Ann Nicholson, Vice President of Investor Relations, welcomed everyone to Corning's second quarter 2023 earnings call. With her were 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. Nicholson reminded everyone that the remarks contain forward-looking statements and that the company would be using core performance measures. She also mentioned that the difference between GAAP and core EPS stemmed from restructuring charges and non-cash mark-to-market adjustments. Nicholson then turned the call over to Wendell Weeks.

The company reported second quarter results of $3.5 billion in sales and $0.45 EPS, with gross and operating margin increasing sequentially. Free cash flow improved to $310 million. The company has been addressing supply chain disruptions, inflation, and consumer spending shifts to improve profitability and cash flow. Demand has grown below historic trends and customers have begun to draw down inventory, leading to lower sales across the company's portfolio.

The company has implemented a comprehensive plan to increase profitability and cash flow, which includes pricing actions, reducing staffing levels, decreasing inventory, and improving gross margin and free cash flow. They believe the volume recovery has already begun in the Display market, with sales having grown more than 20% sequentially due to higher volume.

Corning is expecting to return to pre-pandemic profitability levels in the third quarter and is aiming to grow their sales beyond pre-pandemic levels. They are introducing innovations in Optical Communications, Mobile Consumer Electronics, Automotive, and Life Sciences to increase their value per device and capture growth driven by AI. They have launched Viridian Vials to address the need for sustainable products in the pharmaceutical supply chain.

Corning is expecting their profits to increase due to their efforts in various markets such as automotive, cloud computing, broadband, 5G, solar, pharmaceutical packaging, next-generation displays and cover materials, augmented reality or semiconductors. They are guiding based on current order rates and are expecting to improve profitability and cash flow despite lower sales. Their pricing and productivity actions will continue to drive improvement in the second half.

In the second quarter, Corning saw an increase in profitability and cash flow despite weak demand. Sales were $3.5 billion, up 3% sequentially, and EPS was $0.45, a $0.04 increase from the previous quarter. Gross and operating margins increased by 100 and 200 basis points, respectively, due to pricing and productivity improvement actions. Optical Communications sales were down 5% sequentially and 19% year-over-year due to low orders.

Net income was down 12% sequentially and 23% year-over-year due to lower volume, but was moderated by productivity improvements. Carriers and enterprise operators are pushing projects into 2024 due to high inflation and rising interest rates. Demand for optical networks is supported by trends in computation and infrastructure investments to bring broadband to a larger share of the population. In the display technologies segment, sales were up 22% sequentially and 6% year-over-year, and net income was up 30% sequentially. Panel maker utilization has increased consistently, resulting in significant volume increases, and customers understand the need for a price increase to offset elevated costs.

In the second quarter, Specialty Materials sales were down 13% year-over-year, but net income was $33 million, Environmental Technologies sales were up 6% sequentially and 28% year-over-year, Automotive sales were up 8% sequentially and 40% year-over-year, and Life Sciences sales increased due to a strong demand for heavy-duty products in North America and Europe. Double-digit price increases are expected to go into effect in the third quarter, and the profitability is expected to improve and return to pre-pandemic levels. There are also new innovation opportunities in emerging trends such as augmented reality, vendable devices, and AI that will extend Corning's opportunities in the future.

Hemlock and Emerging Growth businesses had sales of $377 million in the second quarter, consistent with the first quarter, but down 10% year-over-year due to a decline in solar-grade polysilicon spot prices. Net income increased sequentially to $26 million, up 4% year-over-year, driven by productivity improvements. For the third quarter, total company sales are expected to be roughly in line with the second quarter, with improved profitability and cash flow. EPS is expected to be about the same or slightly better than the second quarter.

CFO Ed is pleased with the company's execution of their plans to address the pandemic, including sharing inflationary costs with customers, returning productivity ratios to pre-pandemic levels, and normalizing inventory. They are focused on improving cash flow and profitability in the second half of the year, and advancing innovations to outperform their end markets. Long-term, they are well-positioned to capture growth tied to key secular trends and grow faster than their markets.

Edward Schlesinger and Wendell Weeks both responded to a question about Corning's third quarter guidance and the lead cable replacement opportunity. Schlesinger explained that Corning's order book was driving the third quarter guidance, which is lower than expected due to customers pushing projects out into 2024. Weeks added that the lead cable replacement opportunity could be an opportunity for Corning in the future.

The company is shifting their operating philosophy to plan operations based on what they see in their order book, increasing productivity and prices, and carrying appropriate inventory in order to increase profitability and cash flow. The company is already seeing traction in pricing negotiations, and Meta Marshall is asking for more detail on this, such as whether it is accompanied by long-term supply agreements and how it will impact revenue.

