Corning Inc (GLW) — Q1 2024 Earnings Call Transcript

Thank you, and good morning, everyone. Welcome to Corning's First Quarter 2024 Earnings Call. With me today are Wendell Weeks, Chairman and Chief Executive Officer; and Ed Schlesinger, Executive Vice President and Chief Financial 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 relate to GAAP data. Our core performance measures are non-GAAP measures used by management to analyze the business. For the first quarter, the difference between GAAP and core EPS primarily reflected constant currency adjustments, translated earnings contract gains and translation gains on Japanese yen-denominated debt. As a reminder, the 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, and they’re also available on our website for downloading. And now I'll turn the call over to Wendell.

Thank you, Ann. Good morning, everyone. Today, we announced first quarter 2024 results. Sales were nearly $3.3 billion and EPS was $0.38. Year-over-year, gross margin grew 160 basis points to 36.8%, and free cash flow improved by $300 million. These results were at the high end of our guidance. More importantly, we’re seeing encouraging signs of improving market conditions. We continue to expect that the first quarter will be the low quarter for the year. We are executing our plans to add more than $3 billion in annualized sales within the next 3 years. And we already have the required capacity and capabilities in place. As a result, we're poised to deliver powerful incremental profit and cash flow and generate substantial shareholder value. Last quarter, we outlined a framework under which we expect to drive stronger returns on our existing innovation and capacity investments and we shared our expectation that these returns will begin in 2024. The framework has three primary components: First, we believe that the first quarter will be the lowest quarter for the year. We will improve from here. Second, we expect to grow by more than $3 billion in annualized sales in the midterm, which we define as within the next 3 years. The outlook in each of our markets remains positive, and our market positions are quite strong. Third, as we capture this growth, we expect to deliver powerful incrementals. We already have the required production capacity and technical capabilities in place, and the cost and the capital are already reflected in our financials. This is a tremendous opportunity for our shareholders. In the 3 months since our last call, our confidence in these 3 components has only increased. We expect our sales to grow from here and we have reflected this in our second quarter guidance. Today, I'd like to review each component of the framework and share some of the reasons why our confidence has grown. Let me begin with the first component. Our expectation that quarter 1 will be the lowest quarter of 2024. Near term, we expect optical and display to be the biggest drivers of our improvement. In Optical Communications, carrier inventory drawdowns have been the primary source of our below-trend sales. Once carrier inventory starts returning to more normal levels and our customers resume purchasing to support their deployment rates, we would expect to see our order book grow. And that's exactly what is happening. Our order book grew nicely from fourth quarter levels. This and our regular conversations with large carrier customers indicate that the gap between our sales and customer deployments is moderating. As a result, we expect carrier sales to increase from first quarter levels. Additionally, in the enterprise portion of our optical business, we expect our recent wins for AI data centers will translate into orders and sales during the year. In display, panel makers increased their utilization rates late in the first quarter, and we expect the higher utilization to continue into the second quarter, driven by expected growth in retail demand resulting from midyear promotions. For the full year 2024, our expectations for the retail glass market remain unchanged from our January view and consistent with industry expectations. We anticipate relatively flat television unit volume, another year of television screen size growth, and some recovery in PC demand. This leads to mid-single-digit percent growth in glass volume at retail versus 2023. As a result, we expect our financial performance in display to improve significantly from our first quarter run rate. Ed will share more details on that in just a few moments. Now let's move to the second component of our framework. Our expectation that we will add more than $3 billion in annualized sales within the next 3 years. Our positive outlook for each of our market opportunities results from our leadership positions and the power of the secular trends that we're addressing through innovation and close collaboration with customers. There's a lot more Corning to be had in our markets. In Optical Communications, fiber is the ascendant technology, and we're the clear market leader. As I've covered in the last 2 calls, fiber shipments are more than 30% below trend. We fully expect that gap to close, adding more than 40% to our overall optical communication sales. In conversations with our large carrier customers during the quarter, they reinforced their commitment to increasing fiber deployments in 2024 and beyond. Additionally, we expect BEAD-related projects for network builds in underserved areas to add to our addressable market for the next several years. The industry expects funding approvals to begin late this year, leading to spending in 2025. Next, generative AI is an especially attractive opportunity for us, as it creates significant demand for passive optical connectivity solutions and strengthens our value proposition and our competitive advantages. All data centers consist of a front-end network, connecting racks of CPUs. To meet the computational demands of AI, customers are building a new fiber-rich second