Corning Q1 2023 Earnings Call Transcript

Quartr
Provided by Quartr
April 25, 2023

There are 12 speakers on the call.

Operator

Welcome to the Corning Incorporated Quarter 1 2023 Earnings Call. It is my pleasure to introduce to you Ann Nicholson, Vice President of Investor Relations.

Speaker 1

Thank you, and good morning, everybody. Welcome to Corning's Q1 2023 earnings call. With me today are Wendell Weeks, Chairman and Chief Executive Officer Ed Schleffinger, Executive Vice President and Chief Financial Officer and Jeff Evenson, Executive Vice President and Chief Strategy Officer. I'd like to remind you that today's remarks contain forward looking statements that fall within the meaning of the Private Securities Litigation Reform Act of 1995. These statements involve risks, uncertainties and other factors that could cause actual results to differ materially.

Speaker 1

These factors are detailed in the company's financial reports. You should also note that we'll be discussing our consolidated results using core performance measures unless we specifically indicate our comments related to GAAP data. Our core performance measures are non GAAP measures used by management to analyze the business. For the Q1, the primary differences between GAAP and core EPS from restructuring charges and from non cash mark to market adjustments associated with the company's currency hedging contracts and Japanese yen denominated debt. In total, these increased core earnings in Q1 by $97,000,000 As a reminder, the mark to market accounting has no impact on our cash flow.

Speaker 1

A reconciliation of core results to the comparable GAAP value can be found in the Investor Relations section of our website at corning.com. You may also access core results on our website with downloadable financials in the Interactive Analyst Center. Supporting slides are being shown live on our webcast. We encourage you to follow along. They And now I'll turn the call over to Wendell.

Speaker 2

Thank you, Anne, and good morning, everyone. Last quarter, we told you that markets constituting about half Of our sales, we're experiencing recession level demand that our first quarter sales would decline By greater than normal seasonality due to pandemic related disruptions in China, That we would raise prices again to offset additional inflation and also begin to restore our productivity ratios So pre pandemic levels. And as a result, our margins would increase 1 to 2 percentage points sequentially despite lower sales. And that is exactly how the Q1 played out. 1st quarter sales were $3,400,000,000 and EPS Our actions to raise prices and restore productivity ratios began delivering notable results.

Speaker 2

Despite a 7% sequential sales decline, gross margin expanded 160 basis points sequentially to 35.2 percent and operating margin Expanded 150 basis points from the prior quarter to 15.5%. Although conditions remain weak in multiple markets, we expect our results to improve In the Q2, we remain focused on profitability and cash flow and we will continue to align our cost structure to demand. Now I wanted to provide some context on the dynamics we experienced in our key markets. And then I'll discuss how we're continuing to build our long term growth opportunities across our businesses. So let's dive in.

Speaker 2

In Display Technologies, sales declined 3% sequentially as both volume and glass price declined In March, panel maker utilization increased and we expect our volume in the 2nd quarter to Increased significantly from the Q1. As conditions continue to improve, We're optimistic that panel maker utilization is beginning to move beyond correction levels In Optical Communications, sales declined 6% sequentially. Our pricing actions partially offset A greater than normal seasonal volume decline in connectivity solutions, which is associated with the pacing Several large customer projects. Our pricing and productivity actions resulted in net income improving Government commitments to connect the unconnected are contributing to robust cable and fiber demand And we continue to advance our leadership. Last month, we officially opened An optical cable manufacturing campus in North Carolina to help provide U.

Speaker 2

S. Network operators with the cable they need To bring high speed optical connectivity to underserved communities, particularly in rural America. Commerce Secretary, Gina Raimondo said, It is past time that every American be connected with Affordable Internet, no matter where they live, we could not do it without the folks at Corning. We wouldn't have the fiber, the innovation Finally, in Environmental Technologies, We saw increased adoption of gasoline particulate filters in the quarter, which helped drive a 9% sequential improvement in sales Despite the languishing car market, net income grew 19% in the segment Based on our productivity actions and growing sales. To sum up the short term, We're seeing improvement in some of our markets, but a series of challenges continues to ripple across the global economy.

