Welcome to the Corning Incorporated's Quarter One 2021 (sic) [2022] Earnings Call. [Operator Instructions] It is my pleasure to introduce you to Ann Nicholson, Vice President of Investor Relations. Please go ahead..

Thank you, Katherine, and good morning, everybody. Welcome to Corning’s first quarter 2022 earnings call. With me today are Wendell Weeks, Chairman and Chief Executive Officer; Ed Schlesinger, Executive Vice President & Chief Financial Officer; and Jeff Evenson, Executive Vice President and Chief Strategy Officer.

I’d like to remind you that today’s remarks contain forward-looking statements that fall within the meaning of the Private Securities Litigation Reform Act of 1995. These statements involve risks, uncertainties and other factors that could cause actual results to differ materially. These factors are detailed in the company’s financial reports.

You should also note that we will be discussing our consolidated results using core performance measures, unless we specifically indicate our comments related to GAAP data. Our core performance measures are non-GAAP measures used by management to analyze the business.

For the first quarter, the largest differences between our GAAP and core results stem from non-cash mark-to-market gains associated with the company’s currency hedging contracts and non-cash impairment charges.

With respect to mark-to-market adjustments, GAAP accounting requires earnings translation hedge contracts and foreign debt settling in future periods to be mark-to-market and recorded at current value at the end of each quarter, even though those contracts will not be settled in the current quarter.

For us, this increased GAAP earnings in the first quarter by $138 million. To be clear, this mark-to-market accounting has no impact on our cash flow.

Our currency hedges protect us economically from foreign exchange rate fluctuations and provide higher certainty for our earnings and cash flow, our ability to invest for growth and our future shareholder distributions.

Our non-GAAP or core results provide additional transparency into operations by using constant currency rates aligned with the economics of our underlying transactions. We are very pleased with our hedging program and the economic certainty it provides.

We have received more than $1.9 billion in cash under our hedge contracts since their inception almost 10 years ago. A reconciliation of core results to the comparable GAAP value can be found in the Investor Relations section of our website at corning.com.

You may also access core results on our website with downloadable financials in the Interactive Analyst Center. Supporting slides are being shown live on our webcast. We encourage you to follow along. They are also available on our website for downloading. And now, I will turn the call over to Wendell..

Thank you, Ann, and good morning, everyone. We're off to an outstanding start in 2022 with strong first quarter sales and improved profitability. Sales grew 15% over the first quarter of 2021 to $3.7 billion. EPS increased 20% year-over-year to $0.54. Free cash flow was $171 million.

We saw broad based strength across our businesses, and we effectively navigated a complex geopolitical and external operating environment. Gross margin of 36.6% and operating margin of 17.6%, both expanded sequentially and year-over-year. The improvements were primarily driven by benefits of pricing actions across all our businesses.

Historically, prices are usually down in the first quarter. However, as I told you last quarter, we negotiated with customers to increase prices in our long-term contracts to share increased costs more appropriately. And therefore, this year, price in total was up both sequentially and year-over-year.

We expect price to be up again in the second quarter. Specifically in display, we achieved a slight price increase in the first quarter. For the second quarter, we expect price to be up slightly sequentially, and glass supply and demand to remain tight. You'll hear more from Ed on the display market and our outlook.

Now, let's take a closer look at how we performed in each of our Market-Access Platforms. In Display, we continue to operate from a position of strength. We delivered 11% year-over-year sales and net income growth, driven by higher glass volume and slightly higher price.

In Optical Communications, we grew sales 28% year-over-year to $1.2 billion, representing 32% of total sales. Optical Communications is our largest market access platform by sales, and we expect significant growth to continue. Operators are expanding their networks.

The pace of datacenter construction is accelerating and fiber rich wireless deployments are underway. We continue to be energized by the momentum that is building in this business, and we're well-positioned to capture growth.

In Mobile Consumer Electronics, specialty materials outperformed the market with year-over-year sales growth of 9%, driven by significant demand for our premium cover materials and advanced optics products. In automotive, our environmental technology sales declined year-over-year due to customer production constraints.

However, we continue to outperform the market. Sales were up in our Automotive Glass business, and I'll talk more about that in a minute. In Life Sciences, we grew year-over-year, advanced key innovations for cell and gene therapy and expanded supply of glass vials and tubing.

Based on the quarter and our expectation of continued strong demand, we are raising our sales expectations for the year to above $15 billion. Our results speak for themselves. We've been delivering consistent growth with more balanced contributions across the company. And you'll hear more about that from Ed in just a minute.

So how do we do this? Our strong position stems from a complementary set of three core technologies, four proprietary manufacturing and engineering platforms, and five market access platforms. We're leaders in each.

We captured growth opportunities by combining, integrating and evolving these capabilities to help our customers drive their industries forward. And in so doing, we drive more Corning content into the products people are already buying. We typically spend the majority of our time discussing the results within our five segments.

