Q3 2021 Corning Inc Earnings Call
Okay.
Welcome to the Corning incorporated quarter.
So each about 21 earnings call took place yourself in the Q&A queue. Please press Star then one.
My pleasure to introduce to you and Nicholson Vice President of Investor Relations.
Thank you and good morning, everybody welcome to Corning's quarter three earnings call with me today are Wendell weeks, Chairman and Chief Executive Officer, Tony <unk> Executive Vice President and Chief Financial Officer, and just even to an executive Vice President and Chief strategy Officer, I'd like to remind you that today's remarks contain forward looking.
<unk> that fall within the meaning of the private Securities Litigation Reform Act of 1995 those.
Those statements involve risks uncertainties and other factors that could cause the actual results to differ materially.
Actors 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 management to analyze the business for the third quarter the largest differences between our GAAP and core results stemmed from noncash mark to market losses associated with the company's currency hedging contracts and noncash impairment charges.
With respect to mark to market adjustments GAAP accounting requires earning 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 these contracts will not be settled in the current quarter.
This decreased GAAP earnings in Q3 by $16 million to be clear this mark to market accounting has no impact on our cash flow.
Our currency hedges protect us economically from foreign exchange rate fluctuations and provide higher certainty for our earnings and cash flow our ability to invest for growth and our future shareholder distributions, our non-GAAP or core results provide additional transparency into operations by using a constant currency rate aligned with the economics of our.
Underlying transactions.
We're very pleased with our hedging program and the economic certainty. It provides we've received more than $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.
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 they're also available on our website for downloading.
And now I'll turn the call over to Wendell.
Thank you Anne and good morning, everyone.
Today, we reported strong third quarter results that continue a year about standing sales growth margin expansion and significant cash generation.
Sales grew 21% year over year to $3 $6 billion, a new all time high.
Gross margin expanded 50 basis points sequentially, and 70 basis points year over year to 38, 3%.
EPS grew 30% year over year to 56 cents.
And free cash flow of half a billion dollars brought cumulative free cash generation for the first nine months of 2021 two.
Two $1.3 billion.
Our outstanding results in this period of global disruption due to excellent execution at all levels of the company.
And they're driven by a compelling set of long term growth opportunities there were account sharing through our renovations and broad market access as we strengthen our commercial relationships.
And scale operations to meet demand.
Yeah.
Like everyone.
We're dealing with numerous factors caused by the pandemic and the resulting inflation.
In this quarter.
The largest macro impact was constrained in the automotive industry stemming from chip and component shortages.
Auto production in the third quarter is estimated to be down nearly 20% year over year and 9% sequentially.
As a result, we stepped down and light duty sales.
Across our businesses, we prioritize delivery for our customers in a complex inflationary environment.
And we have delivered despite incurring extra cost.
Now, we're taking additional actions, including pricing to address these costs and maintain our ability to invest and support our customers.
And you'll hear more from Tony on this in just a few minutes.
Against this backdrop, we feel really good about our performance.
In the quarter announcements with industry leaders illustrated the power of our portfolio.
Demonstrating not only our relevance across multiple market, but also her role as a key innovation partner.
Our strong position stems from a complementary set of three core technologies, who are proprietary manufacturing and engineering platforms and five market access platforms.
We're leaders in each we.
We generate growth opportunities by delivering combinations and new applications of these capabilities to help our customers to run their industries forward.
And in doing so we drive more corning content into the products people are ready by.
Let me share some highlights from the quarter.
In optical communications the industry is in the early innings of large deployments in support of five G broadband and the cloud.
Momentum is building and we see it confirm high multiple sources.
<unk> net worth meet demand on networks is significantly higher than pre pandemic levels.
Broadband usage for September was up 32% versus pre pandemic levels and up 9% versus September 2020, when remote work and school were largely in play.
Global <unk> subscriptions have grown to almost half a billion this year.
More applications are moving to the cloud and global data creation is expected to grow at 23% compound annual growth rate from 2020 to 25.
Versus 2020 cloud revenue industry wide is up nearly 50%.
The second confirmation of strong industry momentum can be seen in the announcements from leading companies.
On At&t's earnings call last week their CEO said, there on a march to deploy fiber at scale.
We are working towards passing 5 million homes per year.
In the quarter, we announced.
Announced a strategic investment to support their growth plans.
Speaking about our expanded collaboration AT&T said the expansion of fiber infrastructure is central to the growth of broadband reach for our consumers as well as business customers.
Recently shared that they plan to reach 10 million more homes with fiber by the end of 2025 with their CEO, saying quote.
Our future is fiber.
Quote.
Cloud deployments are also expanding Microsoft CEO said that over the past year, they've added new data center clusters in 15 countries across five continents in support of their cloud business.
The third confirmation is however, a substantial increase in sales and continued order book momentum.
