Vice President of Investor Relations.
Thank you Ann good morning, everybody and welcome to our first quarter 2021 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 for an executive Vice President and Chief strategy Officer.
I'd like to remind you that today's rate.
Looking statements.
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 will 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 manage.
I meant to analyze the business.
For the first quarter of the largest difference between our GAAP and core results stemmed from noncash mark to market gains associated with the company's currency hedging contracts with respect to 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 at current value.
At the end of each quarter, even though those contracts will not be settled in the current quarter for us. This increased GAAP earnings in Q1 by $308 million to be clear this mark to market accounting has no impact on our cash flow.
Our currency hedges provide us 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.
Of our underlying transactions.
We're very pleased with our hedging program and the 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 day.
Appointing 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 Ann and good morning, everyone.
Today, we reported a strong start to what we expect to be an outstanding year.
For the first quarter, we grew sales, 29% year over year to $3 $3 billion.
We grew EPS by 125% to 45 cents.
Free cash flow of $372 million builds on the momentum we established in the second half of 2020.
All five of our segments delivered double digit sales and net income growth year over year.
With sales growth rates, ranging from 15% for display to 38% for environmental.
But last year was an easy compare so I think it's worth noting that total company sales are up 14%.
Since the first quarter of 2019.
No question, we're in a strong position.
This morning, I want to take a closer look at how all our businesses are achieving key milestones.
And contributing to Corning success.
I'll frame my remarks around three points.
First invention is fundamental to our long term strategy.
Through our relentless commitment to R&D, we develop category defining products the transform industries and enhance lives.
Second.
As we partner closely with our customers to move their industries forward.
We unlock new ways to integrate more corning content into their ecosystems.
This is a powerful growth mechanism.
And finally.
We continued to build a stronger more resilient company one that is committed to rewarding shareholders, while supporting our customers.
Our people.
And our communities.
Now, let me expand on that.
My first point.
We're living in a world the Corning anticipated exactly a decade ago in our video of day made of glass.
It's the world, where technology underpins every facet of human life of well.
The communication and connection where massive bandwidth facilitate real time information and on demand connections.
And people stay connected to a virtual environment that is literally at their fingertips.
Let's think about what it means as displays and touch screen devices make their way to the very center of daily life.
The demands we're putting on today's screens and the expectations we have for tomorrows.
[noise] imply a very specific set of properties.
The requirements for precision glass and ceramics become more and more exacting.
We need the material that is strong yet thin and light weight.
Flexible and conformable.
Durable damage resistant and in permeable.
Stable enough to withstand hostile weather extreme temperatures and cleaning agents.
It needs to be touch friendly and look elegant.
It must scale for very large applications and yet be useful in the palm of your hand or on your wrist.
The material must also be operable with the world of technical capabilities that lie just below the surface.
The enabling complex electronic circuits and nano scale structure.
And it must be mindful.
Of the environment.
When it comes to the critical components that enable high technology systems.
In multiple markets that we serve.
The bar just keeps getting higher.
This leads to a world where precision glass and ceramics win.
And we have been winning.
When we examine the growth in all our business today, we see key trends converging around our capability set of a very exciting pace.
In short.
We're vital the progress.
We succeed.
Through sustained investments in R&D.
And years of material science and process engineering knowledge.
Everything begins with our cohesive portfolio.
Corning is one of the world's most proficient innovators in materials science, we combine our unparalleled expertise in glass science ceramic science and optical physics, with our proprietary manufacturing and engineering platforms to develop category defining products.
The transform industries and enhance lives.
Today, our inventions clean the air we all breathe.
Connect people to information and each other.
Provide the window through which we access information and entertainment.
And they help facilitate the discovery.
And delivery of new medicines.
And we're building in each of these areas, we're helping our customers moved toward the world with near the infinite and ubiquitous bandwidth with large lifelike displays where cars are cleaner autonomous and connected where medicines of individualized effective and safe.
And where you can do more right from your mobile device protected by cover of materials that can withstand even greater abuse.
That leads me to my second point.
As we work closely with our customers to advance these visions, we find ways to solve their toughest technology challenges.
Of our probability of success increases as we apply more of our world class capabilities and our cost of innovation declines as we apply talent and repurpose our existing assets.
As we apply our focused portfolio, we invent solutions that add even more value to our customers offerings.
