Corning Inc (GLW) — Q4 2020 Earnings Call Transcript

Thank you, and good morning, and welcome to Corning’s fourth 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. These statements involve risks, uncertainties, and other factors that could cause actual results to differ materially. These factors are detailed in the company’s financial reports. You should also note that we will be discussing our consolidated results using core performance measures unless we specifically indicate our comments relate to GAAP data. Our core performance measures are non-GAAP measures used by management to analyze the business. For the fourth quarter, the largest difference between our GAAP and core results stem from restructuring charges, which are primarily noncash, as well as noncash mark-to-market losses associated with the company's currency hedging contracts. With respect to mark-to-market adjustments, GAAP accounting requires earnings translation, hedge contracts, and foreign debt settling in future periods to be marked-to-market and recorded at current value at the end of each quarter, even though these contracts will not be settled in the current quarter. For us, this reduced GAAP earnings in Q4 by $63 million. To be clear, this 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 our earnings and cash flow, 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. 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 their inception more than five years ago. 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 and you can download them from our website. And now I'll turn the call over to Wendell.

Thank you, Ann, and good morning, everyone. Today, we reported an outstanding finish to the year. Each of our segments grew sales and profits year-over-year, and we continue to progress our strategic initiatives. For the fourth quarter, sales were $3.3 billion, up 11% sequentially and 17% year-over-year. Our operating margin expanded 500 basis points year-over-year to 19.4%. Operating income grew 18% sequentially and 58% year-over-year. EPS of $0.52 was up 21% sequentially and 13% year-over-year. We generated $464 million of free cash flow in the fourth quarter, $948 million for the full year, and we finished the year with $2.7 billion in cash on our balance sheet. It goes without saying, 2020 was an incredibly difficult year. We joined the rest of the world to confront the pandemic, economic uncertainty, and social unrest. Throughout the year, we focused on our customers and executed on strategic priorities while protecting our people. For more perspective on our performance, I'll share three observations. First, we demonstrated our ability to adapt rapidly and remain resilient in the face of uncertainty. Second, our more Corning content strategy clearly contributed to our growth and our performance against our end markets; and finally, throughout this difficult period, we're embracing the opportunity to make a difference wherever we are with what we have to contribute. Now, I'll expand on my first observation. Our decisive actions and strong operational execution have resulted in continued leadership in the capabilities that make Corning distinctive. Like many companies, we focused on bolstering our financial strength, reducing production levels, and operating costs, carefully managing inventory, reducing capital expenditures, and pausing share buybacks. However, it's not about what we cut, but what we kept. While we adjusted production, we didn't reduce capacity, keeping us positioned to meet increasing demand when the economy improved. We continue to make strategic investments and advance major innovations with our customers to capture the growth playing out across our market access platforms, and we developed multifaceted programs to protect our talent and preserve our capabilities. Our first half actions generated significant cost savings in the second half of the year, and as the economy started showing signs of recovery, we effectively adjusted our operations to keep pace as demand started to recover in many of the markets we serve. Our results tell the story. Our sales were down 12% in the first half as most economies were impacted by pandemic-related lockdowns. But in the second half, we improved sales 24% over the first while growing operating income 122%, returning to year-over-year growth and generating very strong free cash flow. For the year, we generated almost $1 billion of free cash flow, and our balance sheet remains very strong. We expect this strong momentum to continue heading into 2021. We will continue to adapt and focus on execution as we have proven that our approach is working. Turning to my second observation. In all the industries we serve, important market trends continue to offer new challenges that Corning is uniquely qualified to address and new opportunities to integrate more Corning content into our customers' products. In this difficult year, we have proven that this is an especially powerful value creation letter. We aren't relying exclusively on people buying more products; we're putting more Corning into the products that people are already purchasing. In the fourth quarter, this strategy paid off as we grew sales year-over-year in every one of our businesses. At the top were Specialty Materials, with sales up 20% year-over-year, and Environmental Technologies, up 19% year-over-year, both significantly outperforming their end markets. Last quarter, I described our innovations in Mobile Consumer Electronics, looking at how we're investing to create additional revenue streams and capture content opportunities. Today, I'll focus on our Automotive Market-Access Platform. The auto industry is undergoing major disruptions. Automakers are designing cleaner and safer vehicles, while featuring technology that provides immersive experiences. We're uniquely suited to address these trends. The opportunity is large in the range of $100 per car in Corning content. We're collaborating with more OEMs, and we're offering more solutions to help move the industry forward. Let's look at two of our biggest successes right now. Starting with our Automotive Glass Solutions business, we’re building strong momentum. Our advantaged solutions are enabling the very rapid shift toward in-vehicle displays that are interactive, integrated, and shaped. We're collaborating with industry leaders across the auto ecosystem, including Visteon, LGE, BOE, and Via Optronics to accelerate the adoption of our patented 3D ColdForm technology, which enables lower-cost, shaped auto interiors. Our large-scale facility in Hefei, China is now fully operational and servicing our growing demand. And we continue to see strong adoption of our technology by auto OEMs. Our