This is perhaps the most important indicator of growth over the next few quarters.
We are full.
We are ramping capacity.
And we are energized.
Across the business, we're driving strong year over year sales growth and we're outperforming the optical market as.
We continue to commercialize innovation that extend our competitive advantage and as we provide more solutions to more accustomed to more customers as both the regional and national levels.
During the quarter, we introduced the newest additions to our overall portfolio, which includes solutions designed to support rural deployment.
We also introduced our ever on millimeter wave indoor small cell systems, which deliver five G ready coverage in high density environments, including office buildings factories hotels hospitals and classrooms.
Let's turn to mobile consumer electronics.
Here.
We're helping transform the smartphone experience.
As we help our customers deliver new value to their users we drive more of our content into each device sold.
This played out well during the quarter with ROE launch of Samsung's Galaxy equal three and Galaxy Z flip three.
Both devices featuring gorilla glass versus.
Now they also utilize our new gorilla glass with the X on the lenses of the rear cameras.
This.
It is more according and action.
We've expanded our capabilities into a new category.
Device cameras.
He even though the land is a fraction of the surface area, we addressed with our cover materials the value we add is high.
And we're capturing a very attractive opportunity to increase our revenue per device.
Samsung is also featuring gorilla glass with Dx on the new Galaxy watch for.
Turning to automotive.
Oh, hamzah designing cleaner safer vehicles and distinguishing themselves with technologies that enhance the driving experience.
Corning.
Equally suited to address these trends.
And we're pursuing 100 dollar per car content opportunity across emissions and auto glass solutions.
In the quarter Jeep announced a product that brings our top technical glass into their iconic vehicles. The new Jeep performance parts windshield, featuring gorilla glass is now a factory installed option on the 2021 Wrangler and Gladiator.
We're making the windshields lightweight durable and up to three times more impact resistant and regular windshields.
Additionally.
Tighter emissions regulations continue to provide a strong content opportunity for our environmental solutions.
Oems need higher filtration performance.
And we've responded with a new generation of gasoline particular filters.
The importance of our GPS business drives home my ongoing point.
It's not about motor cars.
It's about more Corning in those cars.
Since 2017.
Our auto sales are up more than 40%.
While global car sales are down 20%.
Turning to display.
We're in a position of strength for two reasons.
Difficultly in more profitable than our competitors.
Second the market for large size Tvs is projected to grow at a double digit compound annual growth rate through 2024.
And we're the leader in Gen 10, five which is the most economical approach for larger sets.
Stepping back.
We've all seen the declines as panel pricing and we're beginning to see panel maker utilization adjustments.
Now we will always demand provides us an opportunity to minimize expedited freight.
And to rebuild tanks that have operated beyond end of life.
Taking these actions.
Allow us to keep our supply balanced to demand.
We expect the overall glass supply to remain tight and the glass pricing environment to remain attractive.
Tony will give you more details on our industry position and our outlook.
Finally in life Sciences.
We're delivering growth on multiple fronts.
We're seeing ongoing demand in support of the global pandemic response.
And our advances are helping advance the transition to cell and gene based therapies.
Additionally.
We're making progress on our multibillion dollar content opportunity and pharmaceutical packaging.
We're expanding our comprehensive portfolio.
Advancing key partnerships and building our customer base.
Corning continues to support the pandemic response.
And its portfolio of advanced vials and pharmaceutical glass tubing.
Has enabled the delivery of more than 3 billion doses of COVID-19 vaccines.
Our high volume manufacturing facility in North Carolina is now operational.
Which will help us scale with demand.
In total we believe our efforts to address the pandemic are enabling permanent industry shifts.
That means our future pharmaceutical packaging landscape defined by enhanced patient safety lower cost minimal regulatory hurdles and increased capacity for life saving drugs.
Other efforts that have gained increased attention.
Endemic or finding broader long term applications.
We introduced Corning guarded.
Paint additive that uses a glass matrix.
Trap copper islands.
A powerful and long used anti microbial material.
Paint with targeted has been proven to kill 99, 9% of bacteria.
And viruses.
Including the one that causes COVID-19.
This month PPG announced that their copper armour paid powered by Guardians received EPA registration and will be available in major U S retail and home improvement stores.
PPG noted that it's the first virus, killing paid in the United States.
And our collaboration builds on an EPA statement, a survey that public health would benefit from surfaces with built in.
Antimicrobials capabilities.
Stepping back.
And I am proud of the many ways our people unleash the power of our portfolio in the quarter.
And when our performance says about courting strong position today.
Key trends are converging around our capabilities as we become more and more vital to industry transformations driving the world forward.
This provides a compelling set.
Of long term growth opportunities.
And we're executing well to bring those opportunities to life.
And.
Make a difference.
Ever we can.
So I want to thank our dedicated employees.