And this provides a powerful growth mechanism.
We art exclusively relying on people just buying more stuff.
We're putting more corning into the products that people are already buying.
Now through that lens lets look at our progress across our market access platforms.
Okay.
In mobile consumer electronics, we continue to help transform the way people interact with and use their devices and we're capturing significant growth by increasing the value we offer on each of those devices.
As we advance state of the art recover materials, we drive sustained outperformance across up and down markets.
We've grown specialty sales every year from 2016 to today, despite smartphone unit sales being roughly flat or down each year.
Over that five year period, we've added more than $750 million in sales on the base of more than $1 billion.
Okay.
Fast company recently recognized our achievements in the space.
Noting both ceramic shield and gorilla glass Ventas the magazine named Corning, The most innovative company in consumer electronics for 2021.
We see a similar growth story, playing out in automotive since 2017, the peak year for car sales.
Our auto sales are up more than 40%.
While global car sales are down 20%.
We're helping customers navigate an industry that is expected to change more.
In the next 10 years than it has in the past 15.
And as we do we are working to capture and expand $100 per car content opportunity across emissions auto glass solutions and other technical glass products, including our patented three D called for <unk> technology.
We were thrilled to see the world Premier event for the all electric <unk> for Mercedes.
It's hyperscale screen features a gorilla glass cover almost five feet wide.
We've also launched a new generation of GPS theyre, helping vehicles, including hybrids achieve even the lower levels of fine particulate emissions and.
And they're helping us exceed of $500 million GPS business ahead of our original timeframe.
In life Sciences.
We are delivering growth on two fronts.
First demand is growing based on COVID-19 vaccines and diagnostics.
Second.
We're becoming increasingly relevant as we help the industry move towards cell and gene based therapies.
And that shift translates into more of our content per drug sold.
Looking longer term.
We're making significant strides towards building of valor glass franchise.
Addressing a multibillion dollar content opportunity in pharmaceutical.
<unk> markets.
We doubled valor bio production in quarter, one versus quota for.
And today the company has shipped another valor of vials for hundreds of millions of doses of COVID-19 vaccines.
Corning also expanded its agreement with the U S government to boost capacity provides to $261 million of.
$57 million increase from our initial June 2020 agreement.
Turning to display.
We're leveraging our competitive advantages to deliver stable returns.
I am pleased to note that in quarter, one we experienced the most favorable first quarter pricing environment in more than a decade.
And we announced a moderate increase to our display glass substrate prices for the second quarter.
Stepping back.
We're the lowest cost producer of display glass.
Which makes us significantly more profitable than our competitors.
Our superior products innovation capabilities and deep customer relationships on the.
Table us to maintain our leadership position.
And our flexible fusion manufacturing platform allows us to match operating capacity with demand.
Meanwhile, the emergence of Gen 10.5 has given us a unique opportunity.
Demand for large size Tvs continues to grow 75 inch says were up more than 60% last year.
These Tvs are most efficiently made on the largest fabs and Corning is well positioned to drive more content into the market in 2021 with its gen 10, five plants in China.
Finally.
Let's look at optical.
I'm energized by the outlook for this business.
We gauge the market by three indicators first dish network need and we can all see the demand on the network is only increasing.
Second is customer statements.
Broadly network operators are making encouraging announcements on capital investment for five G and Hyperscale data center deployments.
There is also good news on fiber to the home.
At&t's CEO, John Stankey recently said the.
The fiber underpins the connectivity, we deliver serving both wired and wireless.
His company announced plans to increase its fiber to the home footprint by an additional 3 million customer locations across more than 90 metro areas in 2021.
For arrived and CFO, Matt Ellis said.
The fiber serves as the critical backbone to our fiber deployment.
Our commitments with our vendor partners, such as Samsung Nokia Ericsson and Corning represent key strategic agreements to drive innovation and by G.
And finally.
The third indicator, we watch is <unk>.
Order book.
We're seeing orders and sales increase.
And we're also seeing multiple governments starting to shape policy.
That of search broadband is the basic right.
The developing action plans to take optical solutions to many more homes.
The White house is calling for more than a $120 billion to bring high speed Internet to every American.
Just looking at the two biggest efforts the rural opportunity development fund and the President's infrastructure plan, we see a multibillion dollar opportunity for Corning.