However, important growth opportunities for our more Corning strategy also reside in the segment we have historically referred to as other. To better reflect the significant contributions and potential of these initiatives, we've renamed it Hemlock and Emerging Growth Businesses. This segment grew 38% year-over-year in the first quarter.

So today, I'm going to spend some time talking about what's going on, and how it underscores our confidence that we will continue to deliver durable, multiyear profitable growth. Hemlock currently delivers most of the sales in the segment. Hemlock manufactures ultra-pure poly silicon for the semiconductor and solar industries.

As a reminder, Corning owns 80.5% of Hemlock as a result of Hemlock's purchase of DuPont's ownership in the company in 2020. This was a great transaction for Corning.

We didn't put any money into the transaction, and we gained an additional 40% interest in Hemlock's strong semiconductor business, that also has the upside potential reflected in the solar market. Recently, we secured multiyear take or pay commitments for solar, and we expect demand to grow.

Additionally, as the renewable energy industry evolves, we believe that Corning's technical and manufacturing capabilities are three and four can provide significant benefits. We believe this business has excellent growth potential. The other two major contributors in this segment are Automotive Glass and Pharmaceutical Glass Packaging.

And we're making good progress on these two large opportunities, and both are prime examples of our focused and cohesive portfolio in action. So, let's take a look at how we reapply and reuse our capabilities to drive ongoing value, starting with automotive glass. There's no denying it. The driving experience is rapidly evolving.

Drivers want more connected and autonomous features. And the basis of competition is moving from the engine to the cabin. Automakers are responding to these trends. Car design is getting less analog and more digital, fewer buttons and more large screens with touch capability. Nearly universally, the solution is more glass.

And as automakers address the opportunities and the challenges they face, they're looking for glass to provide both form and function. To meet their needs, we've reapplied our existing capabilities, expertise and experience in the automotive market.

We started with a fusion draw asset that provide pristine flat glass in our Display and Mobile Consumer Electronics market access platforms. And we took insight from Gorilla Glass to create better, more sustainable products that offer superior economics and help our customers advance the transformation of their industry.

Poll for our technical glass products is strongest in auto interiors. We've answered with auto grade Gorilla Glass. It provides our signature toughness and optics tailored for the automotive use case to bring the smartphone experience into the car. We've also developed and patented ColdForm technology.

By removing heat from the glass shaping process, ColdForm improved yields, saves money, and ultimately delivers a better, more sustainable product at a lower cost than HotForm glass. It enables dashboard and console displays that follow the natural curves of the car's interior, protected by a single, thin piece of precision glass.

Our customers can bend the glass to suit their design needs right at the end of their own display module assembly. Looking ahead, we continue to pursue multiple opportunities for our interior and exterior glass innovations.

We've entered a new product category with our curved mirror solutions for head up displays, and we're providing Gorilla Glass to Jeep's iconic Wrangler, and Gladiator. We're also working on OLED lighting, and we're in the early stages of delivering glass solutions for the sensors that are critical for autonomous vehicles.

What this all adds up to is an increasingly significant business created by applying our more Corning approach. Our Automotive Glass Solutions business is helping us capture $100 per car opportunity. We've already been awarded over a $1 billion of multiyear business across multiple manufacturers and numerous car makes and models.

And we're confident in our growth trajectory as we continue to build on this exciting opportunity. Now let's look at another key emerging growth business. We drew on our glass science capabilities to develop a pharmaceutical packaging solution with both exceptional strength and enhanced chemical stability relative to incumbent porous silica vials.

Porous silica glass is inherently prone to issues such as delamination. Shifting to aluminosilicate base eliminates this risk and optimizes vials for our ion exchange process. As with the auto example that I just shared, we applied our experience making tough damage resistant glass to the pharmaceutical vial market.

And we drew on our deep relationships and years of experience in the life sciences market to deepen our understanding of customers problems and collaborate very closely on our solution. We started with glass tubing and then applied our expertise and extrusion and precision forming to convert the glass into vials.

And we leverage our experience in vapor deposition to apply a coating that helps vials travel more quickly through the drug filling process. The result was valid glass. And I think it's fair to say that this is a product no one else in the world could have invented.

Last fall, we expanded our portfolio by unpacking the valor technology stack to launch a new product that helps address supply chain challenges. Our new velocity vials use already approved packaging with a patented coating.

Velocity is helping drugmakers increase efficiency and throughput to drive faster manufacturing of vaccines and other medications to help meet significant global demand. Today, our solutions are clearly showing their strength. Our portfolio of vials and tubing has enabled the delivery of 5.5 billion doses of COVID-19 vaccines.

And demand continues to be strong. In the first quarter, our vial production was up more than 150% versus 2021. And our tubing production is expected to increase more than 25% this year, as we ramp capacity.

