Q4 2021 Corning Inc Earnings Call

Welcome to the Corning incorporated quarter, four 2021 earnings call took place yourself into the Q&A queue. Please press star one on your Touchtone telephone and it's my pleasure to introduce you and Nicholson Vice President of Investor Relations.

Thank you Shannon and good morning, everybody welcome to Corning's quarter for 2021 earnings call with me today are Wendell weeks, Chairman and Chief Executive Officer, Tony <unk> Executive Vice President and Chief Financial Officer, Jeff Evenson, Executive Vice President and Chief Strategy Officer, and Ed Schlesinger currently serving as senior Vice.

And corporate controller.

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. These statements involve risks uncertainties and other factors that could cause actual results to differ materially.

Factors are detailed in the company's financial reports.

You should also note that we'll be discussing our consolidated results using core performance measures unless we specifically indicate our comments relate to GAAP data. Our core performance measures are non-GAAP measures used by management to analyze the business.

For the fourth quarter, the largest differences between our GAAP and core results stemmed from noncash mark to market gains 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 a current value at the end of each quarter, even though those contracts will not be settled in the current quarter for us. This increased GAAP earnings in Q4 by $86 million.

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 constant currency rates aligned with the economics of our underlying.

<unk>.

We're very pleased with our hedging program and the economic certainty it provides we've.

Received more than $1 8 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 <unk> Dot Com you May also access core results on our website with downloadable financials in the interactive analyst Center.

Appointing slides are being shown live on our webcast. We encourage you to follow along they're also available on our website for downloading and now I will turn the call over to Wendell.

Thank you Anne and good morning, everyone.

Today, we reported fourth quarter and full year 2021 results.

We delivered another strong quarter of year over year growth.

For the fourth quarter sales were $3 7 billion up 12% year over year, we generated EPS of <unk> 54, and free cash flow of $425 million.

For the full year sales were $14 1 billion.

Up 23% year over year.

We.

<unk> EPS of $2 seven.

Up 49% year over year.

And we nearly doubled free cash flow.

In addition, we achieved double digit ROIC.

We expanded our operating margin by 230 basis points.

We increased our dividend by 9%.

And we reduced our outstanding shares by 5% through the resumption of share repurchases.

By leveraging our fundamental capabilities and are more according strategy, we are capturing a compelling set of short and long term opportunities across our portfolio.

We are performing well.

In a challenging environment.

And we have momentum.

Entering the year.

Now all of that said, our gross margin is simply not where it should be.

Okay.

As we said last quarter.

Throughout the pandemic.

<unk> prioritize protecting our people and delivering for our customers in a complex.

<unk> environment.

And it has come at a cost.

Over the last several months, we have negotiated with customers to increase prices in our long term contracts to more appropriately share the increased cost we are experiencing.

We are focused on expanding our gross margin and expect improvement in 2022, as our sales grow and our price actions take hold throughout the year.

Last quarter, we also discussed our expectations for our display business.

I am pleased to report we had another strong quarter of display revenues and profits in quarter four.

Display glass pricing is expected to be flat sequentially in the first quarter.

The supply demand balance for display glass is tight.

In 2022, we expect overall glass supply to remain tight to balanced and the pricing environment to remain favorable.

This morning, you'll hear.

More on these and other priorities for 2022.

I'll focus on how we intend to maintain our growth and positive momentum then Tony and Ed will discuss our results as well as our plan to enhance our profitability and overall financial strength.

So let's dive in.

Been delivering consistent growth sales have been up for six quarters in a row.

Since 2019, we've grown sales by 21% and EPS by 18% with more balanced and consistent contributions across our businesses.

Everything begins with our cohesive portfolio, we're the world leader in glass Science ceramic science and optical physics, along with our four proprietary manufacturing and engineering platforms.

We focused our strategy on capturing synergies among these capabilities and applying them to create disruptive innovations.

Across multiple industries, we work closely with many of the most influential and successful companies to bring our world leading capabilities to bear on their toughest challenges.

In the process.

We help move the world forward.

As we partner with our customers to advance their visions.

Our probability of success increases as we combine our capabilities, we apply our talent and repurpose existing assets.

This provides a powerful value creation lever by unlocking new ways to integrate more of our content into our customers' ecosystems.

We arent exclusively relying on people buying more stuff, we're driving more corning content into the products that are already buying.

Our progress in 2021 illustrates the effectiveness of our approach.

And it gives us confidence that we're building on a strong foundation for additional growth in 2022.

In optical communications, we have returned to growth with sales up 22% in 2021.

And we expect strong growth to continue.

Operators are expanding network capacity capability and access the pace of data center construction is accelerating as more applications move to the cloud and data creation continues to soar.

And fiber rich wireless deployments are underway.

Meanwhile, governments around the world are initiating plans to extend the reach of broadband to more people in more places as network access is increasingly viewed as a human right.

