Corning Incorporated (NYSE:GLW) Q3 2023 Earnings Call Transcript

Corning Incorporated (NYSE:GLW) Q3 2023 Earnings Call Transcript October 24, 2023

Corning Incorporated misses on earnings expectations. Reported EPS is $0.45 EPS, expectations were $0.46.

Operator: Welcome to the Corning Incorporated Quarter Three 2023 Earnings Call. [Operator Instructions] It is my pleasure to introduce to you, Ann Nicholson, Vice President of Investor Relations.

Ann Nicholson: Thank you, and good morning. And welcome to Corning’s third 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 will be discussing our consolidated results using core performance measures, unless we specifically indicate our comments relate to GAAP data.

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Our core performance measures are non-GAAP measures used by management to analyze the business. Third quarter GAAP EPS reflected restructuring and asset write-off charges, realized gains and unrealized non-cash mark-to-market losses on currency hedging contracts and non-cash mark-to-market adjustments associated with the company’s Japanese yen denominated debt. As a reminder, 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 are also available on our website for downloading. And now I will turn the call over to Wendell.

Wendell Weeks: Thank you, Ann. Good morning, everyone. Today we reported our third quarter results. As expected, sales were $3.5 billion and EPS was $0.45. Gross margin expanded sequentially to 37% and free cash flow improved to $466 million. Our results demonstrate solid progress on the programs that we have put in place to increase price and improve productivity while lowering inventory. These initiatives led to improved gross margin and cash flow in the quarter despite volume coming in at the low end of our expectations in Optical Communications as carriers continue to draw down inventory and in Display Technologies as panel makers lowered utilization at the end of the quarter. Now let me share a couple of highlights for the quarter.

I will start with gross margin. We drove an 80-basis-point sequential expansion to 37% on consistent sales, driven primarily by our pricing actions in Display. Additionally, if you compare the third quarter of this year to the fourth quarter of last year, when we launched our comprehensive plan, sales are down almost $200 million, yet we have expanded gross margin percent by 340 basis points. Looking to the fourth quarter, we expect gross margin to be similar even with sales down sequentially. Moving to cash generation, free cash flow of $466 million grew sequentially by $156 million and grew year-over-year by $211 million, up 83% on lower sales. Our gross margin improvements and our ability to run with lower inventory levels, as well as lower CapEx levels are driving these results.

Now this all leads to significantly improved free cash flow conversion and we expect to convert profit to cash at a strong rate going forward. Overall, our results in the quarter illustrate that we continue to make solid progress to reset our price and cost levels to enable an even stronger profit and cash flow cycle as our market volumes revert to mean. We also continue to demonstrate progress on our More Corning technology efforts. We extended our market leadership by collaborating with Apple to deliver durable glass with infused color, a first for any smartphone for the back of the iPhone 15 and iPhone 15 Plus devices. These devices also feature Ceramic Shield, which we collaborated on with Apple to deliver a cover material with unparalleled smartphone performance.

We also recently announced Corning Viridian Vials. This new technology can improve filling line efficiency by up to 50%, while reducing vial manufacturing carbon dioxide equivalent emissions by up to 30%. And just yesterday, we announced an expanded collaboration with long-time customer AUO to accelerate the production of their industry-leading large format curved Automotive display modules using our patented ColdForm technology. Stepping back, we are on the right track, enhancing profits, improving cash generation and delivering new products that capture More Corning content opportunities, all while maintaining our leading market positions. The area that continues to be problematic is our customer demand, especially the weaker carrier sales in Optical.

So although we have hit our guidance to you for 11 consecutive quarters, weak customer demand has put us consistently at the lower end of our sales expectations over the last year even as we are outperforming on price and productivity plans. More importantly, we are well below the trend line for our operations profile. We have the capacity and the capability to deliver $3 billion plus in additional sales with minimal additional cash investments. As a result, this revenue will have powerful incrementals as it returns as long as we keep our capacity and our capabilities vibrant and ready to go. So as we assess our operations profile, we ask ourselves two broad questions. Will our revenue return and when? The first question is relatively straightforward to address.

We simply ask ourselves, what are the long-term trends in our markets and where are we now versus those long-term trends? And then, of course, we need to feel confident that we will win in those markets. Are we the clear market leaders with superior technology offerings, lowest cost platforms and are we advancing More Corning opportunities to increase our value capture for the same volume. So first, let’s look at the trends in our markets. We build our capacity and capabilities around long-term trends. We then modulate our operations and staffing around current volume run rates. So we must understand where our volume run rates are versus trend at all times. We do this for each of our businesses. Let me give you just one example, optical fiber as a good illustration.