We also recently announced a new long-term supply and development agreement with West pharmaceutical to enable advanced injectable drug packaging and delivery systems for the pharmaceutical industry.

This partnership is designed to help speed the commercialization phase for biologic drug developers by avoiding costly time intensive barriers, so they can successfully bring important new drug discoveries to market faster.

In total, we're helping to create a future for pharmaceutical manufacturing that offers higher quality, greater efficiency and better sustainability. Stepping back, I think you can see why our customers value our capabilities. We provide unique solutions to move industries forward, all while making the world just a little bit better.

Because of this, we're able to thrive in up and down markets. Combined with the measures we're taking to improve margins, we're confident in our ability to drive long-term, profitable growth. Now, as I conclude my remarks, I'll leave you with a final thought.

The confluence of the consequential events that we're experiencing today, and the need to operate effectively to serve our stakeholders has required that we all embrace creative new ways of doing business. And at Corning, our values are evident in our actions.

We outline much of our progress in our 2021 sustainability, and DE&I reports, which published last month. And this quarter, we built on our success through actions including financial support for humanitarian efforts in the Ukraine and surrounding countries. And continued progress on the greenhouse gas goals we announced at the end of last year.

I'm excited about the year ahead and look forward to updating you on our progress. Now let me turn the call over to Ed, who will share more details on our results, financial priorities, and outlook..

Thank you, Wendell. Good morning, everyone. I want to begin today by saying how encouraged and energized I am by the way our company is performing. We've started 2022 from a position of strength. We are successfully navigating against the complex external operating environment.

We're confident in our ability to deliver on a short and long-term profitable growth opportunities to create compelling value for shareholders. Starting with the short-term, we had an extremely strong quarter, commercially, operationally and financially.

We delivered year-over-year top and bottom-line growth and we improved margins as our pricing actions began to take hold. Total company sales surpassed $3.7 billion, growing 15% year-over-year, highlighted by a nearly 30% increase in optical sales, a slight increase in display glass prices and continued demand for Hemlock solar materials.

Net income for the quarter was $465 million, up 16% year-over-year, and EPS was $0.54, up 20% year-over-year, both growing at a faster rate than sales. We generated $171 million in free cash flow in the quarter and we are on track for another strong year of cash generation. In terms of capital deployment, we invested $383 million in CapEx.

We declared a quarterly dividend of $0.27, which reflects the 12.5% increase announced in January, and we repurchased approximately $150 million of outstanding shares.

Taking a closer look at profitability, first quarter gross margin expanded 10 basis points sequentially, and 80 basis points year-over-year, primarily due to the benefits of our pricing actions. Typically, aggregate price for the company and gross margin percent decline sequentially in the first quarter.

This year both increased as we took price actions across all businesses. Additionally, first quarter operating margin expanded 140 basis points sequentially, and 50 basis points year-over-year. As we've previously discussed, we continue to experience increases in key input costs. We are tackling these challenges on multiple fronts.

We're leveraging relationships with our suppliers to secure favorable long-term raw material pricing, our strategic approach to manufacture in region and to co-locate with customers has helped to shield us from some of the elevated freight and logistics costs.

And most importantly, we are increasing price to more appropriately share rising costs of raw materials. We will continue our focus on these unusual costs as well as our normal rigorous cost reduction efforts. Combined with our pricing actions, we expect our gross margin percent to improve from the first quarter.

I'm proud of the operational rigor our teams continue to apply and deliver. We're navigating with discipline and agility while capitalizing on our strong market positions. And we see -- we see the benefits in our improving profitability. With that background, let's take a closer look at our segment results.

In Optical Communications, sales grew 28% year-over-year, reaching $1.2 billion for the first quarter as network operators increased capital spending. Net income was $166 million, up 50% year-over-year and 7% sequentially.

Corning continues to outpace the passive optical market and capture growth, which is driven by increased spending on 5G and broadband projects, along with the accelerated pace of data center builds as applications rapidly move to the cloud. Looking ahead, we continue to see strong demand for our Optical Communication Solutions.

We believe the industry is at the beginning of a large multiyear wave of growth for passive optical networks. Project momentum is strong across our customer base. And as the broadband equity access and deployment program rolls out, it could add as much as a $1 billion a year to our market for 4 years, as starting as early is 2023.

We believe that the combination of private network and public infrastructure investments will push the market into double-digit growth over the next few years, and that our solutions provide advantages, particularly lower labor requirements for customers. In Display, sales grew 11% year-over-year to 959 million.

Net income was $236 million also up 11% year-over-year. Sequentially, the price for display glass was up slightly. As we have previously discussed, the display industry is driven by three main factors; retail demand, panel makers production and glass makers ability to supply panel makers.

We continue to expect that glass at retail will grow in 2022 by a high single digit percentage driven by average screen size growth and TV unit growth. Over the last several months panel makers have been reducing their capacity utilization rate.

