Corning Inc (GLW) — Q2 2020 Earnings Call Transcript

Thank you, Joel, and good morning. Welcome to Corning’s second quarter 2020 earnings call. With me today are Wendell Weeks, Chairman and Chief Executive Officer; Tony Tripeny, 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. Those 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 are related to GAAP data. Our core performance measures are non-GAAP measures used by management to analyze the business. 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, and they’re also available on our website for downloading. Now, I'll turn the call over to Wendell.

Thank you, Ann, and good morning, everyone. This morning we reported second quarter 2020 results. Sales were $2.6 billion. Net income was $218 million. EPS was $0.25, and free cash flow was $285 million. All increased sequentially. I have two primary observations on the quarter. First, while we're effectively adjusting to this period of uncertainty with decisive action and operational execution, we're generating positive cash flow and maintaining a strong balance sheet. Second, even in these uncertain times, our strategy to deliver for our customers and outperform our markets is working. We're continuing to lead in the capabilities that make Corning distinctive. In fact, we advanced multiple growth initiatives during the quarter. Let’s consider the first observation in more detail. In the second quarter, we completed adjustments to our operating plan and continued to execute across the board by delivering operational improvements that will generate significant cost savings through 2021. We delivered sequential growth in sales, EPS, and free cash flow. We also completed the vast majority of our anticipated restructuring, including the reprioritization of R&D programs. We believe we're continuing to position Corning for strong long term and improve profitability. Turning to my second observation, our long-term strategy is sound and our growth drivers are intact. As I said before, we're not just counting on everybody buying more products; we're putting more Corning into the products that people already buy. This provides a mechanism for us to outperform our end markets, even in challenging environments. The relevance of our focused and cohesive portfolio remains strong and is actually increasing; some of the secular trends benefiting us could accelerate as consumer lifestyles continue to adapt in a world of social distancing and as healthcare companies advance solutions to end the pandemic. There is a need for expanded network capacity and ubiquitous display as people spend more time online. The safe and widespread delivery of vaccines is among society’s top priorities, and reducing fine particulate pollution appears to be helpful for reducing infection rates. All these needs fall directly within Corning's mission of improving lives through innovation, and we are well positioned to contribute. The progress we've made and the leadership position we leverage across our markets in the second quarter speaks for itself. Let's take a closer look. In Life Sciences, we're mobilizing our capabilities to combat the virus wherever we can. Glass packaging is critical to the COVID-19 vaccine effort, and it is currently in short supply. Our Valor Glass innovation helps enable faster filling line speeds and increased patient safety. Valor Glass was selected by the U.S. Department of Health and Human Services and the Department of Defense to accelerate the delivery of COVID-19 vaccines, and Corning was awarded $204 million in funding to expand Valor manufacturing capacity. Three leading COVID-19 vaccine producers have entered supply agreements for Valor Glass, and we’re also working with several other potential customers to capture additional opportunities. Additionally, we announced a long-term supply agreement with Pfizer to provide Valor Glass for currently marketed drugs in their portfolio. Our Life Sciences segment entered several long-term agreements with major customers for COVID-19 molecular diagnostic testing and antibody detection kits in quarter two. We're seeing strong demand for these products currently, and we expect to accelerate shipments further in the second half. In Mobile Consumer Electronics, our specialty materials segment delivered 13% year-over-year sales growth while the smartphone market declined year-over-year. Our performance was driven by strong demand for premium products, and we announced two exciting milestones. Gorilla Glass has now been used on more than 8 billion devices worldwide. We maintained our industry leadership with the launch of Gorilla Glass Victus, which is the toughest Gorilla Glass yet and features significantly better drop and scratch performance than any other Gorilla Glass or competitive glass from other manufacturers. Samsung will be the first customer to adopt Gorilla Glass Victus in the near future. In Automotive, our Environmental Technologies segment outperformed in a weak market; strong adoption of our Gasoline Particulate Filters continued to drive their sales growth to more than 20% year-over-year. Turning to Optical Communications, Corning grew sales 12% sequentially, driven by carrier network projects. We announced a collaboration with EnerSys to speed up 5G deployment by simplifying the delivery of fiber and electrical power to small-cell wireless sites. We also announced that we're working with Qualcomm Technologies to deliver indoor networks that are 5G-ready, easy to install, and affordable. The Corning systems are expected to be among the first designed to deliver 5G and our capability over millimeter wave spectrum in the indoor segment. This includes enterprises such as offices, university campuses, hospitals, hotels, retail outlets, and more. Our collaboration will enable a small footprint and low power consumption platform for true high bandwidth 5G for in-building networks. Customer deployment will begin in the fall. In Display, Corning generated consistent sequential net income as customer demand remains steady, and large screen TV sales continue to drive demand, supporting the opening of our Gen 10.5 facilities. Across our markets, you can see that we're successfully advancing our long-term growth initiatives. Additionally, near-term market conditions have improved. Auto factories are resuming operations in North America and Europe, and auto sales in China have returned to pre-pandemic levels. Telecommunications service providers and data center operators have resumed sending their technicians into the field, and they're rethinking their network needs to address greater demand for their services. Life Science labs are slowly reopening. We also expect television demand to remain resilient, as in-home entertainment is more important than ever, and the demand for computing devices will be boosted by work and learn from home. So, we're seeing some encouraging developments across our industries. On the other hand, disruptive forces from the pandemic to civil unrest to a worldwide recession and geopolitical struggles all remain in play, and they create uncertainty. We are united as a company to remain vigilant and adapt appropriately. We're rising to the challenge. I'll now turn the call over to Tony, so he can give you some more detail on our quarter and our near-term outlook.