recent proof point is the new Mercedes-Benz Hyperscreen dashboard display, which features a Gorilla Glass cover nearly 5 feet wide. Similarly, in Environmental Technologies, in a year when a global pandemic temporarily shut down OEM production, our proprietary gasoline particulate filter business still grew sales year-over-year. When we introduced GPF, we said our technology increased our content opportunity per car by three to four times. Like most of our innovations, it started with the customer challenge. Europe and China are addressing fine particulate pollution with new emissions regulations. We applied our expertise in ceramic science with our advanced manufacturing capabilities and extrusion to rapidly develop filters that efficiently trap ion particulates. Today, we're effectively helping automakers reduce these harmful emissions, meet new regulations, and produce some of the cleanest gasoline vehicles you can buy. Demand for our GPS has grown quickly. With our market-leading product, we continue to win the majority of platforms awarded to date. We're well on our way to building a $0.5 billion business. We're actually ahead of schedule, and the content opportunity continues to grow. We expect our GPS technology to migrate beyond Europe and China as other regions focus on improving air quality. Many new car models will soon be required to get even closer to near-zero particulate emissions. In response, we recently introduced our next-generation GPS, featuring enhanced filtration capabilities. They're launching in upcoming models as automakers prepare for the next wave of regulations. Across our markets, we see a similar content story playing out as we respond to key industry challenges with more Corning solutions. Let me share some other accomplishments across our market access platforms. In Life Sciences, pandemic-related demand has highlighted our strength in the industry. We achieved major milestones towards building a significant Valor Glass franchise in 2020. At the start of the year, we entered a long-term supply agreement to provide Valor Glass vials for a portion of the currently marketed Pfizer drug products. Soon after, we were awarded $204 million in funding from the U.S. government to substantially expand domestic manufacturing capacity for Valor vials. Today, we're supplying Valor Glass to several leading COVID vaccine manufacturers. We produce millions of Valor vials and shipped enough for more than 100 million doses, supporting multiple vaccine developers. In our Life Sciences segment, the global health fight is driving strong demand for our consumable products. We're supporting the development of treatments in vaccines, as well as mass testing efforts. We received $15 million from the U.S. government to expand domestic capacity for robotic pipette tips, which are used for COVID diagnostic testing. BioNTech recently recognized our contribution to their successful COVID vaccine development. Turning to Mobile Consumer Electronics, we launched the toughest Gorilla Glass yet, Victus. It's already featured on six Samsung devices. Corning also invented the world's first transparent color-free glass ceramic, which is featured on the front cover of the latest iPhone. Apple and Corning partnered to develop and scale the manufacturing of Ceramic Shield. It offers unparalleled durability and toughness. I noted that Specialty Materials sales were up 20% year-over-year in quarter four. They were up 18% for the full year in a smartphone market that declined 7%. In Optical Communications, we returned to growth and we expect this growth to continue as customers increase spending to support growing bandwidth requirements. In 2020, we introduced new and innovative solutions that help speed the deployment of 5G. We launched our outdoor 5G-ready connectivity solutions, featuring compact, easy-to-install terminals that can be deployed in any conceivable architecture. Operators can save up to $500 per terminal location, dramatically lowering installation cost and speeding up deployment. We're also collaborating with Verizon to enable 5G millimeter wave indoor deployments for their enterprise customers. We're working with Qualcomm Technologies to deliver indoor networks that are 5G-ready, easy-to-install, and affordable. We're collaborating with EnerSys to simplify the delivery of fiber and electrical power to small-cell wireless sites. Turning to Display, retail demand for TV and IT products remains strong. Demand for large-sized TVs continues to grow. 75-inch sets were up more than 60% for the full year. Large TVs are most efficiently made on Gen 10.5 plants. Corning is well-positioned to capture that growth with its Gen 10.5 plants in China, including the two newest Gen 10.5 facilities in Wuhan and Guangzhou, which are now expanding production to meet customer demand. Ramping these sites has been no small feat in the midst of a pandemic. We are very proud of our innovative and dedicated expert engineering teams that rose to a host of unprecedented challenges to start up tanks in both facilities. Looking ahead, Corning's long-term growth drivers and content opportunities are strong in each of our markets. We believe some secular trends could accelerate as consumer lifestyles continue to change in the aftermath of the health crisis. That leads to my third observation. We're living through the kind of moment that tends to bring true character to light. At Corning, our values are evident in our actions. We've unleashed our capabilities to help combat the virus. We're proud to be creating life-changing technologies that contribute to keeping people safe and helping society address the challenges of the pandemic. We also recognize that in these unprecedented times, we have the opportunity to share resources and leadership on a range of important issues. We've launched racial and social equity programs, and our Unity Campaign supports vital human services and emergency relief in our communities around the world. In conclusion, on all fronts, Corning is executing well. We're delivering outstanding results and making important progress across our strategic priorities. I am confident that we are entering the year with solid momentum and we expect to grow in 2021. Our More Corning strategy will continue to drive outperformance across the diverse industries that we serve. We're not just counting on consumers buying more cars, TVs, or smartphones to grow. I'm excited about how we're bringing our capabilities to bear in optical and life sciences as operators expand their networks, and we continue to support vital drug and vaccine development. Now, I'll turn the call over to Tony, so that he can provide additional insight on our results and expectations.