We expect additional utilization reductions in the second quarter and we've reflected that expectation in our guidance. Nevertheless, similar to Q1, we expect second quarter price to be up slightly sequentially and glass supply and demand to remain tight. Two factors add to glass supply demand tightness.

First, over the last 18 months, we have extended tanks beyond they're designed to life to support customer demand. Second, we have completely depleted our inventory, leading to higher logistics cost and missed opportunities.

So, we plan to shutdown end of life tanks, upgrade to the latest technology and begin to replenish our inventory levels to ensure excellent service for our customers. We feel good about our outlook for 2022. We've completed long-term share agreements that cover well over 90% of our planned volume for the year.

In 2022, overall, we expect glass supply to remain tight to balanced and the pricing environment to remain favorable. In total, we are very pleased with displays performance, and we're operating from a position of strength. In Specialty Materials, sales grew 9% year-over-year to $493 million. Net income was $75 million, down 18% year-over-year.

This sales growth was driven by our more Corning strategy. Take the Samsung Galaxy S22 series for example. Our cover materials are on the front and back of these devices, including all five rear cameras on the Galaxy S22 Ultra. Also, we continue to benefit from the strength of our new-to-the-world.

Apple's iPhone 13 launch and legacy product lines like the iPhone 12, which features ceramic shield resulted in increased premium glass sales year-over-year. In the quarter, investments in innovations that are moving towards commercialization resulted in lower net income versus first quarter 2021.

We expect growth to accelerate and profitability to improve throughout the year as we introduce new innovations and capture more content per device. In the first quarter, environmental technology sales declined 7% year-over-year due to automaker production constraints. Net income was $74 million consistent with 2021.

The auto industry has been experiencing variability from ongoing shortages of chips, components and raw materials. As a result, auto production has been paced by component availability versus consumer demand.

Once these constraints are relieved, automakers will be able to increase production to satisfy pent-up vehicle demand, and we would expect significant sales growth from current levels. Moving to Life Sciences. Sales increased 3% year-over-year to $310 million.

Net income was $42 million, down 13% year-over-year, primarily driven by COVID-related operational challenges in the first half of the quarter, which impacted our output. We expect growth going forward with strong demand for our products and production output increasing over first quarter levels.

Finally, in Hemlock and Emerging Growth Businesses, sales increased 38% year-over-year to $375 million primarily driven by strong performance at Hemlock as we continue to see increased demand for solar materials. Corning Pharmaceutical Technologies also contributed to year-over-year growth.

Our portfolio of vials and tubing has enabled the delivery of 5.5 billion doses of COVID-19 vaccines. And automotive glass solutions grew year-over-year as well. The company has been awarded more than a $1 billion of business from multiple manufacturers and numerous car makes and models. In summary, we grew organic sales $500 million this quarter.

On a year-over-year basis, we are growing faster than our end markets driven by our more Corning strategy. And as we look ahead, we're confident that our content driven strategy will continue to create outperformance and growth. Now let's talk about our outlook for the second quarter and how we're viewing the year.

For the second quarter, we expect $3.7 billion to $3.9 billion in sales with EPS of $0.54 to $0.59. We expect benefits from pricing actions to accelerate in the quarter. And this guidance reflects our view of the most probable outcomes of potential COVID-19 lockdowns in China.

For the full year, we're now expecting to exceed $15 billion in sales with growth at a high single-digit percentage. We expect EPS to grow up to a few percentage points faster than sales and gross margin to expand from the first quarter. And we anticipate another year of strong free cash flow in 2022.

Our priorities for capital allocation remain the same, investing in profitable growth opportunities across our market access platforms, extending our leadership and rewarding our shareholders.

We expect our return on invested capital to increase as we continue to reuse and repurpose assets, secure customer commitments and deliver on high ROIC projects. We're continuing to build a stronger, more resilient company that can deliver multiyear consistent and profitable growth.

Now, as I wrap up my formal remarks, I'd like to leave you with a few key highlights. We're off to a great start in Q1. We see strong demand across all our businesses, and our pricing actions are beginning to take hold with more coming in the second quarter. In Display, we achieved a slight price increase in the first quarter.

For the second quarter, we expect price to be up slightly sequentially, and glass and the supply and demand to remain tight. We expect Q2 sales in the range of $3.7 billion to $3.9 billion and EPS to be in the range of $0.54 to $0.59. And our guidance reflects our view of the most probable outcomes of potential COVID-19 lockdowns in China.

We have an incredible set of opportunities across all of our market access platforms. For example, we see multiyear double-digit growth in optical. And in mobile consumer electronics, we have an exciting innovations in our pipeline that will deliver growth in the second half of this year and beyond.

In total, we're a stronger and more balanced company today than we were even 5 years ago. And we are focused on commercial and operational execution to achieve broad based profitable growth. With that, I'll turn it over to Ann for Q&A..

