Corning Inc (GLW) — Q3 2022 Earnings Call Transcript

Thank you, and good morning. Welcome to Corning's Q3 2022 Earnings Call. With me today are Wendell Weeks, Chairman and Chief Executive Officer; Ed Schlesinger, Executive Vice President and Chief Financial Officer; and Jeff Evenson, Executive Vice President and Chief Strategy Officer. I'd like to remind you that today's remarks contain forward-looking statements that fall within the meaning of the Private Securities Litigation Reform Act of 1995. These statements involve risks, uncertainties and other factors that could cause actual results to differ materially. These factors are detailed in the company's financial reports. You should also note that we'll be discussing our consolidated results using core performance measures, unless we specifically indicate our comments related to GAAP data. Our core performance measures are non-GAAP measures used by management to analyze the business. For the third quarter, the primary difference between GAAP and core EPS was from primarily noncash charges associated with capacity optimization and noncash mark-to-market adjustments associated with the company's currency hedging contracts. This increased core earnings in the third quarter by $234 million. To be clear, these charges and mark-to-market accounting have no impact on our cash flow. 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 Corning results on our website with downloadable financials in the Interactive Analyst Center. Supporting slides are being shown live. They're also available on our website for downloading. And now I'll turn the call over to Wendell.

Thank you, Ann, and good morning, everyone. Today, we reported solid third quarter results that demonstrate strong execution. We continue to operate each of our businesses well, and our focus on leadership and distinctive capabilities allows us to capitalize on important secular trends and drive our More Corning approach. Sales were $3.7 billion, up slightly versus a strong third quarter last year, and EPS was $0.51. We were able to offset a sales decline in display technologies with growth in optical communications and solar. While we believe that display panel maker production bottomed in September, we would like to see additional positive evidence before guiding a significant recovery in glass demand. In total, we performed well despite the economic environment. Before we get into the details, I wanted to set some context on what we're facing across our markets. On our last call, we told you that end markets in multiple businesses were down. Smartphone sales in the second quarter declined 8% year-over-year, panel maker utilization in June 2022 was at its lowest level since 2009. And yearly, automotive production was 10 million to 15 million vehicles below its pre-COVID rate. Several of these dynamics continued or even intensified in the third quarter. Smartphone unit sales declined 14% year-over-year in the quarter, with tablet and notebook demand down 17%. Panel maker utilization decreased even further from its June level with September being the lowest month of the quarter and annual automotive production is still 10 million to 15 million cars short due to continued component shortages. Nevertheless, we delivered results within our guidance range and expectations. We continue to benefit from infrastructure investments in broadband and clean energy, two secular trends we're strategically positioned to address. We delivered 16% year-over-year growth in optical communications, and we captured ongoing demand in the solar market, which contributed to 33% year-over-year growth in Hemlock and Emerging Growth Businesses. So let's take a deeper look at what we're seeing in some of our key markets, how we're responding, and why we're confident that our strategy continues to position us to deliver profitable multiyear growth. I'll start with display. In the third quarter, the glass market and our volume both decreased almost 25% sequentially, which significantly reduced our sales and profitability. In September, panel maker utilization reached the lowest level since the fourth quarter of 2008. More than a year ago, we said we expected a correction in the display industry during 2022. In the second quarter, panel makers began reducing production levels with accelerated reductions in June. In the third quarter, panel maker production reached an even lower level. And we believe that panel maker production reached the bottom in September. So now the question is, when will the glass market recover? Now our answer is that we would like to see additional positive evidence before we guide a robust recovery in glass demand. We've maintained stable price and market position during this whole correction. Consequently, we expect our volume and profitability to increase sharply when panel maker utilization rebounds and we expect to exit the correction with strengthened customer relationships and importantly, a refreshed manufacturing fleet. As always, we will keep you informed as we progress. Overall, we feel very good about our execution in display. In mobile consumer electronics, customer product launches and strength in semiconductor drove sequential growth in Specialty Materials. As I noted, smartphone and IT retail unit sales declined significantly in the quarter. We now expect smartphones to be down about 12% for