Good morning, everyone. I'm Samik Chatterjee, and I cover hardware and networking companies at JP Morgan. I have the pleasure of hosting the Corning management team today for the fireside chat. I have with me Wendell Weeks, who's the Chairman and CEO of the company. Before I get started, I just want to remind everyone that Corning will be discussing forward-looking statements, and actual results may differ. I guess that's what I've been given, so I'll leave it there. Wendell, to just kick it off, I saw the press release this morning. It looks like things are getting better and better. In context of that, maybe just help us understand what is getting better, and then how do you think about share buybacks, the timing of that? What should we expect in context of that improvement?
Will do. You know, to begin with, because I think you're right, things are looking up, winter is over. I think to just ground us for a sec, I wanna just take a moment and review sort of, like, how we create ongoing value in the long term, and just, like, why we're so energized right now about some of the tremendous growth and shareholder value creation opportunities that are, like, right in front of us. So for us, it all starts with our focused and cohesive portfolio. We have three core technologies: glass science, ceramic science, and optical physics, along with four proprietary manufacturing and engineering platforms. And we're world leaders in each of these, even in the eyes of our competitors.
Today, we focus our efforts on five market access platforms, and this is what we call our three-four-five approach. Now, the way this works is that our probability of success increases as we apply more of our world-class capabilities. Our cost of innovation declines as we reapply our talent and we repurpose our existing assets. And perhaps most importantly, by combining the capabilities in our portfolio, we create higher and more sustainable competitive barriers, and most importantly of all, we delight our customers. So when we talk about focusing our portfolio, what that means is that we direct 80% of our resources on opportunities that use our existing capabilities from at least two of those three categories within our portfolio.
Now, few competitors can match our capabilities in any one of these areas, so when we combine them, that's how we create these big market-leading positions and margins that are much higher than anybody else in our industries. So I think, let me just give you an example of this in action, that's pretty topical, which is, let's just take one of our manufacturing and engineering platforms, Fusion. When you all think about Fusion, I know when you do, Samik, you probably think of our display business, where our latest sort of Gen 10.5 technology produces glass larger than two king-size beds put together, over 100 sq ft, and as thin as a business card. Upon which our customers build six 75-inch TVs at a time, and that's what's leading to how low cost that LCD technology is.
But we also use those same Fusion assets to serve almost all of our other market access platforms. The most famous of these, of course, is our Gorilla Glass business, which we built on the assets that we originally capitalized for display, and today, now we've built a world-leading $2 billion mobile consumer electronics platform. We're taking the same approach in automotive. We've introduced our automotive customers to our glass expertise, and we now have a triple-digit, fast-growing automotive glass business using these same Fusion assets. And now as we speak, it's one of the things that makes this topical, we're applying our Fusion platform to our optical communication segment.
The rise of Generative AI is driving the potential for our Fusion technology to bring flat, pristine, highly stable glass, initially as a substrate for GPUs, and in the near future, that substrate to become embedded with optical waveguides for co-packaged optics. So just with this one example, I think you can see how our portfolio works. In just one of our core manufacturing platforms, together with three of our core technologies, we're able to serve four out of our five market access platforms. And that's really the power of three, four, five, and it's a great example, really, of how the capabilities in this portfolio lead to long-term growth and continued increasing effectiveness of innovation and reducing cost of innovation. Now, turning more to the medium term, which is what has us pretty energized right now.
As we shared the last couple of quarters. Even though our market leadership position really has only strengthened the last several years, demand in our markets has been temporarily depressed due to supply chain corrections and macroeconomic factors. And as a result, our sales are also well below our trend lines. The good news is that we believe quarter one is the bottom, and we now see our sales and markets improving. Over the last couple of quarters, I've also outlined a framework for you, which we refer to internally, a much more detailed plan, which we call Springboard. And this framework has three primary components. First, we believe that the first quarter, 2024, will be the lowest quarter of the year, will improve from the quarter one levels, and we have clear evidence of improving market conditions.