Wendell Weeks and Ed provide additional information about their price increase strategy, which is meant to return their Display profitability to mid to high 20s. They expect to hit this level of profitability by the end of the third quarter. Asiya Merchant then asks if they have confidence that their business will return to pre-pandemic levels by the end of 2023 or 2024 and Wendell and Ed do not provide an answer.

Wendell Weeks and Ed Schlesinger of the Display company discussed their expectations of returning to pre-pandemic levels of profitability by the end of Q3 of 2021, with a goal of continuing to improve profitability. They reported an improvement of 260 basis points in gross margin and 300 basis points in operating margin from the fourth quarter.

Wendell Weeks discussed the pre-pandemic margin profile for the Display business, noting that the company had exited 2019 with a 24% net income margin and had seen margins of 26-27% in the prior year. He suggested that the company should restore profitability and cash flow to pre-pandemic levels even at muted sales levels, and that shareholders should be kept in mind when considering capital allocation models.

Edward Schlesinger and Wendell Weeks discussed Corning's plans to expand their profit streams in the Solar segment without disclosing the details of their plan. Schlesinger highlighted opportunities with polysilicon and mentioned that there would be some capital spending but it would not be significant. He also mentioned that the Hemlock, auto glass, and Corning Pharmaceutical Technologies businesses would all grow their sales. Weeks mentioned that they would be more forthcoming as their plans finalized.

Wendell Weeks answered Mehdi Hosseini's question about the margin profile of the business unit, stating that there is a lot going on in that segment and that concluding too much from the statement would not be in line with the strategic plan. He then asked for patience as more information would be provided in the near future. Wamsi Mohan then asked about the Display revenue and profitability, and Weeks responded that they are calling for an inflection in Display and expecting significant profit improvement, but that the cost actions and pricing actions will both contribute to the margin improvement.

Edward Schlesinger and Wendell Weeks agree that the price increase is necessary in order to offset the higher costs in the business, and that this represents a new pricing paradigm. They emphasize the importance of their reliability and technology leadership, which will still underpin this new pricing model.

Wendell Weeks is responding to a question from Wamsi Mohan about pricing in the display market and whether it is likely to decline over the next two or three years. Wendell discusses the current quarter, in which the company is increasing prices while maintaining market share and long-term agreements. He then answers Shannon Cross' question about optical pricing, noting that it is holding. Finally, he provides an update on the timing and rollout of government stimulus, both for broadband and poly products.

Wendell Weeks believes that the RIA program will not start to have a big impact until next year, and that this view has not changed. Shannon Cross asked if the program was delayed or progressing as expected. Weeks answered that they had a cynical view of how long it would take, and that they expect it to not start feeling it until next year. Matt Niknam asked if higher rates and macro dynamics are driving a sustained lull in spend, and about cash flow for the first half of the year. Weeks mentioned that there is a gross margin tailwind from the display price hikes.

Wendell Weeks and Edward Schlesinger discussed the inventory buildup at their telecom customers and the difficulty in forecasting when the recovery will occur. Despite this, they still anticipate an increase in operating cash flow in the second half of the year, as they have already seen a significant improvement from Q1 to Q2.

Edward Schlesinger is expecting display margins to increase in the second half of the year due to price increases, but he also expects volumes to increase. Steven Fox asked if it was possible to isolate the margin accretion just from the price increases, and Schlesinger asked him to repeat the question. Fox also asked what prices did in the second quarter.

Wendell Weeks and Steven Fox discussed the success of the pricing increases in the second quarter, with the goal of achieving a double-digit price increase. Weeks noted that the pricing in the second quarter was relatively consistent with the first quarter. Fox asked what the pricing in the second quarter was like, to which Weeks replied that it was relatively consistent with the first quarter. They then discussed how Corning is taking advantage of the growth in the data center and AI markets, aiming to increase the efficiency of their products.

Wendell Weeks and Joshua Spector discussed the potential for revenue growth from the hyperscale data centers due to increased interconnects and other innovations for AI/ML compute. Ann Nicholson asked them to reflect on how this growth would be reflected in the Enterprise segment and promised to get back to George Notter with Jefferies on his question about the optical business.

Edward Schlesinger and Wendell Weeks discussed customers asking to push their delivery dates out into the future, which happens daily. They noted that customers have been taking less than they told them last year and that they have shifted their operating plan to plan based on what they are seeing in their order book. Finally, they stated that they are not seeing any significant competition from gray market fiber optic cable.

At the end of the Q&A, Ann Nicholson thanked everyone for attending and informed them that they will be attending Citi's 2023 Global Technology Conference on September 7 and hosting management visits to investor offices in select cities. The web replay of the call will be available on their site later in the day. The operator concluded the call and thanked everyone for participating.

This summary was generated with AI and may contain some inaccuracies.