the year. And we expect notebook and tablet demand to decline 15%. We expect the year-over-year decline in smartphones, notebooks, and tablets to be greater in the second half than in the first half. This will limit the growth we normally see in our second half sales relative to the first half. Now that said, we continue to outperform the market through our product leadership, our More Corning approach and our ongoing collaboration with industry leaders. Over the long term, our content strategy in mobile consumer electronics will help us grow as we continue to develop and launch premium glasses and optical treatments for existing and new form factors. Additionally, we're executing our More Corning approach in the semiconductor industry. In July, Senator Chuck Schumer and New York Governor Kathy Hochul joined us to announce government funding that supports an expansion of our advanced optics facilities, which made equipment and materials vital to semiconductor manufacturing. Of course, semiconductors are fundamental to virtually all technology we interact with today. We've helped advance the industry for more than 50 years, and our expansion will keep us well positioned to support nearly every step of the chip manufacturing process and to respond to new customer needs, including products for EUV technology. Let's turn to automotive. In Environmental Technologies, we delivered sales and profit growth despite the constraints on vehicle production, and we're outperforming the market for the year. We continue to adjust our operations to effectively navigate the variability in auto production and we are prepared to meet demand when industry production increases to normal rates. We're also generating significant wins in our Automotive Glass Solutions business. Pull is strong for our technical glass and optics innovations. During the quarter, CarUX, a leading car display company owned by Innolux, announced its use of our patented cold-form technology to help drive the future of auto interior displays. Corning continues to be well positioned to further grow its automotive business as the industry offers more advanced, design-oriented cabins and enhanced driver assistance features. Let's move to Optical Communications, which was the largest contributor to third quarter sales. The industry continues to experience a large multiyear wave of growth for passive optical networks, and we continue to increase our capacity to support this growth. In August, U.S. Secretary of Commerce, Gina Raimondo, joined AT&T CEO, John Stankey, and me to announce a new manufacturing facility in Arizona. You may recall Secretary Raimondo's leadership helped pass infrastructure legislation dedicated to the idea of Internet for all. Our new plant will boost optical cable capacity to meet record demand. In September, we opened a new optical fiber manufacturing plant in Poland to serve committed demand. And we're innovating to support every phase of broadband deployment as network access is increasingly viewed as a fundamental human right. In the quarter, we announced additions to our Evolv connectivity portfolio which helps operators streamline permitting, accelerate field installation and optimize network testing. Optical sales have grown 22% and for the first three quarters of the year, setting us up for another strong year of growth. However, we expect fourth quarter sales to be down sequentially due to the timing of customer projects. Turning to solar, the renewable energy industry is evolving rapidly, and our ongoing growth continues to indicate that the market's behavior is more closely tied to a global imperative than the current economic trends. We re-energized our participation in the solar market by starting up idle capacity and securing customer commitments through new long-term take-or-pay contracts for solar-grade polysilicon. Third quarter sales grew significantly year-over-year, and we will benefit from the state of Michigan's infrastructure investment program, which will help us expand operations to meet increasing global demand for polysilicon. We believe that Corning's broader technical and manufacturing capabilities in our sector will prove to be highly relevant in helping advance the renewable energy industry, and we see excellent growth potential in solar. Now as I conclude my remarks, here's what I'd like to leave you with today. We remain very well positioned to deliver profitable multiyear growth and we'll continue to execute with discipline. We'll invest where we see strength and will pace to meet demand. Our cohesive and focused portfolio provides strategic resilience that is playing out well in this current environment. We've established a deep relevance to secular trends along with the ability to drive more content into our markets over time. We've been leading in the automotive and life science markets for 100 years, display for 80 years, telecommunications for 50 and mobile consumer electronics since the inception of smart devices. The basis of our ongoing success is our distinctive set of capabilities and long track record of life-changing and even life-saving inventions. In the past, what enables us to power through moments like the present while maintaining an attractive long-term growth trajectory. Now let me turn the call over to Ed, who will share more details on our results, financial priorities and outlook.