Speaker 2

Nevertheless, we expect to grow sequentially in the second quarter and to improve our key financial metrics. For the back half of the year, I'd be disappointed if we didn't grow from 2nd quarter levels. Longer term, we will continue to innovate and capture growth opportunities as they materialize. We're energized about Corning's future and I'd like to review some of the reasons why. It all starts with our focused and cohesive portfolio.

Speaker 2

We maintain clear leadership in 3 core technologies And 4, proprietary manufacturing and engineering platforms that are on file to solving a broad range of significant challenges in shaping We apply new combinations of our assets and capabilities to advance important secular trends in tandem With our customers and by reapplying and repurposing our insights and assets across multiple opportunities and markets, We increase our profitability. In optical communications, we've been leading in the industry for more than 50 years. This business is the most fully evolved example of Corning's focused portfolio In display, by leveraging all three of our core technologies and evolving our Fusion platform, We have achieved large scale and broad capabilities that have advanced our leadership position. As our customers evolve, we're helping them create a world with richer, more lifeline and ubiquitous displays. In Mobile Consumer Electronics, we invented the cover glass category and redefined it by integrating glass with ceramics And by combining fusion with paper deposition, we continue to advance the state of the art with our leading cover materials, Which have been deployed on more than 8,000,000,000 devices to date.

Speaker 2

And we've recently entered new product categories And S-twenty three series. These advancements are excellent examples of our more important approach. We're also innovating in emerging technologies like augmented reality and bendable devices, which we expect to contribute In automotive, we're helping build a world where vehicles are increasingly green And more software and displays are enabling new in vehicle experiences. Our inventions are enabling industry leaders to meet stringent And we're collaborating with LG Electronics, a global technology and vehicle component solutions innovator to advance in car connectivity. Overall, we're helping to solve more and more of our customers' challenges in design, connectivity and autonomy.

Speaker 2

And at CES, we continue to generate strong industry excitement about how our technical glass and optics capabilities Can expand the boundaries of what's possible. Finally, in life sciences, We're using Corning's core glass and optical physics technologies along with our expertise in vapor deposition, precision forming And extrusion to help support the discovery and delivery of new medicines, including biologic treatments That are personalized, effective and safe. So as you can see, Our investments in distinctive capabilities have placed us at the center of secular trends touching many facets of daily life. And we believe we will continue to develop category defining products to transform industries and enhance labs. I'm also excited by our growth opportunities in the renewable energy industry, Where I believe we can make significant additional contributions to a sustainable U.

Speaker 2

S.-based solar supply chain. We're proud to make the world just a little bit better wherever we can and that extends to all of our stakeholders, Especially in these uncertain times. We recently released our DE and I and sustainability reports, So as I wrap up my remarks, here's what I'd like to leave you with today. Moving forward throughout 2023, we will continue to focus on operating each of our businesses well and adjusting At the same time, we're advancing growth initiatives and capabilities that will drive long term success. We remain well positioned to continue capturing some very rich set of long term opportunities that we've built I look forward to updating you on our progress.

Speaker 2

Now I'll turn the call over to Ed, So he can get into the details of our financial priorities along with our results and outlook. Ed?

Speaker 3

Thank you, Wendell. Good morning, everyone. For the Q1, we delivered results At the higher end of our expectations, sales were $3,400,000,000 and EPS was $0.41 Gross margin was 35.2 percent and operating margin was 15.5%, both meaningful improvements Our free cash flow for the quarter was negative $383,000,000 The first quarter is typically negative Due to cash flow cyclicality, this quarter free cash flow was also impacted by lower sales reflecting the recession level demand We saw several of our markets and overall weakness in China. Looking forward, we expect positive free cash flow starting in the second We continue to make progress on improving our profitability by raising prices to help offset inflation And by adjusting our productivity ratios closer to historical levels. And we will continue to align our cost structure to Successfully weathered the demand environment.

Speaker 3

We remain confident in our relevance to long term secular trends And our more important approach. And we are well positioned to capture durable profitable growth Now let's turn to our Q1 segment results. In Optical Communications, Sales were $1,100,000,000 down 6% sequentially as price increases partially offset a greater than normal seasonal volume associated with the pacing of customer projects. Despite the decline in sales, net income grew 22% sequentially to $159,000,000 primarily driven by pricing and productivity actions taken in late 2022. We continue to believe the industry's underlying growth drivers are intact, long term demand for optical networks Strongly supported by trends in computation and by private and public infrastructure investments to help connect We're pursuing 3 significant secular trends: Broadband, 5 gs and the cloud.