Thank you, Wendell, and good morning. We came into this economic downturn with a balance sheet built for times like these, and we took actions during the quarter to ensure we have the financial resources needed for the duration. We generated $285 million in free cash flow, exited the quarter with $2.2 billion in cash, and are on track to generate positive free cash flow for the year. Our financial position is strong. We are becoming more efficient, and we have the capacity in place to meet expected growth with minimal investment. We expect improved profitability and return on invested capital as we grow sales. As the quarter progressed, demand and visibility improved. We maintained our leadership across all of our market access platforms. As a result, we expected gross sales and profits in the third quarter. As we said on our first quarter call, we've made aggressive adjustments to align our cost and operating plan with lower anticipated sales. These actions were essentially completed in the second quarter and fall into four broad categories; reducing production levels across most of our businesses, adjusting operating expenses with the majority of the savings to be realized in the second half, modifying inventory plans, and reducing capital expenditures. As a result, we expect $200 million in annualized cash savings. We reduced inventory by $120 million in the second quarter, and we reduced our CapEx by half versus Q1 to $288 million. We expect Q3 and Q4 CapEx to be consistent with the second quarter. We had strong operational performance, with sequential improvement in sales, net income, EPS, and free cash flow. Second quarter sales were $2.6 billion, up 2% quarter-over-quarter. Net income was $218 million, up 23% quarter-over-quarter, and EPS was $0.25, up 25% sequentially, and free cash flow was $285 million. Now, before I get into further details of our performance and results, I want to note that the largest difference between our GAAP and core results stem from restructuring charges of $254 million, which was primarily non-cash and included the reassessment and reprioritization of R&D programs. Other differences between our GAAP and core results come from a non-cash mark-to-market adjustment for our currency hedge contracts. With respect to mark-to-market adjustments, GAAP accounting requires earnings translations, hedge contracts, and foreign debt settling in future periods to be mark-to-market and recorded at current value at the end of each quarter, even though those contracts will not be settled in the current quarter. To be clear, mark-to-market accounting has no impact on our cash flow. Our currency hedges protect us economically from foreign exchange rate fluctuations and provide higher certainty for earnings and cash flow, as well as our ability to invest for growth and our future shareholder distributions. Our non-GAAP or core results provide additional transparency into operations by using a constant currency rate aligned with the economics of our underlying transactions. So, we're very pleased with our hedging program and the economic certainty it provides. We've received $1.7 billion in cash under our hedge contracts since the inception more than five years ago. Now let's review the business segments. In Display Technologies, second quarter sales were $753 million and net income was $152 million, both consistent with the first quarter. The Display Glass volume grew by a low single-digit percentage sequentially as our Gen 10.5 customers bought more glass; sequential price declines were moderate and as expected. As Wendell said, we expect that television demand will remain resilient as in-home entertainment is more important than ever, and that demand for IT products will be boosted by work and study from home trends. In the second quarter, worldwide TV sell-through units in Q2 increased slightly year-over-year, better than Q1 and better than the industry anticipated. Additionally, demand for Notebook PCs was strong in the second quarter. Preliminary retail sell-through data for June and July indicate that demand recovery in China has held, and that demand in North America and Europe remains robust, while emerging regions remain weak. While uncertainty exists around retail demand in the back half of the year, we remain confident that TV screen sizes will continue to grow in 2020 and beyond. TVs 65 inches or larger group are almost 40% year-over-year in the first half, and we're well positioned to capture the majority of that growth with Gen 10.5, which is the most efficient Gen size for a large TV manufacturer. We continue to expect Display pricing to decline by a mid-single-digit percentage in 2020. We believe that three factors drive a favorable glass pricing environment. First, we expect glass supply to continue to be balanced with demand. For Corning, we are aligning our capacity with demand. We're also pacing Gen 10.5 capital projects to align with panel makers schedules. Second, our competitors continue to face profitability challenges at current pricing levels. And third, display glass manufacturing requires periodic investment in existing capacity to maintain operations. Glass prices must support acceptable returns on those investments. In Optical Communications, second quarter sales grew 12% sequentially to $887 million as major carriers increased spending on cable deployments and access network projects. Net income grew by $52 million to $81 million on the higher volume and actions taken to lower costs and adjust capacity. The year-over-year decline in sales was consistent with the passive optical market decline. We maintain our view that the long-term trend in Optical is strongly positive. Bandwidth demand has accelerated during the pandemic, consuming network headroom capacity. Evidence of that demand includes AT&T’s report that Wi-Fi calling increased 100%, Verizon's report that VPN connections were up 