For their contributions.
Now I'll close.
Looking back at 2019, when we outlined our priorities for growth and shareholder returns for the next several years, we provided attractive targets as we laid out our plans to build an even bigger stronger company that delivers sustainable results.
Today the growth drivers, we laid out remain intact.
And we're delivering on our goals we are a bigger stronger company than we were in 2019, and we are continuing to grow.
Tony will get into more specifics.
But I feel really good about our position and the progress that we've.
We've made.
I look forward to updating you when we close out a strong year and as we grow again in.
In 2022.
Now I'll turn the call over to Tony.
So that he can give you some more insight on the quarter.
Thank you Wendell and good morning, everyone.
Strong execution resulted in another outstanding quarter.
We are on track to reach $14 billion in sales and over $2 in EPS.
We're making significant progress extending our market leadership, while scaling operations to meet demand and.
And we expect to grow again in 2022.
During the third quarter sales increased 21% year over year to $3 6 billion led by the strength in optical communications and the strong performance in our other businesses.
<unk> grew 30% year over year to 56.
Sales and earnings reflect lower production levels in the automotive industry due to the semiconductor chip shortage the impact that corning's results was approximately $40 million in sales and <unk>.
Of EPS.
Gross margin percent expanded 50 basis points sequentially, and 70 basis points year over year to 38, 3%.
Despite a net impact of a 150 basis points from supply chain challenges and inflationary headwinds.
Free cash flow grew to $497 million with cash generation of $1 $3 billion for the first nine months of the year.
These achievements are particularly noteworthy because we are operating in the face of unprecedented logistical challenges and component shortages.
Delivering for customers in this complex environment requires both decisive action and agility.
Our ability to sense disruption and act quickly has been key to running our plants, well and meeting our customers' needs.
And we're leveraging our diversified global supply chain to continue to meet customer demand.
In fact, I'd be remiss, if I didn't recognize the efforts of our global supply management and operations teams that have allowed us to maintain a steady supply of raw materials, while finding creative shipping strategies.
Their actions have enabled us to effectively deliver for our customers and they are providing actionable insight into the current dynamic environment.
At the same time, we continued to incur additional costs as we work to meet strong customer demand.
And while we have been taking actions to mitigate them certain costs continue to elevate in the third quarter.
For example, we were able to offset a significant portion of elevated freight cost, but resin prices increased again.
Therefore, our margin is temporarily muted.
Given this ongoing inflationary environment, we have price increases underway across all of our businesses.
We saw some benefit from these actions in the third quarter and their impact should accelerate in the fourth quarter and into 2022.
Now, we don't expect the environment to improve in the short term, but our digital supply chain capabilities enable real time visibility into emerging situations, allowing us to proactively address the issues, we remain focused on meeting demand.
Spanning our margins and protecting our ability to invest for customers.
Now, let's take a closer look at the performance in each of our businesses during the third quarter.
In display technology sales were $956 million up 2% sequentially and 16% year over year.
Corning glass volume grew slightly.
And glass prices increased moderately sequentially as expected.
Glass supply continues to be tight and we continue to do everything we can to meet customer demand.
We expect fourth quarter glass prices to be consistent with the third quarter.
Now, there's a lot of discussion about the display industry.
<unk> fleet, we expect the pricing environment to remain favorable as glass supply remains tight the balanced throughout 2022.
Now as we've discussed previously we based our perspective on what will happen in the display market on three main factors.
Retail demand panel maker's production and glassmakers ability to supply the panel makers.
With those factors in line I'll start with what I said about retail demand on our last earnings call in July.
Since LCD televisions emerged as a mainstream technology in 2000 and for LCD TV units have only been down three times.
And never two years in a row.
Since 2014 TV sell through units are typically range bound between 225, and $235 million, which average screen size grows about one and a half inches a year.
In 2020 global TV units increased 4% above the trend line to about $242 million.
Screen size growth was about $1 two inches about 20% below trend.
A lot of smaller TV sold probably to accommodate more people living working and studying from home.
Entering this year, we expected and continue to expect the market to revert the trend implying a decrease in TV units, especially smaller televisions and for normal screen size growth of an inch and a half inches to return.
We now have nine months of retail data under our belt and it is confirmatory caliber.
TV units declined by about 10% year over year, while average screen size growth is in line with the one and a half inches per year trend.
Unit volume for Tvs, 65 inches and larger increase by a mid teen percentage and smaller Tvs were down by a mid teen percentage.
So three quarters through the year, our expectation for TV units being down year over year and screen size growing approximately an inch and a half are playing out.
Now looking ahead to 2022, we think TV units and screen size will continue to follow historical trends and retail glass demand will be up.
That means TV units will be within the typical range of $2 25 to 235 million units and average screen size will grow about an inch and a half.