Second, we expect to grow by more than $3 billion in annualized sales in the next three years. The outlook, really, in each of our markets remains positive, and our market positions are very strong. Our innovative products and deep customer relationships are positioning us well to capture this growth. Third, and perhaps, I think, most importantly, as we capture this growth, we expect to deliver very powerful incrementals. The reason's really simple: We already have the required production capacity and the technical capabilities in place to service that growth, and the cost and the capital are already in our financials. So this is just a tremendous opportunity, we believe, for our shareholders. Now, it's important to note that the Springboard opportunity is well above $3 billion. We communicated the revenue opportunity conservatively to provide you with a more high-confidence plan.
Now, to develop that, we had to think very deeply in probabilistic terms about various outcomes for our markets and our businesses. Let me give you an example that I know is on your mind, Samik, which is the yen and its related impact. Right
... on our display business, on price in our display business. With respect to the yen, as we have shared many times, we're hedged through the end of 2024 to support our core rate of 107. Currently, the yen spot rate is significantly weaker than 107. Now, but we've also told you that going forward, we would maintain appropriate profitability in our display business through some combination of hedging and industrial solutions, like price adjustments. So I just thought I'd share with you in a little more detail what our approach will be to that mechanism in 2025. We already have hedges in place for 2025. They're not at the 107 rate, but they are much better than the current spot rate.
Now, as a reminder, our customers buy glass from us in yen, and they sell panels in US dollars, so they're benefiting from the current weak yen rate. To maintain the level of profitability we have in display, we plan to use a currency-based price adjustment in combination with our hedges, to ensure that we continue to deliver appropriate returns in this business. And because, Samik, I know you will have a question for your models, for your modeling purposes, the way we think about appropriate profitability in our display business is if you just look at the average NPAT return on sales in our segment reporting over the last four or five years, right? That average return is the return that we would expect to have in this business in 2025.
Now, that's just one example of the approaches that we're using to ensure that our Springboard plan delivers greater than a $3 billion revenue opportunity with significant incremental profit and cash flow. Finally, many investors have asked us, "Okay, so when Springboard is successful, what will you do with the additional cash, that we generate from these strong incrementals?" As you know, our capital allocation priorities are to invest for organic growth. We invent, make, and sell product sets. We're an organic grower, and that we return any excess cash that we have above those organic growth needs to our shareholders. Now, because we already have the capital and capabilities in place to support our medium-term expected increase in sales, we also expect to generate a significant amount of excess cash in that term.
Therefore, with the success of the Springboard framework, we'd expect to be able to accelerate the return of cash to our shareholders. In fact, because of growing confidence in Springboard as each month goes by, we have begun to buy back our shares in the second quarter. So right before we turn to Q&A, a few quick points. First quarter sales, we see encouraging signs of us returning to Springboard as our markets improve, we're gonna increase by more than $3 billion with powerful incrementals. Our second quarter guidance reflects this, right? We've already established a higher profitability and cash flow base, and we've got a strong framework in place to drive even stronger returns on our existing innovation and capacity investments. And we're gonna make a lot of progress rapidly, and, we'll continue to share that with you.
Great. Great news on the buyback, and-
Thank you.
Things are looking better. Maybe just going a bit deeper into the AI-related demand.
Uh-huh.
Just help us understand what, how you're thinking about the opportunity in total, as well as the timing in which it comes through?
Generative AI has the potential to impact many of our market access platforms, okay? Because, it will impact both the generation of the models and use of the models in our infrastructure-based business, optical communications, as well as causing refresh cycles on the user interface, as well as developing of entirely new user interfaces using this technology, that we are already engaged on with a number of leaders in the space. But let's concentrate on the one that's gonna hit the fastest. So everybody talks about power in generative AI, and it is true, it uses a lot more power. If you look at the world through glass eyes, like us, right? So what you see is that you use a lot more fiber optics for any given amount of power to do generative AI, like 5x-10x as much.
So, like, the example that I've used with you, Samik, is, if I equalize on power and just take a current sort of CPU server rack, that's the front end of the network today, that will use, let's do about 10 kW, right? So that will use... You have about 32 fibers that connect to the top of that rack, 16 two-fiber connectors. Now, let's go to the back-end network in a GPU rack. First of all, let's just equalize on a 10 kW. So, that'll cover about 2 H100 servers, right? H100 server will tend, there's different architectures, but will tend to run with 8 GPUs per server and an InfiniBand switch with 400 G ports, that uses 16 fibers. So each of those H100 servers uses 128 fibers.