72% over pre-COVID levels, and Zoom surpassing 300 million users from 10 million in December. We expect carriers to expand capacity to meet growing bandwidth in the future, but the current environment makes timing uncertain. While network operators remain committed to the original capital plans for 2020, deployments are constrained by pandemic-related labor and site access constraints. We expect these factors to continue in the third quarter. Environmental Technologies faced a challenging market. During the quarter, OEMs temporarily halted production in both the automotive and diesel markets. To mitigate the impact, we swiftly adjusted our operations to pace with customer demand and reduce costs. Environmental Technologies second quarter sales were $226 million, and profitability was impacted by lower sales and production volumes. Our auto sales were down 31% year-over-year, beating the global auto production decline of 41-45% year-over-year through a continued adoption of Gasoline Particulate Filters. The good news is that by the end of the quarter, auto sales in China returned to pre-lockdown levels, while North American and European OEMs began ramping production. In these realms, we anticipated cyclical downturn in the North American heavy-duty truck market that was worsened by shutdowns, with vehicle production dropping 73% year-over-year. Overall, we remain confident in our content and innovation-driven strategy in environmental and expect to return to growth as markets improve through the second half and into next year. Specialty Materials sales were $417 million in the second quarter, up 13% year-over-year and in sharp contrast to the smartphone market which declined year-over-year. Net income was $90 million, up 34% year-over-year. Sales growth was driven by three factors. First, premium glass demand increased in support of second half customer launches. Second, work and study from home trends drove growth in our products for tablets and laptops. And third, the demand for advanced chips drove sales for our semiconductor equipment products. Looking ahead, we expect our performance relative to the 2020 mobile consumer electronics market to come from further adoption of our innovations. In Life Sciences, second quarter sales declined 7% year-over-year to $243 million. Net income was $31 million, down $9 million versus last year on the lower sales volume. The business was impacted by the prolonged closure of non-essential laboratories such as university research labs, particularly in the North American market. The impact has been somewhat offset by increased demand for consumables using COVID-19 testing applications. Life Science lab re-openings picked up in late May, and lab utilization has been steadily increasing since then. Going forward, we are confident in the opportunities ahead for Life Sciences and Valor, especially as we prepare for upcoming vaccine demand. Equity earnings were positively impacted in the second quarter as our Hemlock JV settled a contract with the seller customer. Going forward, Hemlock will largely sell products in the semiconductor industry. Hemlock’s leadership position is backed by attractive long-term take-or-pay customer contracts with upfront payments. This creates stable revenue, profits, and strong cash flow generation. Let’s move to the balance sheet and our commitment to strong financial stewardship. We generated $285 million of free cash flow, a significant increase from the first quarter. We have $2.2 billion of cash, and we have a debt structure that is conservative by design and relatively unique. Our balance sheet is built for times like these. Today, our average debt maturity is about 25 years, the longest in the S&P 500. Over the next 18 months, we have under $70 million coming due. Less than half of our total debt is due within the next 20 years, and during this time there is no single year with debt repayments over $500 million. Investors often evaluate credit and financial health based on total debt-to-EBITDA. For the S&P 500, the average company has a weighted average debt maturity of roughly 10 years, and more than 80% of debt is due within 20 years. Consequently, when investors calculate the debt-to-EBITDA, they are implicitly focusing mostly on debt due in the next 20 years. Corning's 20-year debt-to-EBITDA is 1.2 times, consistent with an A credit rating and illustrative of the conservatism of our balance sheet. We expect to maintain a strong cash position and to maintain our dividend. As I've previously mentioned, we expect to generate positive free cash flow for the year. We have paused share buybacks and do not expect to add material debt in 2020. So in total, we have a very strong balance sheet and we have the financial resources needed for the duration of the economic downturn. To wrap-up, we had strong operational performance in the second quarter with sequential improvements in sales, net income, EPS, and free cash flow. As the quarter progressed, demand and visibility improved. This improvement has continued throughout July. As a result, we expect to grow sales and profits in the third quarter. However, we remain aware of the potential impact from the pandemic, the global recession, civil unrest, and geopolitical tensions. So, how much growth will depend on end market demand and economic activity during August and September. We will keep you updated as we move through the quarter. Stepping back, our underlying growth drivers are intact, and we're successfully navigating across this crisis. As we grow sales, we expect improved profitability. Furthermore, we have the capacity in place to meet the sales growth with minimal investment, which we expect to result in capital efficiency gains, including ROIC improvement. Altogether, this reaffirms our confidence that Corning is positioned to emerge from this crisis stronger than ever. Now, I'll turn the call back over to Wendell.