I'll remember TV units, which are declining this year have never declined two years in a row.
And next year is a world Cup year in TV units have never declined in a world Cup year.
Finally, the biggest driver of retail glass growth in most years is the increase in screen size. We would expect the average screen size to once again grow one and a half inches next year.
In summary, we expect glass demand at retail to be up by a high single digit percentage in 2022.
As measured in square feet.
Now, let's move from retail the panel makers.
After a period of high production in 2020 in 2021 to meet strong demand.
We are now seeing panel makers temporarily reducing their utilization given the lower 2021 retail demand that we told you about all year.
That is happening just as we would expect.
Now finally, let's move to the glass industry, which struggled to meet demand in 2020 in 2021 as glass has remained tight.
Like other glassmakers, we've depleted our inventories expedited shipping and operated tanks beyond their targeted in the life.
We will use this period of temporarily lower panel maker utilizations, the shutdown into life tanks and rebuild them with our latest technology.
We will also take the opportunity to work our way out of expedited shipping.
These actions keep our supply balanced to demand and we will improve our operating cost going forward.
But rest assured we will still have capacity to supply all of our customers' anticipated glass demand.
When panel acre production ramps to meet the expected high single digit retail demand growth in 2022.
We will be fully prepared with our revitalized fleet of tanks.
Overall, we believe glass supply will be tight the balanced throughout 2022.
And since glass pricing is primarily driven by glass supply demand balance we expect the pricing environment to remain favorable in Q4 and also throughout 2022.
Moving to optical communications, we saw strong growth across the business with sales exceeding $1 1 billion up 24% year over year and 5% sequentially.
Net income was $139 million up 21% year over year.
Net income to <unk> declined 6% sequentially as increased raw material and shipping costs significantly impacted profitability.
During the quarter carriers spent more on five <unk> and broadband projects.
This along with the continued strong pace of enterprise cloud data center builds drove our strong performance.
Demand on networks is at an all time high setting the stage for significant investments in fiber infrastructure as operators expand network capacity capabilities and access.
During the quarter, we announced the collaboration with AT&T, our capacity expansion will allow AT&T to expand investments in fiber infrastructure expand U S broadband networks and accelerate <unk> deployment.
We are well positioned to capture significant ongoing growth in network and data centers investment increases.
Our solutions improve the speed and capital efficiency deployments.
Additionally, Corning is the only large scale end to end manufacturer of optical solutions, which allows us to innovate on important dimensions not available to competitors.
Yeah.
In environmental technologies, our third quarter sales were $385 million up 2% year over year and down 5% sequentially.
As everyone knows chip shortages as having a big impact on the auto industry at the start of 2021 global vehicle production was expected to be about $88 million.
By July the industry was projecting below $85 million.
And given continued chip and component constraints forecast now anticipate auto production around $75 million for the year.
This pullback in production began to impact us in the middle of the third quarter and we expect it to continue for the fourth quarter.
We estimate an impact on EPS in the third quarter of about <unk> <unk> and we expect additional impact in the fourth quarter.
The good news is that when component shortages resolved auto production will recover because end market demand remained strong.
And we will be prepared to meet the growing demand.
Especially materials delivered sales of $556 million up 15% sequentially and in line with the strong third quarter in 2020, when we introduced ceramic shield.
We've grown specialty sales every year from 2016 to today.
Despite smartphone unit sales being roughly flat.
Over that five year period, we've almost doubled our sales.
On a base of more than $1 billion.
Clearly we are successfully executing our objective of driving more content.
In each device sold.
And strong demand continues for our premium cover materials during the quarter. Our glass innovations were featured in 30, new devices, including smartphones Wearables and laptops.
Demand also remains strong for our advanced optics content used in semiconductor manufacturer manufacturing as the broader end market continues to experience robust growth.
In the quarter investments and innovations 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 process, we anticipate that profitability will improve as we come up the learning curve and improve utilization.
Looking into the fourth quarter, we're seeing typical volume declines in gorilla glass following the build supporting flagship customer product launches.
Life Sciences third quarter sales were $305 million up 37% year over year, driven by ongoing demand to support the global pandemic response continued recovery in the academic and pharmaceutical research labs and strong demand for bio production vessel.
<unk> and diagnostic related consumables.
Our life Sciences segment is outpacing the overall industry as evidenced by our sales CAGR of 9%.
Over the last three years.
Stepping back we have made strong progress across all of our businesses, we entered new product categories announced collaborations with key industry leaders and contributed to significant industry advancements.
We're building a strong foundation for future growth.
This combined with our consistent focus on innovation and deep commitment to our DNA is what continues to fuel and sustained corning's leadership position.
<unk> markets.
As we look ahead to Q4, we expect core sales to be in the range of three 5% to $3 7 billion and core EPS in the range of 50 to 55.
Yes.