network to connect GPUs, which increases our market opportunity. Now we'll see this in our financials as customers begin to build large GPU clusters and adopt our latest high-density innovations. Customers want fast deployment. Our preconnectorized structured cabling solutions offer significant installation time advantages. The GPU clusters, which pack a large amount of computing power per rack, require smaller, tensor cables, making connector size and cable diameter important requirements. To meet these high-density requirements, we've introduced new-to-the-world fiber cable and connectivity products. At OFC a few weeks ago, we introduced RocketRibbon cable with Flow Ribbon technology that can reduce cable diameter by 60% with fibers per cable approaching 7,000. A key part of delivering this innovation is our Contour optical fiber, which has a 40% smaller cross-sectional area than legacy fibers. Now our ability to integrate innovations across fiber, cable and connectors, to create end-to-end solutions is a unique competitive advantage, and we're accumulating significant customer wins for upcoming AI data center builds. In our recent customer wins, our revenue is low single-digit hundreds of dollars per GPU. We believe the customer density needs combined with our technology superior performance will sustain these attractive sales attach rates long term. Let's turn to automotive. The U.S. EPA announced new multi-pollutant standards last month. They include a strong particulate emissions limit that will require gasoline particulate filter adoption on U.S. gasoline vehicles, including hybrids, as early as 2026 for model year 2027. We are the inventor and the clear market leader in GPF, and these standards increase our environmental technologies content opportunity by 2 to 3 times per U.S. ICE vehicle. This adoption offers hundreds of millions of dollars of growth for us in the U.S. alone, even in the face of BEV adoption. Keep in mind, we're also pursuing additional more Corning content opportunities in the automotive industry by introducing our automotive glass solutions, which are building success and momentum and are being adopted by both ICE and BEV platforms. In Mobile Consumer Electronics, our goal is to outpace the market by increasing the content we provide for each device. Our sales have consistently outpaced the market over the last decade, and we expect that to continue going forward. We've done this by advancing the state of the art for cover materials and adding more content per device, a classic more Corning play. We have a strong innovation portfolio in support of our close collaborations with leading OEMs, and we expect to continue delivering new products that increase our value per device. In display, we expect volume growth at retail to be driven mainly by television screen size growth. In fact, in the first quarter, sales of 85-inch TVs increased by more than 50% year-over-year. Overall, we expect to capture growth in display because we are the undisputed technology leader. Our successful development of Gen 10.5 and advanced capabilities align with the continued move to larger-sized TVs produced on the lowest cost platforms for large displays. Finally, we continue to build entirely new product platforms to capture opportunities in new categories. Examples include automotive glass solutions to support high autonomy systems, the growing opportunity to localize U.S. solar supply and pharmaceutical packaging. In sum, we expect the power of our market leadership positions and more Corning innovations to allow us to grow faster than our markets in advance our $3 billion plus opportunity. Now I'd like to move to the third component of the framework. Our expectation for powerful incrementals as we add sales. In the fourth quarter of 2022, we initiated a set of actions to restore historic productivity ratios and also to raise price to share the impact of inflation more equitably with our customers. Since we initiated these activities, we have expanded our gross margin by 320 basis points despite sales being down almost $400 million. Our actions have established a significantly stronger profitability and cash flow base even while our P&L includes the costs and technical capabilities necessary to support $3 billion plus in additional sales. Importantly, we have put processes and governance mechanisms in place to generate operating leverage as we grow sales. So as I close today, here's what I'd like to leave you with. Our first quarter results show encouraging signs of improving market conditions. We continue to expect this quarter will be the lowest quarter for the year. Additionally, we've established a higher profitability and cash flow base. Finally, as our markets improve, we have the opportunity to increase our annualized sales by more than $3 billion. As we capture that growth, we expect to deliver powerful incrementals because the required capacity, the technical capabilities are already in place and the costs are already in our financials. This represents a terrific opportunity for our shareholders. Our second quarter guidance reflects higher sales and strong incremental profit. And you'll hear more about this from Ed. We will continue making progress on this opportunity in 2024. Think of us as continuing to march up. I look forward to updating you at investor conferences in the next few months. Now before I turn the call over to Ed, I'd like to take a moment to recognize Jeff Evenson, Executive Vice President and Chief Strategy Officer, who will retire from Corning at the end of May. I want to thank Jeff for his 13 years of outstanding leadership at our company. During his tenure, he's helped grow the company, develop frameworks that define our priorities and guide our actions and raised awareness of glass as a key enabling material. He also increased Corning's focus on sustainability. Jeff, we wish you the very best. With that, I'll turn things over to Ed.

