Q2 2021 Corning Inc Earnings Call
Welcome to the Corning incorporated quarter, 2.2021 earnings call took place yourself in the Q&A queue. Please press star.
Or what.
It is my pleasure to introduce you to Ann Nicholson, Vice President of Investor Relations.
Thank you Catherine and good morning, welcome to Corning quarter, 2.2021 earnings call with me today are Wendell weeks, Chairman and Chief Executive Officer, Tony trip, any executive Vice President and Chief Financial Officer and.
Just even send executive Vice President and Chief strategy Officer.
I'd like to remind you that today's remarks contain forward looking statements that fall within the meaning of the private Securities Litigation Reform Act of 1095 of these statements involve risks uncertainties and other factors that could cause actual results to differ materially.
Factors are detailed.
<unk> and the companies 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 and analyze the business.
In the second quarter GAAP net income of 449 million.
However, GAAP EPS was a loss of <unk> 42 cents due to the GAAP accounting treatment required for the transaction entered into with Samsung display. Let me take you through why this was the case.
As a reminder, on April 5.2021, Corning entered into a share repurchase agreement with Samsung display as part of the.
Agreement Samsung converted preferred stock into common stock and Corning immediately repurchase 35 million shares of that common stock from Samsung the.
The common shares are traded on the open exchange. So GAAP requires a special accounting treatment of the repurchase and extinguishment of the original preferred shares the accounting treatment.
Treatment for an extinguishment of preferred shares is to record the difference between the repurchase price in the original book value in retained earnings.
This adjustment to retained earnings is also removed from net income available to common shareholders when calculating GAAP earnings per share.
Excluding this U S GAAP EPS would've been.
52.
Differences between our GAAP and core results can also stemmed from non cash mark to market gains or losses associated with hedging contracts. They were de minimis this quarter of.
A reconciliation of core results to the comparable GAAP values 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. We encourage you to follow along and they're also available on our website for downloading and now I'll turn the call over to Wendell.
Thank you Ann.
Good morning, everyone.
Today, we reported outstanding second quarter results and we're on track for.
For a strong year.
Versus second quarter, 2020 sales grew 35% to $3.5 billion EPS.
<unk> grew 112% to.
53, <unk> on the higher sales and expanding margins.
Free cash flow grew 65% to $471 million with first half cash generation of 840 <unk>.
John.
<unk>.
No question.
We're in great shape.
And we see a clear growth story, playing out across our businesses.
Each of our 5 segments grew sales by a double digit percentage.
Year over year.
Ranging from 16% per specialty materials to 80% for environmental technologies.
Now of course 2020 was an easy compare.
I think it's worth noting that.
III even versus second quarter of 2019, we grew total company sales and EPS, 17% and 18% respectively.
Since the second quarter of 2019, we've added more.
Then half a billion dollars in quarterly sales.
About $200 million from hemlock.
And more than $300 million is organic growth with about 70% of that come.
Coming from success of our more Corning.
Content strategy and outperforming the competition.
The other 30% of organic growth is from rising with the market.
In each of our market access platforms, we are addressing significant ann transforming.
Formation trends.
We seek to drive content and expand our total addressable market by combining capabilities from our focused portfolio and prioritizing opportunities for more Corning.
Our long term strategy.
Built on a comp.
Sort of reset of 3 core technologies, 4 proprietary manufacturing and engineering platforms and 5 market access platforms.
We are leaders in each.
And the synergies among them allow us to create distinct.
Stinker benefits for our customers.
Improve the return on our investments in R&D.
And reduce capital intensity.
We create breakthrough products and processes by leveraging the synergies among our core capabilities.
Capital.
<unk>, an insights we gain through close collaboration with our customers and taking advantage of our existing plants and pilot facilities for early stage production.
For example over the past few years, we have created new to the world products include.
Including ceramic shield.
Top of Gorilla glasses.
Auto grade glass.
Valor drug packaging.
Gen 10, 5 display glass.
And innovative passive passive optical solutions that are dramatically increasing the.
Ease and cost efficiency of network deployments.
But we're not just creators.
We're also builders.
We do the manufacturing ourselves using processes that we invent.
And proprietary equipment that.
We design and build.
Growth opportunities arise and demand exceeds our existing capacity, we build state of the art plants to manufacturer of products at scale and we locate these plants in close proximity to our customers.
Our strategy.
<unk> that is likely to continue to pay off in a post pandemic world.
We derisk these investments by requiring meaningful commitments from customers, often including funding before beginning construction.
We last detailed our build investments with you and 2019, when we described our focus create build extend value creation cycle.
We pointed out how our build projects were directly.
Bonding to customer needs and commitments.
We knew the carrier carriers like AT&T and Verizon.
Would need more of fiber to densify their networks for 5 G.
We knew that.
We'd need glass for its Gen 10.5.
Panels.
The car companies would need gasoline particulate filters to meet new regulations there.