Thanks, Wendell. Good morning, everyone. Let me start by emphasizing that we're executing well in a challenging environment. Our performance in the third quarter was a proof point of the inherent balance of our cohesive portfolio and the fact that our More Corning approach is working. We’re built to be resilient even in a downturn. Now let's look at our financial results for the third quarter. Sales were $3.7 billion, up 1% from a strong third quarter in 2021. Optical Communications, Environmental Technologies, Life Sciences, and Hemlock and Emerging Growth Businesses all delivered year-over-year growth. In September, Display Technologies experienced the lowest panel maker utilization levels since 2008, resulting in a 28% year-over-year decline in sales for the segment in the third quarter. In Specialty Materials, we outperformed the smartphone market, which was down double digits year-over-year. Turning to profitability. Gross margin was 36.1% and operating margin was 16.9%, down sequentially 140 and 190 basis points, respectively, driven by the lower volume in display technologies. In the third quarter, free cash flow was $255 million, and year-to-date, it was $866 million, keeping us on pace for another year of healthy cash generation. And despite the challenging environment during the quarter, we were able to offset significantly lower volume in display technologies, and we outperformed our underlying markets overall. Now let's turn to the segment results. In Optical Communications, sales grew 16% year-over-year, reaching $1.3 billion. Our year-over-year growth was driven by network operator investments in 5G, broadband and the cloud. Net income was $183 million, up 32% year-over-year, driven by leverage from strong incremental volume. Passive Optical Networks continue to experience a large multiyear wave of growth. We believe that this demand is strongly supported by private and public infrastructure investments to help connect the unconnected and bring broadband to a much larger share of the population. We continue to secure customer commitments, and we're investing to appropriately scale production to serve our incremental demand from current and new customers. And we're also taking further pricing actions to more appropriately share recent cost increases in energy and certain raw materials with our customers. As we've mentioned in the past, this business can be lumpy from quarter to quarter, and you'll see that play out in the fourth quarter as we expect optical sales to be down sequentially based on the timing of customer projects. Now moving to Display. As we updated you in September, panel makers reduced their production levels below our already low expectations. The lower volume resulted in display sales declining 28% year-over-year and 22% sequentially, and we saw a 46% year-over-year and 41% sequential decline in net income due to the high fixed cost nature of glass manufacturing. In the third quarter, glass price was once again consistent sequentially. And we believe the glass pricing environment will remain favorable and factors that continue to drive that favorable pricing include glass supply-demand balance as panel makers reduce production, Corning and other glass makers took additional tanks offline for maintenance and repairs after an extended period of glass tightness. We're also taking this opportunity to upgrade some of our fleet with our latest technology which enables us to reduce cost and extend the life of new tanks. As we continue to work through these upgrades, we are actively managing restarts to align our supply to demand. Another factor is glass maker profitability. It is challenging for glass makers who have high fixed costs to maintain profitability during periods of low volume and the current inflationary environment amplifies that challenge. We expect fourth quarter glass prices to be consistent with the third quarter and glass prices to be stable or up in subsequent quarters. So overall, we continue to operate from a position of strength in the display market. And as Wendell noted, while we believe that panel maker utilization reached the bottom in September, we would like to see more evidence before we got a significant recovery in glass demand. But when glass demand grows, we expect our volume to increase and our profitability to improve. In Specialty Materials, the market for smartphones was down 14% and tablets and notebooks were down 17%. We outperformed the market with sales down only 7% year-over-year, driven by strong demand for premium glasses, and strength in semiconductor materials. Third quarter sales were up 7% sequentially, driven by demand for our premium cover materials to support customer product launches. Adding to our resilience in the segment, Advanced Optics delivered record sales for the second quarter in a row, and we are bringing additional capacity online at our facilities in Fairport and Canton, New York. Net income for the segment was $96 million, down 10% year-over-year due to lower volume and continued development expense related to next-generation products. The weakness in the smartphone, tablet, and notebook markets intensified in the quarter, and we expect fourth quarter sales and profitability to be down sequentially and year-over-year. Long term, we expect to outperform the market as we continue to develop and launch new premium glasses and optical treatments. Turning to Environmental Technologies. In the third quarter, sales were $425 million, up 10% year-over-year and 19% sequentially. The automotive production improved from a very low second quarter as China demand recovered after second quarter COVID lockdowns. However, vehicle production remains constrained due to the continued component shortages. In addition to our sales growth, we improved profitability with net income up 45% year-over-year. Our content-driven strategy is working, gasoline particulate filters remain a critical component of that strategy, driving revenue even in a weakened market. Our next-generation filters are now shipping to customers as emission standards reach near-zero levels and require enhanced filtration performance. In Life Sciences, sales were $312 million, consistent sequentially and up 2% year-over-year. Lower demand for COVID-related products was offset by growth in research products. Net income was $43 million. We continue to commercialize innovations, including the new cell and gene therapy production platform. And looking ahead, we expect to see continued growth in both research and bioprocess. Finally, in Hemlock and Emerging Growth businesses, sales were $407 million, up 33% year-over-year and down 3% sequentially. We continue to see increased demand for semiconductor-grade polysilicon and strong demand for solar materials, and we continue to ramp solar capacity and sign up new customers with long-term take-or-pay contracts. In September, Corning Pharmaceutical Technologies announced that it was awarded $104 million in additional funding from BARDA to support our planned capacity expansion for advanced, high-quality pharmaceutical glass tubing and vials. These expansions are designed to help the health care industry rapidly scale manufacturing to address current and future public health challenges. Now I want to take a minute to talk about currency exchange rates. As you know, the dollar has been strengthening over the past year. As a reminder, we have actively hedged our foreign currency exposure over the past decade. This serves as an effective tool to reduce earnings volatility, protect our cash flow, enhance our ability to invest and provide shareholder returns. Our largest exposure is the yen, and we have most of next year hedged. We expect our core rate to remain the same in 2023. We're very pleased with our hedging program and the economic certainty it provides. We've received more than $2 billion in cash under our hedge contracts since their inception. Now let's turn to the outlook for the fourth quarter. We expect sales in the range of $3.45 billion to $3.65 billion and EPS in the range of $0.41 to $0.47. Our fourth quarter guidance reflects several factors. In Optical Communications, pacing of customer projects will impact sales for the quarter. In Specialty Materials, we expect a sequential decline driven by lower demand in the smartphone, notebook, and tablet markets. And of course, the biggest element in our guidance is Display. As I noted, we do not yet have enough positive evidence to guide significant improvement in glass demand from September levels. We expect free cash flow to be strong in the fourth quarter. And for the full year, we expect free cash flow in the range of $1.3 billion to $1.5 billion. Now I'd like to wrap up with a few key takeaways. As I noted at the opening of my remarks, we're executing well. And because of the inherent balance of our cohesive portfolio and our More Corning approach, we're built to be resilient even in a downturn as evidenced by the performance of Specialty Materials and Environmental Technologies this quarter. Our long-term growth drivers all remain intact, and we're well positioned to continue capturing growth tied to key secular trends such as Optical Communications and solar. In the meantime, we will continue to maintain our strong balance sheet and employ a highly disciplined approach to capital allocation. Given the external environment, we're taking actions to preserve profitability, tightly manage capital expenditures and prioritize cash flow. With that, I'll turn it back over to Ann for Q&A.