Here, you see industry shipments measured in fiber kilometers since the beginning of 2004. The trend line shows a 6.6% compound annual growth rate over the last decade. As you can see, the industry has been operating below trend line in the first half of 2023. Because industry shipments are reported with at least a quarter or two delay, I am going to switch to our own shipment data so that we can bring you up to real time, what we saw over the last few quarters and what we are projecting for quarter four. First thing to notice is, the trend line for our shipments has a 7.3% CAGR over the same 10-year period. We have been growing faster than the market. Now this just makes sense with everything we have shared with you about our More Corning strategy.

Quarter one of 2023 was basically on track and our shipments started dropping away from the 7.3% CAGR line in quarter two and even more so in quarters three and quarter four. Currently, our shipment run rate is at least 30% below trend line. You can think about the 30% plus gap is carrying through all of our Optical revenues. Remember that fiber accounts for only a portion of our sales, we have significant value to our fiber with our cabling and connectivity solutions. So this gap to trend ripples through our entire Optical product portfolio. We feel the demand drop in our fiber sales, cable sales and equipment sales. We are confident that we will return to the long-term trend line. We believe that as customers deplete their inventories, the industry and our sales will resume growth.

Just returning to trend adds more than 40% to our revenue run rate for Optical Communications. So that’s what we mean when we say we will revert to mean and fiber is just one example, we use a similar methodology for key product lines in each of our maps, Automotive, Display, Mobile Consumer Electronics and Life Sciences, all of them. are showing a gap versus long-term trend lines. Right now, because we are operating well below long-term trend lines, we see an enormous opportunity as our markets revert to mean. Now as I noted a moment ago, because we anticipate this recovery across our markets, we need to know we will win as they bounce back. Are we maintaining our leadership position in advancing opportunities to grow faster? In short, yes, are we have built a more advantaged position for 80% plus of our revenues over the last few years.

We are the technology leader, as well as the lowest cost producer, and we have built more opportunities to capitalize on growth in our markets, increasing our value capture with our More Corning approach. Let’s look at a few examples. In Optical Communications, fiber optics remains the ascendant technology with growing applications in wireless, cloud computing, including AI and government efforts to connect the unconnected. Within each of these applications, we have new product innovations that will increase our revenue per installed fiber as those applications grow. We are building on our undisputed global cost and technology leadership position, along with our market leadership in North America. In Automotive, new U.S. EPA regulations go into effect starting in 2027.

These new regulations force adoption of gasoline particulate filters and we are the inventor and clear market leader in GPS. We expect to see sales as early as 2026. In terms of More Corning, this adds 2 times to 3 times the content opportunity for ICE vehicles in the U.S. This means significant growth in our environmental business even in the face of global BEV adoption. In fact, we will still grow environmental sales up until BEV adoption reaches 40% of all vehicles globally and that is not forecast to happen until the next decade. Keep in mind, we have also built new revenue platforms with the successful introduction of our auto glass for interiors, which is being widely adopted in BEVs and offers hundreds of millions of dollars of growth opportunity for us.

In Display, we have been and continue to be the undisputed leader in technology, quality and cost. Our successful development and capability in Gen 10.5 technology aligns with the continued move to larger size TVs with the lowest cost platforms for large displays. We continue to improve productivity, which allows us to free up assets to serve Gorilla Glass, Glass Ceramics and our growing Automotive Glass business. Finally, we continue to build entirely new product platforms that allow us to enter new categories for growth, examples include pharmaceutical packaging, automotive exterior glass for high autonomy systems and the rapidly growing opportunity to reassure U.S. solar capacity. In total, this amounts to a $3 billion plus incremental sales opportunity with minimal cash investment.

Taken together, that’s why we believe our revenues will recover. The next question is when? The answer to this question is less clear. Conventional wisdom is that customer demand in telecom display, semiconductor, smartphones, tablets and notebooks, bounces back in the second half of 2024. That seems plausible to us, but rather than trying to predict the timing of the recovery, we will continue to guide one quarter at a time based on our order entry models until visibility improves. We will continue our programs to improve price, productivity and cost so that we improve profitability and cash flow despite our muted sales outlook. This serves both the purpose of providing enhanced performance near-term, and more importantly, providing a better price and cost springboard for profitability as our volume reverts to trend.

