Corning Q1 2023 Earnings Call Transcript

Presentation

[Operator]

Welcome to the Corning Incorporated Quarter One 2023 Earnings Call. [Operator Instructions]

It is my pleasure to introduce to you Ann Nicholson, Vice-President of Investor Relations.

[Ann H.S. Nicholson, Vice President, Investor Relations at Corning]

Thank you, and good morning, everybody. Welcome to Corning's first quarter 2023 earnings call. With me today are Wendell Weeks, Chairman and Chief Executive Officer, Ed Schlesinger, 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. 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 relate to GAAP data. Our core performance measures are non-GAAP measures used by management to analyze the business. For the first quarter, the primary differences between GAAP and core EPS stem 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 million. As a reminder, the mark-to-market accounting has no impact on our cash flow. 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're also available on our website for downloading.

And now, I will turn the call over to Wendell.

[Wendell P. Weeks, Chairman & Chief Executive Officer at Corning]

Thank you, Ann, and good morning, everyone. Last quarter, we told you that markets constituting about half of our sales were experiencing a recession-level demand. Then our first quarter sales will decline by greater than normal seasonality due to the pandemic-related disruptions, China. Then we would raise prices again to offset additional inflation and also begin to restore our productivity ratios to pre-pandemic levels. And as a result, our margins would increase, one to two percentage points sequentially, despite lower sales. And that is exactly how the first quarter played out.

First quarter sales were $3.4 billion and EPS was $0.41. Our actions to raise prices and restore productivity ratios began delivering notable results. Despite a 7% sequential sales decline, gross margin expanded 160 basis points sequentially to 35.2%. 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 second quarter. 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 work experienced in our key markets, and then I'll discuss how we're continuing to build our long-term growth opportunities across our business. So let's start it.

In Display Technologies, sales declined 3% sequentially as both volume and glass price declined slightly. In March, panel maker utilization increased and we expect our volume in the second quarter to increase significantly from the first quarter. As conditions continue to improve, we're optimistic that panel maker utilization is beginning to move beyond correction levels and will return to more normal levels in the coming quarters.

In Optical Communications, sales declined 6% sequentially. Our pricing actions partially offset a greater than normal seasonal volume decline and connectivity solutions which is associated with the pacing of several large customer projects. Our pricing and productivity actions resulted in net income improving 22% sequentially despite the lower sales. 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.S. network operators with the cable they need to bring high-speed optical connectivity to underserve 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, or the cable."

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.

The follow up is short term? We're seeing improvement in some of our markets, but a series of challenges continues to ripple across the global economy. 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 second 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. We maintain leadership in three core technologies and four proprietary manufacturing and engineering platforms that are on fire to solving a broad range of significant challenges shaping industries. We apply new combinations of our assets and capabilities to advance important secular trends in tandem with our customers and I'll be applying and repurposing our insights assets across multiple opportunities in markets we increase our profitability.

In Optical Communications, we've been leading in the industry for more than 50 years and this business is the most fully evolved example of Corning's focused portfolio, using all three of our core technologies and four of our manufacturing and engineering platforms. And we will continue to apply these capabilities to help build a more connected world over the next 15 years.

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 evolved, we're helping them create a world which is richer and more life-like 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 vapor deposition. We continue to advance the state-of-the-art with a leading cover materials which have been deployed at more than 8 billion devices to date. And we've recently entered new product categories that provide opportunities for more of our content. For example, the camera lens covers on devices like the Samsung Galaxy S22 and S23 Series. These advancements are excellent examples of our More Corning approach.

We're also innovating and emerging technologies like augmented reality bendable devices, which we expect to contribute for long-term growth 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 upcoming EU7 emissions regulations and achieve near-zero emissions levels. 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. And you see, yes, we continue to generate strong industry excitement about 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 helps support the discovery to 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 basic lives. And we believe we will continue to develop category-defining products to transform industries and enhance lives.

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.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&I and Sustainability Report which capture the great progress we've made and underscore our commitment to helping move the world forward.

So as I wrap up my remarks, here's what I would like to give you today. Moving forward throughout 2023, we will continue to focus on operating each of our businesses well and adjusting to meet the needs of the moment, including aligning our cost structure to the demand environment. At the same time, we're advancing growth initiatives and capabilities that will drive long-term success. We remain well-positioned to continue cash earnings, very rich set of long-term opportunities that we've built across our market access platforms. I look forward to updating you on our progress.