Thank you, Wendell, and good morning, everyone. We feel good about our fourth quarter results. On a year-over-year basis, we grew sales and earnings. We expect to grow again in the first quarter, and we expect to grow for the full year, driven by improving markets and our More Corning strategy. We are building a bigger, stronger company that delivers sustainable results while remaining agile in our ability to respond to changing market factors. Now let me walk you through our fourth quarter performance. In the fourth quarter, we grew sales 11% sequentially and 17% year-over-year to $3.3 billion, exceeding expectations. Excluding the consolidation of Hemlock Semiconductor, sales grew 11% year-over-year, with every segment growing sales and net income. Specialty Materials and Environmental Technologies delivered particularly strong year-over-year sales growth, up 20% and 19%, respectively, both outperforming their underlying markets. Optical Communications returned to year-over-year growth, and we expect that growth to continue. Our operating margin was 19.4%. That is an improvement of 500 basis points on a year-over-year basis. We grew operating income 18% sequentially and 58% year-over-year. EPS of $0.52 was up 21% sequentially and 13% year-over-year. We generated $464 million of free cash flow in the quarter. Cumulative free cash flow for the full year was $948 million. We ended the year with a cash balance of $2.7 billion. We entered 2021 in an excellent financial position. Now let's review the business segments. In Display Technologies, fourth quarter sales were $841 million, up 2% sequentially and 6% year-over-year. Net income was $217 million, up 11% sequentially and 21% year-over-year. Retail demand for TV and IT products remained strong during the promotional season in Q4. Display’s full year sales were $3.2 billion, and net income was $717 million. Our full year price declines in 2020 were mid-single digits. The glass market and our glass volume were up mid-single digits for the year. The retail market was more robust than the industry expected, resulting in panel supply being tight for the second half of 2020. Panel makers ran at high utilizations, and the industry drew down inventory to satisfy demand. These dynamics also resulted in glass supply being tight and more recently in shortage due to a power outage at a competitor's glass plant. Now let's look at 2021. We expect the TV and IT retail markets to remain strong. We remain confident that large-size TVs will continue to grow, and we are well-positioned to capture that growth with Gen 10.5, which is the most efficient generation size for large TV manufacturing. We expect the glass market to grow a mid-single-digit percentage in 2021. We expect glass supply to remain tight in the upcoming quarters. As a result of these supply and demand dynamics, we are experiencing a very favorable pricing environment. We expect Q1, 2021 glass prices to be flat with Q4, 2020. This is significantly better than the sequential declines we've seen in any other first quarter over the last decade. Glass prices for some customers in some generation sizes may actually see a sequential increase. We believe the following three factors will continue to drive the favorable pricing environment for the upcoming quarters. First, we expect glass supply to continue to be tight; second, our competitors continue to face profitability challenges at current pricing levels; and third, display glass manufacturing requires periodic investments in existing capacity to maintain operations. Glass prices must support acceptable returns on these investments. In Optical Communications, fourth quarter sales were $976 million, up 8% year-over-year and 7% sequentially. Our year-over-year growth can be attributed to broad improvements in demand for both carrier and enterprise customers. Fourth quarter core net income of $141 million was up 127% year-over-year and 23% sequentially. The improvement was driven by the incremental volume and favorable cost performance. We have returned to growth in Optical Communications, and we expect that growth to continue. Bandwidth demand is increasing, and users are demanding higher performance connections. We're seeing positive statements from customers on increasing investments in their optical networks. Our sales and order rates are picking up, and we're ready to capture demand as it materializes. We are confident we will grow sales in Optical Communications for the year. We continue to monitor and evaluate market demand signals to determine the magnitude of growth, and we'll continue to keep you updated as we go through the year. In Environmental Technologies, fourth quarter sales were $445 million, up 