Speaker 3

We've got major innovation programs underway for each category and our connect solutions offer economic advantages for a broader range of customers than ever before. Display Technology sales in the Q1 were $763,000,000 down 3% sequentially as both volume and glass price declined Net income was $160,000,000 down 6% sequentially on lower sales. On our last call, I updated you on panel maker utilization dynamics. At the beginning of Q4, Utilization began to increase from its low point, but it leveled off in December due to pandemic related disruptions in China. And in January, the disruptions persisted driving utilization back down and below retail demand.

Speaker 3

Subsequently, Conditions in China improved. In March, panel makers increased their utilization and as a result, our volume increased From January February levels, we're expecting panel makers to run at higher utilization levels In the Q2 than they did in the Q1 and therefore we anticipate our sequential glass volume to increase significantly. Favorable pricing is primarily driven by 2 factors. The first factor is the improving glass Supply and demand balance. Glass makers have been taking additional tanks offline for maintenance and repairs.

Speaker 3

As we've noted previously, we are taking this opportunity to upgrade our fleet with our latest technology and we're actively managing the timing of tank restarts The second factor is Glassmakers' profitability. In Q4, our 2 major competitors reported net losses, reinforcing our view that it is challenging for glassmakers who have high costs Moving to Specialty Materials, Demand for our long lead time semiconductor equipment products remains strong. However, Smartphone and IT end market demand remains weak. 1st quarter sales were $406,000,000 down 20% sequentially, consistent with typical seasonality. Net income was $39,000,000 down sequentially due to lower sales.

Speaker 3

We expect the continued adoption of our latest glass innovations such as Gorilla Glass Victus 2 And the introduction of new glass formulations in the second half of twenty twenty three to help offset continued softness in the smartphone and IT Environmental Technologies' 1st quarter sales were $431,000,000 We saw increased GPF Adoption in the quarter, which helped drive a 9% sequential improvement in sales. Net income increased 19% sequentially driven by higher sales We are not projecting a recovery in the automotive market in the second quarter and our current view of the full year That auto sales remain below pre pandemic levels. But our content driven growth strategy Turning to Life Sciences, 1st quarter sales were $256,000,000 Down 13% sequentially, driven by lower demand for COVID related products and the impact of customers drawing down Thank you, Vince. Thank you, Vince. Net income was $9,000,000 driven by lower sales and our actions to reduce Let me take a minute to describe the market dynamics impacting this business and what we expect for the year.

Speaker 3

In 2021 and the first half of twenty twenty two, growth was largely driven by pandemic related demand And customers over ordered due to supply chain challenges. Pandemic related demand began tapering in the second half of twenty twenty two And the industry was left with elevated inventory levels. We expect our sales Finally, in Hemlock and Emerging Growth Businesses, sales in the Q1 were $386,000,000 up year over year and down sequentially, driven primarily by seasonally lower volumes in semiconductor polysilicon. Net income increased sequentially. We are seeing continued strong demand for solar grade polysilicon to meet the need We continue to see strong growth in automotive glass solutions For the Q2, we expect total company sales to grow sequentially, led by display We're not planning on strong second quarter sales, sequential sales improvements in optical communications, life sciences or specialty materials.

Speaker 3

Turning to profitability, we expect to build on our progress from the Q1 and further improve profitability, driven by our efforts to offset inflation and return productivity ratios to historical levels. We expect sales in the range of $3,400,000,000 to $3,600,000,000 and EPS in the range of $0.42 to $0.49 And free cash flow will improve strongly due to normal cyclicality and higher sales. And as I said earlier, we expect positive free cash flow in the second quarter. The most likely case for the second half Is that sales and earnings increase versus the 2nd quarter? Although it's too early to be definitive given continued global economic uncertainty And its impact on consumer demand and infrastructure spending.

Speaker 3

I'd also like to reiterate our capital allocation priorities. We prioritize organic growth through research and development and capital expenditures. The investment opportunities we target generate a 20% ROIC or greater. We expect 2023 full year capital expenditures to be slightly lower than 2022. We are also prioritizing rewarding shareholders with our excess cash in 2 ways.

