Corning Incorporated (NYSE:GLW) Q4 2023 Earnings Call Transcript
Corning Incorporated (NYSE:GLW) Q4 2023 Earnings Call Transcript January 30, 2024
Corning Incorporated misses on earnings expectations. Reported EPS is $0.39 EPS, expectations were $0.4. Corning Incorporated isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Welcome to the Corning Incorporated Quarter Four 2023 Earnings Call. [Operator Instructions] It is my pleasure to introduce to you Ann Nicholson, Vice President of Invest Relations.
Ann Nicholson: Thank you, Shannon, and good morning. Welcome to Corning's fourth 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 fourth quarter, the difference between GAAP and core EPS primarily reflected constant currency adjustments, realized gains and unrealized non-cash mark-to-market losses on translated earnings contracts and non-cash translation losses on Japanese yen denominated debt as well as restructuring and asset write-off charges. As a reminder, these 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 and we encourage you to follow along. They're also available on our website for downloading. And now, I'll turn the call over to Wendell.
Wendell Weeks: Thank you, Ann. Good morning, everyone. Today we reported fourth quarter and full year 2023 results. Sales for the fourth quarter were $3.3 billion and EPS was $0.39, in line with expectations. Free cash flow was $0.5 billion. Gross margin was 37%, consistent with the third quarter despite lower sequential sales. As I shared with you last quarter, demand in most of our markets is temporarily depressed due to supply chain corrections and macroeconomic factors, therefore our sales are well below long term trends. Nevertheless, the actions we took to improve our profitability and cash flow generation throughout 2023 are evident in our financial performance. And based on detailed assessments, we are confident that we've extended our leadership positions across our markets While our current sales are below trend, we expect that to change in the midterm as our markets begin to normalize.
This creates an opportunity for us to increase our sales by more than $3 billion when that happens. As we capture that growth, we expect to deliver powerful incrementals because we already have the required production capacity and technical capabilities in place and the cost is already reflected in our financials. The incremental profit and cash flow annuity created by increasing sales by $3 billion plus is a terrific opportunity for our shareholders, and we expect to start making progress towards realizing that opportunity in 2024. Now it's difficult to call the specific timing of a recovery, but we continue to see signs that it will occur in 2024. As a result, we expect the first quarter to be our low quarter of the year. So, that's a summary of where we are and how we seek to create value in the medium term.
I'd like to provide some additional facts and perspective. At the start of 2023, we introduced plans to improve profitability and cash flow in this lower-demand environment. Throughout the year, we took action to restore our productivity ratios to historical levels and to raise price to more appropriately share inflation with our customers. I'm happy to report we delivered on our plans. When you look at our fourth quarter results on a year-over-year basis, the evidence of our progress is quite clear. We increased gross margin by 330 basis points and free cash flow by $110 million to $0.5 billion despite sales being down by more than $350 million. Our profitability and productivity improvements led to significantly improved free cash flow conversion and we expect to continue converting profit to cash at attractive rates going forward.
Overall, our results in the quarter and throughout 2023 demonstrate that we continue to make solid progress advancing our market leadership, strengthening our profitability and improving our cash flow generation even in the lower demand environment we're experiencing. As a result, we're entering this year operationally strong. Now we intend to build on this strength. As I previously mentioned, we have an opportunity to increase our sales by more than $3 billion in the medium term. Let's take a deeper look as to why we believe this. I shared a bit of how we're thinking about Optical Communications on the last call. I'll start there again today because it's a significant part of our opportunity. We anticipate Optical Communications sales will spring back because we believe and our carrier customers have confirmed that they purchased excess inventory during the pandemic and that they've been utilizing this inventory to continue deploying their networks.
We believe these carriers will soon deplete their inventory and execute on the increased broadband deployment plans they've communicated to us over the last several months. As a result, we expect them to return to their normal purchasing patterns to service their deployments. We also continue to expect speed funding for network builds in underserved areas to begin in the second half of 2024 and continue adding to our addressable market for several years. Additionally, we expect to grow hyperscale sales in support of the growing role of cloud computing and the need to build the second optical network necessary to directly connect the GPUs that drive artificial intelligence. Last quarter, I shared trend lines for fiber shipments, which showed that we are significantly below trend and outlined why we expect our sales to get back on trend.
