Corning – CE Notes
As has been the case in the past, we look at Corning (GLW) differently than most as our focus is on two rather than all of the company’s product segments, display and specialty materials, which represented 39.3% of core sales in the 4th quarter and 40.4% of core sales for the full 2021 year. However on a net income basis these two divisions represented 70.6% of 4Q net income and 73.5% of same for the full year, and while they might not be the drivers for growth in every quarter, they are essential for Corning’s sustained profitability.
The display segment, which supplies substrate glass for LCD and rigid OLED display production, saw a 1.5% decline in sales on a q/q basis but was up 12.0% y/y. Typically 4Q display sales are up 1.8% q/q, but given the new world we live in currently, we chalk up the difference to the variety of factors that are now part of the CE supply chain. Display net income in 4Q was up 2.0% q/q and up 16.1% y/y with 4Q display margins at 26.8%, the highest they have been this year and since 1Q 2017, as very favorable glass pricing continues. We note that the display glass business is one with few suppliers and high entry cost, but one that typically has seen gradual glass price declines built into panel producer supply contracts, although that has not been the case since late 2020 when it became more important for producers, especially those in China, to secure steady supply than to haggle over small price reductions. This has allowed Corning and other glass suppliers to maintain glass prices and even see some increases, helping display segment margins increase from a low of 22.6% in late 2017 to where they are today.
There is some nuance to Corning’s glass substrate business however that does give them an edge over other suppliers and that is their expertise in large substrate production, which has made Corning the leader in that market segment for the last few years, particularly as Gen 10.5 fabs became popular, and while Corning’s large panel glass supply relationship with Samsung Display (pvt) has slowed as SDC moves away from large panel LCD production, it has increased with Chinese panel producers who have become primary suppliers of large panel LCD displays. Given that average TV sizes have been increasing for the last few years, the necessity to produce such large panels in Gen 10.5 fabs has helped Corning to maintain its leadership position in such large panel sizes, cementing their relationships with such fabs by co-locating glass production facilities at the fab itself.
There are mitigating factors however that also fall into the glass business and that is new capacity and utilization rates, with new LCD capacity being the long-term growth driver and utilization being the shorter-term driver. Until the middle of 2021 large panel LCD display industry had been seeing strong demand and increasing TV panel prices as a result of COVID-19, contributing to the performance of Corning’s display segment. That, coupled with LCD capacity growth incentivized by Chinese government subsidies has created the optimal environment for glass suppliers. However things changed a bit in 2H 2021 when the increased cost of TV panels and other components began to impinge TV set sales while overall TV demand slowed as governments began to remove some of the COVID-19 mandates that had fueled demand in early 2021. TV panel prices fell and panel producers moved production to IT products that still saw stable pricing.
The effect of such a change, while seemingly a watershed event, was relatively minor for the glass industry as demand for IT products remained strong and therefore overall utilization rates remained high, but as the industry entered 4Q, it became necessary for panel producers to lower TV panel production utilization or face even greater TV panel price declines, which was the first of two events that will set the tone for display in 2022. The second was the beginning of price declines for IT products, again we believe prompted by the mindset that the COVID-19 pandemic was at least under some level of control and the shelter-at-home necessity was lessened, as we noted yesterday. This is important in the sense that the shift by panel producers toward IT production increases their sensitivity to IT panel price declines, and leaves them little recourse but to lower IT panel utilization if demand for IT products returns to pre-COVID levels, with lower utilization meaning less glass demand.
It will be difficult to discern how much ‘normality’ will be seen in 1Q display results, for Corning and for other component suppliers as 1Q is typically the weakest in terms of CE demand, but while Corning was optimistic about the prospects for the display space and the glass market this year, and guided to flat glass pricing and a continuing tight market in 1Q ’22, we expect much of that optimism is based on contract negotiations that occurred in late 2021, with panel producers a bit more optimistic than they might be now. That said, glass prices don’t change quickly and with high fixed costs the competition has little room to undercut Corning’s dominant position with price, unless they are willing to create a deficit, so we see the second quarter being the key for the display space, as a sustained demand downturn would begin to affect overall material demand, or a more stabilized demand environment would lead to a continuation of Corning’s strong display segment margins. We hate to say 1Q is a throw-away quarter, but its seasonality make it one that can hide a multitude of sins.