Thanks, Tony. During the second quarter, we made great strides in positioning Corning to emerge stronger from the global health crisis and resume growth. Sales, net income, EPS, and free cash flow all increased sequentially. Corning advanced multiple initiatives throughout the second quarter, including the launch of Corning Gorilla Glass Victus and continued innovation with 5G industry leaders. On the COVID-19 front, we continue to seek ways to leverage our deep technology, manufacturing, and engineering capabilities to combat the pandemic directly. We were delighted that Valor Glass was selected by the U.S. Department of Health and Human Services and the Department of Defense to accelerate the delivery of COVID-19 vaccines. Overall, our decisive action and operational execution resulted in positive free cash flow and continued leadership in the capabilities that make Corning distinctive. We're delivering for our customers, we're outperforming on markets, and we're preserving our financial strength. I'll conclude with an additional important development. For nearly 170 years, our company has been dedicated to creating innovations that have a positive impact on the world while conducting business in a way that has a positive impact on our people and our communities. Now, we have an opportunity to make additional contributions. We're setting up an office to further build racial and social unity within the walls of Corning and in our communities. Lewis Steverson, our Chief Legal and Administrative Officer, will lead this office. With that, let's move to Q&A. Ann?

Thanks, Wendell. Operator, we are ready for the first question.

Yes, thank you. Hi, good morning. Thanks for taking my question. If I can just start off with Display. You talked about kind of demand being resilient on the TV side, but as we’re looking at some of the data points from panel makers regarding a substantial improvement in banner shipments quarter-on-quarter or going into 3Q something in the magnitude of 20%. So, wanted to get a sense of what you're seeing in terms of or hearing in terms of demand from your panel customers? And where does inventory stand? Because I think last quarter, you were a bit concerned about the inventory level going in.

Yeah, I think from Samik, from an overall standpoint the TV demand has clearly been resilient. The data points that we saw in the second quarter were the fact that the TV units were up on a year-over-year basis, and that was certainly better than Q1. I mean, it was also better than most people were expecting going into the quarter. In addition to that, if you look at what happened in the preliminary data in June and July, that data was also very strong. In China, we didn't see a change in that data, though that demand remains robust. And then North American and European demand was strong throughout the whole quarter and that continued. So yes, we think TV demand is resilient. We also think that supply chain is perfectly healthy. I mean, we ended the year in a healthy supply chain situation, of course, nobody knew exactly what was going to happen in the second quarter. But given what did happen in the second quarter and the way things are going now, we don't see any supply chain issues there.

Okay. And if I can just follow-up on the cash flow here, so you had a strong free cash flow quarter through the working capital improvements that you're driving. Just help me think about how sustainable those are as you start to kind of go through the recovery in terms of revenue, how much of that improvement is something you have to get back as you go in working capital? Just trying to think about kind of how does this impact your free cash flow conversion in the long run?