<unk> Tech companies would need high density cell culture to support of gene therapy.
And that smartphone Oems would need increasingly.
Singly durable scratch resistant cover glass as they design their phones and bigger cameras.
We told you these build projects will increase our capacity to meet committed demand Ann.
And then as we delivered on that.
That demand they would increase our revenue and generate excellent returns.
We are delivering.
Today, the build projects, we undertook from 2016 to 2019 are collectively delivering.
Our return on invested capital above 20%.
They've helped us increase our sales run rate from $10 billion.
In 2015 and 2016.
2 our current run rate of $14 billion.
And they've helped.
Helped us improve total company rois see by 3 percentage points.
Importantly.
Each time, we build.
We increased our scale and.
We enhance the opportunity to extend our leadership.
And create new innovations.
And because we're constantly improving our productivity and capabilities. We can often manufactured these innovations and drive revenue growth without building new facilities now.
And we actually spend most of our time in this extend part of the site.
ZIP is where we are today.
In this phase, we keep creating an extending until were so successful that demand exceeds our capacity.
As we reapply, our insights and repurpose our assets are best in the world capability.
<unk>, just keep getting better.
Every time, we pursue an adjacent opportunity we explore new combinations of capabilities.
We push the boundaries and areas, where we already lead in.
We cross train our people in deep.
Per building important ways.
In other words, we've created a positive feedback loop that expands our knowledge incur.
Increases the relevance of our capabilities and enhances our value to customers.
And.
S to rapidly fuels our content strategy.
We aren't exclusively relying on people buying more stuff.
We're putting more corning into the products that people are already buying.
And with that in mind.
So let's look at some of the initiatives, we are advancing across our market access platforms.
In mobile consumer electronics, we continue to help transform the way people interact with end user devices.
We captured growth.
Creasing the value we offer on each of those devices.
In the quarter <unk>.
Consistent with our strategy to obtain customer commitments in support of build initiatives.
Apple awarded Corning, an additional $45 million from its.
Advanced manufacturing fund to help expand our manufacturing capacity in the United States and the support of R&D.
To date, we have received $495 million in total from Apple's fund.
We've also launched.
Another chapter in our more Corning strategy.
With an important application of our capabilities to enhance the optics of smartphone cameras.
Which is a new category for us.
The social media experience is centered around photos device designers are adding cameras and increasing lend size.
We're also integrating more advanced capabilities such as telephoto.
Wide angle lenses.
Per red sensors.
These features naturally increase the prominence of the land surface area, which in turn increases the likelihood of scratches and damage.
And 2 of Corning.
Just last week, we announced gorilla glass with Dx Index plus.
From mobile phone cameras.
Dx family increases image quality.
And camera durability by providing a composite glass material that combines low reflection with scratch resistance approaching sapphire.
Samsung.
Yes.
Is the first adopter.
Turning to automotive.
Oem's of design and cleaner and safer vehicles with technology that enhances the driving experience.
We are uniquely suited to address these trends.
We are pursuing of $100 per car content opportunity across emissions precision glass products and auto glass solutions.
And we recently entered a new product category in automotive.
Curved mirror solutions.
Our solutions are enabling the augmented reality head up display.
John dies, new electric crossover the ionic 5.
The system essentially turns the windshield into of display screen letting drivers.
Keep their eyes on the road, while assessing navigation and speed information directly in their line of sight.
Additionally, a new generation of gasoline particulate filters.
Is helping us on our way to surpassing.
<unk> $500 million in annual GPS sales well ahead of our original timeframe.
Turning to life Sciences.
We're delivering growth on multiple fronts.
We're seeing ongoing demand in support of the global.
Pandemic response.
All of our inventions are helping advance the transition to cell and gene therapies.
And we're making significant strides towards building of valor glass franchise.
Addressing a multibillion dollar content opportunity.
City in the pharmaceutical packaging market.
In the second quarter, we further increased valor production capacity and secured additional customer wins.
We worked with Thermo Fisher and Optum of pharma to demonstrate.
<unk> solutions that increase vial filling speed by nearly 70%.
Thereby alleviating of critical bottleneck in the medical supply chain.
Our collaboration features a combination of Corning valor vials and.
Customers Ultra high speed fill and finished solutions.
Thermo Fisher called the results quote a game changer in their ability to serve patients.
Turning to display.
We're experienced the most favorable pricing environment in more than a decade.
And we announced our second moderate increase to our display glass substrate prices.
Stepping back.
We are the lowest cost producer of display glass, which makes us significantly more profitable than our competitors, our superior products and our capabilities and deep customer relationships enable us to enhance our leadership position.
Meanwhile, the emerging.
<unk> of Gen 10, and a half has given us a unique opportunity although market for large size Tvs is expected and projected to grow at a double digit CAGR through 2024.
And Gen 10 of half glass provides the most economical approach for larger set.
Seth.
We recently hosted the official opening ceremony for our Gen 10, 5 facility in the city of Wuhan.