The specialty materials segment, which is primarily a supplier of cover glass to the display industry, along with some specialty optical products, saw a 6.8% q/q decline in sales, also a bit more than the 5 year average of -4.2% q/q, but was down 5.0% on a y/y basis. As Corning sells cover glass to processor, rather than directly as it does with substrate glass, they have a less direct ‘demand connection’ which can move segment results away from expectations, in both directions, but 4Q is a volatile quarter for specialty materials with q/q spread between +5.4% and -13.1%. That said, net income from the specialty materials division was down 14.0% q/q and 32.4% y/y, with the only y/y growth seen in 1Q against a very weak 1Q in 2020.
No direct 1Q guidance was given for Specialty Materials with a broader ‘expect sales to grow faster than our underlying markets’, but Corning added that the lower net income was the result of investments in new innovations that will be commercialized this year with a nod toward optical products for EUV lithography in the semiconductor space. With the smartphone market seeing relatively slow growth and despite Corning’s relentless push to find more points in the mobile market in which glass can be used, it will be a challenge to grow the cover glass business this year with at least one new product announcement. Perhaps a new version of ‘Ceramic Shield’ or a UTG cover glass with superior characteristics, but smartphone size growth is relatively limited, with foldables picking up that mantra, which leads us in that direction relative to new products for specialty materials.
Perhaps we are reading more into Corning’s loose guidance for display and Specialty Materials for 1Q, but based on the display space itself and panel pricing, we are expecting the inverse of last year, when a strong 1H in the display space was followed by a weakening 2H, but we are struggling a bit to understand what the drivers for a better 2H ’22 in the display space might be, aside from typical seasonality. We expect that even with some of the potential changes to panel pricing and demand mentioned above that the effect on Corning’s display glass businesses will lag the industry a bit, but while last year was a year in which the display industry had considerable leverage over panel buyers, this year is more likely to have real negotiations, less affected by exogenous circumstances, resulting in a more ‘normal’ balance between supply and demand, leading us to expect a bit less overall growth in the display space.
The display segment, which supplies substrate glass for LCD and rigid OLED display production, saw a 1.5% decline in sales on a q/q basis but was up 12.0% y/y. Typically 4Q display sales are up 1.8% q/q, but given the new world we live in currently, we chalk up the difference to the variety of factors that are now part of the CE supply chain. Display net income in 4Q was up 2.0% q/q and up 16.1% y/y with 4Q display margins at 26.8%, the highest they have been this year and since 1Q 2017, as very favorable glass pricing continues. We note that the display glass business is one with few suppliers and high entry cost, but one that typically has seen gradual glass price declines built into panel producer supply contracts, although that has not been the case since late 2020 when it became more important for producers, especially those in China, to secure steady supply than to haggle over small price reductions. This has allowed Corning and other glass suppliers to maintain glass prices and even see some increases, helping display segment margins increase from a low of 22.6% in late 2017 to where they are today.
There is some nuance to Corning’s glass substrate business however that does give them an edge over other suppliers and that is their expertise in large substrate production, which has made Corning the leader in that market segment for the last few years, particularly as Gen 10.5 fabs became popular, and while Corning’s large panel glass supply relationship with Samsung Display (pvt) has slowed as SDC moves away from large panel LCD production, it has increased with Chinese panel producers who have become primary suppliers of large panel LCD displays. Given that average TV sizes have been increasing for the last few years, the necessity to produce such large panels in Gen 10.5 fabs has helped Corning to maintain its leadership position in such large panel sizes, cementing their relationships with such fabs by co-locating glass production facilities at the fab itself.