If there's two of them in a rack to equalize on that power, that's 256 fibers, and so it's an 8x increase in the amount of glass per rack, right? Now, from an innovator's perspective, there's two things. First of all, of course, we love the volume. That's awesome. But from an innovator's standpoint, and this is really just the earliest gens, you see having to fit way more in the same space. So this is what's led us to invent a brand new to the world fiber that's smaller, brand new to the world cables, which are much smaller, brand new to the world connectors, which are dramatically smaller, like order of magnitude, right? And new systems and new passive systems to be able to connect all these things and make installation speed way faster, right?
And reduce the probability of an outage on that fiber optic pipe. So from a plumber's perspective, right, the near term opportunity will be, as those innovations take place, especially in the large GPU clusters, you'll see that start to really run through our numbers, and you should start seeing it really in the back half as those big clusters start to get put in.
Okay. And-
Was that more than you wanted to know?
No.
Okay.
I would actually ask you to elaborate on the other piece, which is the edge.
Yeah.
The IP you referenced.
Okay, good.
I mean, we all have our forecasts of when AI is going to be driving a replacement cycle, but definitely want to hear what you're hearing from your customers in when do we see a replacement cycle on smartphone or any other edge devices you're thinking of?
So like you, Samik, and depending on who you speak with, which of my customers you speak with, you will get a different idea on what the primary interface will be for Generative AI. And you will get a compelling case from each of them on why their device, their device set will have an innovation cycle and therefore become the primary. I don't think I'm smart enough yet to know which one of them is right, but I do think they're all right in a way in which that you are gonna have to upgrade your hardware, right, to make use of this new tool in an effective way. You know, whether or not it's gonna be more silicon-heavy, like notebooks, or whether it'll be more like phones or whether it will be entirely new devices is up for debate.
Probably the most interesting space is the very new UI space, like what will be sort of the phone of the future with this? I mean, but that's super interesting, and there's a lot of really smart people working on it, and we're enjoying working on it with them, but, that is probably the most speculative of all.
Help me tie that with your Specialty Materials platform.
Mm-hmm.
I know you've talked about not having a major launch this year-
Mm-hmm.
But having, indicating it's more next year.
Mm-hmm.
How do you tie that with how your customers are thinking about when the replacement cycle can really activate?
Yeah. Right now, I'd say the first efforts are really to incorporate GenAI's capabilities into more existing format structures, right? And then that just take where, you know, take mobile consumer electronics. The phones are down, I don't know, 20% since we first did the More Corning strategy. Our revenue's up 40%, right? So I think the first way they look at this is a reason to get phones moving again and to differentiate. Our big next step up into how do I get more Corning on top of that base growth, that relies more on sort of new materials that we're introducing in new form factors. And it's just the way those adoption cycles work, that, you know, our next one, our next big material, to me, looks more like it'll hit next year-
Okay.
-than this.
Okay. I want to go back and follow up on your comments about using currency-based price adjustments with your display customers.
That's a-
This is a-
I don't know what the question is, but that's the right topic.
This comes from the step, on the heels of taking a 20% price increase-
Uh-huh.
last year.
Mm-hmm.
Same time, I guess. Just talk to us more in terms of how do you think about pricing power that you have to take a price increase following the 20%, and how would you expect your competitors to respond on, in that sort of dynamic?
Right. So, our confidence has grown because we just did a double-digit price increase, and though, the industry was, you know, was slow to follow, they did, right? And for us, the discussion is pretty straightforward with our customers, right? That they're benefiting from this yen, and, you know, we should, we should be able to share that in a more appropriate fashion. No customer in consumer electronics welcomes a price increase, right? But our relative position, because of our leadership in the technology, right, our ability to serve all types, really, all across the globe, and that none of our competitors are financially doing that well, right, means that it's not like we're being greedy. So, that's the way we look at it. We're confident that we'll be able to do it again since we've done it.