Simply put, we have the ability to deliver another $3 billion plus in sales with powerful incrementals and minimal cash investments. This represents such a significant opportunity for our shareholders that will maintain this powerful platform throughout this down cycle, all while we continue to improve our near-term profitability and cash flow. This is how we are steering our way through this period and I look forward to updating you on our progress. Now I will turn the call over to Ed so we can get into the details of our results and outlook.

Ed Schlesinger: Thank you, Wendell. Good morning, everyone. In the third quarter, our sales were $3.5 billion, gross margin was 37%, EPS was $0.45 and free cash flow was $466 million. This was in line with our expectations. However, I want to point out that volume in both Optical Communications and Display Technologies was below our expectations. This was offset by strong sales in Specialty Materials. Our gross margin was up 80 basis points sequentially on consistent -- on sales consistent with the prior quarter and 340 basis points from the fourth quarter of 2022. Free cash flow was up $156 million sequentially and $211 million year-over-year. The increase in free cash flow was driven by improved profitability and inventory reductions.

We also lowered capital expenditures in the quarter. Our improving profitability and cash, despite muted sales, demonstrates execution of our programmatic approach. Let me provide some details on our segment results. In Optical Communications, sales declined 14% sequentially to $918 million, reflecting lower order rates from carriers as they continue to draw down inventory. Net income was $91 million, down sequentially reflecting lower volumes. Looking ahead, we are not counting on improvements in our orders over the next six months. Longer term, we expect our growth to resume as customers complete the drawdown of their inventory. Additionally, we remain confident that the industry’s underlying growth drivers are intact, specifically, broadband, 5G, cloud computing and advanced AI.

There are also public infrastructure investments to help connect the unconnected and bring broadband to a much larger share of the U.S. population. In Display Technologies, third quarter sales were $972 million and net income was $242 million. Volume in the quarter was lower than our expectation. Net income grew 16% sequentially, reflecting the progress on our previously announced price increases. Here’s an update on what we are seeing in the business. In line with what we told you last quarter, we are on track to achieve double-digit price increases at our customers in the second half. The impact of these complicated agreements flow through our financials in both the third and fourth quarters. These pricing actions resulted in net income margin of 25% in the third quarter, up 3 percentage points from 22% in the second quarter.

On average, our customers are experiencing double-digit price increases with the majority of the impact in the third quarter. Year-over-year sales and net income were up 42% and 81%, respectively. Panel maker utilization declined as we exited the third quarter. And looking ahead to the fourth quarter, in line with industry reports, we expect panel makers to reduce utilization further from these levels and we expect the glass market and our volume to be down sequentially as much as low teens. Display industry analysts attribute the panel maker utilization decline to a wrestling match between panel makers and set makers over the significant panel price increases during 2023. This dynamic is expected to maintain a healthy supply chain exiting 2023, setting the stage for panel maker utilization to recover in the first half of 2024.

However, despite lower sequential volume, we expect to maintain or improve our profitability levels in the fourth quarter as we continue to see the benefits of our pricing actions. For 2024, we expect the pricing environment to remain favorable as we expect glass supply to be balanced to demand as multiple display glass makers have announced capacity reductions earlier this year. In Specialty Materials, sales in the third quarter were $563 million, up 33% sequentially. The improvement was driven by higher Gorilla Glass sales resulting from customer product launches in the quarter, which helped offset overall end market softness and continued solid demand for semiconductor optics drove another strong quarter for Advanced Optics. Net income was $72 million, up sequentially, primarily driven by higher volume and the adoption of premium cover materials.

Moving to Environmental Technologies. Sales in the third quarter were $449 million, up 6% year-over-year, driven by ongoing growth of gasoline particulate filter adoption in China, which offset expected softness in heavy-duty markets in North America. Productivity improvement actions helped net income grow faster than sales to reach $99 million, up 14% year-over-year. In Life Sciences, sales in the third quarter were $230 million, consistent with the second quarter. Sales were down year-over-year, reflecting significantly lower demand for COVID-related products in China and the impact of customers drawing down inventory. Net income increased sequentially to $13 million, driven by productivity improvement actions. Turning to Hemlock and Emerging Growth businesses.

Sales in the third quarter were $327 million, down 13% sequentially and 20% year-over-year, reflecting a decline in solar grade polysilicon prices and lower sales in pharmaceutical technologies as we completed the last of our volume commitments for COVID-related products in the second quarter. We are seeing continued strong demand for our solar grade polysilicon, which meets the need for a transparent, sustainable and traceable solar supply chain in the U.S. market. As a reminder, we have long-term take-or-pay contracts with our customers that have floor pricing mechanisms built in to help mitigate the impacts of spot market dynamics. Net income was a loss of $8 million, down sequentially driven by lower sales. Now let’s turn to our outlook.