There are mitigating factors however that also fall into the glass business and that is new capacity and utilization rates, with new LCD capacity being the long-term growth driver and utilization being the shorter-term driver. Until the middle of 2021 large panel LCD display industry had been seeing strong demand and increasing TV panel prices as a result of COVID-19, contributing to the performance of Corning’s display segment. That, coupled with LCD capacity growth incentivized by Chinese government subsidies has created the optimal environment for glass suppliers. However things changed a bit in 2H 2021 when the increased cost of TV panels and other components began to impinge TV set sales while overall TV demand slowed as governments began to remove some of the COVID-19 mandates that had fueled demand in early 2021. TV panel prices fell and panel producers moved production to IT products that still saw stable pricing.
The effect of such a change, while seemingly a watershed event, was relatively minor for the glass industry as demand for IT products remained strong and therefore overall utilization rates remained high, but as the industry entered 4Q, it became necessary for panel producers to lower TV panel production utilization or face even greater TV panel price declines, which was the first of two events that will set the tone for display in 2022. The second was the beginning of price declines for IT products, again we believe prompted by the mindset that the COVID-19 pandemic was at least under some level of control and the shelter-at-home necessity was lessened, as we noted yesterday. This is important in the sense that the shift by panel producers toward IT production increases their sensitivity to IT panel price declines, and leaves them little recourse but to lower IT panel utilization if demand for IT products returns to pre-COVID levels, with lower utilization meaning less glass demand.
It will be difficult to discern how much ‘normality’ will be seen in 1Q display results, for Corning and for other component suppliers as 1Q is typically the weakest in terms of CE demand, but while Corning was optimistic about the prospects for the display space and the glass market this year, and guided to flat glass pricing and a continuing tight market in 1Q ’22, we expect much of that optimism is based on contract negotiations that occurred in late 2021, with panel producers a bit more optimistic than they might be now. That said, glass prices don’t change quickly and with high fixed costs the competition has little room to undercut Corning’s dominant position with price, unless they are willing to create a deficit, so we see the second quarter being the key for the display space, as a sustained demand downturn would begin to affect overall material demand, or a more stabilized demand environment would lead to a continuation of Corning’s strong display segment margins. We hate to say 1Q is a throw-away quarter, but its seasonality make it one that can hide a multitude of sins.
The specialty materials segment, which is primarily a supplier of cover glass to the display industry, along with some specialty optical products, saw a 6.8% q/q decline in sales, also a bit more than the 5 year average of -4.2% q/q, but was down 5.0% on a y/y basis. As Corning sells cover glass to processor, rather than directly as it does with substrate glass, they have a less direct ‘demand connection’ which can move segment results away from expectations, in both directions, but 4Q is a volatile quarter for specialty materials with q/q spread between +5.4% and -13.1%. That said, net income from the specialty materials division was down 14.0% q/q and 32.4% y/y, with the only y/y growth seen in 1Q against a very weak 1Q in 2020.
No direct 1Q guidance was given for Specialty Materials with a broader ‘expect sales to grow faster than our underlying markets’, but Corning added that the lower net income was the result of investments in new innovations that will be commercialized this year with a nod toward optical products for EUV lithography in the semiconductor space. With the smartphone market seeing relatively slow growth and despite Corning’s relentless push to find more points in the mobile market in which glass can be used, it will be a challenge to grow the cover glass business this year with at least one new product announcement. Perhaps a new version of ‘Ceramic Shield’ or a UTG cover glass with superior characteristics, but smartphone size growth is relatively limited, with foldables picking up that mantra, which leads us in that direction relative to new products for specialty materials.
Perhaps we are reading more into Corning’s loose guidance for display and Specialty Materials for 1Q, but based on the display space itself and panel pricing, we are expecting the inverse of last year, when a strong 1H in the display space was followed by a weakening 2H, but we are struggling a bit to understand what the drivers for a better 2H ’22 in the display space might be, aside from typical seasonality. We expect that even with some of the potential changes to panel pricing and demand mentioned above that the effect on Corning’s display glass businesses will lag the industry a bit, but while last year was a year in which the display industry had considerable leverage over panel buyers, this year is more likely to have real negotiations, less affected by exogenous circumstances, resulting in a more ‘normal’ balance between supply and demand, leading us to expect a bit less overall growth in the display space.
Corning - Segment Net Margins & Sales - Display & Specialty Materials - Source: Company Data
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