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

[Edward A. Schlesinger, Executive Vice President & Chief Financial Officer at Corning]

Thank you, Wendell. Morning, everyone. For the first quarter, we delivered results at the higher end of our expectations. Sales were $3.4 billion and EPS was $0.41. Gross margin was 35.2% and operating margins between 15.5%. Both meaningful improvements of the fourth quarter. Our free cash flow for the quarter was negative $383 million. 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 quarter and for the remainder of 2023.

Overall, our team demonstrated operational rigor during the quarter. 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 weather the demand environment. We remain confident in our relevance to long-term secular trends and our More Corning approach, and we are well-positioned to capture durable profitable growth as the global economy improves.

Now, let's turn to our first quarter segment results. In Optical Communications, sales were $1.1 billion, down 6% sequentially as price increases partially offset a greater than normal seasonal volume decline associated with the pacing of customer projects. Despite the decline in sales, net income grew 22% sequentially to $159 million, 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 is strongly supported by trends in computation and by private and public infrastructure investments to help connect the unconnected, and bring broadband to a much larger share of the population. We're pursuing three significant secular trends, broadband, 5G, and the cloud. We've got major innovation programs underway for each category and our connectivity solutions offer economic advantages for a broader range of customers than ever before.

Display Technology sales in the first quarter were $763 million down 3% sequentially as more volume and glass price declined slightly. Net income was $160 million, 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 levels off in December due to pandemic-related disruptions in China, and in January, the disruptions persisted, driving utilization back down and below retail demand, subsequently conditions in China improved.

In March, panel makers increased their utilization and as a result, our volumes increased from January and February levels. We're expecting panel makers to run at higher utilization levels in the second quarter than they did in the first quarter, and therefore, we anticipate our sequential glass volume to increase significantly. Favorable pricing is primarily driven by two factors. The first factor is the improving glass supply and demand balance. Glass makers have been taking additional tanks offline for maintenance and repairs. 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 to align our supply to demand. The second factor is glass makers' profitability. In Q4, our two major competitors reported net loss losses, reinforcing our view that it is challenging for glass makers who have high costs to remain profitable at current pricing levels.

Moving to Specialty Materials. Demand for our long-lead time semiconductor equipment products remains strong. However, smartphone and IT end-market demand remains weak. First quarter sales were $406 million, down 20% sequentially consistent with typical seasonality. Net income was $39 million down sequentially due to the lower sales. 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 2023 to help offset continued softness in the smartphone in IT -- in the smartphone and IT markets. Additionally, we believe that new innovation opportunities and emerging technologies like augmented reality and bendable devices will contribute to long-term growth.

Environmental Technologies first quarter sales were $431 million. We saw increased GPS adoption in the quarter which helped drive a 9% sequential improvement in sales. Net income increased 19% sequentially, driven by higher sales and improved productivity. We are not projecting a recovery in the automotive market in the second quarter and our current view of the full ear is that auto sales remain below pre-pandemic levels but our content-driven growth strategy continues to help us outperform the market.

Turning to Life Sciences. First quarter sales were $256 million, down 13% sequentially, driven by lower demand for COVID-related products and the impact of customers drawing down their inventory. Net income was $9 million, driven by lower sales and our actions to reduce production levels in the quarter.

Let me take a minute to describe the market dynamics impacting this business and what we expect for the year. In 2021 and the first half of 2022, 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 2022 and the industry was left with elevated inventory levels. We expect our sales and profitability to improve as the industry corrects and we restore productivity ratios back to pre-pandemic levels.

Finally in Hemlock and Emerging Growth Businesses, sales in the first quarter were $386 million 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 for a transparent, sustainable, and traceable solar supply chain in the U.S. market, and we continue to see strong growth in Automotive Glass Solutions and additional opportunities and Pharmaceutical Technologies.

Now let's turn to our outlook. For the second quarter, we expect total company sales to grow sequentially led by display as the industry continues to recover. We're not planning on strong second quarter sales sequential sales improvements in Optical Communications, Life Sciences or Specialty Materials.

Turning to profitability, we expect to build on our progress from the first quarter 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 $3.4 billion to $3.6 billion 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 second quarter. Although it's too early to be definitive given continued global economic uncertainty and its impact on consumer demand and infrastructure spending.