For the fourth quarter, we expect sales to be approximately $3.25 billion, driven by continued weak demand in Optical Communications, sequentially lower volume in our Display business, reflecting lower panel maker utilization, typical sales patterns in Specialty Materials following significant customer product launches in the third quarter and the possibility that the labor issues in the automotive industry could impact our Automotive business more in the fourth quarter than it did in the third quarter. We remain focused on our actions to improve profitability and cash flow during this low volume period. As a result of our continued execution we expect to deliver another quarter of strong free cash flow and a gross margin percentage similar to the third quarter despite lower sequential sales.

We expect EPS of $0.37 to $0.42. Before I wrap up, I’d like to reiterate our commitment to strong financial discipline. We are maintaining a strong and efficient balance sheet. For example, we have one of the longest debt tenors in the S&P 500. Our current average debt maturity is approximately 25 years with only a little more than $1 billion in debt coming due in the next five years and we have no significant debt coming due in any given year. Let me leave you with a few final thoughts. In the near-term, we will continue our focus on improving profitability and cash flow despite the muted sales outlook for the quarter. At the same time, we will -- we remain well positioned to capture significant additional sales with minimal cash investment and longer term we remain confident in our ability to outperform our markets as they recover and to grow beyond prior peak sales run rates with strong incremental leverage.

I look forward to updating you on our progress. Now I will turn things back over to Ann.

Ann Nicholson: Thank you, Ed. Operator, we are ready for the first question.

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Q&A Session

Operator: Thank you. [Operator Instructions] Our first question comes from the line of Asiya Merchant with Citi. Your line is now open.

Asiya Merchant: Great. Thank you. If I could just dive a bit on Display and I apologize to jumped on the call later, I had another call at the same time. But if you can just talk to us a little bit about how you kind of see the Display environment improving in the -- as you guys look ahead, not just the fourth quarter, but due to 2024 as well and how we should think about the margin trajectory there? Thank you.

Ed Schlesinger: Yeah. Hi, Asiya. So a couple of things. So, first of all, as we talked about our price increases taking effect here in the back half of 2023. So that obviously improves our profitability in this space and we expect the pricing environment to remain favorable as we go into 2024. We talked about some glass makers taking capacity offline, which helps to keep supply and demand in balance. What we are seeing in the -- with respect to volume and panel maker utilization at the end of Q3 and in Q4, we view that as improving as we go into 2024. So we would say that the volume environment improves in 2024, the glass volume environment improves in 2024 as well. Does that answer your question?

Asiya Merchant: Yeah. And if I may just...

Ann Nicholson: On the fourth quarter, I know there’s been some discussion on panel made utilization coming lower, but I am not -- I just wanted to reconcile that with your comments that the panel maker utilization will increase as you kind of look ahead.

Ed Schlesinger: Yeah. We think that what’s happening in the fourth quarter is a temporary situation as panel makers and set makers work through their pricing environment. As you know, panel prices have increased throughout 2023. That said, we think the inventory levels, we exit the year with healthy inventory levels and retail doesn’t really have to improve for panel maker utilization to go up at some point in 2024, we think that’s relatively early in the year.

Asiya Merchant: Got it. Thank you.

Ann Nicholson: Our next question.

Operator: Our next question comes from the line of Martin Yang with Oppenheimer. Your line is now open.

Martin Yang: Good morning. Thank you for taking my question. On Display, do you feel that you have achieved what you set out to regarding pricing increase with your customers and do you expect additional benefits in 4Q from the price -- pricing change relative to 3Q?

Wendell Weeks: Yes. So we are -- these are super complicated agreements, okay? But fundamentally we are going to exit, we are going to have double-digit price increases as we flow through this back half. There will be further enhancement as we go into Q4. And all the dynamic that’s going on in our guide is we are also expecting panel maker utilization, which started to lower as we exited quarter three, we are expecting that to be pretty low through the quarter as sort of panel makers and set makers wrestle around pricing themselves and so that’s going to drive our volume down sequentially in quarter four. But we feel very good about the reset of the price and so we will continue to see those benefits in our profitability.

Martin Yang: Thank you, Wendell. I have another question relating to Display and Automotive. I think the agreement you have, are new customers as AUO for ColdForm technology is an interesting one as AUO itself acquired a Tier 1 supplier recently in Automotive. Maybe can you talk about the cost and effect there is Corning having a bigger presence in Automotive triggered the AUO due the same or AUO’s entry into Automotive led to a deeper collaboration between Corning and AUO Automotive Glass.