Thanks, Ed. Crystal, we're ready for the first question.

Two things I want to dig into. Is there a minimum OpEx that you can offer us? I understand there are a lot of moving parts, especially with macro headwinds. And I'm just trying to better understand how flexible you are with managing expenses. And the same thing with CapEx, there is no visibility as to when display will show a rebound. So should we assume that the CapEx trend into next year will show a decline on a year-over-year basis?

Yes. Mehdi, what I would say on OpEx, we're certainly taking actions to pause spending in this current environment. As I mentioned, our goal is going to be to protect profitability and to protect our cash flow. I don't think, given the fact that we feel good about our long-term growth drivers, we're going to take significant actions at least at this point in time. And with respect to capital, we're definitely pausing spending here as we go into the fourth quarter, and you should see the rate of our spending coming down a little bit.

Our next question?

I have two questions regarding Optical. First, regarding the project delays you're experiencing, what makes you confident that these are not indicative of more serious issues and that additional delays won't occur, especially as winter approaches and with the challenges in Europe? Secondly, could you explain how the ramp-up of the new Optical plants has impacted margins this quarter and how this will influence the next year, considering the costs associated with the Arizona build-out?

So Steve, regarding the macro environment, you follow it closely. The demand in Optical is incredibly strong. However, we focus on supporting customers that will be significant long-term players, and telecommunications tends to have a concentrated industry. When some of our larger customers adjust their timing, it creates fluctuations in our revenue. We are very confident in the demand drivers for Optical. Typically, I can be somewhat pessimistic about Optical, but there is clear evidence that demand is strong. As for how long these timing changes can occur, you raise a valid point about the winter months, which are typically slower for us due to seasonality. It’s difficult to predict whether these changes will last for the last three months or slightly longer. What is clear, though, is that the demand for Optical is exceptionally strong.