This site is co located with a large bow plant, allowing corning to deliver Gen 10, 5 glass substrates more efficient.
Lee to our customer for its production of large size display panels.
Gen 10 of half provides strong economics for our shareholders, while creating options to use earlier generation fusion tanks for new applications.
<unk>, such as automotive and cover glass.
To illustrate remember that we launched our gorilla glass business back in 2007 by Repurposing some of our existing fusion assets.
Overtime Repurposing has resulted in us avoiding more.
That of $1 billion in capital spending.
Finally, let's look at optical communications.
We're energized by the momentum that is building in this business.
We see that momentum confirmed by multiple sources.
Case first is network need demand on the network has only been increasing broadband usage for June was up 33% versus pre pandemic levels.
And up 10% versus June 2020.
Which was a peak quarantine period.
Global <unk> subscriptions have grown to almost $300 million and they're on track to double that by the end of 2021, according to industry projections.
The second confirmation is customer commitments.
And many of our customers are actually being quite public about their plans.
We believe we're in the early innings of of large capital deployment cycle across via fiber.
Fiber to the home and Hyperscale data centers.
On At&t's earnings call last week their CEO said that by year end, they expect to have expanded their fiber footprint by 3 million locations, including both business.
And consumer customers.
Deutsche Telecom's, managing director recently shared that by 2024, they're planning to have about 10 million homes passed.
And 97% <unk> coverage he said.
Business the expansion of high performance networks is our top priority, whether with <unk> in mobile communications or fiber optic broadband expansion to achieve this we are massively increasing the investments in our network and cloud.
And Microsoft's CEO recently shared his perspective on expanding data center capacity to meet cloud demand. He said quote digital adoption curves aren't slowing down.
In fact, they are accelerating and it's just the beginning.
<unk> quote.
Of course, the third confirmation is our order book, which is perhaps the most important indicator of growth over the next few quarters here, we're seeing year over year growth.
Double digit percentages.
In both carrier and enterprise networks.
During the quarter.
We extended our technology and market leadership in optical communications by introducing new solutions that speed network deployment, we launched Corning S. M 28.
Cantor of fiber.
Which offers an industry first combination of superior bend ability.
Compatibility with other fibers and low signal loss.
We also launched edge rapid connect solutions that increased fiber density.
<unk> and reduce customer installation time by up to 70%.
Across our markets you can see that our value creation model is driving growth.
And the key trends are.
Converging around our capabilities.
We're helping our customers move toward a world with nearly infinite and ubiquitous bandwidth.
With lives Lifeflight displays.
Where cars are a cleaner autonomous.
Our connected.
We're medicines are individualized effective and safe.
And where you can do more from your mobile device.
Protected by cover materials that are more <unk>.
And more capable.
Now I'll wrap up my remarks today with 1 final point.
I've always said that how we do things is as important as what we accomplish.
So I'd like to take a moment to emphasize.
And committed to making a difference wherever we can.
We're building on more than a century of honest.
Respectful.
And fair behavior.
And such behavior must.
Wordlessly characterize all our actions.
Including progress toward improving our environmental.
Social.
And governance programs.
To share insight into our approach, we recently issued our annual report on diversity equity and inclusion.
And we published our first sustainability report.
On all dimensions.
Corning is operating exceptionally well.
Focused on providing value for all of our stakeholders.
I want to thank our incredibly dedicated employees around the world for their continued hard work.
And I look forward to updating you on our progress as we build on our momentum.
In the second half of the year.
Now I'll turn the call over to Tony So he can.
Use of more insight on the quarter.
Thank you Wendell and good morning, everyone. As Wendell said, we are on track for a strong year.
Second quarter results were outstanding we added almost $1 billion in sales year over year of half a billion.
<unk> sales over pre pandemic levels.
And we generated significant operating and free cash flow.
We also improved margins, both sequentially and year over year, which contributed to our strong EPS.
Across the board our progress has been very positive.
In particular pre pandemic comparisons highlight our strength.
We are confident this momentum will continue.
In all of our markets Corning's unique capabilities put us at the center of our substantial growth trend, while our content strategy drives outperformance.
And we have a highly effective value creation model in place to deliver profitable growth.
And create shareholder value.
Now, let me walk you through the key metrics and drivers of our second quarter performance.
Sales increased 35% year over year.
Year to $3.5 billion of strong run rate net income was $459 million up of 111% and EPS was <unk> 53 cents up 112% year over year.
We saw continued strength across our business.
<unk> optical.
Communications delivered its third consecutive quarter of year over year of growth and we expect to see that trend continue.
Display technologies was up sequentially and year over year and continues to experience the most favorable pricing environment in.
This segment of in a decade.
Life Sciences, and environmental outperformed their markets and grew significantly versus last year's pandemic loans.
Our margins expanded sequentially gross margin improved 200 basis points to 37, 8%.