19% year-over-year and 17% sequentially, ahead of expectations as markets continue to improve, and GPF adoptions continued in China. Net income was $93 million, up 45% year-over-year and 35% sequentially, driven by strong operational performance globally and successful ramping of additional GPF capacity in China. For the full year, sales were $1.4 billion, and our performance was better than the underlying market. Net income was $197 million. While our full year 2020 sales were certainly impacted by COVID-19, we are recovering faster than the market by increasing our content for both the automotive and diesel end markets. Despite severely challenged markets, we saw year-over-year growth in GPF sales. Strong GPF adoption continues in Europe and in China, where the China 6a regulation is being implemented nationwide this month. We are ahead of our original timeframe to build a $500 million GPF business. Specialty Materials had an outstanding fourth quarter and full year. Q4 sales of $545 million were up 20% year-over-year, full-year sales were $1.9 billion, up 18% year-over-year, despite a 7% decline in the smartphone market, driven by strong demand for our premium cover materials and our other innovations. Net income was $423 million, up 40% from 2019 on higher sales volume and strong cost performance. The importance of computing and connectivity were amplified during the pandemic. Our new product innovations, including Ceramic Shield and Gorilla Glass Victus, as well as our EUV products in the semiconductor market were important contributors to our strong performance. Now before I get to our Life Sciences results, I'd like to note something of great importance to us. Throughout the pandemic, our Life Sciences market access platform has applied its broad capabilities and full product portfolio to help the world combat the pandemic. From our traditionally research-focused consumables to our bioproduction products to our transport media and, of course, our Valor Glass, we're playing a vital role in the development and supply of test kits and vaccines. Now let's look at our segment results. Life Sciences fourth quarter sales were $274 million, up 7% year-over-year and 23% sequentially, driven by strong demand for COVID-related products, including bioproduction products used in clinical trials. Net income was $42 million, up 11% year-over-year and 50% sequentially. In summary, we successfully navigated a very challenging year. We strengthened our balance sheet, established growth in the second half and generated free cash flow of $948 million for the year. As we look ahead, we have strong momentum coming into 2021 and expect year-over-year growth to accelerate in the first quarter. Specifically, we expect core sales of $3.0 billion to $3.2 billion compared to $2.5 billion in the first quarter last year, and EPS of $0.40 to $0.44, which is double last year's first quarter EPS at the low end of the range. For the full year, we expect growth in sales and earnings, and we anticipate generating more free cash flow in 2021 than in 2020. We will share more with you as the year progresses. Let's turn to our commitment to financial stewardship and prudent capital allocation. Our fundamental approach remains the same. We will continue to focus our portfolio and utilize our financial strength. We generate very strong operating cash flow, and we expect that to continue going forward. We will continue to use our cash to grow, extend our leadership, and reward shareholders. Our first priority for our use of cash is to invest in our growth and extend our leadership. We do this through RD&E investments, capital spending, and strategic M&A. Our next priority is to return excess cash to shareholders in the form of dividends and opportunistic share repurchases. In 2021, we expect CapEx similar to 2020, as we have capacity in place to meet higher sales. Now we'll invest more if we require capacity to support additional growth, and any additional capital investment would be supported by a customer commitment. We'll keep you updated as we go throughout the year. Given our expected strong free cash flow generation in 2021, we expect to increase our distributions to shareholders. That includes reinstating opportunistic share repurchases sometime this year. In closing, we're very pleased with our strong close to 2020, highlighted by growing sales and profitability. We continue to focus on a rich set of opportunities. Our businesses are fundamental to the long-term growth drivers in the industries they serve, and our More Corning strategy continues to deliver sales outperformance relative to our end markets. I look forward to sharing our progress as the year goes on. With that, let's move to Q&A.