I'd now like to update you on progress during the fourth quarter. Here you see Corning's fiber shipments measured in fiber kilometers since the beginning of 2007. The trend line shows a 7.3% compound annual growth rate over the last decade compared to a 6.6% CAGR for industry fiber shipments over the same period. As I explained during our third quarter call, our fiber shipments in quarter one of 2023 were basically in line with expected market trends, but started to drop below our trend line in quarter two and even more so in quarter three, with our shipments more than 30% below trend line, primarily due to elevated carrier inventory levels. We now have another quarter of data to share. In the Q4, we saw a small uptick in fiber shipments, but they remain more than 30% below trend.
More importantly, our regular sit downs with key customers indicate that they are deploying at a higher rate than they are purchasing as they continue to make progress on drawing down inventory. Additionally, they have plans to increase deployments in 2024. We look forward to updating you on takeaways from our next round of sit downs. We're also seeing encouraging signs in hyperscale. Overall orders grew in the fourth quarter and we're seeing the earliest edge of AI related network builds in our order books. Returning to trend adds more than 40% to our revenue run rate for Optical Communications and we are laser focused on doing just that. Beyond that, we expect the strong underlying growth trend to continue far into the future and our sales to grow faster than the market through more Corning innovations.
Optical fiber remains the ascendant technology with growing applications in wireless, cloud computing including AI and broadband efforts to connect the unconnected. As those applications grow, we have new product innovations in each that will increase our revenue per installed fiber. Government incentives to ensure everyone has Internet access also extend the long term trend line. Display provides another example of how our sales will spring back. Retail sales During the fourth quarter selling season were softer than industry expectations. Panel makers responded by reducing their fourth quarter utilization levels. Additionally, industry reports indicate that panel makers plan to run at lower utilization levels in the first quarter as they continue to align panel supply to demand with fab shutdowns planned during the Lunar New Year holidays in February.
For the first quarter of 2024, we expect the glass market and our volume to be down by a mid-single digit percentage sequentially. For the full year of 2024, our expectations are in line with the industry. We anticipate relatively flat television unit volume, another year of TV screen size growth, and some recovery in PC demand. Combined, this adds mid-single digit growth in glass volume at retail versus 2023. We expect panel maker utilization to increase after the first quarter to meet the expected retail demand. As a result, we expect our financial performance to significantly improve from our first quarter run rate. Longer term, we expect continued volume growth in retail to be mainly driven by television screen size growth as it has the past several years and for some improvement in units as consumer demand normalizes.
Well, we expect to win in this market because we are the undisputed technology leader. Our successful development and capability in Gen 10.5 aligns with the continued move to larger sized TVs produced on the lowest cost platforms for large displays. Life Sciences is another segment where market normalization contributes significantly to our expected growth. Customers in North America and in Europe are completing their inventory drawdowns. We are continuing our productivity and operations improvements, and we're refocusing our commercial and production efforts on drug discovery and production as the market returns. We also continue to evolve our products and business model for vials in our pharmaceutical technologies business. In addition to markets returning to normal, we continue to execute our more Corning content opportunities across the company.
In Mobile Consumer Electronics and Automotive, we see more Corning as the primary growth mechanism. Let's look first at Mobile Consumer Electronics. Since 2016, handhelds have declined 21%, while our sales of Gorilla Glass have increased 41%. Now, we've done this by advancing the state-of-the-art for cover materials. And this is just a classic more Corning play. We have a strong innovation portfolio in support of our close collaborations with leading OEMs. And we expect to continue delivering new products that increase our content per device. You saw a great example of this earlier in January in our announcement with Samsung about Corning Gorilla Armor, which dramatically enhances sunlight readability and scratch resistance. Extreme ultraviolet lithography, or EUV, a market we serve with our advanced optics products, is another great, more Corning opportunity.
We are the market leader for the photo mask and mirror materials of choice for GPUs and other advanced semiconductors. In automotive, proposed US EPA regulations would require adoption of gasoline particulate filters and provide an incremental driver of demand for our market-leading GPF offerings. In terms of more Corning, GPF adds two to three times the content opportunity in ICE vehicles. This would mean significant growth in our environmental business, even in the face of global BEV adoption. Additionally, we're winning both interior and exterior auto glass business, as customers increasingly view our solutions to be system enabling components. As I wrap up, here's what I'd like to leave you with. A majority of our markets are operating below trend.