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 two ways. First, dividends, which we've raised for 13 years in a row. Second, 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, and I'm proud to say we maintain one of the longest debt tenors in the S&P 500. Our average maturity is about 25 years with no significant debt coming due in the given year. In sum, the actions we are taking position us to come out of this period of uncertainty, a financially strong and well-positioned for a return to growth.

Now, I'd like to wrap up with a few key takeaways. In the second quarter, 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 while maintaining the flexibility to address changing market conditions and capture upside as it occurs. Our long-term growth drivers all remain intact and we're well-positioned to continue capturing growth tied to key secular trends, such as those playing out in the optical communications and solar markets.

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

[Ann H.S. Nicholson, Vice President, Investor Relations at Corning]

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

Questions and Answers

[Operator]

Thank you. [Operator Instructions] Our first question comes from the line of Matt Niknam with Deutsche Bank. Your line is now open.

[Matt Niknam, Analyst at Deutsche Bank Aktiengesellschaft]

Hey, guys. Thank you for taking the question. Congrats on the quarter. Just two 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 second quarter. 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 sub-scale or smaller carriers, which may be facing maybe financial conditions, which are impacting some of the longer-term investment plans. Thanks.

[Wendell P. Weeks, Chairman & Chief Executive Officer at Corning]

Thanks for the questions. Thanks for the congratulations. Appreciate it. So here is the dynamics we're seeing over here customers and how we'll react. So first, fiber and cable demand remains quite tight and that's really -- you can see that exhibited by the success of our recent price increase actions in that space. So for us, it's really the connectivity sales. So I think hardware, connectors, and the engineered systems for fiber-to-the-home and large scale hyper-scale data centers are running below last year's levels largely due for the customer project timing. Now, what we hear from customers is the underlying drivers remains very robust. Cloud, AI/ML, 5G broadband connectivity. So we're sort of facing this interesting dichotomy which is all the long-term drivers remain in place and they are 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 as first being removed in these civil works projects. So we're taking these words with little grain of salt and we're just not reflecting our forecast and our guide, any real robust recovery, yes, until we see it. And it's not -- we're seeing this as large players not just small folks. So I might think our -- seeking our -- to conserve our financial resources as they deal with their own uncertainty but at the same time, we haven't given up on their launch strategic plans. It doesn't mean that we won't see a strong bounce back to the brand rate that you'd expect to match with their words on deployment plans in the back half. We could see it, it's just, we're just not going to guide it until we have it in our hands. Does that make sense, Matt?

[Matt Niknam, Analyst at Deutsche Bank Aktiengesellschaft]

That's great. Yeah. Very much appreciated. And I'll hand it over -- just can get in Q&A. Thanks.

[Operator]

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

[Shannon Cross, Analyst at Credit Suisse Group]

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 make sure that we are seeing a bit of a rebound there? Thank you.

[Wendell P. Weeks, Chairman & Chief Executive Officer at Corning]

So as you heard in Ed's comments, what's good is that we originally started to see the recovery in quarter four and the pandemic shock sits in and sets in China, sort of we go backwards. And then we expected that we will work our way through it and then start to see the recovery start again in quarter one. That's what we saw in March. So we saw utilization start decline. We're seeing a continued decline through this month. So as we're -- when we watch our -- what's actually happening with panel maker utilization, how are we seeing the dynamics play out between set makers and halo makers. It's looking to us like we're going to move beyond the recovery time, the correction times in this market and recovery is underway and we'd expect to see that build in the coming quarters. That's the way it works to us, that's the way it feels to us, that's what the data is telling us. But it's still early, right, so we're not coming out hard and core say, yeah, we're back to normal. We're not there yet but we're seeing the trends all move in the right direction, Shannon.

[Shannon Cross, Analyst at Credit Suisse Group]

Thank you very much.

[Operator]

Thank you.

[Ann H.S. Nicholson, Vice President, Investor Relations at Corning]

Next question.

[Operator]

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

[Steven Fox, Analyst at Fox Advisors]

Hi. Good morning. 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's opportunities for typical seasonality where maybe we should vouch 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.

[Edward A. Schlesinger, Executive Vice President & Chief Financial Officer at Corning]

Hey, Stevem this is Ed. I'll take that one. So maybe I'll start with the second quarter and then I'll go to the second half. So as we think about the second quarter, in our guide, we're thinking about a significant improvement in Display. I think that's the primary driver. 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 Specialty Materials, we typically see customer product launches happen in the second half into business but 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 grow. I think, additionally, Wendell described the Optical Communications situation very well and we can certainly grow from first to second quarter levels in Optical Communications. Life sciences, you could see a small increase and then depending on how Display would play out, you could see growth there as well.

