Corning Inc (GLW) — Q3 2023 Earnings Call Transcript

Thank you, and good morning. And welcome to Corning’s third quarter 2023 earnings call. With me today are Wendell Weeks, Chairman and Chief Executive Officer; Ed Schlesinger, Executive Vice President and Chief Financial Officer; and Jeff Evenson, Executive Vice President and Chief Strategy Officer. I’d like to remind you that today’s remarks contain forward-looking statements that fall within the meaning of the Private Securities Litigation Reform Act of 1995. These statements involve risks, uncertainties and other factors that could cause actual results to differ materially. These factors are detailed in the company’s financial reports. You should also note that we 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. Third quarter GAAP EPS reflected restructuring and asset write-off charges, realized gains, and unrealized non-cash mark-to-market losses on currency hedging contracts and non-cash mark-to-market adjustments associated with the company’s Japanese yen denominated debt. As a reminder, mark-to-market accounting has no impact on our cash flow. A reconciliation of core results to the comparable GAAP value can be found in the Investor Relations section of our website at corning.com. You may also access core results on our website with downloadable financials in the Interactive Analyst Center. Supporting slides are being shown live on our webcast. We encourage you to follow along. They are also available on our website for downloading. And now I will turn the call over to Wendell.

Thank you, Ann. Good morning, everyone. Today we reported our third quarter results. As expected, sales were $3.5 billion and EPS was $0.45. Gross margin expanded sequentially to 37% and free cash flow improved to $466 million. Our results demonstrate solid progress on the programs that we have put in place to increase price and improve productivity while lowering inventory. These initiatives led to improved gross margin and cash flow in the quarter despite volume coming in at the low end of our expectations in Optical Communications as carriers continue to draw down inventory and in Display Technologies as panel makers lowered utilization at the end of the quarter. Now let me share a couple of highlights for the quarter. I will start with gross margin. We drove an 80-basis-point sequential expansion to 37% on consistent sales, driven primarily by our pricing actions in Display. Additionally, if you compare the third quarter of this year to the fourth quarter of last year, when we launched our comprehensive plan, sales are down almost $200 million, yet we have expanded gross margin percent by 340 basis points. Looking to the fourth quarter, we expect gross margin to be similar even with sales down sequentially. Moving to cash generation, free cash flow of $466 million grew sequentially by $156 million and grew year-over-year by $211 million, up 83% on lower sales. Our gross margin improvements and our ability to run with lower inventory levels, as well as lower CapEx levels are driving these results. Now this all leads to significantly improved free cash flow conversion and we expect to convert profit to cash at a strong rate going forward. Overall, our results in the quarter illustrate that we continue to make solid progress to reset our price and cost levels to enable an even stronger profit and cash flow cycle as our market volumes revert to mean. We also continue to demonstrate progress on our More Corning technology efforts. We extended our market leadership by collaborating with Apple to deliver durable glass with infused color, a first for any smartphone for the back of the iPhone 15 and iPhone 15 Plus devices. These devices also feature Ceramic Shield, which we collaborated on with Apple to deliver a cover material with unparalleled smartphone performance. We also recently announced Corning Viridian Vials. This new technology can improve filling line efficiency by up to 50%, while reducing vial manufacturing carbon dioxide equivalent emissions by up to 30%. And just yesterday, we announced an expanded collaboration with long-time customer AUO to accelerate the production of their industry-leading large format curved Automotive display modules using our patented ColdForm technology. Stepping back, we are on the right track, enhancing profits, improving cash generation, and delivering new products that capture More Corning content opportunities, all while maintaining our leading market positions. The area that continues to be problematic is our customer demand, especially the weaker carrier sales in Optical. So although we have hit our guidance to you for 11 consecutive quarters, weak customer demand has put us consistently at the lower end of our sales expectations over the last year even as we are outperforming on price and productivity plans. More importantly, we are well below the trend line for our operations profile. We have the capacity and capability to deliver $3 billion plus in additional sales with minimal additional cash investments. As a result, this revenue will have powerful incrementals as it returns as long as we keep our capacity and our capabilities vibrant and ready to go. So as we assess our operations profile, we ask ourselves two broad questions. Will our revenue return and when? The first question is relatively straightforward to address. We simply ask ourselves, what are the long-term trends in our markets and where are we now versus those long-term trends? And then, of course, we need to feel confident that we will win in those markets. Are we the clear market leaders with superior technology offerings, lowest cost platforms and are we advancing More Corning opportunities to increase our value capture for the same volume. So first, let’s look at the trends in our markets. We build our capacity and capabilities around long-term trends. We then modulate our operations and staffing around current volume run rates. So we must understand where our volume run rates are versus trend at all times. We do this for each of our businesses. Let me give you just one example, optical fiber as a good illustration. Here, you see