And as a result, our 2023 full year sales are down from the prior year. In this lower demand environment, we have successfully taken actions to improve our profitability and cash flow, and we believe we have extended our leadership positions across our businesses. We are confident that our markets will normalize. And as they do, we have an opportunity to increase our annual sales by more than $3 billion. As we capture that growth, we expect to deliver powerful incrementals since the required capacity and technical capabilities are already in place and the costs are already in our financials. This represents a terrific opportunity for our shareholders. We expect to make progress on this opportunity in 2024 and we believe the first quarter is our low quarter of the year.
While it's difficult to call this specific timing of a recovery, we will continue our regular engagements with our large optical customers to review their recent deployments in detail and better understand their plans for deployments in 2024 and beyond. Following the Lunar New Year, we'll have similar meetings with our display customers. And we look forward to updating you in the next few months at investor conferences on our learnings and our progress. As I conclude, I'd like to remind you that the essence of what we do here at Corning is invent, make, and sell. We drive durable multi-year growth by inventing category defining products, developing scalable manufacturing platforms, and building strong trust-based relationships with our customers who are the leaders in their industries.
Now, I'll turn the call over to Ed, so that he can get into the details of our results and our outlook.
Ed Schlesinger: Thank you, Wendell, and good morning, everyone. I will start by summarizing a few key takeaways and then I'll move to the fourth quarter results. Our full year sales were $13.6 billion, down 8%, reflecting our markets being well below long-term trends. Despite the lower sales, we improved profitability and cash flow by restoring productivity ratios back to historical levels and offsetting inflation by raising prices. As a result, in the fourth quarter of 2023, we expanded gross margin by 330 basis points versus the fourth quarter of 2022, despite sales being down by more than $350 million, and we grew free cash flow sequentially every quarter from first quarter levels. As you heard from Wendell, we have an opportunity to increase our sales by more than $3 billion in the medium term as our markets normalize.
And we have in place the necessary production capacity and technical capabilities to service that growth. Our operations and finance teams are collaborating closely on processes and tools to ensure that we capture the growth and operating leverage required to deliver significant incremental profit and cash flow. We expect to make progress during 2024. Moving to fourth quarter results. Sales were $3.3 billion, gross margin was 37%, EPS was $0.39, and free cash flow was $487 million. Now, let me provide some details on our segment results. In Optical Communications, sales for the fourth quarter were $903 million, down 2% sequentially, primarily reflecting temporarily lower demand from carrier customers as they continued to draw down inventory.
Net income for the quarter was $88 million, down 3% sequentially on the lower volume. Longer term, we remain confident that Optical Communications market will normalize. We believe that the industry's underlying growth drivers are intact, specifically broadband, 5G, cloud computing, and advanced AI. We will also benefit from public infrastructure investments to help connect the unconnected and bring broadband to a much larger share of the US population. And from an order rate perspective, we are beginning to see green shoots in the hyperscale data center space. Moving to Display Technologies, fourth quarter sales were $869 million, down 11% sequentially. The remainder of our second half price increases partially offset a sequential volume decline that was consistent with the market.
Results -- retail results during the fourth quarter selling season were softer than industry expectations. Panel makers responded by reducing their fourth quarter utilization levels. Additionally, industry reports indicate that panel makers plan to run at lower utilization levels in the first quarter as they continue to align panel supply to demand with fab shutdowns planned during the Lunar New Year holidays in February. For the first quarter of 2024, we expect the glass market and our volume to be down by a mid-single digit percentage sequentially. For the full year of 2024, our expectations are in line with the industry. We anticipate relatively flat television unit volume, another year of TV screen size growth, and some recovery in PC demand.
This adds mid-single digit growth in glass volume at retail versus 2023. We expect panel maker utilization to increase after the first quarter to meet the expected retail demand growth. As a result, we expect our financial performance to significantly improve from our first quarter run rate. Moving to pricing, we successfully executed a double-digit price increase at our customers in the second half of 2023. We expect the pricing environment to remain favorable with glass supply balanced to demand as display glassmakers reduced capacity in 2023. We expect our Q1 2024 glass prices to be consistent with Q4 of 2023. In Specialty Materials, sales in the fourth quarter were $473 million, down 16% sequentially, following strong third quarter sales of our smartphone cover materials in support of customer product launches.