Thanks, Tony. Operator, we're ready for the first question.

Thank you. I have a two-part question regarding display. First, you mentioned a strong pricing environment heading into Q1. Can you provide insight into how this might differ given the unique supply dynamics, especially since Q1 is typically a challenging quarter for pricing? How do you foresee this affecting pricing trends throughout the year? Second, I'd like to know your thoughts on the shift of some major providers from Korea to China. This transition seems to have been delayed, so how do you think it will impact supply and pricing? Thank you.

Sure. It's important to consider what has transpired over the past year regarding displays. Overall, the market was stronger than we anticipated, leading panel makers to operate at full capacity in the latter half of 2020. This increased utilization, along with efforts to reduce inventory to satisfy demand, resulted in a shortage of glass throughout the year. We remain confident that this tight supply will persist over the next few quarters due to ongoing demand and the need to replenish what has been lost in the supply chain. Consequently, this situation has led to favorable pricing in the first quarter. Looking ahead, we believe the tight environment will continue.

Yes. Building on what Tony mentioned, you're clearly following the industry closely. We were facing tight conditions with glass, and it appears that this will persist for the foreseeable future. A competitor's power outage, along with the planned shutdown of their operations in Korea, has delayed everything as the market remains strong, leading to a shortage. We transitioned from tight supply to a shortage, which resulted in a very favorable pricing environment in the first quarter. We expect to maintain tight conditions while addressing these issues. The Korean operations are shifting towards larger Gen 10.5 plants for economic reasons, but they are still relying on us to support their supply needs without a definite timeline for when they will make the transition, as they continue to perceive strong demand in the market. Does that clarify things? Does that address your question?

I'm curious if the longer-term view of production moving to China changes due to the delay with the Koreans. Does this affect your overall outlook on the impact of your position in China?

Well, I think because these Gen 10.5 plants produced panels, I don't know, roughly at about a 30% cost advantage, especially when they're integrated with our glass operations. The fastest, a pretty powerful microeconomic force so that you're just seeing the behavior set that when demand is well is more than those ultimate low-cost production assets, then less productive capacity stays full. And as that continues to grow, I still think the right bet is continuing movement towards those big Gen 10.5 plants.

Okay. Great. Thank you very much.

Thank you very much for taking my question. I wanted to dig a bit further into the opportunity for Valor over the next 18 to 24 months. And I'm just curious how maybe conversations have changed with partners given the strong uptake, I know it's from a small base, but of Valor Glass vials related to COVID, and just how maybe have your thoughts changed around the timing of investment and the ability to grow this business? Thank you.

So the way we view Valor, Shannon, is this is an opportunity to help make all of us safer. And so, we're going with Virtu first, rather than any one of our previous plans. Now, we are full on accelerating as fast as we can. We're also looking at other ways that our Valor technology can help fill and finish operations because as the world shifts to try to address this really need for billions of doses. We want to make sure that other life-saving medicines can be produced. That bottleneck is going to increasingly shift towards fill and finish. We are uniquely qualified to do that. Many of the vaccines have very complicated thermal cycles that our technology is once again uniquely positioned to do. So, the short answer to your question is we need to make a lot more vials, is the short answer to your question, Shannon.