Thank you, Wendell, and good morning, everyone. Our first quarter sales were $3.26 billion, and EPS was $0.38, at the high end of our guidance. Our actions to increase price and improve productivity ratios are paying off. In the first quarter, despite lower year-over-year sales, we grew gross margin by 160 basis points. We also grew free cash flow by more than $300 million versus the first quarter of 2023. Overall, we have established a significantly stronger profitability and cash flow base, and we expect to grow from first quarter levels. In the second quarter, we expect sales of approximately $3.4 billion, with strong incremental profit and EPS in the range of $0.42 to $0.46. Let's take a closer look at our segment results. In Optical Communications, sales for the first quarter were $930 million, down 17% year-over-year, reflecting temporarily lower carrier demand as customers continued to draw down inventory. Net income for the quarter was $100 million, down 37% year-over-year, reflecting the lower volume. We are seeing clear signs of improving market conditions, and we think Q1 represents an inflection point. Sequentially, sales grew in both carrier and enterprise in the first quarter, which is more favorable than normal seasonality. Our order rates are steadily increasing as some of our carrier customers are reaching the end of their inventory drawdowns. We believe we're well positioned to take advantage of the industry's long-term growth drivers, specifically broadband, 5G, cloud computing and AI. We will also benefit from public infrastructure investments to help connect the unconnected and bring broadband to a much larger share of the U.S. population. Moving to Display Technologies. As we shared with you in January, panel makers reduced their utilization levels in the fourth quarter in response to a softer retail selling season. Additionally, as expected, panel makers utilization levels remained low in the first quarter to align supply to demand. Our first quarter sales were $872 million, up 14% year-over-year and net income was $201 million, up 26% year-over-year. The increase in net income was primarily driven by higher volume and pricing actions taken in the second half of 2023. First quarter glass price was consistent with the fourth quarter of 2023 as expected. Now it's worth noting that first quarter net income was negatively impacted by our decision to reduce our production to align to the lower volume we experienced in the fourth and first quarters. Our profitability will be higher in the second quarter. Looking ahead to the second quarter, we expect panel makers to run at higher utilization rates, driven by growth in retail demand resulting from midyear promotions, and we will return our production volume to more normal levels. We expect the second quarter glass market and our volume to increase sequentially as a result of higher panel maker utilization, and we expect glass price to be consistent with the first quarter. For the full year, our expectations for the retail market remain unchanged from our January view and are consistent with industry expectations. Specifically, we anticipate relatively flat television unit volume, another year of TV screen size growth, and some recovery in PC demand. This adds mid-single-digit percent growth in glass volume at retail versus 2023. Overall, we expect the pricing environment to remain favorable. Before I move on, I want to take a minute to address currency exchange rates. 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 protect shareholder returns. We're very pleased with our hedging program and the economic certainty it provides. And we've received more than $2.5 billion in cash under our hedge contracts since their inception. Our most significant hedge contracts are for the Japanese yen, which support our yen core rate of 107 through the end of 2024. As we look beyond 2024, our goal is to maintain an appropriate return on our display business through a combination of currency hedges and industrial solutions like price increases. First, on hedging, we are actively working to improve our hedge coverage for 2025 and into the future. The yen forward curve works in our favor. So if you go out a year, the forward rate is about JPY 8 stronger than today's spot rate; out 2 years, it's approximately 14; and so on. The current yen spot rate is significantly weaker than the 30-year average of approximately JPY 110. We have made some progress on our hedges and are now partially hedged for 2025, and we'll continue to look for attractive opportunities to increase our hedges. Second, our customers sell panels in U.S. dollars, and they buy glass from us in yen. They are benefiting from the current weak yen rate. We plan to share the economics more appropriately with our customers by raising glass prices in yen. We successfully took a first step in this direction in the second half of 2023. We will continue to keep you updated as we make progress. Moving to Specialty Materials. Sales in the first quarter were $454 million, up 12% year-over-year, driven by strong demand for our premium smartphone cover materials as well as semiconductor-related products. Net income was $44 million, up 13% year-over-year, driven by higher volume. Our more Corning approach will continue to help us win as handheld and IT markets recover. Additionally, over time, we anticipate growth from new innovations such as bendable glass and augmented reality as they are adopted more broadly. Environmental Technologies first quarter sales were $455 million, up 6% year-over-year, driven by increased GPF adoption in China which more than offset a decline in heavy-duty diesel in North America, an impact we expect to continue through 2024. Net income was $105 million, up 28% year-over-year, driven by higher volume and improved operating performance. In Life Sciences, sales in the first quarter were $236 million, down 8% versus the first quarter of 2023 as customers in North America and Europe continue to draw down their inventory. Net income was $13 million, up 44% year-over-year, reflecting improved productivity. Turning to Hemlock and Emerging Growth businesses. Sales in the first quarter were $311 million, down 19% year-over-year, reflecting lower pricing for solar grade polysilicon and lower sales in pharmaceutical technologies from the completion of volume commitments for COVID-related products. Now let's turn to our outlook. Last quarter, we shared our expectation that the first quarter would be the low quarter of the year, and we're even more confident that that is the case. In the second quarter, we expect sales to grow sequentially to approximately $3.4 billion with strong incremental profit and EPS in the range of $0.42 to $0.46. We also anticipate free cash flow to grow sequentially by approximately $300 million in the second quarter and we expect CapEx of approximately $1.2 billion for the year. Wendell outlined our framework to drive strong returns on our existing innovation and capacity investments and shared our expectations for powerful incremental profit and cash flow. Given this opportunity, we've begun to think about our approach to the allocation of that cash going forward. As a reminder, we prioritize investing for organic growth opportunities. And as we've shared today, in the midterm, we have the capabilities and capacity in place to add more than $3 billion in annualized sales with minimal cash investment. You can see that reflected in our CapEx expectations for 2024. This contributes to the strong free cash flow we expect to generate. Additionally, we maintain a strong and efficient balance sheet, and we're in great shape. We have one of the longest debt centers in the S&P 500. Our current average debt maturity is about 23 years with about only $1 billion in debt coming due over the next 5 years, and we have no significant debt due coming due in any given year. So as our cash flow increases, we remain committed to providing returns to our shareholders. We have grown our dividend 40% since 2019 and our dividend yield is top quartile in the S&P 500, and we will continue to be opportunistic on share repurchases. I look forward to sharing more in the coming months as we continue to make progress building a solid foundation for durable, profitable long-term growth. Now I'll turn things back over to Ann.