For example, the recently passed U S infrastructure Bill allocated 65 billion in new spending for broadband infrastructure, including $42 billion for new network builds.

Our customers are stating their preferences for fiber to build these networks.

As the only large scale end to end manufacturer of optical solutions quoting plays a vital role in driving the continued expansion of connectivity. We are working even more closely with industry players at the regional and national levels, including expanding our law.

Long time collaboration with AT&T.

Stepping back.

We're at the beginning of a large multi year wave of growth for passive optical networks project momentum is strong across our customer base and.

As U S infrastructure plans roll out it could add as much as $1 billion a year to the market for four years, starting as early as 2023.

We believe private carrier and public infrastructure investments will push the market into double digit growth.

Over the next few years.

In life Sciences, we delivering growth on multiple fronts with sales up 24% in 2021.

We're seeing ongoing demand in support of a global pandemic response.

Our inventions are also helping the industry advanced the transition to cell and gene based therapies.

And we're making progress on our multibillion dollar content opportunity.

Our pharmaceutical packaging business.

After introducing valor glass vials in 2017, we recently introduced velocity vials. These.

These vials or helping industry, leading drugmakers increase efficiency and throughput to drive faster manufacturing of vaccines to help meet global demand.

Velocity joins valor and our glass tubing business as we build a comprehensive end to end pharmaceutical packaging portfolio.

In fact, our portfolio has enabled the delivery of nearly 5 billion doses of COVID-19 vaccines so far.

And earlier this week West pharmaceutical services, a global leader in injectable drug administration.

<unk>, a long term supply agreement and technology investment in Corning to enhance injectable drug packaging systems.

And automotive 2021 sales in our environmental technology segment increased 16% to reach an all time high one $6 billion despite weakness in the automotive market related to chip shortage.

<unk>.

We're pursuing a $100 per car content opportunity driven by trends that are reshaping the auto industry and re imagining the car.

We delivered multiple proof points in 2021.

<unk> launched the Hyperscale dashboard display in the Mercedes Benz E <unk> <unk>.

The displays features a gorilla glass cover nearly five feet wide.

Building on this momentum we entered a new automotive product category with our curved mirror solutions. This innovation is enabling the augmented reality head up display and Hyundai electric crossover the ionic five.

And Jeep announced a product that brings our tough technical glass into their iconic vehicles.

The new Jeep performance parts windshield, featuring Gorilla glass is now a factory installed option on the wrangler and Gladiator.

Additionally, tighter emissions regulations continue to provide a strong content opportunity for our environmental solutions.

Our newest generation of gasoline particulate filters help vehicles, including hybrids achieved even lower levels of fine particulate tailpipe emissions.

The contributions of our GTS business provide a strong illustration of our more Corning strategy in action.

Since 2017, environmental technology sales have increased more than 40%.

While global car sales has decreased by 20%.

Let's turn to mobile consumer electronics, where 2021 sales increased 7% and we surpassed the $2 billion in sales for the first time.

Since 2016 specialty materials has added nearly $900 million on a base of $1 1 billion in a smartphone market that has been flat to down.

As we help our customers deliver new value to their users.

More of our content is deployed in each device sold.

That is another great illustration of more Corning in action.

Our industry, leading innovations continued to garner widespread accolades.

In fact fast company named Corning, the most innovative company in the consumer electronics category.

For 2021, touting ceramic shield, the world's first transparent and color free glass ceramic as close virtually indestructible and cloud.

And recognizing gorilla glass victims.

Toughest gorilla glass yet.

We continue to see strong demand for both of these premium products.

In 2021 more than 125 devices, including smartphones Wearables tablets, and laptops launch featuring gorilla glass and we expanded our capabilities into a new category by introducing gorilla glass Dx and Dx plus to optimize mobile phone cameras.

These composite products create an attractive opportunity to increase our revenue per device.

Finally in 2021, Apple awarded Corning, an additional $45 million from its advanced manufacturing fund to date. According has received $495 million.

In total from Apple's fund.

We're investing in multiple new inventions and innovations for mobile consumer electronics, and we're excited about the potential and.

In 2022 and beyond.

Turning to display our leadership in large glass puts us in a position of strength.

2021 sales grew 17% to $3 7 billion.

Our volume exceeded glass market growth as we ramp Gen 10, five facilities that supply glass for large size Tvs, which are expected to grow at a high teens compound annual growth rate over the next several years.

In 2022, we expect overall glass supply remained tight to balanced.

And the pricing environment to remain favorable.

We continue to believe the retail market will grow led by higher TV unit sales and growth in average screen size.

Across our markets long term growth drivers are strong and our role is clear we lead and capabilities that are vital to progress.

Our approach provides exciting opportunities for Corning inventions to make a positive impact on the world.

And it underscores our commitment to moving the world forward everything that we do.

Now let me give you some examples outside of the operational context.