Additionally, the U K launch its 5 billion pound project gigabit.
The plan is to bring next generation broadband to more than a million hard to reach homes and businesses.
And the European Commission is calling for 135 billion euros to support the rollout of rapid broadband services to all regions and households, starting.
In 2021.
In addition, we remain the unquestioned technology and market leader, we consistently create new products and extend our lead by delivering solutions that help our customers realize the network patients faster.
And cheaper.
Simultaneously, we are driving productivity improvements to increase capacity and lower cost.
In total we're feeling very good about optical.
So I.
I've talked about how we invest to create and make innovations that solve tough challenges.
The labor for our customers.
And growth.
Now I wanted to Ann My final point.
As we effectively build our strength as the company, we will continue to reward our shareholders.
The strength of our businesses results in significant cash generation, our first priority is to invest for growth and.
And we are committed to return excess cash to shareholders in the form of dividends and opportunistic buybacks.
In the first quarter, we announced the 9% increase to our dividend.
And earlier this month, we seized a great opportunity to resume share buybacks.
Through our recent transaction with Samsung display, we repurchased 4% of our outstanding shares.
This is a great deal for our shareholders and it's great news for Corning, The Samsung retained a 9% long term ownership stake in the company.
We see their investment as validation of Corning innovation roadmap and the value of our capabilities.
As we look ahead.
It's the only adds to our confidence.
Shifting to a broader view of our stakeholder base, we're committed to sharing resources and leadership on a range of important issues.
We continue to support vital human services and emergency relief and our communities around the world.
Our office of racial of quality and social unity has made significant strides in.
In North Carolina, we've established a five year partnership with MCA and T. The largest historically black University in the United States to provide scholarships through 2026.
The funding focuses on enhancing stem education.
Helping students become community classroom teachers and.
The boosting the number of graduates in other fields critical.
To the nation's workforce.
In New York, we're providing hands on support.
Police reform.
We're also energized around our sustainability efforts the U S. EPA has once again named Corning, an energy star partner of the year recent.
The recently Verizon publicly recognized our sustainable practices.
And I am pleased to announce that we will publish our first sustainability report in the coming months.
On all dimensions.
Corning is operating exceptionally well.
And our capabilities are vital to progress on multiple fronts.
We're succeeding.
At building.
The stronger.
For a resilient company.
I want to thank.
Incredibly dedicated employees around the world for their commitment to our company.
To the communities we serve.
And to each other.
And I look forward to updating you on our progress throughout the year now I'll turn the call over to Tony. So he can give you some more insight on the quarter.
Thank you Ann good morning, everyone.
I am pleased to reiterate the Corning had another excellent quarter, we closed 2020 with strong momentum and built on that momentum by delivering sales EPS and cash flow above our expectations.
We are off to a great start and we expect that strong demand and positive momentum to continue throughout the year.
Now, let me walk you through our first quarter performance.
Sales were $3 $3 billion, which translates to a year over year increase of 29%.
We posted double digit sales and net income growth year over year across across all of our segments environmental.
The environmental technologies, and specialty materials delivered particularly strong year over year growth.
Posting sales increases of 38% and 28%, respectively, and net income gains of about 111 and 78% respectively.
Optical communications posted its second quarter of year over year of growth and we expect to see that trend continue.
And notably display experienced the most favorable first quarter pricing environment, we've seen in more than a decade.
During the quarter multiple events disrupted global supply chains.
Like many other companies, we experienced elevated freight and logistics cost across our businesses and we expedited shipments to meet our customers' expanding demand.
This ultimately reduced profits by approximately $50 million.
As a result, our margins were below normalized levels.
This was most pronounced in our environmental technologies optical communications and display businesses.
We will continue to do what it takes to deliver for our customers.
But we'll also take steps to mitigate these costs and we expect to see them begin to decline in the second quarter and normalized longer term.
Operating margin was 17, 1%.
That's an improvement of 730 basis points on a year over year basis.
Operating income of 125% year over year.
EPS came in at 45, which is more than double year over year.
Free cash flow of $372 million was up $691 million versus first quarter 2020.
And it equates the 39% of our 2020 total.
This adds to our confidence that we will generate significantly more free cash flow in 2020.
So even with the disruptions from the Suez to storms to continued COVID-19 challenges.
