Corning (GLW) reported 4Q results above expectations and gave 1Q guidance that was also above expectations. While the 4Q call focused considerable time on Life Science and Environmental segments, we focus more on display and specialty materials, both of which faced very ‘unprecedented’ challenges this year. Display Sales in 4Q were 841m (core), up 1.7% q/q and 5.8% y/y, while Specialty Materials (primarily Gorilla Glass) saw 4Q sales decline 13.5% q/q but increase 20.8% y/y with full year display sales down 0.6%, while specialty materials sales were up 18.2%.
Large panel display industry sales growth was up ~15.6% for 2020, with much of that growth coming from higher panel prices in the 2nd half of the year, however glass pricing tracks quite differently, making a comparison a poor assessment of performance. As glass prices do not have the volatility of panel prices, the leverage that panel prices have for display producers is far less for display glass. That said, Corning’s display margins increased from 20.2% in 1Q to 25.8% in 4Q and display net income increased 42.8% over the same period, giving a better indication as to how the overall improvement in the display market affected Corning’s display sales and profitability.
While the display industry’s growth has been a driver for Corning’s glass business during much of the last decade, the company’s Specialty Material’s business, which is primarily Gorilla Glass™ and similar products, has become a new source of growth, while display maintains more ‘steady’ growth prospects. In fact given that smartphone shipments are expected to be down for the 2020 year when all data is compiled, growth in the Specialty Materials business, which has strong ties to mobile devices, is quite telling, which indicates that these materials have seen increasing content on mobile devices, a point emphasized by management.
As strengthened glass becomes a more common product and specifications continue to be improved, the competitive nature of the smartphone business will continue that trend. Last year the specialty materials division introduced Victus™, a further improved Gorilla Glass, and what is called ‘Ceramic Shield’ by Apple (AAPL), a glass composite with ceramic nano-crystals, that improve strength without reducing clarity. Again, given the competition seen in the smartphone space, such new products, unless they are exclusive to a customer, get picked-up relatively quickly by major smartphone brands, while lesser brands tend to use earlier GG versions to reduce BOM.
While the use of strengthened glass as an external automotive product is limited to premium vehicles, its use in digital dashboards, which are gaining traction, is a key to some of the promises made to automotive customers about interior vehicle safety, while still being able to be molded to whatever shape such a display might require. Based on the Specialty Materials division’s ability to continually improve and expand applications for its products, there is far less reliance on absolute mobile device growth and more on expanding content on a per device basis, which allows for segment growth despite weakness in end markets, although we still expect that the specialty materials segment is still primarily dependent on mobile devices.
On a more general basis, after the early part of 202, glass availability continued to tighten and a power outage at a competitor (see our note 12/15/20) pushed the glass market into shortage, While there was little glass price impact given the occurrence happening during the last few days of the year, it does set the tone for glass pricing in 1Q and potentially 1H, which is now expected to be flat in 1Q on a q/q basis, for the first time in what is usually a relatively weak glass pricing quarter. Corning will certainly benefit from this very positive pricing trend, but its sustainability is a function of the 2021 demand cycle, which is by no means a sure bet, as we expect South Korean panel producers to resume their program of reducing or ending large panel production as soon as they see a break in panel pricing which would reduce demand, at least on a perceived basis.
All in, while we have focused on just two segments of Corning’s business (~52% in 4Q), as these two are most directly related to consumer electronics, we would have expected display results to be about as reported for the year, while our expectations for Specialty Materials would have been less. As noted above, Corning’s ability to expand device content in the Specialty Materials space has been unusually aggressive during a time when demand and device pricing remain under pressure. This is a hard act to follow, so even a small bit of mobile device (smartphone) growth this year would help to keep that momentum intact, otherwise that aggressive content and application development cycle will be the sole driver and not every year can Corning be developing a new product with a major customer. Certainly not to disparage the effort, but the bar is now set pretty high.
Large panel display industry sales growth was up ~15.6% for 2020, with much of that growth coming from higher panel prices in the 2nd half of the year, however glass pricing tracks quite differently, making a comparison a poor assessment of performance. As glass prices do not have the volatility of panel prices, the leverage that panel prices have for display producers is far less for display glass. That said, Corning’s display margins increased from 20.2% in 1Q to 25.8% in 4Q and display net income increased 42.8% over the same period, giving a better indication as to how the overall improvement in the display market affected Corning’s display sales and profitability.
While the display industry’s growth has been a driver for Corning’s glass business during much of the last decade, the company’s Specialty Material’s business, which is primarily Gorilla Glass™ and similar products, has become a new source of growth, while display maintains more ‘steady’ growth prospects. In fact given that smartphone shipments are expected to be down for the 2020 year when all data is compiled, growth in the Specialty Materials business, which has strong ties to mobile devices, is quite telling, which indicates that these materials have seen increasing content on mobile devices, a point emphasized by management.
As strengthened glass becomes a more common product and specifications continue to be improved, the competitive nature of the smartphone business will continue that trend. Last year the specialty materials division introduced Victus™, a further improved Gorilla Glass, and what is called ‘Ceramic Shield’ by Apple (AAPL), a glass composite with ceramic nano-crystals, that improve strength without reducing clarity. Again, given the competition seen in the smartphone space, such new products, unless they are exclusive to a customer, get picked-up relatively quickly by major smartphone brands, while lesser brands tend to use earlier GG versions to reduce BOM.
While the use of strengthened glass as an external automotive product is limited to premium vehicles, its use in digital dashboards, which are gaining traction, is a key to some of the promises made to automotive customers about interior vehicle safety, while still being able to be molded to whatever shape such a display might require. Based on the Specialty Materials division’s ability to continually improve and expand applications for its products, there is far less reliance on absolute mobile device growth and more on expanding content on a per device basis, which allows for segment growth despite weakness in end markets, although we still expect that the specialty materials segment is still primarily dependent on mobile devices.
On a more general basis, after the early part of 202, glass availability continued to tighten and a power outage at a competitor (see our note 12/15/20) pushed the glass market into shortage, While there was little glass price impact given the occurrence happening during the last few days of the year, it does set the tone for glass pricing in 1Q and potentially 1H, which is now expected to be flat in 1Q on a q/q basis, for the first time in what is usually a relatively weak glass pricing quarter. Corning will certainly benefit from this very positive pricing trend, but its sustainability is a function of the 2021 demand cycle, which is by no means a sure bet, as we expect South Korean panel producers to resume their program of reducing or ending large panel production as soon as they see a break in panel pricing which would reduce demand, at least on a perceived basis.
All in, while we have focused on just two segments of Corning’s business (~52% in 4Q), as these two are most directly related to consumer electronics, we would have expected display results to be about as reported for the year, while our expectations for Specialty Materials would have been less. As noted above, Corning’s ability to expand device content in the Specialty Materials space has been unusually aggressive during a time when demand and device pricing remain under pressure. This is a hard act to follow, so even a small bit of mobile device (smartphone) growth this year would help to keep that momentum intact, otherwise that aggressive content and application development cycle will be the sole driver and not every year can Corning be developing a new product with a major customer. Certainly not to disparage the effort, but the bar is now set pretty high.
Corning - Segment Net Margins Sales - Display & Specialty Materials - Source: Company Data
RSS Feed