I think the first time we were more nervous than we are the second time.
Okay, thanks. Going to the $3 billion Springboard opportunity or more than $3 billion that you talked about, you did provide a lot, a lot of details into-
Yes.
the segments itself.
Mm-hmm.
Clearly, optical display, all are part of it, but help us to the extent that you can quantify things. When we think about, even with, when we start with the high confidence, $3 billion that you talked about-
Yes.
What are the big sort of buckets there? How to think about how much of that comes from display and optical versus the other segments?
So because the pie is much bigger than the three, it's hard to do what share, right? Because we definitely, we start out with a bigger number than we probabilistically adjust. But what I can do for you is, which ones do we expect soonest, right? So we have growth really across all five of the platforms. The ones that we'll see this year, like right away, you'll see display and opto, will be the earliest ones coming in, right? And we're beginning to see that evidence, which is what you saw reflected in our quarter two guide, right? And as we work our way through quarter two, and we gather more data, more information, more orders in our order books, then we should be able to speak a little more confidently as we go forward.
Those will be ones that will trigger in the nearest term, right?
Yep.
Automotive, phone glass, and environmental, that is gonna move also, starting late in this time period, and see, I've already shared the next move there is really a More Corning move-
Right.
-because we haven't built more growth cycle in, for the refresh cycle because we don't feel confident enough yet-
Okay
... that we know when that is going to be, right? And in our life science segment, it's really been about that whole pivot from COVID and everything that that did, and returning sort of our product line availability to those other areas that are non-COVID related. And as those get available to supply, and the markets clean out of the inventory, we'll see that start to come back, too. So a lot of these things start to come in this year, but the big ones for this year, that you'll see right away are display and opto.
Okay. Let's talk about autos just briefly.
Sure.
You've talked about a $100 per car opportunity there. How is the lower EV demand that we're seeing in the market impacting your own thinking on the timeline to get to $100 per car in terms of content? And, anything you're seeing from automakers in terms of even them exploring change in platforms from EVs to maybe hybrids or other platforms?
Okay, so let's start at the end, and then we'll back up. So at the end, there's no question that our automotive customers are thinking deeply about what their relative mix will be of ICE, whether it's a hybrid form or not, to EV. There's just no question. So in general, you can think about our play in auto as being, we have our established environmental business, which does pollution abatement, really, for all ICE vehicles. That opportunity has been growing. So cars are down, I don't know, probably about 15%, you know, since late in the last decade through to now. Our revenue's up about 60% in auto. The huge bulk of that is driven by adoption of our new gas particulate filter technology, first in Europe, then in China.
The exciting news is that the EPA just issued their guidance that starting in the 2027 model year, the U.S. vehicles will now need GPF technology. That adds a few $100 million of opportunity to that business alone. Our automotive glass business is already in the triple-digit hundreds of $1 million. It's growing really fast. We originally envisioned that as a good hedge bet in EVs, so we're indexed a little heavier in EVs for that, but we're also on ICE vehicles, and we have ICE vehicles and EV vehicles today with $100 of content on them. Regretfully, it's just not all of them, right? So we're starting to see that fundamental technology work. I think the biggest wild card for us in auto is our play in exterior going to work or not.
It's a cheap shot on goal for us 'cause we use all of our Fusion assets, right? So the theory is that autonomy will require camera-based systems from inside the cabin, which will require new material sets on the windshield because it becomes like a lens. We have a particular customer who's hard over that they're right technically. We support that customer. Are they or not? It's just too early to tell. Autonomy's a complicated question, and which way it'll solve is complicated. If that works, too, then, you know, automotive could become our most important segment, right?
Let me open it up and see if anyone in the audience... Please go.
Hi, I have a question. When you look at the NVL72 from NVIDIA, it has something like 1.5 miles, two miles of copper in the back. When do you foresee that going to, you know, fiber optics, given the fact that, you know, that's 70% less power in fiber optics? I know it's a lot more, but at some point, you can't run copper that long with, you know, and then without it deteriorating, so.
I'm smiling because you think like me. I love that. Talk about the, talk about the miles of copper, man, that's a keeper. I love that one.