Speaker 3

1st is dividends, Which we've raised for 13 years in a row. 2nd is share buybacks. We bought back about 5% of our outstanding shares in 2021 And we'll continue to be opportunistic. Preserving the financial strength of the company is always a top priority. We maintain a strong balance sheet that provides appropriate durability and flexibility.

Speaker 3

And I'm proud to say Corning maintains one of the longest Debt tenors in the S and P 500, our average maturity is about 25 years with no significant debt coming due in any given year. In sum, the actions we are taking position us to come out of this period of uncertainty, financially strong In the Q2, we expect sales, profitability and cash generation to improve driven by our profit improvement actions, Cost controls and continued recovery in display technologies. We're executing a highly disciplined approach to Our investment decisions while maintaining a strong balance sheet. We're particularly focused on aligning our cost structure to the demand environment, Our long term growth drivers all remain intact and we're well positioned to continue capturing growth And with that, I'll turn it back over to Anne for Q and

Speaker 1

A. Thanks, Ed. Hey, operator, we are ready for our first question.

Operator

Our first question comes from the line of Matt Niknam with Deutsche Bank. Your line is now open.

Speaker 4

Hey, guys. Thank you for taking the question. Congrats Quarter. Just 2 if I could on optical. If you could just talk about the latest you're hearing from your customers and maybe speak a little bit more in terms of expectations of what's embedded for the And then secondly on optical, I'm just trying to figure out in terms of where you're seeing some of the Pause or more near term softness, is it broadly distributed or is it maybe more in the sort of subscale or smaller carriers, which may be facing

Speaker 2

Thanks for the questions. And congratulations. Apptav. So here's the dynamics we're seeing over here from customers So first, fiber and cable demand remains quite tight. And that's really you can see that with exhibited by the success of our recent Price increase actions in that space.

Speaker 2

So for us, it's really the connectivity sales. So think Hardware connectors in the engineered systems for fiber to the home and large scale hyper Scale data centers are running below last year's levels, largely due To customer project timing. Now what we hear from customers is the underlying drivers remains Very robust cloud, AIML, 5 gs, broadband connectivity. So We're sort of facing this interesting dichotomy, which is all the long term drivers remain in place And they're all speaking about very robust deployment plans. At the same time, We're just not seeing it in our order book nor are we seeing it in Earth being moved In these large Civil Works projects.

Speaker 2

So we're taking these words with a little grain of salt And we're just not reflecting in our forecast and our guide Any real robust recovery yet until we see it. And it's not We're seeing this in large players, not just small folks. Some, I think, are Seeking to conserve financial resources as they deal with their own uncertainty, But at the same time, haven't given up on their launch of strategic plans. It doesn't mean that we won't see a strong Bounce back to the run rate, that you'd expect to match with their words on deployment plans in the back half, we could see it. We're just not going to guide it until we have it in our hands.

Speaker 2

Does that make sense, Matt?

Speaker 4

That's great. Yes, very much appreciated. And I'll hand it over, just others can get in the Q and A. Thanks.

Operator

Thank you. Our next question comes from the line of Shannon Cross with Credit Suisse. Your line is now open.

Speaker 5

Thank you very much. Wendell, can you talk a bit more on the display rebound that you're seeing, particularly what you saw in March and How you expect that to trend through the year? What key points are you tracking to Thank you.

Speaker 2

So as you heard in Ed's comments, So how we're good is, we originally started to see the recovery in quarter 4. The pandemic shock fits in, it That's in China. So if we go backwards and then we expected We will work our way through it and then start to see the recovery start again in quarter 1. And that's what we saw in March. So we saw utilization start to climb.

Speaker 2

We're seeing it continue to climb through this month. So as what we watch are what's actually happening with panel maker utilization, How are we seeing the dynamics play out between set makers and panel makers? It's looking to us Like we're going to move beyond the recovery time, the correction time in this market and recoveries underway We would expect to see that build in the coming quarters. That's the way it looks to us, that's the way it feels to us, that's what the data is telling us. But it's still early, right?

Speaker 2

So we're not coming out hardcore and saying, yes, we're back to normal. We're not there yet, But we're seeing the trends all move in the right direction, Shannon.

Speaker 5

Thank you very much.