In 2021, we hosted COVID-19 vaccination clinics at Corning sites around the world.

And we know some Mexico for example, we helped administered more than 100000 doses of vaccines and boosters to employees and community members.

And we provided more than 200000 diagnostic tests for employees around the world.

We kicked off a five year $5 $5 million of partnership with the nations largest historically Black University North Carolina A&P.

Our work will prepare students for stem careers.

We engaged our board of directors to provide guidance and resources to our office of ratio of quality and social unity.

Utilizing our members diverse experience gender age and ethnicities to advanced.

This new initiative.

We achieved gender pay equity globally for all salaried employees and we expanded the reach of our D. Eni office with regional business counsels.

And finally, we committed to greenhouse gas goals that align with the Paris agreement.

And we signed solar contracts that hemlock that will help the world address its renewable energy goals.

I feel very good about our efforts to bolster quality inside and outside the company and our progress on our sustainability initiatives.

Overall, we continue to build a stronger more resilient company. We're in the early innings of exciting industry transformations and key trends are converging around our capabilities.

You can see it in our results.

You can see it in our outlook for 2022 and advancement of new businesses towards significant commercial sales over the next few years.

Of course.

To keep advancing during corning's next 170 years, we must focus on growing and developing our leaders we have a new generation who are stepping up to guide this company to a very exciting phase of its history and into the future and I'm working closely with each of them.

To that end I want to recognize Tony.

As he prepares to hand over the reins to Ed in just a few weeks.

The strong position we're in today certainly reflects the many contributions he's made throughout more than three decades of excellent service to Corning.

Tony.

We thank you and.

And wish you the very best in retirement.

At the same time I'm excited to welcome Ed into the CFO role, which he starts on February 18th.

That has long played a key role in the growth and financial strength of our company, Tony and I have worked closely with him during that time and I look forward to the important contributions he will make in this new position.

So let me turn the call over to Tony and Ed who will share more details on our results our priorities and our outlook for 2022.

Thank you Wendell and good morning, everyone.

Our growth initiatives are succeeding and we delivered another quarter of excellent year over year growth and capped off a truly exceptional year for.

For the full year sales increased 23% and EPS was up 49%.

All of our segments grew with four out of five increasing sales by a double digit percentage.

It was a strong year, even compared to pre pandemic levels. Since 2019, we have grown sales by 21% and EPS by 18%, we nearly doubled free cash flow to $1 $8 billion, which is a conversion rate of 97% for the year.

We achieved double digit ROIC.

And we utilized our strong cash generation to reward shareholders, we increased our dividend, 9% and we reduced our outstanding shares by 5% to the resumption of share repurchases.

And so many dimensions, we are feeling great.

That said as you heard from Wendell our gross margin percentage is not where it should be.

In the fourth quarter gross margin was 36, 5% down 180 basis points sequentially.

As expected below normal auto production and seasonally lower sales in specialty materials reduced profitability.

In addition, we restarted idle polysilicon capacity to support Hemlocks, new long term solar contracts, thus incurring temporary startup cost.

We expect to expand gross margin percent throughout the year.

We negotiated pricing increases in long term customer contracts to more appropriately share the higher costs that we are experiencing these.

These increases take effect and accelerate throughout the year.

As always we expect to deliver on a robust cost reduction program.

Combined benefits of these efforts should offset the cumulative inflation, we experienced over the last year.

And what we anticipate for 2022.

Our gross and operating margins.

Also benefit from growing volume.

Our operating Leverages, such that additional volume drives good incremental profitability and becomes even more apparent as we offset inflation.

We expect volume increases throughout the year.

As our volumes increase and our pricing actions take effect, our gross margin percent will grow.

As a reminder, the first quarter is usually our lowest volume quarter of the year.

We expect specialty materials to improve on its normal cycle with Q1, typically being the lowest quarter of the year <unk>.

Environmental Technologies' sales will improve with the resolution of the chip shortage, which we expect to happen later in the year.

In optical communications will grow as we fill the capacity that we're adding to meet growing demand.

For the year, we expect price increases cost reductions and volume growth.

Putting this all together, we expect Q1 to be the lowest gross margin percent quarter of the year and for gross margin to grow from there.

Now, let's take a closer look at performance in each of our businesses during the fourth quarter.

But full year.

Let's begin with optical communications fourth quarter sales were up 7% sequentially exceeding $1 $2 billion net income increased 12%.

For the full year sales grew 22% to $4 3 billion and net income was up 51%.

We grew significantly faster than the passive optical market.

National and regional carriers to increase capital spending on five <unk> and broadband projects. Additionally, enterprise sales were up as customers increase spending on data center builds.

Full year net income grew 51% driven by the incremental volume despite cost headwinds related to materials and logistics.

We're entering 2022 with a sales run rate, 25% higher than where we started in 2021.