Profitability is expected to decline sequentially due to the further reduction on the automotive related sales as I mentioned and lower gorilla glass sales following strong customer launches.
That said, we expect to close out 2021, with both top and bottom line growth and another year of strong cash flow.
And we expect our momentum to continue in 2022 with sales and EPS growth along with strong cash generation.
Now I'd like to expand on Windows closing point.
Back in 2019, we outlined our goals for growth and shareholder returns. We said, we would leverage our focused and cohesive portfolio to extend our leadership and capture significant growth opportunities.
And we said that key trends would continue to converge around our capabilities.
What we said back in 2019 still rings true today.
Despite the pandemic and the resulting global disruptions.
Our key growth drivers are all intact some are even accelerating.
And we are on track or even ahead of the goals we laid out in 2019 in all our market access platforms.
Since 2019 sales have grown at a 10% CAGR ahead of the 6% to 8% target.
Now we have been growing EPS at a rate consistent with sales, which puts us ahead of our target.
Which puts us behind our target because inflationary pressures are clearly impacting profitability.
But we do expect that our cost and pricing actions will deliver significant improvement over time.
As we said we would do we're also growing our return on invested capital.
Today, our total company ROIC is in the double digits.
Our most recent capacity expansions.
We like to call them build investments are fully ramped have enabled the two and a half a billion dollars of sales. We've added since 2019 and are delivering more than 20% ROIC.
Our aggregate free cash flow generation for 2020 in 2021 is expected to be more than $2 5 billion.
Finally, we remain steadfast in our commitment to investing in growth and extending our leadership, while returning excess cash to shareholders through share repurchases and a 10% annual increase in our dividend.
As you might remember we decided early in the pandemic to ensure the stability and flexibility of our financial position by building up our cash reserve.
In April we reserve, we resumed share buybacks with the Samsung transaction, where we repurchased 4% of our fully diluted shares.
Consistent with our strategy to Opportunistically buy back shares we plan to do more repurchases.
In Q4.
In summary, we have built a strong foundation over the last several years.
Our capabilities are relevant to major growth trends across our markets.
Our more Corning strategy is working and we.
We're executing through some very volatile end markets.
Expanding relationships and commitments with our customers extending our leadership position and generating outstanding sales.
<unk> and free cash flow.
With that let's move to Q&A.
Ann.
Thanks, Tony Michelle we're ready for our first question.
As a reminder to ask a question. Please press Star then one if your.
A question has been answered and you'd like to look at yourself in the queue. Please press the pound key.
First question comes from Matt <unk> with Deutsche Bank. Your line is open.
Hey, guys. Thank you for taking the questions.
Two if I could first of all on the price increases you mentioned increases across all units.
I'm just wondering if you can give us maybe a little bit more color in terms of.
How we should anticipate that the flow through I know you initiated some of these <unk>, but I'm wondering how to think about the cadence and the flow through there.
Order of magnitude and then just wondering if this is really intended to effectively pass through the entirety of some of the cost pressure, you're facing or whether it's just a portion of that.
And then just secondarily as we think about capital allocation, Tony maybe to your last point around.
Doing a little bit more on buybacks in <unk> I'm, just wondering if you could refresh us.
In terms of how youre thinking about leverage where you would like to be and ultimately how you see corning sort of getting closer to that two <unk> leverage target you've laid out in the past.
So first on in terms of the price increases.
Clearly our priorities over the last several years.
Last year or so with the pandemic is to protect our people and protect our customers and we have been doing a great job on that on those priorities.
And we saw it in Q3, which is an incredibly challenging environment.
But required decisive action and agility and we had to act quickly and we've done that and I'm personally.
Personally I'm very proud of what all the work we've done as a company is what you'd expect.
Corning.
But.
What tends to happen in this environment is is that you see some places where we've made improvements on from a cost and freight standpoint, and others that have gone up and all of this comes at a cost. So our goal here is to.
Increased prices across all of our businesses, we've had about 150 basis points impact for the last several quarters I would expect that to continue.
Hi.
For in the next quarter, and then for it to get better over time, but the actual timing and prediction of that is just hard to know because theres. So many moving pieces.
So we've tried to do math on pricing here is you have a range of.
What could happen with inflationary pressures and then we have a range.
What could happen with our pricing in each of our different businesses and even in each of our different products.
And what we've tried to do is capture those.
With the guidance that we just gave for quarter four.
And as we continue to gain experience on both.
We would expect to get better and better at being able to narrow those ranges and improve our ability to give you a good idea on how this will impact your models.
And then in terms of from a balance sheet standpoint, I mean, clearly we have a very strong set of goals.
From a balance sheet standpoint.
Amount of leverage we're comfortable with in particular very long maturities from a leverage standpoint, we do have the longest maturity in the S&P 500.
And.