industry shipments measured in fiber kilometers since the beginning of 2004. The trend line shows a 6.6% compound annual growth rate over the last decade. As you can see, the industry has been operating below trend line in the first half of 2023. Because industry shipments are reported with at least a quarter or two delay, I am going to switch to our own shipment data so that we can bring you up to real time, what we saw over the last few quarters and what we are projecting for quarter four. First thing to notice is, the trend line for our shipments has a 7.3% CAGR over the same 10-year period. We have been growing faster than the market. Now this just makes sense with everything we have shared with you about our More Corning strategy. Quarter one of 2023 was basically on track and our shipments started dropping away from the 7.3% CAGR line in quarter two and even more so in quarters three and quarter four. Currently, our shipment run rate is at least 30% below trend line. You can think about the 30% plus gap as carrying through all of our Optical revenues. Remember that fiber accounts for only a portion of our sales; we have significant value in our fiber with our cabling and connectivity solutions. So this gap to trend ripples through our entire Optical product portfolio. We feel the demand drop in our fiber sales, cable sales, and equipment sales. We are confident that we will return to the long-term trend line. We believe that as customers deplete their inventories, the industry and our sales will resume growth. Just returning to trend adds more than 40% to our revenue run rate for Optical Communications. So that’s what we mean when we say we will revert to mean, and fiber is just one example; we use a similar methodology for key product lines in each of our maps, Automotive, Display, Mobile Consumer Electronics and Life Sciences, all of them are showing a gap versus long-term trend lines. Right now, because we are operating well below long-term trend lines, we see an enormous opportunity as our markets revert to mean. Now, as I noted a moment ago, because we anticipate this recovery across our markets, we need to know we will win as they bounce back. Are we maintaining our leadership position in advancing opportunities to grow faster? In short, yes, we have built a more advantaged position for 80% plus of our revenues over the last few years. We are the technology leader, as well as the lowest cost producer, and we have built more opportunities to capitalize on growth in our markets, increasing our value capture with our More Corning approach. Let’s look at a few examples. In Optical Communications, fiber optics remains the ascendant technology with growing applications in wireless, cloud computing, including AI and government efforts to connect the unconnected. Within each of these applications, we have new product innovations that will increase our revenue per installed fiber as those applications grow. We are building on our undisputed global cost and technology leadership position, along with our market leadership in North America. In Automotive, new U.S. EPA regulations go into effect starting in 2027. These new regulations force adoption of gasoline particulate filters and we are the inventor and clear market leader in GPS. We expect to see sales as early as 2026. In terms of More Corning, this adds 2 to 3 times the content opportunity for internal combustion engine vehicles in the U.S. This means significant growth in our environmental business even in the face of global Battery Electric Vehicle adoption. In fact, we will still grow environmental sales up until Battery Electric Vehicle adoption reaches 40% of all vehicles globally and that is not forecast to happen until the next decade. Keep in mind, we have also built new revenue platforms with the successful introduction of our auto glass for interiors, which is being widely adopted in Battery Electric Vehicles and offers hundreds of millions of dollars of growth opportunity for us. In Display, we have been and continue to be the undisputed leader in technology, quality and cost. Our successful development and capability in Gen 10.5 technology aligns with the continued move to larger size TVs with the lowest cost platforms for large displays. We continue to improve productivity, which allows us to free up assets to serve Gorilla Glass, Glass Ceramics and our growing Automotive Glass business. Finally, we continue to build entirely new product platforms that allow us to enter new categories for growth, examples include pharmaceutical packaging, automotive exterior glass for high autonomy systems and the rapidly growing opportunity to reassure U.S. solar capacity. In total, this amounts to a $3 billion plus incremental sales opportunity with minimal cash investment. Taken together, that’s why we believe our revenues will recover. The next question is when? The answer to this question is less clear. Conventional wisdom is that customer demand in telecom display, semiconductor, smartphones, tablets and notebooks bounces back in the second half of 2024. That seems plausible to us, but rather than trying to predict the timing of the recovery, we will continue to guide one quarter at a time based on our order entry models until visibility improves. We will continue our programs to improve price, productivity and cost so that we improve profitability and cash flow despite our muted sales outlook. This serves both the purpose of providing enhanced performance near-term, and more importantly, providing a better price and cost springboard for profitability as our volume reverts to trend. Simply put, we have the ability to deliver another $3 billion plus in sales with powerful incrementals and minimal cash investments. This represents such a significant opportunity for our shareholders that we will maintain this powerful platform throughout this down cycle, all while we continue to improve our near-term profitability and cash flow. This is how we are steering our way through this period, and I look forward to updating you on our progress. Now I will turn the call over to Ed so we can get into the details of our results and outlook.