Operator

Thank you.

Speaker 1

Our next

Operator

question comes from the line of Steven Fox with Fox Advisors LLC. Your line is now open.

Speaker 2

Hi, good morning.

Speaker 4

A bit of a difficult question since it involves not guiding to the second half. But Wendell, you mentioned In your opening remarks that you thought you could grow in the second half, where would you say that based on what you're seeing today that there opportunities for typical seasonality where maybe we should couch our expectations for seasonal improvements because the company is typically Very back end loaded in terms of their earnings growth, half over half and the Street is looking for about 25% Quarter over quarter improvement in earnings in Q3. Thanks.

Speaker 3

Hey Steve, this is Ed. I'll take that one. So, maybe I'll start with the 2nd quarter and then I'll go to the second half. So as we think about the 2nd quarter in our guide, We're thinking about a significant improvement in display. I think that's the primary driver.

Speaker 3

We're not expecting significant sales growth in Other businesses, we specifically called out optical, life sciences and specialty materials. When you think about the second half, I think the first thing I'd start with is it's specialty materials. We typically see customer product launch Happened in the second half into business where usually our second half is higher than our first half. I think that's a dynamic that could play out. And in our Thoughts about the most likely case being the second half greater than the first half or greater than the second quarter, that's a place that I would expect to see I think additionally, Wendell described the optical communications situation very well and we could certainly grow from 1st and 2nd quarter levels in optical communications, life sciences, you could see a small increase.

Speaker 3

And then depending on how display

Operator

Thank you. Our next question comes from the line of Wamsi Mohan with Bank of America. Your line is now open.

Speaker 4

Yes. Thank you. Good morning. Just a follow-up on Steve's question. Wendell, when you said you would be disappointed if you did not See growth in second half from second quarter levels.

Speaker 4

Historically, you have on average seen second half up 7% or first half. So It would be fairly dramatic for you to see not sequential growth. Would you say 2023 though is shaping up In line with that kind of expectation of second versus first half or is it more like recessionary Years where maybe the dynamic tracked worse. And if I could, I know you mentioned in Sequential very strong sequential volume growth in 2Q in display. Could you comment on how that looks on a year on year basis as well And where inventory levels are in display?

Speaker 4

Thank you.

Speaker 2

Let's Ed take the second one. On the first one, Jawanjit, it's an excellent question. So here's the way the dynamics playing out within either Our own company is our operating groups, our operating leaders, sound very much Thank you. And they sound very much like our customers all sort of pointing towards What you'd see normally and the behaviors you would expect in our industries. And what's happening is that's running into tension with us sort of in the center of the company who are looking at this and saying, I think this is a pretty unusual time we find ourselves in.

Speaker 2

And it's unclear to us That following the historical cycles, we're following what our customers are telling us It's going to necessarily lead us to the right answer in the short term. So you're on top of the tension, Which is why sort of we're wording it the way we are, which is we do expect growth. How much growth is under much debate within us, but it's not I think what we know, Wamsi, that's making us have that debate is the things that we don't know. And that's sort of the way it's playing out and sort of These passing months brings us a little more clarity. So that's where we are, Wamsi.

Speaker 2

Does that answer make sense to you?

Speaker 4

Yes, it does Wendell. Maybe just to step back for a second if I could, like do you feel that the Macro environment relative to 90 days ago for your end markets is getting better or worse?

Speaker 2

I think that the Integration of the macro environment into our customers' business plans Continues at different rates in different industries. So I'd say by and large, people are speaking less robustly than they were 90 days ago. It changed our point of view much. Well, at the center, probably not so much and our operating units probably were. I think the really interesting question is, isn't so much when does Sort of realization of what the broad economic outlook That's it and all the different entities, is when does the reverse happen?

Speaker 2

Like when do we start to see those More robust signals that shows we're really moving beyond it. And I just haven't seen those yet. That's what I'm looking for. And as soon as we see them, we'll tell you once.

Speaker 4

Yes, that's very helpful, Wendell. Thank you.

Speaker 3

Yes. And well, so you had asked about display 2nd quarter, what we've incorporated in our Q2 guide versus Prior year, so just a couple of thoughts. One, remember last year, the way display played out as the first half was really strong. We started to see panel makers drop their utilization at the end of the second quarter, right. So Q3 and Q4 they ran at much lower rates, Q1 and Q2 they ran at much higher rates, right?