That overall approach has not really changed but we're right we're still being impacted by what's happening from a global economic standpoint, So we're going to continue to kind of work.
Work through where things go.
And the good news is is that we're generating tremendous amount of free cash flow and with that free cash flow that gives us the ability to invest in the business, but also to return cash to shareholders.
Thanks, Toni next question.
Our next question comes from Puneet <unk> with Jpmorgan. Your line is open.
Hi, Thanks for taking my question I guess I wanted to ask on the optical communication than kind of what you're seeing from a demand perspective.
We've heard about.
Okay.
Overall sentiment around demand coming from the broadband connectivity around the government subsidized.
Is the delay on the government side driving any slowdown David.
Just moving over to capacity that you've outlined.
I would like expansion capacity as well and can be just help us understand the magnitude of that expansion.
Potential impact on margin as you build that capacity up as well. Thank you.
So some big I wanted to make sure that I understand your question.
You are asking how do we feel about the growth in the business.
And as.
That growth occurs how do we feel about our margin.
Expansion as that capacity ramps do I understand your question correctly, it's to me.
Yes, I'm doing the addition to that the delay in the government infrastructure.
Driving any slowdown in terms of inquiries from customers.
Great.
So first.
As I had laid out in my comments.
We feel that.
The growth here in the business is very strong.
You saw I think in the quarter, we did about $1 $1 billion of revenue our order book.
I was in excess of that is stronger than that.
Right so.
That gives you an idea of the demand that we're seeing right now and that is before theres any passage.
<unk>.
In the.
Bipartisan infrastructure Bill on what it is the government wants to do with broadband.
So that will layer on top of the demand that we're seeing that is largely say already serving commercial and customer opportunities.
So that's how we feel about demand all those long term trends.
That we see they look like they are all continuing in both cloud and carrier networks.
Now margin so and margin expansion. This is a segment where with given the really strong demand.
We have had a lot of.
Expedited ship.
Shipping we've had a lot of challenges around freight and we've had accelerating raw material costs.
So we're not we haven't been putting quite the increase in our margins that you would normally expect as we fill up right.
That's one of the reasons that we're going to be addressing price with our customers, who we have done all of these long term build investments with.
And hopefully what thats going to do is get the type of margin growth that you would expect.
With our rising revenue growth.
Does that makes sense too sir.
Yes. Thank you. Thank you for taking my question.
Our next question comes from Shannon Cross with Cross Research Your line is open.
Thank you very much Wendell.
The risk of <unk>.
Continuing on this topic I'm just curious can we get more into the inflationary environment I'm trying to understand when you guys have a really great perspective, I think of how transitory versus permanent shift youre seeing out there and what should we watch given the impact to your margins.
Specifically should we watch closely.
See if things are starting to improve.
Great.
So great question Chad.
I would say if you had asked us when this all began sergei.
Included two record recorded three like in that time period, we would have said you know.
This is probably transitory.
And our top priorities are protect our people and protect our customers.
<unk> spend what it takes to make that happen.
And we want to keep our customers running to keep up.
And this too shall pass and our normal great job that we do.
Reducing costs will trigger in and we got this.
And actually it is mainly through conversations with our supply chain had as well as our investors.
That have led us to look at this and say.
This may last longer.
Then we had thought.
And that this looks like we could continue to have challenged supply chains.
For the foreseeable future.
And what we needed to do was add to our priorities that we also needed to protect our investors.
And our ability to invest for the future.
Which in turn allows us to one protect our people and protect our customers and so as we've looked at it that way that is what has led us to start to externalized that cost pressure.
We began in quarter three we've got a lot further to go.
So I think the thing to look at is pretty simply how do we do getting our profitability.
Working in the way you would expect when we have revenue growth because we're expecting to grow normal us.
As we grow.
Because we actually make things for a living.
And so that I think thats. The key thing that we're looking at is to see that as well as we have detailed plans by customer by region by region.
All that is is getting rolled out is already in motion.
Okay, and then I'm curious what your initial conversations with some of the customers in areas, where you are raising prices now.
How is it feeling out there that everything's going up in price so there they're absorbing it or.
How how much pushback that you're getting from from price increases. Thank you.
Well, it's a little early to tell to generalize on that it depends on the customer right.
We've had some who have said.
I was expecting this right.
We have others, who say.
Thank you very much for sharing but.
We'd rather you fix this on your own.
But.
We'll work our way through it I think.
The key thing always to understand.
How we are with our customers is these are very long term partnerships.
Right.
And we invest for the long term and we asked for strong commitments from them and they asked for strong commitments fast, but we face that future all of US are looking at the future when we make these investments and innovation.
And our plants that is a little uncertain and so the way we always try to work through things with our customers is okay. This is where we're at this is reality how do we work through it together in a way that allows you our customer to continue to succeed.