[Steven Fox, Analyst at Fox Advisors]

Great. That's helpful. Thanks.

[Operator]

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

[Wamsi Mohan, Analyst at Bank of America]

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, 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 track 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? Thank you.

[Wendell P. Weeks, Chairman & Chief Executive Officer at Corning]

Let's -- I'll take the second one. On the first one, Wamsi, it's an excellent question. So here's the way the dynamics was playing out within even our own company is our operating groups, our operating leaders sound very much like you. They sound very much like our customers also pointing towards what you see normally and the behavior you would expect in our industries. But what's happening is that's running as attention with us sort of in the center of the company, who -- I'm looking at this and saying, you know, I think this is a pretty unusual time we find ourselves in 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 edge which is why sort of rewarding it the way we are, which is we do expect growth. How much growth? It's under much debate within us but it's not -- I think what we know, Wamsi, it's making us have that debate. It's the things that we don't know. And that sort of the way it's playing out and sort of -- these past eight months brings us a little more clarity, so that's where we are, Wamsi. Does that answer make sense to you?

[Wamsi Mohan, Analyst at Bank of America]

Yeah, 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?

[Wendell P. Weeks, Chairman & Chief Executive Officer at Corning]

I think that the integration of the macro environment into our customer's business plans continues at different rates in different industries. So I think by and large, people are speaking less robustly than they were 90 days ago. So, changed our point-of-view much. Well, at the center probably not so much and our operating units probably were. I think that -- the really interesting question isn't so much when does sort of realization of what the broad economic outlook sets in and all the different [Indecipherable] is when does the reverse happen? Like when do we start to see those more robust state 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, Wamsi.

[Wamsi Mohan, Analyst at Bank of America]

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

[Edward A. Schlesinger, Executive Vice President & Chief Financial Officer at Corning]

Yeah. And Wamsi, you had asked about display second quarter, what we've incorporated in our second quarter guide versus the 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? 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 second quarter this year for display, we think we will run -- 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 certainly in the range of outcomes. I don't know that that's necessarily the most likely outcome.

[Wamsi Mohan, Analyst at Bank of America]

That's helpful. Thank you so much.

[Edward A. Schlesinger, Executive Vice President & Chief Financial Officer at Corning]

Hope that helps.

[Wamsi Mohan, Analyst at Bank of America]

Yeah. Yes, very helpful. Thank you.

[Operator]

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

[James Cannon, Analyst at UBS Group]

Hey, guys, this is James Cannon on for Josh. 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 first quarter, it seemed like you had demand trending sort of in line with weak January improving in March. And I was just wondering if you can 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 second quarter?

[Edward A. Schlesinger, Executive Vice President & Chief Financial Officer at Corning]

Yeah. I think, James, price was slightly down in the quarter and I think the way we think about favorable pricing, in any given quarter can be slightly up, it could be flat, could be slightly down. So I think it's generally in line with the way we've been thinking about it.

[James Cannon, Analyst at UBS Group]

All right. Thank you.

[Ann H.S. Nicholson, Vice President, Investor Relations at Corning]

Next question, please.

[Operator]

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

[Asiya Merchant, Analyst at Citibank, N. A.]

Hey, thank you very much for taking my question. I was just kind of looking into your free cash flow guidance. I know you guys have kind of talked about capex being slightly lower than '22 levels at $1.6 billion and strong sequential improvement in free cash flow. Should we expect free cash flow, given that earnings should improve from hereon, can we expect free cash flow to be higher than what you guys had in '22? Is that reasonable just given capex coming lower and hopefully operating on the earnings level as well doing better than '22?

[Edward A. Schlesinger, Executive Vice President & Chief Financial Officer at Corning]

Yeah. I'm going to build a little bit on the way Wendell described, the way we're thinking about sales and what could happen in the second quarter in the second half, right? I think there is -- certainly in a high-end case, yeah, 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, yeah, there is certainty in case to be made that that would happen. I think we're taking a little bit more moderate view of what might happen. So 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.

[Asiya Merchant, Analyst at Citibank, N. A.]