We significantly reduced inventory by over $100 million during the quarter. Over the past 18 months, we anticipated stronger sales, leading to an excess inventory buildup. We see opportunities to continue reducing inventory moving forward. Improving inventory management is a key focus for us, and we believe this trend is sustainable for at least a few more quarters. As we begin to grow again, we will need to utilize working capital. Another major improvement this quarter was related to our capital spending. In the first quarter, much of this spending was tied to the completion of our major projects, like Gen 10.5. While we still have some ongoing projects, we've significantly reduced our capital expenditure in Q2, and we expect Q3 and Q4 to maintain similar levels.

I think stepping back and looking at free cash flow conversion, fundamentally, when we're not in a build cycle, our free cash flow conversion is excellent. That's where we are right now, right? So it's less about the specific programs and specific things we're doing. It's more just since it takes us a couple of three years to build one of our major low-cost factories, but there's a cycle where we invest for the future. And it is that investment that drives down our free cash flow conversion. We're in a period right now, where we've gotten ahead of that. So, we're in a spot where we're just in a reinvestment stage. And we were like that, we're going to have really high free cash flow conversion; you can expect that to continue.

Got it. Thank you.

Thanks. Good morning, Wendell, I was wondering if you could maybe step back and give us a bigger picture view on the new Optical cycle. You talked about network headroom basically going away and sounds like site access is still an issue, but not as big of an issue. So, if you wanted to think about maybe the next four to six quarters versus how you performed in the year or two before the downturn in Optical, how do we think about that under the sort of new world we're living in? Thank you.

Steve, that's a great question regarding the balance of what we know and what remains uncertain. On the positive side, both our cloud and network service providers are experiencing significant growth, as you've heard from Tony and me during this call. This growth indicates potential for increased revenue moving forward, especially as fiber-based networks offer lower costs. We're beginning to hear from network providers about their plans to consolidate various services onto a single high-capacity fiber network, which could open many revenue opportunities with capital investment. All of this suggests that Optical Communications is likely to enter a growth phase. On the uncertain side, real personnel are needed to install these networks and to establish large cloud data centers. Even though technicians are going back into the field, the current rate is much lower than what would historically be necessary to support previous build cycles. The ongoing pandemic complicates predictions on a quarter-to-quarter basis. However, as you pointed out, the underlying fundamentals and our market position appear very strong, and we should be poised for growth. We just need to see how the situation with the pandemic unfolds.

That's helpful. Thank you.

Great, thank you for taking my question and congratulations on a good quarter. A couple of questions; one is on Optical, there was commentary that the optical segment performed sort of in line with the passive optical market decline and Wendell just talked about all the labor constraints etcetera that's going on. How should we think about Corning always maintaining their leadership across their end markets? When do we expect or when should we expect Corning to again resume growth that outpaces the broader market? And then I have another follow-up on capacity and margins. Thank you.