It allows us to continue to support that success and thats sort of the tone and attitude that we bring to it and that our customers engage in that same dialogue.
But will all play out.
And so certain that as we work our way through it will reach a fair.
Resolution of what happens we operate in inflationary environment at least for a period of time, which.
Neither our customers none of us have had a lot of experience with.
Great. Thank you.
Our next question comes from Steven Fox with Fox Advisors. Your line is open.
Hi, good morning.
I was wondering if maybe you could put some numbers around all that commentary so like if I look at optical for example, your revenues were up 5% quarter over quarter, but your margins were 12 three versus 13 eight in the prior quarter. So how much exactly was the pressure from all those extra costs and adding new capacity.
Hindering margins when volumes are going up and then same question on pricing for display you're saying, it's consistent with prior quarter I assume that's like flat zero percent change in pricing, but last quarter, you were able to pass through some costs does that mean you are not passing through costs. This quarter. Thanks, so much.
Great. So first an opt out that margin drag that you've rightly identified Steve that's the inflationary pressures that we have yet to offset with our customers.
So I think youre right on it and what we'd like to do is see that drag moderate and as you know.
Yes.
Our optical business is big with a lot of customers. So it's a it's a lot of commercial work to get everything in place already began.
<unk> already got going in this last quarter, and we will gain an accelerate in quarter four so thats, what so will be about an auto and youre looking at the right numbers and Thats. The numbers you should expect to improve.
In display we expect price to be consistent with our raised pricing in quarter, three and in quarter two and in quarter. Two so we're following sort of a couple of price raises and we anticipate our price to be consistent.
In quarter four so.
That implies that youre still passing through some of these inflation cost and that price is that correct.
That is correct.
Thank you so much.
Our next question comes from John Roberts with UBS. Your line is open.
Thanks, and congratulations on all the new product wins.
You are now on OEM windshield options for a number of Jeep models versus primarily replacement before where the windshield option be packaged with other options. So if you want the better scenario and the better seats youre going to get the gorilla glass windshield with that or is it going to be Ala carte and youre on the replacement windshield and affordable.
F 150, which is an even bigger models do you think thats going to go OEM anytime soon.
I think thats a great question I need to follow up to see how it is cheap going to do that.
I just need to follow up because right now it just looks like you won a vehicle.
You tend to get them highly bundled so but I don't know what the difference is between how they are seeking to optimize their very few chips and how much is really a long term approach.
Let me follow up on this on that it will get back to you John.
Yes.
Im Windshields I think.
You'll continue to watch this space, we've got a number of.
Significant.
Innovations going on.
Saw the glazing problems that evs represent.
Right and that economy represents.
It's too early I think John for Us to for me to say definitively to you that we have this start building in another large revenue generator for us.
But it ought to resolve as we ought to be able to say that.
Within the coming 12 months because theres. So we're doing so much work in that space.
And.
We're seeing uptake and a number of places.
Our laminated product and some other innovations that we have going on so very right to identify it just a little early for us to call the ball.
And then could we get an update on hemlock, it's ironic that we have such strong semiconductor demand and you've got the contractual structures in place really the hemlock is not participating.
So we're really happy that we are the owners of the hemlock.
Right.
And I think it was a few people that we have this.
It really always understood have lock in staffing you always wanted us to be the owner of that block and finally after all these years.
And we're happy to get it as you know semiconductor demand is strong.
I think the other added revenue source that we're now seeing in hemlock.
Is in solar.
As you know.
We.
Idled.
Bulk of our capacity in solar.
As the U S supply chain.
<unk> sort of ended up.
Downstream of us.
Becoming eroded.
The intense competitive environment with China.
We are now seeing really strong demand.
<unk> solar and we are doing what you would expect us to do which is if a customer wants us.
To commit capacity to them and solar we're putting in place those same type of very strong.
<unk> actual arrangements.
To be able to make sure as we turn up some of that capacity that they buy it.
And again, you'll see that in our revenues.
And.
So we feel very good about it John where should we listen to your EBIT earlier.
Thank you.
Okay.
Our next question comes from <unk> Mohan.
Bank of America. Your line is open.
Yes. Thank you I was wondering when you talk about retail demand and.
High single digits in 2022, do you expect <unk> to grow in line or higher or lower than that.
And then I have some follow ups. Please.
Yes, <unk> I mean.
As you know.
Where a lot of that growth is occurring is in the gen 10 or is in the large screen Tvs and Thats where.
US having three out of the four Gen 10, five factories make.
To make a big makes a big difference. So we would expect that that to continue to positively impact our results in 2022, just like it has the last couple of years.
So the way we tend to think about and sponsor you added two questions Sir.
Please go ahead and I'll follow up.
Okay. So the way we tend to I think youre on.
What are the real key points, so as Tony said like the two key factors.
On.