Thank you, Wendell. Good morning, everyone. In the third quarter, our sales were $3.5 billion, gross margin was 37%, EPS was $0.45, and free cash flow was $466 million. This was in line with our expectations. However, I want to point out that volume in both Optical Communications and Display Technologies was below our expectations. This was offset by strong sales in Specialty Materials. Our gross margin was up 80 basis points sequentially on sales consistent with the prior quarter and 340 basis points from the fourth quarter of 2022. Free cash flow was up $156 million sequentially and $211 million year-over-year. The increase in free cash flow was driven by improved profitability and inventory reductions. We also lowered capital expenditures in the quarter. Our improving profitability and cash, despite muted sales, demonstrates execution of our programmatic approach. Let me provide some details on our segment results. In Optical Communications, sales declined 14% sequentially to $918 million, reflecting lower order rates from carriers as they continue to draw down inventory. Net income was $91 million, down sequentially reflecting lower volumes. Looking ahead, we are not counting on improvements in our orders over the next six months. Longer term, we expect our growth to resume as customers complete the drawdown of their inventory. Additionally, we remain confident that the industry’s underlying growth drivers are intact, specifically, broadband, 5G, cloud computing, and advanced AI. There are also public infrastructure investments to help connect the unconnected and bring broadband to a much larger share of the U.S. population. In Display Technologies, third quarter sales were $972 million and net income was $242 million. Volume in the quarter was lower than our expectation. Net income grew 16% sequentially, reflecting the progress on our previously announced price increases. Here’s an update on what we are seeing in the business. In line with what we told you last quarter, we are on track to achieve double-digit price increases at our customers in the second half. The impact of these complicated agreements flows through our financials in both the third and fourth quarters. These pricing actions resulted in net income margin of 25% in the third quarter, up 3 percentage points from 22% in the second quarter. On average, our customers are experiencing double-digit price increases with the majority of the impact in the third quarter. Year-over-year sales and net income were up 42% and 81%, respectively. Panel maker utilization declined as we exited the third quarter. And looking ahead to the fourth quarter, in line with industry reports, we expect panel makers to reduce utilization further from these levels, and we expect the glass market and our volume to be down sequentially, as much as low teens. Display industry analysts attribute the panel maker utilization decline to a wrestling match between panel makers and set makers over the significant panel price increases during 2023. This dynamic is expected to maintain a healthy supply chain exiting 2023, setting the stage for panel maker utilization to recover in the first half of 2024. However, despite lower sequential volume, we expect to maintain or improve our profitability levels in the fourth quarter as we continue to see the benefits of our pricing actions. For 2024, we expect the pricing environment to remain favorable as we expect glass supply to be balanced to demand as multiple display glass makers have announced capacity reductions earlier this year. In Specialty Materials, sales in the third quarter were $563 million, up 33% sequentially. The improvement was driven by