This year if we're doing our job, that's the way we think about it. We should be outpacing the market, and we will get on with that post-haste.

Okay, and then just on margins, if I think about obviously, you guys are making some progress here sequentially in the third quarter, that's the commentary, and typically 3Q is up 5% or so on the top line and as the top line flows through the margins, etcetera. There's some investor confusion around how idling capacity should help margins. If somebody can walk us through the dynamics there, typically idling capacity would lead to perhaps a hit on margins? And how should we think about the margin improvements in the back half? Thank you.

Yes, Asiya, you're correct. I think when we idle capacity that does hurt the margins, especially if you're having less production than you're actually selling because you also take down inventory, which is, of course, what we did in Q2, in Q3. On the other side, though we did a lot of cost reduction efforts, and that ends up helping margins. As we look forward, the key here is to increase sales, and as we create more sales through our factories and more sales for OpEx structure, we'll see expansion in margins.

Okay, thank you.

Hi, there. Thanks a lot. I guess I wanted to ask about just the fundamentals in the Display business. I'm thinking more strategically, there's a lot of moving parts there, of course, you guys are pacing some of your investment in Gen 10.5. You've got pending exits of some of the LCD panel making facilities in Korea. Certainly, we hear about CVC rumored to be for sale. I mean, can you just talk about what you're seeing over there, and how that kind of plays into your dynamics strategically as you look forward? Thanks.

Thanks for the question. Once you've heard from us in the past, those fundamental drivers remain in place, which is, we have been preparing for a number of years for the ascendancy of the Chinese panel-making infrastructure. Because of the particular way that economy works, we believe what was the strongest region in terms of production in Korea at a cost disadvantage. Once they made the decision not to go to Gen 10.5, that sort of was the die; was cast. That's why we have been on our investment cycle in China with three-quarters of the support coming from our customers or the Chinese government in one form or another. So, those trends look right, they continue to move in our direction. It all just happened a little bit faster than we were planning. Because Korea ended up making decisions a little faster than what was their original plan. So, we don't really have all of our Gen 10.5 facilities up to support all that demand yet. That's what we're working through. CVC, of course, is a strong customer of ours. We would expect our market position to continue to grow as the trends towards China continue and the trends towards our long-term strategic partners continue.

Thank you.

Does that answer your question, George?

Very well, yeah. Thank you.

Thank you very much. I was just curious, given the vaccine and obviously you've gotten some funding from the government but just in general sort of this push to move manufacturing back to the U.S. and clearly a significant amount of government dollars out there right now, if this has changed really your thought process on timeline for Valor to provide meaningful contribution to the business? Thank you.

The simple answer, Shannon, is yes.

Any idea of the magnitude of the pull-in of the timeline?

We have an excellent idea. Yeah, we have an excellent idea; we’re not disclosing it yet. Here's the challenge really why we're not giving specific guidance here on that is we are putting a significant amount of our effort behind the specific human health need that we have to protect our people and the people around the globe with the vaccine. So, that's where we're aiming our efforts. So, any prediction on the specific sales as they evolve would have to involve like what is going to be the success and timing of the vaccine. So, what you can see the way to think about it is we're now accelerating the building of our high-volume manufacturing facility. We're in the midst of pouring concrete on the floor to inside that shell. We're in the midst of quickly ramping our equipment, and we are doubling the output of our big flaps New York facility. So, we're growing very fast. But so our customer is going very fast. It’s really hard to pick winners and losers. So I spilled up; here's why I think about it financially. I still don't think if you're primarily focused on the near term, you should worry much about Valor driving right numbers, right. If you're worried about the long term, this is an excellent sign for us. All the stuff that we bet on, which is we needed U.S.-based manufacturing, that we needed a new pharmaceutical package, that we needed to have more full line capacity, that we could do that through our packaging, that we needed to make patients safer. All those bets looked like they're coming true. But that's really about the long term. It will be a big driver. Meanwhile, we just want to make you safe, and we want to do our part. Does that make sense, Shannon?