Speaker 3

And if you think about the way we typically do our guide, We always have a range of outcomes, right? So if I think about the Q2 this year for display, we think So now I'm going to go back to sequential for a second. We think panel makers will run sequentially higher in the second quarter than they did in the first quarter. And so it's possible they get to the same place as they did last year. That's certainly in the range of outcomes.

Speaker 3

I don't know that that's necessarily the most likely outcome.

Operator

Thank you. Our next question comes from the line of Joshua Spector with UBS. Your line is now open.

Speaker 2

Hey This is James Cannon on for Josh.

Speaker 6

I just wanted to touch on some of the dynamics with display pricing as You talked about some supportive dynamics, but if I think about what played out in the Q1, it seemed like You had demand trending sort of in line with weak January improving in March. And I was just wondering if you could give some color on what happened with pricing that you had guided to being flat and came in down And how that plays into what we should expect for the Q2?

Speaker 3

Yes. I think, James, Price was slightly down in the quarter and I think in the way we think about favorable pricing, it can in any given quarter can It could be slightly up, it could be flagged slightly down. So I think it's generally in line with the way we were thinking about it.

Operator

Our next question comes from the line of Asiya Merchant with Citi. Your line is now open.

Speaker 7

Hey, thank you very much for taking my question. I was just kind of talking looking into your free cash flow guidance, I know you guys have kind of talked about CapEx being slightly lower than 22 levels at $1,600,000,000 and strong sequential improvement in free cash flow. Should we expect free cash flow, given that earnings should improve from here on, can we expect free cash flow to be Higher than what you guys had in 2022. Is that reasonable just given CapEx coming lower and hopefully operating On the earnings level as well doing better than 2022?

Speaker 3

Yes. Assia, I'm going to build a little bit on the way described the way we're thinking about sales and what could happen in the second quarter and the second half, right? I think there's Certainly, in a high end case, yes, cash flow should follow our growth Through the year and if we grow at the higher end of the second quarter and we continue to grow from there, yes, there's certainly a case to be made that that would happen. I think we're taking a little bit more moderate view of what might happen. So Again, capital slightly down and free cash flow improving as sales improves, and just our normal cycling of Cash flow is stronger in the second quarter and in the second half.

Speaker 7

Correct. I think you guided last time to seeing significant working capital improvements that should void free cash flow generation here. So I guess I was just kind of circling back to those comments. And then any update on stock repurchases? Are you expecting to resume that At a level that was maybe consistent with if we dial it back a couple of years?

Speaker 3

No update on stock repurchases. We'll just continue to remain opportunistic there. And maybe I'll make one other comment on your Cash flow statement, as I think about inventory, we talked about a lot of the dynamics that had driven it up Continue to drive it down and I think in Q1 it stayed relatively flat down a little bit, but remember sales were really low. So we actually feel really good about that.

Operator

Our next question comes from the line of Samik Chatterjee with JPMorgan. Your line is now open.

Speaker 8

Yes. Hi. Thanks for taking my questions. Ed, if I can just follow-up on your comment about growth in Specialty Materials in the second half. When I go back and look at it historically, it's been a wide range of as low as 5%, I think last year to As high as 45%.

Speaker 8

So just trying to sort of get a better color there in terms of what should we think about in terms Content growth with some of your customers into the second half, what's that magnitude? And what's also sort of from a macro perspective, are you expecting to sort of from the first half versus second half variance there? Just to be able to right size sort of what that magnitude It looks like and Wendell, one for you in terms of have you been able to digest Biden's recent plans about pushing electric vehicle adoption to 50 By 2,030, how does that impact overall sort of growth outlook for environmental? Thank you.

Speaker 3

Hi, Samik. Yes, I think you're certainly hitting on one of the areas that gives us a range of outcomes In the way we're thinking about the back half, that is in specialty, obviously, smartphone and TCIT demand remains It's relatively weak. I think it's possible that it's above the low end of the range. You articulated the sequential growth first 2nd half over first half, but I don't know that I would say it's going to be at that at the high end of that range. We're not planning Growth levels at that growth at those levels.