higher Gorilla Glass sales resulting from customer product launches in the quarter, which helped offset overall end market softness and continued solid demand for semiconductor optics drove another strong quarter for Advanced Optics. Net income was $72 million, up sequentially, primarily driven by higher volume and the adoption of premium cover materials. Moving to Environmental Technologies, sales in the third quarter were $449 million, up 6% year-over-year, driven by ongoing growth of gasoline particulate filter adoption in China, which offset expected softness in heavy-duty markets in North America. Productivity improvement actions helped net income grow faster than sales to reach $99 million, up 14% year-over-year. In Life Sciences, sales in the third quarter were $230 million, consistent with the second quarter. Sales were down year-over-year, reflecting significantly lower demand for COVID-related products in China and the impact of customers drawing down inventory. Net income increased sequentially to $13 million, driven by productivity improvement actions. Turning to Hemlock and Emerging Growth businesses, sales in the third quarter were $327 million, down 13% sequentially and 20% year-over-year, reflecting a decline in solar grade polysilicon prices and lower sales in pharmaceutical technologies as we completed the last of our volume commitments for COVID-related products in the second quarter. We are seeing continued strong demand for our solar grade polysilicon, which meets the need for a transparent, sustainable, and traceable solar supply chain in the U.S. market. As a reminder, we have long-term take-or-pay contracts with our customers that have floor pricing mechanisms built in to help mitigate the impacts of spot market dynamics. Net income was a loss of $8 million, down sequentially driven by lower sales. Now let’s turn to our outlook. For the fourth quarter, we expect sales to be approximately $3.25 billion, driven by continued weak demand in Optical Communications, sequentially lower volume in our Display business reflecting lower panel maker utilization, typical sales patterns in Specialty Materials following significant customer product launches in the third quarter, and the possibility that the labor issues in the automotive industry could impact our Automotive business more in the fourth quarter than it did in the third quarter. We remain focused on our actions to improve profitability and cash flow during this low volume period. As a result of our continued execution, we expect to deliver another quarter of strong free cash flow and a gross margin percentage similar to the third quarter despite lower sequential sales. We expect EPS of $0.37 to $0.42. Before I wrap up, I’d like to reiterate our commitment to strong financial discipline. We are maintaining a strong and efficient balance sheet. For example, we have one of the longest debt tenors in the S&P 500. Our current average debt maturity is approximately 25 years with only a little more than $1 billion in debt coming due in the next five years, and we have no significant debt coming due in any given year. Let me leave you with a few final thoughts. In the near-term, we will continue our focus on improving profitability and cash flow despite the muted sales outlook for the quarter. At the same time, we remain well positioned to capture significant additional sales with minimal cash investment, and longer term we remain confident in our ability to outperform our markets as they recover and to grow beyond prior peak sales run rates with strong incremental leverage. I look forward to updating you on our progress. Now I will turn things back over to Ann.