Net income was $58 million, down 19% sequentially, reflecting the lower volumes. In Environmental Technologies, fourth quarter sales were $429 million, down 4% sequentially, reflecting normal seasonality. Net income was $98 million, consistent sequentially. For the full year, sales increased 11% to $1.8 billion, outpacing the automotive market recovery. Our content-driven growth strategy and increased GPF adoption due to mid-year implementation of China 6b regulations led to our outperformance. In Life Sciences, sales in the fourth quarter were $242 million, up 5% sequentially. Customers in North America and Europe are completing their inventory drawdowns. Additionally, productivity improvements allowed us to improve service levels to better supply the market as it normalizes.
Net income improved sequentially to $17 million, up 31%, resulting from higher volume and productivity improvements. Turning to Hemlock and Emerging Growth Businesses, sales in the fourth quarter were $356 million, up 9% sequentially, primarily reflecting higher semiconductor polysilicon volume. Now let's turn to our outlook. We expect sales in the first quarter of approximately $3.1 billion. We expect EPS in the range of $0.32 to $0.38. The improvements we made in profitability and cash flow will continue to deliver benefits in 2024. We expect gross margin in the first quarter of ‘24 to be similar to the fourth quarter of 2023, despite lower sales, and to improve first quarter free cash flow by $200 million to $300 million versus the first quarter of 2023.
We expect the first quarter to be our low quarter. We believe we are going to grow from these levels for the following reasons. In Optical Communications, we expect carriers to complete inventory drawdowns and increase deployments throughout the year. We also see orders increasing from hyperscale data center customers. In Display, we expect panel maker utilization to increase from first quarter levels to meet expected full year retail demand. In Life Sciences, we expect markets to continue normalizing. And we plan to deliver more Corning content opportunities in mobile consumer electronics and environmental technologies. Now, I'd like to take a minute to address currency exchange rates. As a reminder, we have actively hedged our foreign currency exposure over the past decade.
This serves as an effective tool to reduce earnings volatility, protect our cash flow, enhance our ability to invest, and protect shareholder returns. We're very pleased with our hedging program and the economic certainty it provides. We have received more than $2.5 billion in cash under our hedge contracts since their inception. Our largest exposure is the Japanese yen. As we've previously shared with investors, we have most of our 2024 yen exposure hedged. We plan to keep our yen core rate at [JPY107] (ph) through the end of 2024. As we look ahead, we are actively working to improve our hedge coverage for 2025. The yen forward curve works in our favor. If you go out one year, the forward yen rate is about JPY7 stronger than today's spot rate.
Out two years, it's about JPY12 stronger and so on. Also, the current yen spot rate is significantly weaker than the 30-year average of approximately JPY110. So we believe there will be an opportunity to place additional long-term hedges at more attractive rates. And in combination with hedging, we can institute an industrial solution, like pricing increases for display glass, the first step of which we took in 2023. So that's how we think about it. It will either solve in the currency markets in a reasonable timeframe or will move to an industrial solution. Now before I wrap up, I want to spend a minute on our priorities to maintain a strong and efficient balance sheet and return excess cash to shareholders. We ended the year with $1.8 billion in cash.
We've created one of the longest debt tenors in the S&P 500. Our current average debt maturity is 23 years, with only $1.4 billion in debt coming due in the next five years, and no significant debt coming due in any given year. And essentially all of our debt instruments are fixed rate. Additionally, we prioritize returning excess cash to shareholders. We have consistently done this including throughout the pandemic. And one of the ways we do that is through dividends. We have grown our dividend 40% since 2019, and our dividend yield is top quartile in the S&P 500. We will propose that our board maintains a quarterly dividend of $0.28 in the first quarter and we will continue to be opportunistic on share repurchases. Now, here's what I want to leave you with today.
We are entering the year operationally and financially strong. We expect the first quarter to be the low quarter of the year. We have an opportunity to capture $3 billion plus in sales over the medium term as markets normalize and we capture more Corning content opportunities. As we do, we are positioned to capture significant incremental profit and cash flow because we have the capacity and capabilities in place and the costs are already in our financials. I look forward to updating you on our progress. And now, I will turn things back over to Ann.
Ann Nicholson: Thanks, Ed. Shannon, we're ready for our first question.
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