Percent and operating margin improved 120 basis points to 18, 3%.
From a year over year basis, gross margin expanded 450 basis points and operating margin expanded 710 basis points.
Now during the quarter we.
We continue to face supply chain disruptions and inflationary headwinds.
Planning and increased output allowed us to reduce costly airfreight, but the sequential improvement was offset by increases in shipping rates and the cost of certain raw materials, such as resin a key component.
Ponant in our optical and life Sciences businesses.
In total we felt about the same of 150 basis points drag on margins as in Q1.
Now, while we don't expect significant improvement on the supply chain cost in the short term, we do expect them to normalize.
Over time.
And we're taking mitigating actions, including raising prices in selected product lines.
Now as is usual in the second quarter operating expenses in dollars increase sequentially.
The increase was greater than in prior years.
Because of our larger because of larger variable compensation accruals consistent with our rising outlook.
Free cash flow was $471 million up of $186 million year over year.
Cumulative free cash flow from the first half.
Of 2021 was $843 million.
We expect to generate significant free cash flow in the second half of the year and to surpass our 2020 total by a wide margin.
Now, let's take a closer look at the performance.
<unk> beach of our businesses.
In display technologies second quarter sales were $939 million up 9% sequentially and 25% versus 2020.
Net income was $248 million of 16% sequentially and 63%.
<unk> of year over year.
And Q2 sequential prices increased moderately as we implemented a price increase during the quarter.
For the third quarter, we are moderately increasing glass prices once again.
We believe the pricing environment.
<unk> will remain favorable going forward.
3 factors will continue to drive this.
First we expect glass supply to remain short to tie in the upcoming quarters.
Second our competitors continue to face profitability challenges at current pricing levels.
<unk> and third display glass manufacturing requires periodic investments in existing capacity to maintain operations.
Now we receive a lot of questions on how the pandemic has impacted the display industry 4.
For example, while there'll be fewer television.
Both in 2021.
We're in 2022.
And what's the impact on the glass market.
So let me take a moment to explain our view all.
Ill focus on televisions since they represent about 70% of the glass market.
Since LCD.
D C 's emerged as mainstream technology in 2004.
<unk> TV units have only been down 3 times.
And never 2 years in a row.
An annual glass demand has never declined.
Now since 2000.
<unk> TV sell through units are typically range bound between $225 and $235 million, while average screen size grows about an inch and a half of year.
In 2020 global TV units increased 4% above the trend line to.
TV $242 million.
Screen size growth was about 1.2 inches about 20% below trend.
A lot of smaller Tvs sold <unk>.
Probably to accommodate more people living working and studying from home.
In total glass demand.
2 of bad was up mid single digits.
Now entering the year, we expected and continue to expect the market to revert the trend in.
Implying a decrease in TV units.
Especially smaller Tvs.
And for normal growth of 1 of half inches.
Man screen size to return.
We now have retail data through the first half of 2021 and it is largely confirmatory.
TV units declined by a mid single digit percentage year over year, while average screen size growth returned to the 1.5.
In sensors per year of trend.
Unit volume of Tvs, 65 inches and larger increased over 20% and smaller televisions were down by a high single digit percentage.
Now consistent with map in history.
The glass market growth.
So halfway through the year, our expectations for TV units being down year over year and seen screen size growing approximately 1.5 inches.
Are playing out.
Looking ahead to 2022, we think TV units and screen size will continue to follow historical trends.
That means TV units will be within the typical range.
Average screen size will grow about 1.5 inches.
Now we have yet to see how the current holiday retail season plays out. So we don't have enough information to definitively comment too much on next year.
But it is worth noting that TEP units, which are declining this year have never declined 2 years in a row.
And next year is of World Cup year, and TV units have never declined in a world Cup year.
And finally the biggest.
Driver of retail glass growth in most years the increase in screen size, we would expect the average screen size to once again grow 1 and a half inches next year.
Now we will refine our views based on this year's holiday retail season, which is still in front of us.
We will keep you updated.
Let's move to optical communications, which continues its growth in with sales, surpassing $1 billion of 21% year over year and 15% sequentially.
Sales increased by a double digit percentage in both.
Both carrier and enterprise networks sequentially.
Per year.
Net income was $148 million up 83% year over year and 33% sequentially.
Higher volume and better operational performance drove the improvement.
The environment is.
Is extremely favorable demand on networks is at an all time high in response operators of expanding network capacity capabilities and access.
The pace of data centers built is accelerating.
And capital spending by our customers is increasing governments.
Around.
<unk>, alright, announcing and initiating plans to extend the reach of broadband.
All of this points to the start of a strong sustained investment phase across the industry.
We are the market leaders and we are well positioned to capture significant growth as network investment increases.
The world of our solutions improve the speed and capital efficiency of NAV.
Commence. Additionally, Corning is the only large scale Indian manufacturer of optical solutions, which allows us to innovate on important dimensions not available to competitors of.