And then on the new plant impact?

And Steve, I was going to say, I think the plants that we recently opened are ramping fine. I feel like we've added some capacity. We'll be able to use that as we go forward, but it takes a little while for all the cost drag to kind of go away, and we should see that sort of fully ramped and the financial impact in 2023.

First, can you maybe share with us one or two closely monitored reliable leading indicators for the display segment where you will be more comfortable calling a recovery after seeing changes in those indicators?

Great question, Martin. So our analytics are really good at being able to say, for instance, last year, we said there was going to be a correction in 2022. And then they're very good at doing things like calling a bottom because we can tell sort of where our panel makers are operating and what exactly is happening with their inventory, etc. They're not as good at following the exact timing of a turn. So for instance, our analytics would have said the panel maker industry should have started. Its correction in a much more robust way in quarter four of last year in quarter two, but they didn't actually start until quarter two and then accelerated into quarter three. So though we're really comfortable with our analytics, we’re a bottom. The calling on when that upswing comes now really gets into sort of what is the psychological behavior of buyers in this industry. And so the way we tend to try to do that, it's a little softer but we do take a look at panel price inflection points. So that's where the absolute level is, but when do they turn and that is actually a buy signal for buyers, right, and it makes signal for panel makers. How is the retail and set maker commentary as we have interviews with them constantly? How are they actually feeling about what it is they're seeing because that's going to drive their behavior. And then finally is just how tight things are becoming in the value chain overall. So as we look at all those things, what we'd say is we can't tell yet what exact month we see the sharp recovery, right? We'll need to see more of that accumulate. But we can say with pretty high confidence that September was a bottom. And now it's just a question of when do we pop up.

Wendell, to follow up on that previous question, could you provide an update on the current levels of weeks of inventory in the display supply chain, especially in comparison to past cycles? Also, Ed, I appreciate that you are mostly hedged for 2023, but with the movements in the yen, could you share with investors a longer-term perspective on your yen hedging strategy and what potential impacts we should anticipate beyond 2023?

Thanks, Wamsi. Value chain inventory, we would say right now is at a healthy range and is starting to approach sort of a little bit tight for health. So that's like one of the analytics where we can say, 'Okay, right, that the correction has done what it is it's supposed to do.' So that's how we're feeling about overall value chain inventory. Does that answer your question on that item?

Yes, it does, Wendell. I was just wondering if you could clarify whether you are at the lower or higher end of the range you mentioned over the past 10 to 15 weeks. Does this provide you with increased confidence that we may be at the bottom of the utilization rates?

So the pandemic sort of changed what is healthy and what's not healthy and all the challenges in the supply chain. But what we should do is we should probably update you if this is a question that you have sort of how we view it overall. And Ed will follow up with you and give you the benefit of our thinking of how we analyze the industry.

Regarding the yen and currency more broadly, we are currently long on the yen and short on other currencies. Many currencies are either weak or degrading against the dollar. We're seizing the opportunity to hedge our positions in weaker currencies as they continue to decline against the dollar. This weakness does affect our overall core rates when we consider them in a broader context. In terms of the yen, we're actively seeking ways to safeguard our position beyond 2023 and have already established some hedges for that timeframe. The forward rate is lower than the current spot rate, which presents us with additional opportunities. We'll keep our investors informed, and we recognize their perspectives as we adopt an opportunistic approach to manage our core rate exposure effectively.

I have two questions about the Optical segment. First, could you discuss the timing deals that are common in this industry? Looking ahead to the next few quarters, are you observing more activity on the telco side or the data center side? It would be helpful if you could break down how these two areas are performing in the pipeline. Second, regarding the telco side, we are hearing more about macroeconomic pressures and rising energy costs worldwide that could impact fiber builds, which have been quite strong recently. Are you noticing more caution from your customers in the telco sector due to these macro factors? Or do you believe government initiatives and the push for broadband will keep spending a priority for the telco sector?