Speaker 8

Wendell, any thoughts on the electrification plans from the current government?

Speaker 2

Yes. And by that, I assume you mean sort of the recent administration announcement from the EPA On what it won't with some of the industrial policy that goes with it, but At that EPA regulation that they just released for comment. And in that, the piece of it that we're most excited about Is that they have now adopted the way to measure and the approach that the Europeans have, Chinese hat, which will mean gas particulate filters will be required on all ICE vehicles in the U. S. So that adds tremendously to our content, Add 2 to 3 times to our content level for the U.

Speaker 2

S. Vehicles and U. S. Markets, not a small market. So what this enables us to do is sort of keep our overall content that's in our environmental piece of our business, Our emissions control piece of our business sort of more Corning plays out as the number of ICE vehicles shrink.

Speaker 2

So we're quite excited by that. Our core long term answer to BEV That's where we have focused the bulk of our glass and optics and autonomy efforts. And At this point in time, really our highest value add vehicles are electric vehicles that has the most content Alanis, despite not using our admissions control, because that tends to be where we're the most successful Both our interiors and our exteriors and now our autonomy products. Did I get to your question?

Speaker 8

No, that's interesting. Thank you. Thanks for the color there.

Operator

Thank you. Our next question comes from the line of Meta Marshall with Morgan Stanley. Your line is now open.

Speaker 5

Great. Thanks. Maybe a question on the Gross margin improvement that you saw in Q1 over Q4 clearly on down volumes. Just how much more Fuel is there to some of these activities to improve gross margin throughout the year, maybe kind of with or without volume improvements. I guess I'm just trying to see Have some of the pricing actions or efficiency actions kind of fully reflected in what we see in Q1 or just how much of that can carry throughout the year and improve margins even if we don't see kind of meaningful improvements in volumes?

Speaker 5

Thanks.

Speaker 3

Hi, Meta, Yes. So first, thanks for the question and maybe I'll just sort of reiterate how we described our margin improvement and what sort of Played out in Q1 and then I'll get to sort of what happens from here. So yes, we increased price. That's definitely a big driver of why margins went up. We're also looking to improve our productivity ratios back to the way we ran prior to the pandemic.

Speaker 3

We've made progress there that takes cost out and we're certainly taking fixed cost out as well. So those We do expect sales to go up in the Q2, but we do expect profitability to go up as well from there. So I think there's more room to run From where we are now, we're going to continue to work on it. It's clearly a priority for us.

Speaker 5

Great. Thanks. And just as the opening of the North Carolina facility kind of impact optical profitability in the near term or can you guys still get efficiencies Or does that plant even add more efficiencies that can help margins there? Thanks.

Speaker 2

As always, as we fire these plants up, get a little bit of drag as we fill them. But We've been able because of the way, because we prioritize protecting our people and our customers through pandemic, We ran at very high staffing levels, pretty high inventory levels. So we've been able With our improvements in those things to more than offset sort of the drag we've seen from opening up some of our new capacity. Very astute question. Yes, we do always get a drag before we get these things all the way filled up and all of our technology deployment.

Speaker 5

Great. Thanks.

Speaker 2

Very good. Okay. Productivity.

Speaker 5

Thank you.

Operator

Thank you. Our next question comes from the line of George Notter with Jefferies. Your line is now open.

Speaker 9

Hi, guys. Thanks very much. I had a question about the optical business. You were talking about fiber connectivity Impacts, I think you talked about customer pacing of projects as being the issue there. But

Speaker 4

as I

Speaker 9

look around the industry, it does seem like there's been some inventory correction I know lead times for fiber connectivity products at one point were quite long and now they're to a significant degree a lot shorter. Is the issue there really customer pacing or is it more about excess inventory and you're going through an inventory correction? Any thoughts would be great.

Speaker 2

Truett, what an outstanding question. What an interesting debate, right? So You're seeing about inventory is how much they put in the ground Determines how fast they brought through their inventory and of course supply chain folks really across the globe Since they couldn't get everything they needed, for sure, over ordered and did all sorts of things, right? And as supply chain time showed, That is certainly part of it, George. Don't question.