Our broad customer base unquestioned technology.
That puts us squarely at the center of customer investments for fiber of the home.
Rural broadband 5 G and Hyperscale data centers.
In environmental technologies second quarter results were $407 million up 81% year over year.
Liter of 8% sequentially.
Net income improved year over year to $81 million and also grew sequentially, partly due to improved freight and logistics costs versus Q1.
Car related sales increased 68, 8% year over year as vehicle production growth.
But down in Dec lows and GPS of adoption continued in Europe and China.
Auto markets continue to be constrained by chip shortages, which impacted our automotive sales sequentially in the second quarter.
We are monitoring and market demand and supply chain activity as we go through.
The second half of the year.
We remain on track to build of $500 million gasoline particulate filter business at <unk>.
<unk> of our original timeframe, we continue to innovate to solve our customers' most challenging problems and have recently begun to ship next generation.
<unk> GPS to help Oems achieve even lower levels of emission.
In diesel sales grew 101% year over year, driven by continued customer adoption of advanced after treatment in China and continued strength in the North American heavy duty truck market.
Specialty materials delivered another outstanding quarter.
Following first quarter year over year growth of 28 per cent. The second quarter was up 16% year over year with sales of $483 million.
Demand remains strong for our premium cover glass materials.
I T products.
During the quarter, our premium glasses and surfaces supported multiple new phone and launches, including 16 smartphones, along with 6 of laptops and tablets featuring gorilla glass.
Demand also remains strong for advanced optics content used in.
And conductor manufacturing, which are essential for deep ultra violet and extreme ultraviolet or <unk> lithography.
Now of investments and innovations that are that are moving towards commercialization resulted in lower net income than in 2020.
As we've noted before newer innovations can face high cost as we develop and scale our manufacturing processes, we anticipate that profitability will improve as we come up the learning curve and improve utilization.
Life Sciences second quarter sales were 300.
$12 million of 28% year over year, and 4% sequentially driven by ongoing recovery in academic and pharmaceutical research labs and continued strong demand for bio production vessels and diagnostic related consumables net.
Net income was 52 million.
<unk> is up 68% year over year, and 8% sequentially driven by the higher sales and solid operating performance.
So our businesses performed very well in our markets are strong.
That said, let me take a moment to reiterate our commitment to financial.
Stewardship and capital allocation.
Our fund 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.
Financial leverage.
We will continue to use our cash to grow <unk>.
Extend our leadership and reward shareholders.
Our first priority for use of cash is to invest in our growth and extend our leadership. We didn't do this through R&D investments capital spending.
Going forward and strategic acquisitions.
Our next priority is to return excess cash to shareholders in the form of dividends and opportunistic share repurchases.
This year, we increased our quarterly dividend by 9% and resumed share buybacks by repurchasing.
<unk> and retiring 4% of our outstanding common shares from Samsung display.
In closing, we had an excellent quarter our performance relative to both 2020 in 2019 adds to our confidence that we are on track.
For an outstanding year.
For the third quarter, we expect core sales in the range of 3.5% of $3.7 billion and we expect earnings per share in the range of 54 to 59.
Our value creation model is working we are pursuing opportunities.
<unk> that utilize capabilities from our focused and cohesive portfolio to drive growth.
By Repurposing, and reapply and capabilities, we're increasing our probability of success lowering our cost of innovation and becoming more capital efficient.
I look.
Of this sharing our progress with you as the year goes on.
With that let's move to Q&A Ann Thanks, Tony and Catherine we're ready for our first question and I ask that in you analysts. Please limit to 1 question. So we can get through everybody.
Thank you.
As a reminder.
Its star 1 to ask a question and your first question comes from Tim Long with Barclays. Your line is open.
Thank you.
Just ask kind of a 2 part of an optical comms.
It sounds like a lot of lot of positives in the industry. There could you just talk a little bit about how you see kind of the cadence of of growth for.
4 of vertical as you see these positives of merchant both the service provider in the Hyperscale market and Tony If you could just follow up and talk a little bit about <unk>.
Operating margin leverage in that business. It looks like it was solid in the quarter how much more room is there on the on the margin front for optical comps. Thank you.
For that.
So first on the cadence for growth.
At this time.
We're in a place where.
What is that.
If we could make more.
We could sell more.
Ed.
1 of our attention is.
So cadence is going to relate more to that.
The normal seasonality that you would see in optical communications.
And so we expect that cadence to continue to be strong and aimed primarily.
Our productivity.
And Tim I think you are right I mean, we certainly do have operating leverage that will come from this business as it continues to grow we do have some headwinds that we're facing I've mentioned, the inflationary headwinds was resin cost and we're working to mitigate us so.
In terms of the actual pace of how that.
That leverage happens is we need to play out over the next couple of quarters, but there is definitely operating leverage there.
Okay. Thank you.
Thank you. Our next question comes from <unk> Mohan with Bank of America. Your line is open.
