Corning Notes
Corning (GLW) reported 4Q results of $3.41b, down 2.4% q/q and down 7.3% y/y and below consensus of $3.55b. EPS was a reported $-0.04 but core results of $3.63b and $0.47 saw sales slightly ahead of consensus and toward the high end of previous guidance, while core EPS was $0.02 above consensus. The company took a $150m restructuring/impairment charge in the quarter, primarily related to inventory. Corning was able to institute price increases in both optical and life sciences, which, along with inventory reductions and “productivity improvements”, which seem to be rationalizing capacity to lower levels more in keeping with current demand, helped profitability and should help to increase margins in subsequent quarters this year. That said, guidance was for $3.2b to $3.4b, below consensus of $3.58b and (core) $0.35 to $0.42, also below consensus of $0.46.
Key Points:
Weak Sales Guidance - Corning expects sales to decline between 6% and 11% against a company norm of -5% as a number of business segments see slower than expected demand. While it is hard to call the return to pre-pandemic demand levels for most CE products a surprise, the rapid change in COVID restriction attitude in China was unexpected, with that event another rain cloud in what Corning was predicting would be a more sunny 1Q and we fault few managements for not anticipating such a radical change in philosophy. That said, the direction in the display space was obvious by 3Q last year, and while the mantra of serving the customer at all cost was necessary in 2020 and 2021, most managements were slow to respond to what was an overheated CE environment last year. Corning seemed to be half in and half out as to its expectations for direction in 3Q and 4Q last year, but now seems to have accepted a return to pre-pandemic levels and the uncertainty of China’s recent COVID ‘transition’. That said, it is easy to be fooled by seasonality and we hope that the company is careful about responding to short-term changes in demand, especially if they are related to building seasonal inventory, as we expect consumers will be a bit more careful about how they spend on CE products this year.
Display recovery delayed – Management sees a recovery in the display space now pushed out by at least one quarter. During the 3rd quarter call, management indicated it felt that the display industry had reached a low point toward fab utilization, and while they were cautious about calling for a quick recovery, their expectation seemed to be toward improving demand and higher utilization rates. Both October and November did see utilization improvement, but China’s abrupt about-face toward COVID lockdowns, and the resulting rapid spread in December, pushed utilization back to previous low levels. January has seen little change, which pushes out Corning’s expectations for a display recovery by 1 quarter. More to the point however is what kind of recovery might be seen as the year progresses, and we expect more of a grinding recovery than a steep one, with only a few industry events or new products to push the space into the consumer spotlight..
Incremental improvement each quarter – Management expects sales improvement in 2Q and the 2nd half, although they were less clear about the momentum of such a recovery. Citing the concept that they were primarily interested in serving their customers during the pandemic, inflation and supply chain issues caused less of a focus on productivity and profitability. Corning’s focus has changed, and after both price increases and capacity rationalization, the necessity to ‘feed the beast’ is a bit less important than remaining profitable and able to return capital to investors. While there is a bit more stability in raw material prices, albeit still at higher than pre-pandemic levels, we applaud that return back to maintaining a higher level of profitability by matching current capacity and costs to current demand. It’s a harder balance to maintain, but given the uncertainty ahead, it is an absolute mandate.
While Corning has taken steps to realign itself with the current demand picture, even as we finish January, they were still unclear as to how the quarter would play out, and the cautious guidance reflects that. The company admitted that it had been surprised by rapidly changing events during 2022 more than once and was certainly less certain about the momentum behind a recovery in a number of their business segments. With display and specialty materials reaching just south of 50% of total company sales in 2Q 2020, their combined share of company sales has declined to 37.8% (4 year low of 34.5% reached in 3Q), and a return to those heady days seems a difficult case to make, and therefore less dependency on product and glass volume growth from these segments puts considerable pressure on Optical to carry that weight, making Corning more sensitive to the optical space than either display or specialty materials. While the company hinted as to new products for AR/VR and its close ties to foldable display production, we expect glass volume growth will be modest this year, although we expect pricing will remain stable.