Wendell Weeks: Just because of the time cycles involved in materials development of our type of innovations, we start earlier, right? And then to have something novel like ColdForm just takes longer, right? What you are seeing is a lot of our long-term customers in Display are now looking to how do I apply those technology platforms to new areas. And what we have been able to do is help bridge them using our ColdForm technology and the strong access we have with Automotive players, right, to be able to bridge those long time customers to new market opportunities for them, all while they are sort of executing their move forward to add a lot more value to their Display Tech. I think it’s a great example of AUO, like intellects is another [ph], right, where some of these Taiwanese based players as they face the growing competition from the new big Gen 10.5 plants that we facilitated in China, they are finding good ways to use their capacity and their capabilities to enter the Automotive stack.

Martin Yang: Thank you.

Ann Nicholson: Thank you. Next question.

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

Meta Marshall: Great. Thanks. Maybe a question just on the Optical business and just whether there’s any different trends between kind of your service provider customers and cloud customers, because kind of the 30% cutback in Q4 would be even more extreme, given the offsets of kind of cloud customers staying consistent. So I just want to get a sense of, is that trend line even more severe if you were just to take the service providers versus cloud customers? Thanks.

Wendell Weeks: The simplest way to answer that is yes.

Meta Marshall: And so maybe just any trends on the cloud customers would be helpful this quarter?

Wendell Weeks: 30% gap versus our long-term trend lines, that includes sort of what’s going on in cloud and so does our run rate, right, and the other apps. So, yes, that is giving you -- you have a good understanding that the gap in that one area is even more dramatic than the 30% gap we are showing you in total.

Meta Marshall: Okay. Great. Thank you.

Wendell Weeks: Is that what you were asking?

Meta Marshall: Yeah. I mean that is kind of the point, but I guess, I am just trying to get a sense that cloud customers are not pulling back as severely as well. There’s nothing we should be noting on the cloud customers as well?

Wendell Weeks: Not that we are seeing. Now remember, cloud went through their own cycle sort of during the pandemic, right, and then adjusting to what they have to do with their value chains. And they are struggling now -- not struggling, but the reaming a lot of their CapEx is being aimed to do a large language model training and that basically adds a second network on the back end, adds even more fiber optic connections. So we have yet to start experiencing the rapid growth that, that represents in our run rate, right? But cloud has been pretty stable.

Meta Marshall: Okay. Perfect. Thank you.

Operator: Thank you. Our next question comes from the line of Matt Niknam with Deutsche Bank. Your line is now open.

Matt Niknam: Hey. Thank you for taking the question. Just one high level one and then one follow-up on Optical. First, from a high level, I mean, obviously, it sounds like you have got significant conviction in the longer term outlook. I mean, with that in mind, how do you think about the potential for accelerating share buybacks given where valuation sits today. And then just to go back to Optical, I am just wondering if you can talk to what sort of visibility you have into next year, particularly as we are sort of in a higher for longer interest rate environment. It would seem that although we have seen a 7% CAGR over the last decade, if we are, in fact, in a different rate dynamic, it may actually temper a lot of the enthusiasm relative to what we had seen a couple of years ago from some of your larger service providers. So just curious on any visibility into 2024 there? Thanks.

Ed Schlesinger: Hey, Matt. This is Ed. I will take a first question. So, first of all, the most important thing for us has been focused on improving our profitability and cash flow, obviously, if we improve our profit, that also improves our cash flow and I think we have done a nice job of that over the last several quarters. Our cash flow conversion was up nicely in Q2 and Q3 and we expect it to be up again here in Q4. So I think that’s first things first. And then I think if you remember back earlier this year, we made the last payment to Samsung on the buyback we did back in 2021. So as we go forward, we will certainly have more firepower to do things like share buybacks. We haven’t need any announcements. So we will come back and we will talk a little bit more about our plans next year, but I think you should feel good about where we are from a balance sheet and a cash flow perspective.

Wendell Weeks: I will take part two, I just want to add a little bit to Ed’s answer to part one. We get that $3 billion plus revenue run rate back. Our shareholders are going to have a lot of fun. The incrementals on that are going to be really, really stunning, because they don’t take much additional cash investment, it’s really minimal, right? And because of our operating leverage, we are going to like that and we are going to have a ton of flexibility to do capital allocation that favors our shareholders. So does that make sense to you Matt before I jump to Opto visibility?

Matt Niknam: It does. It does. Thank you.