And we have a strong order book, we continue to see significant public and private investments and fiber infrastructure as operators work to expand capacity capability and access.

And we expect a large multi year wave of growth.

In fact, we believe private carrier and public infrastructure investments will push the market into double digit growth.

We're adding capacity to capture the growing demand.

And we feel really good about our position as the only large scale end to end manufacturer of optical solutions.

Turning to display in the fourth quarter sales were $942 million up 12% year over year, and net income was $252 million up 16% year over year.

For the full year sales were $3 7 billion up 17% year over year.

Net income reached $960 million up 34% year over year.

The pricing environment was favorable throughout the year and our excellent operational performance allowed us to continue to lead the market.

In the third quarter, we provided detail about our perspective on the display industry based on three main factors retail demand panel maker's production and glassmakers ability to supply panel makers.

Our fourth quarter performance and first quarter outlook reaffirm our expectations.

We continue to expect the glass at retail will grow in 2022 by high single digits, driven by TV unit and screen size growth.

We expect display glass pricing to be flat sequentially in the first quarter.

And supply demand balance for display glass to be tight.

We expect glass supply demand to remain tight the balanced in 2022, and the pricing environment to remain favorable.

Overall, we are very pleased with displays performance in 2021, and we feel good about our outlook for 2022.

We're operating from a position of strength and we intend to build on our momentum as we move forward.

In environmental technologies fourth quarter sales were 330.

$353 million down, 9% sequentially and 21% year over year.

Fourth quarter, net income was $54 million down, 10% sequentially and 42% year over year on lower sales volume.

These declines were driven by auto production constraints created by the semiconductor chip shortage that began in the second quarter of last year.

As expected this negatively impacted profitability for the segment and the company.

Now even with this temporary setback caused by the chip shortage for the full year, we were able to deliver double digit sales growth enabled by our content driven growth strategy.

Full year sales were nearly $1 $6 billion up 16% year over year <unk>.

Primarily driven by strength in heavy duty diesel and greater adoption of gas particulate filters.

For the full year net income was $269 million up 37% year over year.

As we look ahead, we are confident that our content driven approach will continue to drive that performance.

And when the automotive market rebounds, with the resolution of the chip shortage, we expect significant growth from current levels.

Turning to specialty materials.

Sales were $518 million down 7% sequentially on normal seasonality.

Sales were down 5% year over year versus a strong Q4 in 2020 following the launch of ceramic shield.

Fourth quarter, net income was $92 million down sequentially and year over year, driven by the lower sales volume.

Full year sales were up 7% and exceeded $2 billion driven by continued strong sales of premium cover materials.

Demand also remains strong for our advanced optics content used in semiconductor manufacturing as the broader end market continues to experience robust growth.

Despite sales being up full year net income was down as we invested strongly in new innovations that will be commercialized in the coming year.

We have grown sales every year since 2016 through our more Corning approach despite smartphone unit sales maturing.

Over that five year period, we've added nearly $900 million in sales.

On a base of $1 $1 billion.

Looking ahead in 2022, we expect sales to grow faster than our underlying markets driven by continuing adoption of our innovations and growth in advanced optics, specifically in products from EU the lithography.

And as I mentioned earlier, we expect sales to increase from the seasonal low levels, we expect in the first quarter.

And finally, turning to life Sciences, we had a great year with fall sales topping $1 2 billion up 24% year over year.

Fourth quarter sales were $317 million up 16% year over year.

This strong performance was driven by ongoing demand to support the global pandemic response.

Continued recovery in academic and pharmaceutical research labs, and strong demand for bio production vessels and diagnostic related consumables.

Full year net income was $194 million.

40%.

Fourth quarter net income was $49 million up 17%.

Year over year.

Looking ahead to 2022, we expect our strong growth to continue driven by COVID-19 vaccine rollouts.

Strong research funding lab.

Lab utilization returning to pre pandemic levels.

And growth in the bio production segment.

I also want to spend a minute on our other segment.

As a reminder, the majority of sales in our other segment are at Hemlock semiconductor group.

During the year hemlock saw new demand for solar grade polysilicon.

With the increased activity and interest in U S based solar manufacturing customers have turned the hemlock.

Leader in polysilicon manufacturing.

So in addition to selling polysilicon for use in semiconductors.

Hemlock was able to sell solar polysilicon from inventory.

Going forward solar remains a strong revenue opportunity for hemlock.

In the fourth quarter, we signed long term take or pay supply contracts with customer deposits that start to ship in 2022.

As a result, we restarted idle capacity with minimal capital investment to meet this demand.

As I mentioned earlier gross margins were impacted in the fourth quarter as we incurred temporary cost to restart solar polysilicon capacity.

This will improve throughout the year as solid production increases.

Additionally, our auto glass and pharmaceutical packaging emerging businesses are also in the other segment and both businesses significantly grew sales during the year as well.

Stepping back we made strong progress across all of our businesses in 2021.