Speaker 2

And I could even, if I was less cynical, Right. I could even explain most of the change as being that. But then I look on the other side and I'm looking at the pace of the actual ground getting moved, Yes, actual data centers getting built, right? And if that there's a little bit of a disconnect there for me too in that. If I took my customer statement of their deployment goals and integrated that With Jim and Tipton, I'd say, yes, we have a very strong bounce back.

Speaker 2

We'll start to feel it pretty soon. We're still going to take a little bit more of a conservative view. So I don't know if any of that was helpful, George. You make an excellent point. You could be absolutely right.

Speaker 2

We're just going to plan a little bit more conservatively and not plan on sort of a big jump up In the back half, driven by the fact that inventory came in line with deployments.

Speaker 9

Got it. And then just as a follow-up on that. When you think about that fiber connectivity business, is more of the issue then around data center build or is it more about fiber to the Prem type builds or other types of optical networks, what would you kind of pin it on?

Speaker 2

It's probably more fiber to the prem, okay, though hyperscale is definitely slower, Right. It's more fiber to the premise. It's those great big civil works builds that Just aren't moving fast enough yet for us to feel comfortable To call a strong recovery in that business. Now that being said, That can happen quick. That can happen quickly because they haven't come off their stated goals yet.

Speaker 2

We're just not seeing it yet.

Speaker 3

Got it. Thank you very much.

Operator

Thank you. Our next question comes from the line of Tim Long with Barclays. Your line is now open.

Speaker 10

Thank you. Just wanted to go back to display for 2, if I could. 1st, Ed, could you talk a little bit about, obviously, a good recovery coming in the second quarter. I know you guys you said took a lot of tanks offline and did some retrofitting. So could you talk about kind of how much Margin lift we're going to see not just from the volume, but from some of the changes.

Speaker 10

And then just Wendell, may I just want to go back to Kind of visibility in this business. Obviously, there was some head shakes last quarter on utilization going up and then going down. So what level of visibility do you have into those utilization? I'm assuming you see well into this month, but how far out can you go with that? Thank you.

Speaker 3

Thanks, Tim. So just to start with your first question, you're right. I think one of the key dynamics We talk about all the time is glass supply demand balance being key for pricing. So yes, we do manage our tank Suite in that respect. We will continue to do that and make sure that we manage our supply through that process.

Speaker 3

That does impact profitability. That helps us going forward. I think a lot will have Do with how high the volume is in the quarter and how sort of all the dynamics play out?

Speaker 2

And I think our visibility will improve as we get to the end of this month beginning of next year. We have pretty good visibility, but our negotiations really are still going on given the pretty sharp upward inflection We're seeing in customers' volume requests. So that dynamic It's still sort of playing out, but should get pretty clear over the next week or 2.

Speaker 10

Okay. Thank you.

Speaker 1

I think we'll take one last question.

Operator

Our last question is from the line of Martin Yang with Oppenheimer. Your line is now open.

Speaker 11

Good morning. Thank you for taking my question. There's a reference on the call on new formulations for Gorilla Glass. Can you maybe comment on that? Is it in line with the annual Great cycle we have observed in the past or is that something a bit more significant similar to Ceramic Shield?

Speaker 11

The question is about the reference to Gorilla Glass this year. There's a comment on new formulation for Gorilla Glass. So is that new formulation a similar upgrade in the past On the annual cycle or is that new formulation something a little bit more significant similar to the ceramic shield product?

Speaker 2

I got it now. So it's not a jump up to glass ceramic. It's a pretty significant improvement At the glass level and we're seeing really wide adoption, but you're not seeing that fundamental very Big jump in our value add for device that you see from switching to a fundamentally new material set With a very different manufacturing dynamics as well as drop dynamics. So Pretty significant improvement, but in the same glass material set doesn't have as much of a pop in terms of how much our sales revenue is

Speaker 4

Got it. Thank you.

Speaker 1

Thanks, Wendell. Thanks, Martin. I just want to thank everybody for joining us today. Before we close, informing that we will host our 2020 Annual Meeting of Shareholders on April 27. On May 23, we're going to attend the JPMorgan's 51st Annual Global Technology and Media Communications Conference.

Speaker 1

May 31 June 1, we will be attending the Bernstein 39th Annual Strategic Decisions Conference. And on June 22, we'll be attending the Fox Advisors Virtual Transportation Technology Conference.

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Corning Q1 2023
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