Wendell Weeks: Okay. So Opto visibility, it’s a great question. We are in the midst of our -- a detailed process with each and every one of our major carrier customers, just trying to figure out the answer to just that, right? What exactly are your deployments, what are your deployment plans, let’s roll that forward sort of quarter-by-quarter detail-by-detail. Because of the privileged position that we have, they are willing to work with us at that level of detail. That is not complete yet. When it’s complete, that will improve our visibility in that segment of our revenues. So more to come, I don’t have the answer right now, but more to come. As you step back from that, which is really answering the question of when exactly does it return, right?

Next year though. Will we return to trend? We are highly convicted. You saw what those trend lines are. We showed you over the last 10 years. I can go back 20 years. I can go back 30 years, right? We can keep going back, and you will see that trend line, right, because basically, that’s what you see when you have an ascendant technology. We just keep entering markets with S-curves as fiber optics becomes the more economical way, as photons become more economical than electrons as bandwidth distance economics change and as more bandwidth goes up over shorter distances, basically more fiber goes in and that’s why you see those type of long-term technology trend line. So will it return to trend? Absolutely, we are seeing Optics actually enter strongly markets that hasn’t been before, right?

And like wireless and we are seeing new applications like generative AI, which you need more fiber optic connections, right, for a given sort of compute power. So we feel good about the long-term trends. When? We are still working on it, Matt.

Matt Niknam: Appreciate it. Thank you both.

Wendell Weeks: 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: Yes. Thank you. Good morning. Wendell, appreciate the charts and your comments on long-term trends in Optical, but you are calling out inventory digestion right now across cloud, and so clearly, that implies there was an inventory buildup. So your trend lines through 1Q 2023 embed some over shipment as well and I understand that’s true even in historical cycles. But why do you think that the mean reversion wouldn’t mean a lower steady state level, for instance, I think, in the PC market as an analogy, people thought $250 million was sustainably going to $300 million to $350 million and now we are back to $250 million and growing at low singles. So I am just kind of curious as to whether you think that there is a reset that happens to a lower level given, perhaps, overbuild over a longer period of time? And I have a follow-up.

Wendell Weeks: Okay. So first, where we are seeing the inventory draw down right now is primarily the carriers. I think you said cloud, but I think it’s just misspoke. It’s in carriers where we are seeing the drawdown occur, okay? Cloud is operating now more in balance. Does that make sense to you?

Wamsi Mohan: Yes.

Wendell Weeks: Okay. Good. So what drives those trend lines is, you are right, you would see that through the industry, it dipped above the line in 2022 and then you are seeing that adjustment below the line now, right? And you will see that throughout the entire time cycle and you are just looking at the fit against that, that gives you the CAGR. And what actually makes up that will always be sort of slightly different pieces of the network will be being built out at one point in time or another. We don’t see anything that is reducing the application space for fiber. Everything we are seeing is increasing the application space for fiber, right? And that’s just because rates, right, so I think line rates of how much bandwidth you need is going up.

And that’s across even short distances in places like hyperscale cloud, right? And because of that, you are seeing from a technology perspective, links which used to be copper or low fiber count, okay, become high fiber count all optical. And even going down to now our latest technology work, you see glass packaging, right, to be able to get right from the ASIC to optics as fast as possible, mainly because that’s the most economical way to handle that communications to get to photon as quick as possible and we see this in market after market. So I don’t see a collapsing market opportunity, I see a growing market opportunity and that’s what drives those long-term CAGRs. So I would -- that’s how we think about it. To your notebooks and PCs, I mean that’s an interesting analogy.

We could have done that market here because we track that. Our CAGRs, right, would have had that surge up, but we would have integrated the decades of experience we have in notebooks would have taken our forward projection rather than the -- what it did rather than the towards long-term at 300 basing [ph] 350. We would have been because of the way these trend lines work, we would have been well below because you don’t have enough cumulative time at that 300 level, the 350 level to offset all that time that you have had well below that. Does that make sense to you?

Wamsi Mohan: Yeah. Yeah. It does, Wendell. I appreciate the color. I guess as a follow-up in the spirit of looking at the long-term here.

Wendell Weeks: Please do.

Wamsi Mohan: On the yen, if you look beyond 2024, can you give us some sense of how much exposure is hedged and at what level, given that we are back at sort of the 150 level again? And just curious if you could give out some color on sort of maybe just beyond 2024, looking at 2025, 2026, what percent and at what level you might be hedged at? Thank you.

Wendell Weeks: So right now and I think did last quarter or maybe the quarter before, we are hedged through the end of next year, right? And beyond that, right, we have -- we don’t have a significant amount of hedge in that time period. Ed, would you like to add?

