Corning Nudges 3Q Guidance Lower
Speaking at a conference yesterday Corning (GLW) management indicated that while all other segments are operating in line with 3Q guidance, the display business is not and is expected to come in at or below the previous guidance. In order to put that in perspective, here are some notes on 2Q Display segment performance and 3Q guidance:
2Q Display Performance
3Q Display Guidance
3Q Updated Display Guidance
A 15% volume reduction (already anticipated) would result in 3Q display sales of $746m. As it seems glass volumes have deteriorated further and pricing expected to be flat, that would imply display sales ~$700m, down roughly 26% y/y for 3Q (down 20% q/q) or about $50m lower than guidance which leaves us with the possibility that either a 20% reduction in glass volume is not enough or there are other segments that are weaker than expected. We would assume the former, although it could be a bit of both given the macro environment. Corning indicated that the incremental display glass volume shortfall was a result of the COVID lockdowns in China, despite the insistence of affected Chinese panel producers that there would be little effect on production, with Corning being a far more credible source.
Corning did say that on a long term basis they believe the prospects for the display business remain ‘good’ and acknowledged that the pandemic caused ‘advanced purchases’ to be made in the TV space which pushed TV units above the normal range, but while not giving an estimate for 2023 they indicated that TV units in 2023 would likely be back to that ‘normal’ range. If one looks at the display industry from a capacity perspective, production capacity for fabs above Gen 6, which would be used primarily for TV panel production, make up ~73.2% of overall LCD capacity (100% yield), so the TV space is of great importance to Corning, especially in China where Chinese display glass producers supply primarily Gen 6 and smaller glass substrates and Corning is the share leader in large size substrates.
One point that is critical to the glass substrate market is glass prices, which have been stable to positive for the last few years as glass demand has either outstripped or been equal to supply. While overall available capacity has not changed significantly, given the high cost and technical knowhow needed for new entrants, with the very weak demand seen this quarter, low panel producer utilization rates, and panel prices at or below cash costs, panel producers will be under pressure to reduce costs further. While they are always looking to bring down material costs, glass is so essential to making LCD panels that sustainable availability has taken preference over price, leading to stable or rising glass prices. Corning believes that glass substrate pricing has only a small effect on the overall profitability of the TV industry and that rational behavior by the small number of substrate glass competitors, meaning balancing production capacity against demand, is responsible for the stable glass pricing seen in recent years, but we are always concerned that a sustained period of weak panel production, and/or weak consumer demand will push panel producers to negotiate pricing with a bit more emphasis on absolute price.
With the weaker demand seen currently, display glass producers are taking tanks off-line to do maintenance tasks that have been postponed over the last few quarters or years in order to meet demand. While fewer tanks will keep capacity tight, once relining or other tasks are completed, a decision as to restarting the furnace must be made, with the cost of maintaining a non-producing furnace line a major consideration. If display demand returns, all will be right in the glass substrate world, but sustained weak demand could put pressure on glass producers to restart idle tanks and to fill those tanks some price concessions could be offered. We are always concerned about material costs in the display space, but since 2020 the industry has seen what we call ‘artificial’ demand change some of the rules. Without that demand, do we return to the old normal where glass prices decline a bit each quarter or has the glass substrate industry learned that profitability is more important than share, a lesson not everyone in the display space pays attention to. If the next two or three quarters do not show signs of improving demand, we would expect glass prices to flatten or go negative later next year. We give that scenario relatively low odds but given the recent environment they have to be considered.
2Q Display Performance
- Display Sales $878m – Down 8.4% q/q – Down 6.5% y/y
- Display Segment represents 24.3% of reported sales & 23.3% of core sales
- Display Net Income $228m Down 3.4% q/q – Down 8.1% y/y
- Glass Pricing – Up slightly
3Q Display Guidance
- Overall company sales (full year) slightly above $15b which implies (reported) sales of ~$7.715b in 2H, up 5.7% h/h or up 3.7% h/h on core sales.
- Expect 3Q sales flat q/q and up y/y, implies $3.65 to $3.85b
- Expect Glass volume to be down ~15% q/q across industry & company
- Expect flat glass pricing q/q
- Expect TV units to be flat to down y/y
3Q Updated Display Guidance
- Lower than anticipated glass volume brings overall guidance 3Q guidance to low-end ($3.65b) or below original range, taking at least $100m (single point) from full year unless 4Q is stronger than expected overall.
- 3Q will be the low in quarterly display glass demand
- TV units still flat to down
- Too early for 2023 TV shipment estimate but likely to return to ‘normal’ range of 225m to 235m
A 15% volume reduction (already anticipated) would result in 3Q display sales of $746m. As it seems glass volumes have deteriorated further and pricing expected to be flat, that would imply display sales ~$700m, down roughly 26% y/y for 3Q (down 20% q/q) or about $50m lower than guidance which leaves us with the possibility that either a 20% reduction in glass volume is not enough or there are other segments that are weaker than expected. We would assume the former, although it could be a bit of both given the macro environment. Corning indicated that the incremental display glass volume shortfall was a result of the COVID lockdowns in China, despite the insistence of affected Chinese panel producers that there would be little effect on production, with Corning being a far more credible source.
Corning did say that on a long term basis they believe the prospects for the display business remain ‘good’ and acknowledged that the pandemic caused ‘advanced purchases’ to be made in the TV space which pushed TV units above the normal range, but while not giving an estimate for 2023 they indicated that TV units in 2023 would likely be back to that ‘normal’ range. If one looks at the display industry from a capacity perspective, production capacity for fabs above Gen 6, which would be used primarily for TV panel production, make up ~73.2% of overall LCD capacity (100% yield), so the TV space is of great importance to Corning, especially in China where Chinese display glass producers supply primarily Gen 6 and smaller glass substrates and Corning is the share leader in large size substrates.
One point that is critical to the glass substrate market is glass prices, which have been stable to positive for the last few years as glass demand has either outstripped or been equal to supply. While overall available capacity has not changed significantly, given the high cost and technical knowhow needed for new entrants, with the very weak demand seen this quarter, low panel producer utilization rates, and panel prices at or below cash costs, panel producers will be under pressure to reduce costs further. While they are always looking to bring down material costs, glass is so essential to making LCD panels that sustainable availability has taken preference over price, leading to stable or rising glass prices. Corning believes that glass substrate pricing has only a small effect on the overall profitability of the TV industry and that rational behavior by the small number of substrate glass competitors, meaning balancing production capacity against demand, is responsible for the stable glass pricing seen in recent years, but we are always concerned that a sustained period of weak panel production, and/or weak consumer demand will push panel producers to negotiate pricing with a bit more emphasis on absolute price.
With the weaker demand seen currently, display glass producers are taking tanks off-line to do maintenance tasks that have been postponed over the last few quarters or years in order to meet demand. While fewer tanks will keep capacity tight, once relining or other tasks are completed, a decision as to restarting the furnace must be made, with the cost of maintaining a non-producing furnace line a major consideration. If display demand returns, all will be right in the glass substrate world, but sustained weak demand could put pressure on glass producers to restart idle tanks and to fill those tanks some price concessions could be offered. We are always concerned about material costs in the display space, but since 2020 the industry has seen what we call ‘artificial’ demand change some of the rules. Without that demand, do we return to the old normal where glass prices decline a bit each quarter or has the glass substrate industry learned that profitability is more important than share, a lesson not everyone in the display space pays attention to. If the next two or three quarters do not show signs of improving demand, we would expect glass prices to flatten or go negative later next year. We give that scenario relatively low odds but given the recent environment they have to be considered.
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