All right. I think as guided last time, seeing significant working capital improvements that should buoy free cash flow generation year. So I guess I was just kind of circling back to those comments. And then any update on stock repurchases? Like are you expecting to resume that at a level that was maybe consistent with -- if we dial it back a couple of years.

[Edward A. Schlesinger, Executive Vice President & Chief Financial Officer at Corning]

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 has driven it up through 2022 with respect to a various challenging supply chain environment and inflation and our goal is to continue to drive it down. And I think in Q1, we stayed relatively flat, down a little bit, but remember, sales were doing well, so we actually feel really good about that.

[Asiya Merchant, Analyst at Citibank, N. A.]

Okay. Thank you.

[Operator]

Thank you. Our next question comes from the line of Samik Chatterjee with J.P. Morgan. Your line is open.

[Samik Chatterjee, Analyst at J.P. Morgan]

Yeah. 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 too as high as 45%. So just trying to sort of get a better color there in terms of what we should think about in terms of content growth or with some of your custom ones into the second half, what's the magnitude? Also, from a macro perspective, are you expecting to sort of from the first half versus second half variance there, just to be able to write say sort of what that magnitude 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 2030, how does that impact overall sort of growth outlook for environmental? Thank you.

[Edward A. Schlesinger, Executive Vice President & Chief Financial Officer at Corning]

Hi, Samik. Yeah, 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 PC IT demand remains relatively weak. I think it's possible that above the low end of the range, you articulated the sequential growth first -- second 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 region. We're not planning on growth levels at those levels.

[Samik Chatterjee, Analyst at J.P. Morgan]

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

[Wendell P. Weeks, Chairman & Chief Executive Officer at Corning]

Yes. I assume you mean sort of the reset administration announcement for the EPA on what -- along with some of the industrial policy because we've implied and that NPA regulations that they just released at 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 have 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 two to three times content level for U.S. vehicles and U.S. markets had a smaller 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 missions control piece of our business. So More Corning plays out as the number of ICE vehicles. So we're quite excited by that. Our core long-term answer to BEB is that's where we have focused the bulk of our glass optics and the autonomy efforts. And at this point in time really our highest value add vehicles, auto electric vehicles that has the most content on it despite not using our emissions control because that tends to be well with the most successful on both our interiors and exteriors and now autonomy products. Did I get to your question?

[Samik Chatterjee, Analyst at J.P. Morgan]

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.

[Meta Marshall, Analyst at Morgan Stanley]

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 improvement? 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 improved margins, even if we don't see kind of meaningful improvements in volumes. Thanks.

[Edward A. Schlesinger, Executive Vice President & Chief Financial Officer at Corning]

Hi, Meta. Yeah, 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 brand prior to the pandemic. We've made progress there that takes cost out and we're certainly taking fixed cost out as well. So those drove our margins up sequentially on lower sales, which is very unnatural. I think there is definitely an opportunity for us to continue to do that. We do expect sales to go up in the second quarter, 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.

[Meta Marshall, Analyst at Morgan Stanley]

Great. Thanks. And just as 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.

[Wendell P. Weeks, Chairman & Chief Executive Officer at Corning]

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 prioritized protecting our people and our customers in pandemic, we ran at very-high staffing levels, very high levels. So we're been able -- with our improvements in those things to more than us fast sort of the drag we've seen from opening up some of our new capacity. But it's very astute question, yeah. We do always drag before we get these things all the way filled up and all of our technology employed there.

[Meta Marshall, Analyst at Morgan Stanley]

Great. Thanks.

[Wendell P. Weeks, Chairman & Chief Executive Officer at Corning]

We're also getting productivity from there.

[Meta Marshall, Analyst at Morgan Stanley]

Thank you.

[Operator]

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

[George Notter, Analyst at Jefferies Group]

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

[Wendell P. Weeks, Chairman & Chief Executive Officer at Corning]

George, what an outstanding question and what an interesting debate, right? You see the amount of inventory is how much they put in the ground in terms of how fast they provide through their inventory and of course, supply chain folks really across the globe since they couldn't get everything they needed for sure it was rewarded in all sorts of things, right? And as supply chain time soon, that is certainly part, George, you don't question. And I could even -- I was less cynical, right? I could either 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 rolled, the actually datacenters getting built, right? And if there's a little bit of a disconnect there for me to with that. If I took my customers statements or their deployment goals and integrated that, with him, he'll definitely say, yeah, we have a very strong bounce back. So it's a pure pretty soon. But I would -- 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. We're just going to play out a little bit more conservatively and not plan on sort of the big shop up in the back half, driven by the fact that inventory came in line with deployments.