Yes. Thank you so much.
Thanks for all of the details of the display side of the business Dissecting TV unit growth and seen screen sales growth year in this year and potentially next.
You had very strong pricing performance as well and loss in 2021.
So how sustainable do you view.
Q the current pricing environment do you see.
Normalized outlook on display in 'twenty, 2 also translating to a reversal to low to mid single digit price declines are comprising remain.
Better given the supply demand dynamics in glass.
Thanks.
Question, 1 Z I think it's a little early for us to.
Be able to.
Gave you some guidance on how we feel about pricing next year.
Without doubt.
Yes.
These are very long term strategy, we've been pursuing here.
<unk> continues to bear fruit.
And we are seeing pricing stabilization.
Continue to improve throughout that time period of that effort.
Thanks.
And Theres, many things that are going on technically.
And with our strategic moves that lower the pricing intensity of the environment. So we would expect all of those factors to continue to be in place.
But 1 quarter out.
Right now is probably about as far as.
We'd like to guide at this time of pricing side of <unk>.
Okay.
Next question.
Our next question comes from Asia merchant with Citigroup. Your line is open.
Great.
Great. Thank you.
Some of the investors.
Caution as it relates to any device demand I know Tony you talked a lot of about <unk>, but maybe if you can talk about notebooks and smartphones.
How you think about your components will be go into those 2 end markets and if theres any risk.
Risk of excess inventory in the channel.
Maybe due to supply constraints, which are Indiana, resulting in demand push outs.
No.
Thanks is here.
So let's start with the first part so in general.
Remember.
Our outperformance in the markets driven by our more Corning strategy I know Theres a number of great examples, but 1 of course is.
Smartphone demand where over the last number of years smartphone demand has been pretty constant rate it really.
Really hasnt grown Meanwhile, our revenues have grown in excess of 40% and.
And so that content story really plays out of.
Across really all of the different device category. So there's always a degree of mitigation.
Of the impact of what's going on with consumers.
Sue or behavior at any given point of time.
So thats first to put in context, where all of them.
Moving forward, what we've tried to do is place that range of outcomes of consumer behavior.
And 2 our guides.
Into the way in which we're thinking about and planning.
Business in the near term.
We invest though in the long term.
So we're really behind those technology trends into more Corning strategy.
Ed.
So for us.
Being able to call it 1 quarter or for the other doesn't really impact our core investor.
<unk> strategies.
But we get a ton of information because we serve those markets. So broadly we try to integrate that into the points of view that we give to you.
So I guess short version is in there our point of view is that.
All of that is in there.
We'll update the point of view.
As we learn more.
Great and then from the auto glass opportunity I know at 1 point.
Thank you guys had talked about being able to per.
<unk> more color on that sort of point of various niches of certain run rates when you open.
And call out auto glass.
Is that something still under works for 2021 or just given all of the bottlenecks in automotive production should we expect that to come later in 2020. Thank you.
Yes.
A great question, so things are going great for us right now.
In auto glass.
<unk>.
We should get around to figuring out the right way to update you guys on that progress.
So everything is going fine with the innovations everything is going fine with the industry.
We just have to get our act.
Either to decide how do we best help our investors understand our trajectory in that business. So thank you for the reminder, that's on our to do list.
Yes.
Thank you.
Thank you as a reminder, if you would like to ask a question.
To guest Star 1.
Question comes from John Roberts with UBS. Your line is open.
Thank you nice quarter.
When do you think gross margins will be back to pre pandemic levels.
So right now.
We are clearly facing a lot of supply chain.
Chain disruptions and inflationary pressure and what we saw in the first quarter was of course of lot of that.
Relative to freight and logistics, we had plans to mitigate that we actually did those mitigation, but then there were other things that occurred particularly around the increased resin costs.
Sure So as you know.
We think about the guide in particular of the guide for the third quarter. We thought it was prudent to assume that that 150 basis points drag that's coming from.
Those inflationary and supply chain logistics costs would continue.
And we're going to again.
Again do the same thing we got lots of things.
To mitigate those and including in some cases raising prices on certain product lines.
At least we think for at least for the next couple of quarters. We will continue to see that drag we do believe it will mitigate over time, but exactly how long it takes to mitigate that.
We just need.
Just need to.
Let it play out.
Next question.
Our next question comes from Steven Fox with Fox Advisors. Your line is open.
Thanks, Good morning, just 1 more on margins.
On the investment spending on the specialty materials that you called out can you give us a sense for how big that was in terms of of drag on the operating margins and how it subsides.
And then just a clarification on the on what you just said Tony so going forward on the inflation pressures of 150 basis points quarter over quarter. Those arent changing so it's the same amount in dollars that you saw in Q2 is that how we should think about it yes.
Yes, that's how we should think about I mean as I said, we do have some plans to mitigate some of that we've also.
So he implemented those plans.
We just thought as we were thinking about the guidance what happened to us in Q2.