Great. Thank you, Ed. We're ready for our first question.

If I could, one for Wendell, one for Ed. Wendell, on the commentary around the data center opportunity around AI. I was wondering if you could just share some color on when you think these incremental orders and revenue will flow into Corning. And these hundreds of low hundreds of dollars per GPU, can you just break that down into maybe just a little bit more color on where exactly that's coming from? Is this rack-to-rack connections in optical and data center? And how large do you think the TAM for that is? And I have a follow-up for Ed, please.

So we're looking at the timing of when we'll begin to see results reflected in our financials. We have a substantial business in enterprise, particularly focusing on the front-end network that connects the CPUs. Based on our existing business, we expect to see a significant revenue growth, provided the orders we've secured here are fulfilled in the latter half of the year. You'll notice that momentum starting to build. To explain where this growth originates, let's start at the rack level. A typical front-end rack equipped with CPUs usually has about 32 fibers connecting to the top of the rack switch, which consists of 16 ports with 2 fibers per port. There are different configurations, but considering a back-end network, a GPU rack typically houses several hundred servers, which would require around 256 fibers in that same rack. This indicates an approximately 8-fold increase in the number of fibers per rack. This demand drives us to innovate and figure out how to incorporate eight times as many light pipes into the same space. Thus, as we start to see the implementation of large cluster GPU installations, you should see the impact on our financial results. Wamsi, does that address your question?

Yes, it did. Wendell, could you also provide insights on the B100, which appears to offer a much higher density solution compared to the H100 and likely requires a significantly greater amount of bandwidth between racks?

That is a great observation, and it aligns with the ongoing trend we are witnessing, which indicates that we have a lot of innovation to pursue as both density and bandwidth requirements continue to rise. This situation limits the distance an electron can travel and brings photons closer to the GPUs, creating new opportunities for our flat glass and our capability to channel light into various formats. What you are describing is actually driving a whole new range of innovations that we are working on diligently.