[George Notter, Analyst at Jefferies Group]

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?

[Wendell P. Weeks, Chairman & Chief Executive Officer at Corning]

It's probably more fiber to the prem.

[George Notter, Analyst at Jefferies Group]

Okay.

[Wendell P. Weeks, Chairman & Chief Executive Officer at Corning]

Because hyperscale is definitely slower, right? There is more fiber to the premise with those great big civil works builds that just aren't moving fast enough yet for us to feel comfortable to call the strong recovery in that business. Now, that being said, that can have been quick, right? That happen quickly because they haven't come off their stated goals yet but we're just not seeing anything.

[George Notter, Analyst at Jefferies Group]

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.

[Tim Long, Analyst at Barclays]

Thank you. Just wanted to go back to display for two if I could. First, Ed, can you talk a little bit about, obviously good recovery coming in the second quarter. You guys said you took a lot of tanks offline and did some retrofitting, so can 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? And then just Wendell, I just wanted to go back to kind of visibility in this business. Obviously, there was some head faced 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 you go with that? Thank you.

[Edward A. Schlesinger, Executive Vice President & Chief Financial Officer at Corning]

Thanks, Tim. So just 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 fleet in that respect. We will continue to do that and make sure that we manage our supply through that process. That does impact profitability. That helps us going forward. I think a lot will have to do with how high the volume is in the quarter and how sort of all the dynamics play out.

[Wendell P. Weeks, Chairman & Chief Executive Officer at Corning]

And I think our visibility helps improve as we get to the end of this month beginning in the next. 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 is still sort of our playing out but it should get pretty clear within the next week or two.

[Tim Long, Analyst at Barclays]

Okay. Thank you.

[Ann H.S. Nicholson, Vice President, Investor Relations at Corning]

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.

[Martin Yang, Analyst at Oppenheimer]

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

[Wendell P. Weeks, Chairman & Chief Executive Officer at Corning]

Sorry, could you repeat the question? I've lost to a little bit in the middle of that. Say that...

[Martin Yang, Analyst at Oppenheimer]

Sure. The question is about the reference to Gorilla Glass. congrats glass, This year, there's a comment on new formulation for Gorilla Glass, so is that new formulation, a similar upgrades in the past on an annual cycle or is that new formulation something a little more significant similar to the Ceramic Shield product?

[Wendell P. Weeks, Chairman & Chief Executive Officer at Corning]

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 should not see that fundamental very big jump in our value add per device if you see from switching to a fun event building new material set with a very different manufacturing dynamics as well as dropped dynanic. So pretty significant improvement but in the same glass material set doesn't have as much of a part in terms of how much our sales revenue is profound, it's something like this we're seeing.

[Martin Yang, Analyst at Oppenheimer]

Got it. Thank you. Thanks, Wendell. Thanks, Martin. I just want to thank everybody for joining us today. Before we close, inform you that we will host our 2023 Annual Meeting of Shareholders on April 27th. On May 23rd, we're going to attend the J.P. Morgan 51st Annual Global Technology, Media and Communications Conference. On May 31st and June 1st, we'll be attending the Bernstein 39th Annual Strategic Decisions Conference, and on June 22nd, we'll be attending the Fox Advisors Virtual Transportation Technology Conference. Finally, a web replay of today's call will be available on our site, starting later this morning. Thanks for joining us. Operator, you may disconnect all lines.

[Operator]

[Operator Closing Remarks]

Participants

Corporate Executives

• Ann H.S. Nicholson, Vice President, Investor Relations
• Wendell P. Weeks, Chairman & Chief Executive Officer
• Edward A. Schlesinger, Executive Vice President & Chief Financial Officer

Analysts

• Matt Niknam, Deutsche Bank Aktiengesellschaft
• Shannon Cross, Credit Suisse Group AG
• Steven Fox, Fox Advisors
• Wamsi Mohan, Bank of America Co.
• James Cannon, UBS Group AG
• Asiya Merchant, Citibank, N. A.
• Samik Chatterjee, J.P. Morgan
• Meta Marshall, Morgan Stanley
• George Notter, Jefferies Group
• Tim Long, Barclays PLC
• Martin Yang, Oppenheimer Holdings Inc.