It does, it does. Can you talk a bit about any competitive moves that you've seen from some of the others out in the industry because it seems like you guys are in a really good position, and I'm wondering if you've seen anything pop up recently? And then thank you.

Well, in this industry remember we’re an attacker. So historically, we haven't had much of a position in pharmaceutical packaging. It was only when we saw significant issues with the packaging of today that we developed the Valor Innovation and decided we needed to do this to make patients safer. We needed to bring our capabilities to that fight. So, we're really the attacker; we're just getting started. But I think you're right. I think we're off to a robust start to give our competitors a heck of a wake-up call.

Hi, thanks for the opportunity. Congratulations on the quarter. I wanted to ask about the Specialty Materials outperformance. Can you talk us about how significant the impact from work from home and the strong semiconductor equipment demand was relative to smartphone premium products? And then maybe how sustainable you see that as we go into 2H?

I think from an overall standpoint, each of those items were roughly about a third of the reason for the outperformance. I mean clearly, what happened to the glass that we sell both the tablets and as far as we sell the notebook computers that have Gorilla Glass on them was very important to us. We think it's a good example of the innovations that we have that cause us to perform better than the underlying market. The semiconductor performance was also good. I mean, the demand for advanced chipsets really have made a difference there. And then from a glass standpoint, as we said, as people get ready, as our customers get ready to introduce new products in the back half of the year, they of course, pulled all those products early, and we saw nice demand there too.

All right. Thank you.

Great, thanks. Maybe just a question for me on the Optical segment picking up, but just whether you could give us a sense of the breadth of that pickup; is it amongst kind of one or two major customers? Are you seeing it kind of across the board and any commentary on hyperscale customers in terms of their kind of optical demand?

I think from an overall standpoint, in the specialty side and the carrier market, I mean, it's certainly more than one or two customers, but it was driven very much in the carrier market. When you see our detailed numbers, you'll see that those were the numbers that were up on a sequential basis. In the enterprise market, it was a little bit more mixed; I think from a data center standpoint, that's where a lot of the labor constraint really showed up. I mean, in some data centers, less so than others. But I think that's one of the reasons that those sales were down on a quarter-over-quarter basis. But then also a lot of our enterprise customers are small and medium businesses, and also corporate spending. We saw those areas were clearly impacted by what's happening in the outside world. But there was a broad set, especially in the carrier business.

Got it. And then maybe just on the restructuring charge, and you noted that it was due to reprioritization of some R&D projects. Are there any major projects we should consider discontinued, or just any commentary there? Thanks.

Yes, I mean, it was very specifically a stealth project that we hadn't really talked a lot about externally, that had originally been initiated by a customer request. If you recall on our 3, 4, 5 strategies, there's the 20% that’s outside of 3, 4, 5 capabilities where we put our energy and efforts into. I mean, it's one of those projects in that 20% category. Of course, in this environment, it made sense for us to go back and look at that 20%. And so that's what we did. We ended up restructuring and impairing some of those assets.

Yeah, hi, thank you for the question. I wanted to start with the lack of guidance or the lower guidance for September and just see if I'm interpreting this correctly. It seems like your Display commentary is positive, and then, Optical has been uncertain so that leaves us with Specialty as the source of increased uncertainty in September. So, I wanted to check and see if that's accurate, or that's the right way to interpret this and then if that is right, what's driving that? Is it product timing or is it demand uncertainty; you may be double click on why the reduced guidance in September? And also maybe tell us whether you're going to continue to provide a lower level of guidance like this or is this just a one-off?

So, let's start with your premise, okay. We're not providing lower guidance for September, nor are we providing lower guidance for Specialty or anything like this. While this is, I think you're overthinking it. Here's the situation. Really, all lights are flashing green in our specific industries and in our performance of our units. Our financial executives, our operational executives, our strategic executives were all four getting more specific guidance this quarter, okay. I'm the problem. It's not anything that we're seeing happening specifically in our industries. It's just as I look at the world, and I see the pandemic doing what it's doing. I see a very broad global recession. I see civil unrest, really across the globe. And I see an awful lot of global tensions in a geopolitical sense. It's that macro area that makes me say, I think there's just too much uncertainty just to count on what we're seeing with our own two eyes. But if we just looked at our data, I think we'd be comfortable giving specific guidance, and we would view that guidance as positive. I'm just more worried about the uncertainty. Does that make sense to you, Rod? I know it must disappoint.