Right. So I'd say that it is for our numbers like our post because when you've got a macro environment that's really strong. And then all that's really happening is customer timing. So then it really ends up us being able to answer from our order book, what's going on. And in our order book, it would basically be some key telcos is just what's affecting our project timing more than anything else, right? And so those are long-term projects. And so they kick off one, they conclude one, they start another. And so those can be lumpy. In terms of the macro, I don't know that we're the right ones to ask because there's so much demand, and we're still short, especially in fiber and cable, that we'll tend to get more signals that they want more and more, and they share how aggressive their plans are. So we're probably getting a lot more of that than we are the sort of macro, are they cautious. The combination of major government programs around the world that don't really start to kick in for almost another year, right, as well as catching up to all the demand that happened during the pandemic and how much of their capacity basic their guardrail capacity got consumed by demand as well as the 5G, cloud, all the broadband initiatives, all these things still a really sort of positive bullish signal to us. That doesn't mean that you're not right that they may be experiencing something in macro. We're just not hearing it. Does that make sense?

Yes, that does. Very, very helpful.

Just two quick ones, if I can. So just curious on your level of confidence on the pricing comments in display. A little bit surprised talking about pricing there still into next year. It seems a little bit early at this point. So I'm curious if that depends on utilization rates increasing or is that something you see playing out potentially regardless of that scenario? And then just a follow-up on the restructuring charges in the quarter. Can you just provide some comments on kind of what was restructured within the Emerging Growth Businesses?

So our confidence on price really has been driven by our performance throughout this correction and going into where our prices have been stable throughout every single stage of it, including here in this last quarter. So you heard from Ed sort of the dynamics that have led to this, but we feel good about where we're at, and we expect pricing to continue to be stable as we exit the correction, as it has been up to stable throughout going into the correction and to the bottom of the correction.

And Josh, I'll make a comment on the restructuring charges. So what you saw this quarter was primarily related to sort of an early-stage business moving more towards commercialization. Oftentimes, we have Gen 1 assets. And as we move into like a high-volume manufacturing stage, we advance our technology. Our costs go down significantly and we sort of obsolete those Gen 1 assets, and that's the primary driver of what happened in the third quarter.

I wanted to ask a bit about solar. Can you talk about what you're thinking may be the contribution from the IRA and a backlog or how we should think about orders and then potential for additional capacity over time? Because it seems to me like this could be a big opportunity for Hemlock, especially if you start bringing more capacity back to the U.S.

Shannon, so first, I would say we feel great about our Solar business. That was a great part of our ability to offset the lower volume of display in the third quarter. Our orders are strong, and we continue to sign customers up and sell out the capacity we've brought online. We see that as a secular growth trend going forward. I think as we've shared, we have more capacity that we can bring online, and we're in the process of evaluating that and the exact timing of when all that will happen. We're certainly taking a look through all of the legislation that recently passed and how that impacts us. I think you can view that as all positive for us, and we'll come back over time and talk a little bit about it more in detail.

Shannon, you're right to look at it and say, 'Gosh, I think this is probably really good for Corning.' And we'll update you as we turn into the year on what we think that will mean.

Just two, if I could. First, more on the macro and demand backdrop. I know there was a question asked about Optical, but more broadly across your end markets, are you seeing tighter financial conditions impacting your customers' propensity to invest heading into next year? And then secondly, on pricing, I know you've talked a little bit about pricing increases; it sounds like there's a little bit more that could be coming in Optical. Just wondering if you've seen any sort of pushback or hesitancy to digest these increases in light of maybe some of the tighter financial conditions.

We are observing the economic conditions significantly affecting our end markets. As I mentioned earlier, areas such as smartphones, notebooks, panel maker utilization, and automotive are showing considerable declines, particularly those linked to consumer electronics. This downturn has prompted our customers to be cautious, though they have not abandoned their long-term investment strategies. Like us, our customers require considerable time to expand their productive capacity and innovate new technologies. To date, their long-term investment appetite remains intact. Many recognize the current economic challenges they face, leading to a question of timing rather than preparedness. This reflects the current mood we are experiencing. Regarding pricing, we are noticing additional inflation in our optical segment, and we plan to approach our customers to more fairly address this in the upcoming quarter. Throughout the year, we have successfully communicated the inflation impacts to our customers through price increases across our business. For now, we have managed that well, and I can provide an update on how this recent round has gone in the next quarter.