Keep in mind for display and they really drive display or the demand at the retail level.
Which we believe will be up single digits next year, and then glass supply demand balance, which we believe.
Going to be tight to balanced.
In quarter four and throughout 'twenty.
2022.
And as a result of this we believe the glass environment.
For pricing is going to continue to be favorable.
When we say tied to balance.
Sure.
What we mean is that we're coming out of this time period.
We're out of it yet with glass.
A very tight and we have been extending tanks beyond their planned life. We've had very high expediting cost and we have delayed technology upgrades really for the last year plus.
And so what our plan is is to take any opportunity presented by lower panel maker utilization.
To take targeted tanks down for upgrades, while improving service levels with lower expediting cost.
Now the timing for these is solely within corning's control right. So far.
First goal is we plan to meet our customers demand.
We're going to continue to protect our customers and meet the demand that they think they need.
But we're also going to get our fleet ready to lower cost and increase quality for years to come.
And as a result, that's what we mean by tight to balance our customers get what they eat a while we get our upgrades done whenever we can so that's our approach here.
And that's that's how we feel about display and while we are providing some insight into next year as well when we normally just would have told you what's going to happen next quarter.
That's helpful Wendell and if I could just follow up a clarification question.
I think Tony mentioned that in Q4, you would expect some seasonal softness.
And specialty.
Given some product launch timing.
In Q3.
But I think he specifically said gorilla glass and I was wondering if that was meant to be as specific as gorilla glass versus ceramic shareholder or was that meant to be a comment about specialty cover glass in general.
So when it.
Let them.
Very good question.
Tony What did you mean I would've thought it men in total, but you tell me absolutely men in total okay.
So one thing I need you to do that.
Awesome really interesting question I took it in total but good question.
Thanks Lindsay.
Time for one more question.
Our last question comes from Tim Long with Barclays. Your line is open.
Thank you.
Maybe just a two parter on display here.
Wendell you just mentioned again the.
Some of the moves youre doing with end of life Ing, some tanks and some new ones.
Could you talk about maybe Tony chime in as well.
What are the kind of cash flow impacts other near term gross margin impacts that it sounds like ultimately it could be a better profitability dynamics. So can you just walk us through the cadence of of what those changes mean to the model.
And then second.
Could you talk a little bit maybe more high level about PC and display.
Pax, obviously with pandemic, those probably became a little bit bigger part of the mix what is the outlook there.
And how do you see that.
How do you see that impacting the overall volume dynamic as you look forward. Thank you.
I think to the first part of the question I'll start with Tony come in.
I think from a modeling standpoint is we do these upgrades of course, we're doing it to increase quality and lower costs, but the right way to think about it through your next year would be how you feel revenue plays out it will pretty much just play out like that you launched.
I don't think Youll see any added cost drag or things like that anticipate youre kind of mainly see it.
With the revenue change that's what I would say what do you think the I think I think that's right. I mean, there are some things like the expedited freight costs for example that will go away. So.
As we think about the 150 basis points as we go through next year that will certainly help us to some degree against that and you'll see those results of the financials and then from a cash flow standpoint, I mean, all of this is part of our ongoing cash flow capital spending.
It's not part of our build cycle or anything like that so I don't think it will really stand out from a cash flow standpoint.
And I think Greg question on Pcs and notebooks.
<unk>.
As you quite rightly pointed out a PC makers.
I had a really strong demand during the pandemic, what we're seeing right. Now we are hearing from them is that demand is still quite robust, but its shifting towards commercial.
Rather than.
Sure.
Consumer demand and that as a result.
Is that a really strong in commercial still fine things quite tight.
And.
That's how they are seeing that play out.
And we'd be happy to sit down with you Tim if you want it sure how we view.
Total demand.
Coming to play and how that plays out in glass and we'd be happy to do that.
Yes, just wondering if you think thats.
Additional headwind relative to Tvs and kind of strong next year.
You know not much because like I said, you're seeing consumer back off right.
And then we're seeing.
Which uses a certain type of display which is too deep to go into here right and we're seeing commercial.
<unk>.
Big companies with a return to work in those upgrade cycles turn it in.
Turn up so I don't view it as a big headwind one way or the other.
But like I said first of all through the details with you in that where you could lower our heads out and how that differs from where you see things.
Okay, great. Thank you.
Great.
Thanks, Tim and I want to thank everybody for joining us today before we close I want to let you know that we're going to be at the Baird Virtual Global Industrial conference on November 10th the Credit Suisse Annual Technology Conference on December <unk>, and the Barclays Virtual Global Technology Media and Telecommunications conference on December 7th.
Finally, a replay of today's call will be available on our site. Starting later this morning. So thanks for joining US Michelle you can disconnect all lines.
Thank you. This concludes the program and you may now disconnect everyone have a great day.
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