We entered new product categories announced collaboration 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 R&D is what continues to fuel and sustained corning's leadership position across its markets.

Looking ahead, we expect Corning sales and EPS to grow year over year in the first quarter.

We expect sales to be in the range of three five to three $7 billion.

And EPS in the range of 48 to 53.

Sales are down sequentially due to typical seasonal volume declines.

For the full year, we expect sales of approximately $15 billion in profit to grow faster than sales.

Before I turn things over to Ed I'd like to take a moment to express my gratitude.

First to all Corning employees, whose dedication and commitment to this great company is such an inspiration.

Second to those of you on the call and all our shareholders.

For being with being on this journey with US we're working hard every day to maintain your trust and reward your confidence in us.

And finally I'd like to thank Wendell.

Ed and my fellow members of <unk> Senior leadership team.

I'm proud to have played a role in building the strong foundation Corning has today.

It's truly been a wonderful journey.

As Ed takes the reigns in just a few weeks.

Fully confident in his ability to build on this foundation and continue creating value for all our shareholders.

With that I'll turn it over to Ed.

Thanks, Tony and Hello, everyone.

I'm looking forward to connecting with you in the days and months ahead. So we can expand on the thoughts I share today and address any questions you may have.

Before I start I'd like to say that it's been an honor working alongside Tony All these years.

Under his tenure, we met or exceeded all the goals of our four year strategy and capital allocation framework and today, we're performing well against the subsequent goals, we outlined in our strategy and growth framework in 2019, our execution has created a stronger more.

Our resilient Corning and that provided vital proved vital as the pandemic unfolded.

Our solid footing enabled us to preserve our financial strength throughout 2020.

And it kept us well positioned for growth in 2021.

Throughout it all Tony's focus on financial stewardship has been central to our results and I plan to sustain that disciplined approach.

So let me walk through my priorities as CFO as I work to ensure that Corning continues to be an excellent steward of capital.

We expect another strong year of cash generation in 2022.

In our financial priorities remain unchanged, we will continue to invest our cash to support organic growth extend our leadership and reward shareholders.

First we will continue to invest for growth primarily through R&D and Capex are.

<unk> is fundamental to our long term success and our allocation will be consistent with previous years in.

In 2022, we expect to keep Capex consistent with 2021.

Our investments include adding capacity to meet to meet growing demand introduce new innovations and improve productivity.

Shareholder returns also remain a key priority.

In 2022, we expect to increase our dividend per share by approximately 10%.

And we expect to continue opportunistic share repurchases building on the 5% of outstanding shares we repurchased in 2021.

In the near term improving gross margin is my top priority.

We expect improvement throughout 2022 as sales grow and our pricing actions take hold.

Overall, our closed today, saying that I am optimistic about our growth trajectory for 2022 and excited to step into the CFO role.

We're building on our strong foundation.

Our capabilities are relevant to major trends playing out across the industries we serve.

Our more Corning approach is working.

And we're executing effectively through some very volatile end markets expanding relationships and commitments with our customers.

And extending our leadership position.

Based on the growth drivers and financial priorities you've heard this morning, I feel good about delivering on our expectation to grow sales $2 15 billion in 2022 with EPS growing even faster.

I look forward to updating you on our progress throughout the year.

And with that I'll turn it back over to Ann for Q&A.

Thanks, Ed.

Shannon, we're ready for the first question and I ask that folks. Please try to keep it to one question. So we can get through if any as we can.

Thank you as a reminder to ask a question you will need to press star one of your telephone to withdraw.

Your question press the pound key.

Our first question comes from <unk> Mohan with Bank of America. Your line is open.

Yes. Thank you.

When you look at your comments on long term contracts, where you're negotiating pricing can you can you give us some sense of what percent of your revenue is tied into these contracts and how.

How should investors think about the bridge to $15 billion in revenues how much of that increase would you say is pricing versus content versus market growth and Tony. Thanks for all you've done for Corning its been a pleasure working with you.

<unk> I appreciate it.

So let's deal with the pricing question first.

So first let's.

Pullout display.

For a moment, we provide glass pricing guidance, each and every quarter.

In display.

And you know that we expect the pricing environment.

To remain favorable.

You just received both what happened in quarter four.

Was flat sequential pricing in display and our guide for flat sequential pricing in quarter, one as well.

As you look at let's take that I'll take all of our other segments Auto life Sciences.

<unk> at AMC, if we take them as a whole.

We expect price to be up.

In total dollars year over year.

Now each of the businesses is different.

Different types of contracts and then within each of those you have.

Different customers in different positions. So it's hard to reach a general statement, but I think as you think about it analytically.

<unk>, we expect prices as a whole in those segments to go up.

Turning to the $15 billion.

Like always for us.

That.

You should be thinking about it primarily as being driven by our growth.

The way the sort of construct that you heard from Tony.