It could happen to us again in Q3, where we have new areas, where we have inflationary pressures. So that's how we're thinking about it it's not that we're not taking actions, but we just think from a guidance standpoint, that's about right.
And then in terms of the impact on the <unk>.
Projects in specialty materials, I mean, they did have a.
And impact on our gross margin Ann in our operating margin and you, especially saw that impact when you look at the specialty materials results.
And when you think about scaling that Steve.
You have a pretty good model I say, what the Incrementals should play out of that and the bulk of that Delta is.
Investment in this.
And this felt innovation. So I think if you think about it that way you've got the right sort of box color.
And as to how quickly it.
Our way.
As fast as we can make it.
Right.
We're just coming up the production cycle here and.
And it's it's progressing but like often with innovations.
Yeah.
It's what you.
Don't know that surprises you as opposed to what you have done so.
We shouldnt be humble and predicting the exact end of the drag.
Understood that's very helpful. Thank you.
Thank you. Our next question comes from Mehdi Hosseini with Seg.
Your line is open.
Thanks for taking my question and Tony I wanted to go back to your comment about of television in the last part of it and thanks for the detail.
Wanted to ask you is whether your key assumption for the panels that are in the channel.
Asking that because I'm under the impression that this year we of.
Had to refill the channel given the strong demand in the second half and I'm just curious what we'd like to know how the channel refill with impact next year.
Yeah.
Many of the way we always think about this is what really matters over time is what happens in the end consumer.
<unk>.
And you know where the channel go in any given quarter will of course make a difference in any quarterly number but what we're really focused on is the longer term trend there and as I pointed out is that we expected coming into the year for TV units to be down and for.
<unk> size to grow the instead of half of it at least halfway through the year. That's what we're seeing as we look out to next year, we'd expect to be back on the trend line that we had previously been on and you know just a reminder, that TV units haven't been down 2 years in a row havent been down in a world Cup year, Anthony what really drives the growth is the.
Scripps screen size growth and we expect that to be up and instead of half. So what we need to do is actually get through the big selling season, and then we will have more insights once we do that.
Got it thank you.
Thank you. Our next question comes from Rod Hall with Goldman Sachs. Your line is open.
The Street, Yeah, Hi, Thanks for fitting me in I, just wanted to come back to the input inflation question I guess, Tony you called out the resin I'm curious whether you guys are seeing other commodity inputs in plate and whether how temporary do you think that says do you think it's short term.
Or do you think that as of now.
Ongoing.
Theme that we'll still be talking about next year, just kind of wondering how inflation is likely to impact the model over the next let's say 12 months. Thanks.
So we are seeing it in other raw material areas, but the biggest 1 that we saw in the first in the second quarter was really in the resins.
John.
<unk>.
And chip.
Yes.
Shipping freight areas like that we do we do think in the shipping and freight areas.
We saw some improvement in the second quarter and we'd expect that to continue.
So.
I think that's exactly how this is going to play out over the next several quarters is certainly hard to predict we think it's prudent to think of it is going to be there and we fought it in our guidance was based on the assumption that that would.
Continue into the third quarter, we do believe this will normalize our mitigating actions.
Actions will.
You don't have and have an impact so I'm not worried about it in the long ago.
But certainly in the nearer term I'm more concerned about it so rod I think it's an excellent question.
And we don't know the exact answer right now and I think anybody who says they.
No the exact answer.
Is is probably being pride for okay. So.
That's why we're that's why we're approaching it the way that we are which is to say, it's like because we look to our guide.
We're going to account for those.
Those things that we don't know yet.
That could arise from an inflationary standpoint, and also on our mitigation actions you see us begin to take pricing action.
2 more equitably share.
Some of these supply chain.
<unk> pressures and shipping pressures that we feel.
I think we'll all of US will learn more here in the coming quarters and then as we do we'll be able to give you I think of.
A much better point of view.
You on what happens with those cost structures, but as well what our plans are.
Make sure of that.
We're doing the right things around pricing around cost mitigation to make sure those don't unfairly burdened our shareholders.
Great. Okay. Thank you.
Okay.
Okay.
Thank you. Our next question comes from of Cemig Chatterji with J P. Morgan Your line is open.
Hi, Good morning, Thanks for taking my question I guess I had 1 more on <unk> and kind of display segment.
Thanks for the color about the.
Kind of what are you seeing in retail data I know you've talked previously about China retail properly recovering and self correcting to some extent just wanted to get kind of what you're seeing in the retail data relative to that market and then display margins of 26.4 that you reported is the highest it's been for of why is it.
So as we think kind of about the next couple of quarters. Given that you are getting price increases is that the primary driver of improvement that we should be thinking about in the display of margins thinking.
So I think from of display margin standpoint, I mean, clearly what has happened is we've been doing a lot of build of investments and as we've talked.
About the foreign it's Wendell talked about.
Windows build investments come online.