Thank you, Ed. Operator, we are ready for the first question.

Thank you. I'd like to ask about the Display environment and how you foresee its improvement as we look ahead, not just for the fourth quarter but into 2024 as well. Could you also share your thoughts on the margin trajectory in that area? Thank you.

Hello, Asiya. There are a few things to note. First, our price increases, which take effect in the second half of 2023, will certainly enhance our profitability in this area, and we anticipate that the pricing environment will remain beneficial as we move into 2024. We've also mentioned that some glass manufacturers are reducing their capacity, which helps maintain balance between supply and demand. In terms of volume and panel maker utilization, we expect improvements as we head into 2024. Thus, we believe the volume landscape, particularly for glass, will get better in 2024. Does that address your question?

Yeah. And if I may just...

On the fourth quarter, I know there has been some discussion about panel maker utilization decreasing, but I wanted to clarify that with your comments that panel maker utilization will increase as we look ahead.

Yeah. We think that what’s happening in the fourth quarter is a temporary situation as panel makers and set makers work through their pricing environment. As you know, panel prices have increased throughout 2023. That said, we think the inventory levels, we exit the year with healthy inventory levels and retail doesn’t really have to improve for panel maker utilization to go up at some point in 2024; we think that’s relatively early in the year.

Got it. Thank you.

Our next question.

Good morning. Thank you for taking my question. Regarding Display, do you believe you have accomplished your pricing increase goals with your customers, and do you anticipate further benefits in the fourth quarter from the pricing change compared to the third quarter?

Yes, we are dealing with very complex agreements. However, we plan to exit with double-digit price increases as we move through the latter half of the year. There will be additional improvements as we enter Q4. Additionally, we anticipate that panel maker utilization, which began to decline as we finished the third quarter, will remain low throughout the quarter as panel makers and set makers adjust their pricing. This will lead to a sequential decrease in our volume in Q4. Nevertheless, we are optimistic about the price reset, and we expect to continue seeing benefits for our profitability.

Thank you, Wendell. I have another question relating to Display and Automotive. I think the agreement you have, are new customers as AUO for ColdForm technology is an interesting one as AUO itself acquired a Tier 1 supplier recently in Automotive. Maybe can you talk about the cost and effect there is Corning having a bigger presence in Automotive triggered the AUO due the same or AUO’s entry into Automotive led to a deeper collaboration between Corning and AUO Automotive Glass.

Just because of the time cycles involved in materials development of our type of innovations, we start earlier, right? And then to have something novel like ColdForm just takes longer, right? What you are seeing is a lot of our long-term customers in Display are now looking to how do I apply those technology platforms to new areas. And what we have been able to do is help bridge them using our ColdForm technology and the strong access we have with Automotive players, right, to be able to bridge those long time customers to new market opportunities for them, all while they are sort of executing their move forward to add a lot more value to their Display Tech. I think it’s a great example of AUO, like intellects is another example, right, where some of these Taiwanese based players as they face the growing competition from the new big Gen 10.5 plants that we facilitated in China, they are finding good ways to use their capacity and their capabilities to enter the Automotive stack.

Thank you.

Thank you. Next question.

Great. Thanks. Maybe a question just on the Optical business and just whether there’s any different trends between kind of your service provider customers and cloud customers, because kind of the 30% cutback in Q4 would be even more extreme, given the offsets of kind of cloud customers staying consistent. So I just want to get a sense of, is that trend line even more severe if you were just to take the service providers versus cloud customers? Thanks.

The simplest way to answer that is yes.

And so maybe just any trends on the cloud customers would be helpful this quarter?

There is a 30% gap compared to our long-term trend lines, which reflects what is happening in cloud services and our overall run rate. Furthermore, the gap in that specific area is even more significant than the 30% gap we are displaying in total.

Okay. Great. Thank you.

Is that what you were asking?

Yeah. I mean that is kind of the point, but I guess, I am just trying to get a sense that cloud customers are not pulling back as severely as well. There’s nothing we should be noting on the cloud customers as well?

Not that we are seeing. Remember, the cloud went through its own cycle during the pandemic and is now adjusting its value chains. They are not really struggling, but a significant portion of their capital expenditures is focused on large language model training, which requires additional network infrastructure and more fiber optic connections. We have not yet begun to see the rapid growth that this could bring to our run rate. However, the cloud has remained relatively stable.

Okay. Perfect. Thank you.