Thank you.

Yes. Thank you. Good morning. So Optical grew in the quarter on a year-on-year basis and you're expressing confidence on the fact that the growth is going to continue. Can you maybe help us think about sort of the rate and pace of recovery in Optical, and how the conversations with your customers have changed through the course of the quarter that's now giving you this confidence on growth? And you seem to be really firing across all cylinders here. I'm curious if you can maybe share some high-level viewpoint on 2021 versus 2020, which segment would you say is going to be the largest contributor of growth and profitability? Thank you.

Well, let me first start with from an Optical standpoint. I think the last several calls, we really have focused on our fundamental belief that as bandwidth demand is increasing and users demand higher performance, connections that this was going to be positive from a business standpoint. We've even talked about how our customers were beginning to talk more about that in their conference calls, and there are plenty of examples of that. I think what's really happened over the last three or four months is that our sales and order rates have started to pick up. It's that pickup in the sales and order rates that drove our growth on a year-over-year basis and why we're confident that growth is going to happen. I think the question before was when was it going to happen? I think the answer is that it's happening now. That's how we think about it there. And then I think from an overall economic standpoint, clearly, as we enter into the year, we had a very strong fourth quarter, and we expect to have a strong first quarter. But there's still a lot of uncertainty in the world and we're not in the greatest position to sort through how that uncertainty is actually going to play out. We think there's two places where we can provide unique insights. One was optical that we just talked about. The other was to better understand what's happening from a display standpoint, and that's the areas that we focused on during the call.

Okay. Thanks for the follow-up. Regarding pricing, it's unusual for the first quarter, as price contracts for LCD glass are typically reset in Q1. Wendell explained the reasons behind the improved pricing. You mentioned that the market is expected to remain relatively tight. As you increase your Gen 10.5 capacity, should we anticipate a change in pricing throughout the year? Generally, there's a significant drop in Q1 followed by moderate pricing for the rest of the year. However, this year has not shown that drop, and in fact, some customers are experiencing a price increase. Will the pricing pattern continue to be very moderate as in previous years, or should we expect more accelerated pricing pressure as Gen 10.5 capacity increases throughout the year?

I think you should think of it, Wamsi, as we'd expect that moderation. The environment for moderation continues. I totally get your question though because the pattern of pricing sort of is a little different than normal. We had the best pricing in quarter one that we've had in a decade in terms of relative move. Relative decrease. The pattern of the question is, like, totally legit, but we do expect it to remain tight how the exact pattern plays out. Let's take it a quarter at a time. Right now, we see quarter one the way we see it. Our current look in the quarter two is, as Tony said, looks pretty favorable to us in continued moderation.

Thanks, guys. Congrats on the quarter.

Thank you for the opportunity. I have a couple of quick questions. First, regarding Specialty, you've clearly demonstrated a strong performance despite the challenges with smartphones. Could you provide more insights into your expectations for Specialty moving forward? Secondly, for Tony, you mentioned in recent conferences that you are managing OpEx very well. Could you discuss some of the internal changes you've implemented that will help maintain OpEx despite the growth and positive demand trends you foresee in 2021? Thank you.