Ed Schlesinger: Yeah. Two other things, Wamsi, that I would add. One, we recently raised price in Display. That’s one way for us to address the yen. We are going to certainly readdress that or rethink about that as we go into 2024. And then, secondly, given the large differential in interest rates between Japan and the United States, there’s a pretty steep forward curve yen. So if you go out a year, it’s about ¥6. So you go out another year, it’s about ¥12 and so on. So just as you think about the rate that’s out there, it’s not the 150, it’s really the forward rate that matters to us because we could actually hedge at that rate right now. So the average over the next five years is below 130…

Wendell Weeks: Yes.

Ed Schlesinger: … versus if you think about the rate yen in total being at 150. I just wanted to point that out.

Wamsi Mohan: Yeah. But it’s going to lowest [ph]. Thanks, Ed.

Wendell Weeks: So that gives you an idea of the sort of ceiling on our exposure is what would be the average rate sort of post 2024 if we reestablish long-term hedging programs. And what we are trying to do is sort of balance to see we believe that there will be an opportunity, because of the way in which the currency markets work to be able to put in place more long-term hedges at rates we like. If that doesn’t happen, we will institute an industrial fix, meaning price increase so that we maintain strong returns in this business for our shareholders and that’s the way we tend to think of it. It will either solve relatively easily in the currency markets in the timeframe or will -- to an industrial solution, the first step of which you just saw this year.

Wamsi Mohan: Okay. Thank you so much.

Operator: Thank you. [Operator Instructions] Our next question comes from the line of Steven Fox with Fox Advisor. Your line is now open.

Steven Fox: Hi. Good morning. Wendell, I was wondering if you could talk a little bit more about some of the comments you made around the new revenue platforms and also some of the cyclicality in the business from two aspects. One, it seems like thinking about your comments that as you have instituted more technology, more value add into some of your served markets, you have created more cyclicality as well. I wonder if you would agree with that. And then, secondly, from my perspective, it seems like the $3 billion has somewhat disappointed over the last few years and especially as you think about how dynamics are changing maybe around demand for some of your COVID products, et cetera. Is it time to maybe look at that $3 billion and even though it has a lot of leverage, maybe pair back some of those products or see if they are better off in other places or with other companies? Thanks.

Wendell Weeks: Steve, I think that’s a really good question. First, I want to make sure we are clear and we will follow up with you more. For us, the huge bulk of that $3 billion is not in new platforms, okay?

Steven Fox: Okay.

Wendell Weeks: That’s just in like fiber optics and some of the new products in it, regaining 40% growth to trend line, it’s just like Display getting back to trend line. It’s Automotive getting back to trend line. So it’s the products you know and love, Steven, right, that you have been driving through your models for a long time, right? That is the stuff that is well below trend and that is the lion share of the $3 billion, right?

Steven Fox: Okay.

Wendell Weeks: So the new platforms, which you speak, are a pretty small amount, right, of that gainer, right? And for those, I think, what we do is, as we have learned different things, we change our profile. So whether it’s a pharmaceutical packaging, where we pivoted everything to serve COVID because we thought that was good for the world, right? Government funded a free plan for our shareholders, fine, right? Customers signed up to long-term take or pays, which we just completed sort of that take-or-pay process in quarter two for some of those things we signed up for to help deliver those lifesaving vaccines. And then we are saying, okay, so what do we pivot towards now and then we go to what’s an asset-light strategy there and that’s why we are opening up the technology stack and being able to enable other players in the industry, some of our competitors or some people like West, right, to sort of use our tech and then we return to our shareholders through a variety of mechanisms, everything from sort of licensing to go-to-market models that end up with us still capturing.

So we will do that in each of these. We are always adjusting to what we see as the opportunity without doubt, as we go through this down cycle on revenues, it’s significantly increases the skepticism, which we bring to new opportunities, right? So I think in that way, your concept is right and we will do that. But I think the thing where we are going to need to flush out for you more is it’s not those areas, it’s the $3 billion. It’s just -- that’s just getting back to run rate. We have demonstrated on products and people consume every day, okay? That makes sense to you, Steve?

Steven Fox: Yeah. It does. You answered everything except for the one question on just sort of the cyclicality of the business now…

Wendell Weeks: Oh! Got you.

Steven Fox: …your current stack?

Wendell Weeks: I started to think about that at the moment, you said it. It’s super interesting, because like let’s stay on fiber, given that we are adding so much more value now for fiber tip than we did, right? So therefore, when they go down, we -- when we lose a fiber tip now, it causes more revenue fall off than it used to when we were just a fiber maker.