Thanks. Katherine, we're ready for our first question..

Thank you. [Operator Instructions] Our first question comes from Rod Hall with Goldman Sachs. Your line is open..

Yes, good morning. Thanks for the question. Really solid set of numbers here. I guess the -- one of the areas standing out to us is the display strength. And you'd called out pricing and supply demand meeting each other. I just wonder if maybe if you could talk a little bit about the inventory levels there. I know.

Ed, in your comments, you said that you're still replenishing inventory. Can you talk a little bit about how much longer it takes to get to a point of inventory that you're satisfied with, and then I have a follow-up to that? Thanks..

Thanks for the comments, Rod. It's Wendell. The -- our inventory is still well below where we would like it to be in display for service levels. We're hoping to have the opportunity in quarter two to rebuild it, remains to be seen whether or not we can - whether or not demand will allow us to be able to get that to the service levels we'd like.

Right now, if you would ask us, we'd say probably wouldn't be till later in the year. Before we could get our service levels to the spot that we would like that have a little bit more contained logistics cost, a little bit easier for our customers to pull when they need it..

Okay, great. Thanks. Wendell. And then I also wanted to -- I wanted to just ask about capacity constrain. I know in the past you guys have talked about optical and Hemlock both being constrained. I know Hemlock capacity, it seemed like you could bring on pretty quickly. Optical, I know there's a facility in Poland under construction.

I just wonder if you could talk a little bit about where we are in terms of capacity constrain there, and bringing new capacity on for those two particular units?.

That's a great question. If we could make more, we could sell more. So, we are -- you quite rightly point out the already announced capacity expansions. And as always, we're working with our customers to see if they're willing to make the appropriate level of commitments to be able to make us feel comfortable that we would add additional capacity.

Those discussions have not been completed as of yet. So, what we are doing is we're focusing on ramping the already announced expansions and we're trying to accelerate those as much as we can. Demand remains robust..

Great. Okay. Thanks a lot, Wendell. I really appreciate it..

Thank you. Our next question comes from Mehdi Hosseini with SIG. Your line is open..

Yes. Thanks for taking my question. Two follow-ups. One, on the margin profile is interesting. The Display margin declined sequentially despite a slight increase, but other segments have materially increased in margin. And I just want to understand how those dynamics have played out.

Was it just a display higher cost? Or did you have a better ability to raise prices out of the display? And I have a follow-up..

Yes, hi. This is Ed. So, I think in the aggregate, the primary driver of our margin profile increase is raising price. As Wendell mentioned, and we talked a little bit about in our formal remarks, price was actually up in the quarter sequentially. So that's driving the increase in our margins in the aggregate.

It plays out a little differently across all of our business segments..

Okay. Just a quick follow-up on Optical. You highlighted, I think I heard you incremental revenue of a $1 billion. You also highlighted how you're tied to capacity. How do you see adding capacity? How -- what's the lead times for optical? And what would it take for you to realize this incremental revenue? I think you said $1 billion..

Yes. sSo we have capacity in Optical coming online in the back half of this year, that will increase our capacity and allow us as you heard Wendell say to meet some of the unmet demand we have right now. And then as we see the demand profile playing out, we will make decisions around when we would add additional capacity.

Obviously, having customer commitments will be a big part in how and when we do that..

Got it. Thank you..

Next question, Katherine?.

Thank you. Our next question comes from Asiya Merchant with Citigroup. Your line is open..

Great. Thank you. Just first a clarification on free cash flow. It was much lower than what I was expecting, given your profitability and revenue. What should we expect for free cash flow cadence for the remainder of the year? And then I have a quick follow-up..

Yes. Hi, Asiya. So, a couple of things I would say on free cash flow. First, generally, Q1 is the low quarter for us relative to the rest of the year. We expect sales to expand. So we built some working capital in the quarter. You'll see that inventory was up from the beginning of the quarter. So that's a driver of why free cash flow was a little low.

And if you think about it relative to last year, we were at a much lower sales level and not necessarily expecting as much growth. So we didn't build as much inventory. In fact, we actually depleted inventory a little bit in Q1. I think you can think of us having similar year, as we've had in 2021 with respect to free cash flow this year..

Great. Okay, thank you. And then just on Display and cover glass demand, I understand pricing is obviously working in your favor for those segments and in aggregate.

Do you also expect display unit demand to go up here in the second quarter and as the year progresses, I know at one point you were talking about China demand and just TV unit demand increasing as the year progresses, given World Cup that we have in the back half? Is that kind of still the outlook that you think just given the macro headwinds that are there for consumer spending..

So, in retail for Display, basically after sort of above trendline, retail sales at the beginning of the pandemic. Last year, television sales were down, sort of well below mean, well below the trend line. And so, this year, we -- and really the rest of the industry expect retail to revert towards, but not actually reaching the mean.