We do expect at least some seasonality in the display and specialty materials segments throughout the year, although from a sales perspective 1H comparisons will be difficult, but more will depend on the company’s ability to bring margins up in both segments as optical remains a wild card early this year. Hopefully a more realistic outlook will hold display and specialty materials inventory and capacity to more reasonable levels, as we expect any bounce back in demand will be a bit more gradual this year, giving a bit more time to relight glass capacity when needed. While there is no escape from the weakness in the CE space for Corning, at least they have enough business balance to continue to generate positive cash flow and maintain a solid balance sheet, which is more than we can say about many others in the CE space.
Key Points:
Weak Sales Guidance - Corning expects sales to decline between 6% and 11% against a company norm of -5% as a number of business segments see slower than expected demand. While it is hard to call the return to pre-pandemic demand levels for most CE products a surprise, the rapid change in COVID restriction attitude in China was unexpected, with that event another rain cloud in what Corning was predicting would be a more sunny 1Q and we fault few managements for not anticipating such a radical change in philosophy. That said, the direction in the display space was obvious by 3Q last year, and while the mantra of serving the customer at all cost was necessary in 2020 and 2021, most managements were slow to respond to what was an overheated CE environment last year. Corning seemed to be half in and half out as to its expectations for direction in 3Q and 4Q last year, but now seems to have accepted a return to pre-pandemic levels and the uncertainty of China’s recent COVID ‘transition’. That said, it is easy to be fooled by seasonality and we hope that the company is careful about responding to short-term changes in demand, especially if they are related to building seasonal inventory, as we expect consumers will be a bit more careful about how they spend on CE products this year.
Display recovery delayed – Management sees a recovery in the display space now pushed out by at least one quarter. During the 3rd quarter call, management indicated it felt that the display industry had reached a low point toward fab utilization, and while they were cautious about calling for a quick recovery, their expectation seemed to be toward improving demand and higher utilization rates. Both October and November did see utilization improvement, but China’s abrupt about-face toward COVID lockdowns, and the resulting rapid spread in December, pushed utilization back to previous low levels. January has seen little change, which pushes out Corning’s expectations for a display recovery by 1 quarter. More to the point however is what kind of recovery might be seen as the year progresses, and we expect more of a grinding recovery than a steep one, with only a few industry events or new products to push the space into the consumer spotlight..
Incremental improvement each quarter – Management expects sales improvement in 2Q and the 2nd half, although they were less clear about the momentum of such a recovery. Citing the concept that they were primarily interested in serving their customers during the pandemic, inflation and supply chain issues caused less of a focus on productivity and profitability. Corning’s focus has changed, and after both price increases and capacity rationalization, the necessity to ‘feed the beast’ is a bit less important than remaining profitable and able to return capital to investors. While there is a bit more stability in raw material prices, albeit still at higher than pre-pandemic levels, we applaud that return back to maintaining a higher level of profitability by matching current capacity and costs to current demand. It’s a harder balance to maintain, but given the uncertainty ahead, it is an absolute mandate.
While Corning has taken steps to realign itself with the current demand picture, even as we finish January, they were still unclear as to how the quarter would play out, and the cautious guidance reflects that. The company admitted that it had been surprised by rapidly changing events during 2022 more than once and was certainly less certain about the momentum behind a recovery in a number of their business segments. With display and specialty materials reaching just south of 50% of total company sales in 2Q 2020, their combined share of company sales has declined to 37.8% (4 year low of 34.5% reached in 3Q), and a return to those heady days seems a difficult case to make, and therefore less dependency on product and glass volume growth from these segments puts considerable pressure on Optical to carry that weight, making Corning more sensitive to the optical space than either display or specialty materials. While the company hinted as to new products for AR/VR and its close ties to foldable display production, we expect glass volume growth will be modest this year, although we expect pricing will remain stable.
We do expect at least some seasonality in the display and specialty materials segments throughout the year, although from a sales perspective 1H comparisons will be difficult, but more will depend on the company’s ability to bring margins up in both segments as optical remains a wild card early this year. Hopefully a more realistic outlook will hold display and specialty materials inventory and capacity to more reasonable levels, as we expect any bounce back in demand will be a bit more gradual this year, giving a bit more time to relight glass capacity when needed. While there is no escape from the weakness in the CE space for Corning, at least they have enough business balance to continue to generate positive cash flow and maintain a solid balance sheet, which is more than we can say about many others in the CE space.
Corning - Sales - Display & Specialty Materials - Source: SCMR LLC, Company Data
Corning - Net Margins - Display & Specialty Materials Segments - Source: SCMR LLC, Company Data
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