Hey. Thank you for taking the question. Just one high level one and then one follow-up on Optical. First, from a high level, I mean, obviously, it sounds like you have got significant conviction in the longer term outlook. I mean, with that in mind, how do you think about the potential for accelerating share buybacks given where valuation sits today? And then just to go back to Optical, I am just wondering if you can talk to what sort of visibility you have into next year, particularly as we are sort of in a higher for longer interest rate environment. It would seem that although we have seen a 7% CAGR over the last decade, if we are, in fact, in a different rate dynamic, it may actually temper a lot of the enthusiasm relative to what we had seen a couple of years ago from some of your larger service providers. So just curious on any visibility into 2024 there? Thanks.

Hey, Matt. This is Ed. I will take a first question. So, first of all, the most important thing for us has been focused on improving our profitability and cash flow. Obviously, if we improve our profit, that also improves our cash flow and I think we have done a nice job of that over the last several quarters. Our cash flow conversion was up nicely in Q2 and Q3 and we expect it to be up again here in Q4. So I think that’s first things first. And then I think if you remember back earlier this year, we made the last payment to Samsung on the buyback we did back in 2021. So as we go forward, we will certainly have more firepower to do things like share buybacks. We haven’t made any announcements. So we will come back and we will talk a little bit more about our plans next year, but I think you should feel good about where we are from a balance sheet and a cash flow perspective.

I will take part two. I just want to add a little bit to Ed’s answer to part one. We get that $3 billion plus revenue run rate back. Our shareholders are going to have a lot of fun. The incrementals on that are going to be really, really stunning, because they don’t take much additional cash investment, it’s really minimal, right? And because of our operating leverage, we are going to like that and we are going to have a ton of flexibility to do capital allocation that favors our shareholders. So does that make sense to you, Matt, before I jump to Optical visibility?

It does. It does. Thank you.

Optical visibility is a great question. We are currently engaged in a thorough process with each of our major carrier customers to determine their deployment plans, reviewing this quarter-by-quarter and detail-by-detail. Due to our strong relationships, they are willing to collaborate with us at this level of detail, but it's not finalized yet. Once it is, it will enhance our visibility in that revenue segment. I don’t have the answer right now, but we will update you. When considering the overall question of when things will return to normal, we are confident it will happen next year. You saw the trend lines over the past ten years, and we can look back even further. These trend lines reflect the growth of an ascending technology as we penetrate new markets with S-curves. Fiber optics is becoming more cost-effective, and as bandwidth demands change, we see increased fiber deployment. So, yes, it will return to trend. We are also seeing optics enter markets such as wireless and new applications like generative AI, which require more fiber optic connections for computing power. We are positive about the long-term trends, but we are still working on the timing.

Appreciate it. Thank you both.

Yes. Thank you. Good morning. Wendell, appreciate the charts and your comments on long-term trends in Optical, but you are calling out inventory digestion right now across cloud, and so clearly, that implies there was an inventory buildup. So your trend lines through 1Q 2023 embed some over shipment as well and I understand that’s true even in historical cycles. But why do you think that the mean reversion wouldn’t mean a lower steady state level, for instance, I think, in the PC market as an analogy, people thought $250 million was sustainably going to $300 million to $350 million and now we are back to $250 million and growing at low singles. So I am just kind of curious as to whether you think that there is a reset that happens to a lower level given, perhaps, overbuild over a longer period of time? And I have a follow-up.

Okay. So first, where we are seeing the inventory drawdown right now is primarily the carriers. I think you said cloud, but I think it’s just misspoke. It’s in carriers where we are seeing the drawdown occur, okay? Cloud is operating now more in balance. Does that make sense to you?

Yes.