I guess I had a similar macro question for you, Wendell, which is, I mean, for a long time, you've been outperforming most of the underlying markets you participate in, and the driver there has been more Corning content in every end market. I'm just thinking as we sort of go into next year and the macro is tougher, have you seen in past down cycles any change in customer willingness to sort of continue to increase Corning content, particularly in sort of a challenging macro? And any sort of pushback that you're seeing on pricing as well at this time given that inflation is obviously something you need to pass through. But at the same time, the macro is starting to worsen a bit more than expected. So are you starting to see any hesitation from customers as well in those negotiations?

Great question. Most of our More Corning initiatives tend to lower our customers' costs or enhance their ability to provide essential functions. Overall, I would say we are not witnessing a decline in their capabilities. For instance, with our cloud-based solutions, our latest innovations allow us to deliver fully engineered connectivity systems, which save them 40% in materials and reduce installation time by months. We enhance the quality across the board, resulting in more revenue for us while simultaneously saving our customers time and money. That exemplifies our approach with More Corning, and we are seeing strong adoption of these solutions. When it comes to mobile consumer electronics, the strategies diverge. There are clear leaders in this space who continue to invest heavily in enhancing their product offerings. However, some companies, especially in China, have struggled in the premium market and are adopting fewer of our key innovations. Overall, the successful players are investing more with us. I believe our fundamental More Corning strategy is proving effective and shows strong potential. I appreciate your question; it raises interesting points and highlights the uniqueness of the current landscape.

My first question is about Optical. I know it has been asked a few times, but I want to clarify whether this is primarily related to a few service providers based in the Americas, or if it's more of a global trend. You mentioned that it's mostly within the telecommunications sector, but I'm curious to know if it's mostly concentrated in the U.S. or if it's international as well. Additionally, I have a second question regarding inventories, which have been a significant use of cash this year. Can you provide insight into the major drivers behind this and whether you expect some reversion in Q4 that would aid in achieving your free cash flow generation targets?

First question, North America based, right, and relatively limited in terms of the number of people that are involved. So telco North America based, just timing. And I think if you just talk to the industry more broadly, you'll see that, to refrain from almost all of our customers is we can't get enough. And so that's still the backdrop, that's still the heartbeat, and it's just timing and a few key customers.

And Meta, on inventory, you're right. You can see it in our cash flow. We've definitely built a lot of inventory through September, and we definitely need to make that reverse. That's what we're thinking it will start to happen in the fourth quarter and as we go into 2023. I mean I think there are a few factors that drive it higher. And it's one of the reasons why we haven't been able to sort of slow it down and reverse it sooner. First and foremost, just in general, the supply chain has been difficult, and we want to make sure we can serve our customers, so we're carrying a little more inventory than we might otherwise have. And as we brought our sales forecast down for the back half of the year, we need to sort of catch up and digest a little bit of the inventory that we have and that we've produced. And then lastly, just the cost of the inventory, right? So as inflation hits us, it manifests itself in inventory, and then we get that back as we raise price when we sell that through. So there's a little bit of a delay in that. Those are really the factors that drive it up. And yes, our goal is to get it down starting here in the fourth quarter.

Just a quick follow-up. If I were to go back to late 2019, 2020, the last time that your Display revenue were declining, the averaged 20% net income. And if I fast forward to your Q3, your revenues are about $70 million less than that period, but you're still able to get almost to 20% net margin. Is it just a reflection of the trends that have come offline? Or is this something else that helps with relatively better margin given the lower revenue volume? An insight would be great.

That's a great question. I agree with your observation. This is one of the reasons we feel confident about our performance in display during this correction. What you're witnessing is the significant improvement in productivity brought by our new technology and the excellent cost performance we've achieved. With prices remaining stable or increasing over a long period, we've been focusing on enhancing our stability in Display. Our strategy has been to maintain steady pricing and a strong market position while leveraging our advanced technology to improve cost efficiency and boost profitability. We're looking forward to the end of this correction and the market's recovery, as we anticipate that increased glass demand will lead to strong growth and positive outcomes for us.

Thanks, Mehdi, and thanks, Wendell. Okay. Thank you all for joining us this morning. Before we close, I wanted to let you know that we will attend the Credit Suisse 26th Annual Technology Conference on November 29 and the Barclays Global Technology, Media and Telecommunications Conference on December 8. Additionally, we'll be hosting management visits to investor offices in select cities. Finally, a replay of today's call will be available on our site starting later this morning. So once again, thank you all for joining us. Operator, that concludes our call. Please disconnect all lines.