Outstanding operating performance and that's what you're really seeing in display for sure. The pricing is is also helping but it is really what's happening from an operating performance standpoint in.
In terms of the China market has actually been kind.
Luckily where it was.
Before we haven't really seen much of a change there.
We're obviously monitoring it closely to see if something changes.
Great. Thank you.
Next question.
Our next question comes from Martin Yang with Oppenheimer <unk> Company. Your line is open.
Exactly thank you for taking my question and good morning, everyone.
The gorilla glass 4 camera smartphone camera cover of medicines to be a pretty big opportunity and of.
The market seems to be able to adopt that solution set of quickly can you maybe give us more context.
All of the supply chain, whether or not of yard solution could fit well into your existing manufacturing process and how are the customer feedback so far on the new product.
Thanks, Mike.
We're quite <unk>.
Excited about this opportunity.
80, as well so thanks for calling it out of.
The way the supply chain works is we will literally provide that part of cover pipe. So both the.
Underlying structure of the glass structures as well as the material we used.
Used to drive the composite.
To be able to improve the optics and durability of those cameras.
We have built the supply chain to be able to have that roll into really the same plants.
That ultimately glass parts go to to build phones.
So we feel pretty good that we have the capability and we've built the capability to serve the market.
So now it will be how quickly will the technology be.
Adopted.
Because it is new.
<unk> is a new feature for 4 of <unk>.
So does improve camera performance pretty darn significantly so we're hoping that that becomes pretty rapidly adopted.
1 thing that's going to impact pacing, though is when you change.
The light.
Capturing capabilities.
<unk>.
All of our camera remember the cameras are pretty complex devices right. So.
You have.
The <unk> system, you have different chipsets to deal with that imaging and they are built around an optical chain that is.
Loans at certain amount of light it's available. So we are actually improving that and so as you improve that to take full advantage of it you probably need to optimize some other components. So.
So we do think that though it is relatively easy optimal.
There are things that you would need.
As of do differently to take full advantage of this to deliver an advantage.
And customer experience.
That's really helpful. Thank you.
Next question.
It comes from Shannon Cross with Cross Research your line is.
Open.
Thank you very much of a big Big picture question. During the script you noted builds.
Projects, you've undertaken from 2016 to 2019 of an ROIC see ever.
Over 20 per cent and you're kind of this is my word but in of harvesting mode on some of those.
How should we think about the pace.
Some of the investments you've made.
Over the last few years just in terms of thinking about how you maintain sort of the continued benefit from from I don't know where you're investing in and so that in 4 years, you can say that you know the ones you've done.
Right now, our yielding sort of a similar growth rate I'm just.
Trying to understand the building blocks that get us to the future strong revenue growth given what you've done in the past 4 years. So you're sure Shannon that's of Great question. I mean, the first thing I would say is our focus right now is on what we call our extend capital and that extend capital is how we continue.
ONR businesses.
And a lot of the growth that.
We're experiencing right now really comes from the investments we've made the last couple of years from the extend capital in addition to the build capital.
And we'd expect that we've got a lot of extend capital that we're putting in place right now and that's going to continue to support our growth going forward.
Word.
Given our more Corning trends and.
No our innovation model and the opportunities that we see out there that really gives us a chance to perform much better than the underlying market and I'm sure at some point, we will be back at looking at build capital and when we do that we'll.
We will do that with real customer commitments <unk>.
To growth financings so we.
We think this is of great model to run our business with its really improved our capital efficiencies. It's improved our return on invested capital.
I think from a shareholder standpoint, this is a great way to run our businesses.
Great. Thank you.
Yes.
Let's take 1 more question before we close.
Okay and that comes from meta Marshall with Morgan Stanley. Your line is open.
Great. Thanks, and maybe following up on the last question.
Wendell you guys mentioned kind of.
By constraints on the optical side you know you've also mentioned kind of increase rois.
<unk> you've been pretty reserved.
Kind of Capex rightfully, so kind of during a lower cash flow generation period, but as that picks up.
What should we consider for Capex for the remainder of the year would you step up some of the investments to increase product availability.
Yes, I think.
Our underlying view on what capital spending is going to be this year is roughly the same as it's been since the beginning of the year.
<unk>.
Knew we were going to have of Goodyear of strong year with growth, it's a little bit.
Growing faster than maybe what we originally projected so maybe capital will go up a little bit.
More than our original projections, but our original outlook would be it would be pretty similar to what we did in 2020, so maybe there'll be a little bit higher than that but not a not a lot higher than that.
Great. Thanks.
Great.
Alright.
Thanks, everybody for joining us before.
Before I close I wanted to let you know that we're going to be attending the Jefferies Virtual conference on September 1st and the city Virtual conference on September 14, you can find a replay of today's call on our site. Starting later this morning. Once again, thank you for joining us and Catherine you can disconnect all lines.
Thank.
This concludes today's conference call. Thank you for participating you may now disconnect.
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Yes.
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