It was a very strong quarter.
Now, let's take a closer look at the performance of each of our businesses.
In display technologies first quarter sales were $863 million up 3% sequentially and up 15% year over year net.
Net income was $213 million up 40% year over year.
Net income declined slightly sequentially because of the timing and flows of incentives associated with expansions in China.
Corning volume grew by a low single digit percentage sequentially.
And Q1 sequential prices remained consistent with Q4 levels.
Now we continue to see strong end market demand.
Retail demand for large size Tvs and products, including notebook Pcs are both on track for another year of double digit growth.
As a reminder growth and large sized Tvs is the most important driver for us as we are well positioned to capture that growth with Gen 10 of the half which is the most efficient gen size for a large TV manufacturing.
Panel makers are running at high Utilizations and glass demand is robust.
And we continue to expect the glass market the grow by a mid single digit percentage in 2021.
Against this backdrop issues that our competitors have created glass shortages in an already tight supply environment.
Our primary operational focus is the supply our customers demand.
Corning experienced the most favorable first quarter glass pricing environment in more than a decade.
And we had increased cost and logistics energy raw materials and other operational expenses.
As a result, we are moderately increasing glass prices in the second quarter.
We believe the pricing environment will remain favorable going forward.
The factors will continue to drive this.
First we expect glass supply to remain short the tie in the upcoming quarters.
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.
Looking ahead, we expect the glass supply will continue to be short the tight and we will continue to partner with our customers to maximize our glass supply.
In optical communications first quarter sales were $937 million up 18% year over year.
Sales were up in both enterprise and carrier networks, driven by the accelerated pace of data center builds and increased capital spending on network capacity expansion and fiber to the home projects.
Net income was $111 million up 283% the.
The improvement was driven by incremental volume and strong cost performance.
There are some extremely encouraging announcements coming from leading network operators as well as governments around the world that point to the start of a strong investment phase across the industry.
Clearly there is a lot of excitement surrounding network deployment and optical fiber.
<unk> role in delivering both basic and next generation services to end customers.
We are well positioned to capture a significant amount of that upside in the market.
Corning is the industry leader and the only large scale end to end manufacturer of optical solutions, which allows us to innovate on important dimensions not available to competitors. This puts us squarely at the center of growth trajectories in fiber to the home five G and Hyperscale data.
Centers.
We've returned the growth in optical communications and we remain confident that we will continue to grow.
In environmental technologies first quarter sales for $441 million up 38% year over year.
Net income was $74 million up of 111% year over year.
Diesel sales grew 44% year over year, driven by customers continuing to adopt more advanced after treatment in China and by a stronger than expected North America heavy duty truck market.
Automotive sales were up 34% year over year as the global auto market improved and GPS of adoption continued in Europe and China.
And we are well on our way and ahead of our original timeframe to build the $500 million gas particulate filter business.
European regulations are in full effect and adoption in China continues as China's six day implementation of the regulations began during the first quarter.
In specialty materials first quarter sales of $451 million were up 28% year over year due to strong demand for premium cover materials.
Strength in the market and demand for semiconductor related optical glasses net.
Net income was $91 million of 78% from 2020, as a result of higher sales volumes and lower manufacturing costs.
Connectivity and computation continues to grow in importance, creating strength and resilience in the smartphone.
And semiconductor markets.
And we outperformed that strong market.
Our premium glasses and surfaces supported new phones, and it launches, including more than 25, smartphones and 12 laptops and tablets featuring gorilla glass.
And we are capturing high demand for our industry, leading advanced optics materials, which are essential for deep and extreme ultraviolet or <unk> lithography.
In 2020, <unk> systems accounted for more than 30% of all semiconductor lithography equipment expenditures our customers believe these systems will grow significantly over the next five years.
So we see growth for our semiconductor related materials, well beyond resolution of the current and well publicized capacity tightness.
Life Sciences first quarter sales were $300 million up 16% year over year, and 9% sequentially driven by continued strong demand for diagnostics growth and bio production and recovery and lab research markets net income was 48 million.
Up 26% year over year, and 14% sequentially driven by the higher sales and solid operating performance.
Now I'd like to turn to our commitment to financial stewardship and 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 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 R&D and the investments capital spending and strategic M&A our.