Yeah, I mean, it's not a.
No, you're exactly right.
It doesn't make sense, like, if you're gonna increase the speed.
You've nailed it in one. The way to think about from a just raw sort of techno-economic standpoint, what you're realizing is It's actually a pretty well-understood frontier, which is. It's a weird metric. It's 100 gigabit per meter second, right? If you have bandwidth requirements that are above 100 gigabit per second for a meter, right? That's all that means, right? Then it's less expensive to do it with photons than it is with electrons. Below, it's less expensive to do with electrons. So if you think about networking, what you see is the amount of distance that the copper is going is shrinking as the bandwidth goes up.
In these next generations, you're looking at a gap of millimeters before people want to go into optics, and that's when I was talking about our Fusion technology coming to the substrate form, because, like, think of a switch ASIC or anything, at certain speeds, you're just gonna wanna go to light right away on that flat platform... and this is what they mean by optical back planes and everything like that. There's all sorts of tricks that people have done to keep the copper in. They move the switch to the middle of the rack rather than the top of the rack, 'cause that reduces the distance. But you are right on just a fundamental physics thing that drives long-term secular trend in opto.
So it won't be, you know, for a cycle or two, 'cause there's hard problems to solve to get light on and off of those things, and, and will change, but it's a big opportunity for us in semiconductor packaging and co-packaged optics, and it's something we're working on. It's really a great question, and I'm keeping the mile and a half of copper. Well, let's run that one down. That's a keeper.
Wendell, before we wrap up, I wanted to ask you a question on the margin front.
Yes.
As I was preparing for this discussion, it was interesting. I was looking through the model, and you used to do 41% gross margin-
Yeah.
-when revenues were $7 billion-$11 billion, and now we are sort of, for lack of a better word, struggling to get to $40 billion when you are-
Yeah
at a $14 billion run rate.
Mm-hmm.
What, what changed, and how do we get back to that?
So the way to think about our margins now is, when inflation came, it sort of changed the profitability ratios, while for the same amount of volume, we could deliver the same amount of profit. Inflation hit us, right? And when it did, and we began to work to share that more appropriately with our customers, we put those more dollars in price, which increases the size of the denominator for it. So if what we're doing is you're sharing one for one, it's going into cost, right? And then we're offsetting that with going into the revenue. So it depresses our margin %, even with the same dollars. So what we used to think of as 40, given how much we've increased our price and what's happened with inflation, we think about today as 38. That's the same sort of number.
Now, what makes your question, I think, incredibly topical is because of the incrementals that we can't experience, because the cost that's currently in our cost of goods sold and our OpEx is able to support higher revenues.
Right.
So when those incrementals start to work, then we, you ought to be able to start seeing, adjusted for the inflation pricing thing, us turning in real record sort of gross margins once that's adjusted. So that is what we're aiming at. We see the same thing you do, and it's just, first one is just arithmetic, second one is the incrementals are there.
Okay. Thanks a lot.
Your thinking around how to have disciplines in the operation, I think you called it the three, four, five.
Yes. Mm-hmm.
At the same point, sometimes you can start to build a culture where people get very. It's like, it's like having a needle deep in the groove on the record, you know, at some point.
Yes.
How do you make—'cause almost every segment you're in is trying to be disrupted right now by-
Yes
-somebody else.
Mm-hmm.
How do you make sure you're not finding yourself in that place where the three, four, five is leading you to a place where we're so deeply entrenched in just seeing the things we see and not seeing the things that are to the left and right of us or, you know, you know, five miles down the road that we can't even see right now?
I think that's an excellent question. What we try to do is that 20% that we keep outside of that core discipline in the way we run our core research group, is meant to go and look at those wilder spaces and what other people are doing. In the end, talent rules, right? To be able to see that stuff, and I think, we do better in some areas than others, but that's the way we think about it.
Thank you.
Great. Wendell, thank you for-
Oh, it's a pleasure.
... attending the conference. Thank you for the detailed presentation as well and the thoughts.
Thanks.
Thank you to the audience as well.
All right, guys. Thanks so much.