And therefore, it'd be up year-over-year. As we looked at the quarter one retail data, we -- it was a little bit lower than what our models would have anticipated. And but we still anticipate growth for the year and we reflected some of that lower growth rate into the guidance that we have given you. So that's what we think is going on in Display.

Does that address your question?.

Yes. And then similarly, on smartphones, which are more of a covered glass story, I mean, there is talks, as you know, just dour outlook for smartphones with the exception of a few OEMs that are doing well.

What's kind of baked into your outlook for specialty glass for the remainder of the year? Because I think you said growth should accelerate from the 9% level that you guys delivered in 1Q..

So, for us in Mobile Consumer Electronics, it's really so much more of a content story than a unit growth story. If you look over the last number of years, smartphone sales have been relatively flat and like our revenues been up over 40%. So, it's really a more a Corning content story.

We expect that content story to continue to be favorable for us as we move through the next couple of years, at least..

Great. Thank you..

Next question. We have a question from Martin Yang with Oppenheimer. Your line is open..

Hi, good morning. Thank you for taking my question. You highlighted some impact from China lockdowns to be baked into your guidance. Can you maybe go into more details on how are you directly or indirectly affected by the lockdowns? Thank you..

Yes. Hi, Martin. I would say that, for sure, we're seeing an impact across the entire supply chain, us, our customers and our suppliers. We're managing through it quite well. And we've reflected the perspective that will continue to see sort of rolling lock downs, if you will, through various different jurisdictions in China.

I would say we're not expecting sort of a full Chinese economic shutdown in the way we think about our guidance.

What we do, and we think our way through this, because we have to develop our different operating models is -- what we -- it was doing a lot of work with our various professionals to try to take a look at what are the most probabilistic outcomes here? What are the more probable outcomes, and then to design our operating contours to meet those? And how would we flex in certain ways to make sure that we're able to protect our people and still be able to serve our customers.

And then what we’ve done is we've taken those potential outcomes, and then tried to build those into the financial guidance that we have given to you..

Got it. Thank you..

Next question..

We have a question from Steven Fox with Fox Advisors. Your line is open..

Thanks. Good morning. I guess I had a question on pricing. I think one of the concerns going into your results was there was a big increase in metals, oil prices that might have affected your input costs beyond what you had contracted forward.

How do we get comfortable with the idea that if inflation continues to be a negative surprise that you are able to pass through pricing on a pretty timely basis. I imagine it's different by different. I imagine it's different by different business units, and then I had a follow-up if I could..

So, we're deployed against that, Steven, as you know, right. And we are -- I think the best evidence for our ability to do that was just in our Q1 results, and in our Q2 guide. So that being said, as always, let's see how the cost profiles evolve.

So far, what we have discovered is that our customers are working with us in partnership to more appropriately share the increased cost that we experience. We would expect that to continue..

Okay, that's helpful. And then just maybe on the auto grade glass number. The $1 billion of business that you've booked. Can you put that in perspective relative to just how all these new models are coming out? I think there's like 25 or 26, new EV models coming out in 2022 alone.

What percentage of sort of that -- those new models are you capturing? Where maybe content is higher? Like, can you give us an idea of where you are in sort of going after that iceberg? Thanks..

Steve, that's a great question. Let's reflect some on that. And let's have and get back to you and try to think about the best way to address that sort of that second question..

Okay..

Thank you..

All right. Sounds good. Thank you..

Our next question comes from Josh Spector with UBS. Your line is open..

Yes. Hey, everyone. Thanks for taking my question. I just wanted to follow-up on some of the comments earlier about specialty glass and smartphones. You guys are pretty prescriptive in terms of the content opportunity in auto.

Do you have a similar kind of number when you think about smartphones, in terms of content per unit? I mean, you say you expect that to increase.

But is there a dollar number or a quantitative way we should think about that for the next couple of years?.

That's an -- you guys are asking excellent questions. That's another excellent question. We do expect it to increase. I'm sort of not at liberty to say, sort of, in what way because that would give some insight into. Some of our customers were exciting new product of features.

But let us think a little bit about is there a more macro index way to think about your question, because that's a reasonable question and let us reflect on that one, too..

Okay, thank you..

Thank you. Our next question comes from Samik Chatterjee with JPMorgan. Your line is open..

Hi. Good morning. Thanks for taking my question. I guess the first one, I did want to see if you can give us a bit more color about the margins in Optical Communication. You had really strong margins there, about 100 basis points up sequentially. Is that again, a lot of price driven by your pricing actions.

And maybe you can talk to how you think about margin progression from here on, particularly, how easy is it to take pricing actions with some of the service provider customers? And I’ve a quick follow-up. Thanks..