Is that if we look back at this past year.

Are we had cost inflation are much higher than a normal year of increasing input costs.

And the way we're looking at the pricing is that we expect to share that more appropriately with our customers and the price together with our normal robust.

Cost reduction will put us in a position to offset the inflation, we've already experienced as well as what we anticipate for 2022.

That then allows the volume growth.

To drop to the gross margin line with a normal sort of robustness.

And without any sort of friction costs driven by.

Excess inflation.

So thats the way we tend to think about the $15 billion Thats. The way, we think about price cost and then how it turns into gross margin percentage gains.

As volume grows and the price actions take effect.

Thanks, Ron.

Next question.

Our next question from Tim long with Barclays. Your line is open.

Thank you.

I wanted to ask on the optical comms business, obviously pretty strong in the quarter can you talk a little bit.

Have you already started to see the benefits from the.

Renewed agreement with with AT&T and.

And looking out at this business. It sounds like you think you could see double digit growth.

The next several years, so could you talk a little bit about how you see the margin progression over time do you think net margins can get back to levels. They were a few years ago given higher growth.

And pricing actions as well thank you.

Yes, I think the short answer to that is for sure we think that.

Margins will expand in this business for all the reasons that Wendell just explained I mean first we are taking pricing actions here and Thats, where a lot of our long term supply agreements are and those will roll out through the year and then secondly, when you combine it with the volume increase that we expect so yes, we would expect our margins to increase.

And in terms of AT&T, obviously, theyre very important customer for us and we continue to see the benefits from that relationship.

Okay. Thank you.

Our next question comes from Martin Yang with Oppenheimer. Your line is open.

Hi, Thank you for taking my question can you maybe talk about the cadence.

<unk> price increase and associated margin expansion.

The majority of this year.

Any.

One quarter, where we should expect most of the pricing impact to be 40.

<unk> four.

Yes.

I mean, Martin I mean, it's clearly going to rollout at different times at different pace by customers.

We would expect to see some of it start kicking in in Q1, and then accelerate from there.

We would expect to have happen is Q1 being our lowest quarter from a gross margin standpoint, and then when you add the sales volume increase that we expect.

As we described how those dynamics work, we'd expect gross margin to expand from there throughout the year.

The way we tend to think about it cycle wise is that first quarter will be the lowest amount of incremental price that it builds as the year goes on as more and more of the.

Contracts are.

The increased.

Increased pricing go into effect and.

As it applies to more volume just following our normal seasonal cycle of our businesses.

I guess I was.

Trying to get.

And the potential for.

The price increase with customers the effect of that to maybe lingering into 2020.

So.

So it's an excellent question.

Like many things.

When we.

When we wrestle with.

<unk>.

Issue of inflation.

And.

We tried to figure out how to deal with that problem.

And things.

And we developed new tools.

I would say that our customers have been very fair with us and they've been very favorable discussions because a good mutual understanding that.

We rely on each other we're real partners, we tend not to be transactional with our customers and our customers on a transactional with us.

So the good news is those long term nature of those relationships when that each and every time, we evolve that relationship it tends to last.

So I think it all really depends.

On what happens with inflation going forward.

The key thematic is that.

We will own or partner with the type of rigorous cost reduction we normally do.

But for these excess costs this excess inflation.

They've agreed to share that in a more appropriate fashion with us.

Got it that's perfectly clear thank you.

Next question.

Our next question comes from Steven Fox with Fox Advisors. Your line is open.

Thanks, Good morning, Tony Congrats on your retirement and thanks for all your help over the years really appreciate it.

Steve in terms of Mike Thanks.

My question I guess I was wondering if you guys could dig into the specialty materials, a little bit more it sounded like there's some new drivers that's going to help sales growth this year.

I'm just trying to understand maybe the new versus the more typical growth of the recent years and then maybe its impact on gross margins for the coming year.

Thanks to access, especially for the comments and Tony.

<unk>.

I think when you think about specialty Youre, just seeing the inverse of what you see this year in terms of margin we're investing in new.

New programs that our stealth in nature.

As the spending has gone up the investments has gone up as we begin to sort of ramp some of those production assets, but they are not totally stable, yet and we're continuing to invest in the product technology and what we expect is as we work our way through this year those products will get them.

Produce.

They'll start generating revenue or will get more efficient and making them and therefore, they will turn into profit.

Year over year.

Profit gains as we work our way through 2022.

So more of a second half type of everything you just said yes.

Yes, yes, I think more of as more of a second half.

Which is as you know tends to be relatively typical and in mobile consumer electronics.

Got it thank you.

Great next question.

Our next question comes from John Roberts with UBS. Your line is open.

Thanks <unk>.

As well Tony and welcome Edward since we have so much CFO firepower here on this call.

Corning met the earlier financial goals that were laid out but they didn't include an ROIC target and if you look at slide 38, and ROIC is only 10%.