Our next priority is to return excess cash to shareholders in the form of dividends and opportunistic share repurchases.
In February we announced the 9% increase to our quarterly dividend.
In April share, we resumed share buybacks by repurchasing 4% of our outstanding common shares from Samsung display.
We are pleased that Samsung will remain a significant shareholder.
Their ownership demonstrates confidence in the value of corning's capabilities, our ongoing technology collaborations and our combined innovation leadership.
The repurchases will be immediately accretive to EPS starting in Q2.
We will remain opportunistic during the year surrounding additional share repurchases.
In closing, we had an excellent quarter relative to both 2020 and the 2019.
Demand is high across our businesses are more acquiring strategy is working and we are operating very well with all segments growing year over year.
We are growing our top and bottom line and generating strong free cash flow.
For the second quarter, we expect core sales of three three to $3 $5 billion and earnings per share of 49 the 53.
And for the rest of the year, we expect that momentum to continue.
I look forward to sharing our progress with you as the year goes on.
With that let's move to Q&A Ann.
Thank you Tony operator, we're ready for the first question.
Thank you.
First question comes from Steven Fox with Fox Advisors. Your line is open.
Thanks, Good morning, and thanks for all of the color on the call. So far Wendell I was wondering if you could maybe put some perspective on the current optical cycle from two points. One is the differences maybe in the markets served.
By region application versus prior cycles, where you strong where you maybe have opportunities and secondly, your own innovation of what could drive better content for you at market outgrowth of et cetera, and then Tony just on the other sales line can you maybe break that out of a little bit and give us some color on what was in that this quarter. Thank you.
Thanks, David.
In terms of this build cycle.
I think the most.
Interesting thing about it.
It is.
How to manage it and it is.
The nature of network builds.
The big Civil works projects and the Big capital investments.
And so they tend to be made with very long term.
Anticipation of growing demand.
What's happened is.
During the pandemic the networks sort of burn through there the guardrail that they always tend to have the always trying to be about 18 months ahead of any demand and so now you're feeling it there for.
Feeling the revenue opportunity even earlier as they build so that provides a little more impetus. So that's the first thing I think that's a little different than build cycles that you and I have seen in the past Steven this much less on spec.
More on the baseline demand has just moved up.
More work from home, there's more need for bandwidth.
Theres more cloud Theres more and it's here today and so I think that's one thing I think the second thing is are the entry of fiber optics in a significant way into wireless.
So historically.
And <unk> systems for three G.
<unk> been relatively fiber poor.
They haven't been big consumers of fiber.
But with five G. Those cells the to be so much closer to the consumer to their customers you need more densification and thats driving a lot more glass into the wireless network.
So it sort of put us in this position Steven Ware.
Sort of like whichever network wins.
Whichever network.
They tend to emphasize it'll be glass rich.
Now if that wasn't already more than you wanted to know I think the third thing is the operators.
Our building more converged networks.
Especially the big folks used to run of wireless network separate from wireline there even the separation between what is aimed at.
Consumers versus businesses and now they're realizing that their very best returns or by putting in fixed glass networks, and then being able to serve as many different offerings of the tip of that fiber.
So in general this has built a pretty good bull case for.
The technology cycle, continuing to move our way along with the build cycle.
As you heard me say in the opening one of the things we're doing when you sort of see that converge nature.
And you see more of cloud is it's driving our innovation wheel to be able to find ways for people to install networks and have them be able to go faster.
A less expensively and now greener using much less materials, and we have a whole suite of products.
We're just starting to introduce.
That are going to help make this build cycle be of more effective investment for our customers.
And then Steve in terms of the other segment sales were about $270 million of just a couple of hundred million dollars over last year vast majority of those sales were from hemlock hemlock had a strong quarter.
What we also saw of little bit of an increase in both our auto glass in our valor business on a year over year basis.
Great I appreciate all that color. Thank you very much.
Our next question comes from Summit Chatterji with J P. Morgan Your line is open.
Hi, Thanks for taking my question.
<unk>.
Just on the display I wanted to understand the difference.
When you talk about retail demand being strong you talked about of double digit growth.
But for the glass market Youre talking about from mid single digit.
Doug.
The market outlooks on the base load.
<unk> talked about in previous years, despite the much stronger market.
Is that really just the capacity constrain that.