Yes, thanks. The -- I would say the primary driver is price in Optical Communications. Of course, as sales go up, we would expect margins to go up as well. I think as we go forward, as Wendell mentioned, we will continue to look to increase price and you will see how input costs play out. And that will certainly impact how our margin progresses.

But we do expect gross margin in total for the company to go up from the first quarter..

Okay. And for my follow-up, if I can just create a full year guide, you're guiding toward high single-digit revenue growth versus mid-single-digit prior. It doesn't sound like display or environmental are big drivers of that. So, if you can just help us understand a bit more at the segment level.

What are the big drivers in terms of changing expectations? And if pricing or sort of getting better price realization through the quarter helped sort of increase that target as well. Thank you..

Certainly better price realization helps on the revenue line. And I would say optical continues to gain strength. But we have some good contributions really across the platform in a pretty balanced way. But it is Optical continues to provide a lot of our year-over-year growth this year continues to be a nice driver for us..

Thank you. Thanks for taking my questions..

Our next question comes from Tim Long with Barclays. Your line is open..

Thank you. Just wanted to follow-up on the Optical business. Could you talk a little bit, it looks like the telco business was very strong, but enterprise ticked down a little bit.

What's going on with that piece of the business? Is it just kind of lumpiness of hyperscale? Or is there anything else going on there? And when you think about the capacity improvements that you're seeing in the second half, what -- what's driving that, which of the businesses and maybe just one -- last one on that hyperscale piece, if you can talk about maybe pricing between hyperscale and telco? Is it similarly easy to push the higher price into both of those verticals? Thank you..

Okay, let's take them in order. I think, Tim, first of all, you've got to write on enterprise versus telecom thing. I think it's just timing, right? We see nothing systemic. We continue to see strong demand in both platforms for us. The -- I got the pricing one. So, for the pricing one -- pricing is always challenging. These are all very big players.

I wouldn't construe one as being easier than the other. What I would say is that both understand the situations that we face, and both value us very much for our ability to supply in the innovations that we bring. There's an interesting little sort of, I think, sub story that is going on for us.

And it's also behind some of our numbers this year, is we're introducing a number of new innovations that once again introduce more Corning into the solutions.

As everybody is struggling with installation, both having getting enough people and the accelerating cost of doing installation, whether you're trying to build hyperscale, you're trying to build a wireline or you're trying to build a wireless network.

What we've done is we've introduced and we're going to continue to introduce a series of very new products that dramatically reduce installation time -- in installation, labor, content especially the need for highly skilled labor. So those are also increasing the amount of revenue per link that we receive.

So really, it's also a more a Corning strategy that you're going to see drive our results strongly as well.

Did I miss one for you, Tim? Did you have another that I missed [multiple speakers]?.

I just wanted to understand the capacity increases that you have planned for Optical kind of what -- is that just the same broad-based demand? Is there anything more specific that's feeding that need?.

Yes, we have both fiber and cable capacity coming online, so that sort of feeds almost everything we do across all of our customers. So that will give us capacity in many places in the Optical space..

Okay. Thank you very much..

Thank you. Our next question comes from Wamsi Mohan with Bank of America. Your line is open..

Yes, thank you. Ed, you noted improvement in gross margin sequentially here in the second quarter. I was hoping maybe you could calibrate that a little bit. Should we expect gross margins to also be up on a year-on-year basis in the second quarter and how about for the full year? And I’ve a follow-up..

So, I would say that we you should think of about it sequentially, it's just easier for us in terms of how we think about it, because of increasing inflation and increasing prices. If you get $1 of inflation and you offset that with $1 of price, your gross margin dollars are flat, but your percentage actually goes down.

So, you sort of have this headwind you have to overcome. So through the year, we expect to overcome that headwind because we have price coming in, and we'll continue to grow our sales. So, I think of it as gross margin going up sequentially from Q1 to Q2..

Okay. Thanks, Ed. One point Tony had said he did not expect to change the yen hedge level under his tenure, and the yen has clearly moved a lot recently. He obviously stuck to that.

But can you give us some explicit levels where you're hedged at for the next 3 years, just given the magnitude of the move in the yen be helpful to recalibrate all of us on how far away from 107? If you're going to move away from 107, how far away from that you're considering to re-hedge or already hedged that? And just what -- how much of your exposure is hedged at 107 in the next couple of years? Thank you..

Yes. Thanks for that question. So, a couple of things. First, I just want to step back a little bit and remind everyone we hedge the yen and other Asian currencies, where we have significant exposure. We think of it as sort of a basket of exposures. We've been doing that for quite some time, we've been successful.

And you've heard us say we've almost have $2 billion worth of cash received under these programs, we've been successful. We're pretty fully hedged out, 18 months or so. And then we have a material amount of our exposure hedged beyond that certainly in '23, and then we have hedges into 2024, and even some hedges in some of those currencies beyond that.

So, I would not anticipate us certainly for the next couple of years changing our core rate from 107..

Okay. Thank you so much..