Great. Let's begin with OpEx, and then I’ll briefly discuss specialty. I want to share some broader insights on our outlook for the year. Regarding OpEx, as we entered early 2020 and faced changes, we implemented several measures to adjust our operating costs. Some adjustments were intended to ensure we could respond as the economy recovered, including compensation-related actions such as furloughs. Naturally, as business conditions improve, those costs will also come back. Overall, we have maintained a strong focus on ensuring that our OpEx does not grow faster than our sales over a longer period. This principle underpins our approach to OpEx. Structurally, our frameworks enable us to enhance our market access platforms, allowing us to efficiently leverage these resources across both our technology and customer-facing teams. This should help us address growth more effectively. We anticipate that operating margin leverage will become a more significant driver for us than just focusing on manufacturing gross margins. You’ll see us concentrate on that area because we are beginning to see synergy across our portfolio. Now, let’s touch on specialty briefly. We expect our performance to surpass that of the smartphone market moving forward. While I’m not making predictions about the smartphone market specifically, we saw strong momentum and a robust order book in Q4, which has continued into this quarter. This clarity allowed us to provide the sales and EPS guidance for the first quarter that we just shared. We listened to our investors and simplified our communication by offering sales and EPS guidance for the entire company instead of the more complex market-by-market breakdown we used to provide. For the whole year, we simply expect our momentum and performance to remain strong compared to our markets. The key question is the potential impact of the macroeconomic environment. While everyone has their views on the macro situation, we at Corning recognize the limitations of our ability to predict macroeconomic and geopolitical events and their tensions. We believe it is not beneficial to forecast these factors at this time, nor can we precisely determine our revenue for the year. However, we are confident that we will outperform these markets. Regardless of the geopolitical or macroeconomic scenario you consider, you can rely on us to perform better.

That's great. Thank you.

Yes, thanks for taking my question. Just a follow-up on the Specialty Material. Wendell, when do you think we're actually going to see enough of a penetration into other industries so for – specifically for Gorilla that you would have more of a debundling from a smartphone market? And I have a follow-up.

Could you say more? I want to make sure I understand your question.

Sure. Sure. We have been anticipating diversification of Gorilla Glass into other markets like auto. You highlighted Mercedes Benz. I want to see what instigated you to illustrate that case. And in that context, how should we think about diversification of Gorilla and Specialty Material end market?

I totally understand. As always, a really good question. We highlighted that for two reasons. First, our momentum in auto glass systems is increasing. It's not yet at the point where we would say, okay, in your models, you better start providing for display because it's going to change your macro numbers. But we can totally feel it. You will feel it more going forward. We're also seeing Gorilla find its way into more and more of our MAPs. We will really talk about that in the form of those market access platforms as the various forms that technology takes serve multiple customers. Believe it or not, it's even finding its way into opto. Let us take that note. As that becomes more important, we'll make sure we share a little bit more on it, Mehdi.

Sure. Thank you. As a follow-up to that question. Thank you for providing detailed opportunities in other industries. You highlighted $100 of content per car. I want to better understand whether some of the key assumptions, how are you thinking about the evolution of electric vehicles and as that segment grows, is your $100 content accounts for that change in the auto industry? Does that also account for Gorilla penetrating other industries? How should we think about variability in that $100 content?

Yes. The short answer to your question is, yes. So, all of the above. What I recommend we do is, why don't we follow up with Ann and let us share just the way we think about the MAP. It'll probably be an excellent report for you to do. We'll be helpful and lay that all out because you had a great question. We have the build, and we'd be happy to share it.

Okay. Can I ask one...

I think Tony has something to add. He's looking at me like he has something to add. No, I think that would be great. Why don't we talk later today about the next steps on this? I wanted to point out as the CFO that any glass sold to the automotive industry is currently reported in our automotive or other segment, not in our Specialty Materials segment, but that was just a reporting clarification.

Well, thank you very much.

You're welcome.

Hi, guys. This is Joe Cardoso on for Samik. Just one follow-up question for me on the optical side. Obviously, the return of your growth and guide for full year growth is great to hear, but I just wanted to take a moment and focus on the profitability initiatives that have been done in that business specifically. Can you walk us through what you've been doing on the optical side, particularly as it relates to temporary versus permanent measures, as well as if there's any weighting towards carrier versus the enterprise portions of those businesses? As we see revenues come back in that business, is there any way you can gauge expectations relative to profitability now versus, let's say, a year ago, assuming apples-to-apples revenue profile?

I think from an overall standpoint, we're seeing both growth in the carrier and in the enterprise business. Of course, the enterprise piece is a lot of what being grown from cloud computing, hyperscale data centers. Some of the traditional enterprise pieces are more impacted by the economy. You're not seeing that as much. We're really seeing growth in both parts of those businesses. From an operational standpoint, what's important to note is that even though our revenues were down, we didn't change our ability to supply, because we always knew it was going to come back. There are costs that you carry during those kind of periods. When you fill those factories back up, you see expansions from a margin standpoint. We saw that in the third and fourth quarter of this year, and we expect to see that going forward.