I appreciate the response. Ed, regarding the yen discussion as we plan for 2025, there appear to be various factors affecting display, including the yen rate and the pricing you mentioned. How significant is the partial hedge, and where do you anticipate being hedged as we end this year for 2025? What do you believe the core rate will be, and if we were to move to a different core rate next year, what do you think that would look like using all available strategies? Could you summarize this at a high level, including the price changes you talked about? How should we view display at the top line, considering all these shifts?

Thank you for your question, Wamsi. I understand your interest in that information. The key takeaway is that we are focused on generating returns in this business, and we expect to continue this in 2024, just as we did in 2023. Our aim is to maintain consistent economics moving forward, regardless of the yen's performance or our hedging capabilities. We excel at hedging and have a well-established program in place. We will explore appealing opportunities to develop our hedge portfolio for 2025, and if the yen moves in our favor, we'll extend our strategy further. While it's premature to discuss core rates or similar matters, consider our display economics for 2024 as indicative of our display business. We will increase prices to counteract the yen's impact, and we believe this approach will keep us on track. We have made considerable progress with hedging, and we'll provide ongoing updates as we proceed. This is how we suggest you think about the situation.

Operator, we're ready for our next question.

Great. Maybe a question for me. You noted that you have the capacity kind of today with capital you've already built to have $3 billion of additional revenue. You noted that you expect to kind of grow over the next 3 years by more than that $3 billion. And so just trying to get a sense of where you think that the biggest opportunities or investments will be over the next couple of years? And then maybe a second question. There's been obviously, a lot made of BEAD timing and understanding that you're seeing kind of improving demand trends on service provider as they come out of inventory digestion, but just kind of what your latest thoughts are around kind of BEAD timing as an enhancement to the optical business.

I'll start with the second point, and then Ed can address the first. Regarding BEAD timing, we are generally cautious about how efficiently the government can allocate resources for network building. We firmly support this initiative, which requires U.S. content, and we believe it is well-directed and will be completed. The funds have been allocated, but we anticipate the process will be a bit slower than the overall industry expectations. We expect funds to be allocated this year, but real spending won’t begin until next year. That’s our current perspective.

Yes, that's helpful.

Yes, regarding your other question, I want to emphasize that we actually have the ability to exceed $3 billion in sales. We're framing our outlook based on our current capabilities. The source of those sales and opportunities will depend on whether we need to make any additional investments beyond our current setup, but we are confident in achieving a figure well above $3 billion. There are definitely some areas where we might invest a bit, but those are all included in the capital expenditure guidance we provided for 2024. We reduced our capital spending in the latter half of 2023. Therefore, at this moment, I don't see the need for substantial capital investment. For instance, as we expand our auto glass business and continue to gain traction there, we may need to allocate some funds, though it won't be the substantial capital typically associated with building glass manufacturing capacity, but rather on the finishing processes. Our goal is to generate a significant amount of cash flow from our existing capacity.

I would like to ask about your opinion regarding newly announced subsidy programs for home appliance trading in China. I know your retail estimates on PV sales this year hasn't changed. Do you think this could be a new catalyst to drive upside to retail TV market and your glass volume in '24?

That's a great question. They're relatively recent, and we're still in the midst of trying to understand how that will play out when it hits the consumer. Our expectations have been for China retail demand to be relatively muted this year. You're right to point it out, we're just a little early in being able to analyze and predict what its impact will be like. We'll get back to you on that as our understanding evolves.

Maybe to sort of ask you another one on display, just a bit more longer term. I know you have a strong position in the display market with the display glass, but traditionally or historically, the problem with this market has been the shorter cycle nature of the swings in the volume cycle. When you think about the duration of this current cycle, are you thinking about it any differently, how does the cycle track rate to some of the sort of volatility we've seen in the past? And then a bit more near term. I know you mentioned you're expecting a step up in terms of industry volume into 2Q. But any more color there because that does seem like 1Q panel maker utilization improved late in the quarter more than you expected. So how are you thinking about 2Q now based on the sort of stronger exit of 1Q?