Limiting the glass market demand and does that pushed some demand into next year I just wanted to better understand the difference. Thank you.
Yes, no I think from an overall standpoint, youre right I mean, we're expecting the demand this year to be similar to what's happened in past years and that of course is really driven by what happens with large screen size Tvs.
And so what we're pointing out is how important not only those are but that's where we've seen a lot of good demand.
One of the other changes that have happened over the last couple of years does it is.
He is also having stronger demand than what we've seen in the last couple of years and given the work from home and study from home.
Environment, we expect that to continue so I mean, we would expect or what really drives this market. As you know of Cemig is what happens from a screen size standpoint, we'd expect our screen size to be up in that one of half inch plus just like it has in the past and that would drive that marketplace. The one thing I would note is that the one.
Market, where.
Where demand isn't as strong from a television standpoint is in China.
And China hasn't been as strong in the last couple of years, and we would expect that that the change over time and when that changes. We do think that that will be additional demand that isn't in the marketplace to day, whether that happens in the back half of this year of next year, we'll just have to wait to see.
And cemig, but you're basically, noting and I think it's.
It's an astute observation is that that demand above sort of our normal screen size growth.
Is getting masked by a reduction.
In the value chain downstream of us So your question of.
Does that basically.
More demand out into next year.
That's a good one and it all depends on how that supply chain ends overall, but.
It's a very good observation.
Okay. Thanks for the kind of 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 ask two I suppose one would be the inventory levels on Tvs.
No that Wendell you talked just a second ago about the supply shortages and you know how that mixes with demand I'm. Just curious when you guys think the inventory levels out there, we'll be back to something like a new normal whatever that is.
And then secondly, I wanted to ask on C band auction and the optical business, whether you have detected any any delays in deployment of optical fiber around.
Some of that C band spectrum build out in five of your build out or do you think that the.
The deployment of all of that starts maybe the summer just kind of trying to figure out what the timing expectation for that optical demand, particularly in the U S. It's around the C band of <unk>. Thanks.
So I think in terms of the.
Television inventory levels as you know as Wendell said, we did see significant demand last year and that definitely and continue to see good demand in the first quarter and that clearly is impacting what's happening from an inventory level standpoint.
That is where we're seeing the.
The.
Continued reduction in those areas.
Whether that sorts itself out by the end of the year or into next year really depends on what level of demand continues on a going forward basis.
Not only on these large size Tvs in it but also of our it products and then whatever eventually happens from a standpoint in China also.
And on the.
C band piece I think the.
John.
To take your question divided into the two pieces first just look at the value of that C band.
Akshay run is one of the things I take away from that is the value of Densification.
Because the way you increase the returns on those relatively big amounts of they spend on spectrum is.
Hugh.
You can split it up.
You can reuse the same basic spectrum as long as you increase the Densification of your network and decrease the surface area of that particular spectrum. So I think it really provides powerful economic.
Interest and sort of fiber rich.
Wireless networks over time, so I think that's good news.
As far as the actual timing goes.
Because of the converged nature of the networks I don't know off the top of my head Rod, let let us check into it and we'll get back to you. If we have any deep insight okay.
Great. Okay. Thanks, guys I appreciate it.
Thank you. Our next question comes from John Roberts with UBS. Your line is open.
Thank you or any of the baby businesses in the other segment, graduating to the adult segments anytime soon say auto glass or valor glass or when do you think those businesses grow up.
Well It makes me laugh on my earnings call, but.
Yeah, I think that the extra of big question, we're arguing about just that.
And when do they move fully into our math structures of our market access platforms.
Yes.
We're not quite ready to have them graduate yet, but it's but we're in the midst of that exact dialogue Sir.
Yeah.
Yes, I mean I think.
As I said, we saw growth on a year over year basis in both of those businesses and we feel good about that and.
I think there's definite benefit of having them in the other segment in terms of the real focus that we get but then we also leveraged our market access platforms at the same time so we.
We will definitely continue the debate that internally.
Thank you.
Thank you. Our next question comes from <unk> Mohan with Bank of America. Your line is open.
Yes. Thank you.
I was hoping you could talk more broadly about.
If the constraints.
In the semiconductor space are creating any particular challenges for for Corning across its business lines and.