Yes. Additionally, Joe, there's another aspect to consider. As revenues grow, we anticipate our margins will also improve. However, the specific purchases made by operators or enterprise clients can affect quarter-to-quarter variability. When they choose our more complex, highly engineered solutions, our profitability increases compared to when they're just purchasing fiber and cable, which can vary with the size of the cable. Therefore, the product mix plays a significant role in our optical business on a quarterly basis. Overall, I believe Tony has captured the key ideas, which is that as we fulfill orders, we expect to see positive incremental gains.

Thanks, guys. I appreciate the insights into that and on a result.

Thanks. Nice quarter and glad to be active on the stock again.

John, you're welcome.

It's so good to hear your voice, John. Long time no see.

Yeah. You've had another quarter to think about the strategy in semiconductors. You've got the lens business and Specialty Materials, and it's benefiting from EUV and you put Hemlock in other, and it doesn't really benefit from any, I think, special trends going on in the semiconductor market. So, and it just looks like an opportunistic good deal at this point. Is there more to within that?

So first, I'm just having flashbacks to almost a decade ago when you were telling me what we needed to do is make sure we ended up with Hemlock because it fit so much better with us and the silicone side fit so much better with Dow. And so we finally got it done, John. It just took us a while. We feel good about it. For sure, the economics on that deal are incredibly good, and we really like that. Your insight from all those years ago, I think is right. We're going to run some experiments to see, can we make more of a difference to Hemlock? Can we, with our capabilities, make it accelerate or vice versa? We're interested, can we address some of the significant issues there are with the lack of domestic production of solar here in the U.S.? So there are a number of significant opportunities. It's too early to say, will they work out or not? Sometimes, and I'd love to have a conversation with you about any ideas that you have on it as well, given how long you've advocated for this.

We will certainly follow up with you on those ideas, John. I want to emphasize that the financial benefits of this deal are unfolding as we anticipated. We did not invest any funds into this transaction, and Hemlock is generating substantial cash. They are working on repaying most of their debt within a year, with a significant portion being addressed in the fourth quarter. Hemlock generates around $150 million in annual cash flow. We are very optimistic about this deal from both a financial and strategic perspective.

You mentioned that for 2021, capital expenditures are expected to be roughly similar to 2020. Do you still anticipate that they will remain relatively modest through 2023, as was part of your target shared at Investor Day?

Yeah. I think what happens through 2023, of course, depends a lot on how much growth we get and how much growth capital we have to put in bill capital that we have to put in over the next several years. The good news is any bill capital comes with growth. Secondly, it comes with a pretty significant customer commitment.

Great. Thank you.

Go ahead, Joel.

Thanks. Good morning. I just had two quick questions. First, on the 25 points of outperformance for Specialty Materials versus mobile device sales last year, can you sort of put that in perspective, where maybe there's some unusualness to the outperformance, what maybe a normal rate of change would be versus markets, et cetera? And then just as a follow-up, when you talk about the bullishness with Optical, how much are you factoring in the recent auctions on the rural side and the 5G side into that bullishness, or is this before thinking about those things? Thanks.

I think on the specialty side, you can always expect us to outperform because of the more Corning strategy, putting more content, higher value content in. What the rate of that is, I think you're quite wise to say, that could depend on which particular products are working really well for our end customers and how much of that has our newest technology or is different types of our technology. That gets a lot harder to predict. You have to call the total market as well as which OEMs sort of win in that market, as well as which of our technologies play. Overall, you could think about it as we will outperform. It's just a little too early in the year to give you some insight into how much to outperform. On Optical, you're right to identify it, it is definitely a positive, but it is just one of the number of positive impacts and announcements that you're seeing from our key customers. It's never been that we believe strongly that our customers would have to build and invest to meet the very strong demand. We wanted to do, before we predicted when it would come, we wanted to see it in our sales. We wanted to see it in our order book. We wanted to see the projects actually state, and that's what we're seeing. That’s why we're saying it.

That's helpful. Congrats on the quarter.

Thanks.

Thanks, Tony. Operator, we're ready for the first question.

Thank you.