Do you think we will have a focus on that going forward you pivoted to focus on gross margin I don't know if youre going to pivot maybe to focus on ROIC as well and maybe wrap the capital spending outlook and with that as well.

Sure I mean, I think that.

If you look back over the last several years has actually been a pretty significant improvement in ROIC.

And it was clearly one of our focuses both on the original strategy and capital allocation framework, but if you go back to when we talked about in 2019. It was a very specific commitment to get to at least above 10% level, which I'm really proud of the fact that we accomplish that in 2021.

Especially when you think about the challenges from a pandemic standpoint.

But for sure are continuing to expand ROIC, which is kind of the ultimate.

Measure of profitability is is a real focus areas for us and so that also remains a high priority from a financial management standpoint, yes.

Yes, I would add John that we expect to grow as we've shared with you and expand our margins and we gave you our capital guidance. So we certainly are focused on ROIC and expect it to continue to be important for us as we go forward.

Okay.

Next question.

Our next question is from <unk> merchant with Citi. Your line is open.

Great. Thank you for the opportunity.

And Tony once again, thank you for all your help.

The question on margin I mean, you got pushed back this quarter I think Tony mentioned.

Since startup cost that impacted margins this quarter, which.

As Wendell pointed out were underwhelmed in relative to expectations my understanding with them.

Cost negotiations and inflationary pressures being passed on to customers were being negotiated and <unk> as well.

Did you get the most pushback.

On that.

And why do you feel so confident.

These inflationary pressure should abate in 2002 with the negotiated contract.

Thank you.

Okay.

So it wasn't so it's really just a timing question it wasn't so much of.

What goes into effect exactly in Q4, who pushed against us and who did it.

Really it's just since these are all long term contract based and the reason we have these long term contracts is that our core value creation comes from us, making product and having a high transformation value driven by our factories and.

And the key thing we need to do to drive that ROIC up.

And to give good streams of earnings to our investors is to make sure we derisk that capital investment.

So the good news with that is that the way inflation works is that tends to put some dampening of the effective inflation on us because of our fixed cost structure being relatively high.

But the downside is that.

Those long term contracts, you have to actually sit down and renegotiate them.

So it gives us confidence is.

We've renegotiated them and reached a formal agreement with our customers on this is what their pricing will be.

So it takes time to do that.

To reach agreement that what is the appropriate sharing but the good news is once you reach agreement you have agreement and then now we just execute.

That's where we are now we're not closed with everybody. There is more to do and Thats. Another reason that some of it builds through the year.

Okay with regard.

I'm sorry.

Sorry, you're asking with regard to the startup cost that you mentioned that was primarily hemlock and thats actually a pretty exciting thing for us as you know when we did the transaction around <unk> block in September of 2020. It was primarily based on our semiconductor market.

We looked at solar as an option.

That solar appears to be materializing, and we have signed long term contracts and thats, where the startup cost came from.

Sure.

Alright next question.

Our next go ahead I'll touch on some challenging.

P. Morgan your line is open.

Thank you hi, Thanks for taking my question and congrats for Tony.

I was going to just ask on display.

Tony you sounded optimistic about the.

DB environment in 2020.

Thank you Justin <unk> from the data we saw I mean, we haven't seen any positive data points that can use the industry seemed a bit more.

Fair ratio.

Let's see.

The soft environment in terms of DVD in full gear.

What's really driving in terms of data points and maybe what youre looking at driving that optimism about BV unit outlook in 2022 and separately just on the screen. So you those were let me fill in the decent data shows screen size increases aren't going up as much as it did.

It used to is there inflation driven change in consumer behavior.

Consumers are maybe pulling back a bit in terms of moving to higher screen sizes.

Well.

Thanks for the.

Just a question on display.

We think it's really it's an important area because what we.

I've heard from investors is that a key factor weighing on our stock price is a concern that the current cycle downward price in profits can be LCD panel industry.

Would cause a significant glass price and profit squeeze for quoting.

Now what we said in quarter three is it.

We believe glass supply demand balance will be tight.

And.

Therefore, the glass pricing environment will remain favorable.

And therefore, we did not expect a significant reduction in <unk>.

Our profit stream.

We now have a quarter for data.

Glass price was flat sequentially.

Further.

We guided that for quarter one.

The glass price will be flat sequentially.

Sequentially.

Once again.

Glass supply demand remains tight.

So now we have more confirmatory evidence to support our belief.

The pricing environment will be favorable in 2022.

Oh.

That I think is the core evidence that we're looking at now when you shift to thinking about the market retail a full glass out in retail overall is like in the range of what we anticipated.

And size, we actually expect to do quite well in the coming year, one of the things that happened.

During the pandemic is that a lot of smaller screens were sold and that tends to be the place where the units. We expect it to drop off more than they have which has sort of has the effect of.

Also accelerating if anything.