So what drives those trend lines is that you can see the industry dipped above the line in 2022 and is now adjusting below the line. This pattern will be evident throughout the entire cycle, and examining the fit against it gives you the CAGR. The components that make this up will vary over time as different parts of the network are built. We do not see anything that would diminish the application space for fiber; instead, everything indicates that it is expanding. This is due to increasing bandwidth requirements, even over short distances in areas like hyperscale cloud. As a result, what were once copper links or low fiber counts are now transitioning to high fiber count all-optical solutions. Our latest technological advancements include glass packaging to expedite communication from the ASIC to optics as quickly as possible, since this is the most cost-effective method to transmit information rapidly. This trend is consistent across multiple markets. Therefore, I don’t perceive a shrinking market opportunity; rather, I see it growing, which is what drives those long-term CAGRs. Regarding notebooks and PCs, it’s an interesting comparison. We could have assessed that market here since we track it, and our CAGRs would have shown a surge, but integrating our extensive experience in notebooks would have influenced our projections negatively, given the trend lines. We would have fallen well below expectations because there hasn’t been enough cumulative time at the 300 or 350 levels to counterbalance all the previous time spent below those levels.

Yeah. Yeah. It does, Wendell. I appreciate the color. I guess as a follow-up in the spirit of looking at the long-term here.

On the yen, if you look beyond 2024, can you give us some sense of how much exposure is hedged and at what level, given that we are back at sort of the 150 level again? And just curious if you could give out some color on sort of maybe just beyond 2024, looking at 2025, 2026, what percent and at what level you might be hedged at? Thank you. So right now, and I think I did last quarter, or maybe the quarter before, we are hedged through the end of next year, right? And beyond that, we don’t have a significant amount of hedge in that timeframe. Ed, would you like to add?

Yeah. Two other things, Wamsi, that I would add. One, we recently raised price in Display. That’s one way for us to address the yen. We are going to certainly readdress that or rethink about that as we go into 2024. And then, secondly, given the large differential in interest rates between Japan and the United States, there’s a pretty steep forward curve yen. So if you go out a year, it’s about ¥6. So you go out another year, it’s about ¥12 and so on. So just as you think about the rate that’s out there, it’s not the 150; it’s really the forward rate that matters to us because we could actually hedge at that rate right now. So the average over the next five years is below 130.

...versus if you think about the rate yen in total being at 150. I just wanted to point that out.

Yeah. But it’s going to lowest. Thanks, Ed.

This gives you an idea of the potential limit on our exposure regarding the average rate after 2024 if we reestablish long-term hedging programs. We are trying to assess the possibility of using the dynamics of the currency markets to implement more long-term hedges at favorable rates. If that opportunity does not arise, we will resort to price increases to ensure strong returns for our shareholders. We believe the situation will either be resolved efficiently in the currency markets within the timeframe or will lead us to an industrial solution, the initial step of which was observed this year.

Okay. Thank you so much.

Hi. Good morning. Wendell, I was wondering if you could talk a little bit more about some of the comments you made around the new revenue platforms and also some of the cyclicality in the business from two aspects. One, it seems like thinking about your comments that as you have instituted more technology, more value add into some of your served markets, you have created more cyclicality as well. I wonder if you would agree with that. And then, secondly, from my perspective, it seems like the $3 billion has somewhat disappointed over the last few years and especially as you think about how dynamics are changing maybe around demand for some of your COVID products, et cetera. Is it time to maybe look at that $3 billion and even though it has a lot of leverage, maybe pair back some of those products or see if they are better off in other places or with other companies? Thanks.

Steve, I think that’s a really good question. First, I want to make sure we are clear and we will follow up with you more. For us, the huge bulk of that $3 billion is not in new platforms, okay? That’s just in like fiber optics and some of the new products in it, regaining 40% growth to trend line, it’s just like Display getting back to trend line. It’s Automotive getting back to trend line. So it’s the products you know and love, Steven, right, that you have been driving through your models for a long time, right? That is the stuff that is well below trend and that is the lion's share of the $3 billion, right?

Okay.