Let me address the first question. It's a great question. As panel manufacturing has shifted from Korea and Taiwan to China, this concentration has begun to create different dynamics between set makers and panel makers. Historically, the market was strong, making it difficult to predict the required capacity accurately. Set makers typically had strong late demand, while panel makers aimed for consistent production, leading to inventory buildups that caused market volatility. Two things have changed: we are now in a mature stage of the display market, which makes it easier to predict, and the new strong panel makers are optimizing their prices by aligning production more closely with actual orders from set makers. This shift is affecting how much inventory accumulates in the value chain. This change has occurred over the past couple of quarters, and it's too early to determine if it will last. If it does, it could signify better health for the industry and lessen the cycles you've mentioned. The pandemic created a significant cycle, and we are still managing its aftermath. That may provide more insight than you were seeking, but it's a topic we are seriously considering.

And any thoughts on 2Q, the step-up from 1Q, just given the exit run rate was higher in 1Q?

Yes. Samik, as you articulate, panel maker utilization was low generally in Q1. We certainly saw a step-up towards the end of the quarter. We're expecting them to run at higher levels through the second quarter and really through the year because if retail is flat just to meet that flat unit demand, they would have to run at significantly higher levels for the remaining 3 quarters of the year to meet that demand. We're not guiding specific volume increase from Q1 to Q2, but I think it's pretty meaningful.

Thank you. Maybe just a two-parter on the optical comms business. First, on the telco side, you talked about the inventory normalization, but there's also a lot of chatter out there and weakness given 5G hasn't seemed to work all that successfully to the telcos. So could you just talk about that business in the context of 5G isn't really successful and what that means for some of these longer-term contracts that you have with some of the larger players? And then secondly, on the enterprise side, could you just touch on the opportunity for a lot of chatter about GPUs kind of chasing where there happens to be spare capacity for energy. Do you see an opportunity for your enterprise business with large data centers popping up in new areas that will need to be connected?

Thank you, Tim. Regarding 5G, our telco customers are facing a challenge as they transition from 4G, which is primarily wireless, to 5G, which requires more infrastructure and increasingly resembles wireline technology. They are taking the opportunity to combine their wireline and wireless networks, leading to significant cost savings and various revenue opportunities for network deployments. As a result, we are witnessing improvements in their cost productivity and service capabilities. However, there is still a question about the incremental revenue generated by 5G at this stage, which has proven to be a struggle for them. Our outlook for the year reflects a cautious deployment forecast, primarily due to the depletion of inventory acquired during the pandemic. Although we anticipate a pickup, the overall deployment outlook remains lower than expected. I hope that answers your question, Tim.

Yes, yes. And then just on the data centers popping up in other places impact?

The answer to your question is yes. It is an interesting opportunity. It relates to enhancing our capabilities that others don't have, particularly our ability to respond globally across a large geographic footprint, not just in the U.S. but worldwide. The search for energy extends beyond simply finding the right communities here. So yes, it presents a significant opportunity for us in terms of both innovation and volume. However, it is too early to factor that in because they haven't yet located all the energy sources that will be needed, and they are still addressing the infrastructure implications related to that.

Great. And apologies if this question has been answered. But I did notice inventory was a little higher this quarter and OpEx tracked a little bit higher as well. Just if you can provide some clarity on that.

Thank you, Asiya. Regarding inventory, we had a very low-volume quarter overall. We expect our volume to increase throughout the year. Thus, we view inventory as an opportunity to reduce it from the current level, which we believe will enhance cash flow in 2024. Concerning OpEx, our expenses increased sequentially. The key takeaway is that our variable compensation in 2023 was lower than usual due to not meeting performance targets, leading to reduced payouts. We've adjusted our targets, and we anticipate performing better in 2024, which brings our variable compensation back to a normal level. It's important to note that we are dedicated to maintaining our OpEx relatively flat at its current level. In the first quarter, it was around $700 million, and it may range between $700 million and $725 million moving forward. By managing OpEx this way, it creates an additional leverage point for us as sales increase. This is why we discuss powerful incrementals, as gross margin and operating margin will also expand, leading profitability to grow faster than sales. Overall, I feel positive about OpEx.

Well, I was just going to ask, I know there was commentary on yen earlier, but investors have been asking when Corning would feel comfortable sharing sort of the new yen hedges. And perhaps this question has already been answered, but I did join late, so apologies if this is a repetitive question. But any color on this.

Yes. No apologies necessary, Asiya. Yes, what I shared earlier was the most important thing is to think about the return we generate in this business. Our goal is to generate an appropriate return. You could think of that as what we will deliver in 2024 or what we delivered in 2023. And we're going to use yen hedging and raising price in combination to generate that economics or those economics to generate that return. And so we have made progress on our hedges. We've made some nice progress, and we'll be opportunistic throughout the year, and we'll look to hedge at attractive rates. We're not discussing the details. And I think it's too early to think about how to frame up core rate for 2025. So we'll keep you posted on that. But just think of it as the overall profitability level or cash generation level in the display business.