Yes.

Does it make sense to you?

No, no, no Wendell, that's very helpful. I appreciate that. That answers my question. I wanted to focus on the working capital again, Tony. One thing that stood out to us was the accounts payable, which decreased significantly in June. I'm curious whether that is a sustainable level or if you expect it to return to more historical averages. Can you explain what caused that change?

Yeah. And I think from an overall standpoint, I mean, Wendell is right, I mean, we're in a period of time where our free cash flow conversion is going to be strong because we're not doing the investment capital that we've done the last several years. On any given line item on the cash flow statement, there's a variety of things that happen on a month-in-and-month-out standpoint. But we're committed, and we're going to deliver free cash flow for the year, and that’s what our focus is. We're thrilled with our performance in the second quarter. I think it really helps investors understand our ability to generate that free cash flow.

Okay, thank you.

Yes, thank you. Wendell, you noted strong free cash flow margins coming off a build cycle. I think, Tony, you just referenced that too. I was wondering how long typically these post-build cycles are especially given the fact that Display has been usually a large source of that historical perspective on that would be helpful. And given COVID now, do you think that is extended for a longer period of time? And I have a follow up.

That's a very excellent question. In a way, what you're asking is, when will we be in our next build cycle, which usually is for revenue that's a couple of years. I think it's really hard to answer that question, Wamsi. Drove me up in the middle of the night and asked me, I'd say, I think we're going to be in a period of really staying within more of the reinvestment, repurpose pieces of our wheel, right. Pieces of our wheel for a time period that is your normal models you should be able to count on. At the same time, what we hope for is that successful health with the vaccine and all those things put us in a long-term spot, those mega trends are a conversion of more value in order to be back in our build cycle. But I think we'll have plenty of warning, Wamsi. Sorry, I don't have a more specific answer for you.

No, thank you. Thanks for the information, Wendell. And Tony, regarding the government's funding of $204 million to expand Valor's manufacturing capacity, how should we understand its impact on your statements? Will it be reflected in CapEx immediately? Is it fully allocated to CapEx? Can you provide any additional details on that? Thank you.

Yeah, I think the way to think about it, Wamsi, is, as we spend this money, this gets reversed. As we spend it, we added into our statements, most of it is for capacity and most of it is in CapEx, but there's also some operating expenses, and they'll get reimbursed there too.

Thanks, Wamsi. Operator, we've got time for one more question.

Yes, thanks for taking my question, two follow-ups. Tony, given all the changes going on within the company and increased focus on reducing the cost, should I expect your operating margins to expand from here on even if revenues were to go flat just for the scenario analysis? And I have a follow up.

I mean, clearly, what we've done in the second quarter is reduce our operating costs. That will be reflected as we get into Q3 and Q4. From our overall standpoint, as we've talked about before, our real focus area is to get back to growing our sales and growing our profitability. When our sales grow, we expect to see improved profitability too.

Okay. And then Wendell, I just want to better understand the dynamics impacting the TV industry. Can you remind me what the mix of 65-inch TVs is as a percentage of the overall TV demand or shipment?

Mehdi, at the top of my head, I'm drawing a blank on that, that's clearly where a lot of the growth is going, to give example, almost 40% on a year-over-year basis. But when we have our follow-up call, we'll get to the answer to that.

All right. Thank you.

Thanks.

Thanks, Mehdi, and thanks everybody for joining us today. Before we close out, just want to let you know that we will attend the Jefferies Semiconductor IP Hardware and Communication Infrastructure Summit on September 2nd and Citi 2020 Global Technology Conference on September 9th, and both will be virtual conferences. So once again, thank you, and Joel, please disconnect all lines.