Diagonal growth on average so that's the way we tend to think about.

And retail, which you guys have anything to add on that no I think I think that's exactly right.

Our expectations for the year really haven't changed.

They're pretty well in line from a unit standpoint with what.

Third party.

People in the industry are looking at and the screen size, we're very confident in that inch and a half has been.

Pretty consistent for a very long period of time and when you look at the growth above 65 inches Tvs over the last year. It just confirms that inch and a half we feel very confident about that.

Thank you.

Next question.

Our next question comes from George Notter with Jefferies. Your line is open.

Hi, guys. Thanks, very much I guess I wanted to ask about the optical business.

Obviously I think the bet. There is just how fast you guys can expand manufacturing capacity.

I saw you grew that business, obviously about six 5% sequentially, so youre, making progress but at the same time, we hear about how you are lead times or nearly two years for high count fiber cables. So.

Maybe you could talk about the gating items to expanding capacity there.

Is it resin is it.

Yes.

Buildings and draw towers, just kind of walk us through what you see and then and then last thing congrats to Tony.

Okay.

Thanks George.

As you pointed out I will comment on our specific backlog by product line, but as you point out if we could make more we could sell more.

And that's why we announced the capacity expansions we did.

Last year.

And we expect those to ramp as the year goes on.

With each of those capacity expansions.

We need to have in place long term commitments from our customers and we have those and that is ramping.

So the real bottleneck isn't present, it isn't raw materials and labor. It is just us being able to get into place capacity that is more appropriately balanced to the demand that we are experiencing.

Alright next question.

Our next question comes from Rod Hall with Goldman Sachs. Your line is open.

Yes, Thanks for fitting me in congrats on a great working with you.

Best of luck and thanks Ryan.

So I had two questions one on him lock the hemlock commentary on polar I thought was pretty positive.

You got to have any.

Ideas for growth there.

'twenty to 'twenty one.

Mid single digit any kind of indication you can give us for that.

Hi, Rod, we're not specifically, giving guidance, but what I would say is we've signed a number of long term multi year agreements, we received cash upfront, they're take or pay agreement. So we're highly confident that we'll be able to fill the capacity that we have coming online so youll see.

That expand through the year in 2022.

Thanks wondering interesting dynamics that and could maybe sit down with you on that afterwards, but just from a modeling standpoint, when we did the.

Hemlock transaction as you heard from Jeff.

So it really stood on the semiconductor business, but we picked up all of those.

Solar capabilities. It really is an option with that was inventory.

But that we also had there was.

As solar grade and so just through this year, we sold down a bulk of that inventory, which generated cash nicely and then now you're really seeing new.

Solar grade polysilicon being made by us with the startup that you were talking about.

When you work through the modeling let's have.

And sit down to provide a little bit of help.

Just sort of how that worked.

Okay, great. Thanks, Wendell and then.

Buyback is kind of back to the same level. It was in December .

Should we be thinking like we're back into kind of a <unk>.

Normalized buyback regime no.

Well for sure right our approach from a buyback standpoint is first we generate very strong operating cash flow and our first priority is to invest that in our business and our growth and sustained leadership.

And then obviously once we've done that we want to return the cash to shareholders.

Ed mentioned, we've increased the dividend in 2021, and we expect to increase the dividend in 2022.

And then we'll be opportunistic on buybacks and we saw Q4 is a really great opportunity to buy back shares when the stock price months in.

We will continue to pursue buybacks on an opportunistic basis.

Great. Okay. Thanks, a lot Tony.

Thank you.

Shannon, let's take one more question please.

Our last question is from meta Marshall with Morgan Stanley . Your line is open.

Great. Thanks, maybe just a question on environmental.

Wanted to get a sense of.

Clearly.

That's an issue with auto is right now, but we had a lot of like <unk>.

Cars that are basically ready to go and just needed a chat and so just trying to get a sense of.

When you start to see environmental pick back up.

Yes.

The supply chain shortage.

Maybe first off on the auto market are you really kind of.

Corridor or two after that to walk through kind of inventory that they may have.

Okay.

We don't see a significant inventory overhang for our product.

One of the reason is that.

Our demand supply was tight for that product to begin with as we work to OE.

Through the year.

Our content strategy has put a good amount of strain on our ability to supply.

So in general if you had a point of view on when chips.

Started to come back for auto and as auto production scale, we would expect to roughly followed that timing.

Great. Thank you.

Great. Thanks, Nina Alright.

Alright. Thank you all for joining us today before we close I wanted to let everyone know that we will attend to cig 11th annual Tech conference on March 4th in the Morgan Stanley Global Technology Media and Telecom conference on March 8th well.

Management visits to investor offices in select cities finally.

A web replay of today's call will be available on our site. Starting later this morning. So thank you all for joining US Shannon that concludes our call. Please disconnect all lines.

This concludes today's conference call. Thank you for participating you may now disconnect.

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