If I could Tony could you talk about the gross margins in the quarter I understood your comment around the $50 million headwind because of some of the increased logistical of freight costs energy costs, but can you talk about how why we are not seeing potentially batter of gross margins given the pricing and volumes that youre seeing in display and particular.
And maybe maybe underlying that what is actually happening with like for like margins across the segments any color there would be helpful. Thank you.
Sure I'll start with that Tony Your I mean, one is you know our stated goal is to expand our operating margins and improve our return on invested capital.
The good news is we're doing just that and we believe these results are very good.
We think operating margins of the right place the judge our profitability.
And the reason we focus on is it's where we're utilizing our focus portfolio to capture synergies across our businesses and you saw this expansion in operating margin you saw it in Q3 and Q4 last year on a year over year basis, and you see it again in Q1, and our Q1 operating margin was $17.
1%, which was up considerably from last year.
And our operating margin in terms of dollars was up 125%. So I mean this is good performance and in line with where we were actually from a pre pandemic standpoint, but as you noted. It was also included a 150 basis points.
Of.
Of course from the $50 million of freight and logistics costs and when you adjust for that then it's extremely strong performance from a margin standpoint, and the good news is these costs will start to decline in Q2, they're going to normalize longer term and as that happens you would expect to see continued expansions.
From a margin standpoint now one question, we get a lot is what does hemlock do to our margins.
And this is the really good example of why we think if youre going to judge our profitability operating margins is the right place the judge it it's actually a drag on our gross margin percentage on average, it's about 50 basis points, but in Q1, because we had a little bit stronger business in the hemlock it was actually greater than that.
But it is slightly accretive on an operating margin standpoint, and that's why we think it's important to think about things from an operating standpoint, so from where we said we think there was really good performance in Q1, and you'd expect to see improved profitability has returned to a more normalized environment.
Exits.
Thanks, that's helpful Wendell.
Do you follow up on the <unk>.
Semi side.
Sure.
Got it.
It's definitely impacting.
Auto display.
Ed.
Or.
Mobile consumer electronics industries.
But really in all three of those are backlogs been strong enough. The we're not feeling it in our sales.
So we're watching it really closely.
But so far.
We're not we're just not feeling it in our revenue, although we know that it is definitely impacting the industry like auto is the leader in it.
They can't get enough.
We're still growing really strongly into that.
So more to come we'll look at it closely and any insights that you pick up along the way we would appreciate as well Sir.
Thanks Wendell.
Okay.
Thank you. Our next question comes from Asia of merchant with Citi. Your line is open.
Great. Thank you.
For the color and thanks for all of the incremental comments as far I just have a couple of questions. One on capex. It came in a little bit shorter than what I was expecting should we expect this run rate to continue for the remainder of the year or was there any one time this quarter and then just the commentary so far on demand.
<unk> backlog order pipeline seems really strong I know Corning debt did used to provide annual guidance.
Guidance alrighty annual color across the various segments.
Any reason why.
That's not the case this particular quarter and should we expect that in the future quarters. Thank you.
Yes, I think from a.
The Capex standpoint, what we said back in January we thought capex would be pretty similar to what occurred in 2020, and we still think that's likely to be the case as you noted our demand is very strong and so as we get out further into the year.
Is it possible, we'd spend a little bit more capex in order to meet that demand.
That's certainly always the possibility, but I think from an overall standpoint, where we were back in January is still the right place and if for some reason that were to change in a big way of course that always comes with committed.
<unk> demand and so that's a good thing and the.
Then in terms of our full year guidance I mean, clearly we're very.
Happy about the momentum that we've experienced in Q4 and in Q1 and as with the guide. We gave we expect the continuing from the Q2 standpoint, there's still a lot of uncertainty in the world and the.
A lot of.
General uncertainty and so we're very focused right now on delivering.
Delivering in the near term and keeping that momentum going.
If I could just add the to both I think as you think about cash flow Capex and then our guide.
The.
Fundamentally our cash flows really strong when we're not in a big build cycle.
And that's what you're seeing right now.
We are in the create and extend pieces of our value creation cycle and you see it with our quarter one free cash flow conversion was 90%.
And you should really expect this type of very powerful cash flow from us.
When we're not in a significant build cycle.
It takes us about 18 months to get one of these big plants up and then it takes us a while the fill it we're.
Now benefiting.