Congrats on a solid quarter. This is James Cannon on for Josh. I just wanted to poke on the powerful incrementals you described. We're talking about a $3 billion sales opportunity. I mean if I look back at kind of last couple of quarters, your gross margin has held in pretty steady despite sales declining. I think there's some noise with display pricing coming through. Can you just give me some color as to how we should think about the cadence of gross margins as we go through the rest of the year?

Thanks for the question. To put it in perspective, if we look back at the fourth quarter of 2022, that was our lowest point. Since then, we have improved our gross margin by 300 basis points while sales have decreased by nearly $400 million. This improvement has been achieved by enhancing our productivity ratios, optimizing our operations, and increasing prices. Currently, we are at a solid baseline of 37%. It's worth noting that this 37% is effectively closer to 39% when factoring in previous adjustments for inflation and price increases. We are starting from a strong base and have the capacity to support significantly higher sales, which is typically not our usual growth strategy. As sales increase, we anticipate that our gross margin will also rise in alignment with those sales each quarter. Additionally, as I mentioned earlier, we believe that operating expenses are another leverage point for our operating margins. Overall, we expect to see an upward trend in gross margin as our sales grow from that 37% baseline.

Okay. Another way to think about it is, as that $3 billion comes through, I believe 40 has typically been your target. Has that changed? Or do you think that's where you can get to?

Yes. So I think we can get there. But just as a reminder, the 40, if you go back in time, we've absorbed a significant amount of inflation and raised price, which brings our margin percentage down. So 38% is sort of the new 40% in old math. But I still think despite that new base, we can get back to that 40% level as we accrete our sales up.

I guess I was just wondering on the Specialty Materials business, if you can provide some more detail. From my seat, it looks like it did much better than I would have thought for Q1. How much of that was due to Gorilla Glass? How do you sort of look at the rest of the year, given sort of mixed results in Q1 on the phone side, like what kind of seasonality, et cetera, are we looking at?

Yes. I think it was more or less in line with how we would have expected it. I think it's a business that will grow as we add more Corning content. That's the way we think about it for the year. We don't see the smartphone market being up that much in units, maybe a point or two for the year. There certainly can be some growth in the IT space, but even that is at a single digit, maybe mid-single digit level. So I think the growth catalyst here is for us to add content into the market.

And we just don't see a lot of that happening this year. Steve, most of our newest innovations will be aimed at the model year following this. So we're not looking at Mobile Consumer Electronics as being a big catalyst for near-term growth in terms of versus Q1, right, for this year, but future it will be.

Super. We've got time for another question.

I'm interested in your thoughts on display. You mentioned a suitable level of profitability, which I understand. However, when you renew the hedging portfolio, there's a cost associated with that. In the past, it seems you viewed the hedging portfolio as relatively neutral regarding the costs of being long versus short. Will that continue to be the case as we renew the hedges moving forward? Additionally, when you refer to an appropriate level of profitability, are you factoring in the expenses related to the hedging program?

The appropriate level of profitability would include any cost of hedging. We're long yen, right? And so you heard, and Ed was pointing out sort of over the sweep of time, we generated on the order of $2.5 billion of cash, positive cash arising from our hedges, right? That or us hedging that long-end position. And the way we think about this is that position is coming from the fact we sell in yen. And so we will resolve this either in the currency market should the yen come back to more sort of reasonable levels, right? And we'll be opportunistic about that. But if not, our customers are picking up the game in terms of lower-cost glass because we sell in yen. And so what we will do is just raise our price in yen to share some of that volatility that we're seeing in the yen. Does that make sense, George?

It does. I assume it's still fair to say that the cost of the hedging program is pretty minimal to shareholders, we're pretty balanced in terms of the two sides.

Thanks, George, and thank you, everybody, for joining us today. Before we close, I wanted to let you know that we will hold our Annual Meeting of Shareholders on May 2. In addition, we'll also attend the JPMorgan Technology Conference on May 21. And finally, we'll be hosting management visits to investor offices in select cities. There'll be a web replay of today's call on our site starting later this morning. Thank you all for joining us. Shannon, that concludes our call.