Steven Fox: Right.

Wendell Weeks: I think that’s true. At the same time, the baseline is bigger, right? So I don’t know if it increases cyclicality. Let me think about that mathematically myself or Jeff and you have got me curious. Let me do a little bit of quantitative work and we will get back to you, Steven.

Steven Fox: Great. Appreciate all the color. Thank you.

Wendell Weeks: And one other quick thing to add on this, Steven, because one as you know, what we have done to try to fix volatility of technology substitution curves is, we take and spread across multiple markets our three core technologies and our four manufacturing engineering platforms. In that way, it sort of any given point in time, markets that don’t move together, right, think like people don’t consume smartphones related to their COVID-19 vaccination rates, right? They don’t move together or cell and gene therapy doesn’t move with buying large-size televisions, right? So even though they use some of those same core technologies we have. And one of the things, so we get a balancing effect to offset some of that cyclicality and volatility.

What happened during COVID, so in general, if you were to look at over time, what we have built is, if you think about correlation as being like negative one be negatively correlated, zero would be not correlated at all and one being highly correlated, you move the same direction. We have gotten our correlation to be down to like, I don’t know, 1.7 or so. So really relatively uncorrelated, which helps with that volatility. Then what happened in the pandemic as the pandemic sort of forced correlated a bunch of our markets that for different reasons, it don’t have a lot to do with each other and our correlation levels started to get 0.7, right? So highly correlated. And so that is -- so we are seeing our markets which should be diversification effects before it’s correlated by the pandemic and what’s happened after.

The good news here is we are starting to see them get non-correlated again. So we are starting to see that go back to historical patterns. Now if you ask me which one I would choose reverting to mean on the absolute level of revenues or reverting to mean on our level of diversification? I choose more revenue, but we are already seeing the progress on sort of what should be our long-term effects of dampening of volatility. That was more than…

Steven Fox: Okay.

Wendell Weeks: … you wanted to know, isn’t it?

Steven Fox: No. No. That’s really interesting. That gave me a list of thought to…

Wendell Weeks: Yeah.

Steven Fox: I appreciate it. Thank you.

Ann Nicholson: Thanks, Steve. We will take one more question.

Operator: Our last question comes from the line of Josh Spector with UBS. Your line is now open.

Josh Spector: Yeah. Hi. Thanks for squeezing me in. So just as you think about your, I guess, pent-up revenue potential here, that $3 billion, depending on when that comes back, maybe it’s one year to three years depending on kind of how strong or weak the macro is, how do you think about your capital investment in light of that? You need to invest as much as you have over the last few years or is this a chance for you to step back on that and that markets tighten before you think about growth in that?

Wendell Weeks: I will start and then Ed can go after me, right? That’s why we use the term minimal cash investment, right? We have got in place the capabilities and the capacity we need to support that $3 billion, right? So we do believe that you should see very muted CapEx and very high free cash flow conversion. But Ed, why don’t you add?

Ed Schlesinger: Yeah. I would agree and I would say you are starting to see our capital spending coming down right now, you will continue to see that come down as we go through the fourth quarter and into next year as we finish up some of the things that we have been working on. So I agree with Wendell that we can support that and if there’s something new that’s not in that or something beyond that, we will talk about it with you all with respect to capital. But I think you can think of our conversion as being better than it has been over the last period of time, a couple of years.

Wendell Weeks: And what we are -- you are looking at here is, again, it’s very unusual, which is sort of weird cycle with the pandemic and post-pandemic times is, I can’t think of a time, right, where we had the opportunity to generate as much revenue with capability sets that we have got ready to go in such a fast time period. I mean it’s -- so the incrementals here, they are a lot of set new records for us. That’s what we are going to be seeking to do and that’s the balance we are seeking to strike as we adjust to the run rate of today, we want to maintain that opportunity, because the power of that to create value for our shareholders is really, really powerful and interesting.

Ann Nicholson: Thank you, Wendell. Thank you, Josh. I will wrap up for today. Thank you for joining us. Before we close, I wanted to let everyone know that we will be attending the UBS Technology Conference on November 28th. Thank you, Josh. Additionally, we will host management visits to investor offices in select cities. And finally, a web replay of today’s call will be available on our site starting later this morning. Once again, thank you all for joining us. Operator, that concludes our call. You can disconnect all lines.

Operator: This concludes today’s conference call. Thank you for participating. You may now disconnect.