Next question..

We have a question from Matt Niknam with Deutsche Bank. Your line is open..

Hey, thanks for taking the question. So, most of the model and housekeeping related questions have been asked, so I'm going to ask a higher level one. And so, on the commentary and prepared remarks, you talked about the company's strong top line growth potential, obviously, some operating leverage as well, though.

It seems like there's a disconnect between fundamentals and stock valuation, which hasn't necessarily rerated to reflect the upside. And so, I'm wondering, what do you think the Street's most under appreciating? And then what can the company do to help maybe unlock some more value in shares? Thanks..

I think that the thing that Street most misses is that we have two big dynamics going on that maybe we had to adjust to. First is the success of our more Corning strategy. More and more of our content is being adopted into products that our customers already buy.

And that gives us a lot of revenue leverage that is not dependent upon just people buying more stuff. That content story is very powerful one. And I think was also reflected in some of the questions that we got earlier in the call that were really good questions.

And perhaps, we need to do a little bit better job of giving folks an idea of the power of that leverage is they think long-term about it. The next is, we are on top of some major secular trends.

And the reason we've been around 170 years is we're really good at starting early on major technology trends that use our three core technologies at our four manufacturing and engineering platforms. And we're against trends that long-term are going to just be very powerful.

You even saw some of them play out sort of in the surprises that people got in Q1. So Optical Communications people continue to underestimate mainly because they're missing just one a strong macro secular trend it is for now in 5G for cloud, as well as enhanced broadband across the globe.

Even within Display, I think the big secular trend was the move to larger and larger displays, which are best expressed through Gen 10.5, which because of our long-term thoughtful technology innovations, we have our sort of unfair share of the expression of as displays go bigger.

A new one, I think that people are beginning to get a grasp on, but still not yet reflecting is this sort of opportunity in renewable energy that are material set about 3 or 4 can potentially bring. And all of those were just in Q1. Plus, we have that same sort of big, macro secular trends in a number of our other areas.

And I think in general, folks tend to be a little bit slow in realizing that those are the trend lines that any company is following. And we just need to continue to put up the type of results that you seen us do here, and that are in our guide for Q2 and for the year.

And part of us believes that nothing will help change minds quite like consistent performance on our part, and that's where we focus..

Thank you, Wendell..

That's great. Thank you..

Operator, we can squeeze in one more question..

Our last question comes from Meta Marshall with Morgan Stanley. Your line is open..

Great. Maybe jumping [ph] on the renewable energy piece, just wanted to see if Hemlock is -- are you guys still selling on the inventory there? Or when would you expect capacity to ramp up there? And then maybe just on the Display business, just what is the timing of some of those tanks being taken offline? Thanks..

Hi, Meta. So, in terms of Hemlock, as we've shared, we had a lot of inventory. We sold out almost all that inventory in 2021 and we started to ramp capacity in the fourth quarter.

We shared that on our last conference call, and we've been ramping that capacity through the first quarter, we're sort of almost at the rate at which we want to be, to be able to serve the demand we have.

And so, a little bit of inventory sold in Q1, but really now starting to sell the product that we're producing, and would expect to do that for the remainder of this year and forward. And then, in terms of Display, tanks, I think, as Wendell mentioned earlier, I think a lot of that will depend on how much demand we see in the second quarter.

So, we definitely need to take those tanks down and replenish our inventory as we work through it, but part of that will be how robust the demand is in Q2..

So we've tried to do is reflect that. And really, for us now, our manufacturing platforms is a little of a Rubik's Cube, because those manufacturing platforms serve our Mobile Consumer Electronics business, our Automotive business, and our Display business.

And so what we need to do is sort of find different ways to get those technology upgrades in getting much needed repairs and maintenance. And so, putting that all together is what we try to reflect in our guide. I think one of the things that makes it challenging to evaluate from outside is that really with the way we make product.

So our manufacturing platform serves many different outlets. So it's like hard to drive a direct line between what's happening in panels and directly into what will happen into our glass manufacturing. Because really we have demand overall for our fusion platform and our overall melting capability.

That's a long way of basically saying we're feathering it in whenever we can, and we tried to reflect our best understanding in our guide to you..

Great. Thank you so much..

Great. Thanks, Meta, and thank you everybody for joining us today. Before we close, I wanted to let everyone know that we will attend the JP Morgan Global Technology Media and Communications Conference on May 24.

The Bernstein Strategic Decisions Conference on June 2, the Bank of America Securities Global Technology Conference on June 8; and the Fox Advisors Virtual Transportation Technology Conference on June 23. Additionally, we're going to be hosting management visits to investor offices in select cities.

Finally, a replay of today's call will be available on our website starting later this morning. Once again, thanks for joining us. Katherine, that concludes our call. Please disconnect all lines..

This concludes today's conference call. Thank you for participating. You may now disconnect..