The new platforms you're referring to make up a relatively small portion of our growth. As we gather insights, we adapt our strategy. For example, we shifted our pharmaceutical packaging efforts to support COVID initiatives, which we believed benefitted society. Additionally, we had government-funded initiatives that provided free offers to our shareholders. Our customers committed to long-term agreements, and we completed that take-or-pay process in the second quarter for some of these commitments to help deliver essential vaccines. Now, we are considering our next strategic pivot and exploring an asset-light approach. This involves opening up our technology to allow other industry players, including competitors like West, to utilize our technology while we find ways to return value to our shareholders through various methods, such as licensing and go-to-market strategies. We will adapt as we see new opportunities, but this current revenue downturn has certainly increased our skepticism towards new prospects. I believe your understanding is accurate, and we will proceed accordingly. However, it is important to clarify that the focus should be on the $3 billion, which is about returning to our established run rate. We have proven the demand for our products that are consumed daily. Does that make sense to you?

Yeah. It does. You answered everything except for the one question on just sort of the cyclicality of the business now.

Oh! Got you. I began to consider that as soon as you mentioned it. It's very intriguing, especially when we focus on fiber, given that we are now adding significantly more value for fiber tips than we did previously. Consequently, when we lose a fiber tip now, it results in a greater revenue decline than it did when we were solely a fiber manufacturer.

Right.

I think that’s true. At the same time, the baseline is bigger, right? So I don’t know if it increases cyclicality. Let me think about that mathematically myself or Jeff and you have got me curious. Let me do a little bit of quantitative work and we will get back to you, Steven.

Great. Appreciate all the color. Thank you.

I would like to add one more point, Steven. As you know, we've been working to manage the volatility of technology substitution curves by spreading our three core technologies and four manufacturing engineering platforms across various markets. This approach allows us to mitigate fluctuations since different markets do not always move in unison. For example, smartphone purchases are not directly influenced by COVID-19 vaccination rates, and the same applies to cell and gene therapy compared to large television sales, despite some shared core technologies. This strategy helps balance and offset cyclicality. During COVID, we noticed an increase in correlation among markets that typically do not relate to one another, with correlation levels rising to about 0.7, indicating high correlation. This situation has changed what we typically expect from market diversification. The positive outcome is that we're beginning to see these markets return to their non-correlated states, aligning more with historical trends. If I had to choose between a return to the mean in absolute revenue or our level of diversification, I would prefer more revenue. However, we are already witnessing progress toward reducing volatility long-term. That might have been more information than you needed.

Yeah. No. No. That’s really interesting. That gave me a list of thought to.

Thanks, Steve. We will take one more question.

Yeah. Hi. Thanks for squeezing me in. So just as you think about your, I guess, pent-up revenue potential here, that $3 billion, depending on when that comes back, maybe it’s one year to three years depending on kind of how strong or weak the macro is, how do you think about your capital investment in light of that? You need to invest as much as you have over the last few years or is this a chance for you to step back on that and that markets tighten before you think about growth in that?

I will start, and then Ed can go after me, right? That’s why we use the term minimal cash investment, right? We have got in place the capabilities and the capacity we need to support that $3 billion, right? So we do believe that you should see very muted CapEx and very high free cash flow conversion. But Ed, why don’t you add?

Yeah. I would agree and I would say you are starting to see our capital spending coming down right now, you will continue to see that come down as we go through the fourth quarter and into next year as we finish up some of the things that we have been working on. So I agree with Wendell that we can support that, and if there’s something new that’s not in that or something beyond that, we will talk about it with you all with respect to capital. But I think you can think of our conversion as being better than it has been over the last period of time, a couple of years.

What you are seeing here is quite unusual due to the pandemic and the post-pandemic period. I can't recall a time when we had the chance to generate as much revenue with the capabilities we have ready to go in such a short timeframe. The incremental gains here are setting new records for us. Our goal is to strike a balance as we adjust to today's run rate while maintaining this opportunity, as it holds significant potential to create value for our shareholders.

Thank you, Wendell. Thank you, Josh. I will wrap up for today. Thank you for joining us. Before we close, I wanted to let everyone know that we will be attending the UBS Technology Conference on November 28th. Thank you, Josh. Additionally, we will host management visits to investor offices in select cities. And finally, a web replay of today’s call will be available on our site starting later this morning. Once again, thank you all for joining us. Operator, that concludes our call. You can disconnect all lines.