From the wisdom of Ipass build cycles, and so that's going to continue to be strong.
On the guidance, we've listened really closely.
Our investment communities and what we've tried to do is as of the feedback we've gotten is sort of what would be most valuable would be to move to the more macro sales and EPS level and the take it a quarter at a time for now.
<unk>.
Then as we can.
Continue to progress under this method, if you or others have thoughts on how we could additionally, improve our ability to communicate with investors will be really open to it so more conversation to come in and we look forward to your input.
Great. Thank you.
Thank you. Our next question comes from Martin Yang with Oppenheimer. Your line is open.
Hi, Good morning, Thank you for taking my question.
Window can you maybe comment on where we are in the Hyperscale data center investments and maybe any additional color.
Comments on there.
The action in the next 12 to 18 months will be appreciated. Thank you.
Great. So short version is.
They are increasing their investments in hyperscale.
Really across the board.
Various folks are.
More of a vague versus more direct.
Right, but what you see is really across the board and hyper.
Folks are commenting that they are going to.
Continue to increase their investment in data centers as Theyre going forward here in this year. So we're actually in the build cycle for them.
As well good news is we have the capacity we are ready to go.
And we're seeing that demand as you saw it in quarter, one and we're going to continue to see it.
And I'm really excited about some of our potential innovations in that space.
That will.
Once again create that more corning more of our content why we reduce hyper scales carbon footprint.
Reduced its cost and increase.
The ability to get them of fast.
Great. Thanks.
Operator, we'll ask squeeze in one more question.
Our last question comes from Tim Long with Barclays. Your line is open.
Thank you thanks for getting me.
Under the belt here.
Two if I could maybe.
Tony for you could you talk a little bit about <unk>.
Operating expenses I get the focus on margin over <unk>.
Gross margin.
It looked like a pretty.
Good number in Q1, how do we think about the cadence there given you guys have done some refocusing on the Opex side, but also we should start seeing some kind of return to travel and things like that in incentive payments and whatnot.
And then second.
On the life Sciences business could you talk a little bit about if obviously you had two really strong quarters. There do you think there's been some pull forward or do you think we're kind of at the new higher levels for that business. Thank you.
Yes, Tim from an operating expense standpoint, Youre right, where we remain very focused on that during the pandemic. We took a lot of actions, which saved us roughly a couple of hundred million dollars during the year and we've said all along that those costs return as we returned to normal normal and.
I would expect too.
Continue to see those increase somewhat as.
As we go into the second instead of the third quarter.
Kind of of the historic operating.
Spence percentages that we've had I think thats, where youre going to end up from an overtime standpoint, clearly where we remain very focused on it but I just I do think that you do see increases as the business goes up.
But the thing to keep in mind is that of course with the leverage that we're getting from out of margin standpoint that we would expect our operating margins to go up just like the experienced since we did on a year over year basis in Q1 and also as we saw in Q3 and Q4.
Thank you.
And then from a life Sciences standpoints.
Think that.
This is the this is an ongoing.
Business level I mean this is strength.
We've seen across our businesses our orders are actually very strong our backlog is strong.
And I mean.
This is a level of.
The business that we'd expect the going forward and we would expect to see continued growth in that business actually.
Yes. It is.
Thank you.
Quite rightly asking is because of.
The real.
Crunch in the life Sciences. The says people are trying to react.
Everything that was needed for the pandemic.
You do create.
Some high variability in supply chains.
And we will experience some of that.
But in general because of where we're positioned.
With our products and our innovations, we're sort of going down the journey in life Sciences. It looks a lot like our other market access platforms, where the areas that we've invested.
Going to grow faster than the underlying <unk>.
Markets and innovations are going to lead to a more Corning story and therefore I believe we are in kind of elevated growth.
<unk> for the life Sciences going forward as our innovation has just become more relevant.
To the secular trends in that industry.
Okay. Thank you.
Thanks, Tim Thank you Wendell.
And thanks, operator, thank you all for joining US. This morning before we close I wanted to let everyone know that we will attend the Jpmorgan virtual Tech and Internet conference on May 26, and the Bernstein Conference on June 2nd finally, a web replay of today's call will be available on our site. Starting later this morning.
Once again, thanks for joining us and operator, you can disconnect all lines.
This concludes today's conference call. Thank you for participating you may now disconnect.
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